<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1998
REGISTRATION STATEMENT NO. 333-62911
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO.1 TO
FORM S-3 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MORGAN STANLEY CAPITAL I INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3291626
(State of incorporation) (I.R.S. Employer
Identification No.)
1585 Broadway
New York, New York 10036
(212) 296-7000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
---------------------
DAVID R. WARREN
President
1585 Broadway
New York, New York 10036
(212) 296-7000
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
---------------------
Copy to:
CARLOS RODRIGUEZ, ESQ.
Brown & Wood LLP
One World Trade Center
New York, New York 10048
(212) 839-5300
KEVIN C. BLAUCH, ESQ.
Latham & Watkins
885 Third Avenue
New York, New York 10022
(212) 906-1241
MICHAEL S. GAMBRO, ESQ.
ANNA H. GLICK, ESQ.
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
(212) 504-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the sane offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
===============================================================================
<PAGE>
This Registration Statement contains: (1) a base prospectus and form
of prospectus supplement to be used in connection with the offering of
certificates that will represent beneficial ownership interests in trust funds
consisting of one or more segregated pools of various types of single family
residential mortgage loans, securities collateralized by such loans, and/or
government securities (the version 1 prospectus); and (2) a base prospectus and
form of prospectus supplement to be used in connection with the offering of
certificates that will represent beneficial ownership interests in trust funds
consisting of one or more segregated pools of various types of multifamily or
commercial mortgage loans, securities collateralized by such loans, and/or
government securities (the version 2 prospectus).
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
[VERSION 1]
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998
$----------------
PROSPECTUS SUPPLEMENT
(To Prospectus dated ____, 199_)
MORGAN STANLEY CAPITAL I INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _______
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will consist of ____ classes of Certificates, designated as the
Class [ ] Certificates, Class [ ] Certificates and Class [ ] Certificates (the
Class [ ] Certificates, collectively, the "Subordinate Certificates"). It is a
condition of the issuance of the Class [ ] Certificates that they be rated [not
lower than] "_______________" by _________________.
The Certificates will represent in the aggregate the entire beneficial
interest in a trust fund (the "Trust Fund") to be established by Morgan Stanley
Capital I Inc. (the "Depositor"). The Trust Fund will consist primarily of [a
pool (the "Mortgage Pool") of [conventional], [fixed rate] [adjustable rate]
mortgage loans, with terms to maturity of not more than ___ years (the
"Mortgage Loans"), secured by first [and/or junior] liens on one- to
four-family residential properties,] [mortgage participations, mortgage
pass-through certificates, mortgage-backed securities evidencing interests
therein or secured thereby (the "MBS"),] [and] [certain direct obligations of
the United States, agencies thereof or agencies created thereby (the
"Government Securities")]. The Mortgage Loans were originated or acquired by
___________ (the "Mortgage Asset Seller") and will be sold to the Depositor on
or prior to the date of initial issuance of the Certificates.
The Class [ ] Certificates will evidence approximately an initial ___%
undivided interest in the Trust Fund and the Subordinate Certificates, in the
aggregate, will evidence approximately an initial ___% undivided interest in
the Trust Fund. Only the Class [ ] Certificates are being offered hereby.
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, CERTAIN RISKS SET FORTH
UNDER THE CAPTION "RISK FACTORS" HEREIN AND IN THE PROSPECTUS.
[The MBS will [consist of] [include] the following series and classes
of securities: [identify title[s] and class[es] of MBS][, including [title[s]
and class[es] of MBS].] [The [title[s] and class[es] of MBS] are [subordinate]
[interest-only] securities.] [See "Summary--The MBS."]]
[The yield to investors in the [interest-only] Certificates will be
[extremely] sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) in the Mortgage Loans
which may fluctuate significantly over time. An [extremely] rapid rate of
principal payments on the Mortgage Loans could result in the failure of
investors in the [interest-only] Certificates to recover their initial
investments.]
[As more fully described herein, each Mortgage Loan provides for
periodic adjustments (which may occur monthly, quarterly, semi-annually or
annually) of the mortgage interest rate (the "Mortgage Rate") thereon and the
monthly payment due thereon, in each case subject to the limitations described
herein. Accordingly, a significant increase in the Mortgage Rate and the amount
of the scheduled monthly payment due thereafter may result, which may increase
the likelihood of default on and prepayment of such Mortgage Loan. In most
cases, because the Mortgage Rate on a Mortgage Loan will be subject to
adjustment monthly, while the monthly payment due thereon will be subject to
adjustment annually, in each case subject to the limitations described herein,
and because the application of payment caps limits adjustments to the monthly
payments on certain Mortgage Loans, the Mortgage Loans (and consequently the
Class [ ] Certificates) may be subject to accelerated, reduced or negative
amortization.
------------
MORGAN STANLEY & CO.
INCORPORATED
_______, 19__
<PAGE>
Certain of the Mortgage Loans continue to be in an initial fixed interest rate
period and have not experienced the first adjustment to their respective
Mortgage Rates.] The characteristics of the Mortgage Loans are more fully
described herein under "Description of the Mortgage Pool."
Distributions on the Class [ ] Certificates will be made, to the
extent of available funds, on the __th day of each [month] [__] or, if any such
day is not a business day, on the next succeeding business day, beginning in
__________ (each, a "Distribution Date"). [As more fully described herein,
distributions allocable to interest, if any, on the Class [ ] Certificates on
each Distribution Date will be based on the [applicable] [then-applicable
variable] pass-through rate (the "Pass-Through Rate") and the aggregate
[principal balance (the "Certificate Balance")] [notional balance (the
"Notional Balance")] of such class [or each component thereof] outstanding
immediately prior to such Distribution Date. [The Pass-Through Rate applicable
to the Class [ ] Certificates from time to time will equal the [sum of __% and
the Index (as defined herein) subject to certain limitations] [weighted average
of the Class [ ] Remittance Rates (as defined herein) on the Mortgage Loans.
The Pass-Through Rate for the Class [ ] Certificates on the first Distribution
Date will be _% per annum and is expected to change thereafter [because the
weighted average of the Class [ ] Remittance Rates is expected to change for
succeeding Distribution Dates.] Distributions in respect of principal, if any,
of the Class [ ] Certificates will be made as described herein under
"Description of the Certificates -- Distributions -- Priority" and
"--Calculations of Principal".]
[_______________ will act as master servicer of the Mortgage Loans
(the "Master Servicer"). The obligations of the Master Servicer with respect to
the Certificates will be limited to its contractual servicing obligations and
the obligation under certain circumstances to make Advances to the
Certificateholders. If the Master Servicer fails to make any such Advance or
otherwise fails to perform its servicing obligations, the Trustee will be
obligated to assume such servicing obligations and to make such Advance to the
extent described herein. See "Description of the Certificates -- Advances"
herein. [The only] obligation of the Depositor with respect to the Certificates
will be to obtain from the Mortgage Asset Seller certain representations and
warranties with respect to the Mortgage Loans and to assign to the Trustee the
obligation of the Mortgage Asset Seller to repurchase or substitute for any
Mortgage Loan as to which there exists an uncured material breach of any such
representation or warranty.]
-------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CLASS [ ] CERTIFICATES. THE CLASS [ ] CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF
THEIR RESPECTIVE AFFILIATES. NEITHER THE CLASS [ ] CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF
THEIR AFFILIATES.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.]
-------------------------
An election will [not] be made to treat the Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. [The Class [ ] Certificates will constitute "regular interests" in
the REMIC.] See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
<PAGE>
ii
The yield to maturity on the Class [ ] Certificates will depend on the
rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans. See "Risk Factors" herein and "Risk
Factors -- Average Life of Certificates; Prepayments; Yields" and "Yield
Considerations" in the Prospectus. As further described herein, losses on the
Mortgage Loans will be allocated to the Subordinate Certificates prior to
allocation to the Class [ ] Certificates. See "Description of the Certificates
- -- Distributions -- Priority" herein.
There is currently no secondary market for the Class [ ] Certificates.
Morgan Stanley & Co. Incorporated (the "Underwriter") currently expects to make
a secondary market in the Class [ ] Certificates, but has no obligation to do
so. There can be no assurance that such a market will develop or, if it does
develop, that it will continue. See "Plan of Distribution" herein.
The Class [ ] Certificates offered hereby will be purchased by the
Underwriter from the Depositor and will be offered by the Underwriter from time
to time to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. Proceeds to the Depositor from the sale
of the Class [ ] Certificates will be ___% of the initial aggregate principal
balance thereof as of ____________ 1, 199_ (the "Cut-off Date") plus accrued
interest from the Cut-off Date, before deducting expenses payable by the
Depositor.
The Class [ ] Certificates are offered subject to prior sale, when, as
and if accepted by the Underwriter, and subject to approval of certain legal
matters by __________, counsel for the Underwriter. It is expected that
delivery of the Class [ ] Certificates [in book-entry form] [in registered,
certified form] will be made on or about ___________, 199_, [through the
facilities of The Depository Trust Company] [at the offices of the Underwriter,
New York, New York] against payment therefor in immediately available funds.
[This Prospectus Supplement may be used by the Underwriter, an
affiliate of the Depositor and the Master Servicer, in connection with offers
and sales related to market making transactions in the Certificates.]
-------------------------
THE CLASS [ ] CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR
AND ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED _______________, 199_,
OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING
THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE
URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF
THE CLASS [ ] CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS
RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
iii
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Supplement ----
Summary......................................................................1
Risk Factors................................................................18
Description of the Mortgage Pool............................................20
Description of the Certificates.............................................33
Pooling and Servicing Agreement.............................................40
Use of Proceeds.............................................................43
Certain Federal Income Tax Consequences.....................................43
ERISA Considerations........................................................44
Legal Investment............................................................45
Plan of Distribution........................................................46
Legal Matters...............................................................46
Rating......................................................................46
Prospectus
Prospectus Supplement.........................................................
Available Information.........................................................
Incorporation of Certain Information by Reference.............................
Summary of Prospectus.........................................................
Risk Factors..................................................................
Description of the Trust Funds................................................
Use of Proceeds...............................................................
Yield Considerations..........................................................
The Depositor.................................................................
Description of the Certificates...............................................
Description of the Agreements.................................................
Description of Credit Support.................................................
Certain Legal Aspects of Mortgage Loans.......................................
Certain Federal Income Tax Consequences.......................................
State Tax Considerations......................................................
ERISA Considerations..........................................................
Legal Investment..............................................................
Plan of Distribution..........................................................
Legal Matters.................................................................
Financial Information.........................................................
Rating........................................................................
Index of Principal Definitions................................................
iv
<PAGE>
-------------------------
UNTIL ______________, 199_, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CLASS [ ] CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
No dealer, salesman, or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus Supplement and the accompanying Prospectus in connection with
the offer contained in this Prospectus Supplement and the accompanying
Prospectus, and, if given, such information or representations must not be
relied upon as having been authorized by the Issuer, the Depositor or the
Underwriter. This Prospectus Supplement and the accompanying Prospectus shall
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. The delivery
of this Prospectus Supplement and the accompanying Prospectus at any time does
not imply that the information herein is correct as of any time subsequent to
the date hereof.
v
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Title of Certificates......................................... Mortgage Pass-Through Certificates, Series 199_-_,
(the "Certificates").
Depositor..................................................... Morgan Stanley Capital I Inc., a Delaware corporation and a
wholly-owned limited purpose finance subsidiary of Morgan
Stanley Group Inc. See "The Depositor" in the Prospectus.
Master Servicer............................................... _______________, a ________________. See "Pooling and Servicing
Agreement -- The Master Servicer" herein.
[Sub-Servicers................................................ ___________________, a __________________]
Trustee....................................................... ___________________, a ___________________.
Cut-off Date.................................................. ____________ 1, 199_.
Closing Date.................................................. ______________ 1, 199_.
Distribution Dates............................................ Distributions on the Certificates will be made by the Trustee,
to the extent of available funds, on the __ day of each [month]
[ ] or, if any such __ day is not a business day, then on the
next succeeding business day, beginning in ________ 19__ (each,
a "Distribution Date"), to the holders of record as of the close
of business on the [last business day of the month preceding the
month] of each such distribution (each, a "Record Date").
Notwithstanding the above, the final distribution on any
Certificate will be made after due notice by the Trustee of the
pendency of such distribution and only upon presentation and
surrender of such Certificates at the location to be specified
in such notice.
[Registration of the Class
[ ] Certificates............................................. The Class [ ] Certificates will be represented by one or more
global certificates registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"). No person
acquiring an interest in the Class [ ] Certificates (any such
person, a "Class [ ] Certificate Owner")
<PAGE>
will be entitled to receive a Certificate of such class in fully
registered, certificated form (a "Definitive Class [ ]
Certificate"), except under the limited circumstances described
in the Prospectus under "Description of the
Certificates-Book-entry Registration and Definitive
Certificates". Instead, DTC will effect payments and transfers
in respect of the Class [ ] Certificates by means of its
electronic recordkeeping services, acting through certain
participating organizations ("Participants"). This may result in
certain delays in receipt of payments by an investor and may
restrict an investor's ability to pledge its securities. Unless
and until Definitive Class [ ] Certificates are issued, all
references herein to the rights of holders of a Class [ ]
Certificate are to the rights of Class [ ] Certificate Owners of
such class as they may be exercised through DTC and its
Participants, except as otherwise specified herein. See
"Description of the Certificates-General" herein and
"Description of the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.]
Denominations................................................. The Class [ ] Certificates will be issuable [on the book-entry
records of DTC and its Participants] [in registered, certified
form] in denominations of $_______ and integral multiples of
$_____________ in excess thereof[, with one Certificate of such
class evidencing an additional amount equal to the remainder of
the Certificate Balance thereof].
[The Mortgage Pool............................................ The Mortgage Pool will consist of [[conventional], [fixed rate]
[adjustable rate] Mortgage Loans secured by first [and/or
junior] liens on one- to four-family residential properties (the
"Mortgaged Properties") located in __ different states,]
[mortgage participations, mortgage pass-through certificates,
mortgage-backed securities evidencing interests therein or
secured thereby (the "MBS"),] [and] [certain direct obligations
of the United States, agencies thereof or agencies created
thereby (the "Government Securities")]. [The Mortgage Loans will
have an aggregate principal balance as of the Cut-off Date of
$_________ and individual principal balances at origination of
at least $______________ but not more than $__________, with an
average principal balance at origination of approximately
$_________. The Mortgage Loans will have
S-2
<PAGE>
terms to maturity from the date of origination or modification
of not more than ____ years, and a weighted average remaining
term to maturity of approximately _____ months as of the Cut-off
Date. The Mortgage Loans will bear interest at Mortgage Rates of
at least _____% per annum but not more than _____% per annum,
with a weighted average Mortgage Rate of approximately ____% per
annum as of the Cut-off Date. The Mortgage Loans will be
acquired by the Depositor on or before the Closing Date. In
connection with its acquisition of the Mortgage Loans, the
Depositor will be assigned (and will in turn assign to the
Trustee for the benefit of the holders of the Certificates)
certain rights in respect of representations and warranties
described herein that were made by the Mortgage Asset Seller.]
[_____ of the Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal balance as of the Cut-off
Date, provide for scheduled payments of principal and/or
interest ("Monthly Payments") to be due on the _____ day of each
month; the remainder of the Mortgage Loans provide for Monthly
Payments to be due on [identify day or days] of each month (the
date in any month on which a Monthly Payment on a Mortgage Loan
is first due, the "Due Date"). [The rate per annum at which
interest accrues on each Mortgage Loan is subject to adjustment
on specified Due Dates (each such date, an "Interest Rate
Adjustment Date") by adding a fixed percentage amount (a "Gross
Margin") to the value of the then-applicable Index (as described
below) subject, in the case of substantially all of the Mortgage
Loans, to limitations on the periodic adjustment of the related
Mortgage Rate, and to maximum and minimum lifetime Mortgage
Rates, as described herein. ___ of the Mortgage Loans,
representing ___% of the Mortgage Loans by aggregate principal
balance as of the Cut-off Date, provide for Interest Rate
Adjustment Dates to occur [monthly]; the remainder of the
Mortgage Loans provide for adjustments to the Mortgage Rate to
occur quarterly, semi-annually or annually. [Each of the
Mortgage Loans provides for an initial fixed interest rate
period;] of the Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal balance as of the Cut-off
Date, have not yet experienced their first Interest Rate
Adjustment Date. The latest
S-3
<PAGE>
initial Interest Rate Adjustment Date for any Mortgage Loan is
scheduled to occur on --------.]]
[The amount of the Monthly Payment on each Mortgage Loan is also
subject to adjustment on specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount that would amortize the
outstanding principal balance of the Mortgage Loan over its then
remaining amortization schedule and pay interest at the
applicable Mortgage Rate, subject, in the case of several
Mortgage Loans, to payment caps, which limit the amount by which
the Monthly Payment may adjust on any Payment Adjustment Date as
described herein. _______ of the Mortgage Loans, representing
__% of the Mortgage Loans (by aggregate principal balance as of
the Cut-off Date, provide for Payment Adjustment Dates to occur
annually, while the remainder of the Mortgage Loans provide for
adjustments of the Monthly Payment to occur monthly, quarterly
or semi-annually.]
[Only in the case of Mortgage Loans, representing ____% of the
Mortgage Loans by aggregate principal balance as of the Cut-off
Date, does a Payment Adjustment Date immediately follow each
Interest Rate Adjustment Date. As a result, and because the
application of payment caps may limit the amount by which the
Monthly Payments may adjust in respect of certain Mortgage
Loans, the amount of a Monthly Payment may be more or less than
the amount necessary to amortize the remaining principal balance
of the Mortgage Loan over its then remaining amortization
schedule and pay interest at the then-applicable Mortgage Rate.
Accordingly, Mortgage Loans may be subject to slower
amortization (if the Monthly Payment due on a Due Date is
sufficient to pay interest accrued to such Due Date at the
then-applicable Mortgage Rate but is not sufficient to reduce
principal in accordance with the applicable amortization
schedule), to negative amortization (if interest accrued to a
Due Date at the applicable Mortgage Rate is greater than the
entire Monthly Payment due on such Due Date) or to accelerated
amortization (if the Monthly Payment due on a Due Date is
greater than the amount necessary to pay interest accrued to
such Due Date at the
S-4
<PAGE>
then-applicable Mortgage Rate and to reduce principal in
accordance with the applicable amortization schedule).]
[__ Mortgage Loans, representing ____% of the Mortgage Loans by
aggregate principal balance as of the Cut-off Date, permit
negative amortization. Substantially all of the Mortgage Loans
that permit negative amortization contain provisions that limit
the extent to which the amount of their respective original
principal balances may be exceeded as a result thereof.]
[__ Mortgage Loans, representing ____% of the Mortgage Loans by
aggregate principal balance as of the Cut-off Date, provide for
monthly payments of principal based on amortization schedules
significantly longer than the remaining term of such Mortgage
Loans, thereby leaving substantial outstanding principal amounts
due and payable (each such payment, a "Balloon Payment") on
their respective maturity dates, unless prepaid prior thereto.]
For a further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.]
[The MBS...................................................... [Title and issuer of underlying securities, amount deposited or
pledged, amount originally issued, maturity date, interest rate,
[redemption provisions], description of other material terms.]
[The Index.................................................... As of any Interest Rate Adjustment Date, the Index used to
determine the Mortgage Rate on each Mortgage Loan will be the
____________. See "Description of the Mortgage Pool -- The
Index" herein.]
[Conversion of Mortgage Loans................................. Approximately __% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) (the "Convertible Mortgage
Loans") provide that, at the option of the related Mortgagors,
the adjustable interest rate on such Mortgage Loans may be
converted to a fixed interest rate, provided that certain
conditions have been satisfied. Upon notification from a
Mortgagor of such Mortgagor's intent to convert from an
adjustable interest rate to a fixed interest rate, and prior to
the conversion of any such Mortgage Loan, the related
Warrantying Party (as defined herein) will be obligated to
purchase the Converting Mortgage
S-5
<PAGE>
Loan (as defined herein) at the Conversion Price (as defined
herein). [In the event of a failure by a Subservicer to purchase
a "Converting Mortgage Loan"], the Master Servicer is required
to use its best efforts to purchase such Converted Mortgage Loan
(as defined herein) from the Mortgage Pool at the Conversion
Price during the one-month period following the date of
conversion.] In the event that neither the related Warrantying
Party nor the Master Servicer purchases a Converting or
Converted Mortgage Loan, the Mortgage Pool will thereafter
include both fixed-rate and adjustable-rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.]
The Class [ ] Certificates.................................... The Class [ ] Certificates will be issued pursuant to a Pooling
and Servicing Agreement, to be dated as of the Cut-off Date,
among the Depositor, the Master Servicer and the Trustee (the
"Pooling and Servicing Agreement"). The Class [ ] Certificates
have an initial Certificate Balance of $_______ (the initial
"Class [ ] Balance"), representing an initial interest of
approximately ___% in a trust fund (the "Trust Fund"), which
will consist primarily of the Mortgage Pool [The Class [ ]
Certificates will not have a Certificate Balance.]
Distributions on the Class [ ] Certificates will be made on the
____ day of each [month] [__] or, if such day is not a business
day, on the succeeding business day, beginning on ____________
__, 199_ (each, a "Distribution Date"). Distributions on each
Distribution Date will be made by check or wire transfer of
immediately available funds, as provided in the Pooling and
Servicing Agreement, to the Class [ ] Certificateholders of
record as of the [last business day of the month preceding the
month] of such Distribution Date (each, a "Record Date"), except
that the final distribution on the Class [ ] Certificates will
be made only upon presentation and surrender of the Class [ ]
Certificates at the office or agency specified in the Pooling
and Servicing Agreement. [As more specifically described herein,
the Class [ ] Balance will be adjusted from time to time on each
Distribution Date to reflect any additions thereto resulting
from allocations of Mortgage Loan negative amortization to the
Class [ ] Certificates and any reductions thereof resulting from
distributions of principal of the Class [ ] Certificates. As
further described herein, interest
S-6
<PAGE>
shall accrue on the Class [ ] Balance at a Pass-Through Rate
thereon.
Pass-Through Rate on the
Class [ ] Certificates...................................... [The Pass-Through Rate on the Class [ ] Certificates is fixed
and is set forth on the cover hereof.] [The Pass-Through Rate on
the Class [ ] Certificates will be equal to the weighted average
of the Class [ ] Remittance Rates in effect from time to time on
the Mortgage Assets. The Class [ ] Remittance Rate in effect for
any Mortgage Assets as of any date of determination [is equal to
the excess of the Mortgage Rate thereon over __% per annum] [(i)
prior to its first Interest Rate Adjustment Date is equal to the
related Mortgage Rate then in effect minus __ basis points (the
"Net Mortgage Rate") and (ii) from and after its first Interest
Rate Adjustment Date is equal to the related Mortgage Rate then
in effect minus the excess of the related Gross Margin over __
basis points.]] [The Class [ ] Certificates [or a component
thereof] will not be entitled to distributions of interest and
will not have a Pass-Through Rate.] [Describe any other method
used to calculate the Pass-Through Rate.]
Interest Distributions
on the Class [ ] Certificates............................... Holders of the Class [ ] Certificates will be entitled to
receive on each Distribution Date, to the extent of the
Available Distribution Amount for such Distribution Date,
distributions allocable to interest in an aggregate amount (the
"Class [ ] Interest Distribution Amount") equal to thirty days'
interest accrued on the Class [ ] Balance] [Class [ ] Notional
Amount] outstanding immediately prior to such Distribution Date
at the then-applicable Pass-Through Rate less the Class [ ]
Certificates' allocable share (calculated as described herein)
of [(i) the aggregate amount of negative amortization in respect
of the Mortgage Loans for their respective Due Dates occurring
during the related Due Period and (ii)] the aggregate portion of
Prepayment Interest Shortfalls incurred during the related Due
Period that was not covered by the application of the Master
Servicer's servicing compensation for the related Due Period.
[The amount, if any, by which the Class [ ] Interest
Distribution Amount for any Distribution Date is reduced as a
result of negative amortization on the Mortgage Loans shall
constitute the "Class Negative Amortization" for
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<PAGE>
such Distribution Date in respect of the Class [ ] Certificates
and shall be added to the Class [ ] Balance on such Distribution
Date.] [The Class [ ] Notional Amount will equal the [sum of
the] Class [ ] Balance. The Class [ ] Notional Amount does not
entitle the Class [ ] Certificates [or a component thereof] to
any distributions of principal.] If the Available Distribution
Amount for any Distribution Date is less than the Class [ ]
Interest Distribution Amount for such Distribution Date, the
shortfall will be part of the Class [ ] Interest Distribution
Amount distributable to holders of Class [ ] Certificates on
subsequent Distribution Dates, to the extent of available funds.
The Available Distribution Amount for any Distribution Date
generally includes: (i) scheduled payments on the Mortgage
Assets due during or prior to the related Due Period and
collected as of the related Determination Date (to the extent
not distributed on previous Distribution Dates) and certain
unscheduled payments and other collections on the Mortgage
Assets collected during the related Due Period, net of amounts
payable or reimbursable to the Master Servicer therefrom; (ii)
any Advances made by the Master Servicer for the related
Distribution Date; and (iii) that portion of the Master
Servicer's servicing compensation for the related Due Period
applied to cover Prepayment Interest Shortfalls incurred during
the related Due Period. See " Description of the Certificates --
Distributions -- Calculations of Interest" herein.
Principal Distributions
on the Class [ ]
Certificates................................................ Holders of the Class [ ] Certificates will be entitled to
receive on each Distribution Date, to the extent of the balance
of the Available Distribution Amount remaining after the payment
of the Class [ ] Interest Distribution Amount for such
Distribution Date, distributions in respect of principal in an
amount (the "Class [ ] Principal Distribution Amount") generally
equal to the aggregate of (i) the then Class [ ] Scheduled
Principal Distribution Percentage (calculated as described
herein) of all scheduled payments of principal (including the
principal portion of any Balloon Payments) due on the Mortgage
Loans during or, if and to the extent not previously
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<PAGE>
received or advanced and distributed on prior Distribution
Dates, prior to the related Due Period that were paid by the
mortgagors as of the related Determination Date or advanced by
the Master Servicer in respect of such Distribution Date, (ii)
[the Senior Accelerated Percentage of] [all principal
prepayments received during the related Due Period and (iii), to
the extent not previously advanced [the [lesser of the] Class [
] Scheduled Principal Distribution Percentage of the Stated
Principal Balance of the Mortgage Loans] [and the] [Senior
Accelerated Percentage of any unscheduled principal recoveries
received during the related Due Period in respect of the
Mortgage Loans, whether in the form of liquidation proceeds,
insurance proceeds, condemnation proceeds or amounts received as
a result of the purchase of any Mortgage Loan out of the Trust
Fund.]] Distributions in respect of principal of the Class [ ]
Certificates on any Distribution Date shall be limited to the
sum of (i) the Class [ ] Balance outstanding immediately prior
to such Distribution Date and (ii) the Class Negative
Amortization, if any, for such Distribution Date in respect of
the Class [ ] Certificates. [Initially, the "Senior Accelerated
Percentage" will equal 100% thereafter, as further described
herein, the Senior Accelerated Percentage may be reduced under
certain circumstances.] See "Description of the Certificates
--Distributions -- Calculations of Principal" herein. [The Class
[ ] Certificates do not have a Certificate Balance and are
therefore not entitled to any principal distributions].
Advances...................................................... The Master Servicer is required to make advances ("Advances") in
respect of delinquent Monthly Payments on the Mortgage Loans,
subject to the limitations described herein. The Trustee will be
obligated to make any such Advance if the Master Servicer fails
in its obligation to do so, to the extent provided in the
Pooling and Servicing Agreement. See "Description of the
Certificates -- Advances" herein and "Description of the
Certificates -- Advances in Respect of Delinquencies" in the
Prospectus.
Subordination ................................................ The rights of holders of the Subordinate Certificates to receive
distributions of amounts collected on the Mortgage Loans will be
subordinate, to the extent described herein, to the rights of
holders of the Class [ ] Certificates. This
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<PAGE>
subordination is intended to enhance the likelihood of receipt
by the holders of the Class [ ] Certificates of the full amount
of the Class [ ] Interest Distribution Amount and the [ultimate
receipt of principal equal to the initial Class [ ] Balance].
The protection afforded to the holders of the Class [ ]
Certificates by means of the subordination, to the extent
provided herein, will be accomplished by the application of the
Available Distribution Amount to the Class [ ] Certificates
prior to the application thereof to the Subordinate Certificates
[and by reducing the Class [ ] Interest Distribution Amount and
the Class [ ] Balance by an amount equal to the interest portion
and the principal portion, respectively, Realized Losses
allocated to such class]. See "Description of the Certificates
-- Subordination" herein.
[The Subordinate
Certificates................................................ The Class [ ] Certificates have an initial Certificate Balance
of $____________ (the initial "Class [ ] Balance") and the Class
[ ] Certificates have an initial Certificate Balance of
$________ (the initial "Class [ ] Balance"), representing ____%
and _____%, respectively, of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date. Interest shall accrue
on the Class [ ] Balance and Class [ ] Balance at a Pass-Through
Rate equal to [____% per annum] [the weighted average of the Net
Mortgage Rates in effect from time to time on the Mortgage
Loans].
[The Class [ ] Certificates, which have no Pass-Through Rate and
initially have a Certificate Balance of $______________ (the
initial "Class [ ] Balance"), represent the right to receive on
any Distribution Date the balance, if any, of the Available
Distribution Amount remaining after the payment of all interest
and principal due on the other Classes of Certificates.
Subsequent to the first Distribution Date, the Class [ ] Balance
will equal the excess, if any, of the aggregate Stated Principal
Balance of the Mortgage Loans over the sum of the Class [ ]
Balance, Class [ ] Balance and Class [ ] Balance.]
[The Subordinate Certificates are not offered hereby.]]
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<PAGE>
[Special Prepayment Considerations............................ The rate of principal payments on the Class [ ] Certificates
collectively will depend on the rate and timing of principal
payments (including prepayments, defaults and liquidations) on
the Mortgage Loans. As is the case with mortgage-backed
securities generally, the Class [ ] Certificates are subject to
substantial inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time. Generally, when
prevailing interest rates are increasing, prepayment rates on
mortgage loans tend to decrease, resulting in a reduced return
of principal to investors at a time when reinvestment at such
higher prevailing rates would be desirable. Conversely, when
prevailing interest rates are declining, prepayment rates on
mortgage loans tend to increase, resulting in a greater return
of principal to investors at a time when reinvestment at
comparable yields may not be possible.
[The multiple class structure of the Class [ ] Certificates
results in the allocation of prepayments among certain classes
as follows [to be included as appropriate]:
[SEQUENTIALLY PAYING CLASSES: [All] classes of the Class [ ]
Certificates are subject to various priorities for payment of
principal as described herein. Distributions on classes having
an earlier priority of payment will be immediately affected by
the prepayment speed of the Mortgage Loans early in the life of
the Mortgage Pool. Distributions on classes with a later
priority of payment will not be directly affected by the
prepayment speed until such time as principal is distributable
on such classes; however, the timing of commencement of
principal distributions and the weighted average lives of such
classes will be affected by the prepayment speed experienced
both before and after the commencement of principal
distributions on such classes.]
[[SCHEDULED] CERTIFICATES: Principal distributions on the
[Scheduled] Certificates will be payable in amounts determined
based on schedules as described herein, provided that the
prepayment speed of the Mortgage Loans each month remains [at a
constant level of] [between approximately ___% [SPA][CPR] (as
defined herein) and] ___% [SPA][CPR]. [However, as discussed
herein, actual principal distributions are likely to deviate
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<PAGE>
from the described amounts, because it is highly unlikely that
the actual prepayment speed of the Mortgage Loans each month
will remain at or near ___% [SPA][CPR].] If the prepayment speed
of the Mortgage Loans is consistently higher than ___% of
[SPA][CPR], then the [Companion] Certificates will be retired
before all of the [Scheduled] Certificates are retired, and the
rate of principal distributions and the weighted average lives
of the remaining [Scheduled] Certificates will become
significantly more sensitive to changes in the prepayment speed
of the Mortgage Loans and principal distributions thereon will
be more likely to deviate from the described amounts.]
[[COMPANION] CERTIFICATES: Because of the application of amounts
available for principal distributions among the Class [ ], Class
[ ] and Class [ ] Certificates in any given month, first to the
[Scheduled] Certificates up to the described amounts and then to
the [Companion] Certificates, the rate of principal
distributions and the weighted average lives of the [Companion]
Certificates will be extremely sensitive to changes in the
prepayment speed of the Mortgage Loans. The weighted average
lives of the [Companion] Certificates will be significantly more
sensitive to changes in the prepayment speed than that of the
[Scheduled] Certificates or a fractional undivided interest in
the Mortgage Loans.]]
[Special Yield Considerations................................. The yield to maturity on each respective class of the Class [ ]
Certificates will depend on the rate and timing of principal
payments (including prepayments, defaults and liquidations) on
the Mortgage Loans and the allocation thereof (and of any losses
on the Mortgage Loans) to reduce the Certificate Principal
Balance (or Notional Amount) of such class, as well as other
factors such as the Pass-Through Rate (and any adjustments
thereto) and the purchase price for such Certificates. The yield
to investors on any class of Class [ ] Certificates will be
adversely affected by any allocation thereto of prepayment
interest shortfalls on the Mortgage Loans, which are expected to
result from the distribution of interest only to the date of
prepayment (rather than a full month's interest) in connection
with prepayments in full, and the lack of any
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<PAGE>
distribution of interest on the amount of any partial
prepayments.
In general, if a Class [ ] Certificate is purchased at a premium
and principal distributions thereon occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of
purchase. Conversely, if a Class [ ] Certificate is purchased at
a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that originally
anticipated.
The Class [ ] Certificates were structured based on a number of
assumptions, including a prepayment assumption of ___%
[SPA][CPR] and weighted average lives corresponding thereto as
set forth herein under "Special Prepayment Considerations." The
yield assumptions for the respective classes of Offered
Certificates will vary as determined at the time of sale.
[The multiple class structure of the Senior Certificates causes
the yields of certain classes to be particularly sensitive to
changes in the prepayment speed of the Mortgage Loans and other
factors, as follows [to be included as appropriate]:]
[Interest strip and inverse floater classes: The yield to
investors on the [identify classes] will be extremely sensitive
to the rate and timing of principal payments on the Mortgage
Loans (including prepayments, defaults and liquidations), which
may fluctuate significantly over time. A rapid rate of principal
payments on the Mortgage Loans could result in the failure of
investors in the [identify interest strip and inverse floater
strip classes] to recover their initial investments, and a
slower than anticipated rate of principal payments on the
Mortgage Loans could adversely affect the yield to investors on
the [identify non-strip inverse floater classes].]
[[Variable Strip] Certificates. In addition to the foregoing,
the yield on the [Variable Strip] Certificates will be
materially adversely affected to a greater extent than the
yields on the other Class [ ] Certificates if the Mortgage Loans
with
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<PAGE>
higher Mortgage Rates prepay faster than the Mortgage Loans with
lower Mortgage Rates, because holders of the [Variable Strip]
Certificates generally have rights to relatively larger portions
of interest payments on the Mortgage Loans with higher Mortgage
Rates than on Mortgage Loans with lower Mortgage Rates.]
[Adjustable rate (including inverse floater) classes: The yield
on the [identify floating rate classes] will be sensitive, and
the yield on the [identify inverse floater classes] will be
extremely sensitive, to fluctuations in the level of [the
index]. The Pass-Through Rate on the [identify inverse floater
classes] will vary inversely with, and at a multiple of, [the
index].]
[Inverse floater companion classes: In addition to the
foregoing, in the event of relatively low prevailing interest
rates (including [the index] and relatively high rates of
principal prepayments over an extended period, while investors
in the [identify inverse floater companion classes] may then be
experiencing a high current yield on such Certificates, such
yield may be realized only over a relatively short period, and
it is unlikely that such investors would be able to reinvest
such principal prepayments on such Certificates at a comparable
yield.]
[RESIDUAL CERTIFICATES: Holders of the Residual Certificates are
entitled to receive distributions of principal and interest as
described herein; however, holders of such Certificates may have
tax liabilities with respect to their Certificates during the
early years of their term that substantially exceed the
principal and interest payable thereon during such periods. [In
addition, such distributions will be reduced to the extent that
they are subject to United States federal income tax
withholding.]]]
Optional Termination.......................................... At its option, the Master Servicer may purchase all of the
Mortgage Assets, and thereby effect termination of the Trust
Fund and early retirement of the then outstanding Certificates,
on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans remaining in the Trust Fund is
less than __% of the aggregate principal balance of such
Mortgage Loans as of the Cut-off Date. [At its option, the
<PAGE>
Master Servicer may also purchase any Class [ ] Certificates on
any Distribution Date on which the Class [ ] Balance is less
than ___% of the original balance thereof.] See "Pooling and
Servicing Agreement -- Termination" herein and "Description of
the Certificates -- Termination" in the Prospectus.
Certain Federal Income Tax
Consequences................................................ [An election will be made to treat the Trust Fund as a real
estate mortgage investment conduit ("REMIC") for federal income
tax purposes. Upon the issuance of the Class [ ] Certificates,
Brown & Wood LLP or Cadwalader, Wickersham & Taft or Latham &
Watkins, counsel to the Depositor, will deliver its opinion
generally to the effect that assuming compliance with all
provisions of the Pooling and Servicing Agreement, for federal
income tax purposes, the Trust Fund will qualify as a REMIC
under Sections 860A through 860G of the Internal Revenue Code of
1986 (the "Code").
For federal income tax purposes, the Class [ ] Certificates will
be the sole class of "residual interests" in the REMIC and the
Class [ ], Class [ ] and Class [ ] Certificates will be the
"regular interests" in the REMIC and will be treated as debt
instruments of the REMIC.
The Class [ ] Certificates [may[will]][will not] be treated as
having been issued with original issue discount for federal
income tax purposes. The prepayment assumption that will be used
for purposes of computing the accrual of original issue
discount, market discount and premium, if any, for federal
income tax purposes will be equal to a [constant prepayment rate
("CPR")] [standard prepayment assumption ("SPA")] of ____%.
However, no representation is made that the Mortgage Loans will
prepay at that rate or at any other rate.]
For further information regarding the federal income tax
consequences of investing in the Class [ ] Certificates, see
"Certain Federal Income Tax Consequences" herein and in the
Prospectus.]
ERISA Considerations.......................................... [A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security
Act of 1974, as
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<PAGE>
amended ("ERISA"), or Section 4975 of the Code should review
carefully with its legal advisors whether the purchase or
holding of Class [ ] Certificates could give rise to a
transaction that is prohibited or is not otherwise permitted
either under ERISA or Section 4975 of the Code or whether there
exists any statutory or administrative exemption applicable to
an investment therein.] [The U.S. Department of Labor has issued
an individual exemption, Prohibited Transaction Exemption 90-24,
to the Underwriter that generally exempts from the application
of certain of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and
holding of pass-through certificates underwritten by the
Underwriter such as the Class [ ] Certificates and the servicing
and operation of asset pools such as the Trust Fund, provided
that certain conditions are satisfied. A fiduciary of any
employee benefit plan subject to ERISA or the Code should
consult with its legal advisors regarding the requirements of
ERISA and the Code.] See "ERISA Considerations" herein and in
the Prospectus.
Rating........................................................ It is a condition to the issuance of the Class [ ] Certificates
that they be rated [not lower than] "___" by . A security
-------------- rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at
any time by the assigning rating organization. A security rating
does not address the frequency of prepayments (whether voluntary
or involuntary) of Mortgage Loans, or the corresponding effect
on yield to investors. [The rating of the Class [ ] Certificates
does not address the possibility that the holders of such
Certificates may fail to fully recover their initial
investments.] See "Risk Factors" and "Rating" herein and "Yield
Considerations" in the Prospectus.
Legal Investment ............................................. The appropriate characterization of the Class [ ] Certificates
under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase
the Class [ ] Certificates, may be subject to significant
interpretative uncertainties. The Class [ ] Certificates [will]
[will not] be "mortgage related
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<PAGE>
securities" within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984 [so long as they are rated in at least
the second highest rating category by the Rating Agency, and, as
such, are legal investments for certain entities to the extent
provided in SMMEA]. Accordingly, investors should consult their
own legal advisors to determine whether and to what extent the
Class [ ] Certificates constitute legal investments for them.
See "Legal Investment" herein and in the Prospectus.
</TABLE>
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<PAGE>
RISK FACTORS
[Description will depend on the particulars of the Mortgage Assets]
Special Prepayment Considerations. The rate and timing of principal
payments on the Class [ ] Certificates will depend, among other things, on the
rate and timing of principal payments (including prepayments, defaults,
liquidations and purchases of Mortgage Assets due to a breach of representation
and warranty) on the Mortgage Assets. The rate at which principal prepayments
occur on the Mortgage Loans will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans, the level of
prevailing interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however, if
prevailing interest rates fall significantly below the Mortgage Rates on the
Mortgage Loans, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. [The rate of principal payments on the Class [ ]
Certificates will correspond to the rate of principal payments on the Mortgage
Loans and is likely to be affected by the Lock-out Periods and Prepayment
Premium Provisions applicable to the Mortgage Loans and by the extent to which
the Master Servicer is able to enforce such provisions. Mortgage loans with a
lock-out period or a prepayment premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical mortgage loans without such provisions, with shorter
lock-out periods or with lower prepayment premiums.] [As is the case with
mortgage-backed securities generally, the Class [ ] Certificates are subject to
substantial inherent cashflow uncertainties because the Mortgage Loans may be
prepaid at any time.]
[As described herein, prior to reduction of the Class [ ] Balance to
zero, all principal prepayments on and other unscheduled recoveries of
principal of the Mortgage Loans will be allocated to the Class [ ]
Certificates. To the extent that no prepayments or other unscheduled recoveries
of principal are distributed on the Subordinate Certificates, the subordination
afforded the Class [ ] Certificates by the Subordinate Certificates, in the
absence of offsetting losses on the Mortgage Loans allocated thereto, will be
increased.]
See "Description of the Certificates -- Distributions -- Priority" and
"Certain Yield, Prepayment and Maturity Considerations" herein and "Yield
Considerations" in the Prospectus.
Special Yield Considerations. The yield to maturity on the Class [ ]
Certificates will depend, among other things, on the rate and timing of
principal payments (including prepayments, defaults, liquidations and purchases
of Mortgage Loans due to a breach of representation and warranty) on the
Mortgage Loans and the allocation thereof to reduce the Certificate Balance of
such class. [The yield to maturity on the Class [ ] Certificates will also
depend on changes in the Index and the effect of any maximum lifetime Mortgage
Rate, minimum lifetime Mortgage Rate, Payment Cap and Periodic Rate Cap
applicable to each Mortgage Loan.] The yield to investors on the Class [ ]
Certificates will be adversely affected by any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage Loans, which are expected to result from
the distribution of interest only to the date of prepayment (rather than a full
month's interest) in connection with prepayments in full, and the lack of any
distribution of interest on the amount of any partial prepayments. Neither the
Certificates not the Mortgage Loans are guaranteed by any governmental entity
or private insurer.
In general, if a Certificate is purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Certificate is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will
be lower than assumed at the time of purchase.
See "Certain Federal Income Tax Consequences" herein and in the
Prospectus and "Yield Considerations" in the Prospectus.
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<PAGE>
[Risks Associated with Certain of the Mortgage Loans and Mortgaged
Properties.] [Description of type of property.]
[Because the Mortgage Loans are adjustable rate mortgage loans, the
Mortgage Rates and Monthly Payments will increase in a rising interest rate
environment, perhaps without a corresponding increase in the mortgagors'
income. In such event, the related mortgagor's ability to make Monthly Payments
may be impaired, and a mortgagor payment default would be more likely to
occur.]
Effect of Mortgagor Defaults. The aggregate amount of distributions on
the Class [ ] Certificates, the yield to maturity of the Class [ ]
Certificates, the rate of principal payments on the Class [ ] Certificates and
the weighted average life of the Class [ ] Certificates will be affected by the
rate and the timing of delinquencies and defaults on the Mortgage Loans. If a
purchaser of a Class [ ] Certificate calculates its anticipated yield based on
an assumed rate of default and amount of losses on the Mortgage Loans that is
lower than the default rate and amount of losses actually experienced and such
additional losses are allocable to such class of Certificates, such purchaser's
actual yield to maturity will be lower than that so calculated and could, under
certain extreme scenarios, be negative. The timing of any loss on a liquidated
Mortgage Loan will also affect the actual yield to maturity of the Class [ ]
Certificates to which a portion of such loss is allocable, even if the rate of
defaults and severity of losses are consistent with an investor's expectations.
In general, the earlier a loss borne by an investor occurs, the greater is the
effect on such investor's yield to maturity.
As and to the extent described herein, the Master Servicer will be
entitled to receive interest on unreimbursed Advances and unreimbursed
servicing expenses that (i) are recovered out of amounts received on the
Mortgage Loan as to which such Advances were made or such servicing expenses
were incurred, which amounts are in the form of liquidation proceeds, insurance
proceeds, condemnation proceeds or amounts paid in connection with the purchase
of such Mortgage Loan out of the Trust Fund or (ii) are determined to be
nonrecoverable Advances. The Master Servicer's right to receive such payments
of interest are prior to the rights of Certificateholders to receive
distributions on the Certificates and, consequently, may result in losses being
allocated to the Class [ ] Certificates that would not otherwise have resulted
absent the accrual of such interest.
Even if losses on the Mortgage Loans are not borne by an investor in
the Class [ ] Certificates, such losses may affect the weighted average life
and yield to maturity of such investor's Certificates. Losses on the Mortgage
Loans, to the extent not allocated to the Class [ ] Certificates, may result in
a higher percentage ownership interest evidenced by such Certificates than
would otherwise have resulted absent such loss. The consequent effect on the
weighted average life and yield to maturity of the Class [ ] Certificates will
depend upon the characteristics of the remaining Mortgage Loans.
Regardless of whether losses ultimately result, delinquencies and
defaults on the Mortgage Loans may significantly delay the receipt of payments
by the holder of a Class [ ] Certificate, to the extent that Advances or the
subordination of another class of Certificates does not fully offset the
effects of any such delinquency or default. The Scheduled Principal
Distribution Amount and the Unscheduled Principal Distribution Amount generally
consist of, as more fully described herein, principal of the Mortgage Loans
actually collected or advanced. The Master Servicer has the ability to extend
and modify Mortgage Loans that are in default or as to which a payment default
is imminent, including the ability to extend the date on which a Balloon
Payment is due by up to __ months, subject to certain conditions described in
the Pooling and Servicing Agreement. The Master Servicer's obligation to make
Advances in respect of a Mortgage Loan that is delinquent as to its Balloon
Payment is limited, however, to the extent described under "Description of the
Certificates -- Advances". Until such time as any Mortgage Loan delinquent in
respect of its Balloon Payment is liquidated, the entitlement of the holders of
Class [ ] Certificates on each Distribution Date in respect of principal of
such Mortgage Loan will be limited to the Class [ ] Scheduled Principal
Distribution Percentage of that portion of the Available Distribution Amount
that represents the principal portion of (i) any payment made by the related
mortgagor under a forbearance arrangement or (ii) any related Advance made by
the Master Servicer. Consequently, any delay in the receipt of a Balloon
Payment that is payable, in whole or in part, to holders of Class [ ]
Certificates will extend the weighted average life of the Class [ ]
Certificates.
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<PAGE>
As described under "Description of the Certificates -- Distributions"
herein, if the portion of Available Distribution Amount distributable in
respect of interest on the Class [ ] Certificates on any Distribution Date is
less than the Distributable Certificate Interest then payable for such class,
the shortfall will be distributable to holders of such class of Certificates on
subsequent Distribution Dates, to the extent of available funds. Any such
shortfall will not bear interest and will therefore negatively affect the yield
to maturity of such class of Certificates for so long as it is outstanding.
[The following paragraphs will be included in the event any of the Mortgage
Loans are acquired from the Resolution Trust Corporation:]
[Troubled Originators. The Mortgage Loans were originated or purchased
by the [Originating Institutions], each of which is subject to an RTC
receivership. It is possible that the financial difficulties experienced by the
[Originating Institutions] may have adversely affected either or both of (i)
the standards and procedures pursuant to which the Mortgage Loans were
originated or purchased by such [Originating Institutions] and (ii) the manner
in which such Mortgage Loans have been serviced prior to assumption of
servicing responsibilities by the Master Servicer. The Mortgage Loans will be
acquired by the Depositor on or before the Closing Date from the Mortgage Asset
Seller, which acquired the Mortgage Loans from the RTC in its capacity as
receiver of each of the associations pursuant to a certain commercial mortgage
loan sale agreement, dated ______, 199_ (as amended, the "Loan Sale
Agreement"). Pursuant to the Loan Sale Agreement, the RTC as receiver of the
[Originating Institutions], has made certain representations and warranties
regarding the Mortgage Loans and is obligated to cure such breaches or
repurchase those Mortgage Loans as to which there is a breach of such
representations and warranties. The RTC repurchase price for the Mortgage Loans
is par plus accrued interest at the related Mortgage Rate[,except in the case
of Mortgage Loans as to which a repurchase for a breach of the representation
and warranty relating to certain environmental matters would be accomplished at
a price that initially is discounted but increases to par over approximately __
years]. See "Description of the Mortgage Pool -- Representations and Warranties
of the Originating Institutions" herein. The RTC, acting in its corporate
capacity, has guaranteed such obligations of the RTC, acting in its capacity as
receiver. The agreement pursuant to which such guarantee was made by the RTC is
hereinafter referred to as the "Guarantee Agreement".]
[Limited Information. The information set forth in this Prospectus
Supplement with respect to the Mortgage Loans is derived from books and records
of the [Originating Institutions], as well as a limited review of the credit
and legal files relating to the Mortgage Loans. Accordingly, available
information does not permit the Depositor to determine fully the origination,
credit appraisal and underwriting practices of the originators of the Mortgage
Loans. Furthermore, it is possible that this Prospectus Supplement does not
contain material information regarding the Mortgage Loans that would have been
disclosed if the structure and personnel of the [Originating Institutions] had
not been affected by such institutions having been placed in receivership.
While the Depositor has undertaken a limited review of the records and files
related to the Mortgage Loans in connection with the issuance of the Class [ ]
Certificates the Mortgage Loans have not been "re-underwritten" or subjected to
the type of review that would typically be made in respect of a newly
originated mortgage loan.]]
DESCRIPTION OF THE [MORTGAGE POOL] [MBS]
GENERAL
The Trust Fund will consist primarily of [___ [conventional], [fixed
interest] [adjustable interest] rate Mortgage Loans with an aggregate principal
balance as of the Cut-off Date, after deducting payments of principal due on
such date, of $____________,] [mortgage participations, mortgage pass-through
certificates, mortgage-backed securities evidencing interests therein or
secured thereby (the "MBS"),] [and] [certain direct obligations of the United
States, agencies thereof or agencies created thereby (the "Government
Securities")]. Each Mortgage Loan is evidenced by a promissory note (a
"Mortgage Note") and secured by a mortgage, deed of trust or other similar
security instrument (a "Mortgage" creating a first fee lien on a one- to four-
family residential property (a "Mortgaged Property"). The Mortgaged Properties
consist of [description of one- to four-family residential properties].
[Because no evaluation of any mortgagor's financial condition
S-20
<PAGE>
has been conducted, investors should consider all of the Mortgage Loans to be
non-recourse loans so that, in the event of mortgagor default, recourse may be
had only against the specific property and such limited other assets as have
been pledged to secure a Mortgage Loan, and not against the mortgagor's other
assets.] All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as
of the Cut-off Date.]
[The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by ________________ (the "Mortgage Asset Seller") and
will comply with the underwriting criteria described herein. The Depositor will
purchase the Mortgage Loans to be included in the Mortgage Pool on or before
the Closing Date from the Mortgage Asset Seller pursuant to a seller's
agreement (the "Seller's Agreement"), to be dated as of ____________, 199_
between the Mortgage Asset Seller and the Depositor. The Depositor will cause
the Mortgage Loans in the Mortgage Pool to be assigned to _______________, as
Trustee, pursuant to the Pooling and Servicing Agreement. _____________, in its
capacity as Master Servicer, will service the Mortgage Loans pursuant to the
Pooling and Servicing Agreement.
Under the Seller's Agreement, _______________, as seller of the
Mortgage Loans to the Depositor, will make certain representations, warranties
and covenants to the Depositor relating to, among other things, the due
execution and enforceability of the Seller's Agreement and certain
characteristics of the Mortgage Loans, and will be obligated to repurchase or
substitute for any Mortgage Loans as to which there exists deficient
documentation or an uncured material breach of any such representation,
warranty or covenant. Under the Pooling and Servicing Agreement the Depositor
will assign all its right, title and interest in such representations,
warranties and covenants (including ____________________'s repurchase or
substitution obligation) to the Trustee for the Trust Fund. The Depositor will
make [no] representations or warranties with respect to the Mortgage Loans and
will have no obligation to repurchase or substitute for Mortgage Loans with
deficient documentation [or which are otherwise defective]. _____________, as
seller of the Mortgage Loans to the Depositor, is selling such Mortgage Loans
without recourse and, accordingly, in such capacity, will have no obligations
with respect to the certificates other than pursuant to such representations,
warranties, covenants and repurchase obligations. See "Description of the
Agreements -- Representations and Warranties; Repurchases" in the Prospectus.]
[THE MBS
[Title and issuer of underlying securities, amount deposited or
pledged, amount originally issued, maturity date, interest rate, [redemption
provisions], together with description of other material terms.]
[Description of principal and interest distributions on the MBS.]
[Description of advances by the servicer of the mortgage loans
underlying the MBS.]
[Description of effect on the MBS of allocation of losses on the
underlying mortgage loans.]
As to each series of MBS included in the Trust Fund, the various
classes of certificates from such series [(including classes not in the Trust
Fund but from the same series as classes that are in the Trust Fund] are
listed, together with the related pass-through rates and certain other
information applicable thereto, in Annex B hereto.]
[CONVERTIBLE MORTGAGE LOANS
____% of the Mortgage Loans ("Convertible Mortgage Loans") provide
that, at the option of the related Mortgagors, the adjustable interest rate on
such Mortgage Loans may be converted to a fixed interest rate. The first month
in which any of the Mortgage Loans may convert is ____________, and the last
month in which any of the Mortgage Loans may convert is _____________. Upon
conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage
Note which formula is intended to result in a Mortgage Rate which is not less
than the then current market interest rate (subject to applicable usury laws).
After such
S-21
<PAGE>
conversion, the monthly payments of principal and interest will be adjusted to
provide for full amortization over the remaining term to scheduled maturity.
Upon notification from a Mortgagor of such Mortgagor's intent to convert from
an adjustable interest rate to a fixed interest rate and prior to the
conversion of any such Mortgage Loan (a "Converting Mortgage Loan"), the
related Warrantying Party will be obligated to purchase the Converting Mortgage
Loan at a price equal to the outstanding principal balance thereof plus accrued
interest thereon net of any subservicing fees (the "Conversion Price"). In the
event of a failure by a Warrantying Party to purchase a converting Mortgage
Loan, the Master Servicer is required to use its best efforts to purchase such
Mortgage Loan following its conversion (a "Converted Mortgage Loan") during the
one-month period following the date of conversion at the Conversion Price.
In the event that the related Warrantying Party fails to purchase a
Converting Mortgage Loan and the Master Servicer does not purchase a Converted
Mortgage Loan, neither the Depositor nor any of its affiliates nor any other
entity is obligated to purchase or arrange for the purchase of any Converted
Mortgage Loan. Any such Converted Mortgage Loan will remain in the Mortgage
Pool as a fixed-rate Mortgage Loan and will result in the Mortgage Pool's
having both fixed rate and adjustable rate Mortgage Loans. See "Certain Yield
and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the Trustee
of such Mortgage Loan and the purchaser will thereafter own such Mortgage Loan
free of any further obligation to the Trustee or the Certificateholders with
respect thereto.]
[THE INDEX
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate will be a per annum rate equal to
______________, as most recently available as of the date days prior to the
Payment Adjustment Date (the "Index"). Such average yields reflect the yields
for the week prior to that week in which the information is reported. In the
event that the Index is no longer available, an index reasonably acceptable to
the Trustee that is based on comparable information will be selected by the
Master Servicer.
The Index is currently calculated based on information reported in
___________. Listed below are the weekly average yields on actively traded
______________ as reported in ____________ on the date that would have been
applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such _______________ on any Payment Adjustment Date or during
the life of any Mortgage Loan.]
[name of Index]
<TABLE>
<CAPTION>
Adjustment Date 1990 1991 1992 1993 1994 1995
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January [ ] ............................
February [ ] ...........................
March [ ] ..............................
April [ ] ..............................
May [ ].................................
June [ ]................................
July [ ]................................
August [ ]..............................
September [ ]...........................
October [ ].............................
November [ ]............................
December [ ]............................
</TABLE>
S-22
<PAGE>
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
[Approximately ___% of the Mortgage Loans have Due Dates that occur on
the ___ day of each month; approximately ___% of the Mortgage Loans have Due
Dates that occur on the ___ day of each month; approximately _____% of the
Mortgage Loans have Due Dates that occur on the ___ day of each month; and the
remainder of the Mortgage Loans have Due Dates that occur on the fifteenth day
of each month.]
[As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from _____% per annum to _______%
per annum; (ii) a weighted average Mortgage Rate of ______% per annum; (iii)
Gross Margins ranging from ____ basis points to ______ basis points; (iv) a
weighted average Gross Margin of ____ basis points; (v) principal balances
ranging from $_______ to $______; (vi) an average principal balance of
$_________; (vii) original terms to scheduled maturity ranging from _____
months to _________ months; (viii) a weighted average original term to
scheduled maturity of _____ months; (ix) remaining terms to scheduled maturity
ranging from ____ months to _____ months; (x) a weighted average remaining term
to scheduled maturity of ________ months; (xi) Cut-off Date Loan-to-Value
("LTV") Ratios ranging from ______% to ________%; (xii) a weighted average
Cut-off Date LTV Ratio of _____%; (xiii) as to the _______% of the Mortgage
Loans to which such characteristic applies, (A) minimum lifetime Mortgage Rates
ranging from ____% per annum to ______ % per annum and (B) a weighted average
minimum lifetime Mortgage Rate of _______% per annum; and (xiv) as to
the__________% of Mortgage Loans to which such characteristic applies and for
which it may be currently calculated, (A) maximum lifetime Mortgage Rate
ranging from _______% per annum to ________% per annum and (B) a weighted
average maximum lifetime Mortgage Rate of _________% per annum.]
[___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Risk Factors -- Balloon
Payments" in the Prospectus.]
[The Mortgage Rate on each Mortgage Loan is subject to adjustment on
each Interest Rate Adjustment Date by adding the related Gross Margin to the
value of the Index (described below) as most recently announced a specified
number of days prior to such Interest Rate Adjustment Date, subject, in the
case of substantially all of the Mortgage Loans, to minimum and maximum
lifetime Mortgage Rates, with ranges specified below. The Mortgage Rates on the
Mortgage Loans generally are adjusted monthly; however, certain of the Mortgage
Loans provide for Interest Rate Adjustment Dates to occur quarterly (___% of
the Mortgage Loans), semi-annually ( % of the Mortgage Loans) or annually
(____% of the Mortgage Loans). Each of the Mortgage Loans provided for an
initial fixed interest rate period; Mortgage Loans, representing ___% of the
Mortgage Loans, have not experienced their first Interest Rate Adjustment
Dates. The latest initial Interest Rate Adjustment Date for any Mortgage Loan
is to occur in___________________.]
[Subject to the Payment Caps described below, the amount of the
Monthly Payment on each Mortgage Loan adjusts periodically on each Payment
Adjustment Date to an amount that would fully amortize the principal balance of
the Mortgage Loan over its then remaining amortization schedule and pay
interest at the Mortgage Rate in effect during the one month period preceding
such Payment Adjustment Date. Approximately __% of the Mortgage Loans provide
that an adjustment of the amount of the Monthly Payment on a Payment Adjustment
Date may not result in a Monthly Payment that increases by more than ___% (nor,
in some cases, decreases by more than ____%) of the amount of the Monthly
Payment in effect immediately prior to such Payment Adjustment Date (each such
provision, a "Payment Cap"); however, certain of those Mortgage Loans also
provide that the Payment Cap will not apply on certain Payment Adjustment Dates
or if the application thereof would result in the principal balance of the
Mortgage Loan exceeding (through negative amortization) by a specified
percentage the original principal balance thereof. Generally, the related
Mortgage Note provides that if, as a result of negative amortization, the
respective principal balance of the Mortgage Loan reaches an amount specified
therein (which as to most Mortgage Loans is not greater than _% of the Mortgage
Loan principal
S-23
<PAGE>
balance as of the origination date thereof), the amount of the Monthly Payments
due thereunder will be increased as necessary to prevent further negative
amortization.
[Only in the case of _____% of the Mortgage Loans does a Payment
Adjustment Date immediately follow each Interest Rate Adjustment Date. As a
result, and because application of Payment Caps may limit the amount by which
the Monthly Payments due on certain of the Mortgage Loans may adjust, the
amount of a Monthly Payment may be more or less than the amount necessary to
amortize the Mortgage Loan principal balance over the then remaining
amortization schedule at the applicable Mortgage Rate. Accordingly, Mortgage
Loans may be subject to slower amortization (if the Monthly Payment due on a
Due Date is sufficient to pay interest accrued to such Due Date at the
applicable Mortgage Rate but is not sufficient to reduce principal in
accordance with the applicable amortization schedule), to negative amortization
(if interest accrued to a Due Date at the applicable Mortgage Rate is greater
than the entire Monthly Payment due on such Due Date) or to accelerated
amortization (if the Monthly Payment due on a Due Date is greater than the
amount necessary to pay interest accrued to such Due Date at the applicable
Mortgage Rate and to reduce principal in accordance with the applicable
amortization schedule).]
[No Mortgage Loan currently prohibits principal prepayments; however,
certain of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Although Prepayment Premiums
are payable to the Master Servicer as additional servicing compensation, the
Master Servicer may waive the payment of any Prepayment Premium only in
connection with a principal prepayment that is proposed to be made during the
three month period prior to the scheduled maturity of the related Mortgage
Loan, or under certain other limited circumstances.]
The following table sets forth the range of Mortgage Rates on the
Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Mortgage Rates as of the Cut-off Date
Mortgage Rate Number of Percent Aggregate Percent by
- ------------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
----- ------ the Cut-off Date Balance as of
---------------- the Cut-off Date
-----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
=========== ========== ============= =========
Weighted Average
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
S-24
<PAGE>
The following table sets forth the types of Mortgaged Properties
securing the Mortgage Loans:
<CAPTION>
Property Type
Type Number of Percent Aggregate Percent by
- ---- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
---------------- the Cut-off Date
----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
=========== ========== ============= =========
Note: Percentage totals may not add due to rounding.
[The following table sets forth the range of Gross Margins for the
Mortgage Loans:]
<CAPTION>
[Gross Margins]
Mortgage Rate Number of Percent Aggregate Percent by
- ------------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ======== =========== =======
Weighted Average
Gross Margin:
Note: Percentage totals may not add due to rounding.
S-25
<PAGE>
[The following table sets forth the frequency of adjustments to the
Mortgage Rates on the Mortgage Loans as of the Cut-off Date:]
<CAPTION>
[Frequency of Adjustments to Mortgage Rates]
Frequency(A) Number of Percent Aggregate Percent by
- ------------ Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ============== =============== ===========
Weighted Average
Frequency of
Adjustments to
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) _______ or ___% of Mortgage Loans have not experienced their first
Interest Rate Adjustment Date.
[The following table sets forth the frequency of adjustments to the
Monthly Payments on the Mortgage Loans as of the Cut-off Date:]
<CAPTION>
[Frequency of Adjustments to Monthly Payments]
Frequency (A) Number of Percent Aggregate Percent by
- ------------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
=========== ========== ================ ===========
Weighted Average
Frequency of
Adjustments to
Monthly Payments:
Note: Percentage totals may not add due to rounding.
S-26
<PAGE>
[The following table sets forth the range of maximum lifetime Mortgage
Rates for the Mortgage Loans:]
<CAPTION>
[Maximum Lifetime Mortgage Rates]
Maximum Number of Percent Aggregate Percent by
Lifetime Mortgage by Principal Aggregate
Mortgage Rate Loans Number Balance as of Principal
------------- ------- -------- the Cut-off Date Balance as of
------------------- the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ========== ================ =========
</TABLE>
Weighted Average
Maximum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without a lifetime rate cap.
(B) The lifetime rate caps for these Mortgage Loans are based upon the
Index as determined at a future point in time plus a fixed percentage.
Therefore, the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ____ Mortgage Loans without a
lifetime rate cap or the - Mortgage Loans with lifetime rate caps which
are currently not determinable.
[The following table sets forth the range of minimum lifetime Mortgage
Rates on the Mortgage Loans:]
<TABLE>
<CAPTION>
[Minimum Lifetime Mortgage Rates]
Minimum Number of Percent Aggregate Percent by
Lifetime Mortgage by Principal Aggregate
Mortgage Rate Loans Number Balance as of Principal
--------------- ------- ----------- the Cut-off Date Balance as of
------------------- the Cut-off Date
-------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
================= =========== ============ =========
Weighted Average
Minimum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
S-27
<PAGE>
(A) Represents Mortgage Loans without interest rate floors.
(B) This calculation does not include the Mortgage Loans without interest rate
floors.
The following table sets forth the range of principal balances of the
Mortgage Loans as of the Cut-off Date:
<CAPTION>
Principal Balances as of the Cut-off Date
-----------------------------------------
Principal Balance Number of Percent Aggregate Percent by
as of the Mortgage by Principal Aggregate
Cut-off Date Loans Number Balance as of Principal
--------------- --------- ------------ the Cut-off Date Balance as of
------------------- the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============= =========== ================ ===========
Average Principal Balance
as of the
Cut-off Date:
Note: Percentage totals may not add due to rounding.
The following tables set forth the original and remaining terms to
maturity (in months) of the Mortgage Loans:
<CAPTION>
Original Term to Maturity in Months
-----------------------------------
Original Number of Percent Aggregate Percent by
Term in Months Mortgage by Principal Aggregate
- ---------------- Loans Number Balance as of Principal
-------- ---------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ========= =============== ==========
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-28
<PAGE>
The following tables set forth the purpose for which the Mortgage Loan
was originated, [the type of program under which it was originated and the
occupancy type].
<CAPTION>
Mortgage Loan Purpose
---------------------
Remaining Number of Percent Aggregate Percent by
Term in Mortgage by Principal Aggregate
Months Loans Number Balance as of Principal
--------- --------- --------- the Cut-off Date Balance as of
-------------------- the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
======== ============= ================ =========
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
[Mortgage Loan Documentation Program]
--------------------------------------
Remaining Number of Percent Aggregate Percent by
Term in Mortgage by Principal Aggregate
Months Loans Number Balance as of Principal
-------- ------- ---------- the Cut-off Date Balance as of
------------------ the Cut-off Date
-----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ========== =============== =======
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-29
<PAGE>
Mortgage Loan Occupancy Type
----------------------------
Remaining Number of Percent Aggregate Percent by
Term in Mortgage by Principal Aggregate
Months Loans Number Balance as of Principal
------------- -------- --------- the Cut-off Date Balance as of
------------------ the Cut-off Date
-----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
=========== ======= ================ =======
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Remaining Term to Maturity in Months
------------------------------------
Remaining Number of Percent Aggregate Percent by
Term in Mortgage by Principal Aggregate
Months Loans Number Balance as of Principal
-------- ------- --------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ======= ================= ========
Weighted Average Remaining
Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-30
<PAGE>
The following tables set forth the respective years in which the
Mortgage Loans were originated and are scheduled to mature:
Mortgage Loan Year of Origination
-----------------------------------
Year Number of Percent Aggregate Percent by
---- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
----- ------ the Cut-off Date Balance as of
---------------- the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ======== ================ =======
Note: Percentage totals may not add due to rounding.
Mortgage Loan Year of Scheduled Maturity
----------------------------------------
Year Number of Percent Aggregate Percent by
---- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------ -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ======= ================= =======
Note: Percentage totals may not add due to rounding.
</TABLE>
The following table sets forth the range of Original LTV Ratios of the
Mortgage Loans. An "Original LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the principal balance of a Mortgage Loan
on the date of its origination, and the denominator of which is [in general]
the lesser of (i) the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan and (ii) the sale price of such Mortgaged Property at the
time of such origination. There can be no assurance that the value (determined
through an appraisal or otherwise) of a Mortgaged Property determined after
origination of the related Mortgage Loan will be equal to or greater than the
value thereof (determined through an appraisal or otherwise) obtained in
connection with the origination. As a result, there can be no assurance that
the loan-to-value ratio for any Mortgage Loan determined at any time following
origination thereof will be lower than the Original LTV Ratio, notwithstanding
any positive amortization of such Mortgage Loan.
S-31
<PAGE>
<TABLE>
<CAPTION>
Original LTV Ratios
-------------------
Original Number of Percent Aggregate Percent by
LTV Ratio Mortgage by Principal Aggregate
----------- Loans Number Balance as of Principal
--------- ------------ the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ========= ================= ========
Weighted Average Original
LTV Ratio:
Note: Percentage totals may not add due to rounding.
The Mortgage Loans are secured by Mortgaged Properties in
different states. The table below sets forth the states in which the Mortgaged
Properties are located:
<CAPTION>
Geographic Distribution
-----------------------
State Number of Percent Aggregate Percent by
---------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
--------- ------------ the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
=========== ========= ================== =========
Note: Percentage totals may not add due to rounding.
[regional breakdown to be provided as appropriate]
No more than ___% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code.
[___% of the Mortgage Loans provide that upon any principal prepayment
of a Mortgage Loan, whether made voluntarily or involuntarily, the related
Mortgagor will be required to pay a prepayment premium or yield maintenance
Penalty (a "Prepayment Premium") in the amount set forth in the following
table.]
S-32
<PAGE>
<CAPTION>
[Mortgage Loan Prepayment Premiums]
-----------------------------------
Prepayment Number of Percent Aggregate Percent by
Premium Mortgage by Principal Aggregate
----------- Loans Number Balance as of Principal
------- ------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ========= ================= =======
</TABLE>
Note: Percentage totals may not add due to rounding.
Set forth in Annex A to this Prospectus Supplement are certain
individual characteristics of the Mortgage Loans.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by _______,
generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Class [ ] Certificates, a Mortgage Loan may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Depositor
deems such removal necessary or appropriate and may be prepaid at any time. A
limited number of other mortgage loans may be included in the Mortgage Pool
prior to the issuance of the Class [ ] Certificates unless including such
mortgage loans would materially alter the characteristics of the Mortgage Pool
as described herein. The Depositor believes that the information set forth
herein will be representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Class [ ] Certificates are issued, although
the range of Mortgage Rates and maturities and certain other characteristics of
the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Class [ ] Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Class [ ] Certificates.
In the event Mortgage Loans are removed from or added to the Mortgage Pool as
set forth in the preceding paragraph, such removal or addition will be noted in
the Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of ____ classes to be designated as the Class [ ]
Certificates, the Class [ ] Certificates, the Class [ ] Certificates and the
Class [ ] Certificates. The Class [ ], Class [ ] and Class [ ] Certificates
(the "Subordinate Certificates") will be subordinate to the Class [ ]
Certificates, as described herein. The Certificates represent in the aggregate
the entire beneficial ownership
S-33
<PAGE>
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all payments
under and proceeds of the Mortgage Loans received after the Cut-off Date
(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any Mortgaged Property acquired on behalf of the Trust Fund through
foreclosure or deed in lieu of foreclosure (upon acquisition, an "REO
Property"); (iii) such funds or assets as from time to time are deposited in
the Certificate Account and any account established in connection with REO
Properties (the "REO Account"); and (iv) the rights of the mortgagee under all
insurance policies with respect to the Mortgage Loans. Only the Class [ ]
Certificates are offered hereby.
The Class [ ] Certificates will have an initial [Certificate Balance]
[Notional Balance] of $__________. The Class [ ] Certificates represent ___% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The Class [ ] Certificates will have an initial Certificate Balance of
$__________, representing ___% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. The Class [ ] Certificates will have an
initial Certificate Balance of $__________, representing ___% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. The initial
Certificate Balance of the Class [ ] Certificates will be [zero]. The
Certificate Balance of any class of Certificates outstanding at any time
represents the maximum amount which the holders thereof are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage
Loans and the other assets in the Trust Fund. The respective Certificate
Balances of the Class [ ], Class [ ] and Class [ ] Certificates (respectively,
the "Class [ ] Balance", "Class [ ] Balance" and "Class [ ] Balance") will in
each case be (i) reduced by amounts actually distributed on such class of
Certificates that are allocable to principal and [(ii) increased by amounts
allocated to such class of Certificates in respect of negative amortization on
the Mortgage Loans [Describe Notional Balance.]] [The Certificate Balance of
the Class [ ] Certificates (the "Class [ ] Balance") will at any time equal the
aggregate Stated Principal Balance of the Mortgage Loans minus the sum of the
Class [ ] Balance, Class [ ] Balance and Class [ ] Balance.] The Stated
Principal Balance of any Mortgage Loan at any date of determination will equal
(a) the Cut-off Date Balance of such Mortgage Loan, plus [(b) any negative
amortization added to the principal balance of such Mortgage Loan on any Due
Date after the Cut-off Date to and including the Due Date in the Due Period for
the most recently preceding Distribution Date], minus (c) the sum of (i) the
principal portion of each Monthly Payment due on such Mortgage Loan after the
Cut-off Date, to the extent received from the mortgagor or advanced by the
Master Servicer and distributed to holders of the Certificates before such date
of determination, (ii) all principal prepayments and other unscheduled
collections of principal received with respect to such Mortgage Loan, to the
extent distributed to holders of the Certificates before such date of
determination, and (iii) any reduction in the outstanding principal balance of
such Mortgage Loan resulting out of a bankruptcy proceeding for the related
mortgagor.
[None of the Class [ ] Certificates are offered hereby.]
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be
made on the ____ day of each month or, if such ____ day is not a business day,
then on the next succeeding business day, commencing in ____________________
199_ (each, a " Distribution Date" ) . All distributions (other than the final
distribution on any Certificate) will be made by the Master Servicer to the
persons in whose names the Certificates are registered at the close of business
on each Record Date, which will be the [last business day of the month]
preceding the month in which the related Distribution Date occurs. Such
distributions will be made by wire transfer in immediately available funds to
the account specified by the Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder will have provided
the Master Servicer with wiring instructions no less than five business days
prior to the related Record Date and is the registered owner of Certificates
the aggregate initial principal amount of which is at least $ , or otherwise by
check mailed to such Certificateholder. The final distribution on any
Certificate will be made in like manner, but only upon presentment or surrender
of such Certificate at the location specified in the notice to the holder
thereof of such final distribution. All distributions made with respect to a
class of Certificates on each Distribution Date will be allocated pro rata
among the outstanding Certificates of such class based on their respective
Percentage Interests. The Percentage Interest evidenced by any Class [ ]
Certificate is equal to the initial denomination thereof as of the Closing
Date, divided by the initial Certificate Balance for such class. The aggregate
distribution to be made on the Certificates on any Distribution Date shall
equal the Available Distribution Amount.
S-34
<PAGE>
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related Determination Date, (ii) the
aggregate amount of any Advances made by the Master Servicer in respect of such
Distribution Date and (iii) the aggregate amount deposited by the Master
Servicer in the Certificate Account in respect of such Distribution Date in
connection with Prepayment Interest Shortfalls incurred during the related Due
Period, net of (b) the portion of the amount described in clause (a)(i) hereof
that represents (i) Monthly Payments due on a Due Date subsequent to the end of
the related Due Period, (ii) any voluntary principal prepayments and other
unscheduled recoveries on the Mortgage Loans received after the end of the
related Due Period or (iii) any amounts payable or reimbursable therefrom to
any person.
Priority. On each Distribution Date, the Master Servicer shall apply
amounts on deposit in the Certificate Account, to the extent of the Available
Distribution Amount, first, to distributions of interest to holders of the
Class [ ] Certificates, in the amount equal to all Distributable Certificate
Interest in respect of the Class [ ] Certificates for such Distribution Date
and, to the extent not previously distributed, for all preceding Distribution
Dates and second, to distributions of principal to holders of the Class [ ]
Certificates, in an amount, not to exceed the sum of the Class [ ] Balance
outstanding immediately prior to such Distribution Date [and any Class Negative
Amortization in respect of the Class [ ] Certificates for such Distribution
Date], equal to the sum of (A) the then Class [ ] Scheduled Principal
Distribution Percentage of the Scheduled Principal Distribution Amount for such
Distribution Date and (B) the Unscheduled Principal Distribution Amount for
such Distribution Date.
On or after the reduction of the Class [ ] Balance to zero, the
Available Distribution Amount will be paid solely to the holders of the
Subordinate Certificates.
Calculations of Interest. The "Distributable Certificate Interest" in
respect of the Class [ ] Certificates for any Distribution Date represents that
portion of the Accrued Certificate Interest in respect of such class of
Certificates for such Distribution Date that is net of such class's allocable
share of (i) the aggregate portion of any Prepayment Interest Shortfalls
resulting from voluntary principal prepayments on the Mortgage Loans during the
related Due Period [that are not covered by the application of servicing
compensation of the Master Servicer for the related Due Period (such uncovered
aggregate portion, as to such Distribution Date,] the "Net Aggregate Prepayment
Interest Shortfall")[; and (ii) the aggregate of any negative amortization in
respect of the Mortgage Loans for their respective Due Dates during the related
Due Period (the aggregate of such negative amortization, as to such
Distribution Date, the "Aggregate Mortgage Loan Negative Amortization").]
The "Accrued Certificate Interest" in respect of the Class [ ]
Certificates for any Distribution Date is equal to thirty days' interest
accrued during the related Interest Accrual Period at the Pass-Through Rate
applicable to such class of Certificates for such Distribution Date accrued on
the related [Certificate Balance] [Classes [ ] Notional Amount] outstanding
immediately prior to such Distribution Date. The Pass-Through Rate applicable
to the Class [ ] Certificates for any Distribution Date [is fixed and is set
forth on the cover hereof] [will equal the weighted average of the Class [ ]
Remittance Rates in effect for the Mortgage Assets as of the commencement of
the related Due Period (as to such Distribution Date, the "Weighted Average
Class [ ] Remittance Rate"). The "Class [ ] Remittance Rate" in effect for any
Mortgage Loan as of any date of determination (a) prior to its first Interest
Rate Adjustment Date, is equal to the related Mortgage Rate then in effect
minus basis points and (b) from and after its first Interest Rate Adjustment
Date, is equal to the related Mortgage Rate then in effect minus the excess of
the related Gross Margin over basis points. The "Interest Accrual Period" for
the Certificates is the calendar month preceding the month in which the
Distribution Date occurs.] [is equal to the excess of the Mortgage Rate thereon
over ____% per annum.] [The Class [ ] Notional Amount will equal the [sum of
the Class [ ] Balance. The Class [ ] Notional Amount does not entitle the Class
[ ] Certificate [or a component thereof] to any distribution of principal.]
The portion of Net Aggregate Prepayment Interest Shortfall [and the
Aggregate Mortgage Loan Negative Amortization] for any Distribution Date that
will be allocated to the Class [ ] Certificates on such Distribution Date will
be equal to the then applicable Class [ ] Interest Allocation Percentage. The
"Class [ ] Interest Allocation Percentage" for any Distribution Date will equal
a fraction, expressed as a percentage, the numerator of which is equal to the
product of
S-35
<PAGE>
(a) the Class [ ] Balance [(net of any Uncovered Portion thereof)] outstanding
immediately prior to such Distribution Date, multiplied by (b) the Pass-Through
Rate for the Class [ ] Certificates for such Distribution Date, and the
denominator of which is the product of (x) the aggregate Stated Principal
Balance of the Mortgage Loans outstanding immediately prior to such
Distribution Date, multiplied by (y) the Weighted Average Net Mortgage Rate for
such Distribution Date. The "Net Mortgage Rate" in effect for any Mortgage Loan
as of any date of determination is equal to the related Mortgage Rate then in
effect minus basis points. [The "Uncovered Portion" of the Class [ ] Balance,
as of any date of determination, is the portion thereof representing the
excess, if any, of (a) the Class [ ] Balance then outstanding, over (b) the
aggregate Stated Principal Balance of the Mortgage Loans then outstanding.]
[The Class [ ] Certificates [or a component thereof] will not be
entitled to distributions of interest and will not have a Pass-Through Rate.]
Calculations of Principal. Holders of the Class [ ] Certificates will
be entitled to receive on each Distribution Date, to the extent of the balance
of the Available Distribution Amount remaining after the payment of the Class [
] Interest Distribution Amount for such Distribution Date an amount equal to
the Class [ ] Principal Distribution Amount. The "Class [ ] Principal
Distribution Amount" for any Distribution Date will equal the sum of (i) the
product of the Scheduled Principal Distribution Amount and the Class [ ]
Scheduled Principal Distribution Percentage, (ii) the product of the Senior
Accelerated Percentage and all principal prepayments received during the
related Due Period and, (iii) to the extent not previously advanced, [the
lesser of the Class [ ] Scheduled Principal Distribution Percentage of the
Stated Principal Balance of the Mortgage Loans and the Senior Accelerated
Percentage of the Unscheduled Principal Distribution Amount net of any
prepayment amounts described in clause (ii) above. The "Scheduled Principal
Distribution Amount" for any Distribution Date is equal to the aggregate of the
principal portions of all Monthly Payments, including Balloon Payments, due
during or, if and to the extent not previously received or advanced and
distributed to Certificateholders on a preceding Distribution Date, prior to
the related Due Period, in each case to the extent paid by the related
mortgagor or advanced by the Master Servicer and included in the Available
Distribution Amount for such Distribution Date. The principal portion of any
Advances in respect of a Mortgage Loan delinquent as to its Balloon Payment
will constitute advances in respect of the principal portion of such Balloon
Payment.
[The portion of the Class [ ] Principal Distribution Amount payable on
any Distribution Date shall be allocated to the Class [ ] Certificates as
follows: [Describe distributions which may be concurrent or sequential and
among different classes and may be based on a schedule of payments sometimes
referred to as a Schedule of PAC, TAC or Scheduled Balances for some and not
other classes.]]
[The Class [ ] Scheduled Principal Distribution Percentage for any
Distribution Date represents the portion of the Scheduled Principal
Distribution Amount for such Distribution Date payable (subject to the payment
priorities described herein) on the Class [ ] Certificates. The "Class [ ]
Scheduled Principal Distribution Percentage" for any Distribution Date will
equal the lesser of (a) 100% and (b) a fraction, expressed as a percentage, the
numerator of which is the Class [ ] Balance outstanding immediately prior to
such Distribution Date, and the denominator of which is the lesser of (i) the
sum of the Class [ ] Balance, the Class [ ] Balance and the Class [ ] Balance
and (ii) the aggregate Stated Principal Balance of the Mortgage Loans, in
either case outstanding immediately prior to such Distribution Date.]
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments received
on the Mortgage Loans during the related Due Period; and (b) the excess, if
any, of (i) all unscheduled recoveries received on the Mortgage Loans during
the related Due Period, whether in the form of liquidation proceeds,
condemnation proceeds, insurance proceeds or amounts paid in connection with
the purchase of a Mortgage Loan out of the Trust Fund, exclusive in each case
of any portion thereof payable or reimbursable to the Master Servicer in
connection with the related Mortgage Loan, over (ii) the respective portions of
the net amounts described in the immediately preceding clause (i) needed to
cover interest (at the applicable Net Mortgage Rate in effect from time to
time) on the related Mortgage Loan from the date to which interest was
previously paid or advanced through the Due Date for such Mortgage Loan in the
related Due Period [(exclusive of any portion of such interest added to the
principal balance of such Mortgage Loan as negative amortization).]
S-36
<PAGE>
[The "Class Negative Amortization" in respect of any class of
Certificates for any Distribution Date is equal to such class' allocable share
of the Aggregate Mortgage Loan Negative Amortization for such Distribution
Date.]
SUBORDINATION
In order to maximize the likelihood of distribution in full of the
Class [ ] Interest Distribution Amount and the Class [ ] Scheduled Principal
Distribution Amount, on each Distribution Date, holders of the Class [ ]
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Subordinate Certificates, to
the extent necessary to satisfy the Class Interest Distribution Amount and the
Class [ ] Scheduled Principal Distribution Amount.
[The entitlement to the Class [ ] Certificates of the [entire] [a
larger percentage under certain circumstances of] Unscheduled Principal
Distribution Amount will accelerate the amortization of the Class [ ]
Certificates relative to the actual amortization of the Mortgage Loans.]
[To the extent that the Class [ ] Certificates are amortized faster
than the Mortgage Loans, without taking into account losses on the Mortgage
Loans, the percentage interest evidenced by the Class [ ] Certificates in the
Trust Fund will be decreased (with a corresponding increase in the interest in
the Trust Fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective Certificate Balances, the Subordinate afforded the
Class [ ] Certificates by the Subordinate Certificates.]
[The principal portion of any Realized Losses will be allocated first
in reduction of the Subordinate Certificates [in the order specified here] and
then to the Class [ ] Certificates [in the order specified here]. Any losses
realized on a Mortgage Loan that is finally liquidated equal to the excess of
the Stated Principal Balance of such Mortgage Loan remaining, if any, plus
interest thereon through the last day of the month in which such Mortgage Loan
was finally liquidated, after application of all amounts received (net of
amounts reimbursable to the Master Servicer or any Sub-Servicer for Advances
and expenses, including attorneys' fees) towards interest and principal owing
on the Mortgage Loan, is referred to herein as a "Realized Loss."]
ADVANCES
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated to make advances (each, an "Advance") out of
its own funds, or funds held in the Certificate Account that are not required
to be part of the Available Distribution Amount for such Distribution Date, in
an amount equal to the aggregate of [(i)] all Monthly Payments (net of the
Servicing Fee), [other than Balloon Payments,] which were due on the Mortgage
Loans during the related Due Period and delinquent as of the related
Determination Date [and (ii) in the case of each Mortgage Loan delinquent in
respect of its Balloon Payment as of the related Determination Date, an amount
sufficient to amortize fully the principal portion of such Balloon Payment over
the remaining amortization term of such Mortgage Loan and to pay interest at
the Net Mortgage Rate in effect for such Mortgage Loan for the one month period
preceding its Due Date in the related Due Period (but only to the extent that
the related mortgagor has not made a payment sufficient to cover such amount
under any forbearance arrangement that has been included in the Available
Distribution Amount for such Distribution Date)]. The Master Servicer's
obligations to make Advances in respect of any Mortgage Loan will continue
through liquidation of such Mortgage Loan and out of its own funds from any
amounts collected in respect of the Mortgage Loan as to which such Advance was
made, whether in the form of late payments, insurance proceeds, liquidation
proceeds, condemnation proceeds or amounts paid in connection with the purchase
of such Mortgage Loan. Notwithstanding the foregoing, the Master Servicer will
be obligated to make any Advance only to the extent that it determines in its
reasonable good faith judgment that, if made, would be recoverable out of
general funds on deposit in the Certificate Account. Any failure by the Master
Servicer to make an Advance as required under the Pooling and Servicing
Agreement will constitute an event of default thereunder, in which case the
trustee will be obligated to make any such Advance, in accordance with the
terms of the Pooling and Servicing Agreement.
S-37
<PAGE>
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Class [ ] Certificates will be affected
by the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The yield to maturity on
the Class [ ] Certificates will also be affected by the level of the Index. The
rate of principal payments on the Class [ ] Certificates will correspond to the
rate of principal payments (including prepayments) on the related Mortgage
Loans.
[Description of factors affecting yield, prepayment and maturity of
the Mortgage Loans and Class [ ] Certificates depending upon characteristics of
the Mortgage Loans.]
WEIGHTED AVERAGE LIFE OF THE CLASS [ ] CERTIFICATES
Weighted average life refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Class [ ]
Certificates will be influenced by the rate at which principal payments
(including scheduled payments, principal prepayments and payments made pursuant
to any applicable policies of insurance) on the Mortgage Loans are made.
Principal payments on the Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to a default or other dispositions of the
Mortgage Loans).
The table of Percent of Initial Certificate Balance Outstanding for
the Class [ ] Certificates at the respective percentages of [CPR] [SPA] set
forth below indicates the weighted average life of such Certificates and sets
forth the percentage of the initial principal amount of such Certificates that
would be outstanding after each of the dates shown at the indicated percentages
of [CPR][SPA]. The table has been prepared on the basis of the following
assumptions regarding the characteristics of the Mortgage Loans: (i) an
outstanding principal balance of $_________, a remaining amortization term of
___ months and a term to balloon of ___ months: (ii) an interest rate equal to
____% per annum until the Due Date and thereafter an interest rate equal to %
per annum (at an assumed Index of ____%) and Monthly Payments that would fully
amortize the remaining balance of the Mortgage Loan over its remaining
amortization term; (iii) the Mortgage Loans prepay at the indicated percentage
of [CPR][SPA]; (iv) the maturity date of each of the Balloon Mortgage Loans is
not extended; (v) distributions on the Class [ ] Certificates are received in
cash, on the 25th day of each month, commencing in_____________; (vi) no
defaults or delinquencies in, or modifications, waivers or amendments
respecting, the payment by the mortgagors of principal and interest on the
Mortgage Loans occur; (vii) the initial Certificate Balance of the Class [ ]
Certificates is $________; (viii) prepayments represent payment in full of
individual Mortgage Loans and are received on the respective Due Dates and
include 30 days' interest thereon; (ix) there are no repurchases of Mortgage
Loans due to breaches of any representation and warranty or otherwise; (x) the
Class [ ] Certificates are purchased on ________; (xi) the Servicing Fee is
____% per annum; and (xii) the Index on each Interest Rate Adjustment Date is
________% per annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class [ ] Certificates and sets forth the percentages of
the initial Certificate Balance of the Class [ ] Certificates that would be
outstanding after the Distribution Date in ___________ of each of the years
indicated, at various percentages of [CPR][SPA]. Neither [CPR][SPA] nor any
other prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Mortgage Pool. Variations in the actual prepayment experience and the balance
of the Mortgage Loans that prepay may increase or decrease the percentage of
initial Certificate Balance (and weighted average life) shown in the following
table. Such variations may occur even if the average prepayment experience of
all such Mortgage Loans is the same as any of the specified assumptions.
S-38
<PAGE>
Percent of Initial Class [ ] Certificate Balance Outstanding
at the Following Percentages of [CPR][SPA]
<TABLE>
<CAPTION>
Distribution Date
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................... ___% __% __% __% __% __%
____________ 25, 1993...............
____________ 25, 1994...............
____________ 25, 1995...............
____________ 25, 1996...............
____________ 25, 1997...............
____________ 25, 1998...............
____________ 25, 1999...............
____________ 25, 2000...............
____________ 25, 2001...............
____________ 25, 2002...............
____________ 25, 2003...............
</TABLE>
Weighted Average Life
(Years) (+) . . . . . . . . . . . .
+ The weighted average life of the Class [ ] Certificates is determined
by (i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
[Class [ ] Yield Consideration]
[Will describe assumption for various scenarios showing sensitivity of
certain classes to prepayment and default risks and set forth resulting yield.]
S-39
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, 199_ (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer and the Trustee.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class [ ] Certificates. The Depositor
will provide to a prospective or actual Class [ ] Certificateholder without
charge, upon written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to Morgan Stanley & Co.
Incorporated, ____________________________ New York, New York _____.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the Closing Date, the Depositor will assign or cause to
be assigned the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. Prior to the Closing Date, the Depositor
will, as to each Mortgage Loan, deliver to the Trustee (or the custodian
hereinafter referred to), among other things, the following documents
(collectively, as to such Mortgage Loan, the "Mortgage File"): (i) the original
or, if accompanied by a "lost note" affidavit, a copy of the Mortgage Note,
endorsed by ____________________ which transferred such Mortgage Loan, without
recourse, in blank or to the order of Trustee; (ii) the original Mortgage or a
certified copy thereof, and any intervening assignments thereof, or certified
copies of such intervening assignments, in each case with evidence of recording
thereon; (iii) an assignment of the Mortgage, executed by the
____________________ which transferred such Mortgage Loan, in blank or to the
order of the Trustee, in recordable form; (iv) assignments of any related
assignment of leases, rents and profits and any related security agreement (if,
in either case, such item is a document separate from the Mortgage), executed
by ____________________ which transferred such Mortgage Loan, in blank or to
the order of the Trustee; (v) originals or certified copies of all assumption,
modification and substitution agreements in those instances where the terms or
provisions of the Mortgage or Mortgage Note have been modified or the Mortgage
or Mortgage Note has been assumed; and (vi) the originals or certificates of a
lender's title insurance policy issued on the date of the origination of such
Mortgage Loan or, with respect to each Mortgage Loan not covered by a lender's
title insurance policy, an attorney's opinion of title given by an attorney
licensed to practice law in the jurisdiction where the Mortgaged Property is
located. The Pooling and Servicing Agreement will require the Depositor
promptly (and in any event within _____ days of the Closing Date) to cause each
assignment of the Mortgage described in clause (iii) above to be submitted for
recording in the real property records of the jurisdiction in which the related
Mortgaged Property is located. Any such assignment delivered in blank will be
completed to the order of the Trustee prior to recording. The Pooling and
Servicing Agreement will also require the Depositor to cause the endorsements
on the Mortgage Notes delivered in blank to be completed to the order of the
Trustee.
THE MASTER SERVICER
General. ____________________, a __________________ corporation, will
act as Master Servicer (in such capacity, the "Master Servicer") for the
Certificates pursuant to the Pooling and Servicing Agreement. The Master
Servicer[, a wholly-owned subsidiary of __________,] [is engaged in the
mortgage banking business and, as such, originates, purchases, sells and
services mortgage loans. _________________ primarily originates mortgage loans
through a branch system consisting of _______________________ offices in
__________ states, and through mortgage loan brokers.]
The executive offices of the Master Servicer are located at
_______________, telephone number (__)__________.
S-40
<PAGE>
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on one- to four- family residential mortgage loans included in
the Master Servicer's servicing portfolio (which includes mortgage loans that
are subserviced by others). The indicated periods of delinquency are based on
the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until 31 days past due on a
contractual basis.
<TABLE>
<CAPTION>
As of December 31, 19 As of December 31, 19 As of , 19
-------------------------- ----------------------- -------------------------
By No. of By Dollar By No. of By Dollar By No. of By Dollar
Loans Amount of Loans Amount of Loans Amount of
------ Loans ------ Loans ------- Loans
------ ------- -----------
(Dollar Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio ________ $______ ________ $______ ________ $_______
Period of Delinquency
31 to 59 days
60 to 89 days
90 days or more ________ _______ _______ ________ ________ _________
Total Delinquent Loans ________ $______ ________ $______ ________ $______
%
Percent of Portfolio % % % % %
Foreclosures pending (1)
%
Percent of Portfolio % % % % %
Foreclosures
%
Percent of Portfolio % % % % %
</TABLE>
- --------------------
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond
to the delinquency and foreclosure experience of the Master Servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over the life of the Mortgage Pool.
CERTIFICATE ACCOUNT
The Master Servicer is required to deposit on a daily basis all
amounts received with respect to the Mortgage Loans of the Mortgage Pool, net
of its servicing compensation, into a separate Certificate Account maintained
with ____________. Interest or other income earned on funds in the Certificate
Account will be paid to the Master Servicer as
S-41
<PAGE>
additional servicing
compensation. See "Description of the Trust Funds -- Mortgage Assets" and
"Description of the Agreements -- Certificate Account and Other Collection
Accounts" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
[Include description of Servicing Standard]
- -------------------------------------------
The principal compensation to be paid to the Master Servicer in
respect of its master servicing activities will be the Servicing Fee. The
Servicing Fee will be payable monthly only from amounts received in respect of
interest on each Mortgage Loan, will accrue at the Servicing Fee Rate and will
be computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on such Mortgage Loan is
computed. The Servicing Fee Rate [with respect to each Mortgage Loan equals %
per annum] [equals the weighted average of the excesses of the Mortgage Rates
over the respective Net Mortgage Rates].
As additional servicing compensation, the Master Servicer is entitled
to retain all assumption fees, prepayment penalties and late payment charges,
to the extent collected from mortgagors, together with any interest or other
income earned on funds held in the Certificate Account and any escrow accounts.
The Servicing Standard requires the Master Servicer to, among other things,
diligently service and administer the Mortgage Loans on behalf of the Trustee
and in the best interests of the Certificateholders, but without regard to the
Master Servicer's right to receive such additional servicing compensation. The
Master Servicer is obligated to pay certain ongoing expenses associated with
the Mortgage Pool and incurred by the Master Servicer in connection with its
responsibilities under the Agreement. See "Description of the Agreements --
Retained Interest; Servicing Compensation and Payment of Expenses" in the
Prospectus for information regarding other possible compensation payable to the
Master Servicer and for information regarding expenses payable by the Master
Servicer [and "Certain Federal Income Tax Consequences" herein regarding
certain taxes payable by the Master Servicer].
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency a
statement setting forth certain information with respect to the Mortgage Loans
and the Certificates required pursuant to the Pooling and Servicing Agreement.
In addition, within a reasonable period of time after each calendar year, the
Master Servicer shall furnish to each person who at any time during such
calendar year was the holder of a Certificate a statement containing certain
information with respect to the Certificates required pursuant to the Pooling
and Servicing Agreement, aggregated for such calendar year or portion thereof
during which such person was a Certificateholder. See "Description of the
Certificates -- Reports to Certificateholders" in the Prospectus.
VOTING RIGHTS
At all times during the term of this Agreement, the Voting Rights
shall be allocated among the Classes of Certificateholders in proportion to the
respective Certificate Balances of their Certificates [(net, in the case of the
Class [ ], Class [ ] and Class [ ] Certificates, of any Uncovered Portion of
the related Certificate Balance)]. Voting Rights allocated to a class of
Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment or other liquidation
of the last Mortgage Loan or REO Property subject thereto, and (ii) the
purchase of all of the assets of the Trust Fund by the Master Servicer. Written
notice of termination of the Pooling and Servicing Agreement will be given to
each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at the office of the Certificate
Registrar specified in such notice of termination. In no
S-42
<PAGE>
event, however, will the trust created by the Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in such Pooling and Servicing Agreement.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
greater of (1) the aggregate fair market value of all the Mortgage Loans and
REO Properties then included in the Trust Fund, as mutually determined by the
Master Servicer and the Trustee, and (2) the excess of (a) the sum of (i) the
aggregate Purchase Price of all the Mortgage Loans then included in the Trust
Fund and (ii) the fair market value of all REO Properties then included in the
Trust Fund, as determined by an appraiser mutually agreed upon by the Master
Servicer and the Trustee, over (b) the aggregate of amounts payable or
reimbursable to the Master Servicer under the Pooling and Servicing Agreement.
Such purchase will effect early retirement of the then outstanding Class [ ]
Certificates, but the right of the Master Servicer to effect such termination
is subject to the requirement that the aggregate Stated Principal Balance of
the Mortgage Loans then in the Trust Fund is less than __% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. [In addition,
the Master Servicer may at its option purchase any class or classes of Class [
] Certificates with a Certificate Balance less than __% of the original balance
thereof at a price equal to such Certificate Balance plus accrued interest
through _________.]
USE OF PROCEEDS
The net proceeds from the sale of Class [ ] Certificates will be used
by the Depositor to pay the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class [ ] Certificates,
_______________________________, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, for federal income tax purposes, the
Trust Fund will qualify as a REMIC under the Code.
For federal income tax purposes, the Class [ ] Certificates will be
the sole class of "residual interests" in the REMIC and the Class [ ], Class [
] and Class [ ] Certificates will be the "regular interests" in the REMIC and
will be treated as debt instruments of the REMIC.
See "Certain Federal Income Tax Consequences -- REMICS" in the
Prospectus.
[The Class [ ] Certificates [may][will not] be treated as having been
issued with original issue discount for federal income tax reporting purposes.
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to ___%
[CPR][SPA]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax Consequences --
REMICS -- Taxation of Owners of REMIC Regular Certificates" and "--Original
Issue Discount" in the Prospectus.]
The Class [ ] Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of such a class
of Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Certain Federal Income Tax Consequences
- -- REMICS -- Taxation of Owners of REMIC Regular Certificates" and "-- Premium"
in the Prospectus.
S-43
<PAGE>
[The Class [ ] Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code] and "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code generally in the same proportion that the
assets of the REMIC underlying such Certificates would be so treated.] [In
addition, interest (including original issue discount) on the Class [ ]
Certificates will be interests described in Section 856(c)(3)(B) of the Code to
the extent that such Class [ ] Certificates are treated as "real estate assets"
under Section 856(c)(4)(A) of the Code.] [Moreover, the Class [ ] Certificates
will be "obligation[s] . . . which . . .[are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3)(C) of the
Code.] [The Class [ ] Certificates will not be considered to represent an
interest in "loans . . . secured by an interest in real property" within the
meaning of Section 7701 (a)(19)(C)(v) of the Code.] See "Certain Federal Income
Tax Consequences -- REMICS -- Characterization of Investments in REMIC
Certificates" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Class [ ] Certificates, see "Certain Federal Income Tax
Consequences -- REMICS" in the Prospectus.
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan or other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts and certain
insurance company general accounts in which such plans, accounts or
arrangements are invested, that is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA" and an "ERISA Plan"), or Section 4975
of the Code (together with an ERISA Plan, "Plans") should carefully review with
its legal advisors whether the purchase or holding of Class [ ] Certificates
could give rise to a transaction that is prohibited or is not otherwise
permitted either under ERISA or Section 4975 of the Code.
[The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption [90-24] (the "Exemption"), [on May 17, 1990]
to Morgan Stanley & Co. Incorporated, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code and Section 502(i) of ERISA, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Morgan
Stanley & Co. Incorporated, (b) any person directly or indirectly, through one
or more intermediaries, controlling, controlled by or under common control with
Morgan Stanley & Co. Incorporated and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to the Class [ ] Certificates.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class [ ] Certificates or a transaction in connection with the servicing,
operation and management of the Trust Fund to be eligible for exemptive relief
thereunder. First, the acquisition of the Class [ ] Certificates by a Plan 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 rights and
interests evidenced by the Class [ ] Certificates must not be subordinate to
the rights and interests evidenced by the other certificates of the Trust with
respect to the right to receive payment in the event of default or
delinquencies in underlying assets of the Trust. Third, the Class [ ]
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Corporation,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any
member of the "Restricted Group", which consists of any Underwriter, the
Depositor, the Master Servicer, each sub-servicer and any mortgagor with
respect to Mortgage Loans constituting more than 5% of the aggregate
unamortized principal balance of the Mortgage Loans as of the date of initial
issuance of the Class [ ] Certificates. Fifth, the sum of all payments made to
and retained by the Underwriter must
S-44
<PAGE>
represent not more than reasonable compensation for underwriting the Class [ ]
Certificates; the sum of all payments made to and retained by the Underwriter
must represent not more than reasonable compensation for underwriting the Class
[ ] Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans 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 and any
sub-servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Sixth, the investing 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.
Because the Class [ ] Certificates are not subordinate to any other
class of Certificates with respect to the right to receive payment in the event
of default or delinquencies on the underlying assets of the Trust, the second
general condition set forth above is satisfied with respect to such
Certificates. It is a condition of the issuance of the Class [ ] Certificates
that they be rated [not lower than] "____" by ___________________. A fiduciary
of a Plan contemplating purchasing a Class [ ] Certificate in the secondary
market must make its own determination that at the time of such acquisition,
the Class [ ] Certificates continue to satisfy the third general condition set
forth above. The Depositor expects that the fourth general condition set forth
above will be satisfied with respect to the Class [ ] Certificates. A fiduciary
of a Plan contemplating purchasing a Class [ ] Certificate must make its own
determination that the first, third, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class [ ] Certificate.
Before purchasing a Class [ ] Certificate, a fiduciary of a Plan
should itself confirm (a) that such Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions, in
particular, Prohibited Transaction Class Exemption 83-1. See "ERISA
Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class [ ]
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Prospective purchasers
that are insurance companies should consult with their counsel regarding
whether the United States Supreme Court's decision in the case of John Hancock
v. Harris Trust Savings Bank, 510 U.S. 86 (1993) affects their ability to make
purchases of Class [] Certificates and the extent to which Prohibited
Transaction Class Exemption 95-60 may be available. See "ERISA Considerations"
in the Prospectus.
LEGAL INVESTMENT
The Class [ ] Certificates [will] [will not] constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") [so long as they are rated in at least the second highest
rating category by the Rating Agency, and, as such, are legal investments for
certain entities to the extent provided in SMMEA]. SMMEA provided that states
could override its provisions on legal investment and restrict or condition
investment in mortgage related securities by taking statutory action on or
prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
The Depositor makes no representations as to the proper
characterization of the Class [ ] Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Class [
] Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the Class [ ] Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Class [ ] Certificates constitute a
legal investment under SMMEA or is subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
S-45
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Class [ ] Certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Distribution of the Class [ ] Certificates will be
made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the Certificates will be __% of the initial aggregate
principal balance thereof as of the Cut-off Date, plus accrued interest from
the Cut-off Date at a rate of __% per annum, before deducting expenses payable
by the Depositor. In connection with the purchase and sale of the Class [ ]
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Depositor also has been advised by the Underwriter that it,
through one or more of its affiliates currently expects to make a market in the
Class [ ] Certificates offered hereby; however, it has no obligation to do so,
any market making may be discontinued at any time, and there can be no
assurance that an active public market for the Class [ ] Certificates will
develop.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by
_____________________________ and for the Underwriter by ____________________.
RATING
It is a condition to issuance that the Class [ ] Certificates be rated
[not lower than] "______" by ________________. However, no person is obligated
to maintain the rating on the Class [ ] Certificates, and _______________ is
not obligated to monitor its rating following the Closing Date.
________________'s ratings on mortgage pass-through certificates
address the likelihood of the receipt by holders thereof of payments to which
they are entitled. _____________'s ratings take into consideration the credit
quality of the mortgage pool, structural and legal aspects associated with the
certificates, and the extent to which the payment stream in the mortgage pool
is adequate to make payments required under the certificates.
_________________'s rating on the Class [ ] Certificates does not, however,
constitute a statement regarding frequency of prepayments on the Mortgage
Loans. [The rating of the Class [ ] Certificates does not address the
possibility that the holders of such Certificates may fail to fully recover
their initial investments.] See "Risk Factors" herein.
There can be no assurance as to whether any rating agency not
requested to rate the Class [ ] Certificates will nonetheless issue a rating
and, if so, what such rating would be. A rating assigned to the Class [ ]
Certificates by a rating agency that has not been requested by the Depositor to
do so may be lower than the rating assigned by ________________'s pursuant to
the Depositor's request.
The rating of the Class [ ] Certificates should be evaluated
independently from similar ratings on other types of securities. 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.
S-46
<PAGE>
ANNEX A
[CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS]
[Attach Mortgage Loan Schedule that details relevant and available
information regarding the Mortgage Loans, such as the information included
under the following headings:
1. Loan ID number 19. Next rate change
2. Original balance 20. First payment change
3. Current balance 21. Next payment change
4. Current rate 22. Rate adjustment frequency
5. Current payment 23. Payment adjustment frequency
6. Note date 24. Period payment cap
7. Original term 25. Life rate cap
8. Remaining term 26. Life rate floor
9. Maturity date 27. Negative amortization cap
percent
10. Amortization 28. Negative amortization cap
amount
11. Origination appraisal 29. LTV and current balances based
upon the Appraised Value]
12. Name of borrower
13. Street
14. City
15. State
16. Zip code
17. Rate index
18. First rate change
<PAGE>
ANNEX B
[TITLE, SERIES OF MBS]
TERM SHEET
<TABLE>
<CAPTION>
<S> <C>
CUT-OFF DATE: [ ] MORTGAGE POOL CUT-OFF DATE BALANCE: $[ ]
DATE OF INITIAL ISSUANCE: [ ] REFERENCE DATE BALANCE: $[ ]
RELATED TRUSTEE: [ ] PERCENT OF ORIGINAL MORTGAGE POOL REMAINING [ ]%
AS OF REFERENCE DATE:
MATURITY DATE: [ ]
<CAPTION>
CLASS PASS-THROUGH INITIAL FEATURES
OF RATE CERTIFICATE ----------
CERTIFICATES ---- PRINCIPAL
------------ BALANCE
---------
<C> <C> <C> <C>
[ ] [ ]% $[ ] [ ]
</TABLE>
[First MBS Distribution Date on which the MBS may receive a portion of
prepayments: [date]]
MINIMUM SERVICING FEE RATE:* [ ]% per annum AS OF DATE OF
MAXIMUM SERVICING FEE RATE:* [ ]% per annum INITIAL ISSUANCE
----------------
SPECIAL HAZARD AMOUNT: $[ ]
BANKRUPTCY AMOUNT: $[ ]
FRAUD LOSS AMOUNT: $[ ]
- --------------------
*Combined Related Master Servicing and Subservicing Fee Rate.
<PAGE>
AS OF AS OF DATE OF
DELIVERY DATE INITIAL ISSUANCE
--------------- -----------------
SENIOR PERCENTAGE [ ]% [ ]%
SUBORDINATE PERCENTAGE [ ]% [ ]%
RATINGS: RATING AGENCY CLASS VOTING RIGHTS:
[ ] [ ]
[ ]
[ ]
[ ]
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State. Information
contained herein is subject to completion or amendment. A registration
statement relating to these securities has been filed with the Securities and
Exchange Commission. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes effective. This
prospectus supplement and the prospectus to which it relates shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
[VERSION 2]
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998
$----------------
PROSPECTUS SUPPLEMENT
(To Prospectus dated ____, 199_)
MORGAN STANLEY CAPITAL I INC..
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _______
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will consist of ____ classes of Certificates, designated as the
Class [ ] Certificates, Class [ ] Certificates and Class [ ] Certificates (the
Class [ ] Certificates, collectively, the "Subordinate Certificates"). It is a
condition of the issuance of the Class [ ] Certificates that they be rated [not
lower than] "_______________" by _________________.
The Certificates will represent in the aggregate the entire beneficial
interest in a trust fund (the "Trust Fund") to be established by Morgan Stanley
Capital I Inc. (the "Depositor"). The Trust Fund will consist primarily of [a
pool (the "Mortgage Pool") of [fixed rate] [adjustable rate] mortgage loans,
with terms to maturity of not more than ___ years (the "Mortgage Loans"),
secured by [first and/or junior] liens on [multifamily][commercial]
properties,] [mortgage participations, mortgage pass-through certificates,
mortgaged-backed securities evidencing interests therein or secured thereby
(the "MBS"),] [and] [certain direct obligations of the United States, agencies
thereof or agencies created thereby (the "Government Securities")]. The
Mortgage Loans were originated or acquired by ___________ (the "Mortgage Asset
Seller") and will be sold to the Depositor on or prior to the date of initial
issuance of the Certificates.
The Class [ ] Certificates will evidence approximately an initial ___%
undivided interest in the Trust Fund and the Subordinate Certificates, in the
aggregate, will evidence approximately an initial ___% undivided interest in
the Trust Fund. Only the Class [ ] Certificates are being offered hereby.
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, CERTAIN RISKS SET FORTH
UNDER THE CAPTION "RISK FACTORS" HEREIN AND IN THE PROSPECTUS.
[The MBS will [consist of] [include] the following series and classes
of securities: [identify title[s] and class[es] of MBS][, including [title[s]
and class[es] of MBS].] [The [title[s] and class[es] of MBS] are [subordinate]
[interest-only] securities.] [See "Summary--The MBS."]]
[The yield to investors in the [interest-only] Certificates will be
[extremely] sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) in the Mortgage Loans,
which may fluctuate significantly over time. An [extremely] rapid rate of
principal payments on the Mortgage Loans could result in the failure of
investors in the [interest-only] Certificates to recover their initial
investments.]
[As more fully described herein, each Mortgage Loan provides for
periodic adjustments (which may occur monthly, quarterly, semi-annually or
annually) of the mortgage interest rate (the "Mortgage Rate") thereon and the
monthly payment due thereon, in each case subject to the limitations described
herein. Accordingly, a significant increase in the Mortgage Rate and the amount
of the scheduled monthly payment due thereafter may result, which may increase
the likelihood of default on and prepayment of such Mortgage Loan. In most
cases, because the Mortgage Rate on a Mortgage Loan will be subject to
adjustment monthly, while the monthly payment due thereon will be subject to
adjustment annually, in each case subject to the limitations described herein,
and because the application of payment caps limits adjustments to the monthly
payments on certain Mortgage Loans, the Mortgage Loans (and consequently the
Class [ ] Certificates) may be subject to accelerated, reduced or negative
amortization.
----------------------
MORGAN STANLEY & CO.
INCORPORATED
____________, 19__
<PAGE>
Certain of the Mortgage Loans continue to be in an initial fixed
interest rate period and have not experienced the first adjustment to their
respective Mortgage Rates.] The characteristics of the Mortgage Loans are more
fully described herein under "Description of the Mortgage Pool."
Distributions on the Class [ ] Certificates will be made, to the
extent of available funds, on the __th day of each [month] [__] or, if any such
day is not a business day, on the next succeeding business day, beginning in
__________ (each, a "Distribution Date"). [As more fully described herein,
distributions allocable to interest, if any, on the Class [ ] Certificates on
each Distribution Date will be based on the [applicable] [then-applicable
variable] pass-through rate (the "Pass-Through Rate") and the aggregate
[principal balance (the "Certificate Balance")] [notional balance (the
"Notional Balance")] of such class [or each component thereof] outstanding
immediately prior to such Distribution Date. [The Pass-Through Rate applicable
to the Class [ ] Certificates from time to time will equal the [sum of __% and
the Index (as defined herein) subject to certain limitations] [weighted average
of the Class [ ] Remittance Rates (as defined herein) on the Mortgage Loans.
The Pass-Through Rate for the Class [ ] Certificates on the first Distribution
Date will be _% per annum and is expected to change thereafter [because the
weighted average of the Class [ ] Remittance Rates is expected to change for
succeeding Distribution Dates.] Distributions in respect of principal, if any,
of the Class [ ] Certificates will be made as described herein under
"Description of the Certificates -- Distributions -- Priority" and
"--Calculations of Principal".]
[_______________ will act as master servicer of the Mortgage Loans
(the "Master Servicer"). The obligations of the Master Servicer with respect to
the Certificates will be limited to its contractual servicing obligations and
the obligation under certain circumstances to make Advances to the
Certificateholders. If the Master Servicer fails to make any such Advance or
otherwise fails to perform its servicing obligations, the Trustee will be
obligated to assume such servicing obligations and to make such Advance to the
extent described herein. See "Description of the Certificates -- Advances"
herein. [The only] obligation of the Depositor with respect to the Certificates
will be to obtain from the Mortgage Asset Seller certain representations and
warranties with respect to the Mortgage Loans and to assign to the Trustee the
obligation of the Mortgage Asset Seller to repurchase or substitute for any
Mortgage Loan as to which there exists an uncured material breach of any such
representation or warranty.]
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CLASS [ ] CERTIFICATES. THE CLASS [ ] CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF
THEIR RESPECTIVE AFFILIATES. NEITHER THE CLASS [ ] CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF
THEIR AFFILIATES.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.]
----------------------
An election will [not] be made to treat the Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. [The Class [ ] Certificates will constitute "regular interests" in
the REMIC.] See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
ii
<PAGE>
The yield to maturity on the Class [ ] Certificates will depend on the
rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans. See "Risk Factors" herein and "Risk
Factors -- Average Life of Certificates; Prepayments; Yields" and "Yield
Considerations" in the Prospectus. As further described herein, losses on the
Mortgage Loans will be allocated to the Subordinate Certificates prior to
allocation to the Class [ ] Certificates. See "Description of the Certificates
- -- Distributions -- Priority" herein.
There is currently no secondary market for the Class [ ] Certificates.
Morgan Stanley & Co. Incorporated (the "Underwriter") currently expects to make
a secondary market in the Class [ ] Certificates, but has no obligation to do
so. There can be no assurance that such a market will develop or, if it does
develop, that it will continue. See "Plan of Distribution" herein.
The Class [ ] Certificates offered hereby will be purchased by the
Underwriter from the Depositor and will be offered by the Underwriter from time
to time to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. Proceeds to the Depositor from the sale
of the Class [ ] Certificates will be ___% of the initial aggregate principal
balance thereof as of ____________ 1, 199_ (the "Cut-off Date") plus accrued
interest from the Cut-off Date, before deducting expenses payable by the
Depositor.
The Class [ ] Certificates are offered subject to prior sale, when, as
and if accepted by the Underwriter, and subject to approval of certain legal
matters by __________, counsel for the Underwriter. It is expected that
delivery of the Class [ ] Certificates [in book-entry form] [in registered,
certified form] will be made on or about ___________, 199_, [through the
facilities of The Depository Trust Company] [at the offices of the Underwriter,
New York, New York] against payment therefor in immediately available funds.
[This Prospectus Supplement may be used by the Underwriter, an
affiliate of the Depositor and the Master Servicer, in connection with offers
and sales related to market making transactions in the Certificates.]
----------------------
THE CLASS [ ] CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR
AND ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED _______________, 199_,
OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING
THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE
URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF
THE CLASS [ ] CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS
RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
iii
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Supplement ----
Summary.................................................................... S
Risk Factors............................................................... S
Description of the Mortgage Pool........................................... S
Description of the Certificates............................................ S
Pooling and Servicing Agreement............................................ S
Use of Proceeds............................................................ S
Certain Federal Income Tax Consequences.................................... S
ERISA Considerations....................................................... S
Legal Investment........................................................... S
Plan of Distribution....................................................... S
Legal Matters.............................................................. S
Rating..................................................................... S
Prospectus
Prospectus Supplement......................................................
Available Information......................................................
Incorporation of Certain Information by Reference..........................
Summary of Prospectus......................................................
Risk Factors...............................................................
Description of the Trust Funds.............................................
Use of Proceeds............................................................
Yield Considerations.......................................................
The Depositor..............................................................
Description of the Certificates............................................
Description of the Agreements..............................................
Description of Credit Support..............................................
Certain Legal Aspects of Mortgage Loans....................................
Certain Federal Income Tax Consequences....................................
State Tax Considerations...................................................
ERISA Considerations.......................................................
Legal Investment...........................................................
Plan of Distribution.......................................................
Legal Matters..............................................................
Financial Information......................................................
Rating.....................................................................
Index of Principal Definitions.............................................
ii
<PAGE>
----------------------
UNTIL ______________, 199_, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CLASS [ ] CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------------
No dealer, salesman, or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus Supplement and the accompanying Prospectus in connection with
the offer contained in this Prospectus Supplement and the accompanying
Prospectus, and, if given, such information or representations must not be
relied upon as having been authorized by the Issuer, the Depositor or the
Underwriter. This Prospectus Supplement and the accompanying Prospectus shall
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. The delivery
of this Prospectus Supplement and the accompanying Prospectus at any time does
not imply that the information herein is correct as of any time subsequent to
the date hereof.
ii
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Title of Certificates........................................... Mortgage Pass-Through Certificates, Series 199_-_, (the
"Certificates").
Depositor....................................................... Morgan Stanley Capital I Inc., a Delaware corporation and a
wholly-owned limited purpose finance subsidiary of Morgan
Stanley Group Inc. See "The Depositor" in the Prospectus.
Master Servicer................................................. _______________, a ________________. See "Pooling and Servicing
Agreement -- The Master Servicer" herein.
[Sub-Servicers.................................................. _______________, a ________________]
[Special Servicers.............................................. _______________, a ________________]
Trustee......................................................... _____________, a ____________________.
Cut-off Date.................................................... ____________ 1, 199_.
Closing Date.................................................... ______________ 1, 199_.
Distribution Dates.............................................. Distributions on the Certificates will be made by the Trustee,
to the extent of available funds, on the __ day of each [month]
[ ] or, if any such __ day is not a business day, then on the
next succeeding business day, beginning in ________ 19__ (each,
a "Distribution Date"), to the holders of record as of the close
of business on the [last business day of the month preceding the
month] of each such distribution (each, a "Record Date").
Notwithstanding the above, the final distribution on any
Certificate will be made after due notice by the Trustee of the
pendency of such distribution and only upon presentation and
surrender of such Certificates at the location to be specified
in such notice.
[Registration of the Class
[ ] Certificates............................................... The Class [ ] Certificates will be represented by one or more
global certificates registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"). No person
acquiring an interest in the Class [ ] Certificates
<PAGE>
(any such person, a "Class [ ] Certificate Owner") will be
entitled to receive a Certificate of such class in fully
registered, certificated form (a "Definitive Class [ ]
Certificate"), except under the limited circumstances described
in the Prospectus under "Description of the
Certificates-Book-entry Registration and Definitive
Certificates". Instead, DTC will effect payments and transfers
in respect of the Class [ ] Certificates by means of its
electronic recordkeeping services, acting through certain
participating organizations ("Participants"). This may result in
certain delays in receipt of payments by an investor and may
restrict an investor's ability to pledge its securities. Unless
and until Definitive Class [ ] Certificates are issued, all
references herein to the rights of holders of a Class [ ]
Certificate are to the rights of Class [ ] Certificate Owners of
such class as they may be exercised through DTC and its
Participants, except as otherwise specified herein. See
"Description of the Certificates-General" herein and
"Description of the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.]
Denominations................................................... The Class [ ] Certificates will be issuable [on the book-entry
records of DTC and its Participants] [in registered, certified
form] in denominations of $_______ and integral multiples of
$_____________ in excess thereof[, with one Certificate of such
class evidencing an additional amount equal to the remainder of
the Certificate Balance thereof].
[The Mortgage Pool.............................................. The Mortgage Pool will consist of [[fixed rate] [adjustable
rate] Mortgage Loans secured by [first] [junior] liens on
[multifamily] [commercial] properties (the "Mortgaged
Properties") located in __ different states,] [mortgage
participations, mortgage pass-through certificates,
mortgaged-backed securities evidencing interests therein or
secured thereby (the "MBS"),] [and] [certain direct obligations
of the United States, agencies thereof or agencies created
thereby (the "Government Securities")]. [The Mortgage Loans will
have an aggregate principal balance as of the Cut-off Date of
$_________ and individual principal balances at origination of
at least $______________ but not more than $__________, with an
average principal balance at origination of approximately
$_________. The Mortgage Loans will have terms to maturity from
the date of origination or modification of not more
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<PAGE>
than ____ years, and a weighted average remaining term to
maturity of approximately _____ months as of the Cut-off Date.
The Mortgage Loans will bear interest at Mortgage Rates of at
least _____% per annum but not more than _____% per annum, with
a weighted average Mortgage Rate of approximately ____% per
annum as of the Cut-off Date. The Mortgage Loans will be
acquired by the Depositor on or before the Closing Date. In
connection with its acquisition of the Mortgage Loans, the
Depositor will be assigned (and will in turn assign to the
Trustee for the benefit of the holders of the Certificates)
certain rights in respect of representations and warranties
described herein that were made by the Mortgage Asset Seller.]
[_____ of the Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal balance as of the Cut-off
Date, provide for scheduled payments of principal and/or
interest ("Monthly Payments") to be due on the _____ day of each
month; the remainder of the Mortgage Loans provide for Monthly
Payments to be due on [identify day or days] of each month (the
date in any month on which a Monthly Payment on a Mortgage Loan
is first due, the "Due Date"). [The rate per annum at which
interest accrues on each Mortgage Loan is subject to adjustment
on specified Due Dates (each such date, an "Interest Rate
Adjustment Date") by adding a fixed percentage amount (a "Gross
Margin") to the value of the then-applicable Index (as described
below) subject, in the case of substantially all of the Mortgage
Loans, to limitations on the periodic adjustment of the related
Mortgage Rate, and to maximum and minimum lifetime Mortgage
Rates, as described herein. ___ of the Mortgage Loans,
representing ___% of the Mortgage Loans by aggregate principal
balance as of the Cut-off Date, provide for Interest Rate
Adjustment Dates to occur [monthly]; the remainder of the
Mortgage Loans provide for adjustments to the Mortgage Rate to
occur quarterly, semi-annually or annually. [Each of the
Mortgage Loans provides for an initial fixed interest rate
period;] of the Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal balance as of the Cut-off
Date, have not yet experienced their first Interest Rate
Adjustment Date. The latest initial Interest Rate Adjustment
Date for any Mortgage Loan is scheduled to occur on --------.]]
S-3
<PAGE>
[The amount of the Monthly Payment on each Mortgage Loan is also
subject to adjustment on specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount that would amortize the
outstanding principal balance of the Mortgage Loan over its then
remaining amortization schedule and pay interest at the
applicable Mortgage Rate, subject, in the case of several
Mortgage Loans, to payment caps, which limit the amount by which
the Monthly Payment may adjust on any Payment Adjustment Date as
described herein. _______ of the Mortgage Loans, representing
__% of the Mortgage Loans (by aggregate principal balance as of
the Cut-off Date, provide for Payment Adjustment Dates to occur
annually, while the remainder of the Mortgage Loans provide for
adjustments of the Monthly Payment to occur monthly, quarterly
or semi-annually.]
[Only in the case of Mortgage Loans, representing ____% of the
Mortgage Loans by aggregate principal balance as of the Cut-off
Date, does a Payment Adjustment Date immediately follow each
Interest Rate Adjustment Date. As a result, and because the
application of payment caps may limit the amount by which the
Monthly Payments may adjust in respect of certain Mortgage
Loans, the amount of a Monthly Payment may be more or less than
the amount necessary to amortize the remaining principal balance
of the Mortgage Loan over its then remaining amortization
schedule and pay interest at the then-applicable Mortgage Rate.
Accordingly, Mortgage Loans may be subject to slower
amortization (if the Monthly Payment due on a Due Date is
sufficient to pay interest accrued to such Due Date at the
then-applicable Mortgage Rate but is not sufficient to reduce
principal in accordance with the applicable amortization
schedule), to negative amortization (if interest accrued to a
Due Date at the applicable Mortgage Rate is greater than the
entire Monthly Payment due on such Due Date) or to accelerated
amortization (if the Monthly Payment due on a Due Date is
greater than the amount necessary to pay interest accrued to
such Due Date at the then-applicable Mortgage Rate and to reduce
principal in accordance with the applicable amortization
schedule).]
[__ Mortgage Loans, representing ____% of the Mortgage Loans by
aggregate principal balance as
S-4
<PAGE>
of the Cut-off Date, permit negative amortization. Substantially
all of the Mortgage Loans that permit negative amortization
contain provisions that limit the extent to which the amount of
their respective original principal balances may be exceeded as
a result thereof.]
[ Mortgage Loans, representing % of the Mortgage Loans by
aggregate principal balance as of the Cut-off Date, provide for
monthly payments of principal based on amortization schedules
significantly longer than the remaining term of such Mortgage
Loans, thereby leaving substantial outstanding principal amounts
due and payable (each such payment, a "Balloon Payment") on
their respective maturity dates, unless prepaid prior thereto.]
For a further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.]
[The MBS........................................................ [Title and issuer of underlying securities, amount deposited or
pledged, amount originally issued, maturity date, interest rate,
[redemption provisions], description of other material terms.]
[The Index...................................................... As of any Interest Rate Adjustment Date, the Index used to
determine the Mortgage Rate on each Mortgage Loan will be the
____________. See "Description of the Mortgage Pool -- The
Index" herein.]
The Class [ ] Certificates...................................... The Class [ ] Certificates will be issued pursuant to a Pooling
and Servicing Agreement, to be dated as of the Cut-off Date,
among the Depositor, the Master Servicer and the Trustee (the
"Pooling and Servicing Agreement"). The Class [ ] Certificates
have an initial Certificate Balance of $_______ (the initial
"Class [ ] Balance"), representing an initial interest of
approximately ___% in a trust fund (the "Trust Fund"), which
will consist primarily of the Mortgage Pool [The Class [ ]
Certificates will not have a Certificate Balance.]
Distributions on the Class [ ] Certificates will be made on the
____ day of each [month] [__] or, if such day is not a business
day, on the succeeding business day, beginning on ____________
__, 199_ (each, a "Distribution Date"). Distributions on each
Distribution Date will be made by check or wire transfer of
immediately available funds, as provided in the Pooling and
Servicing Agreement, to the Class [ ] Certificateholders of
record as of
S-5
<PAGE>
the [last business day of the month preceding the month] of such
Distribution Date (each, a "Record Date"), except that the final
distribution on the Class [ ] Certificates will be made only
upon presentation and surrender of the Class [ ] Certificates at
the office or agency specified in the Pooling and Servicing
Agreement. [As more specifically described herein, the Class [ ]
Balance will be adjusted from time to time on each Distribution
Date to reflect any additions thereto resulting from allocations
of Mortgage Loan negative amortization to the Class [ ]
Certificates and any reductions thereof resulting from
distributions of principal of the Class [ ] Certificates. As
further described herein, interest shall accrue on the Class [ ]
Balance at a Pass-Through Rate thereon.
Pass-Through Rate on the
Class [ ] Certificates........................................ [The Pass-Through Rate on the Class [ ] Certificates is fixed
and is set forth on the cover hereof.] [The Pass-Through Rate on
the Class [ ] Certificates will be equal to the weighted average
of the Class [ ] Remittance Rates in effect from time to time on
the Mortgage Assets. The Class [ ] Remittance Rate in effect for
any Mortgage Assets as of any date of determination [is equal to
the excess of the Mortgage Rate thereon over __% per annum] [(i)
prior to its first Interest Rate Adjustment Date is equal to the
related Mortgage Rate then in effect minus __ basis points (the
"Net Mortgage Rate") and (ii) from and after its first Interest
Rate Adjustment Date is equal to the related Mortgage Rate then
in effect minus the excess of the related Gross Margin over __
basis points.]] [The Class [ ] Certificates [or a component
thereof] will not be entitled to distributions of interest and
will not have a Pass-Through Rate.] [Describe any other method
used to calculate the Pass-Through Rate.]
Interest Distributions
on the Class [ ] Certificates................................. Holders of the Class [ ] Certificates will be entitled to
receive on each Distribution Date, to the extent of the
Available Distribution Amount for such Distribution Date,
distributions allocable to interest in an aggregate amount (the
"Class [ ] Interest Distribution Amount") equal to thirty days'
interest accrued on the Class [ ] Balance] [Class [ ] Notional
Amount] outstanding immediately prior to such Distribution Date
at the then-applicable Pass-Through Rate less the Class [ ]
Certificates' allocable share (calculated as
S-6
<PAGE>
described herein) of [(i) the aggregate amount of negative
amortization in respect of the Mortgage Loans for their
respective Due Dates occurring during the related Due Period and
(ii)] the aggregate portion of Prepayment Interest Shortfalls
incurred during the related Due Period that was not covered by
the application of the Master Servicer's servicing compensation
for the related Due Period. [The amount, if any, by which the
Class [ ] Interest Distribution Amount for any Distribution Date
is reduced as a result of negative amortization on the Mortgage
Loans shall constitute the "Class Negative Amortization" for
such Distribution Date in respect of the Class [ ] Certificates
and shall be added to the Class [ ] Balance on such Distribution
Date.] [The Class [ ] Notional Amount will equal the [sum of
the] Class [ ] Balance. The Class [ ] Notional Amount does not
entitle the Class [ ] Certificates [or a component thereof] to
any distributions of principal.] If the Available Distribution
Amount for any Distribution Date is less than the Class [ ]
Interest Distribution Amount for such Distribution Date, the
shortfall will be part of the Class [ ] Interest Distribution
Amount distributable to holders of Class [ ] Certificates on
subsequent Distribution Dates, to the extent of available funds.
The Available Distribution Amount for any Distribution Date
generally includes: (i) scheduled payments on the Mortgage
Assets due during or prior to the related Due Period and
collected as of the related Determination Date (to the extent
not distributed on previous Distribution Dates) and certain
unscheduled payments and other collections on the Mortgage
Assets collected during the related Due Period, net of amounts
payable or reimbursable to the Master Servicer therefrom; (ii)
any Advances made by the Master Servicer for the related
Distribution Date; and (iii) that portion of the Master
Servicer's servicing compensation for the related Due Period
applied to cover Prepayment Interest Shortfalls incurred during
the related Due Period. See " Description of the Certificates --
Distributions -- Calculations of Interest" herein.
Principal Distributions
on the Class [ ]
Certificates.................................................. Holders of the Class [ ] Certificates will be entitled to
receive on each Distribution Date, to the extent of the balance
of the Available Distribution
S-7
<PAGE>
Amount remaining after the payment of the Class [ ] Interest
Distribution Amount for such Distribution Date, distributions in
respect of principal in an amount (the "Class [ ] Principal
Distribution Amount") generally equal to the aggregate of (i)
the then Class [ ] Scheduled Principal Distribution Percentage
(calculated as described herein) of all scheduled payments of
principal (including the principal portion of any Balloon
Payments) due on the Mortgage Loans during or, if and to the
extent not previously received or advanced and distributed on
prior Distribution Dates, prior to the related Due Period that
were paid by the mortgagors as of the related Determination Date
or advanced by the Master Servicer in respect of such
Distribution Date, (ii) [the Senior Accelerated Percentage of]
[all principal prepayments received during the related Due
Period and (iii), to the extent not previously advanced [the
[lesser of the] Class [ ] Scheduled Principal Distribution
Percentage of the Stated Principal Balance of the Mortgage
Loans] [and the] [Senior Accelerated Percentage of any
unscheduled principal recoveries received during the related Due
Period in respect of the Mortgage Loans, whether in the form of
liquidation proceeds, insurance proceeds, condemnation proceeds
or amounts received as a result of the purchase of any Mortgage
Loan out of the Trust Fund.]] Distributions in respect of
principal of the Class [ ] Certificates on any Distribution Date
shall be limited to the sum of (i) the Class [ ] Balance
outstanding immediately prior to such Distribution Date and (ii)
the Class Negative Amortization, if any, for such Distribution
Date in respect of the Class [ ] Certificates. [Initially, the
"Senior Accelerated Percentage" will equal 100% thereafter, as
further described herein, the Senior Accelerated Percentage may
be reduced under certain circumstances.] See "Description of the
Certificates --Distributions -- Calculations of Principal"
herein. [The Class [ ] Certificates do not have a Certificate
Balance and are therefore not entitled to any principal
distributions].
Advances........................................................ The Master Servicer is required to make advances ("Advances") in
respect of delinquent Monthly Payments on the Mortgage Loans,
subject to the limitations described herein. The Trustee will be
obligated to make any such Advance if the Master Servicer fails
in its obligation to do so, to the extent provided in the
Pooling and Servicing Agreement. See "Description of the
Certificates --
S-8
<PAGE>
Advances" herein and "Description of the Certificates --
Advances in Respect of Delinquencies" in the Prospectus.
Subordination .................................................. The rights of holders of the Subordinate Certificates to receive
distributions of amounts collected on the Mortgage Loans will be
subordinate, to the extent described herein, to the rights of
holders of the Class [ ] Certificates. This subordination is
intended to enhance the likelihood of receipt by the holders of
the Class [ ] Certificates of the full amount of the Class [ ]
Interest Distribution Amount and the [ultimate receipt of
principal equal to the initial Class [ ] Balance]. The
protection afforded to the holders of the Class [ ] Certificates
by means of the subordination, to the extent provided herein,
will be accomplished by the application of the Available
Distribution Amount to the Class [ ] Certificates prior to the
application thereof to the Subordinate Certificates [and by
reducing the Class [ ] Interest Distribution Amount and the
Class [ ] Balance by an amount equal to the interest portion and
the principal portion, respectively, Realized Losses allocated
to such class]. See "Description of the Certificates --
Subordination" herein.
[The Subordinate
Certificates.................................................. The Class [ ] Certificates have an initial Certificate Balance
of $____________ (the initial "Class [ ] Balance") and the Class
[ ] Certificates have an initial Certificate Balance of
$________ (the initial "Class [ ] Balance"), representing ____%
and _____%, respectively, of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date. Interest shall accrue
on the Class [ ] Balance and Class [ ] Balance at a Pass-Through
Rate equal to [____% per annum] [the weighted average of the Net
Mortgage Rates in effect from time to time on the Mortgage
Loans].
[The Class [ ] Certificates, which have no Pass-Through Rate and
initially have a Certificate Balance of $______________ (the
initial "Class [ ] Balance"), represent the right to receive on
any Distribution Date the balance, if any, of the Available
Distribution Amount remaining after the payment of all interest
and principal due on the other Classes of Certificates.
Subsequent to the first Distribution Date, the Class [ ] Balance
will equal the excess, if any, of the aggregate Stated Principal
Balance of the Mortgage Loans over the
S-9
<PAGE>
sum of the Class [ ] Balance, Class [ ] Balance and Class [ ]
Balance.]
[The Subordinate Certificates are not offered hereby.]]
[Special Prepayment
Considerations................................................ The rate of principal payments on the Class [ ] Certificates
collectively will depend on the rate and timing of principal
payments (including prepayments, defaults and liquidations) on
the Mortgage Loans. As is the case with mortgage-backed
securities generally, the Class [ ] Certificates are subject to
substantial inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time. Generally, when
prevailing interest rates are increasing, prepayment rates on
mortgage loans tend to decrease, resulting in a reduced return
of principal to investors at a time when reinvestment at such
higher prevailing rates would be desirable. Conversely, when
prevailing interest rates are declining, prepayment rates on
mortgage loans tend to increase, resulting in a greater return
of principal to investors at a time when reinvestment at
comparable yields may not be possible.
[The multiple class structure of the Class [ ] Certificates
results in the allocation of prepayments among certain classes
as follows [to be included as appropriate]:
[SEQUENTIALLY PAYING CLASSES: [All] classes of the Class [ ]
Certificates are subject to various priorities for payment of
principal as described herein. Distributions on classes having
an earlier priority of payment will be immediately affected by
the prepayment speed of the Mortgage Loans early in the life of
the Mortgage Pool. Distributions on classes with a later
priority of payment will not be directly affected by the
prepayment speed until such time as principal is distributable
on such classes; however, the timing of commencement of
principal distributions and the weighted average lives of such
classes will be affected by the prepayment speed experienced
both before and after the commencement of principal
distributions on such classes.]
[[SCHEDULED] CERTIFICATES: Principal distributions on the
[Scheduled] Certificates will be payable in amounts determined
based on schedules as described herein, provided that the
prepayment
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<PAGE>
speed of the Mortgage Loans each month remains [at a constant
level of] [between approximately ___% CPR (as defined herein)
and] ___% CPR. [However, as discussed herein, actual principal
distributions are likely to deviate from the described amounts,
because it is highly unlikely that the actual prepayment speed
of the Mortgage Loans each month will remain at or near ___%
CPR.] If the prepayment speed of the Mortgage Loans is
consistently higher than ___% CPR, then the [Companion]
Certificates will be retired before all of the [Scheduled]
Certificates are retired, and the rate of principal
distributions and the weighted average lives of the remaining
[Scheduled] Certificates will become significantly more
sensitive to changes in the prepayment speed of the Mortgage
Loans and principal distributions thereon will be more likely to
deviate from the described amounts.]
[[COMPANION] CERTIFICATES: Because of the application of amounts
available for principal distributions among the Class [ ], Class
[ ] and Class [ ] Certificates in any given month, first to the
[Scheduled] Certificates up to the described amounts and then to
the [Companion] Certificates, the rate of principal
distributions and the weighted average lives of the [Companion]
Certificates will be extremely sensitive to changes in the
prepayment speed of the Mortgage Loans. The weighted average
lives of the [Companion] Certificates will be significantly more
sensitive to changes in the prepayment speed than that of the
[Scheduled] Certificates or a fractional undivided interest in
the Mortgage Loans.]]
[Special Yield
Considerations................................................ The yield to maturity on each respective class of the Class [ ]
Certificates will depend on the rate and timing of principal
payments (including prepayments, defaults and liquidations) on
the Mortgage Loans and the allocation thereof (and of any losses
on the Mortgage Loans) to reduce the Certificate Principal
Balance (or Notional Amount) of such class, as well as other
factors such as the Pass-Through Rate (and any adjustments
thereto) and the purchase price for such Certificates. The yield
to investors on any class of Class [ ] Certificates will be
adversely affected by any allocation thereto of prepayment
interest shortfalls on the Mortgage Loans, which are expected to
result from the distribution of interest only to the date of
prepayment (rather than
S-11
<PAGE>
a full month's interest) in connection with prepayments in full,
and the lack of any distribution of interest on the amount of
any partial prepayments.
In general, if a Class [ ] Certificate is purchased at a premium
and principal distributions thereon occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of
purchase. Conversely, if a Class [ ] Certificate is purchased at
a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that originally
anticipated.
The Class [ ] Certificates were structured based on a number of
assumptions, including a prepayment assumption of ___% CPR and
weighted average lives corresponding thereto as set forth herein
under "Special Prepayment Considerations." The yield assumptions
for the respective classes of Offered Certificates will vary as
determined at the time of sale.
[The multiple class structure of the Senior Certificates causes
the yields of certain classes to be particularly sensitive to
changes in the prepayment speed of the Mortgage Loans and other
factors, as follows [to be included as appropriate]:]
[INTEREST STRIP AND INVERSE FLOATER CLASSES: The yield to
investors on the [identify classes] will be extremely sensitive
to the rate and timing of principal payments on the Mortgage
Loans (including prepayments, defaults and liquidations), which
may fluctuate significantly over time. A rapid rate of principal
payments on the Mortgage Loans could result in the failure of
investors in the [identify interest strip and inverse floater
strip classes] to recover their initial investments, and a
slower than anticipated rate of principal payments on the
Mortgage Loans could adversely affect the yield to investors on
the [identify non-strip inverse floater classes].]
[[VARIABLE STRIP] CERTIFICATES. In addition to the foregoing,
the yield on the [Variable Strip] Certificates will be
materially adversely affected to a greater extent than the
yields on the other Class [ ] Certificates if the Mortgage Loans
with
S-12
<PAGE>
higher Mortgage Rates prepay faster than the Mortgage Loans with
lower Mortgage Rates, because holders of the [Variable Strip]
Certificates generally have rights to relatively larger portions
of interest payments on the Mortgage Loans with higher Mortgage
Rates than on Mortgage Loans with lower Mortgage Rates.]
[ADJUSTABLE RATE (INCLUDING INVERSE FLOATER) CLASSES: The yield
on the [identify floating rate classes] will be sensitive, and
the yield on the [identify inverse floater classes] will be
extremely sensitive, to fluctuations in the level of [the
index]. THE PASS-THROUGH RATE ON THE [IDENTIFY INVERSE FLOATER
CLASSES] WILL VARY INVERSELY WITH, AND AT A MULTIPLE OF, [THE
INDEX].]
[Inverse floater companion classes: In addition to the
foregoing, in the event of relatively low prevailing interest
rates (including [the index] and relatively high rates of
principal prepayments over an extended period, while investors
in the [identify inverse floater companion classes] may then be
experiencing a high current yield on such Certificates, such
yield may be realized only over a relatively short period, and
it is unlikely that such investors would be able to reinvest
such principal prepayments on such Certificates at a comparable
yield.]
[RESIDUAL CERTIFICATES: Holders of the Residual Certificates are
entitled to receive distributions of principal and interest as
described herein; however, holders of such Certificates may have
tax liabilities with respect to their Certificates during the
early years of their term that substantially exceed the
principal and interest payable thereon during such periods. [In
addition, such distributions will be reduced to the extent that
they are subject to United States federal income tax
withholding.]
Optional Termination............................................ At its option, the Master Servicer may purchase all of the
Mortgage Assets, and thereby effect termination of the Trust
Fund and early retirement of the then outstanding Certificates,
on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans remaining in the Trust Fund is
less than __% of the aggregate principal balance of such
Mortgage Loans as of the Cut-off Date. [At its option, the
Master Servicer may also purchase any Class [ ] Certificates on
any Distribution Date on which the
S-13
<PAGE>
Class [ ] Balance is less than ___% of the original balance
thereof.] See "Pooling and Servicing Agreement -- Termination"
herein and "Description of the Certificates -- Termination" in
the Prospectus.
Certain Federal Income Tax
Consequences.................................................. [An election will be made to treat the Trust Fund as a real
estate mortgage investment conduit ("REMIC") for federal income
tax purposes. Upon the issuance of the Class [ ] Certificates,
Brown & Wood LLP or Cadwalader, Wickersham & Taft or Latham &
Watkins, counsel to the Depositor, will deliver its opinion
generally to the effect that assuming compliance with all
provisions of the Pooling and Servicing Agreement, for federal
income tax purposes, the Trust Fund will qualify as a REMIC
under Sections 860A through 860G of the Internal Revenue Code of
1986 (the "Code").
For federal income tax purposes, the Class [ ] Certificates will
be the sole class of "residual interests" in the REMIC and the
Class [ ], Class [ ] and Class [ ] Certificates will be the
"regular interests" in the REMIC and will be treated as debt
instruments of the REMIC.
The Class [ ] Certificates [may[will]][will not] be treated as
having been issued with original issue discount for federal
income tax purposes. The prepayment assumption that will be used
for purposes of computing the accrual of original issue
discount, market discount and premium, if any, for federal
income tax purposes will be equal to a constant prepayment rate
("CPR") of ____%. However, no representation is made that the
Mortgage Loans will prepay at that rate or at any other rate.]
For further information regarding the federal income tax
consequences of investing in the Class [ ] Certificates, see
"Certain Federal Income Tax Consequences" herein and in the
Prospectus.]
ERISA Considerations............................................ [A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
should review carefully with its legal advisors whether the
purchase or holding of Class [ ] Certificates could give rise to
a transaction that is prohibited or is not otherwise permitted
either
S-14
<PAGE>
under ERISA or Section 4975 of the Code or whether there exists
any statutory or administrative exemption applicable to an
investment therein.] [The U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-24, to
the Underwriter that generally exempts from the application of
certain of the prohibited transaction provisions of Section 406
of ERISA, and the excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and
holding of pass-through certificates underwritten by the
Underwriter such as the Class [ ] Certificates and the servicing
and operation of asset pools such as the Trust Fund, provided
that certain conditions are satisfied. A fiduciary of any
employee benefit plan subject to ERISA or the Code should
consult with its legal advisors regarding the requirements of
ERISA and the Code.] See "ERISA Considerations" herein and in
the Prospectus.
Rating.......................................................... It is a condition to the issuance of the Class [ ] Certificates
that they be rated [not lower than] "___" by . A security
-------------- rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at
any time by the assigning rating organization. A security rating
does not address the frequency of prepayments (whether voluntary
or involuntary) of Mortgage Loans, or the corresponding effect
on yield to investors. [The rating of the Class [ ] Certificates
does not address the possibility that the holders of such
Certificates may fail to fully recover their initial
investments.] See "Risk Factors" and "Rating" herein and "Yield
Considerations" in the Prospectus.
Legal Investment ............................................... The appropriate characterization of the Class [ ] Certificates
under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase
the Class [ ] Certificates, may be subject to significant
interpretative uncertainties. The Class [ ] Certificates [will]
[will not] be "mortgage related securities" within the meaning
of the Secondary Mortgage Market Enhancement Act of 1984 [so
long as they are rated in at least the second highest rating
category by the Rating Agency, and, as such, are legal
investments for certain entities to the extent provided in
SMMEA]. Accordingly, investors should consult their own legal
advisors
S-15
<PAGE>
to determine whether and to what extent the Class [ ]
Certificates constitute legal investments for them. See "Legal
Investment" herein and in the Prospectus.
</TABLE>
S-16
<PAGE>
RISK FACTORS
[Description will depend on the particulars of the Mortgage Assets]
Special Prepayment Considerations. The rate and timing of principal
payments on the Class [ ] Certificates will depend, among other things, on the
rate and timing of principal payments (including prepayments, defaults,
liquidations and purchases of Mortgage Assets due to a breach of representation
and warranty) on the Mortgage Assets. The rate at which principal prepayments
occur on the Mortgage Loans will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans, the level of
prevailing interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however, if
prevailing interest rates fall significantly below the Mortgage Rates on the
Mortgage Loans, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. [The rate of principal payments on the Class [ ]
Certificates will correspond to the rate of principal payments on the Mortgage
Loans and is likely to be affected by the Lock-out Periods and Prepayment
Premium Provisions applicable to the Mortgage Loans and by the extent to which
the Master Servicer is able to enforce such provisions. Mortgage loans with a
lock-out period or a prepayment premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical mortgage loans without such provisions, with shorter
lock-out periods or with lower prepayment premiums.] [As is the case with
mortgage-backed securities generally, the Class [ ] Certificates are subject to
substantial inherent cashflow uncertainties because the Mortgage Loans may be
prepaid at any time.]
[As described herein, prior to reduction of the Class [ ] Balance to
zero, all principal prepayments on and other unscheduled recoveries of
principal of the Mortgage Loans will be allocated to the Class [ ]
Certificates. To the extent that no prepayments or other unscheduled recoveries
of principal are distributed on the Subordinate Certificates, the subordination
afforded the Class [ ] Certificates by the Subordinate Certificates, in the
absence of offsetting losses on the Mortgage Loans allocated thereto, will be
increased.]
See "Description of the Certificates -- Distributions -- Priority" and
"Certain Yield, Prepayment and Maturity Considerations" herein and "Yield
Considerations" in the Prospectus.
Special Yield Considerations. The yield to maturity on the Class [ ]
Certificates will depend, among other things, on the rate and timing of
principal payments (including prepayments, defaults, liquidations and purchases
of Mortgage Loans due to a breach of representation and warranty) on the
Mortgage Loans and the allocation thereof to reduce the Certificate Balance of
such class. [The yield to maturity on the Class [ ] Certificates will also
depend on changes in the Index and the effect of any maximum lifetime Mortgage
Rate, minimum lifetime Mortgage Rate, Payment Cap and Periodic Rate Cap
applicable to each Mortgage Loan.] The yield to investors on the Class [ ]
Certificates will be adversely affected by any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage Loans, which are expected to result from
the distribution of interest only to the date of prepayment (rather than a full
month's interest) in connection with prepayments in full, and the lack of any
distribution of interest on the amount of any partial prepayments. Neither the
Certificates not the Mortgage Loans are guaranteed by any governmental entity
or private insurer.
In general, if a Certificate is purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Certificate is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will
be lower than assumed at the time of purchase.
See "Certain Federal Income Tax Consequences" herein and in the
Prospectus and "Yield Considerations" in the Prospectus.
[Risks Associated with Certain of the Mortgage Loans and Mortgaged
Properties.] [Description of type of property, lease provisions, nature of
tenants and operating income.]
S-17
<PAGE>
[Because the Mortgage Loans are adjustable rate mortgage loans, the
Mortgage Rates and Monthly Payments will increase in a rising interest rate
environment, perhaps without a corresponding increase in the mortgagors' net
operating income. In such event, as the Debt Service Coverage Ratios (as
defined herein) for such Mortgage Loans decrease, the related mortgagor's
ability to make Monthly Payments may be impaired, and a mortgagor payment
default would be more likely to occur.]
Effect of Mortgagor Defaults. The aggregate amount of distributions on
the Class [ ] Certificates, the yield to maturity of the Class [ ]
Certificates, the rate of principal payments on the Class [ ] Certificates and
the weighted average life of the Class [ ] Certificates will be affected by the
rate and the timing of delinquencies and defaults on the Mortgage Loans. If a
purchaser of a Class [ ] Certificate calculates its anticipated yield based on
an assumed rate of default and amount of losses on the Mortgage Loans that is
lower than the default rate and amount of losses actually experienced and such
additional losses are allocable to such class of Certificates, such purchaser's
actual yield to maturity will be lower than that so calculated and could, under
certain extreme scenarios, be negative. The timing of any loss on a liquidated
Mortgage Loan will also affect the actual yield to maturity of the Class [ ]
Certificates to which a portion of such loss is allocable, even if the rate of
defaults and severity of losses are consistent with an investor's expectations.
In general, the earlier a loss borne by an investor occurs, the greater is the
effect on such investor's yield to maturity.
As and to the extent described herein, the Master Servicer will be
entitled to receive interest on unreimbursed Advances and unreimbursed
servicing expenses that (i) are recovered out of amounts received on the
Mortgage Loan as to which such Advances were made or such servicing expenses
were incurred, which amounts are in the form of liquidation proceeds, insurance
proceeds, condemnation proceeds or amounts paid in connection with the purchase
of such Mortgage Loan out of the Trust Fund or (ii) are determined to be
nonrecoverable Advances. The Master Servicer's right to receive such payments
of interest are prior to the rights of Certificateholders to receive
distributions on the Certificates and, consequently, may result in losses being
allocated to the Class [ ] Certificates that would not otherwise have resulted
absent the accrual of such interest.
Even if losses on the Mortgage Loans are not borne by an investor in
the Class [ ] Certificates, such losses may affect the weighted average life
and yield to maturity of such investor's Certificates. Losses on the Mortgage
Loans, to the extent not allocated to the Class [ ] Certificates, may result in
a higher percentage ownership interest evidenced by such Certificates than
would otherwise have resulted absent such loss. The consequent effect on the
weighted average life and yield to maturity of the Class [ ] Certificates will
depend upon the characteristics of the remaining Mortgage Loans.
Regardless of whether losses ultimately result, delinquencies and
defaults on the Mortgage Loans may significantly delay the receipt of payments
by the holder of a Class [ ] Certificate, to the extent that Advances or the
subordination of another class of Certificates does not fully offset the
effects of any such delinquency or default. The Scheduled Principal
Distribution Amount and the Unscheduled Principal Distribution Amount generally
consist of, as more fully described herein, principal of the Mortgage Loans
actually collected or advanced. The Master Servicer has the ability to extend
and modify Mortgage Loans that are in default or as to which a payment default
is imminent, including the ability to extend the date on which a Balloon
Payment is due by up to __ months, subject to certain conditions described in
the Pooling and Servicing Agreement. The Master Servicer's obligation to make
Advances in respect of a Mortgage Loan that is delinquent as to its Balloon
Payment is limited, however, to the extent described under "Description of the
Certificates -- Advances". Until such time as any Mortgage Loan delinquent in
respect of its Balloon Payment is liquidated, the entitlement of the holders of
Class [ ] Certificates on each Distribution Date in respect of principal of
such Mortgage Loan will be limited to the Class [ ] Scheduled Principal
Distribution Percentage of that portion of the Available Distribution Amount
that represents the principal portion of (i) any payment made by the related
mortgagor under a forbearance arrangement or (ii) any related Advance made by
the Master Servicer. Consequently, any delay in the receipt of a Balloon
Payment that is payable, in whole or in part, to holders of Class [ ]
Certificates will extend the weighted average life of the Class [ ]
Certificates.
As described under "Description of the Certificates -- Distributions"
herein, if the portion of Available Distribution Amount distributable in
respect of interest on the Class [ ] Certificates on any Distribution Date is
less than the Distributable Certificate Interest then payable for such class,
the shortfall will be distributable to holders of such class
S-18
<PAGE>
of Certificates on subsequent Distribution Dates, to the extent of available
funds. Any such shortfall will not bear interest and will therefore negatively
affect the yield to maturity of such class of Certificates for so long as it is
outstanding.
[The following paragraphs will be included in the event any of the
Mortgage Loans are acquired from the Resolution Trust Corporation:]
[Troubled Originators. The Mortgage Loans were originated or purchased
by the [Originating Institutions], each of which is subject to an RTC
receivership. It is possible that the financial difficulties experienced by the
[Originating Institutions] may have adversely affected either or both of (i)
the standards and procedures pursuant to which the Mortgage Loans were
originated or purchased by such [Originating Institutions] and (ii) the manner
in which such Mortgage Loans have been serviced prior to assumption of
servicing responsibilities by the Master Servicer. The Mortgage Loans will be
acquired by the Depositor on or before the Closing Date from the Mortgage Asset
Seller, which acquired the Mortgage Loans from the RTC in its capacity as
receiver of each of the associations pursuant to a certain commercial mortgage
loan sale agreement, dated ______, 199_ (as amended, the "Loan Sale
Agreement"). Pursuant to the Loan Sale Agreement, the RTC as receiver of the
[Originating Institutions], has made certain representations and warranties
regarding the Mortgage Loans and is obligated to cure such breaches or
repurchase those Mortgage Loans as to which there is a breach of such
representations and warranties. The RTC repurchase price for the Mortgage Loans
is par plus accrued interest at the related Mortgage Rate[,except in the case
of Mortgage Loans as to which a repurchase for a breach of the representation
and warranty relating to certain environmental matters would be accomplished at
a price that initially is discounted but increases to par over approximately __
years]. See "Description of the Mortgage Pool -- Representations and Warranties
of the Originating Institutions" herein. The RTC, acting in its corporate
capacity, has guaranteed such obligations of the RTC, acting in its capacity as
receiver. The agreement pursuant to which such guarantee was made by the RTC is
hereinafter referred to as the "Guarantee Agreement".]
[Limited Information. The information set forth in this Prospectus
Supplement with respect to the Mortgage Loans is derived from books and records
of the [Originating Institutions], as well as a limited review of the credit
and legal files relating to the Mortgage Loans. Accordingly, available
information does not permit the Depositor to determine fully the origination,
credit appraisal and underwriting practices of the originators of the Mortgage
Loans. Furthermore, it is possible that this Prospectus Supplement does not
contain material information regarding the Mortgage Loans that would have been
disclosed if the structure and personnel of the [Originating Institutions] had
not been affected by such institutions having been placed in receivership.
While the Depositor has undertaken a limited review of the records and files
related to the Mortgage Loans in connection with the issuance of the Class [ ]
Certificates the Mortgage Loans have not been "re-underwritten" or subjected to
the type of review that would typically be made in respect of a newly
originated mortgage loan.]]
DESCRIPTION OF THE [MORTGAGE POOL] [MBS]
GENERAL
The Trust Fund will consist primarily of [___ [fixed interest]
[adjustable interest] rate Mortgage Loans with an aggregate principal balance
as of the Cut-off Date, after deducting payments of principal due on such date,
of $____________,] [mortgage participations, mortgage pass-through
certificates, mortgaged-backed securities evidencing interests therein or
secured thereby (the "MBS"),] [and] [certain direct obligations of the United
States, agencies thereof or agencies created thereby (the "Government
Securities")]. [Each Mortgage Loan is evidenced by a promissory note (a
"Mortgage Note") and secured by a mortgage, deed of trust or other similar
security instrument (a "Mortgage" creating a [first][junior] fee lien on a
[multifamily][commercial] property (a "Mortgaged Property"). The Mortgaged
Properties consist of [description of commercial or multifamily residential
properties]. [Because no evaluation of any mortgagor's financial condition has
been conducted, investors should consider all of the Mortgage Loans to be
non-recourse loans so that, in the event of mortgagor default, recourse may be
had only against the specific property and such limited other assets as have
been pledged to secure a Mortgage Loan, and not against the mortgagor's other
assets.] All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as
of the Cut-off Date.]
S-19
<PAGE>
[The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by ________________ (the "Mortgage Asset Seller") and
will comply with the underwriting criteria described herein. The Depositor will
purchase the Mortgage Loans to be included in the Mortgage Pool on or before
the Closing Date from the Mortgage Asset Seller pursuant to a seller's
agreement (the "Seller's Agreement"), to be dated as of____________, 199_
between the Mortgage Asset Seller and the Depositor. The Depositor will cause
the Mortgage Loans in the Mortgage Pool to be assigned to _______________, as
Trustee, pursuant to the Pooling and Servicing Agreement. _____________, in its
capacity as Master Servicer, will service the Mortgage Loans pursuant to the
Pooling and Servicing Agreement.
Under the Seller's Agreement, _______________, as seller of the
Mortgage Loans to the Depositor, will make certain representations, warranties
and covenants to the Depositor relating to, among other things, the due
execution and enforceability of the Seller's Agreement and certain
characteristics of the Mortgage Loans, and will be obligated to repurchase or
substitute for any Mortgage Loans as to which there exists deficient
documentation or an uncured material breach of any such representation,
warranty or covenant. Under the Pooling and Servicing Agreement the Depositor
will assign all its right, title and interest in such representations,
warranties and covenants (including ____________________'s repurchase or
substitution obligation) to the Trustee for the Trust Fund. The Depositor will
make [no] representations or warranties with respect to the Mortgage Loans and
will have no obligation to repurchase or substitute for Mortgage Loans with
deficient documentation [or which are otherwise defective]. _____________, as
seller of the Mortgage Loans to the Depositor, is selling such Mortgage Loans
without recourse and, accordingly, in such capacity, will have no obligations
with respect to the certificates other than pursuant to such representations,
warranties, covenants and repurchase obligations. See "Description of the
Agreements -- Representations and Warranties; Repurchases" in the Prospectus.]
[THE MBS
[Title and issuer of underlying securities, amount deposited or
pledged, amount originally issued, maturity date, interest rate, [redemption
provisions], together with description of other material terms.]
[Description of principal and interest distributions on the MBS.]
[Description of advances by the servicer of the mortgage loans
underlying the MBS.]
[Description of effect on the MBS of allocation of losses on the
underlying mortgage loans.]
As to each series of MBS included in the Trust Fund, the various
classes of certificates from such series [(including classes not in the Trust
Fund but from the same series as classes that are in the Trust Fund] are
listed, together with the related pass-through rates and certain other
information applicable thereto, in Annex B hereto.]
[THE INDEX
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate will be a per annum rate equal to
______________, as most recently available as of the date___days prior to the
Payment Adjustment Date (the "Index"). Such average yields reflect the yields
for the week prior to that week in which the information is reported. In the
event that the Index is no longer available, an index reasonably acceptable to
the Trustee that is based on comparable information will be selected by the
Master Servicer.
The Index is currently calculated based on information reported in
___________. Listed below are the weekly average yields on actively traded
______________ as reported in ____________ on the date that would have been
applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such _______________ on any Payment Adjustment Date or during
the life of any Mortgage Loan.]
S-20
<PAGE>
[name of Index]
<TABLE>
<CAPTION>
Adjustment Date 1990 1991 1992 1993 1994 1995
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January [ ] ............................
February [ ] ...........................
March [ ] ..............................
April [ ] ..............................
May [ ].................................
June [ ]................................
July [ ]................................
August [ ]..............................
September [ ]...........................
October [ ].............................
November [ ]............................
December [ ]............................
</TABLE>
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
[Approximately ___% of the Mortgage Loans have Due Dates that occur on
the ___ day of each month; approximately ___% of the Mortgage Loans have Due
Dates that occur on the ___ day of each month; approximately _____% of the
Mortgage Loans have Due Dates that occur on the ___ day of each month; and the
remainder of the Mortgage Loans have Due Dates that occur on the fifteenth day
of each month.]
[As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from _____% per annum to _______%
per annum; (ii) a weighted average Mortgage Rate of ______% per annum; (iii)
Gross Margins ranging from ____ basis points to ______ basis points; (iv) a
weighted average Gross Margin of ____ basis points; (v) principal balances
ranging from $_______ to $______; (vi) an average principal balance of
$_________; (vii) original terms to scheduled maturity ranging from _____
months to _________ months; (viii) a weighted average original term to
scheduled maturity of _____ months; (ix) remaining terms to scheduled maturity
ranging from ____ months to _____ months; (x) a weighted average remaining term
to scheduled maturity of ________ months; (xi) Cut-off Date Loan-to-Value
("LTV") Ratios ranging from ______% to ________%; (xii) a weighted average
Cut-off Date LTV Ratio of _____%; (xiii) as to the _______% of the Mortgage
Loans to which such characteristic applies, (A) minimum lifetime Mortgage Rates
ranging from ____% per annum to ______ % per annum and (B) a weighted average
minimum lifetime Mortgage Rate of _______% per annum; (xiv) as to
the__________% of Mortgage Loans to which such characteristic applies and for
which it may be currently calculated, (A) maximum lifetime Mortgage Rate
ranging from _______% per annum to ________% per annum and (B) a weighted
average maximum lifetime Mortgage Rate of _________% per annum; (xv) Cut-off
Date Debt Service Coverage Ratios ranging from ______% to _____% and (xvi) a
weighted average Cut-off Date Debt Service Coverage Ratio of___________%.]
[___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Risk Factors -- Balloon
Payments" in the Prospectus.]
[The Mortgage Rate on each Mortgage Loan is subject to adjustment on
each Interest Rate Adjustment Date by adding the related Gross Margin to the
value of the Index (described below) as most recently announced a specified
number of days prior to such Interest Rate Adjustment Date, subject, in the
case of substantially all of the Mortgage Loans, to minimum and maximum
lifetime Mortgage Rates, with ranges specified below. The Mortgage Rates on the
Mortgage Loans generally are adjusted monthly; however, certain of the Mortgage
Loans provide for Interest Rate Adjustment Dates to occur quarterly (___% of
the Mortgage Loans), semi-annually ( % of the Mortgage Loans) or annually
(____% of the Mortgage Loans). Each of the Mortgage Loans provided for an
initial fixed interest rate period; Mortgage Loans, representing ___% of the
Mortgage Loans, have not experienced their first Interest Rate
S-21
<PAGE>
Adjustment Dates. The latest initial Interest Rate Adjustment Date for any
Mortgage Loan is to occur in___________________.]
[Subject to the Payment Caps described below, the amount of the
Monthly Payment on each Mortgage Loan adjusts periodically on each Payment
Adjustment Date to an amount that would fully amortize the principal balance of
the Mortgage Loan over its then remaining amortization schedule and pay
interest at the Mortgage Rate in effect during the one month period preceding
such Payment Adjustment Date. Approximately __% of the Mortgage Loans provide
that an adjustment of the amount of the Monthly Payment on a Payment Adjustment
Date may not result in a Monthly Payment that increases by more than ___% (nor,
in some cases, decreases by more than ____%) of the amount of the Monthly
Payment in effect immediately prior to such Payment Adjustment Date (each such
provision, a "Payment Cap"); however, certain of those Mortgage Loans also
provide that the Payment Cap will not apply on certain Payment Adjustment Dates
or if the application thereof would result in the principal balance of the
Mortgage Loan exceeding (through negative amortization) by a specified
percentage the original principal balance thereof. Generally, the related
Mortgage Note provides that if, as a result of negative amortization, the
respective principal balance of the Mortgage Loan reaches an amount specified
therein (which as to most Mortgage Loans is not greater than _% of the Mortgage
Loan principal balance as of the origination date thereof), the amount of the
Monthly Payments due thereunder will be increased as necessary to prevent
further negative amortization.
[Only in the case of _____% of the Mortgage Loans does a Payment
Adjustment Date immediately follow each Interest Rate Adjustment Date. As a
result, and because application of Payment Caps may limit the amount by which
the Monthly Payments due on certain of the Mortgage Loans may adjust, the
amount of a Monthly Payment may be more or less than the amount necessary to
amortize the Mortgage Loan principal balance over the then remaining
amortization schedule at the applicable Mortgage Rate. Accordingly, Mortgage
Loans may be subject to slower amortization (if the Monthly Payment due on a
Due Date is sufficient to pay interest accrued to such Due Date at the
applicable Mortgage Rate but is not sufficient to reduce principal in
accordance with the applicable amortization schedule), to negative amortization
(if interest accrued to a Due Date at the applicable Mortgage Rate is greater
than the entire Monthly Payment due on such Due Date) or to accelerated
amortization (if the Monthly Payment due on a Due Date is greater than the
amount necessary to pay interest accrued to such Due Date at the applicable
Mortgage Rate and to reduce principal in accordance with the applicable
amortization schedule).]
[No Mortgage Loan currently prohibits principal prepayments; however,
certain of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Although Prepayment Premiums
are payable to the Master Servicer as additional servicing compensation, the
Master Servicer may waive the payment of any Prepayment Premium only in
connection with a principal prepayment that is proposed to be made during the
three month period prior to the scheduled maturity of the related Mortgage
Loan, or under certain other limited circumstances.]
S-22
<PAGE>
The following table sets forth the range of Mortgage Rates on the
Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Mortgage Rates as of the Cut-off Date
-------------------------------------
Mortgage Rate Number of Percent Aggregate Percent by
- ------------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
----- ------ the Cut-off Date Balance as of
---------------- the Cut-off Date
-----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
=========== ========== ============= =========
Weighted Average
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
The following table sets forth the types of Mortgaged Properties
securing the Mortgage Loans:
<CAPTION>
Property Type
-------------
Type Number of Percent Aggregate Percent by
---- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
----- ------ the Cut-off Date Balance as of
---------------- the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Note: Percentage totals may not add due to rounding.
S-23
<PAGE>
[The following table sets forth the range of Gross Margins for the
Mortgage Loans:]
<CAPTION>
[Gross Margins]
-------------
Mortgage Rate Number of Percent Aggregate Percent by
- ------------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Gross Margin:
Note: Percentage totals may not add due to rounding.
[The following table sets forth the frequency of adjustments to the
Mortgage Rates on the Mortgage Loans as of the Cut-off Date:]
<CAPTION>
[Frequency of Adjustments to Mortgage Rates]
-------------------------------------------
Frequency(A) Number of Percent Aggregate Percent by
- ----------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
----------------- the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Frequency of
Adjustments to
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) _______ or ___% of Mortgage Loans have not experienced their first Interest
Rate Adjustment Date.
S-24
<PAGE>
[The following table sets forth the frequency of adjustments to the Monthly Payments on the Mortgage Loans as
of the Cut-off Date:]
<CAPTION>
[Frequency of Adjustments to Monthly Payments]
--------------------------------------------
Frequency (A) Number of Percent Aggregate Percent by
- ------------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
-----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Frequency of
Adjustments to
Monthly Payments:
Note: Percentage totals may not add due to rounding.
[The following table sets forth the range of maximum lifetime Mortgage
Rates for the Mortgage Loans:]
<CAPTION>
[Maximum Lifetime Mortgage Rates]
-------------------------------
Maximum Number of Percent Aggregate Percent by
Lifetime Mortgage by Principal Aggregate
Mortgage Rate Loans Number Balance as of Principal
--------------- ------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Maximum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without a lifetime rate cap.
(B) The lifetime rate caps for these Mortgage Loans are based upon the
Index as determined at a future point in time plus a fixed percentage.
Therefore, the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ____ Mortgage Loans without a
lifetime rate cap or the___Mortgage Loans with lifetime rate caps which
are currently not determinable.
S-25
<PAGE>
[The following table sets forth the range of minimum lifetime Mortgage
Rates on the Mortgage Loans:]
<CAPTION>
[Minimum Lifetime Mortgage Rates]
------------------------------
Minimum Number of Percent Aggregate Percent by
Lifetime Mortgage by Principal Aggregate
Mortgage Rate Loans Number Balance as of Principal
--------------- -------- ------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Minimum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without interest rate floors.
(B) This calculation does not include the___Mortgage Loans without interest rate
floors.
The following table sets forth the range of principal balances of the
Mortgage Loans as of the Cut-off Date:
<CAPTION>
Principal Balances as of the Cut-off Date
-----------------------------------------
Principal Balance Number of Percent Aggregate Percent by
as of the Mortgage by Principal Aggregate
Cut-off Date Loans Number Balance as of Principal
--------------- --------- ---------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Average Principal Balance
as of the
Cut-off Date:
Note: Percentage totals may not add due to rounding.
S-26
<PAGE>
The following tables set forth the original and remaining terms to
maturity (in months) of the Mortgage Loans:
<CAPTION>
Original Term to Maturity in Months
-----------------------------------
Original Number of Percent Aggregate Percent by
Term in Months Mortgage by Principal Aggregate
- ---------------- Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
<CAPTION>
Remaining Term to Maturity in Months
------------------------------------
Remaining Number of Percent Aggregate Percent by
Term in Mortgage by Principal Aggregate
Months Loans Number Balance as of Principal
-------- ------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average Remaining
Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the respective years in which the Mortgage Loans
were originated and are scheduled to mature:
<CAPTION>
Mortgage Loan Year of Origination
---------------------------------
Year Number of Percent Aggregate Percent by
------ Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Note: Percentage totals may not add due to rounding.
S-27
<PAGE>
<CAPTION>
Mortgage Loan Year of Scheduled Maturity
----------------------------------------
Year Number of Percent Aggregate Percent by
------ Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Note: Percentage totals may not add due to rounding.
The following table sets forth the range of Original LTV Ratios of the
Mortgage Loans. An "Original LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the principal balance of a Mortgage Loan
on the date of its origination, and the denominator of which is [in general]
the lesser of (i) the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan and (ii), the sale price of such Mortgaged Property at
the time of such origination. There can be no assurance that the value
(determined through an appraisal or otherwise) of a Mortgaged Property
determined after origination of the related Mortgage Loan will be equal to or
greater than the value thereof (determined through an appraisal or otherwise)
obtained in connection with the origination. As a result, there can be no
assurance that the loan-to-value ratio for any Mortgage Loan determined at any
time following origination thereof will be lower than the Original LTV Ratio,
notwithstanding any positive amortization of such Mortgage Loan.
<CAPTION>
Original LTV Ratios
-------------------
Original Number of Percent Aggregate Percent by
LTV Ratio Mortgage by Principal Aggregate
----------- Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average Original
LTV Ratio:
Note: Percentage totals may not add due to rounding.
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans. The "Debt Service Coverage Ratio" for any
Mortgage Loan is the ratio of Net Operating Income produced by the related
Mortgaged Property for the period covered by the annual operating statement to
the amounts of principal, interest and other sums due under such Mortgage Loan
for the same period. "Net Operating Income" is the rent from all leases under
which the tenants have taken occupancy at the time of calculation (including
only rents prior to expiration for those leases whose terms expire within one
year of the calculation and pass-through for utilities and excluding all free
rent) less operating expenses (such as utilities, administrative expenses,
repairs and maintenance) and less fixed expenses (such as insurance,
S-28
<PAGE>
real estate and other taxes to be paid by mortgagor). The annual operating
statements for the Mortgaged Properties used in preparing the following table
were obtained from the respective mortgagors. The information contained therein
was unaudited, and the Depositor has made no attempt to verify its accuracy.
The last day of the twelve-month period covered by each such operating
statement is set forth in Annex A with respect to the related Mortgage Loan.
[Certain of the Mortgaged Properties have relatively short operating histories,
and such performance may be less indicative of future performance than in the
case of a property with a stable operating history over an extended period of
time. However, even with respect to Mortgaged Properties with longer operating
histories, operating income produced by Mortgaged Properties in the past should
not be construed as indicative of the future performance of any Mortgaged
Property. [Annual operating statements for any year following 19__ could not be
obtained with respect to _______ of the Mortgaged Properties and, consequently,
the Debt Service Coverage Ratios for the related Mortgage Loans were not
calculated. As a result, no conclusions should be drawn as to those Mortgage
Loans on the basis of the information set forth below.]
<CAPTION>
Debt Service Coverage Ratios as of the Cut-off Date
---------------------------------------------------
Debt Service Number of Percent Aggregate Percent by
Coverage Mortgage by Principal Aggregate
Ratio Loans Number Balance as of Principal
------- ------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Weighted Average
Debt Service Coverage
Ratio:
Note: Percentage totals may not add due to rounding.
(A) The debt service coverage ratios for these loans were not calculated
due to a lack of operating statements with respect to years after
19__.
(B) This calculation does not include the ____ Mortgage Loans where debt
service coverage ratios were not calculated.
S-29
<PAGE>
The Mortgage Loans are secured by Mortgaged Properties in_different
states. The table below sets forth the states in which the Mortgaged Properties
are located:
<CAPTION>
Geographic Distribution
-----------------------
State Number of Percent Aggregate Percent by
------- Mortgage by Principal Aggregate
Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
Note: Percentage totals may not add due to rounding.
[regional breakdown to be provided as appropriate]
[____% of the Mortgage Loans prohibit the prepayment thereof until a
date specified in the related Mortgage Note (such period, the "Lock-out Period"
and the date of expiration thereof, the "Lock-out Date"). The following table
sets forth the Lock-out Dates for such Mortgage Loans.]
<CAPTION>
[Mortgage Loan Lock-out Dates]
---------------------------
Lock-out Number of Percent Aggregate Percent by
Date Mortgage by Principal Aggregate
------ Loans Number Balance as of Principal
------- ------- the Cut-off Date Balance as of
------------------ the Cut-off Date
------------------
<S> <C> <C> <C> <C>
Total 100.00% 100.00%
============ ======= =========== =======
Note: Percentage totals may not add due to rounding.
S-30
<PAGE>
[___% of the Mortgage Loans provide that upon any principal prepayment
of a Mortgage Loan, whether made voluntarily or involuntarily, the related
Mortgagor will be required to pay a prepayment premium or yield maintenance
Penalty (a "Prepayment Premium") in the amount set forth in the following
table.]
<CAPTION>
[Mortgage Loan Prepayment Premiums]
---------------------------------
Prepayment Number of Percent Aggregate Percent by
Premium Mortgage by Principal Aggregate
--------- Loans Number Balance as of Principal
------- -------- the Cut-off Date Balance as of
------------------ the Cut-off Date
-----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
============ ======= ============ =======
</TABLE>
Note: Percentage totals may not add due to rounding.
Set forth in Annex A to this Prospectus Supplement are certain
individual characteristics of the Mortgage Loans.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by _______,
generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Class [ ] Certificates, a Mortgage Loan may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Depositor
deems such removal necessary or appropriate and may be prepaid at any time. A
limited number of other mortgage loans may be included in the Mortgage Pool
prior to the issuance of the Class [ ] Certificates unless including such
mortgage loans would materially alter the characteristics of the Mortgage Pool
as described herein. The Depositor believes that the information set forth
herein will be representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Class [ ] Certificates are issued, although
the range of Mortgage Rates and maturities and certain other characteristics of
the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Class [ ] Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Class [ ] Certificates.
In the event Mortgage Loans are removed from or added to the Mortgage Pool as
set forth in the preceding paragraph, such removal or addition will be noted in
the Form 8-K.
S-31
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of ____ classes to be designated as the Class [ ]
Certificates, the Class [ ] Certificates, the Class [ ] Certificates and the
Class [ ] Certificates. The Class [ ], Class [ ] and Class [ ] Certificates
(the "Subordinate Certificates") will be subordinate to the Class [ ]
Certificates, as described herein. The Certificates represent in the aggregate
the entire beneficial ownership interest in a Trust Fund consisting of: (i) the
Mortgage Loans and all payments under and proceeds of the Mortgage Loans
received after the Cut-off Date (exclusive of payments of principal and
interest due on or before the Cut-off Date); (ii) any Mortgaged Property
acquired on behalf of the Trust Fund through foreclosure or deed in lieu of
foreclosure (upon acquisition, an "REO Property"); (iii) such funds or assets
as from time to time are deposited in the Certificate Account and any account
established in connection with REO Properties (the "REO Account"); and (iv) the
rights of the mortgagee under all insurance policies with respect to the
Mortgage Loans. Only the Class [ ] Certificates are offered hereby.
The Class [ ] Certificates will have an initial [Certificate Balance]
[Notional Balance] of $__________. The Class [ ] Certificates represent ___% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The Class [ ] Certificates will have an initial Certificate Balance of
$__________, representing ___% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. The Class [ ] Certificates will have an
initial Certificate Balance of $__________, representing ___% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. The initial
Certificate Balance of the Class [ ] Certificates will be [zero]. The
Certificate Balance of any class of Certificates outstanding at any time
represents the maximum amount which the holders thereof are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage
Loans and the other assets in the Trust Fund. The respective Certificate
Balances of the Class [ ], Class [ ] and Class [ ] Certificates (respectively,
the "Class [ ] Balance", "Class [ ] Balance" and "Class [ ] Balance") will in
each case be (i) reduced by amounts actually distributed on such class of
Certificates that are allocable to principal and [(ii) increased by amounts
allocated to such class of Certificates in respect of negative amortization on
the Mortgage Loans [Describe Notional Balance.]] [The Certificate Balance of
the Class [ ] Certificates (the "Class [ ] Balance") will at any time equal the
aggregate Stated Principal Balance of the Mortgage Loans minus the sum of the
Class [ ] Balance, Class [ ] Balance and Class [ ] Balance.] The Stated
Principal Balance of any Mortgage Loan at any date of determination will equal
(a) the Cut-off Date Balance of such Mortgage Loan, plus [(b) any negative
amortization added to the principal balance of such Mortgage Loan on any Due
Date after the Cut-off Date to and including the Due Date in the Due Period for
the most recently preceding Distribution Date], minus (c) the sum of (i) the
principal portion of each Monthly Payment due on such Mortgage Loan after the
Cut-off Date, to the extent received from the mortgagor or advanced by the
Master Servicer and distributed to holders of the Certificates before such date
of determination, (ii) all principal prepayments and other unscheduled
collections of principal received with respect to such Mortgage Loan, to the
extent distributed to holders of the Certificates before such date of
determination, and (iii) any reduction in the outstanding principal balance of
such Mortgage Loan resulting out of a bankruptcy proceeding for the related
mortgagor.
[None of the Class [ ] Certificates are offered hereby.]
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be
made on the ____ day of each month or, if such ____ day is not a business day,
then on the next succeeding business day, commencing in ____________________
199_ (each, a " Distribution Date" ) . All distributions (other than the final
distribution on any Certificate) will be made by the Master Servicer to the
persons in whose names the Certificates are registered at the close of business
on each Record Date, which will be the [last business day of the month]
preceding the month in which the related Distribution Date occurs. Such
distributions will be made by wire transfer in immediately available funds to
the account specified by the Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder will have provided
the Master Servicer with wiring instructions no less than five business days
prior to the related Record Date and is the registered owner of Certificates
the aggregate initial principal amount of which is at least $ , or otherwise by
check mailed to such Certificateholder. The final distribution on any
Certificate will be made in like manner, but only upon
S-32
<PAGE>
presentment or surrender of such Certificate at the location specified in the
notice to the holder thereof of such final distribution. All distributions made
with respect to a class of Certificates on each Distribution Date will be
allocated pro rata among the outstanding Certificates of such class based on
their respective Percentage Interests. The Percentage Interest evidenced by any
Class [ ] Certificate is equal to the initial denomination thereof as of the
Closing Date, divided by the initial Certificate Balance for such class. The
aggregate distribution to be made on the Certificates on any Distribution Date
shall equal the Available Distribution Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related Determination Date, (ii) the
aggregate amount of any Advances made by the Master Servicer in respect of such
Distribution Date and (iii) the aggregate amount deposited by the Master
Servicer in the Certificate Account in respect of such Distribution Date in
connection with Prepayment Interest Shortfalls incurred during the related Due
Period, net of (b) the portion of the amount described in clause (a)(i) hereof
that represents (i) Monthly Payments due on a Due Date subsequent to the end of
the related Due Period, (ii) any voluntary principal prepayments and other
unscheduled recoveries on the Mortgage Loans received after the end of the
related Due Period or (iii) any amounts payable or reimbursable therefrom to
any person.
Priority. On each Distribution Date, the Master Servicer shall apply
amounts on deposit in the Certificate Account, to the extent of the Available
Distribution Amount, first, to distributions of interest to holders of the
Class [ ] Certificates, in the amount equal to all Distributable Certificate
Interest in respect of the Class [ ] Certificates for such Distribution Date
and, to the extent not previously distributed, for all preceding Distribution
Dates and second, to distributions of principal to holders of the Class [ ]
Certificates, in an amount, not to exceed the sum of the Class [ ] Balance
outstanding immediately prior to such Distribution Date [and any Class Negative
Amortization in respect of the Class [ ] Certificates for such Distribution
Date], equal to the sum of (A) the then Class [ ] Scheduled Principal
Distribution Percentage of the Scheduled Principal Distribution Amount for such
Distribution Date and (B) the Unscheduled Principal Distribution Amount for
such Distribution Date.
On or after the reduction of the Class [ ] Balance to zero, the
Available Distribution Amount will be paid solely to the holders of the
Subordinate Certificates.
Calculations of Interest. The "Distributable Certificate Interest" in
respect of the Class [ ] Certificates for any Distribution Date represents that
portion of the Accrued Certificate Interest in respect of such class of
Certificates for such Distribution Date that is net of such class's allocable
share of (i) the aggregate portion of any Prepayment Interest Shortfalls
resulting from voluntary principal prepayments on the Mortgage Loans during the
related Due Period [that are not covered by the application of servicing
compensation of the Master Servicer for the related Due Period (such uncovered
aggregate portion, as to such Distribution Date,] the "Net Aggregate Prepayment
Interest Shortfall")[; and (ii) the aggregate of any negative amortization in
respect of the Mortgage Loans for their respective Due Dates during the related
Due Period (the aggregate of such negative amortization, as to such
Distribution Date, the "Aggregate Mortgage Loan Negative Amortization").]
The "Accrued Certificate Interest" in respect of the Class [ ]
Certificates for any Distribution Date is equal to thirty days' interest
accrued during the related Interest Accrual Period at the Pass-Through Rate
applicable to such class of Certificates for such Distribution Date accrued on
the related [Certificate Balance] [Classes [ ] Notional Amount] outstanding
immediately prior to such Distribution Date. The Pass-Through Rate applicable
to the Class [ ] Certificates for any Distribution Date [is fixed and is set
forth on the cover hereof] [will equal the weighted average of the Class [ ]
Remittance Rates in effect for the Mortgage Assets as of the commencement of
the related Due Period (as to such Distribution Date, the "Weighted Average
Class [ ] Remittance Rate"). The "Class [ ] Remittance Rate" in effect for any
Mortgage Loan as of any date of determination (a) prior to its first Interest
Rate Adjustment Date, is equal to the related Mortgage Rate then in effect
minus basis points and (b) from and after its first Interest Rate Adjustment
Date, is equal to the related Mortgage Rate then in effect minus the excess of
the related Gross Margin over basis points. The "Interest Accrual Period" for
the Certificates is the calendar month preceding the month in which the
Distribution Date occurs.] [is equal to the excess of the Mortgage Rate thereon
over ____% per annum.] [The Class [ ] Notional Amount will equal the [sum of
the Class [ ] Balance. The Class [ ] Notional Amount does not entitle the Class
[ ] Certificate [or a component thereof] to any distribution of principal.]
S-33
<PAGE>
The portion of Net Aggregate Prepayment Interest Shortfall [and the
Aggregate Mortgage Loan Negative Amortization] for any Distribution Date that
will be allocated to the Class [ ] Certificates on such Distribution Date will
be equal to the then applicable Class [ ] Interest Allocation Percentage. The
"Class [ ] Interest Allocation Percentage" for any Distribution Date will equal
a fraction, expressed as a percentage, the numerator of which is equal to the
product of (a) the Class [ ] Balance [(net of any Uncovered Portion thereof)]
outstanding immediately prior to such Distribution Date, multiplied by (b) the
Pass-Through Rate for the Class [ ] Certificates for such Distribution Date,
and the denominator of which is the product of (x) the aggregate Stated
Principal Balance of the Mortgage Loans outstanding immediately prior to such
Distribution Date, multiplied by (y) the Weighted Average Net Mortgage Rate for
such Distribution Date. The "Net Mortgage Rate" in effect for any Mortgage Loan
as of any date of determination is equal to the related Mortgage Rate then in
effect minus basis points. [The "Uncovered Portion" of the Class [ ] Balance,
as of any date of determination, is the portion thereof representing the
excess, if any, of (a) the Class [ ] Balance then outstanding, over (b) the
aggregate Stated Principal Balance of the Mortgage Loans then outstanding.]
[The Class [ ] Certificates [or a component thereof] will not be
entitled to distributions of interest and will not have a Pass-Through Rate.]
Calculations of Principal. Holders of the Class [ ] Certificates will
be entitled to receive on each Distribution Date, to the extent of the balance
of the Available Distribution Amount remaining after the payment of the Class [
] Interest Distribution Amount for such Distribution Date an amount equal to
the Class [ ] Principal Distribution Amount. The "Class [ ] Principal
Distribution Amount" for any Distribution Date will equal the sum of (i) the
product of the Scheduled Principal Distribution Amount and the Class [ ]
Scheduled Principal Distribution Percentage, (ii) the product of the Senior
Accelerated Percentage and all principal prepayments received during the
related Due Period and, (iii) to the extent not previously advanced, [the
lesser of the Class [ ] Scheduled Principal Distribution Percentage of the
Stated Principal Balance of the Mortgage Loans and the Senior Accelerated
Percentage of the Unscheduled Principal Distribution Amount net of any
prepayment amounts described in clause (ii) above. The "Scheduled Principal
Distribution Amount" for any Distribution Date is equal to the aggregate of the
principal portions of all Monthly Payments, including Balloon Payments, due
during or, if and to the extent not previously received or advanced and
distributed to Certificateholders on a preceding Distribution Date, prior to
the related Due Period, in each case to the extent paid by the related
mortgagor or advanced by the Master Servicer and included in the Available
Distribution Amount for such Distribution Date. The principal portion of any
Advances in respect of a Mortgage Loan delinquent as to its Balloon Payment
will constitute advances in respect of the principal portion of such Balloon
Payment.
[The portion of the Class [ ] Principal Distribution Amount payable on
any Distribution Date shall be allocated to the Class [ ] Certificates as
follows: [Describe distributions which may be concurrent or sequential and
among different classes and may be based on a schedule of payments sometimes
referred to as a Schedule of PAC, TAC or Scheduled Balances for some and not
other classes.]]
[The Class [ ] Scheduled Principal Distribution Percentage for any
Distribution Date represents the portion of the Scheduled Principal
Distribution Amount for such Distribution Date payable (subject to the payment
priorities described herein) on the Class [ ] Certificates. The "Class [ ]
Scheduled Principal Distribution Percentage" for any Distribution Date will
equal the lesser of (a) 100% and (b) a fraction, expressed as a percentage, the
numerator of which is the Class [ ] Balance outstanding immediately prior to
such Distribution Date, and the denominator of which is the lesser of (i) the
sum of the Class [ ] Balance, the Class [ ] Balance and the Class [ ] Balance
and (ii) the aggregate Stated Principal Balance of the Mortgage Loans, in
either case outstanding immediately prior to such Distribution Date.]
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments received
on the Mortgage Loans during the related Due Period; and (b) the excess, if
any, of (i) all unscheduled recoveries received on the Mortgage Loans during
the related Due Period, whether in the form of liquidation proceeds,
condemnation proceeds, insurance proceeds or amounts paid in connection with
the purchase of a Mortgage Loan out of the Trust Fund, exclusive in each case
of any portion thereof payable or reimbursable to the Master Servicer in
connection with the related Mortgage Loan, over (ii) the respective portions of
the net amounts described in the immediately preceding clause (i) needed to
cover interest (at the applicable Net Mortgage Rate in effect from time to
time) on the related Mortgage Loan from the date to which interest was
previously paid or advanced through the Due Date
S-34
<PAGE>
for such Mortgage Loan in the related Due Period [(exclusive of any portion of
such interest added to the principal balance of such Mortgage Loan as negative
amortization).]
[The "Class Negative Amortization" in respect of any class of
Certificates for any Distribution Date is equal to such class' allocable share
of the Aggregate Mortgage Loan Negative Amortization for such Distribution
Date.]
SUBORDINATION
In order to maximize the likelihood of distribution in full of the
Class [ ] Interest Distribution Amount and the Class [ ] Scheduled Principal
Distribution Amount, on each Distribution Date, holders of the Class [ ]
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Subordinate Certificates, to
the extent necessary to satisfy the Class Interest Distribution Amount and the
Class [ ] Scheduled Principal Distribution Amount.
[The entitlement to the Class [ ] Certificates of the [entire] [a
larger percentage under certain circumstances of] Unscheduled Principal
Distribution Amount will accelerate the amortization of the Class [ ]
Certificates relative to the actual amortization of the Mortgage Loans.]
[To the extent that the Class [ ] Certificates are amortized faster
than the Mortgage Loans, without taking into account losses on the Mortgage
Loans, the percentage interest evidenced by the Class [ ] Certificates in the
Trust Fund will be decreased (with a corresponding increase in the interest in
the Trust Fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective Certificate Balances, the Subordinate afforded the
Class [ ] Certificates by the Subordinate Certificates.]
[The principal portion of any Realized Losses will be allocated first
in reduction of the Subordinate Certificates [in the order specified here] and
then to the Class [ ] Certificates [in the order specified here]. Any losses
realized on a Mortgage Loan that is finally liquidated equal to the excess of
the Stated Principal Balance of such Mortgage Loan remaining, if any, plus
interest thereon through the last day of the month in which such Mortgage Loan
was finally liquidated, after application of all amounts received (net of
amounts reimbursable to the Master Servicer, any Sub-Servicer or any Special
Servicer for Advances and expenses, including attorneys' fees) towards interest
and principal owing on the Mortgage Loan, is referred to herein as a "Realized
Loss."]
ADVANCES
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated to make advances (each, an "Advance") out of
its own funds, or funds held in the Certificate Account that are not required
to be part of the Available Distribution Amount for such Distribution Date, in
an amount equal to the aggregate of (i) all Monthly Payments (net of the
Servicing Fee), other than Balloon Payments, which were due on the Mortgage
Loans during the related Due Period and delinquent as of the related
Determination Date and (ii) in the case of each Mortgage Loan delinquent in
respect of its Balloon Payment as of the related Determination Date, an amount
sufficient to amortize fully the principal portion of such Balloon Payment over
the remaining amortization term of such Mortgage Loan and to pay interest at
the Net Mortgage Rate in effect for such Mortgage Loan for the one month period
preceding its Due Date in the related Due Period (but only to the extent that
the related mortgagor has not made a payment sufficient to cover such amount
under any forbearance arrangement that has been included in the Available
Distribution Amount for such Distribution Date). The Master Servicer's
obligations to make Advances in respect of any Mortgage Loan will continue
through liquidation of such Mortgage Loan and out of its own funds from any
amounts collected in respect of the Mortgage Loan as to which such Advance was
made, whether in the form of late payments, insurance proceeds, liquidation
proceeds, condemnation proceeds or amounts paid in connection with the purchase
of such Mortgage Loan. Notwithstanding the foregoing, the Master Servicer will
be obligated to make any Advance only to the extent that it determines in its
reasonable good faith judgment that, if made, would be recoverable out of
general funds on deposit in the Certificate Account. Any failure by the Master
Servicer to make an Advance as required under the Pooling and Servicing
Agreement will constitute an event of default thereunder, in which case the
trustee will be obligated to make any such Advance, in accordance with the
terms of the Pooling and Servicing Agreement.
S-35
<PAGE>
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Class [ ] Certificates will be affected
by the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The yield to maturity on
the Class [ ] Certificates will also be affected by the level of the Index. The
rate of principal payments on the Class [ ] Certificates will correspond to the
rate of principal payments (including prepayments) on the related Mortgage
Loans.
[Description of factors affecting yield, prepayment and maturity of
the Mortgage Loans and Class [ ] Certificates depending upon characteristics of
the Mortgage Loans.]
WEIGHTED AVERAGE LIFE OF THE CLASS [ ] CERTIFICATES
Weighted average life refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Class [ ]
Certificates will be influenced by the rate at which principal payments
(including scheduled payments, principal prepayments and payments made pursuant
to any applicable policies of insurance) on the Mortgage Loans are made.
Principal payments on the Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to a default or other dispositions of the
Mortgage Loans).
The table of Percent of Initial Certificate Balance Outstanding for
the Class [ ] Certificates at the respective percentages of CPR set forth below
indicates the weighted average life of such Certificates and sets forth the
percentage of the initial principal amount of such Certificates that would be
outstanding after each of the dates shown at the indicated percentages of CPR.
The table has been prepared on the basis of the following assumptions regarding
the characteristics of the Mortgage Loans: (i) an outstanding principal balance
of $_________, a remaining amortization term of ___ months and a term to
balloon of ___ months: (ii) an interest rate equal to ____% per annum until the
Due Date and thereafter an interest rate equal to % per annum (at an assumed
Index of ____%) and Monthly Payments that would fully amortize the remaining
balance of the Mortgage Loan over its remaining amortization term; (iii) the
Mortgage Loans prepay at the indicated percentage of CPR; (iv) the maturity
date of each of the Balloon Mortgage Loans is not extended; (v) distributions
on the Class [ ] Certificates are received in cash, on the 25th day of each
month, commencing in_____________; (vi) no defaults or delinquencies in, or
modifications, waivers or amendments respecting, the payment by the mortgagors
of principal and interest on the Mortgage Loans occur; (vii) the initial
Certificate Balance of the Class [ ] Certificates is $________; (viii)
prepayments represent payment in full of individual Mortgage Loans and are
received on the respective Due Dates and include 30 days' interest thereon;
(ix) there are no repurchases of Mortgage Loans due to breaches of any
representation and warranty or otherwise; (x) the Class [ ] Certificates are
purchased on ________; (xi) the Servicing Fee is ____% per annum; and (xii) the
Index on each Interest Rate Adjustment Date is ________% per annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class [ ] Certificates and sets forth the percentages of
the initial Certificate Balance of the Class [ ] Certificates that would be
outstanding after the Distribution Date in ___________ of each of the years
indicated, at various percentages of CPR. Neither CPR nor any other prepayment
model or assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans included in the Mortgage Pool.
Variations in the actual prepayment experience and the balance of the Mortgage
Loans that prepay may increase or decrease the percentage of initial
Certificate Balance (and weighted average life) shown in the following table.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans is the same as any of the specified assumptions.
S-36
<PAGE>
Percent of Initial Class [ ] Certificate Balance Outstanding
at the Following Percentages of CPR
<TABLE>
<CAPTION>
Distribution Date
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................... ___% __% __% __% __% __%
____________ 25, 1993...............
____________ 25, 1994...............
____________ 25, 1995...............
____________ 25, 1996...............
____________ 25, 1997...............
____________ 25, 1998...............
____________ 25, 1999...............
____________ 25, 2000...............
____________ 25, 2001...............
____________ 25, 2002...............
____________ 25, 2003...............
</TABLE>
Weighted Average Life
(Years) (+) . . . . . . . . . . . .
+ The weighted average life of the Class [ ] Certificates is determined
by (i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
[Class [ ] Yield Consideration]
[Will describe assumption for various scenarios showing sensitivity of
certain classes to prepayment and default risks and set forth resulting yield.]
S-37
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, 199_ (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer and the Trustee.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class [ ] Certificates. The Depositor
will provide to a prospective or actual Class [ ] Certificateholder without
charge, upon written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to Morgan Stanley & Co.
Incorporated, ____________________________ New York, New York _____.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the Closing Date, the Depositor will assign or cause to
be assigned the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. Prior to the Closing Date, the Depositor
will, as to each Mortgage Loan, deliver to the Trustee (or the custodian
hereinafter referred to), among other things, the following documents
(collectively, as to such Mortgage Loan, the "Mortgage File"): (i) the original
or, if accompanied by a "lost note" affidavit, a copy of the Mortgage Note,
endorsed by ____________________ which transferred such Mortgage Loan, without
recourse, in blank or to the order of Trustee; (ii) the original Mortgage or a
certified copy thereof, and any intervening assignments thereof, or certified
copies of such intervening assignments, in each case with evidence of recording
thereon; (iii) originals or certified copies of any related assignment of
leases, rents and profits and any related security agreement (if, in either
case, such item is a document separate from the Mortgage) and any intervening
assignments of each such document or instrument; (iv) an assignment of the
Mortgage, executed by the ____________________ which transferred such Mortgage
Loan, in blank or to the order of the Trustee, in recordable form; (v)
assignments of any related assignment of leases, rents and profits and any
related security agreement (if, in either case, such item is a document
separate from the Mortgage), executed by ____________________ which transferred
such Mortgage Loan, in blank or to the order of the Trustee; (vi) originals or
certified copies of all assumption, modification and substitution agreements in
those instances where the terms or provisions of the Mortgage or Mortgage Note
have been modified or the Mortgage or Mortgage Note has been assumed; and (vii)
the originals or certificates of a lender's title insurance policy issued on
the date of the origination of such Mortgage Loan or, with respect to each
Mortgage Loan not covered by a lender's title insurance policy, an attorney's
opinion of title given by an attorney licensed to practice law in the
jurisdiction where the Mortgaged Property is located. The Pooling and Servicing
Agreement will require the Depositor promptly (and in any event within _____
days of the Closing Date) to cause each assignment of the Mortgage described in
clause (iv) above to be submitted for recording in the real property records of
the jurisdiction in which the related Mortgaged Property is located. Any such
assignment delivered in blank will be completed to the order of the Trustee
prior to recording. The Pooling and Servicing Agreement will also require the
Depositor to cause the endorsements on the Mortgage Notes delivered in blank to
be completed to the order of the Trustee.
THE MASTER SERVICER
General. ____________________, a __________________ corporation, will
act as Master Servicer (in such capacity, the "Master Servicer") for the
Certificates pursuant to the Pooling and Servicing Agreement. The Master
Servicer[, a wholly-owned subsidiary of __________,] [is engaged in the
mortgage banking business and, as such, originates, purchases, sells and
services mortgage loans. _________________ primarily originates mortgage loans
through a branch system consisting of _______________________ offices in
__________ states, and through mortgage loan brokers.]
The executive offices of the Master Servicer are located at
_______________, telephone number (__)__________.
S-38
<PAGE>
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on [multifamily][commercial] mortgage loans included in the
Master Servicer's servicing portfolio (which includes mortgage loans that are
subserviced by others). The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until 31 days past due on a contractual basis.
<TABLE>
<CAPTION>
As of December 31, 19 As of December 31, 19 As of , 19
-------------------------- ----------------------- -------------------------
By No. of By Dollar By No. of By Dollar By No. of By Dollar
Loans Amount of Loans Amount of Loans Amount of
------ Loans ------ Loans ------- Loans
------ ------- -----------
(Dollar Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio ________ $______ ________ $______ ________ $_______
Period of Delinquency
31 to 59 days
60 to 89 days
90 days or more ________ _______ _______ ________ ________ _________
Total Delinquent Loans ________ $______ ________ $______ ________ $______
Percent of Portfolio % % % % % %
Foreclosures pending (1)
Percent of Portfolio % % % % % %
Foreclosures
Percent of Portfolio % % % % % %
</TABLE>
- --------------------
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond
to the delinquency and foreclosure experience of the Master Servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over the life of the Mortgage Pool.
[SPECIAL SERVICERS
The Master Servicer is permitted, at its own expense, to utilize
agents or attorneys in performing any of its obligations under the Pooling and
Servicing Agreement, but will not thereby be relieved of any such obligation,
and will be responsible for the acts and omissions of any such agents or
attorneys.
The Master Servicer currently intends to engage [_____________]
("__________"), a _____________ corporation, as its agent to perform certain
servicing functions primarily related to property inspections, foreclosure and
S-39
<PAGE>
the operation and sale of REO Property. See "Description of the Agreements --
Realization Upon Defaulted Whole Loans" in the Prospectus.
____________________________ is [describe organization] of
[multifamily][commercial] properties and has extensive experience in the
[describe relevant experience] of [multifamily] [commercial] properties.]
CERTIFICATE ACCOUNT
The Master Servicer is required to deposit on a daily basis all
amounts received with respect to the Mortgage Loans of the Mortgage Pool, net
of its servicing compensation, into a separate Certificate Account maintained
with ____________. Interest or other income earned on funds in the Certificate
Account will be paid to the Master Servicer as additional servicing
compensation. See "Description of the Trust Funds -- Mortgage Assets" and
"Description of the Agreements -- Certificate Account and Other Collection
Accounts" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
[Include description of Servicing Standard]
The principal compensation to be paid to the Master Servicer in
respect of its master servicing activities will be the Servicing Fee. The
Servicing Fee will be payable monthly only from amounts received in respect of
interest on each Mortgage Loan, will accrue at the Servicing Fee Rate and will
be computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on such Mortgage Loan is
computed. The [weighted average] Servicing Fee Rate [with respect to each
Mortgage Loan] equals % per annum. [The principal compensation to be paid to
the Special Servicer in respect of its special servicing activities will be the
Special Servicing Fee. The Special Servicing Fee will be payable monthly only
from amounts received in respect of interest on each Specially Serviced
Mortgage Loan, will accrue at the Special Servicing Fee Rate and will be
computed on the basis of the same principal amount for the same period
respecting which any related interest payment on such Mortgage Loan is
computed. The Special Servicing Fee Rate with respect to each Specially
Serviced Mortgage Loan equals ___% per annum.] [As further compensation for its
servicing activities, the Special Servicer shall also be entitled to receive
(i) the Liquidation Fee for the procurement (directly or through an agent
thereof) of a purchaser in connection with the liquidation of a Mortgaged
Property securing any defaulted Mortgage Loan, out of related liquidation
proceeds, provided that the payment of such Liquidation Fee would not be a
violation of, and would not subject the Trustee or the Trust Fund to liability
under, any state or local statute, regulation or other requirement (including
without limitation, those governing the licensing of real estate brokers or
salesmen), and (ii) the Management Fee in connection with the operation and
management of any REO Property, out of related revenues. Any "Liquidation Fee"
payable to the Special Servicer will be equal to __% (if the relevant sale
occurs at a foreclosure sale, trustee's sale or other similar proceeding) or
__% (if the relevant sale occurs subsequent to such Mortgaged Property's having
become an REO Property), as applicable, of the gross liquidation proceeds. The
"Management Fee" in respect of any REO Property is payable to the Special
Servicer monthly and is equal to __% of the gross revenues derived from such
REO Property.]
As additional servicing compensation, the Master Servicer is entitled
to retain all assumption fees, prepayment penalties and late payment charges,
to the extent collected from mortgagors, together with any interest or other
income earned on funds held in the Certificate Account and any escrow accounts.
The Servicing Standard requires the Master Servicer to, among other things,
diligently service and administer the Mortgage Loans on behalf of the Trustee
and in the best interests of the Certificateholders, but without regard to the
Master Servicer's right to receive such additional servicing compensation. The
Master Servicer is obligated to pay certain ongoing expenses associated with
the Mortgage Pool and incurred by the Master Servicer in connection with its
responsibilities under the Agreement. See "Description of the Agreements --
Retained Interest; Servicing Compensation and Payment of Expenses" in the
Prospectus for information regarding other possible compensation payable to the
Master Servicer and for information regarding expenses payable by the Master
Servicer [and "Certain Federal Income Tax Consequences" herein regarding
certain taxes payable by the Master Servicer].
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency a
statement setting forth certain information with respect to the Mortgage Loans
and the
S-40
<PAGE>
Certificates required pursuant to the Pooling and Servicing Agreement. In
addition, within a reasonable period of time after each calendar year, the
Master Servicer shall furnish to each person who at any time during such
calendar year was the holder of a Certificate a statement containing certain
information with respect to the Certificates required pursuant to the Pooling
and Servicing Agreement, aggregated for such calendar year or portion thereof
during which such person was a Certificateholder. See "Description of the
Certificates -- Reports to Certificateholders" in the Prospectus.
VOTING RIGHTS
At all times during the term of this Agreement, the Voting Rights
shall be allocated among the Classes of Certificateholders in proportion to the
respective Certificate Balances of their Certificates [(net, in the case of the
Class [ ], Class [ ] and Class [ ] Certificates, of any Uncovered Portion of
the related Certificate Balance)]. Voting Rights allocated to a class of
Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment or other liquidation
of the last Mortgage Loan or REO Property subject thereto, and (ii) the
purchase of all of the assets of the Trust Fund by the Master Servicer. Written
notice of termination of the Pooling and Servicing Agreement will be given to
each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at the office of the Certificate
Registrar specified in such notice of termination. In no event, however, will
the trust created by the Pooling and Servicing Agreement continue beyond the
expiration of 21 years from the death of the survivor of certain persons named
in such Pooling and Servicing Agreement.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
greater of (1) the aggregate fair market value of all the Mortgage Loans and
REO Properties then included in the Trust Fund, as mutually determined by the
Master Servicer and the Trustee, and (2) the excess of (a) the sum of (i) the
aggregate Purchase Price of all the Mortgage Loans then included in the Trust
Fund and (ii) the fair market value of all REO Properties then included in the
Trust Fund, as determined by an appraiser mutually agreed upon by the Master
Servicer and the Trustee, over (b) the aggregate of amounts payable or
reimbursable to the Master Servicer under the Pooling and Servicing Agreement.
Such purchase will effect early retirement of the then outstanding Class [ ]
Certificates, but the right of the Master Servicer to effect such termination
is subject to the requirement that the aggregate Stated Principal Balance of
the Mortgage Loans then in the Trust Fund is less than __% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. [In addition,
the Master Servicer may at its option purchase any class or classes of Class [
] Certificates with a Certificate Balance less than __% of the original balance
thereof at a price equal to such Certificate Balance plus accrued interest
through _________.]
USE OF PROCEEDS
The net proceeds from the sale of Class [ ] Certificates will be used
by the Depositor to pay the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class [ ] Certificates,
_______________________________, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, for federal income tax purposes, the
Trust Fund will qualify as a REMIC under the Code.
For federal income tax purposes, the Class [ ] Certificates will be
the sole class of "residual interests" in the REMIC and the Class [ ], Class [
] and Class [ ] Certificates will be the "regular interests" in the REMIC and
will be treated as debt instruments of the REMIC.
S-41
<PAGE>
See "Certain Federal Income Tax Consequences -- REMICS" in the
Prospectus.
[The Class [ ] Certificates [may][will not] be treated as having been
issued with original issue discount for federal income tax reporting purposes.
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to ___%
CPR. No representation is made that the Mortgage Loans will prepay at that rate
or at any other rate. See "Certain Federal Income Tax Consequences -- REMICS --
Taxation of Owners of REMIC Regular Certificates" and "--Original Issue
Discount" in the Prospectus.]
The Class [ ] Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of such a class
of Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Certain Federal Income Tax Consequences
- -- REMICS -- Taxation of Owners of REMIC Regular Certificates" and "-- Premium"
in the Prospectus.
[The Class [ ] Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code] and "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code generally in the same proportion that the
assets of the REMIC underlying such Certificates would be so treated.] [In
addition, interest (including original issue discount) on the Class [ ]
Certificates will be interests described in Section 856(c)(3)(B) of the Code to
the extent that such Class [ ] Certificates are treated as "real estate assets"
under Section 856(c)(4)(A) of the Code.] [Moreover, the Class [ ] Certificates
will be "obligation[s] . . . which . . .[are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3)(C) of the
Code.] [The Class [ ] Certificates will not be considered to represent an
interest in "loans . . . secured by an interest in real property" within the
meaning of Section 7701 (a)(19)(C)(v) of the Code.] See "Certain Federal Income
Tax Consequences -- REMICS -- Characterization of Investments in REMIC
Certificates" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Class [ ] Certificates, see "Certain Federal Income Tax
Consequences -- REMICS" in the Prospectus.
S-42
<PAGE>
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan or other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts and certain
insurance company general accounts in which such plans, accounts or
arrangements are invested, that is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code should
carefully review with its legal advisors whether the purchase or holding of
Class [ ] Certificates could give rise to a transaction that is prohibited or
is not otherwise permitted either under ERISA or Section 4975 of the Code.
[The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption [90-24] (the "Exemption"), [on May 17, 1990]
to Morgan Stanley & Co. Incorporated, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code and Section 502(i) of ERISA, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Morgan
Stanley & Co. Incorporated, (b) any person directly or indirectly, through one
or more intermediaries, controlling, controlled by or under common control with
Morgan Stanley & Co. Incorporated and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to the Class [ ] Certificates.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class [ ] Certificates or a transaction in connection with the servicing,
operation and management of the Trust Fund to be eligible for exemptive relief
thereunder. First, the acquisition of the Class [ ] Certificates by certain
employee benefit plans subject to ERISA or Section 4975 of the Code (each, a
"Plan"), must be on terms (including the price for such Certificates) 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 rights and interests evidenced
by the Class [ ] Certificates must not be subordinate to the rights and
interests evidenced by the other certificates of the Trust with respect to the
right to receive payment in the event of default or delinquencies in the
underlying assets of the Trust. Third, the Class [ ] Certificates at the time
of acquisition by the Plan must be rated in one of the three highest generic
rating categories by Standard & Poor's Corporation, Moody's Investors Service,
Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc. Fourth,
the Trustee cannot be an affiliate of any member of the "Restricted Group",
which consists of any Underwriter, the Depositor, the Asset Seller, the Master
Servicer, each sub-servicer and any mortgagor with respect to Mortgage Loans
constituting more than 5% of the aggregate unamortized principal balance of the
Mortgage Loans as of the date of initial issuance of the Class [ ]
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting the Class [ ] Certificates; the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable
compensation for underwriting the Class [ ] Certificates; the sum of all
payments made to and retained by the Depositor pursuant to the assignment of
the Mortgage Loans 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 and any sub-servicer must represent not more
than reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing 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.
Because the Class [ ] Certificates are not subordinate to any other
class of Certificates with respect to the right to receive payment in the event
of default or delinquencies on the underlying assets of the Trust, the second
general condition set forth above is satisfied with respect to such
Certificates. It is a condition of the issuance of the Class [ ] Certificates
that they be rated [not lower than] "_____" by ___________________. A fiduciary
of a Plan contemplating purchasing a Class [ ] Certificate in the secondary
market must make its own determination that at the time of such acquisition,
the Class [ ] Certificates continue to satisfy the third general condition set
forth above. The Depositor expects that the fourth general condition set forth
above will be satisfied with respect to the Class [ ] Certificates. A fiduciary
of a
S-43
<PAGE>
Plan contemplating purchasing a Class [ ] Certificate must make its own
determination that the first, third, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class [ ] Certificate.
Before purchasing a Class [ ] Certificate, a fiduciary of a Plan
should itself confirm (a) that such Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. See
"ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class [ ]
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Prospective purchasers
that are insurance companies should consult with their counsel regarding
whether the United States Supreme Court's decision in the case of John Hancock
v. Harris Trust Savings Bank, 510 U.S. 86 (1993) affects their ability to make
purchases of Class [ ] Certificates and the extent to which Prohibited
Transaction Class Exemption 95-60 may be available. See "ERISA Considerations"
in the Prospectus.
LEGAL INVESTMENT
The Class [ ] Certificates [will] [will not] constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") so long as they are rated in at least the second highest
rating category by the Rating Agency, and, as such, are legal investments for
certain entities to the extent provided in SMMEA]. SMMEA provided that states
could override its provisions on legal investment and restrict or condition
investment in mortgage related securities by taking statutory action on or
prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
The Depositor makes no representations as to the proper
characterization of the Class [ ] Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Class [
] Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the Class [ ] Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Class [ ] Certificates constitute a
legal investment under SMMEA or is subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Class [ ] Certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Distribution of the Class [ ] Certificates will be
made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the Certificates will be __% of the initial aggregate
principal balance thereof as of the Cut-off Date, plus accrued interest from
the Cut-off Date at a rate of __% per annum, before deducting expenses payable
by the Depositor. In connection with the purchase and sale of the Class [ ]
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Depositor also has been advised by the Underwriter that it,
through one or more of its affiliates currently expects to make a market in the
Class [ ] Certificates offered hereby; however, it has no obligation to do so,
any market making may be discontinued at any time, and there can be no
assurance that an active public market for the Class [ ] Certificates will
develop.
S-44
<PAGE>
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by
___________________________, and for the Underwriter by ____________________.
RATING
It is a condition to issuance that the Class [ ] Certificates be rated
[not lower than] "______" by ________________. However, no person is obligated
to maintain the rating on the Class [ ] Certificates, and _______________ is
not obligated to monitor its rating following the Closing Date.
________________'s ratings on mortgage pass-through certificates
address the likelihood of the receipt by holders thereof of payments to which
they are entitled. _____________'s ratings take into consideration the credit
quality of the mortgage pool, structural and legal aspects associated with the
certificates, and the extent to which the payment stream in the mortgage pool
is adequate to make payments required under the certificates.
_________________'s rating on the Class [ ] Certificates does not, however,
constitute a statement regarding frequency of prepayments on the Mortgage
Loans. [The rating of the Class [ ] Certificates does not address the
possibility that the holders of such Certificates may fail to fully recover
their initial investments.] See "Risk Factors" herein.
There can be no assurance as to whether any rating agency not
requested to rate the Class [ ] Certificates will nonetheless issue a rating
and, if so, what such rating would be. A rating assigned to the Class [ ]
Certificates by a rating agency that has not been requested by the Depositor to
do so may be lower than the rating assigned by ________________'s pursuant to
the Depositor's request.
The rating of the Class [ ] Certificates should be evaluated
independently from similar ratings on other types of securities. 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.
S-45
<PAGE>
ANNEX A
[CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS]
[Attach Mortgage Loan Schedule that details relevant and available
information regarding the Mortgage Loans, such as the information included
under the following headings:
1. Loan ID number 23. Rate adjustment frequency
2. Original balance
3. Current balance
4. Current rate
5. Current payment
6. Note date
7. Original term
8. Remaining term
9. Maturity date
10. Amortization
11. Origination appraisal
12. Borrowing entity
13. Property name
14. Street
15. City
16. State
17. Zip code
18. Rate index
19. First rate change
20. Next rate change
21. First payment change
22. Next payment change
<PAGE>
24. Payment adjustment frequency
25. Period payment cap
26. Life rate cap
27. Life rate floor
28. Negative amortization cap
amount
29. annualized recent net
operating cost
30. Annualized recent net
operating income
31. Most recent net operating
income year
32. Most recent debt servvice
coverage ratio
33. LTV and current balance based
upon the Appraised Value
<PAGE>
ANNEX B
[TITLE, SERIES OF MBS]
TERM SHEET
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CUT-OFF DATE: [ ] MORTGAGE POOL CUT-OFF DATE BALANCE: $[ ]
DATE OF INITIAL ISSUANCE: [ ] REFERENCE DATE BALANCE: $[ ]
RELATED TRUSTEE: [ ] PERCENT OF ORIGINAL MORTGAGE POOL REMAINING [ ]%
AS OF REFERENCE DATE:
MATURITY DATE: [ ]
<CAPTION>
CLASS PASS-THROUGH INITIAL CERTIFICATE FEATURES
OF CERTIFICATES RATE PRINCIPAL BALANCE
<S> <C> <C> <C> <C>
[ ] [ ]% $[ ] [ ]
</TABLE>
[First MBS Distribution Date on which the MBS may receive a portion of
prepayments: [date]
MINIMUM SERVICING FEE RATE:* [ ]% per annum
MAXIMUM SERVICING FEE RATE:* [ ]% per annum
- ----------------
<TABLE>
<CAPTION>
AS OF DATE OF
INITIAL ISSUANCE
------------------
<S> <C>
* Combined Related Master Servicing and Subservicing Fee Rate SPECIAL HAZARD AMOUNT: $[ ]
FRAUD LOSS AMOUNT: $[ ]
BANKRUPTCY AMOUNT: $[ ]
</TABLE>
AS OF DATE OF AS OF
INITIAL ISSUANCE DELIVERY DATE
------------------- -----------------
SENIOR PERCENTAGE: [ ]% [ ]%
SUBORDINATE PERCENTAGE: [ ]% [ ]%
<PAGE>
CLASS RATING AGENCY VOTING RIGHTS:
RATINGS: [ ] [ ] [ ]
[ ] [ ]
[ ] [ ]
<PAGE>
MORGAN STANLEY CAPITAL I INC.
-----------------------------
<PAGE>
[VERSION 1]
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(Issuable in Series)
MORGAN STANLEY CAPITAL I INC.
Depositor
------------------------
The Certificates offered hereby and by Supplements to this Prospectus
(the "Offered Certificates") will be offered from time to time in one or more
series. Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") consisting of one or more segregated pools of various types of
single family mortgage loans (the "Mortgage Loans"), mortgage participations,
mortgage pass-through certificates, mortgage-backed securities evidencing
interests therein or secured thereby (the "MBS"), certain direct obligations of
the United States, agencies thereof or agencies created thereby (the
"Government Securities") or a combination of Mortgage Loans, MBS and/or
Government Securities (with respect to any series, collectively, "Assets"). The
Mortgage Loans and MBS are collectively referred to herein as the "Mortgage
Assets." If so specified in the related Prospectus Supplement, the Trust Fund
for a series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Each series of Certificates will consist of one or more classes of
Certificates that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Certificates in respect of certain distributions on the
Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal sequentially, based on specified payment
schedules or other methodologies; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available funds,
in each case as described in the related Prospectus Supplement. Any such
classes may include classes of Offered Certificates. See "Description of the
Certificates."
Principal and interest with respect to Certificates will be
distributable monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement. Distributions on
the Certificates of any series will be made only from the assets of the related
Trust Fund.
The Certificates of each series will not represent an obligation of or
interest in the Depositor, Morgan Stanley & Co. Incorporated, any Master
Servicer, any Sub-Servicer or any of their respective affiliates, except to the
limited extent described herein and in the related Prospectus Supplement.
Neither
<PAGE>
the Certificates nor any assets in the related Trust Fund will be guaranteed or
insured by any governmental agency or instrumentality or by any other person,
unless otherwise provided in the related Prospectus Supplement. The assets in
each Trust Fund will be held in trust for the benefit of the holders of the
related series of Certificates pursuant to a Pooling and Servicing Agreement or
a Trust Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be affected
by, among other things, the rate of payment of principal (including
prepayments, repurchase and defaults) on the Mortgage Assets in the related
Trust Fund and the timing of receipt of such payments as described under the
caption "Yield Considerations" herein and in the related Prospectus Supplement.
A Trust Fund may be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
Prospective investors should review the information appearing under
the caption "Risk Factors" herein and such information as may be set forth
under the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Certificate.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" for federal income tax
purposes. See also "Certain Federal Income Tax Consequences" herein.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, CERTAIN RISKS SET FORTH
UNDER THE CAPTION "RISK FACTORS" HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT.
Prior to issuance there will have been no market for the Certificates
of any series and there can be no assurance that a secondary market for any
Offered Certificates will develop or that, if it does develop, it will
continue. This Prospectus may not be used to consummate sales of the Offered
Certificates of any series unless accompanied by the Prospectus Supplement for
such series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters, as more fully
described under "Plan of Distribution" herein and in the related Prospectus
Supplement.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
__________,_____
2
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates covered by such
Prospectus Supplement, whether or not participating in the distribution
thereof, may be required to deliver such Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus and Prospectus Supplement when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Certificates of each series will, among other things,
set forth with respect to such Certificates, as appropriate: (i) a description
of the class or classes of Certificates, the payment provisions with respect to
each such class and the Pass-Through Rate or method of determining the
Pass-Through Rate with respect to each such class; (ii) the aggregate principal
amount and distribution dates relating to such series and, if applicable, the
initial and final scheduled distribution dates for each class; (iii)
information as to the assets comprising the Trust Fund, including the general
characteristics of the assets included therein, including the Mortgage Assets
and any Credit Support and Cash Flow Agreements (with respect to the
Certificates of any series, the "Trust Assets"); (iv) the circumstances, if
any, under which the Trust Fund may be subject to early termination; (v)
additional information with respect to the method of distribution of such
Certificates; (vi) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (vii) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Certificates; (viii) information as to any Master
Servicer, any Sub-Servicer and the Trustee, as applicable; (ix) information as
to the nature and extent of subordination with respect to any class of
Certificates that is subordinate in right of payment to any other class; and
(x) whether such Certificates will be initially issued in definitive or
book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Certificates contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of
the Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, Northwest Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and any
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Offered
Certificates or an offer of the Offered Certificates to any person in any state
or other jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly.
3
<PAGE>
A Master Servicer or the Trustee will be required to mail to holders
of Offered Certificates of each series periodic unaudited reports concerning
the related Trust Fund. Unless and until definitive Certificates are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Certificates, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Certificates (the
"Certificateholders") upon request to their respective DTC participants. See
"Description of the Certificates(YEN)Reports to Certificateholders" and
"Description of the Agreements(YEN)Evidence as to Compliance." The Depositor
will file or cause to be filed with the Commission such periodic reports with
respect to each Trust Fund as are required under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of an offering of Offered Certificates evidencing interests
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the
offering of one or more classes of Offered Certificates, a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent such documents or reports relate to one or more of such classes of such
Offered Certificates, other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to Morgan Stanley
Capital I Inc., c/o Morgan Stanley & Co. Incorporated, 1585 Broadway, 37th
Floor, New York, New York 10036, Attention: David R. Warren, or by telephone at
(212) 761-4700. The Depositor has determined that its financial statements are
not material to the offering of any Offered Certificates.
4
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT.........................................................3
AVAILABLE INFORMATION.........................................................3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................4
SUMMARY OF PROSPECTUS.........................................................6
RISK FACTORS.................................................................15
DESCRIPTION OF THE TRUST FUNDS...............................................21
USE OF PROCEEDS..............................................................26
YIELD CONSIDERATIONS.........................................................26
THE DEPOSITOR................................................................31
DESCRIPTION OF THE CERTIFICATES..............................................31
DESCRIPTION OF THE AGREEMENTS................................................41
DESCRIPTION OF CREDIT SUPPORT................................................59
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................62
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................74
STATE TAX CONSIDERATIONS....................................................105
CERTAIN ERISA CONSIDERATIONS................................................105
LEGAL INVESTMENT............................................................108
PLAN OF DISTRIBUTION........................................................110
LEGAL MATTERS...............................................................111
FINANCIAL INFORMATION.......................................................111
RATING......................................................................111
INDEX OF PRINCIPAL DEFINITIONS..............................................113
5
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of such series. An Index of
Principal Definitions is included at the end of this Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Title of Certificates.................... Mortgage Pass-Through Certificates, issuable in series (the "Certificates").
Depositor................................ Morgan Stanley Capital I Inc., a wholly-owned subsidiary of Morgan Stanley Group Inc.
See "The Depositor."
Master Servicer.......................... The master servicer or master servicers (each, a "Master Servicer"), if any, or a
servicer for substantially all the Mortgage Loans for each series of Certificates,
which servicer or master servicer(s) may be affiliates of the Depositor, will be named
in the related Prospectus Supplement. See "Description of the Agreements(YEN)General"
and "(YEN)Collection and Other Servicing Procedures."
Trustee.................................. The trustee (the "Trustee") for each series of Certificates will be named in the
related Prospectus Supplement. See "Description of the Agreements(YEN)The Trustee."
The Trust Assets......................... Each series of Certificates will represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting primarily of:
(a) Mortgage Assets.............. The Mortgage Assets with respect to each series of Certificates will consist of a pool
of single family loans (collectively, the "Mortgage Loans") and mortgage
participations, mortgage pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by Mortgage Loans (collectively, the "MBS") or a
combination of Mortgage Loans and MBS. The Mortgage Loans will not be guaranteed or
insured by the Depositor or any of its affiliates or, unless otherwise provided in the
Prospectus Supplement, by any governmental agency or instrumentality or other person.
The Mortgage Loans will be secured by first and/or junior liens on one- to four-family
residential properties or security interests in shares issued by cooperative housing
corporations. The Mortgaged Properties may be located in any one of the fifty states,
the District of Columbia or the Commonwealth of Puerto Rico. The Prospectus Supplement
will indicate additional jurisdictions, if any, in which the Mortgaged
6
<PAGE>
Properties may be located. Unless otherwise provided in the related Prospectus
Supplement, all Mortgage Loans will have individual principal balances at origination
of not less than $25,000 and original terms to maturity of not more than 40 years. All
Mortgage Loans will have been originated by persons other than the Depositor, and all
Mortgage Assets will have been purchased, either directly or indirectly, by the
Depositor on or before the date of initial issuance of the related series of
Certificates. The related Prospectus Supplement will indicate if any such persons are
affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its term or that adjusts from time to time, or that
may be converted from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time at the mortgagor's election, in each case
as described in the related Prospectus Supplement. Adjustable Mortgage Rates on the
Mortgage Loans in a Trust Fund may be based on one or more indices. Each Mortgage Loan
may provide for scheduled payments to maturity, payments that adjust from time to time
to accommodate changes in the Mortgage Rate or to reflect the occurrence of certain
events, and may provide for negative amortization or accelerated amortization, in each
case as described in the related Prospectus Supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in each case
as described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment or require payment of a premium or a yield maintenance
penalty in connection with a prepayment, in each case as described in the related
Prospectus Supplement. The Mortgage Loans may provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly, semi-annually or at such
other interval as is specified in the related Prospectus Supplement. See "Description
of the Trust Funds(YEN)Assets."
(b) Government Securities........ If so provided in the related Prospectus Supplement, the Trust Fund may include, in
addition to Mortgage Assets, certain direct obligations of the United States, agencies
thereof or agencies created thereby which provide for payment of interest and/or
principal (collectively, "Government Securities").
(c) Collection Accounts.......... Each Trust Fund will include one or more accounts established and maintained on behalf
of the Certificateholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent described herein and in such Prospectus
Supplement, deposit all payments and collections received or advanced with respect to
the Mortgage Assets and
7
<PAGE>
other assets in the Trust Fund. Such an account may be maintained as an interest
bearing or a non-interest bearing account, and funds held therein may be held as cash
or invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreements(YEN)Certificate Account and Other Collection Accounts."
(d) Credit Support............... If so provided in the related Prospectus Supplement, partial or full protection against
certain defaults and losses on the Mortgage Assets in the related Trust Fund may be
provided to one or more classes of Certificates of the related series in the form of
subordination of one or more other classes of Certificates of such series, which other
classes may include one or more classes of Offered Certificates, or by one or more
other types of credit support, such as a letter of credit, insurance policy, guarantee,
reserve fund or another type of credit support, or a combination thereof (any such
coverage with respect to the Certificates of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the coverage (if
applicable) and related information with respect to each type of Credit Support, if
any, will be described in the Prospectus Supplement for a series of Certificates. The
Prospectus Supplement for any series of Certificates evidencing an interest in a Trust
Fund that includes MBS will describe any similar forms of credit support that are
provided by or with respect to, or are included as part of the trust fund evidenced by
or providing security for, such MBS. See "Risk Factors(YEN)Credit Support Limitations"
and "Description of Credit Support."
(e) Cash Flow Agreements......... If so provided in the related Prospectus Supplement, the Trust Fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and accounts
established for the related series will be invested at a specified rate. The Trust Fund
may also include certain other agreements, such as interest rate exchange agreements,
interest rate cap or floor agreements, currency exchange agreements or similar
agreements provided to reduce the effects of interest rate or currency exchange rate
fluctuations on the Assets or on one or more classes of Certificates. (Currency
exchange agreements might be included in the Trust Fund if some or all of the Mortgage
Assets (such as Mortgage Loans secured by Mortgaged Properties located outside the
United States) were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement (any such agreement, a
"Cash Flow Agreement"), including, without limitation, provisions relating to the
timing,
8
<PAGE>
manner and amount of payments thereunder and provisions relating to the termination
thereof, will be described in the Prospectus Supplement for the related series. In
addition, the related Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement. The Prospectus Supplement
for any series of Certificates evidencing an interest in a Trust Fund that includes MBS
will describe any cash flow agreements that are included as part of the trust fund
evidenced by or providing security for such MBS. See "Description of the Trust
Funds(YEN)Cash Flow Agreements."
Description of Certificates.............. Each series of Certificates evidencing an interest in a Trust Fund that includes
Mortgage Loans as part of its assets will be issued pursuant to a pooling and
servicing agreement, and each series of Certificates evidencing an interest in a Trust
Fund that does not include Mortgage Loans will be issued pursuant to a trust
agreement. Pooling and servicing agreements and trust agreements are referred to
herein as the "Agreements." Each series of Certificates will include one or more
classes. Unless otherwise specified in the related Prospectus Supplement, each series
of Certificates (including any class or classes of Certificates of such series not
offered hereby) will represent in the aggregate the entire beneficial ownership
interest in the Trust Fund. See "(YEN)Distributions on Certificates" and "Description
of the Certificates(YEN)General." Each class of Certificates (other than certain
Stripped Interest Certificates, as defined below) will have a stated principal amount
(a "Certificate Balance") and (other than certain Stripped Principal Certificates, as
defined below), will accrue interest thereon based on a fixed, variable or adjustable
interest rate (a "Pass-Through Rate"). The related Prospectus Supplement will specify
the Certificate Balance, if any, and the Pass-Through Rate for each class of
Certificates or, in the case of a variable or adjustable Pass-Through Rate, the method
for determining the Pass-Through Rate.
Distributions on Certificates............ Each series of Certificates will consist of one or more classes of Certificates that
may (i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Certificates") or subordinate
(collectively, "Subordinate Certificates") to one or more other classes of Certificates
in respect of certain distributions on the Certificates; (iii) be entitled to principal
distributions, with disproportionately low, nominal or no interest distributions
(collectively, "Stripped Principal Certificates"); (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Certificates"); (v) provide for distributions of
accrued interest
9
<PAGE>
thereon commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series (collectively,
"Accrual Certificates"); (vi) provide for distributions of principal sequentially,
based on specified payment schedules or other methodologies; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one or more
of the characteristics described in this paragraph, including a Stripped Principal
Certificate component and a Stripped Interest Certificate component, to the extent of
available funds, in each case as described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, distributions on one or more classes of
a series of Certificates may be limited to collections from a designated portion of the
Whole Loans in the related Mortgage Pool (each such portion of Whole Loans, a "Mortgage
Loan Group"). See "Description of the Certificates--General." Any such classes may
include classes of Offered Certificates. With respect to Certificates with two or more
components, references herein to Certificate Balance, notional amount and Pass-Through
Rate refer to the principal balance, if any, notional amount, if any, and the
Pass-Through Rate, if any, for any such component.
The Certificates will not be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other person,
unless otherwise provided in the related Prospectus Supplement. See "Risk
Factors(YEN)Limited Assets" and "Description of the Certificates."
(a) Interest....................... Interest on each class of Offered Certificates (other than Stripped Principal
Certificates and certain classes of Stripped Interest Certificates) of each series
will accrue at the applicable Pass-Through Rate on the outstanding Certificate Balance
thereof and will be distributed to Certificateholders as provided in the related
Prospectus Supplement (each of the specified dates on which distributions are to be
made, a "Distribution Date"). Distributions with respect to interest on Stripped
Interest Certificates may be made on each Distribution Date on the basis of a notional
amount as described in the related Prospectus Supplement. Distributions of interest
with respect to one or more classes of Certificates may be reduced to the extent of
certain delinquencies, losses, prepayment interest shortfalls, and other contingencies
described herein and in the related Prospectus Supplement. See "Risk
Factors(YEN)Average Life of Certificates; Prepayments; Yields," "Yield Considerations"
and "Description of the Certificates(YEN)Distributions of Interest on the
Certificates."
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(b) Principal...................... The Certificates of each series initially will have an aggregate Certificate Balance no
greater than the outstanding principal balance of the Assets as of, unless the related
Prospectus Supplement provides otherwise, the close of business on the first day of the
month of formation of the related Trust Fund (the "Cut-off Date"), after application of
scheduled payments due on or before such date, whether or not received. The Certificate
Balance of a Certificate outstanding from time to time represents the maximum amount
that the holder thereof is then entitled to receive in respect of principal from future
cash flow on the assets in the related Trust Fund. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Certificates entitled thereto until the
Certificate Balances of such Certificates have been reduced to zero. Unless otherwise
specified in the related Prospectus Supplement, distributions of principal of any class
of Certificates will be made on a pro rata basis among all of the Certificates of such
class or by random selection, as described in the related Prospectus Supplement or
otherwise established by the related Trustee. Stripped Interest Certificates with no
Certificate Balance will not receive distributions in respect of principal. See
"Description of the Certificates(YEN)Distributions of Principal of the Certificates."
Advances................................. Unless otherwise provided in the related Prospectus Supplement, the Master Servicer
will be obligated as part of its servicing responsibilities to make certain advances
that in its good faith judgment it deems recoverable with respect to delinquent
scheduled payments on the Whole Loans in such Trust Fund. Neither the Depositor nor
any of its affiliates will have any responsibility to make such advances. Advances
made by a Master Servicer are reimbursable generally from subsequent recoveries in
respect of such Whole Loans and otherwise to the extent described herein and in the
related Prospectus Supplement. If and to the extent provided in the Prospectus
Supplement for any series, the Master Servicer will be entitled to receive interest on
its outstanding advances, payable from amounts in the related Trust Fund. The
Prospectus Supplement for any series of Certificates evidencing an interest in a Trust
Fund that includes MBS will describe any corresponding advancing obligation of any
person in connection with such MBS. See "Description of the Certificates(YEN)Advances
in Respect of Delinquencies."
Termination.............................. If so specified in the related Prospectus Supplement, a series of Certificates may be
subject to optional early termination through the repurchase of the Assets in the
related Trust Fund by the party specified therein, under the circumstances and in
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the manner set forth therein. If so provided in the related Prospectus Supplement, upon
the reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or on and after a date specified in
such Prospectus Supplement, the party specified therein will solicit bids for the
purchase of all of the Assets of the Trust Fund, or of a sufficient portion of such
Assets to retire such class or classes, or purchase such Assets at a price set forth in
the related Prospectus Supplement. In addition, if so provided in the related
Prospectus Supplement, certain classes of Certificates may be purchased subject to
similar conditions. See "Description of the Certificates(YEN)Termination."
Registration of Certificates............. If so provided in the related Prospectus Supplement, one or more classes of the Offered
Certificates will initially be represented by one or more Certificates registered in
the name of Cede & Co., as the nominee of DTC. No person acquiring an interest in
Offered Certificates so registered will be entitled to receive a definitive
certificate representing such person's interest except in the event that definitive
certificates are issued under the limited circumstances described herein. See "Risk
Factors(YEN)Book-Entry Registration" and "Description of the
Certificates(YEN)Book-Entry Registration and Definitive Certificates."
Tax Status of the Certificates........... The Certificates of each series will constitute either (i) "regular interests" ("REMIC
Regular Certificates") and "residual interests" ("REMIC Residual Certificates") in a
Trust Fund treated as a REMIC under Sections 860A through 860G of the Code, or (ii)
interests ("Grantor Trust Certificates") in a Trust Fund treated as a grantor trust
under applicable provisions of the Code.
(a) REMIC............................. REMIC Regular Certificates generally will be treated as debt obligations of the
applicable REMIC for federal income tax purposes. Certain REMIC Regular Certificates
may be issued with original issue discount for federal income tax purposes. See
"Certain Federal Income Tax Consequences" in the Prospectus Supplement.
A portion (or, in certain cases, all) of the income from REMIC Residual Certificates
(i) may not be offset by any losses from other activities of the holder of such REMIC
Residual Certificates, (ii) may be treated as unrelated business taxable income for
holders of REMIC Residual Certificates that are subject to tax on unrelated business
taxable income (as defined in Section 511 of the Code), and (iii) may be subject to
foreign withholding rules. See "Certain Federal Income Tax Consequences-REMICs-Taxation
of Owners of REMIC
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Residual Certificates".
The Offered Certificates will be treated as (i) assets described in section
7701(a)(19)(C) of the Internal Revenue Code of 1986, as amended (the "Code") and (ii)
"real estate assets" within the meaning of section 856(c)(4)(A) of the Code, in each
case to the extent described herein and in the Prospectus. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
(b) Grantor Trust..................... If no election is made to treat the Trust Fund relating to a Series of Certificates as
a real estate mortgage investment conduit ("REMIC"), the Trust Fund will be classified
as a grantor trust and not as an association taxable as a corporation for federal
income tax purposes, and therefore holders of Certificates will be treated as the
owners of undivided pro rata interests in the Mortgage Pool or pool of securities and
any other assets held by the Trust Fund.
Investors are advised to consult their tax advisors and to review "Certain Federal
Income Tax Consequences" herein and in the related Prospectus Supplement.
ERISA Considerations..................... A fiduciary of an employee benefit plan and certain other retirement plans and
arrangements, including individual retirement accounts, annuities, Keogh plans, and
collective investment funds and separate accounts in which such plans, accounts,
annuities or arrangements are invested, that is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code should
carefully review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not otherwise
permissible either under ERISA or Section 4975 of the Code. See "Certain ERISA
Considerations" herein and in the related Prospectus Supplement. Certain classes of
Certificates may not be transferred unless the Trustee and the Depositor are furnished
with a letter of representations or an opinion of counsel to the effect that such
transfer will not result in a violation of the prohibited transaction provisions of
ERISA and the Code and will not subject the Trustee, the Depositor or the Master
Servicer to additional obligations. See "Description of the Certificates(YEN)General"
and "Certain ERISA Considerations".
Legal Investment......................... Unless otherwise specified in the related Prospectus Supplement, each class of Offered
Certificates will constitute "mortgage-related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). However, institutions
whose investment activities are subject
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to legal investment laws and regulations or review by certain regulatory authorities
may be subject to restrictions on investment in certain classes of the Offered
Certificates. See "Legal Investment" herein and in the related Prospectus Supplement.
Rating...................................... At the date of issuance, as to each series, each class of Offered Certificates will be
rated not lower than investment grade by one or more nationally recognized statistical
rating agencies (each, a "Rating Agency"). See "Rating" herein and in the related
Prospectus Supplement.
</TABLE>
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates
of any series will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Certificates of such series
remain outstanding. The market value of Certificates will fluctuate with
changes in prevailing rates of interest. Consequently, sale of Certificates by
a holder in any secondary market that may develop may be at a discount from
100% of their original principal balance or from their purchase price.
Furthermore, secondary market purchasers may look only hereto, to the related
Prospectus Supplement and to the reports to Certificateholders delivered
pursuant to the related Agreement as described herein under the heading
"Description of the Certificates(YEN)Reports to Certificateholders",
"(YEN)Book-Entry Registration and Definitive Certificates" and "Description of
the Agreements(YEN)Evidence as to Compliance" for information concerning the
Certificates. Except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights and
the Certificates are subject to early retirement only under certain specified
circumstances described herein and in the related Prospectus Supplement. See
"Description of the Certificates(YEN)Termination". Morgan Stanley & Co.
Incorporated currently expects to make a secondary market in the Offered
Certificates, but has no obligation to do so.
LIMITED ASSETS
The Certificates will not represent an interest in or obligation of
the Depositor, the Master Servicer or any of their affiliates. The only
obligations with respect to the Certificates or the Assets will be the
obligations (if any) of the Warrantying Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the
Mortgage Loans, the Master Servicer's and any Sub-Servicer's servicing
obligations under the related Pooling and Servicing Agreement (including the
limited obligation to make certain advances in the event of delinquencies on
the Mortgage Loans, but only to the extent deemed recoverable) and, if and to
the extent expressly described in the related Prospectus Supplement, certain
limited obligations of the Master Servicer in connection with an agreement to
purchase or act as remarketing agent with respect to a convertible ARM Loan (as
defined herein) upon conversion to a fixed rate. Since certain representations
and warranties with respect to the Mortgage Assets may have been made and/or
assigned in connection with transfers of such Mortgage Assets prior to the
Closing Date, the rights of the Trustee and the Certificateholders with respect
to such representations or warranties will be limited to their rights as an
assignee thereof. Unless otherwise specified in the related Prospectus
Supplement, none of the Depositor, the Master Servicer or any affiliate thereof
will have any obligation with respect to representations or warranties made by
any other entity. Unless otherwise specified in the related Prospectus
Supplement, neither the Certificates nor the underlying Mortgage Assets will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Depositor, the Master Servicer, any Sub-Servicer or any of their affiliates.
Proceeds of the assets included in the related Trust Fund for each series of
Certificates (including the Assets and any form of credit enhancement) will be
the sole source of payments on the Certificates, and there will be no recourse
to the Depositor or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Certificates.
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Unless otherwise specified in the related Prospectus Supplement, a
series of Certificates will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is insufficient
to make payments on such Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including the Certificate Account and any accounts
maintained as Credit Support, may be withdrawn under certain conditions, as
described in the related Prospectus Supplement. In the event of such
withdrawal, such amounts will not be available for future payment of principal
of or interest on the Certificates. If so provided in the Prospectus Supplement
for a series of Certificates consisting of one or more classes of Subordinate
Certificates, on any Distribution Date in respect of which losses or shortfalls
in collections on the Assets have been incurred, the amount of such losses or
shortfalls will be borne first by one or more classes of the Subordinate
Certificates, and, thereafter, by the remaining classes of Certificates in the
priority and manner and subject to the limitations specified in such Prospectus
Supplement.
AVERAGE LIFE OF CERTIFICATES; PREPAYMENTS; YIELDS
Prepayments (including those caused by defaults) on the Mortgage
Assets in any Trust Fund generally will result in a faster rate of principal
payments on one or more classes of the related Certificates than if payments on
such Mortgage Assets were made as scheduled. Thus, the prepayment experience on
the Mortgage Assets may affect the average life of each class of related
Certificates. The rate of principal payments on pools of mortgage loans varies
between pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax, legal and other factors. There can be no
assurance as to the rate of prepayment on the Mortgage Assets in any Trust Fund
or that the rate of payments will conform to any model described herein or in
any Prospectus Supplement. If prevailing interest rates fall significantly
below the applicable mortgage interest rates, principal prepayments are likely
to be higher than if prevailing rates remain at or above the rates borne by the
Mortgage Loans underlying or comprising the Mortgage Assets in any Trust Fund.
As a result, the actual maturity of any class of Certificates could occur
significantly earlier than expected. A series of Certificates may include one
or more classes of Certificates with priorities of payment and, as a result,
yields on other classes of Certificates, including classes of Offered
Certificates, of such series may be more sensitive to prepayments on Mortgage
Assets. A series of Certificates may include one or more classes offered at a
significant premium or discount. Yields on such classes of Certificates will be
sensitive, and in some cases extremely sensitive, to prepayments on Mortgage
Assets and, where the amount of interest payable with respect to a class is
disproportionately high, as compared to the amount of principal, as with
certain classes of Stripped Interest Certificates, a holder might, in some
prepayment scenarios, fail to recoup its original investment. A series of
Certificates may include one or more classes of Certificates, including classes
of Offered Certificates, that provide for distribution of principal thereof
from amounts attributable to interest accrued but not currently distributable
on one or more classes of Accrual Certificates and, as a result, yields on such
Certificates will be sensitive to (a) the provisions of such Accrual
Certificates relating to the timing of distributions of interest thereon and
(b) if such Accrual Certificates accrue interest at a variable or adjustable
Pass-Through Rate, changes in such rate. See "Yield Considerations" herein and,
if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments
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might differ from that originally anticipated or the likelihood of early
optional termination of the series of Certificates. Such rating will not
address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a Certificate at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios. Each Prospectus Supplement will identify any payment to which
holders of Offered Certificates of the related series are entitled that is not
covered by the applicable rating.
The amount, type and nature of credit support, if any, established
with respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of such series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit support required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Assets. No assurance can be given
that values of any Mortgaged Properties have remained or will remain at their
levels on the respective dates of origination of the related Mortgage Loans.
Moreover, there is no assurance that appreciation of real estate values
generally will limit loss experiences on the Mortgaged Properties. If the
single family residential real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans underlying or comprising the Mortgage Assets in a particular
Trust Fund and any secondary financing on the related Mortgaged Properties
become equal to or greater than the value of the Mortgaged Properties, the
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced by institutional lenders. In addition, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the rates of delinquencies, foreclosures
and losses with respect to any Trust Fund. To the extent that such losses are
not covered by the Credit Support, if any, described in the related Prospectus
Supplement, such losses will be borne, at least in part, by the holders of one
or more classes of the Certificates of the related series. See "Description of
Credit Support" and "Rating."
RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED PROPERTIES
An investment in securities such as the Certificates which generally
represent interests in mortgage loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, become
equal to or greater than the value of the Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, in the
case of Mortgage Loans that are subject to negative amortization, due to the
addition to principal balance of deferred interest, the principal balances of
such Mortgage Loans could be increased to an amount equal to or in excess of
the value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable credit enhancement, holders of Certificates of the series evidencing
interests in the related Mortgage Loans will bear all risk of loss resulting
from default by mortgagors and will have to look primarily to the value of the
Mortgaged Properties for recovery of the outstanding principal and unpaid
interest on the defaulted Mortgage Loans. Certain of the types of Mortgage
Loans may involve additional uncertainties not present in traditional types of
loans. For example, certain of the Mortgage Loans provide for
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escalating or variable payments by the mortgagor under the Mortgage Loan, as to
which the mortgagor is generally qualified on the basis of the initial payment
amount. In some instances the Mortgagor's income may not be sufficient to
enable them to continue to make their loan payments as such payments increase
and thus the likelihood of default will increase. In addition to the foregoing,
certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. The Mortgage Loans underlying certain
series of Certificates may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or
limited documentation mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
Additionally, a decline in the value of the Mortgaged Properties will increase
the risk of loss particularly with respect to any related junior Mortgage
Loans. See "(YEN)Junior Mortgage Loans."
If applicable, certain legal aspects of the Mortgage Loans for a
series of Certificates may be described in the related Prospectus Supplement.
See also "Certain Legal Aspects of Mortgage Loans" herein.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage Loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related Mortgaged Property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale or
refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition of the mortgagor, tax laws, prevailing general economic
conditions and the availability of credit for single family real properties
generally.
JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first liens may not be included in the Mortgage Pool. The primary risk
to holders of Mortgage Loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related first lien to satisfy fully both the first lien and the Mortgage Loan.
In the event that a holder of the first lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the first lien. The claims of the holder of the first lien
will be satisfied in full out of proceeds of the liquidation of the Mortgage
Loan, if such proceeds are sufficient, before the Trust Fund as holder of the
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junior lien receives any payments in respect of the Mortgage Loan. If the
Master Servicer were to foreclose on any Mortgage Loan, it would do so subject
to any related first lien. In order for the debt related to the Mortgage Loan
to be paid in full at such sale, a bidder at the foreclosure sale of such
Mortgage Loan would have to bid an amount sufficient to pay off all sums due
under the Mortgage Loan and the first lien or purchase the Mortgaged Property
subject to the first lien. In the event that such proceeds from a foreclosure
or similar sale of the related Mortgaged Property were insufficient to satisfy
both loans in the aggregate, the Trust Fund, as the holder of the junior lien,
and, accordingly, holders of the Certificates, would bear the risk of delay in
distributions while a deficiency judgment against the borrower was being
obtained and the risk of loss if the deficiency judgment were not realized
upon. Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the first
mortgage.
OBLIGOR DEFAULT
If so specified in the related Prospectus Supplement, in order to
maximize recoveries on defaulted Whole Loans, a Master Servicer or a
Sub-Servicer will be permitted (within prescribed parameters) to extend and
modify Whole Loans that are in default or as to which a payment default is
imminent, including in particular with respect to balloon payments. While any
such entity generally will be required to determine that any such extension or
modification is reasonably likely to produce a greater recovery on a present
value basis than liquidation, there can be no assurance that such flexibility
with respect to extensions or modifications will increase the present value of
receipts from or proceeds of Whole Loans that are in default or as to which a
payment default is imminent.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe
any Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of credit
support, or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses or
risks; for example, Credit Support may or may not cover fraud or negligence by
a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of
Subordinate Certificates (which may include Offered Certificates), if so
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline under certain circumstances. In addition, if principal payments
on one or more classes of Certificates of a series are made in a specified
order of priority, any limits with respect to the aggregate amount of claims
under any related Credit Support may be exhausted before the principal of the
lower priority classes of Certificates of such series has been repaid. As a
result, the impact of significant losses and shortfalls on the Assets may fall
primarily upon those classes of Certificates having a lower priority of
payment. Moreover, if a form of Credit Support covers more than one series of
Certificates (each, a "Covered Trust"), holders of Certificates evidencing an
interest in a Covered Trust will be subject to the risk that such Credit
Support will be exhausted by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Certificates based on
an assumed level of defaults, delinquencies, other losses or other factors.
There can, however, be no assurance that the loss experience on the related
Mortgage Assets will not exceed such assumed levels. See "(YEN)Limited Nature of
Ratings," "Description of the Certificates" and "Description of Credit
Support."
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or
a
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portion of the credit enhancement for any series of Certificates, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Certificates by any
applicable Rating Agency may be lowered following the initial issuance thereof
as a result of the downgrading of the obligations of any applicable credit
support provider, or as a result of losses on the related Mortgage Assets
substantially in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. None of the Depositor, the Master Servicer
or any of their affiliates will have any obligation to replace or supplement
any credit enhancement, or to take any other action to maintain any rating of
any series of Certificates.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinate Certificateholders to receive distributions
to which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the Master
Servicer is paid its servicing fee, including any unpaid servicing fees with
respect to one or more prior Due Periods, and is reimbursed for certain
unreimbursed advances and unreimbursed liquidation expenses) and the Senior
Certificateholders to the extent described herein. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Certificates. See "Description of the Certificates-- General" and
"--Allocation of Losses and Shortfalls."
The yields on the Subordinate Certificates may be extremely sensitive
to the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate and
amount of such losses assumed by an investor, the yields to maturity on the
Subordinate Certificates may be lower than anticipated.
ENFORCEABILITY
Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property or its interest in the
Mortgaged Property. Mortgages may also include a debt-acceleration clause,
which permits the lender to accelerate the debt upon a monetary or non-monetary
default of the mortgagor. Such clauses are generally enforceable subject to
certain exceptions. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default. The equity courts of
any state, however, may refuse the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
CERTAIN ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
series. In particular, investors that are insurance companies should consult
with their counsel with respect to the United States Supreme Court case, John
Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank. See "Certain
ERISA Considerations."
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Except as provided in the Prospectus Supplement, REMIC Residual
Certificates, if offered hereunder, are anticipated to have "phantom income"
associated with them. That is, taxable income is anticipated to be allocated to
the REMIC Residual Certificates in the early years of the existence of the
related REMIC, even if the REMIC Residual Certificates receive no distributions
from the related REMIC, with a corresponding amount of losses allocated to the
REMIC Residual Certificates in later years. Accordingly, the present value of
the tax detriments associated with the REMIC Residual Certificates may
significantly exceed the present value of the tax benefits related thereto, and
the REMIC Residual Certificates may have a negative "value." Moreover, the
REMIC Residual Certificates will in effect be allocated an amount of gross
income equal to the non-interest expenses of the REMIC, but such expenses will
be deductible by holders of the REMIC Residual Certificates that are
individuals only as itemized deductions (and be subject to all the limitations
applicable to itemized deductions). Accordingly, investment in the REMIC
Residual Certificates will generally not be suitable for individuals or for
certain pass-through entities, such as partnerships or S corporations, that
have individuals as partners or shareholders. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Finally,
prospective purchasers of a REMIC Residual Certificate should be aware that
recently issued final regulations provide restrictions on the ability to
mark-to-market certain "negative value" REMIC residual interests. See "Certain
Federal Income Tax Consequences--REMICs."
CONTROL
Under certain circumstances, the consent or approval of the holders of
a specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a series or a similar means of allocating decision-making under
the related Agreement ("Voting Rights") will be required to direct, and will be
sufficient to bind all Certificateholders of such series to, certain actions,
including directing the Master Servicer with respect to actions to be taken
with respect to certain Mortgage Loans and REO Properties and amending the
related Agreement in certain circumstances. See "Description of the Agreements
(YEN)Events of Default," "(YEN)Rights Upon Event of Default," "(YEN)Amendment"
and "(YEN)List of Certificateholders."
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of
the Certificates will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the Certificateholders or their nominees. Because of this,
unless and until Definitive Certificates are issued, Certificateholders will
not be recognized by the Trustee as "Certificateholders" (as that term is to be
used in the related Agreement). Hence, until such time, Certificateholders will
be able to exercise the rights of Certificateholders only indirectly through
DTC and its participating organizations. See "Description of the
Certificates(YEN)Book-Entry Registration and Definitive Certificates."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include (i)
single family mortgage loans (the "Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by one or more Mortgage Loans or other
similar
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participations, certificates or securities ("MBS"), (iii) direct obligations of
the United States, agencies thereof or agencies created thereby which are not
subject to redemption prior to maturity at the option of the issuer and are (a)
interest-bearing securities, (b) non-interest-bearing securities, (c)
originally interest-bearing securities from which coupons representing the
right to payment of interest have been removed, or (d) interest-bearing
securities from which the right to payment of principal has been removed (the
"Government Securities"), or (iv) a combination of Mortgage Loans, MBS and
Government Securities. As used herein, "Mortgage Loans" refers to both whole
Mortgage Loans and Mortgage Loans underlying MBS. Mortgage Loans that secure,
or interests in which are evidenced by, MBS are herein sometimes referred to as
Underlying Mortgage Loans. Mortgage Loans that are not Underlying Mortgage
Loans are sometimes referred to as "Whole Loans." Any mortgage participations,
pass-through certificates or other asset-backed certificates in which an MBS
evidences an interest or which secure an MBS are sometimes referred to herein
also as MBS or as "Underlying MBS." Mortgage Loans and MBS are sometimes
referred to herein as "Mortgage Assets." The Mortgage Assets will not be
guaranteed or insured by Morgan Stanley Capital I Inc. (the "Depositor") or any
of its affiliates or, unless otherwise provided in the Prospectus Supplement,
by any governmental agency or instrumentality or by any other person. Each
Asset will be selected by the Depositor for inclusion in a Trust Fund from
among those purchased, either directly or indirectly, from a prior holder
thereof (an "Asset Seller"), which may be an affiliate of the Depositor and,
with respect to Mortgage Assets, which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Depositor. If specified in the related
Prospectus Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in another trust fund that contains
the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans will be secured by (i) liens on Mortgaged Properties consisting
of one- to four-family residential properties or (ii) security interests in
shares issued by private cooperative housing corporations ("Cooperatives") or
(ii) Mortgaged Properties located, unless otherwise specified in the related
Prospectus Supplement, in any one of the fifty states, the District of Columbia
or the Commonwealth of Puerto Rico. To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by first and/or
junior mortgages or deeds of trust or other similar security instruments
creating a first or junior lien on Mortgaged Property. The Mortgaged Properties
may include apartments owned by Cooperatives. The Mortgaged Properties may
include leasehold interests in properties, the title to which is held by third
party lessors. Unless otherwise specified in the Prospectus Supplement, the
term of any such leasehold shall exceed the term of the related mortgage note
by at least five years. Each Mortgage Loan will have been originated by a
person (the "Originator") other than the Depositor. The related Prospectus
Supplement will indicate if any Originator is an affiliate of the Depositor.
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage Notes")
secured by mortgages or deeds of trust (the "Mortgages") creating a lien on the
Mortgaged Properties.
Loan-to-Value Ratio
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The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise set forth in the related Prospectus Supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the appraised
value thereof determined in an appraisal obtained at the time of origination of
the Refinance Loan. The Value of a Mortgaged Property as of the date of initial
issuance of the related series of Certificates may be less than the value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Mortgage Loans, including (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans as of the applicable
Cut-off Date, (ii) the type of property securing the Mortgage Loans, (iii) the
weighted average (by principal balance) of the original and remaining terms to
maturity of the Mortgage Loans, (iv) the earliest and latest origination date
and maturity date of the Mortgage Loans, (v) the weighted average (by principal
balance) of the Loan-to-Value Ratios at origination of the Mortgage Loans, (vi)
the Mortgage Rates or range of Mortgage Rates and the weighted average Mortgage
Rate borne by the Mortgage Loans, (vii) the state or states in which most of
the Mortgaged Properties are located, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) the weighted average
Retained Interest, if any, (x) with respect to Mortgage Loans with adjustable
Mortgage Rates ("ARM Loans"), the index, the frequency of the adjustment dates,
the highest, lowest and weighted average note margin and pass-through margin,
and the maximum Mortgage Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan and the frequency of such
monthly payment adjustments, and (xi) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. If specific information respecting
the Mortgage Loans is not known to the Depositor at the time Certificates are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Certificates at or before the initial issuance thereof and will be filed as
part of a Current Report on Form 8-K with the Securities and Exchange
Commission within fifteen days after such initial issuance.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all
of the Mortgage Loans will (i) have individual principal balances at
origination of not less than $25,000, (ii) have original terms to maturity of
not more than 40 years and (iii) provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to
a fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from
time to time pursuant to an election or as otherwise specified on the related
Mortgage Note, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may provide for scheduled payments to maturity or payments
that adjust from time to time to
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accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due on
its stated maturity date, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may contain prohibitions on prepayment (a
"Lock-out Period" and, the date of expiration thereof, a "Lock-out Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Premium") in connection with a prepayment, in each case as described in the
related Prospectus Supplement. In the event that holders of any class or
classes of Offered Certificates will be entitled to all or a portion of any
Prepayment Premiums collected in respect of Mortgage Loans, the related
Prospectus Supplement will specify the method or methods by which any such
amounts will be allocated.
MBS
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, a trust agreement, an
indenture or similar agreement (an "MBS Agreement"). A seller (the "MBS
Issuer") and/or servicer (the "MBS Servicer") of the underlying Mortgage Loans
(or Underlying MBS) will have entered into the MBS Agreement with a trustee or
a custodian under the MBS Agreement (the "MBS Trustee"), if any, or with the
original purchaser of the interest in the underlying Mortgage Loans or MBS
evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be
made on MBS on the dates specified in the related Prospectus Supplement. The
MBS may be issued in one or more classes with characteristics similar to the
classes of Certificates described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Certificates under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have
been established for the MBS on the basis of requirements of either any Rating
Agency that may have assigned a rating to the MBS or the initial purchasers of
the MBS.
The Prospectus Supplement for a series of Certificates evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
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terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under "(YEN)Mortgage Loans(YEN)Mortgage Loan Information in
Prospectus Supplements" above, and the type of information in respect of the
Underlying MBS described in this paragraph, (xii) the characteristics of any
cash flow agreements that are included as part of the trust fund evidenced or
secured by the MBS and (xiii) whether the MBS is in certificated form,
book-entry form or held through a depository such as The Depository Trust
Company or the Participants Trust Company.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Certificates evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal amounts or notional amounts, as applicable, and types of
the Government Securities to be included in the Trust Fund, (ii) the original
and remaining terms to stated maturity of the Government Securities, (iii)
whether such Government Securities are entitled only to interest payments, only
to principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Certificateholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreement(YEN)Certificate Account and Other Collection Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Certificates in the
related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination thereof (any such coverage
with respect to the Certificates of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the coverage
(if applicable) and related information with respect to each type of Credit
Support, if any, will be described in the Prospectus Supplement for a series of
Certificates. See "Risk Factors(YEN)Credit Support Limitations" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in
the funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements,
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such as interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or similar agreements provided to
reduce the effects of interest rate or currency exchange rate fluctuations on
the Assets or on one or more classes of Certificates. (Currency exchange
agreements might be included in the Trust Fund if some or all of the Mortgage
Assets (such as Mortgage Loans secured by Mortgaged Properties located outside
the United States) were denominated in a non-United States currency.) The
principal terms of any such guaranteed investment contract or other agreement
(any such agreement, a "Cash Flow Agreement"), including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder and
provisions relating to the termination thereof, will be described in the
Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor to the purchase of Assets and to pay for certain
expenses incurred in connection with such purchase of Assets and sale of
Certificates. The Depositor expects to sell the Certificates from time to time,
but the timing and amount of offerings of Certificates will depend on a number
of factors, including the volume of Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate, the receipt
and timing of receipt of distributions on the Certificate and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE
Certificates of any class within a series may have fixed, variable or
adjustable Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Assets in the related Trust Fund. The Prospectus Supplement
with respect to any series of Certificates will specify the Pass-Through Rate
for each class of such Certificates or, in the case of a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Asset on the Pass-Through Rate of one
or more classes of Certificates; and whether the distributions of interest on
the Certificates of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
The effective yield to maturity to each holder of Certificates
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Certificate because,
while interest may accrue on each Asset during a certain period, the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
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Each payment of interest on the Certificates (or addition to the
Certificate Balance of a class of Accrual Certificates) on a Distribution Date
will include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "(YEN)The Pass-Through Rate," if the
Interest Accrual Period ends on a date other than a Distribution Date for the
related series, the yield realized by the holders of such Certificates may be
lower than the yield that would result if the Interest Accrual Period ended on
such Distribution Date. In addition, if so specified in the related Prospectus
Supplement, interest accrued for an Interest Accrual Period for one or more
classes of Certificates may be calculated on the assumption that distributions
of principal (and additions to the Certificate Balance of Accrual Certificates)
and allocations of losses on the Assets may be made on the first day of the
Interest Accrual Period for a Distribution Date and not on such Distribution
Date. Such method would produce a lower effective yield than if interest were
calculated on the basis of the actual principal amount outstanding during an
Interest Accrual Period. The Interest Accrual Period for any class of Offered
Certificates will be described in the related Prospectus Supplement.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate
of principal payments on the Assets (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations). The rate at which principal prepayments occur on the
Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Mortgage Rates on the Mortgage
Loans comprising or underlying the Assets in a particular Trust Fund, such
Mortgage Loans are likely to be the subject of higher principal prepayments
than if prevailing rates remain at or above the rates borne by such Mortgage
Loans. In this regard, it should be noted that certain Assets may consist of
Mortgage Loans with different Mortgage Rates and the stated pass-through or
pay-through interest rate of certain MBS may be a number of percentage points
higher or lower than certain of the underlying Mortgage Loans. The rate of
principal payments on some or all of the classes of Certificates of a series
will correspond to the rate of principal payments on the Assets in the related
Trust Fund and is likely to be affected by the existence of Lock-out Periods
and Prepayment Premium provisions of the Mortgage Loans underlying or
comprising such Assets, and by the extent to which the servicer of any such
Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a Prepayment Premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Certificate offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Certificates, the effect on yield
on one or more classes of the Certificates of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
When a full prepayment is made on a Mortgage Loan, the mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid for
the number of days in the month actually elapsed
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up to the date of the prepayment. Unless otherwise specified in the related
Prospectus Supplement, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Certificates
entitled to payments of interest because interest on the principal amount of
any Mortgage Loan so prepaid will be paid only to the date of prepayment rather
than for a full month. Unless otherwise specified in the related Prospectus
Supplement, a partial prepayment of principal is applied so as to reduce the
outstanding principal balance of the related Mortgage Loan as of the Due Date
in the month in which such partial prepayment is received. As a result, unless
otherwise specified in the related Prospectus Supplement, the effect of a
partial prepayment on a Mortgage Loan will be to reduce the amount of interest
passed through to holders of Certificates in the month following the receipt of
such partial prepayment by an amount equal to one month's interest at the
applicable Pass-Through Rate on the prepaid amount.
The timing of changes in the rate of principal payments on the
Mortgage Assets may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the Mortgage Assets and distributed on a Certificate, the greater
the effect on such investor's yield to maturity. The effect on an investor's
yield of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
PREPAYMENTS(YEN)MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
Certificates may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Certificates of the related series.
If so provided in the Prospectus Supplement for a series of
Certificates, one or more classes of Certificates may have a final scheduled
Distribution Date, which is the date on or prior to which the Certificate
Balance thereof is scheduled to be reduced to zero, calculated on the basis of
the assumptions applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Certificates of a series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Mortgage Assets is
paid to such class, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Certificates may be
affected by the varying maturities of the Mortgage Loans comprising or
underlying the MBS. If any Mortgage Loans comprising or underlying the Assets
in a particular Trust Fund have actual terms to maturity of less than those
assumed in calculating final scheduled Distribution Dates for the classes of
Certificates of the related series, one or more classes of such Certificates
may be fully paid prior to their respective final scheduled Distribution Dates,
even in the absence of prepayments. Accordingly, the prepayment experience of
the Assets will, to some extent, be a function of the mix of Mortgage Rates and
maturities of the Mortgage Loans comprising or underlying such Assets. See
"Description of the Trust Funds."
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Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment
model, each as described below. CPR represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans. A prepayment assumption of 100% of SPA assumes prepayment rates
of 0.2% per annum of the then outstanding principal balance of such loans in
the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Mortgage Loans underlying or comprising the Mortgage Assets.
In general, if interest rates fall below the Mortgage Rates on
fixed-rate Mortgage Loans, the rate of prepayment would be expected to
increase.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Certificates of such series and the
percentage of the initial Certificate Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the
Certificates to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Certificates. It is unlikely that prepayment of
any Mortgage Loans comprising or underlying the Mortgage Assets for any series
will conform to any particular level of CPR, SPA or any other rate specified in
the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Mortgage Loans having balloon payments may
default at maturity. In the case of defaults, recovery of proceeds may be
delayed by, among other things, bankruptcy of the mortgagor or adverse
conditions in the market where the property is located. In order to minimize
losses on defaulted Mortgage Loans, the servicer may, to the extent and under
the circumstances set forth in the related Prospectus Supplement, be permitted
to modify Mortgage Loans that are in default or as to which a payment default
is imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of
the Certificates, thereby lengthening the period of time elapsed from the date
of issuance of a Certificate until it is retired.
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With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the mortgagor under each Mortgage Loan
generally will be qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor to make larger level monthly payments following
the adjustment of the Mortgage Rate. In addition, certain Mortgage Loans may be
subject to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which
the monthly payments made by the mortgagor during the early years of the
Mortgage Loan will be less than the scheduled monthly payments thereon (the
"Buydown Period"). The periodic increase in the amount paid by the mortgagor of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the mortgagor, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as
immediately after origination (initial Mortgage Rates are generally lower than
the sum of the applicable index at origination and the related margin over such
index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Rate. The
addition of any such deferred interest to the principal balance of any related
class or classes of Certificates will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which such Certificates were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of
declining interest rates, it might be expected that each minimum scheduled
monthly payment on such a Mortgage Loan would exceed the amount of scheduled
principal and accrued interest on the principal balance thereof, and since such
excess will be applied to reduce the principal balance of the related class or
classes of Certificates, the weighted average life of such Certificates will be
reduced and may adversely affect yield to holders thereof, depending upon the
price at which such Certificates were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Assets and thus the yield on the
Certificates. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures and the principal amount of the Mortgage
Loans comprising or underlying the Mortgage Assets that are foreclosed in
relation to the number and principal amount of
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Mortgage Loans that are repaid in accordance with their terms will affect the
weighted average life of the Mortgage Loans comprising or underlying the
Mortgage Assets and that of the related series of Certificates.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer
may allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would have
the same effect as a prepayment in full of the related Mortgage Loan. A
Sub-Servicer or the Master Servicer may, from time to time, implement programs
designed to encourage refinancing. Such programs may include, without
limitation, modifications of existing loans, general or targeted solicitations,
the offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. In addition, Sub-Servicers may encourage
the refinancing of Mortgage Loans, including defaulted Mortgage Loans, that
would permit creditworthy borrowers to assume the outstanding indebtedness of
such Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale" clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and
"Description of the Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
Morgan Stanley Capital I Inc., the Depositor, is a direct wholly-owned
subsidiary of Morgan Stanley Group Inc. and was incorporated in the State of
Delaware on January 28, 1985. The principal executive offices of the Depositor
are located at 1585 Broadway, 37th Floor, New York, New York 10036. Its
telephone number is (212) 761-4700.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. Each series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior
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(collectively, "Senior Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more other classes of Certificates in
respect of certain distributions on the Certificates; (iii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions (collectively, "Stripped Principal Certificates"); (iv) be
entitled to interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Stripped Interest Certificates"); (v)
provide for distributions of accrued interest thereon commencing only following
the occurrence of certain events, such as the retirement of one or more other
classes of Certificates of such series (collectively, "Accrual Certificates");
(vi) provide for payments of principal sequentially, based on specified payment
schedules, from only a portion of the Assets in such Trust Fund or based on
specified calculations, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Certificate component and a Stripped Interest Certificate component.
If so specified in the related Prospectus Supplement, distributions on one or
more classes of a series of Certificates may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a "Mortgage Loan Group"). Any such classes may include
classes of Offered Certificates.
Each class of Offered Certificates of a series will be issued in
minimum denominations corresponding to the Certificate Balances or, in case of
Stripped Interest Certificates, notional amounts or percentage interests
specified in the related Prospectus Supplement. The transfer of any Offered
Certificates may be registered and such Certificates may be exchanged without
the payment of any service charge payable in connection with such registration
of transfer or exchange, but the Depositor or the Trustee or any agent thereof
may require payment of a sum sufficient to cover any tax or other governmental
charge. One or more classes of Certificates of a series may be issued in
definitive form ("Definitive Certificates") or in book-entry form ("Book-Entry
Certificates"), as provided in the related Prospectus Supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the Certificates
(YEN)Book-Entry Registration and Definitive Certificates." Definitive
Certificates will be exchangeable for other Certificates of the same class and
series of a like aggregate Certificate Balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity" and "Limited Assets."
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made 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"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class or by random selection, as described in the related Prospectus Supplement
or otherwise established by the related Trustee. Payments will be made either
by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Certificates in the requisite amount specified therein), or
by check mailed to the address of the person entitled thereto as it appears on
the Certificate Register; provided, however, that the
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final distribution in retirement of the Certificates (whether Definitive
Certificates or Book-Entry Certificates) will be made only upon presentation
and surrender of the Certificates at the location specified in the notice to
Certificateholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Certificates of each series on each
Distribution Date will be made from the Available Distribution Amount described
below, in accordance with the terms described in the related Prospectus
Supplement. Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related Certificate
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Due
Period (unless the related Prospectus Supplement provides
otherwise, a "Due Period" with respect to any Distribution
Date will commence on the second day of the month in which
the immediately preceding Distribution Date occurs, or the
day after the Cut-off Date in the case of the first Due
Period, and will end on the first day of the month of the
related Distribution Date),
(b) unless the related Prospectus Supplement provides
otherwise, all prepayments, together with related payments of
the interest thereon and related Prepayment Premiums,
Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Due
Period, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller,
a Sub-Servicer, the Master Servicer or any other entity as
specified in the related Prospectus Supplement or that are
payable in respect of certain expenses of the related Trust
Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to
interest shortfalls resulting from prepayments during the related
Prepayment Period; and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Certificate Account as of the
corresponding Determination Date, any amounts collected under, from or
in respect of any Credit Support with respect to such Distribution
Date.
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As described below, the entire Available Distribution Amount will be
distributed among the related Certificates (including any Certificates not
offered hereby) on each Distribution Date, and accordingly will be released
from the Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on such class or a component thereof (the "Pass-Through Rate"). The
related Prospectus Supplement will specify the Pass-Through Rate for each class
or component or, in the case of a variable or adjustable Pass-Through Rate, the
method for determining the Pass-Through Rate. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
will be made on each Distribution Date (other than any class of Accrual
Certificates, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related Prospectus Supplement, and any class of Stripped Principal
Certificates that are not entitled to any distributions of interest) based on
the Accrued Certificate Interest for such class and such Distribution Date,
subject to the sufficiency of the portion of the Available Distribution Amount
allocable to such class on such Distribution Date. Prior to the time interest
is distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates and each Distribution Date (other than certain classes of
Stripped Interest Certificates), "Accrued Certificate Interest" will be equal
to interest accrued for a specified period on the outstanding Certificate
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate, reduced as described below. Unless otherwise provided in the
Prospectus Supplement, Accrued Certificate Interest on Stripped Interest
Certificates will be equal to interest accrued for a specified period on the
outstanding notional amount thereof immediately prior to each Distribution
Date, at the applicable Pass-Through Rate, reduced as described below. The
method of determining the notional amount for any class of Stripped Interest
Certificates will be described in the related Prospectus Supplement. Reference
to notional amount is solely for convenience in certain calculations and does
not represent the right to receive any distributions of principal. Unless
otherwise provided in the related Prospectus Supplement, the Accrued
Certificate Interest on a series of Certificates will be reduced in the event
of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in such accrual period on the Mortgage Loans comprising or underlying the
Mortgage Assets in the Trust Fund for such series. The particular manner in
which such shortfalls are to be allocated among some or all of the classes of
Certificates of that series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise
be added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including delinquencies, losses
and deferred interest on or in respect of the Mortgage Loans comprising or
underlying the Mortgage Assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on the Mortgage Loans comprising or underlying the Mortgage Assets in the
related Trust Fund will result in a corresponding increase in the Certificate
Balance of such class. See "Risk Factors--Average Life of Certificates;
Prepayments; Yields" and "Yield Considerations."
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DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each series, other than certain classes of
Stripped Interest Certificates, will have a "Certificate Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive in respect of principal out of the future cash flow on the Assets and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon from time to time and, if and to the extent so provided in
the related Prospectus Supplement, by the amount of losses incurred in respect
of the related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Certificates prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Certificate Interest. Unless otherwise
provided in the related Prospectus Supplement, the initial aggregate
Certificate Balance of all classes of Certificates of a series will not be
greater than the outstanding aggregate principal balance of the related Assets
as of the applicable Cut-off Date. The initial aggregate Certificate Balance of
a series and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the class
or classes of Certificates entitled thereto in accordance with the provisions
described in such Prospectus Supplement until the Certificate Balance of such
class has been reduced to zero. Stripped Interest Certificates with no
Certificate Balance are not entitled to any distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a class of Certificates may be based on a combination of two or
more different components as described under "--General" above. To such extent,
the descriptions set forth under "--Distributions of Interests on the
Certificates" and "--Distributions of Principal of the Certificates" above also
relate to components of such a class of Certificates. In such case, reference
in such sections to Certificate Balance and Pass-Through Rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate, if
any, on any such component, respectively.
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment
Premiums that are collected on the Mortgage Assets in the related Trust Fund
will be distributed on each Distribution Date to the class or classes of
Certificates entitled thereto in accordance with the provisions described in
such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of
Certificates consisting of one or more classes of Subordinate Certificates, on
any Distribution Date in respect of which losses or shortfalls in collections
on the Mortgage Assets have been incurred, the amount of such losses or
shortfalls will be borne first by a class of Subordinate Certificates in the
priority and manner and subject to the limitations specified in such Prospectus
Supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a Trust Fund against losses and
shortfalls on Mortgage Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
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With respect to any series of Certificates evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer or another entity described therein will be required as part of
its servicing responsibilities to advance on or before each Distribution Date
its own funds or funds held in the Certificate Account that are not included in
the Available Distribution Amount for such Distribution Date, in an amount
equal to the aggregate of payments of principal (other than any balloon
payments) and interest (net of related servicing fees and Retained Interest)
that were due on the Whole Loans in such Trust Fund during the related Due
Period and were delinquent on the related Determination Date, subject to the
Master Servicer's (or another entity's) good faith determination that such
advances will be reimbursable from Related Proceeds (as defined below). In the
case of a series of Certificates that includes one or more classes of
Subordinate Certificates and if so provided in the related Prospectus
Supplement, the Master Servicer's (or another entity's) advance obligation may
be limited only to the portion of such delinquencies necessary to make the
required distributions on one or more classes of Senior Certificates and/or may
be subject to the Master Servicer's (or another entity's) good faith
determination that such advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more classes of such Subordinate Certificates. See "Description of
Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the Master
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Mortgage Loans (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan, "Related Proceeds") and, if so provided in the Prospectus Supplement, out
of any amounts otherwise distributable on one or more classes of Subordinate
Certificates of such series; provided, however, that any such advance will be
reimbursable from any amounts in the Certificate Account prior to any
distributions being made on the Certificates to the extent that the Master
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related
Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinate Certificates. If advances have been made by
the Master Servicer from excess funds in the Certificate Account, the Master
Servicer is required to replace such funds in the Certificate Account on any
future Distribution Date to the extent that funds in the Certificate Account on
such Distribution Date are less than payments required to be made to
Certificateholders on such date. If so specified in the related Prospectus
Supplement, the obligations of the Master Servicer (or another entity) to make
advances may be secured by a cash advance reserve fund, a surety bond, a letter
of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any such
surety bond, will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer (or another entity) will be entitled to receive interest at
the rate specified therein on its outstanding advances and will be entitled to
pay itself such interest periodically from general collections on the Assets
prior to any payment to Certificateholders or as otherwise provided in the
related Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO CERTIFICATEHOLDERS
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Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Certificates of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Certificates
of such class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of
such class allocable to Accrued Certificate Interest;
(iii) the amount of such distribution allocable to Prepayment Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master Servicer
or the Trustee deems necessary or desirable, or that a Certificateholder
reasonably requests, to enable Certificateholders to prepare their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are delinquent
and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of such
Mortgage Loan and (b) the amount of any loss to Certificateholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
loan number of the related Mortgage Loan and (b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
book value, (b) the principal balance of the related Mortgage Loan immediately
following such Distribution Date (calculated as if such Mortgage Loan were
still outstanding taking into account certain limited modifications to the
terms thereof specified in the Agreement), (c) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect thereof
and (d) if applicable, the aggregate amount of interest accrued and payable on
related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such sales
proceeds payable or reimbursable to the Master Servicer in respect of such REO
Property or the related Mortgage Loan and (c) the amount of any loss to
Certificateholders in respect of the related Mortgage Loan;
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(xii) the aggregate Certificate Balance or notional amount, as the
case may be, of each class of Certificates (including any class of Certificates
not offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance due to the
allocation of any loss and increase in the Certificate Balance of a class of
Accrual Certificates in the event that Accrued Certificate Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Certificate Interest, if any, on
each class of Certificates at the close of business on such Distribution Date;
(xvii) in the case of Certificates with a variable Pass-Through Rate,
the Pass-Through Rate applicable to such Distribution Date, and, if available,
the immediately succeeding Distribution Date, as calculated in accordance with
the method specified in the related Prospectus Supplement;
(xviii) in the case of Certificates with an adjustable Pass-Through
Rate, for statements to be distributed in any month in which an adjustment date
occurs, the adjustable Pass-Through Rate applicable to such Distribution Date
and the immediately succeeding Distribution Date as calculated in accordance
with the method specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the close
of business on such Distribution Date; and
(xx) the aggregate amount of payments by the mortgagors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Certificates or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Certificates. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each series
of Offered Certificates will describe any additional information to be included
in reports to the holders of such Certificates.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Certificate a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates."
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TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Certificate Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan subject thereto and (ii)
the purchase of all of the assets of the Trust Fund by the party entitled to
effect such termination, under the circumstances and in the manner set forth in
the related Prospectus Supplement. In no event, however, will the trust created
by the Agreement continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the Agreement will be given to
each Certificateholder, and the final distribution will be made only upon
presentation and surrender of the Certificates at the location to be specified
in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the reduction of the
Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount, the party specified therein will solicit bids
for the purchase of all assets of the Trust Fund, or of a sufficient portion of
such assets to retire such class or classes or purchase such class or classes
at a price set forth in the related Prospectus Supplement, in each case, under
the circumstances and in the manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be issued as Book-Entry
Certificates, and each such class will be represented by one or more single
Certificates registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating
the need for physical movement of certificates. Participants include Morgan
Stanley & Co. Incorporated, securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, such investors ("Certificate Owners") will receive
all distributions on the Book-Entry Certificates through DTC and its
Participants. Under a book-entry format, Certificate Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to Cede & Co., as nominee for DTC ("Cede"), on each
such date, DTC will forward such
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payments to its Participants which thereafter will be required to forward them
to Indirect Participants or Certificate Owners. Unless otherwise provided in
the related Prospectus Supplement, the only "Certificateholder" (as such term
is used in the Agreement) will be Cede, as nominee of DTC, and the Certificate
Owners will not be recognized by the Trustee as Certificateholders under the
Agreement. Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Agreement only indirectly through the
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit distributions of principal
of and interest on the Book-Entry Certificates. Participants and Indirect
Participants with which Certificate Owners have accounts with respect to the
Book-Entry Certificates similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Certificate
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge its interest in the Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in the Book-Entry Certificates, may be limited due
to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Certificateholder under an Agreement only at the direction of
one or more Participants to whose account with DTC interests in the Book-Entry
Certificates are credited.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued in fully
registered, certificated form to Certificate Owners or their nominees
("Definitive Certificates"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Certificates and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Certificates for the Certificate
Owners. Upon surrender by DTC of the certificate or certificates representing
the Book-Entry Certificates, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled,
and thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
The Certificates of each series evidencing interests in a Trust Fund
including Whole Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, a Master Servicer (or Master Servicers) and the
Trustee. The Certificates of each series evidencing interests in a Trust Fund
not including Whole Loans will be issued pursuant to a Trust Agreement between
the Depositor and a Trustee. Any Master Servicer and the Trustee with respect
to any series of Certificates will be named in the related Prospectus
Supplement. In any series of Certificates for which there are multiple Master
Servicers, there will also be multiple Mortgage Loan Groups, each corresponding
to a particular Master Servicer; and, if the related Prospectus Supplement so
specifies, the servicing obligations of each such
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Master Servicer will be limited to the Whole Loans in such corresponding
Mortgage Loan Group. In lieu of appointing a Master Servicer, a servicer may be
appointed pursuant to the Pooling and Servicing Agreement for any Trust Fund.
Such servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the
related Trust Fund. A form of a Pooling and Servicing Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Any Trust Agreement will generally conform to the form of Pooling and Servicing
Agreement filed herewith, but will not contain provisions with respect to the
servicing and maintenance of Whole Loans. The following summaries describe
certain provisions that may appear in each Agreement. The Prospectus Supplement
for a series of Certificates will describe any provision of the Agreement
relating to such series that materially differs from the description thereof
contained in this Prospectus. The summaries 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 Agreement for each Trust Fund and the description of such
provisions in the related Prospectus Supplement. As used herein with respect to
any series, the term "Certificate" refers to all of the Certificates of that
series, whether or not offered hereby and by the related Prospectus Supplement,
unless the context otherwise requires. The Depositor will provide a copy of the
Agreement (without exhibits) relating to any series of Certificates without
charge upon written request of a holder of a Certificate of such series
addressed to Morgan Stanley Capital I Inc., c/o Morgan Stanley & Co.
Incorporated, 1585 Broadway, New York, New York 10036. Attention: David R.
Warren.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Assets to
be included in the related Trust Fund, together with all principal and interest
to be received on or with respect to such Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than
any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Certificates to the Depositor in exchange for the Assets and the
other assets comprising the Trust Fund for such series. Each Mortgage Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement, such
schedule will include detailed information (i) in respect of each Whole Loan
included in the related Trust Fund, including without limitation, the address
of the related Mortgaged Property and type of such property, the Mortgage Rate
and, if applicable, the applicable index, margin, adjustment date and any rate
cap information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the Value and
Loan-to-Value Ratio as of the date indicated and payment and prepayment
provisions, if applicable, and (ii) in respect of each MBS included in the
related Trust Fund, including without limitation, the MBS Issuer, MBS Servicer
and MBS Trustee, the pass-through or bond rate or formula for determining such
rate, the issue date and original and remaining term to maturity, if
applicable, the original and outstanding principal amount and payment
provisions, if applicable.
With respect to each Whole Loan, the Depositor will deliver or cause
to be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed,
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without recourse, in blank or to the order of the Trustee, the original
Mortgage (or a certified copy thereof) with evidence of recording indicated
thereon and an assignment of the Mortgage to the Trustee in recordable form.
Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans where
the original Mortgage Note is not delivered to the Trustee if the Depositor
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. Unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original Mortgage Note. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require the Depositor
or another party specified therein to promptly cause each such assignment of
Mortgage to be recorded in the appropriate public office for real property
records, except in the State of California or in other states where, in the
opinion of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in the related Whole Loan against the claim of
any subsequent transferee or any successor to or creditor of the Depositor, the
Master Servicer, the relevant Asset Seller or any other prior holder of the
Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Asset Seller. If the Asset Seller cannot cure the omission
or defect within a specified number of days after receipt of such notice, then
unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be obligated, within a specified number of days of receipt of such
notice, to repurchase the related Whole Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that an
Asset Seller will fulfill this repurchase or substitution obligation, and
neither the Master Servicer nor the Depositor will be obligated to repurchase
or substitute for such Mortgage Loan if the Asset Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
related Prospectus Supplement, in lieu of curing any omission or defect in the
Asset or repurchasing or substituting for such Asset, the Asset Seller may
agree to cover any losses suffered by the Trust Fund as a result of such breach
or defect.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of
the Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of a financial intermediary in the name of the Trustee
for the benefit of the Certificateholders. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause any MBS and Government Securities
in certificated form not registered in the name of the Trustee to be
re-registered, with the applicable persons, in the name of the Trustee.
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REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, make or assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the "Warrantying Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information
set forth for such Whole Loan on the schedule of Assets appearing as an exhibit
to the related Agreement; (ii) the existence of title insurance insuring the
lien priority of the Whole Loan; (iii) the authority of the Warrantying Party
to sell the Whole Loan; (iv) the payment status of the Whole Loan and the
status of payments of taxes, assessments and other charges affecting the
related Mortgaged Property; (v) the existence of customary provisions in the
related Mortgage Note and Mortgage to permit realization against the Mortgaged
Property of the benefit of the security of the Mortgage; and (vi) the existence
of hazard and extended perils insurance coverage on the Mortgaged Property.
Any Warrantying Party, if other than the Depositor, shall be an Asset
Seller or an affiliate thereof or such other person acceptable to the Depositor
and shall be identified in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may
have been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warrantying
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made,
the Warrantying Party will have a reimbursement, cure, repurchase or
substitution obligation in connection with a breach of such a representation
and warranty only if the relevant event that causes such breach occurs prior to
such date. Such party would have no such obligations if the relevant event that
causes such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warrantying Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that
materially and adversely affects the value of such Whole Loan or the interests
therein of the Certificateholders. If such Warrantying Party cannot cure such
breach within a specified period following the date on which such party was
notified of such breach, then such Warrantying Party will be obligated to
repurchase such Whole Loan from the Trustee within a specified period from the
date on which the Warrantying Party was notified of such breach, at the
Purchase Price therefor. As to any Whole Loan, unless otherwise specified in
the related Prospectus Supplement, the "Purchase Price" is equal to the sum of
the unpaid principal balance thereof, plus unpaid accrued interest thereon at
the Mortgage Rate from the date as to which interest was last paid to the due
date in the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are reimbursable to the Master Servicer. If so provided
in the Prospectus Supplement for a series, a Warrantying Party, rather than
repurchase a Whole Loan as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Certificates, to cause the removal of such Whole Loan from the Trust Fund and
substitute in its place one or more other Whole Loans, in accordance with the
standards described in the related Prospectus Supplement. If so provided in the
Prospectus Supplement for a series, a Warrantying Party, rather than repurchase
or substitute a Whole Loan as to which a breach
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has occurred, will have the option to reimburse the Trust Fund or the
Certificateholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Warrantying
Party.
Neither the Depositor (except to the extent that it is the Warrantying
Party) nor the Master Servicer will be obligated to purchase or substitute for
a Whole Loan if a Warrantying Party defaults on its obligation to do so, and no
assurance can be given that Warrantying Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warrantying Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of
a specified date, with respect to such Government Securities or MBS, covering
(i) the accuracy of the information set forth therefor on the schedule of
Assets appearing as an exhibit to the related Agreement and (ii) the authority
of the Warrantying Party to sell such Assets. The related Prospectus Supplement
will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests of
the Certificateholders and which continues unremedied for thirty days after the
giving of written notice of such breach to the Master Servicer by the Trustee
or the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of Certificates evidencing not less than 25% of the Voting Rights
(unless otherwise specified in the related Prospectus Supplement), will
constitute an Event of Default under such Pooling and Servicing Agreement. See
"Events of Default" and "Rights Upon Event of Default."
CERTIFICATE ACCOUNT AND OTHER COLLECTION ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Certificate Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Certificateholders have a claim with
respect to the funds in the Certificate Account or a perfected first priority
security interest against any collateral securing such funds that is superior
to the claims of any other depositors or general creditors of the institution
with which the Certificate Account is maintained or (ii) otherwise maintained
with a bank or trust company, and in a manner, satisfactory to the Rating
Agency or Agencies rating any class of Certificates of such series. The
collateral eligible to secure amounts in the Certificate Account is limited to
United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Certificate Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Certificate Account will be paid to a Master Servicer or its designee as
additional servicing compensation. The Certificate Account may be maintained
with an institution that is an affiliate of the Master Servicer, if applicable,
provided
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that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Certificate Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Certificate Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee
or on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing compensation
and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be
maintained in respect of each Mortgaged Property securing a Whole Loan in the
Trust Fund (to the extent such proceeds are not applied to the restoration of
the property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer, subject
to the terms and conditions of the related Mortgage and Mortgage Note)
(collectively, "Insurance Proceeds") and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans in the
Trust Fund, by foreclosure or otherwise ("Liquidation Proceeds"), together with
the net proceeds on a monthly basis with respect to any Mortgaged Properties
acquired for the benefit of Certificateholders by foreclosure or by deed in
lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Certificates as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "Assignment of Assets;
Repurchases" and "Representations and Warranties; Repurchases," all proceeds of
any defaulted Mortgage Loan purchased as described under "Realization Upon
Defaulted Whole Loans," and all proceeds of any Asset purchased as described
under "Description of the Certificates Termination" (also, "Liquidation
Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain
interest shortfalls arising out of the prepayment of Whole Loans in the Trust
Fund as described under "Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses";
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(ix) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments on account
of modification or assumption fees, late payment charges or Prepayment Premiums
on the Mortgage Assets;
(x) all payments required to be deposited in the Certificate
Account with respect to any deductible clause in any blanket insurance policy
described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or
the Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in the
Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Agreement and described in the
related Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise provided in the related Agreement and described in the related
Prospectus Supplement, make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under "Description of the Certificates--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and principal
of the particular Whole Loans with respect to which the advances were made or
out of amounts drawn under any form of Credit Support with respect to such
Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Whole Loans and properties, and net income
collected on the particular properties, with respect to which such fees were
earned or such expenses were incurred or out of amounts drawn under any form of
Credit Support with respect to such Whole Loans and properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii) above
which, in the Master Servicer's good faith judgment, will not be recoverable
from the amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and to
the extent so provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected on other
Assets that is otherwise distributable on one or more classes of Subordinate
Certificates, if any, remain outstanding, and otherwise any outstanding class
of Certificates, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances described
in clause (ii) above and the servicing expenses described in clause (iii) above
while such remain outstanding and unreimbursed;
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(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the extent
described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Certificate Account;
(x) to pay the person entitled thereto any amounts deposited in the
Certificate Account that were identified and applied by the Master Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for the
benefit of Certificateholders by foreclosure or by deed in lieu of foreclosure
or otherwise, such payments to be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Certain Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a defaulted
Whole Loan or a property acquired in respect thereof in connection with the
liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Certificateholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Certificateholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warrantying Party to remedy any breach of
representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Certificate Account in error, including amounts received on any Asset after its
removal from the Trust Fund whether by reason of purchase or substitution as
contemplated by "Assignment of Assets; Repurchase" and "Representations and
Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement and described in the related Prospectus Supplement; and
(xviii) to clear and terminate the Certificate Account at the
termination of the Trust Fund.
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Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related
Prospectus Supplement, the Agreement for any series of Certificates may provide
for the establishment and maintenance of a separate collection account into
which the Master Servicer or any related Sub-Servicer will deposit on a daily
basis the amounts described under "--Deposits" above for one or more series of
Certificates. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Certificate Account by a
time specified in the related Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, any amounts which could be withdrawn from
the Certificate Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Whole Loans
and will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans
and held for its own account, provided such procedures are consistent with (i)
the terms of the related Agreement and any related hazard insurance policy or
instrument of Credit Support included in the related Trust Fund described
herein or under "Description of Credit Support," (ii) applicable law and (iii)
the general servicing standard specified in the related Prospectus Supplement
or, if no such standard is so specified, its normal servicing practices (in
either case, the "Servicing Standard"). In connection therewith, the Master
Servicer will be permitted in its discretion to waive any late payment charge
or penalty interest in respect of a late Whole Loan payment.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to the Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Whole Loans. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be responsible for
filing and settling claims in respect of particular Whole Loans under any
applicable instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of
any Whole Loan in a manner consistent with the Servicing Standard so long as
the modification, waiver or amendment will not (i) affect the amount or timing
of any scheduled payments of principal or interest on the Whole Loan or (ii) in
its judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent and
(ii) in its judgment, such modification, waiver or amendment is reasonably
likely to produce a greater recovery with respect to
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the Whole Loan on a present value basis than would liquidation. The Master
Servicer is required to notify the Trustee in the event of any modification,
waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Certificates is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub- Servicer may be entitled to a Retained Interest in certain Whole Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest, Servicing
Compensation and Payment of Expenses."
REALIZATION UPON DEFAULTED WHOLE LOANS
A mortgagor's failure to make required payments may reflect inadequate
income or the diversion of that income from the service of payments due under
the Mortgage Loan, and may call into question such mortgagor's ability to make
timely payment of taxes and to pay for necessary maintenance of the related
Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer is required to monitor any Whole Loan which is
in default, contact the mortgagor concerning the default, evaluate whether the
causes of the default can be cured over a reasonable period without significant
impairment of the value of the Mortgaged Property, initiate corrective action
in cooperation with the mortgagor if cure is likely, inspect the Mortgaged
Property and take such other actions as are consistent with the Servicing
Standard. A significant period of time may elapse before the Master Servicer is
able to assess the success of such corrective action or the need for additional
initiatives.
The time within which the Master Servicer makes the initial
determination of appropriate action, evaluates the success of corrective
action, develops additional initiatives, institutes foreclosure proceedings and
actually forecloses (or takes a deed to a Mortgaged Property in lieu of
foreclosure) on behalf of the Certificateholders, may vary considerably
depending on the particular Whole Loan, the Mortgaged Property, the mortgagor,
the presence of an acceptable party to assume the Whole Loan and the laws of
the jurisdiction in which the Mortgaged Property is located. Under federal
bankruptcy law, the Master Servicer in certain cases may not be permitted to
accelerate a Whole Loan or to foreclose on a Mortgaged Property for a
considerable period of time. See "Certain Legal Aspects of Mortgage Loans."
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes of
Certificates a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Certificate will be described in the related Prospectus
Supplement. The related Prospectus
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Supplement will also describe any such right granted to any person if the
predetermined purchase price is less than the Purchase Price described under
"Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure or similar proceeding. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified
period and that the Master Servicer accept the highest cash bid received from
any person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Whole Loan.
In the absence of any bid determined in accordance with the related Agreement
to be fair, the Master Servicer shall proceed with respect to such defaulted
Mortgage Loan as described below. Any bid in an amount at least equal to the
Purchase Price described under "Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a Whole Loan by operation of law or otherwise, if
such action is consistent with the Servicing Standard and a default on such
Whole Loan has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year following the year of acquisition, unless (i) the Internal Revenue Service
grants an extension of time to sell such property or (ii) the Trustee receives
an opinion of independent counsel to the effect that the holding of the
property by the Trust Fund beyond the close of the third calendar year
following the year after its acquisition will not result in the imposition of a
tax on the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC
under the Code at any time that any Certificate is outstanding. Subject to the
foregoing, the Master Servicer will be required to (i) solicit bids for any
Mortgaged Property so acquired in such a manner as will be reasonably likely to
realize a fair price for such property and (ii) accept the first (and, if
multiple bids are contemporaneously received, the highest) cash bid received
from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan. If the proceeds of any liquidation of the property securing the
defaulted Whole Loan are less than the outstanding principal balance of the
defaulted Whole Loan plus interest accrued thereon at the Mortgage Rate plus
the aggregate amount of expenses incurred by the Master Servicer in connection
with such proceedings and which are reimbursable under the Agreement, the Trust
Fund will realize a loss in the amount of such difference. The Master Servicer
will be entitled to withdraw or cause to be
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withdrawn from the Certificate Account out of the Liquidation Proceeds
recovered on any defaulted Whole Loan, prior to the distribution of such
Liquidation Proceeds to Certificateholders, amounts representing its normal
servicing compensation on the Whole Loan, unreimbursed servicing expenses
incurred with respect to the Whole Loan and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
the related instrument of Credit Support, if any, the Master Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of
itself, the Trustee and the Certificateholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Certificate Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund that includes Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance
policy. The ability of the Master Servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any hazard insurance policy and under any other
insurance policy referred to below, or upon the extent to which information in
this regard is furnished by mortgagors. All amounts collected by the Master
Servicer under any such 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 Master Servicer's normal servicing procedures, subject to
the terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Certificate Account. The Agreement will provide that the
Master Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Master Servicer's maintaining a blanket
policy insuring against hazard losses on the Whole Loans. If such blanket
policy contains a deductible clause, the Master Servicer will
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be required to deposit in the Certificate Account all sums that would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole 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
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that 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 generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of such improvements.
Each Agreement for a Trust Fund that includes Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property as
is consistent with the terms of the related Mortgage and the Servicing
Standard, which insurance may typically include flood insurance (if the related
Mortgaged Property was located at the time of origination in a federally
designated flood area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by the Master Servicer or Sub-Servicer, as the case may be, from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability
of the Master Servicer to present or cause to be presented such claims is
dependent upon the extent to which information in this regard is furnished to
the Master Servicer by mortgagors.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the
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Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the
officers, employees and agents of the Master Servicer so long as certain
criteria set forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent
of the mortgagee to any sale or other transfer of the related Mortgaged
Property, or due-on-sale clauses entitling the mortgagee to accelerate payment
of the Whole Loan upon any sale, transfer or conveyance of the related
Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will generally enforce any due-on-sale clause
to the extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would adversely
affect or jeopardize coverage under any applicable insurance policy. Unless
otherwise specified in the related Prospectus Supplement, any fee collected by
or on behalf of the Master Servicer for entering into an assumption agreement
will be retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of Mortgage Loans Due-on-Sale and
Due-on-Encumbrance."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Certificates will come from the periodic payment to it
of a portion of the interest payment on each Asset. Since any Retained Interest
and a Master Servicer's primary compensation are percentages of the principal
balance of each Asset, such amounts will decrease in accordance with the
amortization of the Assets. The Prospectus Supplement with respect to a series
of Certificates evidencing interests in a Trust Fund that includes Whole Loans
may provide that, as additional compensation, the Master Servicer or the
Sub-Servicers may retain all or a portion of assumption fees, modification
fees, late payment charges or Prepayment Premiums collected from mortgagors and
any interest or other income which may be earned on funds held in the
Certificate Account or any account established by a Sub-Servicer pursuant to
the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Certificateholders, and payment of any other
expenses described in the related Prospectus Supplement. Certain other
expenses, including certain expenses relating to defaults and liquidations on
the Whole Loans and, to the extent so provided in the related Prospectus
Supplement, interest thereon at the rate specified therein may be borne by the
Trust Fund.
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If and to the extent provided in the related Prospectus Supplement,
the Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole Loans
in the related Trust Fund during such period prior to their respective due
dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will
provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for the
Federal Home Loan Mortgage Corporation ("FHLMC"), the servicing by or on behalf
of the Master Servicer of mortgage loans under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with the terms of such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
either the Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of
the Uniform Single Attestation Program for Mortgage Bankers, requires it to
report. In rendering its statement such firm may rely, as to matters relating
to the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC (rendered within one year of such statement)
of firms of independent public accountants with respect to the related
Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on
or before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of such annual accountants' statement and such statements of officers will be
obtainable by Certificateholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the
Master Servicer shall be deemed to be to the servicer of substantially all of
the Whole Loans, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a
conflict being of a type and nature carried on by the Master Servicer at the
date of the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
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Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be protected
against any breach of a representation, warranty or covenant made in such
Agreement, or against any liability specifically imposed thereby, or against
any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Unless otherwise specified in the related Prospectus Supplement,
each Agreement will further provide that any Master Servicer, the Depositor and
any director, officer, employee or agent of a Master Servicer or the Depositor
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates; provided, however,
that such indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to such Agreement); (ii)
incurred in connection with any breach of a representation, warranty or
covenant made in such Agreement; (iii) incurred by reason of misfeasance, bad
faith or gross negligence in the performance of obligations or duties
thereunder, or by reason of reckless disregard of such obligations or duties;
(iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
related Agreement. In addition, each Agreement will provide that neither any
Master Servicer nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. Any such Master Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the 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
Certificateholders, and the Master Servicer or the Depositor, as the case may
be, will be entitled to be reimbursed therefor and to charge the Certificate
Account.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or
consolidation to which the Master Servicer or the Depositor is a party, or any
person succeeding to the business of the Master Servicer or the Depositor, will
be the successor of the Master Servicer or the Depositor, as the case may be,
under the related Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the related Prospectus Supplement for a
Trust Fund that includes Whole Loans, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Certificateholders, or to remit to the Trustee for
distribution to Certificateholders, any required payment; (ii) any failure by
the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for thirty days after written notice of such failure has been given
to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights; (iii) any breach of a
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representation or warranty made by the Master Servicer under the Agreement
which materially and adversely affects the interests of Certificateholders and
which continues unremedied for thirty days after written notice of such breach
has been given to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by or on behalf of the
Master Servicer indicating its insolvency or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by
mail to the Depositor and all Certificateholders of the applicable series
notice of such occurrence, unless such default shall have been cured or waived.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Certificates evidencing not less than 51% of the Voting Rights, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement and in and to the Mortgage Loans (other than as a
Certificateholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding delinquent
mortgage loans, or if the related Prospectus Supplement so specifies, then the
Trustee will not be obligated to make such advances) and will be entitled to
similar compensation arrangements. Unless otherwise specified in the related
Prospectus Supplement, in the event that the Trustee is unwilling or unable so
to act, it may or, at the written request of the holders of Certificates
entitled to at least 51% of the Voting Rights, it shall appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the Rating Agency with a net worth at the time of
such appointment of at least $15,000,000 to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and any such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Certificates representing at least 66 2/3% of the Voting Rights
allocated to the respective classes of Certificates affected by any Event of
Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Certificateholders described in clause (i) under "Events of Default" may be
waived only by all of the Certificateholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Certificateholder will have the right under any Agreement to
institute any proceeding with respect thereto unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Rights 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 sixty days has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of the
trusts or powers
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vested in it by any Agreement 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 holders of
Certificates covered by such Agreement, 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
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Certificates covered by the Agreement, (i) to
cure any ambiguity, (ii) to correct, modify or supplement any provision therein
which may be inconsistent with any other provision therein, (iii) to make any
other provisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, or (iv) to
comply with any requirements imposed by the Code; provided that such amendment
(other than an amendment for the purpose specified in clause (iv) above) will
not (as evidenced by an opinion of counsel to such effect) adversely affect in
any material respect the interests of any holder of Certificates covered by the
Agreement. Unless otherwise specified in the related Prospectus Supplement,
each Agreement may also be amended by the Depositor, the Master Servicer, if
any, and the Trustee, with the consent of the holders of Certificates affected
thereby evidencing not less than 51% of the Voting Rights, for any purpose;
provided, however, that unless otherwise specified in the related Prospectus
Supplement, no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received or advanced on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the holder
of such Certificate, (ii) adversely affect in any material respect the
interests of the holders of any class of Certificates in a manner other than as
described in (i), without the consent of the holders of all Certificates of
such class or (iii) modify the provisions of such Agreement described in this
paragraph without the consent of the holders of all Certificates covered by
such Agreement then outstanding. However, with respect to any series of
Certificates as to which a REMIC election is to be made, the Trustee will not
consent to any amendment of the Agreement unless it shall first have received
an opinion of counsel to the effect that such amendment will not result in the
imposition of a tax on the related Trust Fund or cause the related Trust Fund
to fail to qualify as a REMIC at any time that the related Certificates are
outstanding.
THE TRUSTEE
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with the Depositor and its affiliates and with any Master Servicer
and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Certificates or any Asset or related document
and is not accountable for the use or application by or on behalf of any Master
Servicer of any funds paid to the Master Servicer or its designee in respect of
the Certificates or the Assets, or deposited into or withdrawn from the
Certificate Account or any other account by or on behalf of the Master
Servicer. If no Event of Default has occurred and is continuing, the Trustee is
required to perform only those duties specifically required under the related
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to
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it, the Trustee is required to examine such documents and to determine whether
they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Certificate Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, and enforcing the rights and remedies, of the
Certificateholders during the continuance of an Event of Default, (ii)
defending or prosecuting any legal action in respect of the related Agreement
or series of Certificates, (iii) being the mortgagee of record with respect to
the Mortgage Loans in a Trust Fund and the owner of record with respect to any
Mortgaged Property acquired in respect thereof for the benefit of
Certificateholders, or (iv) acting or refraining from acting in good faith at
the direction of the holders of the related series of Certificates entitled to
not less than 25% (or such higher percentage as is specified in the related
Agreement with respect to any particular matter) of the Voting Rights for such
series; provided, however, that such indemnification will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Master Servicer, if any, and all Certificateholders. Upon receiving such notice
of resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition
any court of competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Depositor
may remove the Trustee and appoint a successor trustee acceptable to the Master
Servicer, if any. Holders of the Certificates of any series entitled to at
least 51% of the Voting Rights for such series may at any time remove the
Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
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For any series of Certificates, Credit Support may be provided with
respect to one or more classes thereof or the related Assets. Credit Support
may be in the form of the subordination of one or more classes of Certificates,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or another method of Credit Support described in the related
Prospectus Supplement, or any combination of the foregoing. If so provided in
the related Prospectus Supplement, any form of Credit Support may be structured
so as to be drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Certificate
Balance of the Certificates and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Certificateholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one series
of Certificates (each, a "Covered Trust"), holders of Certificates evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such
Credit Support may be terminated or replaced and (d) the material provisions
relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor under
any instrument of Credit Support, including (i) a brief description of its
principal business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to
do business, (iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' or policyholders' surplus, if applicable,
as of the date specified in the Prospectus Supplement. See "Risk
Factors--Credit Support Limitations."
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Certificates to receive distributions of principal and
interest from the Certificate Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Certificates. If so
provided in the related Prospectus Supplement, the subordination of a class may
apply only in the event of (or may be limited to) certain types of losses or
shortfalls. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Certificates in a series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of subordination will be
effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Certificates of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Certificates evidencing interests in one group
of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage
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Assets within the Trust Fund. The Prospectus Supplement for a series that
includes a cross-support provision will describe the manner and conditions for
applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a series of
Certificates, the Whole Loans in the related Trust Fund will be covered for
various default risks by insurance policies or guarantees. A copy of any such
material instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified in
the related Prospectus Supplement, the letter of credit may permit draws in the
event of only certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Certificates will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund. A copy of any such letter of credit for a series will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Certificates of the related series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or
determined in the manner specified in the related Prospectus Supplement. A copy
of any such instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Assets as specified in the related Prospectus Supplement.
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Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the
related Prospectus Supplement, reserve funds may be established to provide
limited protection against only certain types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained therein may be released from the reserve fund
under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application to the
Certificates.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited to
the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund may
be applied to make distributions to Certificateholders and use of investment
earnings from the Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of
Certificates, the MBS in the related Trust Fund and/or the Mortgage Loans
underlying such MBS may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify as to
each such form of Credit Support the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal aspects of loans secured by single-family residential
properties. Because such legal aspects are governed primarily by applicable
state law (which laws may differ substantially), the summaries do not purport
to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans
is situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See
"Description of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest
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in, the subject property, the priority of which will depend on the terms of the
particular security instrument, as well as separate, recorded, contractual
arrangements with others holding interests in the mortgaged property, the
knowledge of the parties to such instrument as well as the order of recordation
of the instrument in the appropriate public recording office. However,
recording does not generally establish priority over governmental claims for
real estate taxes and assessments and other charges imposed under governmental
police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties(YEN)a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a deed
to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by
the related mortgage note. In case the mortgagor under a mortgage is a land
trust, there would be an additional party because legal title to the property
is held by a land trustee under a land trust agreement for the benefit of the
mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage
note. The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the mortgage, the law of the state in
which the real property is located, certain federal laws (including, without
limitation, the Soldiers' and Sailors' Civil Relief Act of 1940) and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Offered Certificate, the Mortgage Loans may also consist of cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by a cooperative housing corporation (a "Cooperative") and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling
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units in the cooperatives' buildings. The security agreement will create a lien
upon, or grant a title interest in, the property which it covers, the priority
of which will depend on the terms of the particular security agreement as well
as the order of recordation of the agreement in the appropriate recording
office. Such a lien or title interest is not prior to the lien for real estate
taxes and assessments and other charges imposed under governmental police
powers.
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 a blanket mortgage
or mortgages on the cooperative apartment 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 property mortgagor, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the cooperative's apartment building or
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 a blanket
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 a blanket mortgage,
the mortgagee holding a blanket 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. Also, a blanket 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 cooperatives' interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured by
an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related cooperative shares.
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 promissory 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--Cooperatives" below.
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FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of 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 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 mortgage is not
monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford constitutional
protections to the mortgagor.
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Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration) plus the expenses incurred in
enforcing the obligation. In other states, the mortgagor or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and
vary among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of
trust, except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to
secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make 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. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its
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foreclosure. Accordingly, with respect to those Mortgage Loans, if any, that
are junior mortgage loans, if the lender purchases the property the lender's
title will be subject to all senior mortgages, prior liens and certain
governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
REO Properties
If title to any Mortgaged Property is acquired by the Trustee on
behalf of the Certificateholders, the Master Servicer or any related
Sub-servicer or the Special Servicer, on behalf of such holders, will be
required to sell the Mortgaged Property by the close of the third calendar year
following the year of acquisition, unless (i) the Internal Revenue Service
grants an extension of time to sell such property (an "REO Extension") or (ii)
it obtains an opinion of counsel generally to the effect that the holding of
the property beyond the close of the third calendar year after its acquisition
will not result in the imposition of a tax on the Trust Fund or cause any REMIC
created pursuant to the Pooling and Servicing Agreement to fail to qualify as a
REMIC under the Code. Subject to the foregoing, the Master Servicer or any
related Sub-servicer or the Special Servicer will generally be required to
solicit bids for any Mortgaged Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property. The Master
Servicer or any related Sub-servicer or the Special Servicer may retain an
independent contractor to operate and manage any REO Property; however, the
retention of an independent contractor will not relieve the Master Servicer or
any related Sub-servicer or the Special Servicer of its obligations with
respect to such REO Property.
In general, the Master Servicer or any related Sub-servicer or the
Special Servicer or an independent contractor employed by the Master Servicer
or any related Sub-servicer or the Special Servicer at the expense of the Trust
Fund will be obligated to operate and manage any Mortgaged Property acquired as
REO Property in a manner that would, to the extent commercially feasible,
maximize the Trust Fund's net after-tax proceeds from such property. After the
Master Servicer or any related Sub-servicer or the Special Servicer reviews the
operation of such property and consults with the Trustee to determine the Trust
Fund's federal income tax reporting position with respect to the income it is
anticipated that the Trust Fund would derive from such property, the Master
Servicer or any related Sub-servicer or the Special Servicer could determine
(particularly in the case of an REO Property that is a hospitality or
residential health care facility) that it would not be commercially feasible to
manage and operate such property in a manner that would avoid the imposition of
a tax on "net income from foreclosure property," within the meaning of Section
857(b)(4)(B) of the Code or a tax on "prohibited transactions" under Section
860F of the Code (either such tax referred to herein as an "REO Tax"). To the
extent that income the Trust Fund receives from an REO Property is subject to a
tax on (i) "net income from foreclosure property" such income would be subject
to federal income tax at the highest marginal corporate tax rate (currently
35%) or (ii) "prohibited transactions," such income would be subject to federal
income tax at a 100% rate. The determination as to whether income from an REO
Property would be subject to an REO Tax will depend on the specific facts and
circumstances relating to the management and operation of each REO Property.
Generally, income from an REO Property that is
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directly operated by the Master Servicer or any related Sub-servicer or the
Special Servicer would be apportioned and classified as "service" or
"non-service" income. The "service" portion of such income could be subject to
federal income tax either at the highest marginal corporate tax rate or at the
100% rate on "prohibited transactions," and the "non-service" portion of such
income could be subject to federal income tax at the highest marginal corporate
tax rate or, although it appears unlikely, at the 100% rate applicable to
"prohibited transactions." Any REO Tax imposed on the Trust Fund's income from
an REO Property would reduce the amount available for distribution to
Certificateholders. Certificateholders are advised to consult their tax
advisors regarding the possible imposition of REO Taxes in connection with the
operation of commercial REO Properties by REMICs. See "Certain Federal Income
Tax Consequences" herein and "Certain Federal Income Tax Consequences-REMICs"
in the Prospectus.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying
the entire debt with interest. In addition, in some states, when a foreclosure
action has been commenced, the redeeming party must pay certain costs of such
action. Those having an equity of redemption must generally be made parties and
joined in the foreclosure proceeding in order for their equity of redemption to
be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held beyond the close of the third calendar
year following the year of acquisition. Unless otherwise provided in the
related Prospectus Supplement, with respect to a series of Certificates for
which an election is made to qualify the Trust Fund or a part thereof as a
REMIC, the Agreement will permit foreclosed property to be held beyond the
close of the third calendar year following the year of acquisition if the
Internal Revenue Service grants an extension of time within which to sell such
property or independent counsel renders an opinion to the effect that holding
such property for such additional period is permissible under the REMIC
Provisions.
Cooperative Loans
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The cooperative shares owned by the tenant-stockholder and pledged to
the lender 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
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of 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 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 the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such 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 value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of 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
foreclosure 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 foreclosure. Generally, a sale conducted according to
the usual practice of banks 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 Cooperatives 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.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building was so converted.
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JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are subordinate to first mortgages or deeds of trust held by
other lenders. The rights of the Trust Fund as the holder of a junior deed of
trust or a junior mortgage are subordinate in lien and in payment to those of
the holder of the senior mortgage or deed of trust, including the prior rights
of the senior mortgagee or beneficiary to receive and apply hazard insurance
and condemnation proceeds and, upon default of the mortgagor, to cause a
foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust,
the junior mortgagee's or junior beneficiary's lien will be extinguished unless
the junior lienholder satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. See
"(YEN)Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust
and the junior mortgage or deed of trust, the terms of the first mortgage or
deed of trust will generally govern. Upon a failure of the mortgagor or trustor
to perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment
against the mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former mortgagor
equal to the difference between the net amount realized upon the public sale of
the real property and the amount due to the lender. Some states require the
lender to exhaust the security afforded under a mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
mortgagor. In certain other states, the lender has the option of bringing a
personal action against the mortgagor on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. In some cases,
a lender will be precluded from exercising any additional rights under the note
or mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the mortgagor. 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 purpose of
these statutes is generally 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.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state 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 realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a
debtor through his or her Chapter 11 or Chapter 13
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rehabilitative plan to cure a monetary default in respect of a mortgage loan on
a debtor'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 final judgment of foreclosure had been
entered in state court (provided no sale of the residence had yet 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 indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
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.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale 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 conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on
property that is the subject of a cleanup action by the state on account of
hazardous wastes or hazardous substances released or disposed of on the
property. Such a lien will generally have priority over all subsequent liens on
the property and, in certain of these states, will have priority over prior
recorded liens including the lien of a mortgage. In addition, under federal
environmental legislation and under state law in a number of states, a secured
party that takes a deed in lieu of foreclosure or acquires a mortgaged property
at a foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Certificates might
realize a loss if such costs were required to be paid by the Trust Fund.
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DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the
Mortgage Loans will contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the
mortgagor sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, with respect to certain loans the
Garn-St Germain Depository Institutions Act of 1982 preempts state
constitutional, 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. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
such clauses. Similarly, "due-on-sale" clauses in mortgage loans made by
national banks and federal credit unions are now fully enforceable pursuant to
preemptive regulations of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
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 intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause. The inability to enforce a "due-on-sale"
clause may result in a mortgage that bears an interest rate below the current
market rate being assumed by a new home buyer rather than being paid off, which
may affect the average life of the Mortgage Loans and the number of Mortgage
Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after
a certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. Since many of the Mortgaged Properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Mortgage Loans having
higher Mortgage Rates, may increase the likelihood of refinancing or other
early retirement of such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
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and/or any junior loan or loans, the existence of junior loans and actions
taken by junior lenders can impair the security available to the senior lender
and can interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
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 Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Certain states have taken action to reimpose interest rate
limits and/or to limit discount points or other charges.
The Depositor has been advised by counsel that a court interpreting
Title V would hold that residential first mortgage loans that are originated on
or after January 1, 1980 are subject to federal preemption. Therefore, in a
state that has not taken the requisite action to reject application of Title V
or to adopt a provision limiting discount points or other charges prior to
origination of such mortgage loans, any such limitation under such state's
usury law would not apply to such mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no mortgage loan originated after the date of such state action will be
eligible for inclusion in a Trust Fund unless (i) such mortgage loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such mortgage loan provides that the terms thereof shall be
construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
mortgagor's counsel has rendered an opinion that such choice of law provision
would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the mortgagor may cancel the recorded mortgage or deed
of trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in the
invalidation of the transaction, thereby permitting the mortgagor to cancel the
recorded mortgage or deed of trust without any payment or prohibiting the
lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject 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
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instruments in accordance with regulations promulgated by the Comptroller of
the Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative
mortgage instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with
the regulations promulgated by the Federal Home Loan Bank Board, predecessor to
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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
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 was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) 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. The Relief Act
applies to mortgagors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of any servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfalls in interest collections
resulting from the application of the Relief Act would result in a reduction of
the amounts distributable to the holders of the related series of Certificates,
and would not be covered by advances or, unless otherwise specified in the
related Prospectus Supplement, any form of Credit Support provided in
connection with such Certificates. In addition, the Relief Act imposes
limitations that would impair the ability of the servicer to foreclose on an
affected Mortgage Loan during the mortgagor's period of active duty status,
and, under certain circumstances, during an additional three month period
thereafter. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction.
The government must publish notice of the forfeiture proceeding and may give
notice to all parties "known to have an alleged interest in the property,"
including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the
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lender was, at the time of execution of the mortgage, "reasonably without cause
to believe" that the property was used in, or purchased with the proceeds of,
illegal drug or RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood LLP, Cadwalader, Wickersham & Taft, or
Latham & Watkins counsel to the Depositor. This summary is based on laws,
regulations, including the REMIC regulations promulgated by the Treasury
Department (the "REMIC Regulations"), rulings and decisions now in effect or
(with respect to regulations) proposed, all of which are subject to change
either prospectively or retroactively. This summary does not address the
federal income tax consequences of an investment in Certificates applicable to
all categories of investors, some of which (for example, banks and insurance
companies) may be subject to special rules. Prospective investors should
consult their tax advisors regarding the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Certificates as a REMIC under the Code. The Prospectus
Supplement for each Series of Certificates will specify whether a REMIC
election will be made.
GRANTOR TRUST FUNDS
If a REMIC election is not made, Brown & Wood LLP or Cadwalader,
Wickersham & Taft or Latham & Watkins will deliver its opinion that the Trust
Fund will not be classified as an association taxable as a corporation and that
each such Trust Fund will be classified as a grantor trust under subpart E,
Part I of subchapter J of Chapter 1 of Subtitle A of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as
owners of a portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162
or 212 each Grantor Trust Certificateholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late
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payment charges retained by the Master Servicer, provided that such amounts are
reasonable compensation for services rendered to the Trust Fund. Grantor Trust
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses as itemized deductions only to the extent such
expenses plus all other Code Section 212 expenses exceed two percent of its
adjusted gross income. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount under Code Section 68(b) (which amount will be
adjusted for inflation) will be reduced by the lesser of (i) 3% of the excess
of adjusted gross income over the applicable amount and (ii) 80% of the amount
of itemized deductions otherwise allowable for such taxable year. In general, a
Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income and deductions as and when collected
by or paid to the Master Servicer or, with respect to original issue discount
or certain other income items for which the Certificateholder has made an
election, as such amounts are accrued by the Trust Fund on a constant interest
basis, and will be entitled to claim its pro rata share of deductions (subject
to the foregoing limitations) when such amounts are paid or such
Certificateholder would otherwise be entitled to claim such deductions had it
held the Mortgage Assets directly. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of
income as payment becomes due or is paid to the Master Servicer, whichever is
earlier, and may deduct its pro rata share of expense items (subject to the
foregoing limitations) when such amounts are paid or such Certificateholder
otherwise would be entitled to claim such deductions had it held the Mortgage
Assets directly. If the servicing fees paid to the Master Servicer are deemed
to exceed reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement or
otherwise provided below, as to each Series of Certificates counsel to the
Depositor will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building
and loan association" within the meaning of Code Section
7701(a)(19) representing principal and interest payments on
Mortgage Assets will be considered to represent "loans . . .
secured by an interest in real property which is . . .
residential property" within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type
described in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate
investment trust representing an interest in Mortgage Assets
will be considered to represent "real estate assets" within
the meaning of Code Section 856(c)(4)(A), and interest income
on the Mortgage Assets will be considered "interest on
obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), to the extent that the
Mortgage Assets represented by that Grantor Trust Certificate
are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will
represent "obligation[s] ... which [are] principally secured
by an interest in real property" within the meaning of Code
Section 860G(a)(3).
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The Small Business Job Protection Act of 1996, as part of the repeal
of the bad debt reserve method for thrift institutions, repealed the
application of Code Section 593(d) to any taxable year beginning after December
31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities that constitute "stripped bonds" or "stripped coupons" as
those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under
these rules, such Government Securities are treated as having original issue
discount based on the purchase price and the stated redemption price at
maturity of each Security. As such, Grantor Trust Certificateholders would be
required to include in income their pro rata share of the original issue
discount on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the Grantor
Trust Certificateholder in any taxable year may exceed amounts actually
received during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such
holder's undivided interest in each Mortgage Asset will have its own tax basis.
A Grantor Trust Certificateholder that acquires an interest in Mortgage Assets
at a premium may elect to amortize such premium under a constant interest
method, provided that the underlying mortgage loans with respect to such
Mortgage Assets were originated after September 27, 1985. Premium allocable to
mortgage loans originated on or before September 27, 1985 should be allocated
among the principal payments on such mortgage loans and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Grantor Trust Certificate. The
basis for such Grantor Trust Certificate will be reduced to the extent that
amortizable premium is applied to offset interest payments. It is not clear
whether a reasonable prepayment assumption should be used in computing
amortization of premium allowable under Code Section 171. A Certificateholder
that makes this election for a Certificate that is acquired at a premium will
be deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Certificateholder
acquires during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Mortgage Loan (or an underlying mortgage
loan with respect to a Mortgage Asset) prepays in full, equal to the difference
between the portion of the prepaid principal amount of such Mortgage Loan (or
underlying mortgage loan) that is allocable to the Certificate and the portion
of the adjusted basis of the Certificate that is allocable to such Mortgage
Loan (or underlying mortgage loan). If a reasonable prepayment assumption is
used to amortize such premium, it appears that such a loss would be available,
if at all, only if
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prepayments have occurred at a rate faster than the reasonable assumed
prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On December 30, 1997, the Internal Revenue Service (the
"IRS") issued final regulations (the "Amortizable Bond Premium Regulations")
dealing with amortizable bond premium. These regulations, which generally are
effective for bonds issued or acquired on or after March 2, 1998 (or, for
holders making an election for the taxable year that includes March 2, 1998 or
any subsequent taxable year, shall apply to bonds held on or after the first
day of the taxable year of the election). The Amortizable Bond Premium
Regulations specifically do not apply to prepayable debt instruments or any
pool of debt instruments the yield on which may be affected by prepayments,
such as the Trust Fund, which are subject to Section 1272(a)(6) of the Code.
Absent further guidance from the IRS and unless otherwise specified in the
related Prospectus Supplement, the Trustee will account for amortizable bond
premium in the manner described above. Prospective purchasers should consult
their tax advisors regarding amortizable bond premium and the Amortizable Bond
Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
under such Sections (the "OID Regulations"), will be applicable to a Grantor
Trust Certificateholder's interest in those Mortgage Assets meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of OID income are applicable to mortgages of corporations originated
after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such OID could arise by the financing of points
or other charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable Code provisions or are not for services provided by
the lender. OID generally must be reported as ordinary gross income as it
accrues under a constant interest method. See "--Multiple Classes of Grantor
Trust Certificates--Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than
0.25% of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
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The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following methods.
If a Grantor Trust Certificate is issued with OID, the amount of market
discount that accrues during any accrual period would be equal to the product
of (i) the total remaining market discount and (ii) a fraction, the numerator
of which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the accrual period. For Grantor
Trust Certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (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 accrual period. For purposes of calculating market discount under any of
the above methods in the case of instruments (such as the Grantor Trust
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor
Trust Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
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 Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. 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.
Election to Treat All Interest as OID. 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 for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount 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 will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "Premium" herein. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Certificate is irrevocable.
Anti-abuse Rule. The IRS can apply or depart from the rules contained
in the OID Regulations as necessary or appropriate to achieve a reasonable
result where a principal purpose in structuring a Mortgage Asset, Mortgage Loan
or Grantor Trust Certificate or the effect of applying the otherwise applicable
rules is to achieve a result that is unreasonable in light of the purposes of
the applicable statutes (which generally are intended to achieve the clear
reflection of income for both issuers and holders of debt instruments).
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B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of Code
Sections 1271 through 1288, Code Section 1286 treats a stripped bond or a
stripped coupon as an obligation issued on the date that such stripped interest
is created. If a Trust Fund is created with two classes of Grantor Trust
Certificates, one class of Grantor Trust Certificates may represent the right
to principal and interest, or principal only, on all or a portion of the
Mortgage Assets (the "Stripped Bond Certificates"), while the second class of
Grantor Trust Certificates may represent the right to some or all of the
interest on such portion (the "Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Mortgage
Asset principal balance) or the Certificates are initially sold with a de
minimis discount (assuming no prepayment assumption is required), any non-de
minimis discount arising from a subsequent transfer of the Certificates should
be treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Mortgage Asset by Mortgage Asset basis, which
could result in some Mortgage Assets being treated as having more than 100
basis points of interest stripped off. See "--Non-REMIC Certificates" and
"Multiple Classes of Grantor Trust Certificates--Stripped Bonds and Stripped
Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either (i) the amount of
OID with respect to the Mortgage Assets is treated as zero under the OID de
minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable
servicing fees) is stripped off of the Trust Fund's Mortgage Assets. Pursuant
to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of Stripped
Bond Certificates using an inconsistent method of accounting must change their
method of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return
filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each Mortgage Asset. Unless
otherwise specified in the related Prospectus Supplement, all payments from a
Mortgage Asset underlying a Stripped Coupon Certificate will be treated as a
single installment obligation subject to the OID rules of the Code, in which
case, all payments from such Mortgage Asset would be included in the Mortgage
Asset's stated redemption price at maturity for purposes of calculating income
on such Certificate under the OID rules of the Code.
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It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Grantor Trust Certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However,
if such Certificate is treated as an interest in discrete Mortgage Assets, or
if no prepayment assumption is used, then when a Mortgage Asset is prepaid, the
holder of such Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of such Certificate that is allocable to
such Mortgage Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped
obligation as a separate obligation for purposes of the Code provisions
addressing OID, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from doubt,
each class of Grantor Trust Certificates, unless otherwise specified in the
related Prospectus Supplement, should be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A) and "loans . . .
secured by, an interest in real property which is . . . residential real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
income attributable to Grantor Trust Certificates should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Assets and interest on such Mortgage Assets qualify for
such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be "obligation[s] ... which [are]
principally secured, by an interest in real property" within the meaning of
Code Section 860G(a)(3)(A).
2. Grantor Trust Certificates Representing Interests in Loans Other
Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to a Certificateholder's interest in those Mortgage Assets
as to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Under the OID Regulations, such original issue discount could arise by the
charging of points by the originator of the mortgage in an amount greater than
the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage
Assets. OID on each Grantor Trust Certificate must be included in the owner's
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
amount of OID required to be included in an owner's income in any taxable year
with respect to a
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Grantor Trust Certificate representing an interest in Mortgage Assets other
than Mortgage Assets with interest rates that adjust periodically ("ARM Loans")
likely will be computed as described below under "--Accrual of Original Issue
Discount." The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID Regulations
nor the OID Regulations adequately address certain issues relevant to
prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described below
under "--Accrual of Original Issue Discount," will, unless otherwise specified
in the related Prospectus Supplement, utilize the original yield to maturity of
the Grantor Trust Certificate calculated based on a reasonable assumed
prepayment rate for the mortgage loans underlying the Grantor Trust
Certificates (the "Prepayment Assumption") on the issue date of such Grantor
Trust Certificate, and will take into account events that occur during the
calculation period. The Prepayment Assumption will be determined in the manner
prescribed by regulations that have not yet been issued. In the absence of such
regulations, the Prepayment Assumption used will be the prepayment assumption
that is used in determining the offering price of such Certificate. No
representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the
Code literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent.
However, no other legal authority provides guidance with regard to the proper
method for accruing OID on obligations that are subject to prepayment, and,
until further guidance is issued, the Master Servicer intends to calculate and
report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding
the date of disposition. In the case of an original owner, the daily portions
of OID with respect to each component generally will be determined as set forth
under the OID Regulations. A calculation will be made by the Master Servicer or
such other entity specified in the related Prospectus Supplement of the portion
of OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
stated
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redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of
a Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received. However,
the amount of original issue discount includible in the income of a holder of
an obligation is reduced when the obligation is acquired after its initial
issuance at a price greater than the sum of the original issue price and the
previously accrued original issue discount, less prior payments of principal.
Accordingly, if such Mortgage Assets acquired by a Certificateholder are
purchased at a price equal to the then unpaid principal amount of such Mortgage
Asset, no original issue discount attributable to the difference between the
issue price and the original principal amount of such Mortgage Asset (i.e.
points) will be includible by such holder. Other original issue discount on the
Mortgage Assets (e.g., that arising from a "teaser" rate) would still need to
be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion
of income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the
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Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Code Section 1221, and will generally be
long-term capital gain if the Grantor Trust Certificate has been owned for more
than one year.
Long-term capital gains of individuals are subject to reduced maximum
tax rates while capital gains recognized by individuals on capital assets held
less than twelve months are generally subject to ordinary income tax rates. The
use of capital losses is limited.
It is possible that capital gain realized by holders of one or more
classes of Grantor Trust Certificates could be considered gain realized upon
the disposition of property that was part of a "conversion transaction." A sale
of a Grantor Trust Certificate will be part of a conversion transaction if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and (i) the holder entered the contract
to sell the Grantor Trust Certificate substantially contemporaneously with
acquiring the Grantor Trust Certificate, (ii) the Grantor Trust Certificate is
part of a straddle, (iii) the Grantor Trust Certificate is marketed or sold as
producing capital gain, or (iv) other transactions to be specified in Treasury
regulations that have not yet been issued. If the sale or other disposition of
a Grantor Trust Certificate is part of a conversion transaction, all or any
portion of the gain realized upon the sale or other disposition would be
treated as ordinary income instead of capital gain.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a Grantor Trust Certificate by a bank or a thrift institution to which
such section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificateholder holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for
interest by an applicable tax treaty, unless such income is effectively
connected with a U.S. trade or business of such owner or beneficial owner.
Accrued OID recognized by the owner on the sale or exchange of such a Grantor
Trust Certificate also will be subject to federal income tax at the same rate.
Generally, such payments would not be subject to withholding to the extent that
a Grantor Trust Certificate evidences ownership in Mortgage Assets issued after
July 18, 1984, by natural persons if such Grantor Trust Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Grantor Trust Certificateholder under penalties of
perjury, certifying that such Grantor Trust Certificateholder is not a U.S.
Person and providing the name and address of such Grantor Trust
Certificateholder). To the extent payments to Grantor Trust Certificateholders
that are not U.S. Persons are payments of "contingent interest" on the
underlying Mortgage Assets, or such Grantor Trust Certificateholder is
ineligible for the exemption described in the preceding sentence, the 30%
withholding tax will apply unless such withholding taxes are reduced or
eliminated by an applicable tax treaty and such holder meets the eligibility
and certification requirements necessary to obtain the benefits of such treaty.
Additional restrictions apply to Mortgage Assets of where the mortgagor is not
a natural person in order to qualify for the exemption from withholding. If
capital gain derived from the sale, retirement or other disposition of a
Grantor Trust Certificate is effectively connected with a U.S. trade or
business of a Grantor Trust Certificateholder that is not a U.S. Person, such
Certificateholder will be taxed on the net gain under the graduated U.S.
federal income tax
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rates applicable to U.S. Persons (and, with respect to Grantor Trust
Certificates held by or on behalf of corporations, also may be subject to
branch profits tax). In addition, if the Trust Fund acquires a United States
real property interest through foreclosure, deed in lieu of foreclosure or
otherwise on a Mortgage Asset secured by such an interest (which for this
purpose includes real property located in the United States and the Virgin
Islands), a Grantor Trust Certificateholder that is not a U.S. Person will
potentially be subject to federal income tax on any gain attributable to such
real property interest that is allocable to such holder. Non-U.S. Persons
should consult their tax advisors regarding the application to them of the
foregoing rules.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the laws of
the United States or any political subdivision thereof (other than a
partnership that is not treated as a U.S. Person under any applicable Treasury
regulations), an estate the income of which from sources outside the United
States is includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the United
States or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the trust.
In addition, certain trusts treated as U.S. Persons before August 20, 1996 may
elect to continue to be so treated to the extent provided in regulations.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a
reasonable time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not reported all interest and dividend income required to be shown
on its federal income tax return, 31% backup withholding may be required with
respect to any payments to registered owners who are not "exempt recipients."
In addition, upon the sale of a Grantor Trust Certificate to (or through) a
broker, the broker must withhold 31% of the entire purchase price, unless
either (i) the broker determines that the seller is a corporation or other
exempt recipient, or (ii) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Person, certifies that
such seller is a Non-U.S. Person, and certain other conditions are met. Such as
sale must also be reported by the broker to the IRS, unless either (a) the
broker determines that the seller is an exempt recipient or (b) the seller
certifies its non-U.S. Person status (and certain other conditions are met).
Certification of the registered owner's non-U.S. Person status normally would
be made on IRS Form W-8 under penalties of perjury, although in certain cases
it may be possible to submit other documentary evidence. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax liability.
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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REMICS
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Although a REMIC is not generally subject to federal income
tax (see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including
the implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, 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 in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP or Cadwalader, Wickersham
& Taft or Latham & Watkins will deliver its opinion generally to the effect
that, under then existing law and assuming compliance with all provisions of
the related Pooling and Servicing Agreement, such Trust Fund will qualify as a
REMIC, and the related Certificates will be considered to be regular interests
("REMIC Regular Certificates") or a sole class of residual interests ("REMIC
Residual Certificates") in the REMIC. The related Prospectus Supplement for
each Series of Certificates will indicate whether the Trust Fund will make a
REMIC election and whether a class of Certificates will be treated as a regular
or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) Certificates held by a thrift institution taxed as
a "domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A); and (iii) interest on Certificates held by a real estate
investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets.
In some instances the Mortgage Assets may not be treated entirely as
assets described in the foregoing sections. See, in this regard, the discussion
of Buydown Loans contained in "--Non-REMIC Certificates--Single Class of
Grantor Trust Certificates" above. REMIC Certificates held by a real estate
investment trust will not constitute "Government Securities" within the meaning
of Code Section 856(c)(4)(A), and REMIC Certificates held by a regulated
investment company will not constitute "Government Securities" within the
meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held by certain
financial institutions will constitute "evidences of indebtedness" within the
meaning of Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally
secured by an interest in real property and that is transferred to the REMIC
within a prescribed time period in exchange for regular or residual interests
in the REMIC. The REMIC Regulations provide that manufactured housing or mobile
homes (not including recreational vehicles, campers or similar vehicles) that
are "single family residences" under Code Section 25(e)(10) will qualify as
real property without regard to state law classifications. Under
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Code Section 25(e)(10), a single family residence includes any manufactured
home that has a minimum of 400 square feet of living space and a minimum width
in excess of 102 inches and that is of a kind customarily used at a fixed
location.
Tiered REMIC Structures. For certain Series of Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such Series
of Certificates, Brown & Wood LLP or Cadwalader, Wickersham & Taft or Latham &
Watkins, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC
or REMICs, respectively, will be considered to evidence ownership of regular
interests ("REMIC Regular Certificates") or residual interests ("REMIC Residual
Certificates") in the related REMIC within the meaning of the REMIC provisions.
Other than the residual interest in a Subsidiary REMIC, only REMIC
Certificates issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC or REMICs and the Master REMIC will be treated as one REMIC
solely for purposes of determining whether the REMIC Certificates will be (i)
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code;
(ii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and (iii) whether the income on such Certificates
is interest described in Section 856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, 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.
Original Issue Discount and Premium. The REMIC Regular Certificates
may be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any class of Certificates issued
with OID will be required to include such OID in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest
method based on the compounding of interest as it accrues rather than in
accordance with receipt of the interest payments. The following discussion is
based in part on the OID Regulations and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Holders of REMIC Regular Certificates (the
"REMIC Regular Certificateholders") should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that
Congress intended the regulations to require that the Prepayment Assumption be
the prepayment assumption that is used in
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determining the initial offering price of such REMIC Regular Certificates. The
Prospectus Supplement for each Series of REMIC Regular Certificates will
specify the Prepayment Assumption to be used for the purpose of determining the
amount and rate of accrual of OID. No representation is made that the REMIC
Regular Certificates will prepay at the Prepayment Assumption or at any other
rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price
of a REMIC Regular Certificate is the first price at which a substantial amount
of REMIC Regular Certificates of that class are first sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of REMIC Regular Certificates is sold
for cash on or prior to the date of their initial issuance (the "Closing
Date"), the issue price for such class will be treated as the fair market value
of such class on the Closing Date. The issue price of a REMIC Regular
Certificate also includes the amount paid by an initial Certificateholder for
accrued interest that relates to a period prior to the issue date of the REMIC
Regular Certificate. The stated redemption price at maturity of a REMIC Regular
Certificate includes the original principal amount of the REMIC Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Qualified stated interest
generally means interest payable at a single fixed rate or qualified variable
rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the REMIC Regular Certificate. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on REMIC Regular Certificates with
respect to which Deferred Interest will accrue will not constitute qualified
stated interest payments, and the stated redemption price at maturity of such
REMIC Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during
the first period is treated as the amount by which the stated redemption price
at maturity of the Certificate exceeds its issue price for purposes of the de
minimis rule described below. The OID Regulations suggest that all interest on
a long first period REMIC Regular Certificate that is issued with non-de
minimis OID, as determined under the foregoing rule, will be treated as OID.
Where the interval between the issue date and the first Distribution Date on a
REMIC Regular Certificate is shorter than the interval between subsequent
Distribution Dates, interest due on the first Distribution Date in excess of
the amount that accrued during the first period would be added to the
Certificates stated redemption price at maturity. REMIC Regular
Certificateholders should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and
the denominator of which is the stated redemption price at maturity of the
REMIC Regular Certificate. Although currently unclear, it appears that the
schedule of such distributions should be determined in accordance with the
Prepayment Assumption. The Prepayment Assumption with respect to a Series of
REMIC Regular Certificates will
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be set forth in the related Prospectus Supplement. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the REMIC Regular Certificate is held as a
capital asset. However, accrual method holders may elect to accrue all de
minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be
issued with OID. The calculation of income in this manner could result in
negative original issue discount (which delays future accruals of OID rather
than being immediately deductible) when prepayments on the Mortgage Assets
exceed those estimated under the Prepayment Assumption. The IRS might contend,
however, that certain contingent payment rules contained in final regulations
issued on June 11, 1996, with respect to original issue discount, should apply
to such Certificates. Although such rules are not applicable to instruments
governed by Code Section 1272(a)(6), they represent the only guidance regarding
the current views of the IRS with respect to contingent payment instruments. In
the alternative, the IRS could assert that the stated redemption price at
maturity of such REMIC Regular Certificates should be limited to their
principal amount (subject to the discussion below under "--Accrued Interest
Certificates"), so that such REMIC Regular Certificates would be considered for
federal income tax purposes to be issued at a premium. If such a position were
to prevail, the rules described below under "--Taxation of Owners of REMIC
Regular Certificates--Premium" would apply. It is unclear when a loss may be
claimed for any unrecovered basis for a Super-Premium Certificate. It is
possible that a holder of a Super-Premium Certificate may only claim a loss
when its remaining basis exceeds the maximum amount of future payments,
assuming no further prepayments or when the final payment is received with
respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates--Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an original holder of a REMIC Regular Certificate, a
calculation will be made of the portion of the OID that accrues during each
successive period ("an accrual period") that ends on the day in the calendar
year corresponding to a Distribution Date (or if Distribution Dates are on the
first day or first business day of the immediately preceding month, interest
may be treated as payable on the last day of the immediately preceding month)
and begins on the day after the end of the immediately preceding accrual period
(or on the issue date in the case of the first accrual period). This will be
done, in the case of each full accrual period, by (i) adding (a) the present
value at the end of the accrual period
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(determined by using as a discount factor the original yield to maturity of the
REMIC Regular Certificates as calculated under the Prepayment Assumption) of
all remaining payments to be received on the REMIC Regular Certificates under
the Prepayment Assumption and (b) any payments included in the stated
redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the adjusted issue price of the REMIC Regular
Certificates at the beginning of such accrual period. The adjusted issue price
of a REMIC Regular Certificate at the beginning of the first accrual period is
its issue price; the adjusted issue price of a REMIC Regular Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period and reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accrued during an accrual period will then be divided
by the number of days in the period to determine the daily portion of OID for
each day in the accrual period. The calculation of OID under the method
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in a given accrual period to reflect the fact that
prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue
price but less than the stated redemption price at maturity), however, the
daily portion is reduced by the amount that would be the daily portion for such
day (computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that REMIC Regular Certificate exceeds the following amount:
(a) the sum of the issue price plus the aggregate amount of OID that would have
been includible in the gross income of an original REMIC Regular
Certificateholder (who purchased the REMIC Regular Certificate at its issue
price), less (b) any prior payments included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
that REMIC Regular Certificate for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption. A holder who pays an acquisition premium instead may elect to
accrue OID by treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a variable
rate will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates " that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing
a variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
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Although unclear at present, the Depositor intends to treat interest
on a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through the
life of the REMIC Regular Certificates. It is possible, however, that the IRS
may treat some or all of the interest on REMIC Regular Certificates with a
weighted average rate as taxable under the rules relating to obligations
providing for contingent payments. Such treatment may effect the timing of
income accruals on such REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market discount or original issue discount) and premium in income as
interest, based on a constant yield method. If such an election were to be made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount 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 will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See "--
REMIC Regular Certificates--Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate
is irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also
be subject to the market discount provisions of Code Sections 1276 through
1278. Under these provisions and the OID Regulations, "market discount" equals
the excess, if any, of (i) the REMIC Regular Certificate's stated principal
amount or, in the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had purchased such
REMIC Regular Certificate from an original holder) over (ii) the price for such
REMIC Regular Certificate paid by the purchaser. A Certificateholder that
purchases a REMIC Regular Certificate at a market discount will recognize
income upon receipt of each distribution representing amounts included in such
certificate's stated redemption price at maturity. In particular, under Section
1276 of the Code such a holder generally will be required to allocate each such
distribution first to accrued market discount not previously included in
income, and to recognize ordinary income to that extent. 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.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986,
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shall be treated as ordinary income to the extent that it does not exceed the
accrued market discount at the time of such payment. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the market discount bond is to be reduced
by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at
the beginning of the period. For REMIC Regular Certificates issued without OID,
the amount of market discount that accrues during a period is equal to the
product of (a) the total remaining market discount and (b) 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. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the REMIC Regular Certificates) that provide for payments
that may be accelerated by reason of prepayments of other obligations securing
such instruments, the same Prepayment Assumption applicable to calculating the
accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount
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 Certificate purchased with market discount. For these purposes,
the de minimis rule referred to above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in
which such market discount is includible in income. 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.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will
be considered to have purchased the REMIC Regular Certificate at a premium and
may elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose.
However, the Legislative History states that the same rules that apply to
accrual of market discount (which rules require use of a Prepayment Assumption
in accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have OID) will also apply in amortizing
bond premium under Code Section 171. The Code provides that amortizable bond
premium will be allocated among the interest payments on such REMIC Regular
Certificates and will be applied as an offset against such interest payment. On
June 27, 1996, the IRS published in the Federal Register proposed regulations
on the amortization of bond premium. The foregoing discussion is based in part
on such proposed regulations. On December 30, 1997, the IRS issued the
Amortizable Bond Premium Regulations, which generally are effective for bonds
acquired on
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or after March 2, 1998 or, for holders making an election to amortize bond
premium as described above for the taxable year that includes March 2, 1998 or
any subsequent taxable year, will apply to bonds held on or after the first day
of the taxable year in which the election is made. Neither the proposed
regulations nor the final regulations, by their express terms, apply to
prepayable securities described in Section 1272(a)(6) of the Code, such as the
REMIC Regular Certificates. Certificateholders should consult their tax
advisors regarding the possibility of making an election to amortize any such
bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all
or a portion of the interest payable on such Certificates must be included in
the stated redemption price at maturity of the Certificates and accounted for
as OID (which could accelerate such inclusion). Interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method by the
holders of such Certificates and, therefore, applying the latter analysis may
result only in a slight difference in the timing of the inclusion in income of
interest on such REMIC Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the event
there are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such
Certificates under an accrual method without giving effect to delays and
reductions in distributions on such Subordinated Certificates attributable to
defaults and delinquencies on the Mortgage Assets, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of
defaults and delinquencies on the Mortgage Assets. Timing and characterization
of such losses is discussed in "--REMIC Regular Certificates--Treatment of
Realized Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption,
or retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment that is part of the stated
redemption price at maturity of a REMIC Regular Certificate will recognize gain
equal to the excess, if any, of the amount of the payment over the holder's
adjusted basis in the REMIC Regular Certificate. A REMIC Regular
Certificateholder who receives a final payment that is less than the holder's
adjusted basis in the REMIC Regular Certificate will generally recognize a
loss. Except as provided in the following paragraph and as provided under
"--Market Discount" above, any such gain or loss will be capital gain or loss,
provided that the REMIC Regular Certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of Code Section
1221.
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Such capital gain or loss will generally be long-term capital gain or
loss if the REMIC Regular Certificate was held for more than one year.
Long-term capital gains of individuals are subject to reduced maximum tax rates
while capital gains recognized by individuals on capital assets held less than
twelve months are generally subject to ordinary income tax rates. The use of
capital losses is limited.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to the
extent that such gain does not exceed the excess, if any, of (i) the amount
that would have been includible in such holder's income with respect to the
REMIC Regular Certificate had income accrued thereon at a rate equal to 110% of
the AFR as defined in Code Section 1274(d) determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount actually
includible in such holder's income. Gain from the sale or other disposition of
a REMIC Regular Certificate that might otherwise be capita gain will be treated
as ordinary income if the REMIC Regular Certificate is held as part of a
"conversion transaction" as defined in Code section 1258(c), up to the amount
of interest that would have accrued on the REMIC Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable federal rate under Code section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, or if the REMIC Regular Certificate is held as
part of a straddle. Potential investors should consult their tax advisors with
respect to tax consequences of ownership and disposition of an investment in
REMIC Regular Certificates in their particular circumstances.
The Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a REMIC Regular Certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will 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 may
not have, it appears that the information reports will only require information
pertaining to the appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of interest
based on a period that corresponds to the interval between Distribution Dates
but that ends prior to each such Distribution Date. The period between the
Closing Date for Payment Lag Certificates and their first Distribution Date may
or may not exceed such interval. Purchasers of Payment Lag Certificates for
which the period between the Closing Date and the first Distribution Date does
not exceed such interval could pay upon purchase of the REMIC Regular
Certificates accrued interest in excess of the accrued interest that would be
paid if the interest paid on the Distribution Date were interest accrued from
Distribution Date to Distribution Date. If a portion of the initial purchase
price of a REMIC Regular Certificate is allocable to interest that has accrued
prior to the issue date ("pre-issuance accrued interest") and the REMIC Regular
Certificate provides for a payment of stated interest on the first payment date
(and the first payment date is within one year of the issue date) that equals
or exceeds the amount of the pre-issuance accrued interest, then the REMIC
Regular Certificates' issue price may be computed by subtracting from the issue
price the amount of pre-issuance accrued interest, rather than as an amount
payable on the REMIC Regular Certificate. However, it is unclear under this
method how the OID Regulations treat interest on Payment Lag Certificates.
Therefore, in the case of a Payment Lag Certificate, the Trust Fund intends to
include accrued interest in
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the issue price and report interest payments made on the first Distribution
Date as interest to the extent such payments represent interest for the number
of days that the Certificateholder has held such Payment Lag Certificate during
the first accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will
be allocated as a separate item to those REMIC Regular Certificateholders that
are "pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of
these rules on an investment in the REMIC Regular Certificates. See
"Pass-Through of Non-Interest Expenses of the REMIC" under "Taxation of Owners
of REMIC Residual Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly or partially
worthless, and that, in general, holders of Certificates that are not
corporations should be allowed to deduct as a short-term capital loss any loss
sustained during the taxable year on account of any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Mortgage
Assets remaining in the related Trust Fund have been liquidated or the
Certificates of the related Series have been otherwise retired. Potential
investors and holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged in
a trade or business within the United States will not be subject to federal
withholding tax if (i) such REMIC Regular Certificateholder does not actually
or constructively own 10 percent or more of the combined voting power of all
classes of equity in the issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions
of interest to such holder, including distributions in respect of accrued OID,
may be subject to a 30% withholding tax, subject to reduction under any
applicable tax treaty. If the interest on a REMIC Regular Certificate is
effectively connected with the conduct by a holder that is a non-U.S. Person of
a trade or business in the United States, then such holder will not be subject
to the 30% withholding tax on gross income therefrom
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but will be subject to U.S. income tax at regular graduated rates on its net
income and, if such holder is a corporation, may be subject to U.S. branch
profits tax as well.
Further, a REMIC Regular Certificate will not be included in the
estate of a non-resident alien individual and will not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so. In addition, the IRS may assert
that non-U.S Persons that own directly or indirectly, a greater than 10%
interest in any Mortgagor, and foreign corporations that are "controlled
foreign corporations" as to the United States of which such a Mortgagor is a
"United States shareholder" within the meaning of Section 951(b) of the Code,
are subject to United States withholding tax on interest distributed to them to
the extent of interest concurrently paid by the related Mortgagor.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income
tax returns, or to enable holders to make such information available to
beneficial owners or financial intermediaries that hold such REMIC Regular
Certificates on behalf of beneficial owners. If a holder, beneficial owner,
financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments
with respect to any payments to registered owners who are not "exempt
recipients." In addition, upon the sale of a REMIC Regular Certificate to (or
through) a broker, the broker must withhold 31% of the entire purchase price,
unless either (i) the broker determines that the seller is a corporation or
other exempt recipient, or (ii) the seller provides, in the required manner,
certain identifying information and, in the case of a non-U.S. Person,
certifies that such seller is a Non-U.S. Person, and certain other conditions
are met. Such as sale must also be reported by the broker to the IRS, unless
either (a) the broker determines that the seller is an exempt recipient or (b)
the seller certifies its non-U.S. Person status (and certain other conditions
are met). Certification of the registered owner's non-U.S. Person status
normally would be made on IRS Form W-8 under penalties of perjury, although in
certain cases it may be possible to submit other documentary evidence. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
On October 6, 1997, the Treasury Department issued the New
Regulations, which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
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Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined
by allocating the taxable income of the REMIC for each calendar quarter ratably
to each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of "passive losses."
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder or
cause the REMIC Residual Certificate to have negative "value." Investors should
consult their own tax advisors concerning the federal income tax treatment of a
REMIC Residual Certificate and the impact of such tax treatment on the
after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would equal
the amounts that would have been reported for the same days by an original
REMIC Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that
purchased such REMIC Residual Certificate at a price greater than (or less
than) the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder. See "--Sale or Exchange
of REMIC Residual Certificates" below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable income
of an individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on
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the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC's gross income includes interest, original issue discount
income, and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the REMIC Regular Certificates. Note that
the timing of cancellation of indebtedness income recognized by REMIC Residual
Certificateholders resulting from defaults and delinquencies on Mortgage Assets
may differ from the time of the actual loss on the Mortgage Asset. The REMIC's
deductions include interest and original issue discount expense on the REMIC
Regular Certificates, servicing fees on the Mortgage Loans, other
administrative expenses of the REMIC and realized losses on the Mortgage Loans.
The requirement that REMIC Residual Certificateholders report their pro rata
share of taxable income or net loss of the REMIC will continue until there are
no Certificates of any class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent
that the REMIC's basis therein is less than or greater than its principal
balance, respectively. Any such discount (whether market discount or OID) will
be includible in the income of the REMIC as it accrues, in advance of receipt
of the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
may elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon
and would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the
REMIC Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with respect
to REMIC Regular Certificates except that the 0.25% per annum de minimis rule
and adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize
the cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular Certificates
in determining the REMIC's initial basis in its assets. See "--Sale or Exchange
of REMIC Residual Certificates" below. For a discussion of possible adjustments
to income of a subsequent holder of a REMIC Residual Certificate to reflect any
difference between the actual cost of such REMIC Residual Certificate to such
holder and the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder, see "--Allocation of the
Income of the REMIC to the REMIC Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net loss
would be allocated among the REMIC Residual
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Certificateholders in the same manner as the REMIC's taxable income. The net
loss allocable to any REMIC Residual Certificate will not be deductible by the
holder to the extent that such net loss exceeds such holder's adjusted basis in
such REMIC Residual Certificate. Any net loss that is not currently deductible
by reason of this limitation may only be used by such REMIC Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of REMIC Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-Market
Regulations replaced the temporary regulations which allowed a Residual
Certificate to be marked to market provided that it was not a "negative value"
residual interest and did not have the same economic effect as a "negative
value" residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders
of the REMIC Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related REMIC Residual Certificates in their
entirety and not to holders of the related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in
a REMIC Regular Certificate or a REMIC Residual Certificate directly or through
a pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the
lesser of (i) 3% of the excess of the individual's adjusted gross income over
the Applicable Amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest
holders should consult their own tax advisors about the impact of these rules
on an investment in the REMIC Residual Certificates.
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Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any calendar
quarter will be subject to federal income tax in all events. Thus, for example,
an excess inclusion (i) may not, except as described below, be offset by any
unrelated losses, deductions or loss carryovers of a REMIC Residual
Certificateholder; (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the REMIC Residual Certificateholder
is a pension fund or any other organization that is subject to tax only on its
unrelated business taxable income (see "--Tax-Exempt Investors" below); and
(iii) is not eligible for any reduction in the rate of withholding tax in the
case of a REMIC Residual Certificateholder that is a foreign investor. See
"--Non-U.S. Persons" below.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar
quarter is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual Certificate
over (ii) the sum of the "daily accruals" (as defined below) for all days
during the calendar quarter on which the REMIC Residual Certificateholder holds
such REMIC Residual Certificate. For this purpose, the daily accruals with
respect to a REMIC Residual Certificate are determined by allocating to each
day in the calendar quarter its ratable portion of the product of the "adjusted
issue price" (as defined below) of the REMIC Residual Certificate at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the REMIC Residual Certificate is issued. For this
purpose, the "adjusted issue price" of a REMIC Residual Certificate at the
beginning of any calendar quarter equals the issue price of the REMIC Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the REMIC Residual Certificate before the beginning of such quarter. The
"federal long-term rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published
monthly by the IRS.
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. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special
rule that taxable income cannot be less than excess inclusions. Second, the
amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions. Third, a residual holder's
alternative minimum taxable income for a tax year cannot be less than excess
inclusions for the year. The effect of this last statutory amendment is to
prevent the use of nonrefundable
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tax credits to reduce a taxpayer's income tax below its tentative minimum tax
computed only on excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual holder elects to have such
rules apply only to tax years beginning after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
exceeds such adjusted basis, it will be treated as gain from the sale of the
REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except that
the recognition of loss may be limited under the "wash sale" rules described
below). A holder's adjusted basis in a REMIC Residual Certificate generally
equals the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC
Residual Certificate by a bank or thrift institution to which such section
applies would be ordinary income or loss.
Such capital gain or loss will generally be long-term capital gain or
loss if the REMIC Regular Certificate was held for more than one year.
Long-term capital gains of individuals are subject to reduced maximum tax rates
while capital gains recognized by individuals on capital assets held less than
twelve months are generally subject to ordinary income tax rates. The use of
capital losses is limited.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool" (as
defined in Code Section 7701(i)) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject
to the "wash sale" rules of Code Section 1091. In that event, any loss realized
by the REMIC Residual Certificateholder on the sale will not be deductible,
but, instead, will increase such REMIC Residual Certificateholder's adjusted
basis in the newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Asset, the receipt of income from a source
other than a Mortgage Asset or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the Mortgage Assets for temporary investment
pending distribution on the Certificates. It is not anticipated that the Trust
Fund for any Series of Certificates will engage in any prohibited transactions
in which it would recognize a material amount of net income.
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In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the Trust Fund equal to 100% of the value of the
contributed property (the "Contributions Tax"). No Trust Fund for any Series of
Certificates will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to
treat such Trust Fund as a REMIC may also be subject to federal income tax at
the highest corporate rate on "net income from foreclosure property,"
determined by reference to the rules applicable to real estate investment
trusts. "Net income from foreclosure property" generally means income from
foreclosure property other than qualifying income for a real estate investment
trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC relating to any Series of Certificates arises out of
or results from (i) a breach of the related Servicer's, Trustee's or
Depositor's obligations, as the case may be, under the related Agreement for
such Series, such tax will be borne by such Servicer, Trustee or Depositor, as
the case may be, out of its own funds or (ii) the Depositor's obligation to
repurchase a Mortgage Loan, such tax will be borne by the Depositor. In the
event that such Servicer, Trustee or Depositor, as the case may be, fails to
pay or is not required to pay any such tax as provided above, such tax will be
payable out of the Trust Fund for such Series and will result in a reduction in
amounts available to be distributed to the Certificateholders of such Series.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
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information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be subject
to such tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of Owners
of REMIC Residual Certificates--Excess Inclusions" above.
RESIDUAL CERTIFICATE PAYMENTS(YEN)NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Amounts distributed to holders of
REMIC Residual Certificates should qualify as "portfolio interest," subject to
the conditions described in "--Taxation of Owners of REMIC Regular
Certificates" above, but only to the extent that the underlying mortgage loans
were originated after July 18, 1984. Furthermore, the rate of withholding on
any income on a REMIC Residual Certificate that is excess inclusion income will
not be subject to reduction under any applicable tax treaties. See "--Taxation
of Owners of REMIC Residual Certificates--Excess Inclusions" above. If the
portfolio interest exemption is unavailable, such amount will be subject to
United States withholding tax when paid or otherwise distributed (or when the
REMIC Residual Certificate is disposed of) under rules similar to those for
withholding upon disposition of debt instruments that have OID. The Code,
however, grants the Treasury Department authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (for example, where the
REMIC Residual Certificates do not have significant value). See "--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" above. If the amounts
paid to REMIC Residual Certificateholders that are not U.S. Persons are
effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U.S.
federal income taxation at regular graduated rates. For special restrictions on
the transfer of REMIC Residual Certificates, see "--Tax-Related Restrictions on
Transfers of REMIC Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that residual
interests in such entity are not held by "disqualified
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organizations" (as defined below). Further, a tax is imposed on the transfer of
a residual interest in a REMIC to a "disqualified organization." The amount of
the tax equals the product of (A) an amount (as determined under the REMIC
Regulations) equal to the present value of the total anticipated "excess
inclusions" with respect to such interest for periods after the transfer and
(ii) the highest marginal federal income tax rate applicable to corporations.
The tax is imposed on the transferor unless the transfer is through an agent
(including a broker or other middleman) for a disqualified organization, in
which event the tax is imposed on the agent. The person otherwise liable for
the tax shall be relieved of liability for the tax if the transferee furnished
to such person an affidavit that the transferee is not a disqualified
organization and, at the time of the transfer, such person does not have actual
knowledge that the affidavit is false. A "disqualified organization" means (A)
the United States, any State, possession or political subdivision thereof, any
foreign government, any international organization or any agency or
instrumentality of any of the foregoing (provided that such term does not
include an instrumentality if all its activities are subject to tax and, except
for FHLMC, a majority of its board of directors is not selected by any such
governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding
a residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization
is the record holder of an interest in such entity, will be relieved of
liability for the tax if such record holder furnishes to such entity an
affidavit that such record holder is not a disqualified organization and, for
such period, the pass-through entity does not have actual knowledge that the
affidavit is false. For this purpose, a "pass-through entity" means (i) a
regulated investment company, real estate investment trust or common trust
fund, (ii) a partnership, trust or estate and (iii) certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will,
with respect to such interest, be treated as a pass-through entity. Electing
large partnerships (generally, non-service partnerships with 100 or more
members electing to be subject to simplified IRS reporting provisions under
Code sections 771 through 777) will be taxable on excess inclusion income as if
all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that
no record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic REMIC
Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up calls
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or required liquidation provided for in the REMIC's organizational documents,
(i) the present value of the expected future distributions on the REMIC
Residual Certificate at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. A significant
purpose to impede the assessment or collection of tax exists if the transferor,
at the time of the transfer, either knew or should have known that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such
knowledge if (i) the transferor conducted a reasonable investigation of the
transferee and (ii) the transferee acknowledges to the transferor that the
residual interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes associated with the
residual interest as they become due. If a transfer of a Noneconomic REMIC
Residual Certificate is disregarded, the transferor would continue to be
treated as the owner of the REMIC Residual Certificate and would continue to be
subject to tax on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of
a REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect 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 the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the REMIC
Residual Certificate to a U.S. Person, the transfer will be disregarded, and
the foreign transferor will continue to be treated as the owner, if the
transfer has the effect of allowing the transferor to avoid tax on accrued
excess inclusions. The provisions in the REMIC Regulations regarding transfers
of REMIC Residual Certificates that have tax avoidance potential to foreign
persons are effective for all transfers after June 30, 1992. The Pooling and
Servicing Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with a
duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in REMIC Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state. Therefore,
potential investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
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CERTAIN ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under Section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the
Certificates without regard to the ERISA considerations described below,
subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties
in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity investment"
will be deemed for purposes of ERISA to be assets of the Plan unless certain
exceptions apply.
Under the terms of the regulation, the Trust may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust. In such an event, the Asset Seller, the Master Servicer, the
Trustee, any insurer of the Mortgage Assets and other persons, in providing
services with respect to the assets of the Trust, may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA (and of
Section 4975 of the Code), with respect to transactions involving such assets
unless such transactions are subject to a statutory or administrative
exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own
at least 25% of the value of any class of equity interest. "Benefit plan
investors" are defined as Plans as well as employee benefit plans not subject
to ERISA (e.g., governmental plans). The 25% limitation must be met with
respect to
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each class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Morgan Stanley & Co. Incorporated Prohibited
Transaction Exemption 90-24, Exemption Application No. D-8019, 55 Fed. Reg.
20548 (1990) (the "Exemption") which exempts from the application of the
prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Morgan Stanley & Co. Incorporated or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate; and (2)
the servicing, operation and management of such asset-backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or
a transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least
as favorable to the investing Plan as they would be in an
arm's-length transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of Duff &
Phelps Inc., Fitch Investors Service, Inc., Moody's Investors
Service, Inc. and Standard & Poor's Ratings Group.
(4) The Trustee is not an affiliate of the Underwriter, the
Asset Seller, the Master Servicer, any insurer of the
Mortgage Assets, any borrower whose obligations under one or
more Mortgage Loans constitute more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or
any of their respective affiliates (the "Restricted Group");
(5) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of the
Certificates represents not more than reasonable compensation
for underwriting such Certificates; the sum of all payments
made to and retained by the Asset Seller pursuant to the sale
of the Mortgage Loans to the Trust represents not more than
the fair market value of such Mortgage Loans; the sum of all
payments made to and retained by the Master Servicer
represent not more than reasonable compensation for the
Master Servicer's services under the Pooling Agreement and
reimbursement of the Master Servicer's reasonable expenses in
connection therewith; and
(6) The Plan investing in the Certificates is 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.
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Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied. The Exemption will apply to Certificates purchased by Plans during a
"pre-funding period," if any, in which additional Mortgage Loans will be added
to the Trust, provided certain conditions in the Exemption are satisfied. The
Prospectus Supplement for each Series of Certificates will specify whether
there is a "pre-funding period" and whether such additional conditions will be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. In
particular, in connection with a contemplated purchase of Certificates
representing a beneficial ownership interest in a pool of single family
residential first mortgage loans, such Plan fiduciary should consider the
availability of the Exemption or Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Certificates may
contain additional information regarding the application of the Exemption, PTCE
83-1, or any other exemption, with respect to the Certificates offered thereby.
LEGAL INVESTMENT
Each class of Offered Certificates will be rated at the date of
issuance in one of the four highest rating categories by at least one Rating
Agency. Unless otherwise specified in the related Prospectus Supplement, each
such class that is rated in one of the two highest rating categories by at
least one Rating Agency will constitute "mortgage related securities" ("SMMEA
Certificates") for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") and, as such, will constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including, but not limited to, depository institutions, insurance
companies, trustees and pension funds) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency
or instrumentality thereof constitute legal investments for such entities.
Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Kansas, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North
Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia enacted
legislation on or before the October 3, 1991 cutoff established by SMMEA for
such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in mortgage related securities,
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Investors affected by such legislation will be
authorized to invest in SMMEA Certificates only to the extent provided in such
legislation. SMMEA provides, however, that in no event will the enactment of
any such legislation affect the validity of any contractual commitment to
purchase, hold or invest in "mortgage related securities," or require the sale
or other disposition of such securities, so long as such contractual commitment
was made or such securities acquired prior to the enactment of such
legislation.
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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 "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. The
National Credit Union Administration ("NCUA") has adopted rules, codified at 12
C.F.R. Section 703, which permit federal credit unions to invest in "mortgage
related securities" under certain limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has
obtained written approval from the NCUA to participate in the "investment pilot
program" described in 12 C.F.R. Section 703.140.
Institutions where investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of Offered
Certificates. Any financial institution which is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of
Thrift Supervision ("OTS"), the NCUA or other federal or state agencies with
similar authority should review any applicable rules, guidelines and
regulations prior to purchasing any Offered Certificate. The Federal Financial
Institutions Examination Council ("FFIEC"), for example, has issued a
"Supervisory Policy Statement on Investment Securities and End-User Derivatives
Activities" (the "1998 Policy Statement") which has been adopted by the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the Office of Thrift Supervision effective May 26,
1998, and by the NCUA, effective October 1, 1998. The 1998 Policy Statement
sets forth general guidelines which depository institutions must follow in
managing risks (including market, credit, liquidity, operational (transaction),
and legal risks) applicable to all securities (including mortgage pass-through
securities and mortgage-derivative products) used for investment purposes.
Until October 1, 1998, federal credit unions will still be subject to the
FFIEC's now-superseded "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992, as adopted by the NCUA with certain modifications,
which prohibited depository institutions from investing in certain "high-risk
mortgage securities," except under limited circumstances, and sets forth
certain investment practices deemed to be unsuitable for regulated
institutions.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Certificates. In accordance with Section 402 of the Financial Institutions
Reform, Recovery and Enhancement Act of 1989, the foregoing bulletin will
remain in effect unless and until modified, terminated, set aside or superseded
by the FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance
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industry. Institutions subject to insurance regulatory authorities may be
subject to restrictions on investment similar to those set forth in the Model
Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Certificates offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
this Offered Certificate under various legal investment restrictions, and thus
the ability of investors subject to these restrictions to purchase such Offered
Certificates, may be subject to significant interpretive uncertainties.
Except as to the status of SMMEA Certificates identified in the
Prospectus Supplement for a series as "mortgage related securities" under
SMMEA, the Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Certificates) may adversely affect the liquidity
of the Offered Certificates.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or
to purchase Offered Certificates representing more than a specified percentage
of the investor's assets. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Offered
Certificates of any class constitute legal investments or are subject to
investment, capital or other restrictions, and, if applicable, whether SMMEA
has been overridden in any jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
The Offered Certificates offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Certificates may
be effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Certificates will
be distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Morgan Stanley & Co. Incorporated
("Morgan Stanley") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Certificates agreed
to be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters
may receive compensation from the Depositor or from purchasers of Offered
Certificates in the form of discounts, concessions or commissions. The
Prospectus Supplement will describe any such compensation paid by the
Depositor.
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Alternatively, the Prospectus Supplement may specify that Offered
Certificates will be distributed by Morgan Stanley acting as agent or in some
cases as principal with respect to Offered Certificates that it has previously
purchased or agreed to purchase. If Morgan Stanley acts as agent in the sale of
Offered Certificates, Morgan Stanley will receive a selling commission with
respect to such Offered Certificates, depending on market conditions, expressed
as a percentage of the aggregate Certificate Balance or notional amount of such
Offered Certificates as of the Cut-off Date. The exact percentage for each
series of Certificates will be disclosed in the related Prospectus Supplement.
To the extent that Morgan Stanley elects to purchase Offered Certificates as
principal, Morgan Stanley may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Offered
Certificates of such series.
The Depositor will indemnify Morgan Stanley and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Morgan Stanley and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Morgan Stanley and the Depositor
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Certificates.
Offered Certificates will be sold primarily to institutional
investors. Purchasers of Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Offered Certificates. Certificateholders
should consult with their legal advisors in this regard prior to any such
reoffer or sale.
As to each series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor, and
may be sold by the Depositor at any time in private transactions.
LEGAL MATTERS
Certain legal matters in connection with the Certificates, including
certain federal income tax consequences, will be passed upon for the Depositor
by Cadwalader, Wickersham & Taft or Brown & Wood LLP or Latham & Watkins, New
York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
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Ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of all distributions on the underlying
mortgage loans. These ratings address the structural, legal and issuer-related
aspects associated with such certificates, the nature of the underlying
mortgage loans and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
Accrual Certificates:..............................................9, 10, 32
Accrued Certificate Interest:.............................................34
ARM Loans:............................................................23, 81
Asset Seller:.............................................................22
Assets:................................................................1, 21
Available Distribution Amount:............................................33
Balloon Mortgage Loans:...................................................18
Book-Entry Certificates:..................................................32
Buydown Mortgage Loans:...................................................30
Buydown Period:...........................................................30
Cash Flow Agreement:...................................................8, 26
Cede:..................................................................4, 39
Certificate Account:......................................................44
Certificate Balance:...................................................9, 35
Certificate:..............................................................41
Certificateholders:....................................................4, 21
Certificates:..............................................................6
Commission:................................................................3
Contributions Tax:.......................................................101
Cooperatives:.............................................................22
Covered Trust:........................................................19, 59
CPR:......................................................................29
Credit Support:.....................................................1, 8, 25
Cut-off Date:.............................................................11
Definitive Certificates:..............................................32, 40
Depositor:................................................................22
Determination Date:.......................................................32
Distribution Date:........................................................10
DTC:...................................................................4, 39
Due Period:...............................................................33
ERISA:...............................................................13, 105
Exchange Act:..............................................................4
Exemption:...............................................................106
FDIC:................................................................44, 108
Grantor Trust Certificates:...............................................12
Indirect Participants:....................................................39
Insurance Proceeds:.......................................................45
L/C Bank:.................................................................60
Liquidation Proceeds:.....................................................45
Loan-to-Value Ratio:......................................................23
Lock-out Date:............................................................24
Lock-out Period:..........................................................24
Master Servicer:...........................................................6
MBS Agreement:............................................................24
MBS Issuer:...............................................................24
MBS Servicer:.............................................................24
MBS Trustee:..............................................................24
MBS:................................................................1, 6, 22
Morgan Stanley:..........................................................109
Mortgage Assets:...........................................................1
Mortgage Loans:.................................................1, 6, 21, 22
Mortgage Notes:...........................................................22
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Mortgages:................................................................22
Nonrecoverable Advance:...................................................36
Offered Certificates:......................................................1
Originator:...............................................................22
Participants:.............................................................39
Pass-Through Rate:.....................................................9, 34
Permitted Investments:....................................................44
Plans:...................................................................105
Prepayment Assumption:....................................................81
Prepayment Premium:.......................................................24
Purchase Price:...........................................................43
Rating Agency:............................................................14
Record Date:..............................................................32
Refinance Loans:..........................................................23
Related Proceeds:.........................................................36
Relief Act:...............................................................73
REMIC Certificates:.......................................................85
REMIC Regular Certificates:...........................................12, 85
REMIC Regulations:........................................................74
REMIC Residual Certificates:..........................................12, 85
REMIC:....................................................................13
Restricted Group:........................................................106
Retained Interest:........................................................53
Senior Certificates:...................................................9, 32
Servicing Standard:.......................................................48
SMMEA:...............................................................13, 107
SPA:......................................................................29
Stripped Interest Certificates:........................................9, 32
Stripped Principal Certificates:.......................................9, 32
Subordinate Certificates:..............................................9, 32
Sub-Servicer:.............................................................49
Sub-Servicing Agreement:..................................................49
Title V:..................................................................72
Trust Assets:..............................................................3
Trust Fund:................................................................1
Trustee:...................................................................6
Underlying MBS:...........................................................22
Value:....................................................................23
Voting Rights:............................................................21
Warrantying Party:........................................................43
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[VERSION 2]
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
MORGAN STANLEY CAPITAL I INC.
DEPOSITOR
The Certificates offered hereby and by Supplements to this Prospectus
(the "Offered Certificates") will be offered from time to time in one or more
series. Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") consisting of one or more segregated pools of various types of
multifamily or commercial mortgage loans (the "Mortgage Loans"), mortgage
participations, mortgage pass-through certificates, mortgage-backed securities
evidencing interests therein or secured thereby (the "MBS"), certain direct
obligations of the United States, agencies thereof or agencies created thereby
(the "Government Securities") or a combination of Mortgage Loans, MBS and/or
Government Securities (with respect to any series, collectively, "Assets"). If
so specified in the related Prospectus Supplement, some or all of the Mortgage
Loans will include assignments of the leases of the related Mortgaged
Properties (as defined herein) and/or assignments of the rental payments due
from the lessees under such leases (each type of assignment, a "Lease
Assignment"). A significant or the sole source of payments on certain
Commercial Loans (as defined herein) and, therefore, of distributions on
certain series of Certificates, will be such rent payments. The Mortgage Loans
and MBS are collectively referred to herein as the "Mortgage Assets." If so
specified in the related Prospectus Supplement, the Trust Fund for a series of
Certificates may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof
(with respect to any series, collectively, "Credit Support"), and currency or
interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Each series of Certificates will consist of one or more classes of
Certificates that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Certificates in respect of certain distributions on the
Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal sequentially, based on specified payment
schedules or other methodologies; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available funds,
in each case as described in the related Prospectus Supplement. Any such
classes may include classes of Offered Certificates. See "Description of the
Certificates."
(cover continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investors should consider, among other things, certain risks set forth
under the caption "Risk Factors" herein and in the related Prospectus
Supplement.
Prior to issuance there will have been no market for the Certificates
of any series and there can be no assurance that a secondary market for any
Offered Certificates will develop or that, if it does develop, it will
continue. This Prospectus may not be used to consummate sales of the Offered
Certificates of any series unless accompanied by the Prospectus Supplement for
such series.
Offers of the Offered Certificates may be made through one or
more different methods, including offerings through underwriters, as
more fully described under "Plan of Distribution" herein and in the
related Prospectus Supplement.
MORGAN STANLEY & CO.
INCORPORATED
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[VERSION 2]
- -----------------
Principal and interest with respect to Certificates will be
distributable monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement. Distributions on
the Certificates of any series will be made only from the assets of the related
Trust Fund.
The Certificates of each series will not represent an obligation of or
interest in the Depositor, Morgan Stanley & Co. Incorporated, any Master
Servicer, any Sub-Servicer, any Special Servicer or any of their respective
affiliates, except to the limited extent described herein and in the related
Prospectus Supplement. Neither the Certificates nor any assets in the related
Trust Fund will be guaranteed or insured by any governmental agency or
instrumentality or by any other person, unless otherwise provided in the
related Prospectus Supplement. The assets in each Trust Fund will be held in
trust for the benefit of the holders of the related series of Certificates
pursuant to a Pooling and Servicing Agreement or a Trust Agreement, as more
fully described herein.
The yield on each class of Certificates of a series will be affected
by, among other things, the rate of payment of principal (including
prepayments, repurchase and defaults) on the Mortgage Assets in the related
Trust Fund and the timing of receipt of such payments as described under the
caption "Yield Considerations" herein and in the related Prospectus Supplement.
A Trust Fund may be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
Prospective investors should review the information appearing under
the caption "Risk Factors" herein and such information as may be set forth
under the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Certificate.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" for federal income tax
purposes. See also "Certain Federal Income Tax Consequences" herein.
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates covered by such
Prospectus Supplement, whether or not participating in the distribution
thereof, may be required to deliver such Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus and Prospectus Supplement when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Certificates of each series will, among other things,
set forth with respect to such Certificates, as appropriate: (i) a description
of the class or classes of Certificates, the payment provisions with respect to
each such class and the Pass-Through Rate or method of determining the
Pass-Through Rate with respect to each such class; (ii) the aggregate principal
amount and distribution dates relating to such series and, if applicable, the
initial and final scheduled distribution dates for each class; (iii)
information as to the assets comprising the Trust Fund, including the general
characteristics of the assets included therein, including the Mortgage Assets
and any Credit Support and Cash Flow Agreements (with respect to the
Certificates of any series, the "Trust Assets"); (iv) the circumstances, if
any, under which the Trust Fund may be subject to early termination; (v)
additional information with respect to the method of distribution of such
Certificates; (vi) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (vii) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Certificates; (viii) information as to any Master
Servicer, any Sub-Servicer, any Special Servicer (or provision for the
appointment thereof) and the Trustee, as applicable; (ix) information as to the
nature and extent of subordination with respect to any class of Certificates
that is subordinate in right of payment to any other class; and (x) whether
such Certificates will be initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the Offered
Certificates.
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[VERSION 2]
This Prospectus and the Prospectus Supplement relating to each series of
Certificates contain summaries of the material terms of the documents referred
to herein and therein, but do not contain all of the information set forth in
the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048.
To the extent described in the related Prospectus Supplement, some or
all of the Mortgage Loans may be secured by an assignment of the lessors'
(i.e., the related mortgagors') rights in one or more leases (each, a "Lease")
of the related Mortgaged Property. Unless otherwise specified in the related
Prospectus Supplement, no series of Certificates will represent interests in or
obligations of any lessee (each, a "Lessee") under a Lease. If indicated,
however, in the Prospectus Supplement for a given series, a significant or the
sole source of payments on the Mortgage Loans in such series, and, therefore,
of distributions on such Certificates, will be rental payments due from the
Lessees under the Leases. Under such circumstances, prospective investors in
the related series of Certificates may wish to consider publicly available
information, if any, concerning the Lessees. Reference should be made to the
related Prospectus Supplement for information concerning the Lessees and
whether any such Lessees are subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and any
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Offered
Certificates or an offer of the Offered Certificates to any person in any state
or other jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly.
A Master Servicer or the Trustee will be required to mail to holders
of Offered Certificates of each series periodic unaudited reports concerning
the related Trust Fund. Unless and until definitive Certificates are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Certificates, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Certificates (the
"Certificateholders") upon request to their respective DTC participants. See
"Description of the Certificates--Reports to Certificateholders" and
"Description of the Agreements--Evidence as to Compliance." The Depositor will
file or cause to be filed with the Commission such periodic reports with
respect to each Trust Fund as are required under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of an offering of Offered Certificates evidencing interests
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the
offering of one or more classes of Offered Certificates, a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent such documents or reports relate to one or more of such classes of such
Offered Certificates, other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to Morgan Stanley
Capital I Inc., c/o Morgan Stanley & Co. Incorporated, 1585 Broadway, 37th
Floor, New York, New York 10036, Attention: John E. Westerfield, or by
telephone at (212) 761-4700. The Depositor has determined that its financial
statements are not material to the offering of any Offered Certificates.
3
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[VERSION 2]
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT........................................................3
AVAILABLE INFORMATION........................................................4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................4
SUMMARY OF PROSPECTUS........................................................6
RISK FACTORS................................................................12
DESCRIPTION OF THE TRUST FUNDS..............................................18
USE OF PROCEEDS.............................................................24
YIELD CONSIDERATIONS........................................................25
THE DEPOSITOR...............................................................28
DESCRIPTION OF THE CERTIFICATES.............................................28
DESCRIPTION OF THE AGREEMENTS...............................................36
DESCRIPTION OF CREDIT SUPPORT...............................................46
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE LEASES..................48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................62
STATE TAX CONSIDERATIONS....................................................84
CERTAIN ERISA CONSIDERATIONS................................................85
LEGAL INVESTMENT............................................................87
PLAN OF DISTRIBUTION........................................................88
LEGAL MATTERS...............................................................89
FINANCIAL INFORMATION.......................................................89
RATING......................................................................89
INDEX OF PRINCIPAL DEFINITIONS..............................................90
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
TITLE OF CERTIFICATES
Mortgage Pass-Through Certificates, issuable in series (the "Certificates").
DEPOSITOR
Morgan Stanley Capital I Inc., a wholly-owned subsidiary of Morgan Stanley
Group Inc. See "The Depositor."
MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for each series of
Certificates, which may be an affiliate of the Depositor, will be named in the
related Prospectus Supplement. See "Description of the Agreements--Collection
and Other Servicing Procedures."
4
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[VERSION 2]
SPECIAL SERVICER
The special servicer (the "Special Servicer"), if any, for each series of
Certificates, which may be an affiliate of the Depositor, will be named, or the
circumstances in accordance with which a Special Servicer will be appointed
will be described, in the related Prospectus Supplement. See "Description of
the Agreements--Special Servicers."
TRUSTEE
The trustee (the "Trustee") for each series of Certificates will be named in
the related Prospectus Supplement. See "Description of the Agreements--The
Trustee."
THE TRUST ASSETS
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a Trust Fund consisting primarily of:
(A) MORTGAGE ASSETS
The Mortgage Assets with respect to each series of Certificates will consist of
a pool of multifamily and/or commercial mortgage loans (collectively, the
"Mortgage Loans") and mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities evidencing interests in or
secured by Mortgage Loans (collectively, the "MBS") or a combination of
Mortgage Loans and MBS. The Mortgage Loans will not be guaranteed or insured by
the Depositor or any of its affiliates or, unless otherwise provided in the
Prospectus Supplement, by any governmental agency or instrumentality or other
person. As more specifically described herein, the Mortgage Loans will be
secured by first or junior liens on, or security interests in, properties
consisting of (i) residential properties consisting of five or more rental or
cooperatively-owned dwelling units (the "Multifamily Properties") or (ii)
office buildings, shopping centers, retail stores, hotels or motels, nursing
homes, hospitals or other health-care related facilities, mobile home parks,
warehouse facilities, mini-warehouse facilities or self-storage facilities,
industrial plants, congregate care facilities, mixed use or other types of
commercial properties (the "Commercial Properties"). The term "Mortgaged
Properties" shall refer to Multifamily Properties or Commercial Properties, or
both.
To the extent described in the related Prospectus Supplement, some or all of
the Mortgage Loans may also be secured by an assignment of one or more leases
(each, a "Lease") of one or more lessees (each, a "Lessee") of all or a portion
of the related Mortgaged Properties. Unless otherwise specified in the related
Prospectus Supplement, a significant or the sole source of payments on certain
Commercial Loans (as defined herein) will be the rental payments due under the
related Leases. In certain circumstances, with respect to Commercial
Properties, the material terms and conditions of the related Leases may be set
forth in the related Prospectus Supplement. See "Description of the Trust
Funds--Mortgage Loans--Leases" and "Risk Factors--Limited Assets" herein.
The Mortgaged Properties may be located in any one of the fifty states, the
District of Columbia or the Commonwealth of Puerto Rico. The Prospectus
Supplement will indicate additional jurisdictions, if any, in which the
Mortgaged Properties may be located. Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans will have individual principal
balances at origination of not less than $25,000 and original terms to maturity
of not more than 40 years. All Mortgage Loans will have been originated by
persons other than the Depositor, and all Mortgage Assets will have been
purchased, either directly or indirectly, by the Depositor on or before the
date of initial issuance of the related series of Certificates. The related
Prospectus Supplement will indicate if any such persons are affiliates of the
Depositor.
Each Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over its
term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to an adjustable Mortgage
Rate, from time to time at the mortgagor's election, in each case as described
in the related Prospectus Supplement. Adjustable Mortgage Rates on the Mortgage
Loans in a Trust Fund may be based on one or more indices. Each Mortgage Loan
may provide for scheduled payments to maturity, payments that adjust from time
to time to accommodate changes in the Mortgage Rate or to reflect the
occurrence of certain events, and may
5
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provide for negative amortization or accelerated amortization, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in
each case as described in the related Prospectus Supplement. Each Mortgage Loan
may contain prohibitions on prepayment or require payment of a premium or a
yield maintenance penalty in connection with a prepayment, in each case as
described in the related Prospectus Supplement. The Mortgage Loans may provide
for payments of principal, interest or both, on due dates that occur monthly,
quarterly, semi-annually or at such other interval as is specified in the
related Prospectus Supplement. See "Description of the Trust Funds--Assets."
(B) GOVERNMENT SECURITIES
If so provided in the related Prospectus Supplement, the Trust Fund may
include, in addition to Mortgage Assets, certain direct obligations of the
United States, agencies thereof or agencies created thereby which provide for
payment of interest and/or principal (collectively, "Government Securities").
(C) COLLECTION ACCOUNTS
Each Trust Fund will include one or more accounts established and maintained on
behalf of the Certificateholders into which the person or persons designated in
the related Prospectus Supplement will, to the extent described herein and in
such Prospectus Supplement, deposit all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreements--Certificate Account and Other Collection Accounts."
(D) CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full protection
against certain defaults and losses on the Mortgage Assets in the related Trust
Fund may be provided to one or more classes of Certificates of the related
series in the form of subordination of one or more other classes of
Certificates of such series, which other classes may include one or more
classes of Offered Certificates, or by one or more other types of credit
support, such as a letter of credit, insurance policy, guarantee, reserve fund
or another type of credit support, or a combination thereof (any such coverage
with respect to the Certificates of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the coverage
(if applicable) and related information with respect to each type of Credit
Support, if any, will be described in the Prospectus Supplement for a series of
Certificates. The Prospectus Supplement for any series of Certificates
evidencing an interest in a Trust Fund that includes MBS will describe any
similar forms of credit support that are provided by or with respect to, or are
included as part of the trust fund evidenced by or providing security for, such
MBS. See "Risk Factors--Credit Support Limitations" and "Description of Credit
Support."
(E) CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The Trust Fund may also include certain other agreements, such as
interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets
or on one or more classes of Certificates. (Currency exchange agreements might
be included in the Trust Fund if some or all of the Mortgage Assets (such as
Mortgage Loans secured by Mortgaged Properties located outside the United
States) were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a "Cash Flow Agreement"), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement. The Prospectus Supplement for any series of
Certificates evidencing an interest in a Trust Fund that includes MBS will
describe any cash flow
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agreements that are included as part of the trust fund evidenced by or
providing security for such MBS. See "Description of the Trust Funds--Cash Flow
Agreements." Description of Certificates.
DISTRIBUTIONS ON CERTIFICATES
Each series of Certificates evidencing an interest in a Trust Fund that
includes Mortgage Loans as part of its assets will be issued pursuant to a
pooling and servicing agreement, and each series of Certificates evidencing an
interest in a Trust Fund that does not include Mortgage Loans will be issued
pursuant to a trust agreement. Pooling and servicing agreements and trust
agreements are referred to herein as the "Agreements." Each series of
Certificates will include one or more classes. Each series of Certificates
(including any class or classes of Certificates of such series not offered
hereby) will represent in the aggregate the entire beneficial ownership
interest in the Trust Fund. Each class of Certificates (other than certain
Stripped Interest Certificates, as defined below) will have a stated principal
amount (a "Certificate Balance") and (other than certain Stripped Principal
Certificates, as defined below), will accrue interest thereon based on a fixed,
variable or adjustable interest rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the Certificate Balance, if any, and the
Pass-Through Rate for each class of Certificates or, in the case of a variable
or adjustable Pass-Through Rate, the method for determining the Pass-Through
Rate.
Each series of Certificates will consist of one or more classes of Certificates
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior (collectively, "Senior
Certificates") or subordinate (collectively, "Subordinate Certificates") to one
or more other classes of Certificates in respect of certain distributions on
the Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions (collectively,
"Stripped Principal Certificates"); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Certificates"); (v) provide for distributions
of accrued interest thereon commencing only following the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
such series (collectively, "Accrual Certificates"); (vi) provide for
distributions of principal sequentially, based on specified payment schedules
or other methodologies; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph, including a Stripped Principal
Certificate component and a Stripped Interest Certificate component, to the
extent of available funds, in each case as described in the related Prospectus
Supplement. Any such classes may include classes of Offered Certificates. With
respect to Certificates with two or more components, references herein to
Certificate Balance, notional amount and Pass-Through Rate refer to the
principal balance, if any, notional amount, if any, and the Pass-Through Rate,
if any, for any such component.
The Certificates will not be guaranteed or insured by the Depositor or any of
its affiliates, by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. See
"Risk Factors--Limited Assets" and "Description of the Certificates."
(A) INTEREST
Interest on each class of Offered Certificates (other than Stripped Principal
Certificates and certain classes of Stripped Interest Certificates) of each
series will accrue at the applicable Pass-Through Rate on the outstanding
Certificate Balance thereof and will be distributed to Certificateholders as
provided in the related Prospectus Supplement (each of the specified dates on
which distributions are to be made, a "Distribution Date"). Distributions with
respect to interest on Stripped Interest Certificates may be made on each
Distribution Date on the basis of a notional amount as described in the related
Prospectus Supplement. Distributions of interest with respect to one or more
classes of Certificates may be reduced to the extent of certain delinquencies,
losses, prepayment interest shortfalls, and other contingencies described
herein and in the related Prospectus Supplement. See "Risk Factors--Average
Life of Certificates; Prepayments; Yields," "Yield Considerations" and
"Description of the Certificates--Distributions of Interest on the
Certificates."
(B) PRINCIPAL
The Certificates of each series initially will have an aggregate Certificate
Balance no greater than the outstanding principal balance of the Assets as of,
unless the related Prospectus Supplement provides otherwise, the close of
business on the first day
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of the month of formation of the related Trust Fund (the "Cut-off Date"), after
application of scheduled payments due on or before such date, whether or not
received. The Certificate Balance of a Certificate outstanding from time to
time represents the maximum amount that the holder thereof is then entitled to
receive in respect of principal from future cash flow on the assets in the
related Trust Fund. Unless otherwise provided in the related Prospectus
Supplement, distributions of principal will be made on each Distribution Date
to the class or classes of Certificates entitled thereto until the Certificate
Balances of such Certificates have been reduced to zero. Unless otherwise
specified in the related Prospectus Supplement, distributions of principal of
any class of Certificates will be made on a pro rata basis among all of the
Certificates of such class or by random selection, as described in the related
Prospectus Supplement or otherwise established by the related Trustee. Stripped
Interest Certificates with no Certificate Balance will not receive
distributions in respect of principal. See "Description of the
Certificates--Distributions of Principal of the Certificates."
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be obligated as part of its servicing responsibilities to make
certain advances that in its good faith judgment it deems recoverable with
respect to delinquent scheduled payments on the Whole Loans in such Trust Fund.
Neither the Depositor nor any of its affiliates will have any responsibility to
make such advances. Advances made by a Master Servicer are reimbursable
generally from subsequent recoveries in respect of such Whole Loans and
otherwise to the extent described herein and in the related Prospectus
Supplement. If and to the extent provided in the Prospectus Supplement for any
series, the Master Servicer will be entitled to receive interest on its
outstanding advances, payable from amounts in the related Trust Fund. The
Prospectus Supplement for any series of Certificates evidencing an interest in
a Trust Fund that includes MBS will describe any corresponding advancing
obligation of any person in connection with such MBS. See "Description of the
Certificates--Advances in Respect of Delinquencies."
TERMINATION
If so specified in the related Prospectus Supplement, a series of Certificates
may be subject to optional early termination through the repurchase of the
Assets in the related Trust Fund by the party specified therein, under the
circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Certificate Balance of
a specified class or classes of Certificates by a specified percentage or
amount or on and after a date specified in such Prospectus Supplement, the
party specified therein will solicit bids for the purchase of all of the Assets
of the Trust Fund, or of a sufficient portion of such Assets to retire such
class or classes, or purchase such Assets at a price set forth in the related
Prospectus Supplement. In addition, if so provided in the related Prospectus
Supplement, certain classes of Certificates may be purchased subject to similar
conditions. See "Description of the Certificates--Termination."
REGISTRATION OF CERTIFICATES
If so provided in the related Prospectus Supplement, one or more classes of the
Offered Certificates will initially be represented by one or more Certificates
registered in the name of Cede & Co., as the nominee of DTC. No person
acquiring an interest in Offered Certificates so registered will be entitled to
receive a definitive certificate representing such person's interest except in
the event that definitive certificates are issued under the limited
circumstances described herein. See "Risk Factors--Book-Entry Registration" and
"Description of the Certificates--Book-Entry Registration and Definitive
Certificates."
TAX STATUS OF THE CERTIFICATES
The Certificates of each series will constitute either (i) "regular interests"
("REMIC Regular Certificates") and "residual interests" ("REMIC Residual
Certificates") in a Trust Fund treated as a REMIC under Sections 860A through
860G of the Code, or (ii) interests ("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust under applicable provisions of the Code.
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(A) REMIC
REMIC Regular Certificates generally will be treated as debt obligations of the
applicable REMIC for federal income tax purposes. Certain REMIC Regular
Certificates may be issued with original issue discount for federal income tax
purposes.
See "Certain Federal Income Tax Consequences" in the Prospectus Supplement.
A portion (or, in certain cases, all) of the income from REMIC Residual
Certificates (i) may not be offset by any losses from other activities of the
holder of such REMIC Residual Certificates, (ii) may be treated as unrelated
business taxable income for holders of REMIC Residual Certificates that are
subject to tax on unrelated business taxable income (as defined in Section 511
of the Code), and (iii) may be subject to foreign withholding rules. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates".
The Offered Certificates will be treated as (i) assets described in section
7701(a)(19)(C) of the Internal Revenue Code of 1986, as amended (the "Code")
and (ii) "real estate assets" within the meaning of section 856(c)(4)(A) of the
Code, in each case to the extent described herein and in the Prospectus. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
(B) GRANTOR TRUST
If no election is made to treat the Trust Fund relating to a Series of
Certificates as a real estate mortgage investment conduit ("REMIC"), the Trust
Fund will be classified as a grantor trust and not as an association taxable as
a corporation for federal income tax purposes, and therefore holders of
Certificates will be treated as the owners of undivided pro rata interests in
the Mortgage Pool or pool of securities and any other assets held by the Trust
Fund.
Investors are advised to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan or other retirement plan or
arrangement, including an individual retirement account or annuity or a Keogh
plan, and any collective investment fund or insurance company general or
separate account in which such plans, accounts, annuities or arrangements are
invested, that is subject to Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Code should carefully
review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permissible either under ERISA or Section 4975 of the Code. See
"Certain ERISA Considerations" herein and in the related Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, certain classes
of Certificates may not be transferred unless the Trustee and the Depositor are
furnished with a letter of representations or an opinion of counsel to the
effect that such transfer will not result in a violation of the prohibited
transaction provisions of ERISA and the Code, will not cause the assets of the
Trust to be deemed "plan assets" for purposes of ERISA and the Code and will
not subject the Trustee, the Depositor or the Master Servicer to additional
obligations. See "Certain ERISA Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT
The related Prospectus Supplement will specify whether any class or classes of
the Offered Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and to what extent the
Offered Certificates constitute legal investments for them. See "Legal
Investment" herein and in the related Prospectus Supplement.
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RATING
At the date of issuance, as to each series, each class of Offered Certificates
will be rated not lower than investment grade by one or more nationally
recognized statistical rating agencies (each, a "Rating Agency"). See "Rating"
herein and in the related Prospectus Supplement.
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates
of any series will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Certificates of such series
remain outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities evidencing interests in
single family mortgage loans. The market value of Certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sale of
Certificates by a holder in any secondary market that may develop may be at a
discount from 100% of their original principal balance or from their purchase
price. Furthermore, secondary market purchasers may look only hereto, to the
related Prospectus Supplement and to the reports to Certificateholders
delivered pursuant to the related Agreement as described herein under the
heading "Description of the Certificates--Reports to Certificateholders",
"--Book-Entry Registration and Definitive Certificates" and "Description of the
Agreements--Evidence as to Compliance" for information concerning the
Certificates. Except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights and
the Certificates are subject to early retirement only under certain specified
circumstances described herein and in the related Prospectus Supplement. See
"Description of the Certificates--Termination". Morgan Stanley & Co.
Incorporated currently expects to make a secondary market in the Offered
Certificates, but has no obligation to do so.
LIMITED ASSETS
The Certificates will not represent an interest in or obligation of
the Depositor, the Master Servicer, or any of their affiliates. The only
obligations with respect to the Certificates or the Assets will be the
obligations (if any) of the Warrantying Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the
Mortgage Loans, the Master Servicer's, any Special Servicer's and any
Sub-Servicer's servicing obligations under the related Pooling and Servicing
Agreement (including the limited obligation to make certain advances in the
event of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable). Since certain representations and warranties with respect to the
Mortgage Assets may have been made and/or assigned in connection with transfers
of such Mortgage Assets prior to the Closing Date, the rights of the Trustee
and the Certificateholders with respect to such representations or warranties
will be limited to their rights as an assignee thereof. Unless otherwise
specified in the related Prospectus Supplement, none of the Depositor, the
Master Servicer or any affiliate thereof will have any obligation with respect
to representations or warranties made by any other entity. Unless otherwise
specified in the related Prospectus Supplement, neither the Certificates nor
the underlying Mortgage Assets will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, the Master
Servicer, any Special Servicer, any Sub-Servicer or any of their affiliates.
Proceeds of the assets included in the related Trust Fund for each series of
Certificates (including the Assets and any form of credit enhancement) will be
the sole source of payments on the Certificates, and there will be no recourse
to the Depositor or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Certificates.
Unless otherwise specified in the related Prospectus Supplement, a
series of Certificates will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is insufficient
to make payments on such Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including the Certificate Account and any accounts
maintained as Credit Support, may be withdrawn
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under certain conditions, as described in the related Prospectus Supplement. In
the event of such withdrawal, such amounts will not be available for future
payment of principal of or interest on the Certificates. If so provided in the
Prospectus Supplement for a series of Certificates consisting of one or more
classes of Subordinate Certificates, on any Distribution Date in respect of
which losses or shortfalls in collections on the Assets have been incurred, the
amount of such losses or shortfalls will be borne first by one or more classes
of the Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
AVERAGE LIFE OF CERTIFICATES; PREPAYMENTS; YIELDS
Prepayments (including those caused by defaults) on the Mortgage
Assets in any Trust Fund generally will result in a faster rate of principal
payments on one or more classes of the related Certificates than if payments on
such Mortgage Assets were made as scheduled. Thus, the prepayment experience on
the Mortgage Assets may affect the average life of each class of related
Certificates. The rate of principal payments on pools of mortgage loans varies
between pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax, legal and other factors. There can be no
assurance as to the rate of prepayment on the Mortgage Assets in any Trust Fund
or that the rate of payments will conform to any model described herein or in
any Prospectus Supplement. If prevailing interest rates fall significantly
below the applicable mortgage interest rates, principal prepayments are likely
to be higher than if prevailing rates remain at or above the rates borne by the
Mortgage Loans underlying or comprising the Mortgage Assets in any Trust Fund.
As a result, the actual maturity of any class of Certificates could occur
significantly earlier than expected. A series of Certificates may include one
or more classes of Certificates with priorities of payment and, as a result,
yields on other classes of Certificates, including classes of Offered
Certificates, of such series may be more sensitive to prepayments on Mortgage
Assets. A series of Certificates may include one or more classes offered at a
significant premium or discount. Yields on such classes of Certificates will be
sensitive, and in some cases extremely sensitive, to prepayments on Mortgage
Assets and, where the amount of interest payable with respect to a class is
disproportionately high, as compared to the amount of principal, as with
certain classes of Stripped Interest Certificates, a holder might, in some
prepayment scenarios, fail to recoup its original investment. A series of
Certificates may include one or more classes of Certificates, including classes
of Offered Certificates, that provide for distribution of principal thereof
from amounts attributable to interest accrued but not currently distributable
on one or more classes of Accrual Certificates and, as a result, yields on such
Certificates will be sensitive to (a) the provisions of such Accrual
Certificates relating to the timing of distributions of interest thereon and
(b) if such Accrual Certificates accrue interest at a variable or adjustable
Pass-Through Rate, changes in such rate. See "Yield Considerations" herein and,
if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
series of Certificates. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Certificate at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Certificates
of the related series are entitled that is not covered by the applicable
rating.
The amount, type and nature of credit support, if any, established
with respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of such series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit support required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Assets. No assurance can be given
that values of any Mortgaged Properties have
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remained or will remain at their levels on the respective dates of origination
of the related Mortgage Loans. Moreover, there is no assurance that
appreciation of real estate values generally will limit loss experiences on the
Mortgaged Properties. If the commercial or multifamily residential real estate
markets should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans underlying or comprising
the Mortgage Assets in a particular Trust Fund and any secondary financing on
the related Mortgaged Properties become equal to or greater than the value of
the Mortgaged Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced by institutional lenders.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by the Credit Support, if any,
described in the related Prospectus Supplement, such losses will be borne, at
least in part, by the holders of one or more classes of the Certificates of the
related series. See "Description of Credit Support" and "Rating."
RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED PROPERTIES
Mortgage loans made with respect to multifamily or commercial property
may entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with single family
property. See "Description of the Trust Funds--Assets." The ability of a
mortgagor to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
any independent income or assets of the mortgagor; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. In contrast, the ability of a mortgagor to repay a
single family loan typically is dependent primarily upon the mortgagor's
household income, rather than the capacity of the property to produce income;
thus, other than in geographical areas where employment is dependent upon a
particular employer or an industry, the mortgagor's income tends not to reflect
directly the value of such property. A decline in the net operating income of
an income-producing property will likely affect both the performance of the
related loan as well as the liquidation value of such property, whereas a
decline in the income of a mortgagor on a single family property will likely
affect the performance of the related loan but may not affect the liquidation
value of such property. Moreover, a decline in the value of a Mortgaged
Property will increase the risk of loss particularly with respect to any
related junior Mortgage Loan. See "--Junior Mortgage Loans."
The performance of a mortgage loan secured by an income-producing
property leased by the mortgagor to tenants as well as the liquidation value of
such property may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both;
the risks associated with such loans may be offset by the number of tenants or,
if applicable, a diversity of types of business operated by such tenants.
It is anticipated that a substantial portion of the Mortgage Loans
included in any Trust Fund will be nonrecourse loans or loans for which
recourse may be restricted or unenforceable, as to which, in the event of
mortgagor default, recourse may be had only against the specific property and
such other assets, if any, as have been pledged to secure the related Mortgage
Loan. With respect to those Mortgage Loans that provide for recourse against
the mortgagor and its assets generally, there can be no assurance that such
recourse will ensure a recovery in respect of a defaulted Mortgage Loan greater
than the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual mortgagors or Mortgage Loans in a particular Trust Fund or the
related Mortgaged Properties will generally be greater than for pools of single
family loans both because the Mortgage Assets in a Trust Fund will generally
consist of a smaller number of loans than would a single family pool of
comparable aggregate unpaid principal balance and because of the higher
principal balance of individual Mortgage Loans. Mortgage Assets in a Trust Fund
may consist of only a limited number of Mortgage Loans and/or relate to Leases
to only a single Lessee or a limited number of Lessees.
If applicable, certain legal aspects of the Mortgage Loans for a
series of Certificates may be described in the related Prospectus Supplement.
See also "Certain Legal Aspects of the Mortgage Loans and the Leases" herein.
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RISKS ASSOCIATED WITH COMMERCIAL LOANS AND LEASES
If so described in the related Prospectus Supplement, each mortgagor
under a Commercial Loan may be an entity created by the owner or purchaser of
the related Commercial Property solely to own or purchase such property, in
part to isolate the property from the debts and liabilities of such owner or
purchaser. Unless otherwise specified, each such Commercial Loan will represent
a nonrecourse obligation of the related mortgagor secured by the lien of the
related Mortgage and the related Lease Assignments. Whether or not such loans
are recourse or nonrecourse obligations, it is not expected that the mortgagors
will have any significant assets other than the Commercial Properties and the
related Leases, which will be pledged to the Trustee under the related
Agreement. Therefore, the payment of amounts due on any such Commercial Loans,
and, consequently, the payment of principal of and interest on the related
Certificates, will depend primarily or solely on rental payments by the
Lessees. Such rental payments will, in turn, depend on continued occupancy by,
and/or the creditworthiness of, such Lessees, which in either case may be
adversely affected by a general economic downturn or an adverse change in their
financial condition. Moreover, to the extent a Commercial Property was designed
for the needs of a specific type of tenant (e.g., a nursing home, hospital,
hotel or motel), the value of such property in the event of a default by the
Lessee or the early termination of such Lease may be adversely affected because
of difficulty in re-leasing the property to a suitable substitute lessee or, if
re-leasing to such a substitute is not possible, because of the cost of
altering the property for another more marketable use. As a result, without the
benefit of the Lessee's continued support of the Commercial Property, and
absent significant amortization of the Commercial Loan, if such loan is
foreclosed on and the Commercial Property liquidated following a lease default,
the net proceeds might be insufficient to cover the outstanding principal and
interest owing on such loan, thereby increasing the risk that holders of the
Certificates will suffer some loss.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage Loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related Mortgaged Property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale or
refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition and operating history of the mortgagor and the related
Mortgaged Property, tax laws, rent control laws (with respect to certain
Multifamily Properties and mobile home parks), reimbursement rates (with
respect to certain hospitals, nursing homes and convalescent homes),
renewability of operating licenses, prevailing general economic conditions and
the availability of credit for commercial or multifamily real properties, as
the case may be, generally.
JUNIOR MORTGAGE LOANS
To the extent specified in the related Prospectus Supplement, certain
of the Mortgage Loans may be secured primarily by junior mortgages. In the case
of liquidation, Mortgage Loans secured by junior mortgages are entitled to
satisfaction from proceeds that remain from the sale of the related Mortgaged
Property after the mortgage loans senior to such Mortgage Loans have been
satisfied. If there are not sufficient funds to satisfy such junior Mortgage
Loans and senior mortgage loans, such Mortgage Loan would suffer a loss and,
accordingly, one or more classes of Certificates would bear such loss.
Therefore, any risks of deficiencies associated with first Mortgage Loans will
be greater with respect to junior Mortgage Loans. See "--Risks Associated with
Mortgage Loans and Mortgaged Properties."
OBLIGOR DEFAULT
If so specified in the related Prospectus Supplement, in order to
maximize recoveries on defaulted Whole Loans, a Master Servicer, a Sub-Servicer
or a Special Servicer will be permitted (within prescribed parameters) to
extend and modify Whole Loans that are in default or as to which a payment
default is imminent, including in particular with respect to balloon payments.
In addition, a Master Servicer, a Sub-Servicer or a Special Servicer may
receive a workout fee based on receipts from or proceeds of such Whole Loans.
While any such entity generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery on
a present value basis than liquidation, there can be no
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assurance that such flexibility with respect to extensions or modifications or
payment of a workout fee will increase the present value of receipts from or
proceeds of Whole Loans that are in default or as to which a payment default is
imminent. Additionally, if so specified in the related Prospectus Supplement,
certain of the Mortgage Loans included in the Mortgage Pool for a Series may
have been subject to workouts or similar arrangements following periods of
delinquency and default.
MORTGAGOR TYPE
Mortgage Loans made to partnerships, corporations or other entities
may entail risks of loss from delinquency and foreclosure that are greater than
those of single family mortgage loans. The mortgagor's sophistication and form
of organization may increase the likelihood of protracted litigation or
bankruptcy in default situations.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe
any Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of credit
support, or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses or
risks; for example, Credit Support may or may not cover fraud or negligence by
a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of
Subordinate Certificates (which may include Offered Certificates), if so
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline under certain circumstances. In addition, if principal payments
on one or more classes of Certificates of a series are made in a specified
order of priority, any limits with respect to the aggregate amount of claims
under any related Credit Support may be exhausted before the principal of the
lower priority classes of Certificates of such series has been repaid. As a
result, the impact of significant losses and shortfalls on the Assets may fall
primarily upon those classes of Certificates having a lower priority of
payment. Moreover, if a form of Credit Support covers more than one series of
Certificates (each, a "Covered Trust"), holders of Certificates evidencing an
interest in a Covered Trust will be subject to the risk that such Credit
Support will be exhausted by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Certificates based on
an assumed level of defaults, delinquencies, other losses or other factors.
There can, however, be no assurance that the loss experience on the related
Mortgage Assets will not exceed such assumed levels. See "--Limited Nature of
Ratings," "Description of the Certificates" and "Description of Credit
Support."
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or
a portion of the credit enhancement for any series of Certificates, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Certificates by any
applicable Rating Agency may be lowered following the initial issuance thereof
as a result of the downgrading of the obligations of any applicable credit
support provider, or as a result of losses on the related Mortgage Assets
substantially in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. None of the Depositor, the Master Servicer
or any of their affiliates will have any obligation to replace or supplement
any credit enhancement, or to take any other action to maintain any rating of
any series of Certificates.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinate Certificateholders to receive distributions
to which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the Master
Servicer is paid its servicing fee, including any unpaid servicing fees with
respect to one or more prior Due Periods, and is reimbursed for certain
unreimbursed advances and unreimbursed liquidation expenses) and the Senior
Certificateholders to the extent described
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herein. As a result of the foregoing, investors must be prepared to bear the
risk that they may be subject to delays in payment and may not recover their
initial investments in the Subordinate Certificates. See "Description of the
Certificates--General" and "--Allocation of Losses and Shortfalls."
The yields on the Subordinate Certificates may be extremely sensitive
to the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate and
amount of such losses assumed by an investor, the yields to maturity on the
Subordinate Certificates may be lower than anticipated.
ENFORCEABILITY
Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property or its interest in the
Mortgaged Property. Mortgages may also include a debt-acceleration clause,
which permits the lender to accelerate the debt upon a monetary or non-monetary
default of the mortgagor. Such clauses are generally enforceable subject to
certain exceptions. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default. The equity courts of
any state, however, may refuse the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
If so specified in the related Prospectus Supplement, the Mortgage
Loans will be secured by an assignment of leases and rents pursuant to which
the mortgagor typically assigns its right, title and interest as landlord under
the leases on the related Mortgaged Property and the income derived therefrom
to the lender as further security for the related Mortgage Loan, while
retaining a license to collect rents for so long as there is no default. In the
event the mortgagor defaults, the license terminates and the lender is entitled
to collect rents. Such assignments are typically not perfected as security
interests prior to actual possession of the cash flows. Some state laws may
require that the lender take possession of the Mortgaged Property and obtain a
judicial appointment of a receiver before becoming entitled to collect the
rents. In addition, if bankruptcy or similar proceedings are commenced by or in
respect of the mortgagor, the lender's ability to collect the rents may be
adversely affected. See "Certain Legal Aspects of the Mortgage Loans and the
Leases--Leases and Rents."
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject
to certain environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. Moreoever, the presence of hazardous
or toxic substances, or the failure to remediate such property, may adversely
affect the owner or operator's ability to borrow using such property as
collateral. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") and other federal law, a lender may be liable, as an "owner" or
"operator," for costs of addressing releases or threatened releases of
hazardous substances that require remedy at a property, if agents or employees
of the lender have become sufficiently involved in the operations of the
mortgagor, regardless of whether or not the environmental damage or threat was
caused by a prior owner. A lender also risks such liability on foreclosure of
the mortgage under certain circumstances. Unless otherwise specified in the
related Prospectus Supplement, each Pooling and Servicing Agreement will
provide that none of the Master Servicer, the Sub-Servicer or the Special
Servicer, acting on behalf of the Trust Fund, may acquire title to a Mortgaged
Property securing a Mortgage Loan or take over its operation unless the Master
Servicer has previously determined, based upon a report prepared by a person
who regularly conducts environmental audits, that: (i) the Mortgaged Property
is in compliance with applicable environmental laws, and there are no
circumstances present at the Mortgaged Property relating to the use, management
or disposal of any hazardous substances, hazardous materials, wastes, or
petroleum based materials for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under any federal, state
or local law or regulation; or (ii) if the Mortgaged Property is not so in
compliance or such circumstances are so present, then it would be in the best
economic interest of the Trust Fund to acquire title to the Mortgaged Property
and further to take such actions as would be necessary and appropriate to
effect such compliance and/or respond to such circumstances. See "Certain Legal
Aspects of the Mortgage Loans and the Leases--Environmental Legislation."
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ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
series.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Except as provided in the Prospectus Supplement, REMIC Residual
Certificates, if offered hereunder, are anticipated to have "phantom income"
associated with them. That is, taxable income is anticipated to be allocated to
the REMIC Residual Certificates in the early years of the existence of the
related REMIC, even if the REMIC Residual Certificates receive no distributions
from the related REMIC, with a corresponding amount of losses allocated to the
REMIC Residual Certificates in later years. Accordingly, the present value of
the tax detriments associated with the REMIC Residual Certificates may
significantly exceed the present value of the tax benefits related thereto, and
the REMIC Residual Certificates may have a negative "value." Moreover, the
REMIC Residual Certificates will in effect be allocated an amount of gross
income equal to the non-interest expenses of the REMIC, but such expenses will
be deductible by holders of the REMIC Residual Certificates that are
individuals only as itemized deductions (and be subject to all the limitations
applicable to itemized deductions). Accordingly, investment in the REMIC
Residual Certificates will generally not be suitable for individuals or for
certain pass-through entities, such as partnerships or S corporations, that
have individuals as partners or shareholders. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Finally,
prospective purchasers of a REMIC Residual Certificate should be aware that
recently issued final regulations provide restrictions on the ability to
mark-to-market certain "negative value" REMIC residual interests. See "Certain
Federal Income Tax Consequences--REMICs."
CONTROL
Under certain circumstances, the consent or approval of the holders of
a specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a series or a similar means of allocating decision-making under
the related Agreement ("Voting Rights") will be required to direct, and will be
sufficient to bind all Certificateholders of such series to, certain actions,
including directing the Special Servicer or the Master Servicer with respect to
actions to be taken with respect to certain Mortgage Loans and REO Properties
and amending the related Agreement in certain circumstances. See "Description
of the Agreements--Events of Default," "--Rights Upon Event of Default,"
"--Amendment" and "--List of Certificateholders."
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of
the Certificates will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the Certificateholders or their nominees. Because of this,
unless and until Definitive Certificates are issued, Certificateholders will
not be recognized by the Trustee as "Certificateholders" (as that term is to be
used in the related Agreement). Hence, until such time, Certificateholders will
be able to exercise the rights of Certificateholders only indirectly through
DTC and its participating organizations. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include (i)
multifamily and/or commercial mortgage loans (the "Mortgage Loans"), (ii)
mortgage participations, pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by one or more Mortgage Loans or
other similar participations, certificates or securities ("MBS"), (iii) direct
obligations of the United States, agencies thereof or agencies created thereby
which are not subject to redemption prior
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to maturity at the option of the issuer and are (a) interest-bearing
securities, (b) non-interest-bearing securities, (c) originally
interest-bearing securities from which coupons representing the right to
payment of interest have been removed, or (d) interest-bearing securities from
which the right to payment of principal has been removed (the "Government
Securities"), or (iv) a combination of Mortgage Loans, MBS and Government
Securities. As used herein, "Mortgage Loans" refers to both whole Mortgage
Loans and Mortgage Loans underlying MBS. Mortgage Loans that secure, or
interests in which are evidenced by, MBS are herein sometimes referred to as
Underlying Mortgage Loans. Mortgage Loans that are not Underlying Mortgage
Loans are sometimes referred to as "Whole Loans." Any mortgage participations,
pass-through certificates or other asset-backed certificates in which an MBS
evidences an interest or which secure an MBS are sometimes referred to herein
also as MBS or as "Underlying MBS." Mortgage Loans and MBS are sometimes
referred to herein as "Mortgage Assets." The Mortgage Assets will not be
guaranteed or insured by Morgan Stanley Capital I Inc. (the "Depositor") or any
of its affiliates or, unless otherwise provided in the Prospectus Supplement,
by any governmental agency or instrumentality or by any other person. Each
Asset will be selected by the Depositor for inclusion in a Trust Fund from
among those purchased, either directly or indirectly, from a prior holder
thereof (an "Asset Seller"), which may be an affiliate of the Depositor and,
with respect to Mortgage Assets, which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Depositor. If specified in the related
Prospectus Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in another trust fund that contains
the Assets.
MORTGAGE LOANS
GENERAL
The Mortgage Loans will be secured by liens on, or security interests
in, Mortgaged Properties consisting of (i) residential properties consisting of
five or more rental or cooperatively-owned dwelling units in high-rise,
mid-rise or garden apartment buildings ("Multifamily Properties" and the
related loans, "Multifamily Loans") or (ii) office buildings, shopping centers,
retail stores, hotels or motels, nursing homes, hospitals or other health
care-related facilities, mobile home parks, warehouse facilities,
mini-warehouse facilities or self-storage facilities, industrial plants,
congregate care facilities, mixed use or other types of commercial properties
("Commercial Properties" and the related loans, "Commercial Loans") located,
unless otherwise specified in the related Prospectus Supplement, in any one of
the fifty states, the District of Columbia or the Commonwealth of Puerto Rico.
To the extent specified in the related Prospectus Supplement, the Mortgage
Loans will be secured by first or junior mortgages or deeds of trust or other
similar security instruments creating a first or junior lien on Mortgaged
Property. Multifamily Property may include mixed commercial and residential
structures and may include apartment buildings owned by private cooperative
housing corporations ("Cooperatives"). The Mortgaged Properties may include
leasehold interests in properties, the title to which is held by third party
lessors. Unless otherwise specified in the Prospectus Supplement, the term of
any such leasehold will exceed the term of the related mortgage note by at
least five years. Each Mortgage Loan will have been originated by a person (the
"Originator") other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage Loans
will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust (the "Mortgages") creating a lien on the Mortgaged
Properties. Mortgage Loans will generally also be secured by an assignment of
leases and rents and/or operating or other cash flow guarantees relating to the
Mortgage Loan.
LEASES
To the extent specified in the related Prospectus Supplement, the
Commercial Properties may be leased to Lessees that respectively occupy all or
a portion of such properties. Pursuant to a Lease Assignment, the related
mortgagor may assign its rights, title and interest as lessor under each Lease
and the income derived therefrom to the related mortgagee, while retaining a
license to collect the rents for so long as there is no default. If the
mortgagor defaults, the license terminates and the mortgagee or its agent is
entitled to collect the rents from the related Lessee or Lessees for
application to the monetary obligations of the mortgagor. State law may limit
or restrict the enforcement of the Lease Assignments by a mortgagee until it
takes possession of the related Mortgaged Property and/or a receiver is
appointed. See "Certain Legal Aspects of the Mortgage
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Loans and the Leases--Leases and Rents." Alternatively, to the extent specified
in the related Prospectus Supplement, the mortgagor and the mortgagee may agree
that payments under Leases are to be made directly to the Master Servicer.
To the extent described in the related Prospectus Supplement, the
Leases may require the Lessees to pay rent that is sufficient in the aggregate
to cover all scheduled payments of principal and interest on the related
Mortgage Loans and, in certain cases, their pro rata share of the operating
expenses, insurance premiums and real estate taxes associated with the
Mortgaged Properties. Certain of the Leases may require the mortgagor to bear
costs associated with structural repairs and/or the maintenance of the exterior
or other portions of the Mortgaged Property or provide for certain limits on
the aggregate amount of operating expenses, insurance premiums, taxes and other
expenses that the Lessees are required to pay. If so specified in the related
Prospectus Supplement, under certain circumstances the Lessees may be permitted
to set off their rental obligations against the obligations of the mortgagors
under the Leases. In those cases where payments under the Leases (net of any
operating expenses payable by the mortgagors) are insufficient to pay all of
the scheduled principal and interest on the related Mortgage Loans, the
mortgagors must rely on other income or sources (including security deposits)
generated by the related Mortgaged Property to make payments on the related
Mortgage Loan. To the extent specified in the related Prospectus Supplement,
some Commercial Properties may be leased entirely to one Lessee. In such cases,
absent the availability of other funds, the mortgagor must rely entirely on
rent paid by such Lessee in order for the mortgagor to pay all of the scheduled
principal and interest on the related Commercial Loan. To the extent specified
in the related Prospectus Supplement, certain of the Leases may expire prior to
the stated maturity of the related Mortgage Loan. In such cases, upon
expiration of the Leases the mortgagors will have to look to alternative
sources of income, including rent payment by any new Lessees or proceeds from
the sale or refinancing of the Mortgaged Property, to cover the payments of
principal and interest due on such Mortgage Loans unless the Lease is renewed.
As specified in the related Prospectus Supplement, certain of the Leases may
provide that upon the occurrence of a casualty affecting a Mortgaged Property,
the Lessee will have the right to terminate its Lease, unless the mortgagor, as
lessor, is able to cause the Mortgaged Property to be restored within a
specified period of time. Certain Leases may provide that it is the lessor's
responsibility, while other Leases provide that it is the Lessee's
responsibility, to restore the Mortgaged Property after a casualty to its
original condition. Certain Leases may provide a right of termination to the
related Lessee if a taking of a material or specified percentage of the leased
space in the Mortgaged Property occurs, or if the ingress or egress to the
leased space has been materially impaired.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
Mortgage loans secured by commercial and multifamily properties are
markedly different from owner-occupied single family mortgage loans. The
repayment of loans secured by commercial or multifamily properties is typically
dependent upon the successful operation of such property rather than upon the
liquidation value of the real estate. Unless otherwise specified in the
Prospectus Supplement, the Mortgage Loans will be non-recourse loans, which
means that, absent special facts, the mortgagee may look only to the Net
Operating Income from the property for repayment of the mortgage debt, and not
to any other of the mortgagor's assets, in the event of the mortgagor's
default. Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such a loan. The "Debt Service Coverage Ratio" of a Mortgage Loan at
any given time is the ratio of the Net Operating Income for a twelve-month
period to the annualized scheduled payments on the Mortgage Loan. "Net
Operating Income" means, for any given period, unless otherwise specified in
the related Prospectus Supplement, the total operating revenues derived from a
Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than
(i) non-cash items such as depreciation and amortization, (ii) capital
expenditures and (iii) debt service on loans secured by the Mortgaged Property.
The Net Operating Income of a Mortgaged Property will fluctuate over time and
may be sufficient or insufficient to cover debt service on the related Mortgage
Loan at any given time.
As the primary component of Net Operating Income, rental income (as
well as maintenance payments from tenant-stockholders of a Cooperative) is
subject to the vagaries of the applicable real estate market and/or business
climate. Properties typically leased, occupied or used on a short-term basis,
such as health care-related facilities, hotels and motels, and mini-warehouse
and self-storage facilities, tend to be affected more rapidly by changes in
market or business conditions than do properties leased, occupied or used for
longer periods, such as (typically) warehouses, retail stores, office buildings
and industrial plants. Commercial Loans may be secured by owner-occupied
Mortgaged Properties or Mortgaged Properties leased to a single tenant.
Accordingly, a decline in the financial condition of the mortgagor or single
tenant, as applicable, may have a
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disproportionately greater effect on the Net Operating Income from such
Mortgaged Properties than would be the case with respect to Mortgaged
Properties with multiple tenants.
Changes in the expense components of Net Operating Income due to the
general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate and personal property
tax rates and other operating expenses, including energy costs; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; and acts of God may also affect the risk of default on the related
Mortgage Loan. As may be further described in the related Prospectus
Supplement, in some cases leases of Mortgaged Properties may provide that the
Lessee, rather than the mortgagor, is responsible for payment of some or all of
these expenses; however, because leases are subject to default risks as well
when a tenant's income is insufficient to cover its rent and operating
expenses, the existence of such "net of expense" provisions will only temper,
not eliminate, the impact of expense increases on the performance of the
related Mortgage Loan. See "--Leases" above.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities and hospitals,
the income from which and the operating expenses of which are subject to state
and/or federal regulations, such as Medicare and Medicaid, and multifamily
properties and mobile home parks, which may be subject to state or local rent
control regulation and, in certain cases, restrictions on changes in use of the
property. Low-and moderate-income housing in particular may be subject to legal
limitations and regulations but, because of such regulations, may also be less
sensitive to fluctuations in market rents generally.
The Debt Service Coverage Ratio should not be relied upon as the sole
measure of the risk of default of any loan, however, since other factors may
outweigh a high Debt Service Coverage Ratio. With respect to a Balloon Mortgage
Loan, for example, the risk of default as a result of the unavailability of a
source of funds to finance the related balloon payment at maturity on terms
comparable to or better than those of such Balloon Mortgage Loans could be
significant even though the related Debt Service Coverage Ratio is high.
The liquidation value of any Mortgaged Property may be adversely
affected by risks generally incident to interests in real property, including
declines in rental or occupancy rates. Lenders generally use the Loan-to-Value
Ratio of a mortgage loan as a measure of risk of loss if a property must be
liquidated upon a default by the mortgagor.
Appraised values of income-producing properties may be based on the
market comparison method (recent resale value of comparable properties at the
date of the appraisal), the cost replacement method (the cost of replacing the
property at such date), the income capitalization method (a projection of value
based upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods presents analytical challenges. It is often difficult to find truly
comparable properties that have recently been sold; the replacement cost of a
property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate. Where more than one of
these appraisal methods are used and create significantly different results, or
where a high Loan-to-Value Ratio accompanies a high Debt Service Coverage Ratio
(or vice versa), the analysis of default and loss risks is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish the Multifamily and Commercial
Loans from single family mortgage loans and provide insight to the risks
associated with income-producing real estate, there is no assurance that such
factors will in fact have been considered by the Originators of the Multifamily
and Commercial Loans, or that, for any of such Mortgage Loans, they are
complete or relevant. See "Risk Factors--Risks Associated with Mortgage Loans
and Mortgaged Properties," "--Balloon Payments," "--Junior Mortgage Loans,"
"--Obligor Default" and "--Mortgagor Type."
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LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise set forth in the related Prospectus Supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the appraised
value thereof determined in an appraisal obtained at the time of origination of
the Refinance Loan. The Value of a Mortgaged Property as of the date of initial
issuance of the related series of Certificates may be less than the value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Mortgage Loans, including (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans as of the applicable
Cut-off Date, (ii) the type of property securing the Mortgage Loans (e.g.,
Multifamily Property or Commercial Property and the type of property in each
such category), (iii) the weighted average (by principal balance) of the
original and remaining terms to maturity of the Mortgage Loans, (iv) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(v) the weighted average (by principal balance) of the Loan-to-Value Ratios at
origination of the Mortgage Loans, (vi) the Mortgage Rates or range of Mortgage
Rates and the weighted average Mortgage Rate borne by the Mortgage Loans, (vii)
the state or states in which most of the Mortgaged Properties are located,
(viii) information with respect to the prepayment provisions, if any, of the
Mortgage Loans, (ix) the weighted average Retained Interest, if any, (x) with
respect to Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the
index, the frequency of the adjustment dates, the highest, lowest and weighted
average note margin and pass-through margin, and the maximum Mortgage Rate or
monthly payment variation at the time of any adjustment thereof and over the
life of the ARM Loan and the frequency of such monthly payment adjustments,
(xi) the Debt Service Coverage Ratio either at origination or as of a more
recent date (or both) and (xii) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. The related Prospectus Supplement
will also contain certain information available to the Depositor with respect
to the provisions of leases and the nature of tenants of the Mortgaged
Properties and other information referred to in a general manner under
"--Mortgage Loans--Default and Loss Considerations with Respect to the Mortgage
Loans" above. If specific information respecting the Mortgage Loans is not
known to the Depositor at the time Certificates are initially offered, more
general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Certificates at or before
the initial issuance thereof and will be filed as part of a Current Report on
Form 8-K with the Securities and Exchange Commission within fifteen days after
such initial issuance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, all
of the Mortgage Loans will (i) have individual principal balances at
origination of not less than $25,000, (ii) have original terms to maturity of
not more than 40 years and (iii) provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to
a fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from
time to time pursuant to an election or as otherwise specified on the related
Mortgage Note, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the Mortgage Rate or to
reflect the occurrence of certain events, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-out
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Period" and the date of expiration thereof, a "Lock-out Date") or require
payment of a premium or a yield maintenance penalty (a "Prepayment Premium") in
connection with a prepayment, in each case as described in the related
Prospectus Supplement. In the event that holders of any class or classes of
Offered Certificates will be entitled to all or a portion of any Prepayment
Premiums collected in respect of Mortgage Loans, the related Prospectus
Supplement will specify the method or methods by which any such amounts will be
allocated. A Mortgage Loan may also contain provisions entitling the mortgagee
to a share of profits realized from the operation or disposition of the
Mortgaged Property ("Equity Participations"), as described in the related
Prospectus Supplement. In the event that holders of any class or classes of
Offered Certificates will be entitled to all or a portion of an Equity
Participation, the related Prospectus Supplement will specify the terms and
provisions of the Equity Participation and the method or methods by which
distributions in respect thereof will be allocated among such Certificates.
MBS
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, a trust agreement, an
indenture or similar agreement (an "MBS Agreement"). A seller (the "MBS
Issuer") and/or servicer (the "MBS Servicer") of the underlying Mortgage Loans
(or Underlying MBS) will have entered into the MBS Agreement with a trustee or
a custodian under the MBS Agreement (the "MBS Trustee"), if any, or with the
original purchaser of the interest in the underlying Mortgage Loans or MBS
evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be
made on MBS on the dates specified in the related Prospectus Supplement. The
MBS may be issued in one or more classes with characteristics similar to the
classes of Certificates described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Certificates under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have
been established for the MBS on the basis of requirements of either any Rating
Agency that may have assigned a rating to the MBS or the initial purchasers of
the MBS.
The Prospectus Supplement for a series of Certificates evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under "--Mortgage Loans--Mortgage Loan Information in
Prospectus Supplements" above, and the type of information in respect of the
Underlying MBS described in this paragraph, (xii) the characteristics of any
cash flow agreements that are included as part of the trust fund evidenced or
secured by the MBS and (xiii) whether the MBS is in certificated form,
book-entry form or held through a depository such as The Depository Trust
Company or the Participants Trust Company.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Certificates evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal
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amounts or notional amounts, as applicable, and types of the Government
Securities to be included in the Trust Fund, (ii) the original and remaining
terms to stated maturity of the Government Securities, (iii) whether such
Government Securities are entitled only to interest payments, only to principal
payments or to both, (iv) the interest rates of the Government Securities or
the formula to determine such rates, if any, (v) the applicable payment
provisions for the Government Securities and (vi) to what extent, if any, the
obligation evidenced thereby is backed by the full faith and credit of the
United States.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Certificateholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreement--Certificate Account and Other Collection Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Certificates in the
related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination thereof (any such coverage
with respect to the Certificates of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the coverage
(if applicable) and related information with respect to each type of Credit
Support, if any, will be described in the Prospectus Supplement for a series of
Certificates. See "Risk Factors--Credit Support Limitations" and "Description
of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in
the funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets
or on one or more classes of Certificates. (Currency exchange agreements might
be included in the Trust Fund if some or all of the Mortgage Assets (such as
Mortgage Loans secured by Mortgaged Properties located outside the United
States) were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a "Cash Flow Agreement"), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor to the purchase of Assets and to pay for certain
expenses incurred in connection with such purchase of Assets and sale of
Certificates. The Depositor expects to sell the Certificates from time to time,
but the timing and amount of offerings of Certificates will depend on a number
of factors, including the volume of Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
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YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate, the receipt
and timing of receipt of distributions on the Certificate and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE
Certificates of any class within a series may have fixed, variable or
adjustable Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Assets in the related Trust Fund. The Prospectus Supplement
with respect to any series of Certificates will specify the Pass-Through Rate
for each class of such Certificates or, in the case of a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Asset on the Pass-Through Rate of one
or more classes of Certificates; and whether the distributions of interest on
the Certificates of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
The effective yield to maturity to each holder of Certificates
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Certificate because,
while interest may accrue on each Asset during a certain period, the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Certificates (or addition to the
Certificate Balance of a class of Accrual Certificates) on a Distribution Date
will include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate," if the
Interest Accrual Period ends on a date other than a Distribution Date for the
related series, the yield realized by the holders of such Certificates may be
lower than the yield that would result if the Interest Accrual Period ended on
such Distribution Date. In addition, if so specified in the related Prospectus
Supplement, interest accrued for an Interest Accrual Period for one or more
classes of Certificates may be calculated on the assumption that distributions
of principal (and additions to the Certificate Balance of Accrual Certificates)
and allocations of losses on the Assets may be made on the first day of the
Interest Accrual Period for a Distribution Date and not on such Distribution
Date. Such method would produce a lower effective yield than if interest were
calculated on the basis of the actual principal amount outstanding during an
Interest Accrual Period. The Interest Accrual Period for any class of Offered
Certificates will be described in the related Prospectus Supplement.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate
of principal payments on the Assets (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations). Such payments may be directly dependent upon the
payments on Leases underlying such Mortgage Loans. The rate at which principal
prepayments occur on the Mortgage Loans will be affected by a variety of
factors, including, without limitation, the terms of the Mortgage Loans, the
level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. In this regard, it should be noted that certain
Assets may consist of Mortgage Loans with different Mortgage Rates and the
stated pass-through or pay-through interest rate of certain MBS may be a number
of percentage points higher or lower than certain of the underlying Mortgage
Loans. The rate of principal payments on some or all of the classes of
Certificates of a series will correspond to the rate of principal payments on
the Assets in the related Trust Fund and is likely to be affected by the
existence of Lock-out Periods and Prepayment Premium provisions of the Mortgage
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Loans underlying or comprising such Assets, and by the extent to which the
servicer of any such Mortgage Loan is able to enforce such provisions. Mortgage
Loans with a Lock-out Period or a Prepayment Premium provision, to the extent
enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical Mortgage Loans without such
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Certificate offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Certificates, the effect on yield
on one or more classes of the Certificates of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
When a full prepayment is made on a Mortgage Loan, the mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid for
the number of days in the month actually elapsed up to the date of the
prepayment. Unless otherwise specified in the related Prospectus Supplement,
the effect of prepayments in full will be to reduce the amount of interest paid
in the following month to holders of Certificates entitled to payments of
interest because interest on the principal amount of any Mortgage Loan so
prepaid will be paid only to the date of prepayment rather than for a full
month. Unless otherwise specified in the related Prospectus Supplement, a
partial prepayment of principal is applied so as to reduce the outstanding
principal balance of the related Mortgage Loan as of the Due Date in the month
in which such partial prepayment is received. As a result, unless otherwise
specified in the related Prospectus Supplement, the effect of a partial
prepayment on a Mortgage Loan will be to reduce the amount of interest passed
through to holders of Certificates in the month following the receipt of such
partial prepayment by an amount equal to one month's interest at the applicable
Pass-Through Rate on the prepaid amount.
The timing of changes in the rate of principal payments on the
Mortgage Assets may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the Mortgage Assets and distributed on a Certificate, the greater
the effect on such investor's yield to maturity. The effect on an investor's
yield of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
Certificates may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Certificates of the related series.
If so provided in the Prospectus Supplement for a series of
Certificates, one or more classes of Certificates may have a final scheduled
Distribution Date, which is the date on or prior to which the Certificate
Balance thereof is scheduled to be reduced to zero, calculated on the basis of
the assumptions applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Certificates of a series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Mortgage Assets is
paid to such class, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
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In addition, the weighted average life of the Certificates may be
affected by the varying maturities of the Mortgage Loans comprising or
underlying the MBS. If any Mortgage Loans comprising or underlying the Assets
in a particular Trust Fund have actual terms to maturity of less than those
assumed in calculating final scheduled Distribution Dates for the classes of
Certificates of the related series, one or more classes of such Certificates
may be fully paid prior to their respective final scheduled Distribution Dates,
even in the absence of prepayments. Accordingly, the prepayment experience of
the Assets will, to some extent, be a function of the mix of Mortgage Rates and
maturities of the Mortgage Loans comprising or underlying such Assets. See
"Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans.
Neither CPR nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Mortgage Assets. Moreover, CPR was developed
based upon historical prepayment experience for single family loans. Thus, it
is likely that prepayment of any Mortgage Loans comprising or underlying the
Mortgage Assets for any series will not conform to any particular level of CPR.
The Depositor is not aware of any meaningful publicly available
prepayment statistics for multifamily or commercial mortgage loans.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Certificates of such series and the
percentage of the initial Certificate Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR or at such other rates specified in
such Prospectus Supplement. Such tables and assumptions are intended to
illustrate the sensitivity of weighted average life of the Certificates to
various prepayment rates and will not be intended to predict or to provide
information that will enable investors to predict the actual weighted average
life of the Certificates. It is unlikely that prepayment of any Mortgage Loans
comprising or underlying the Mortgage Assets for any series will conform to any
particular level of CPR or any other rate specified in the related Prospectus
Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE ASSET
A number of Mortgage Loans may have balloon payments due at maturity,
and because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Mortgage Loans having
balloon payments may default at maturity, or that the servicer may extend the
maturity of such a Mortgage Loan in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the mortgagor or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the servicer may, to the extent and under the circumstances set forth in the
related Prospectus Supplement, be permitted to modify Mortgage Loans that are
in default or as to which a payment default is imminent. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Certificates, thereby lengthening
the period of time elapsed from the date of issuance of a Certificate until it
is retired.
FORECLOSURES AND PAYMENT PLANS
The number of foreclosures and the principal amount of the Mortgage
Loans comprising or underlying the Mortgage Assets that are foreclosed in
relation to the number and principal amount of Mortgage Loans that are repaid
in accordance with their terms will affect the weighted average life of the
Mortgage Loans comprising or underlying the Mortgage Assets and that
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of the related series of Certificates. Servicing decisions made with respect to
the Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy proceedings,
may also have an effect upon the payment patterns of particular Mortgage Loans
and thus the weighted average life of the Certificates.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
or the creation of encumbrances upon underlying Mortgaged Property is another
factor affecting prepayment rates that may not be reflected in the prepayment
standards or models used in the relevant Prospectus Supplement. A number of the
Mortgage Loans comprising or underlying the Assets may include "due-on-sale"
clauses or "due-on-encumbrance" clauses that allow the holder of the Mortgage
Loans to demand payment in full of the remaining principal balance of the
Mortgage Loans upon sale or certain other transfers of or the creation of
encumbrances upon the related Mortgaged Property. With respect to any Whole
Loans, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer, on behalf of the Trust Fund, will be required to exercise (or
waive its right to exercise) any such right that the Trustee may have as
mortgagee to accelerate payment of the Whole Loan in a manner consistent with
the Servicing Standard. See "Certain Legal Aspects of the Mortgage Loans and
the Leases--Due-on-Sale and Due-on-Encumbrance" and "Description of the
Agreements--Due-on-Sale and Due-on-Encumbrance Provisions."
THE DEPOSITOR
Morgan Stanley Capital I Inc., the Depositor, is a direct wholly-owned
subsidiary of Morgan Stanley Group Inc. and was incorporated in the State of
Delaware on January 28, 1985. The principal executive offices of the Depositor
are located at 1585 Broadway, 37th Floor, New York, New York 10036. Its
telephone number is (212) 761-4700.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. Each series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to one or more other
classes of Certificates in respect of certain distributions on the
Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions (collectively,
"Stripped Principal Certificates"); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Certificates"); (v) provide for distributions
of accrued interest thereon commencing only following the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
such series (collectively, "Accrual Certificates"); (vi) provide for payments
of principal sequentially, based on specified payment schedules, from only a
portion of the Assets in such Trust Fund or based on specified calculations, to
the extent of available funds, in each case as described in the related
Prospectus Supplement; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph including a Stripped Principal
Certificate component and a Stripped Interest Certificate component. Any such
classes may include classes of Offered Certificates.
Each class of Offered Certificates of a series will be issued in
minimum denominations corresponding to the Certificate Balances or, in case of
Stripped Interest Certificates, notional amounts or percentage interests
specified in the related Prospectus Supplement. The transfer of any Offered
Certificates may be registered and such Certificates may be exchanged without
the payment of any service charge payable in connection with such registration
of transfer or exchange, but the Depositor or the Trustee or any agent thereof
may require payment of a sum sufficient to cover any tax or other
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governmental charge. One or more classes of Certificates of a series may be
issued in definitive form ("Definitive Certificates") or in book-entry form
("Book-Entry Certificates"), as provided in the related Prospectus Supplement.
See "Risk Factors--Book-Entry Registration" and "Description of the
Certificates--Book-Entry Registration and Definitive Certificates." Definitive
Certificates will be exchangeable for other Certificates of the same class and
series of a like aggregate Certificate Balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity" and "Limited Assets."
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made 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"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class or by random selection, as described in the related Prospectus Supplement
or otherwise established by the related Trustee. Payments will be made either
by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Certificates in the requisite amount specified therein), or
by check mailed to the address of the person entitled thereto as it appears on
the Certificate Register; provided, however, that the final distribution in
retirement of the Certificates (whether Definitive Certificates or Book-Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the location specified in the notice to Certificateholders of
such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Certificates of each series on each
Distribution Date will be made from the Available Distribution Amount described
below, in accordance with the terms described in the related Prospectus
Supplement. Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related
Certificate Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a "Due Period" with respect to any
Distribution Date will commence on the second day of the month in which the
immediately preceding Distribution Date occurs, or the day after the Cut-off
Date in the case of the first Due Period, and will end on the first day of the
month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest thereon and
related Prepayment Premiums, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Due Period, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a Sub-Servicer, a
Special Servicer, the Master Servicer or any other entity as specified in the
related Prospectus Supplement or that are payable in respect of certain
expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account, including
any net amounts paid under any Cash Flow Agreements;
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(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as specified in
the related Prospectus Supplement with respect to interest shortfalls resulting
from prepayments during the related Prepayment Period; and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Certificate Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Certificates (including any Certificates not
offered hereby) on each Distribution Date, and accordingly will be released
from the Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on such class or a component thereof (the "Pass-Through Rate"). The
related Prospectus Supplement will specify the Pass-Through Rate for each class
or component or, in the case of a variable or adjustable Pass-Through Rate, the
method for determining the Pass-Through Rate. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
will be made on each Distribution Date (other than any class of Accrual
Certificates, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related Prospectus Supplement, and any class of Stripped Principal
Certificates that are not entitled to any distributions of interest) based on
the Accrued Certificate Interest for such class and such Distribution Date,
subject to the sufficiency of the portion of the Available Distribution Amount
allocable to such class on such Distribution Date. Prior to the time interest
is distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates and each Distribution Date (other than certain classes of
Stripped Interest Certificates), "Accrued Certificate Interest" will be equal
to interest accrued for a specified period on the outstanding Certificate
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate, reduced as described below. Unless otherwise provided in the
Prospectus Supplement, Accrued Certificate Interest on Stripped Interest
Certificates will be equal to interest accrued for a specified period on the
outstanding notional amount thereof immediately prior to each Distribution
Date, at the applicable Pass-Through Rate, reduced as described below. The
method of determining the notional amount for any class of Stripped Interest
Certificates will be described in the related Prospectus Supplement. Reference
to notional amount is solely for convenience in certain calculations and does
not represent the right to receive any distributions of principal. Unless
otherwise provided in the related Prospectus Supplement, the Accrued
Certificate Interest on a series of Certificates will be reduced in the event
of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in such accrual period on the Mortgage Loans comprising or underlying the
Mortgage Assets in the Trust Fund for such series. The particular manner in
which such shortfalls are to be allocated among some or all of the classes of
Certificates of that series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise
be added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including delinquencies, losses
and deferred interest on or in respect of the Mortgage Loans comprising or
underlying the Mortgage Assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on the Mortgage Loans comprising or underlying the Mortgage Assets in the
related Trust Fund will result in
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a corresponding increase in the Certificate Balance of such class. See "Risk
Factors--Average Life of Certificates; Prepayments; Yields" and "Yield
Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each series, other than certain classes of
Stripped Interest Certificates, will have a "Certificate Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive in respect of principal out of the future cash flow on the Assets and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon from time to time and, if and to the extent so provided in
the related Prospectus Supplement, by the amount of losses incurred in respect
of the related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Certificates prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Certificate Interest. Unless otherwise
provided in the related Prospectus Supplement, the initial aggregate
Certificate Balance of all classes of Certificates of a series will not be
greater than the outstanding aggregate principal balance of the related Assets
as of the applicable Cut-off Date. The initial aggregate Certificate Balance of
a series and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the class
or classes of Certificates entitled thereto in accordance with the provisions
described in such Prospectus Supplement until the Certificate Balance of such
class has been reduced to zero. Stripped Interest Certificates with no
Certificate Balance are not entitled to any distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a class of Certificates may be based on a combination of two or
more different components as described under "--General" above. To such extent,
the descriptions set forth under "--Distributions of Interests on the
Certificates" and "--Distributions of Principal of the Certificates" above also
relate to components of such a class of Certificates. In such case, reference
in such sections to Certificate Balance and Pass-Through Rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate, if
any, on any such component, respectively.
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF
EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations that are collected on
the Mortgage Assets in the related Trust Fund will be distributed on each
Distribution Date to the class or classes of Certificates entitled thereto in
accordance with the provisions described in such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of
Certificates consisting of one or more classes of Subordinate Certificates, on
any Distribution Date in respect of which losses or shortfalls in collections
on the Mortgage Assets have been incurred, the amount of such losses or
shortfalls will be borne first by a class of Subordinate Certificates in the
priority and manner and subject to the limitations specified in such Prospectus
Supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a Trust Fund against losses and
shortfalls on Mortgage Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Certificates evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer or another entity described therein will be required as part of
its servicing responsibilities to advance on or before each Distribution Date
its own funds or funds held in the Certificate Account that are not included in
the Available Distribution Amount for such Distribution Date, in an amount
equal to the aggregate of payments
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of principal (other than any balloon payments) and interest (net of related
servicing fees and Retained Interest) that were due on the Whole Loans in such
Trust Fund during the related Due Period and were delinquent on the related
Determination Date, subject to the Master Servicer's (or another entity's) good
faith determination that such advances will be reimbursable from Related
Proceeds (as defined below). In the case of a series of Certificates that
includes one or more classes of Subordinate Certificates and if so provided in
the related Prospectus Supplement, the Master Servicer's (or another entity's)
advance obligation may be limited only to the portion of such delinquencies
necessary to make the required distributions on one or more classes of Senior
Certificates and/or may be subject to the Master Servicer's (or another
entity's) good faith determination that such advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of such Subordinate Certificates. See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the Master
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Mortgage Loans (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan, "Related Proceeds") and, if so provided in the Prospectus Supplement, out
of any amounts otherwise distributable on one or more classes of Subordinate
Certificates of such series; provided, however, that any such advance will be
reimbursable from any amounts in the Certificate Account prior to any
distributions being made on the Certificates to the extent that the Master
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related
Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinate Certificates. If advances have been made by
the Master Servicer from excess funds in the Certificate Account, the Master
Servicer is required to replace such funds in the Certificate Account on any
future Distribution Date to the extent that funds in the Certificate Account on
such Distribution Date are less than payments required to be made to
Certificateholders on such date. If so specified in the related Prospectus
Supplement, the obligations of the Master Servicer (or another entity) to make
advances may be secured by a cash advance reserve fund, a surety bond, a letter
of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any such
surety bond, will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer (or another entity) will be entitled to receive interest at
the rate specified therein on its outstanding advances and will be entitled to
pay itself such interest periodically from general collections on the Assets
prior to any payment to Certificateholders or as otherwise provided in the
related Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Certificates of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Certificates of such
class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of such
class allocable to Accrued Certificate Interest;
(iii) the amount of such distribution allocable to (a) Prepayment Premiums
and (b) payments on account of Equity Participations;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by
any Special Servicer and any Sub-Servicer) and such other customary
information as any such Master
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Servicer or the Trustee deems necessary or desirable, or that a
Certificateholder reasonably requests, to enable Certificateholders to
prepare their tax returns;
(v) the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of business
on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in respect
of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to each Whole Loan that is delinquent two or more months,
(a) the loan number thereof, (b) the unpaid balance thereof, (c)
whether the delinquency is in respect of any balloon payment, (d) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof, (e) if applicable, the aggregate amount
of any interest accrued and payable on related servicing expenses and
related advances assuming such Mortgage Loan is subsequently
liquidated through foreclosure, (f) whether a notice of acceleration
has been sent to the mortgagor and, if so, the date of such notice,
(g) whether foreclosure proceedings have been commenced and, if so,
the date so commenced and (h) if such Mortgage Loan is more than three
months delinquent and foreclosure has not been commenced, the reason
therefor;
(ix) with respect to any Whole Loan liquidated during the related Due
Period (other than by payment in full), (a) the loan number thereof,
(b) the manner in which it was liquidated and (c) the aggregate amount
of liquidation proceeds received;
(x) with respect to any Whole Loan liquidated during the related Due
Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect
of such Mortgage Loan and (b) the amount of any loss to
Certificateholders;
(xi) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the loan number of the related Mortgage Loan and (b) the date of
acquisition;
(xii) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the book value, (b) the principal balance of the related Mortgage
Loan immediately following such Distribution Date (calculated as if
such Mortgage Loan were still outstanding taking into account certain
limited modifications to the terms thereof specified in the
Agreement), (c) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on
related servicing expenses and related advances;
(xiii) with respect to any such REO Property sold during the related Due
Period (a) the loan number of the related Mortgage Loan, (b) the
aggregate amount of sale proceeds, (c) the portion of such sales
proceeds payable or reimbursable to the Master Servicer or a Special
Servicer in respect of such REO Property or the related Mortgage Loan
and (d) the amount of any loss to Certificateholders in respect of the
related Mortgage Loan;
(xiv) the aggregate Certificate Balance or notional amount, as the case may
be, of each class of Certificates (including any class of Certificates
not offered hereby) at the close of business on such Distribution
Date, separately identifying any reduction in such Certificate Balance
due to the allocation of any loss and increase in the Certificate
Balance of a class of Accrual Certificates in the event that Accrued
Certificate Interest has been added to such balance;
(xv) the aggregate amount of principal prepayments made during the related
Due Period;
(xvi) the amount deposited in the reserve fund, if any, on such Distribution
Date;
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(xvii) the amount remaining in the reserve fund, if any, as of the close of
business on such Distribution Date;
(xviii) the aggregate unpaid Accrued Certificate Interest, if any, on each
class of Certificates at the close of business on such Distribution
Date;
(xix) in the case of Certificates with a variable Pass-Through Rate, the
Pass-Through Rate applicable to such Distribution Date, and, if
available, the immediately succeeding Distribution Date, as calculated
in accordance with the method specified in the related Prospectus
Supplement;
(xx) in the case of Certificates with an adjustable Pass-Through Rate, for
statements to be distributed in any month in which an adjustment date
occurs, the adjustable Pass-Through Rate applicable to such
Distribution Date and the immediately succeeding Distribution Date as
calculated in accordance with the method specified in the related
Prospectus Supplement;
(xxi) as to any series which includes Credit Support, the amount of coverage
of each instrument of Credit Support included therein as of the close
of business on such Distribution Date; and
(xxii) the aggregate amount of payments by the mortgagors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Certificates or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xiv), (xviii) and (xix) above, such amounts shall also be provided with
respect to each component, if any, of a class of Certificates. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each series
of Offered Certificates will describe any additional information to be included
in reports to the holders of such Certificates.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Certificate a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates."
TERMINATION
The obligations created by the Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Certificate Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan subject thereto and (ii)
the purchase of all of the assets of the Trust Fund by the party entitled to
effect such termination, under the circumstances and in the manner set forth in
the related Prospectus Supplement. In no event, however, will the trust created
by the Agreement continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the Agreement will be given to
each Certificateholder, and the final distribution will be made only upon
presentation and surrender of the Certificates at the location to be specified
in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the reduction of
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the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount, the party specified therein will solicit bids
for the purchase of all assets of the Trust Fund, or of a sufficient portion of
such assets to retire such class or classes or purchase such class or classes
at a price set forth in the related Prospectus Supplement, in each case, under
the circumstances and in the manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be issued as Book-Entry
Certificates, and each such class will be represented by one or more single
Certificates registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating
the need for physical movement of certificates. Participants include Morgan
Stanley & Co. Incorporated, securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). Unless otherwise provided in the related
Prospectus Supplement, investors that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of,
or other interests in, Book-Entry Certificates may do so only through
Participants and Indirect Participants. In addition, such investors
("Certificate Owners") will receive all distributions on the Book-Entry
Certificates through DTC and its Participants. Under a book-entry format,
Certificate Owners will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede & Co., as nominee
for DTC ("Cede"), on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward them to Indirect
Participants or Certificate Owners. Unless otherwise provided in the related
Prospectus Supplement, the only "Certificateholder" (as such term is used in
the Agreement) will be Cede, as nominee of DTC, and the Certificate Owners will
not be recognized by the Trustee as Certificateholders under the Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Agreement only indirectly through the
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit distributions of principal
of and interest on the Book-Entry Certificates. Participants and Indirect
Participants with which Certificate Owners have accounts with respect to the
Book-Entry Certificates similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Certificate
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge its interest in the Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in the Book-Entry Certificates, may be limited due
to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Certificateholder under an Agreement only at the direction of
one or more Participants to whose account with DTC interests in the Book-Entry
Certificates are credited.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued in fully
registered, certificated form to Certificate Owners or their nominees
("Definitive Certificates"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Certificates and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
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Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Certificates for the Certificate
Owners. Upon surrender by DTC of the certificate or certificates representing
the Book-Entry Certificates, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled,
and thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
The Certificates of each series evidencing interests in a Trust Fund
including Whole Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, a Master Servicer, any Special Servicer
appointed as of the date of the Pooling and Servicing Agreement and the
Trustee. The Certificates of each series evidencing interests in a Trust Fund
not including Whole Loans will be issued pursuant to a Trust Agreement between
the Depositor and a Trustee. Any Master Servicer, any such Special Servicer and
the Trustee with respect to any series of Certificates will be named in the
related Prospectus Supplement. In lieu of appointing a Master Servicer, a
servicer may be appointed pursuant to the Pooling and Servicing Agreement for
any Trust Fund. Such servicer will service all or a significant number of Whole
Loans directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References in
this prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Whole Loans directly. A manager or
administrator may be appointed pursuant to the Trust Agreement for any Trust
Fund to administer such Trust Fund. The provisions of each Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust Fund. A form of a Pooling and Servicing Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Any Trust Agreement will generally conform to the form of
Pooling and Servicing Agreement filed herewith, but will not contain provisions
with respect to the servicing and maintenance of Whole Loans. The following
summaries describe certain provisions that may appear in each Agreement. The
Prospectus Supplement for a series of Certificates will describe any provision
of the Agreement relating to such series that materially differs from the
description thereof contained in this Prospectus. The summaries 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 Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As
used herein with respect to any series, the term "Certificate" refers to all of
the Certificates of that series, whether or not offered hereby and by the
related Prospectus Supplement, unless the context otherwise requires. The
Depositor will provide a copy of the Agreement (without exhibits) relating to
any series of Certificates without charge upon written request of a holder of a
Certificate of such series addressed to Morgan Stanley Capital I Inc., c/o
Morgan Stanley & Co. Incorporated, 1585 Broadway, 37th Floor, New York, New
York 10036, Attention: John E. Westerfield.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Assets to
be included in the related Trust Fund, together with all principal and interest
to be received on or with respect to such Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than
any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Certificates to the Depositor in exchange for the Assets and the
other assets comprising the Trust Fund for such series. Each Mortgage Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement, such
schedule will include detailed information (i) in respect of each Whole Loan
included in the related Trust Fund, including without limitation, the address
of the related Mortgaged Property and type of such property, the Mortgage Rate
and, if applicable, the applicable index, margin, adjustment date and any rate
cap information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the Value,
Loan-to-Value Ratio and the Debt Service Coverage Ratio as of the date
indicated and payment and prepayment provisions, if applicable, and (ii) in
respect of each MBS included in the related Trust Fund, including without
limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the pass-through or
bond rate or formula for determining such rate, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
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With respect to each Whole Loan, the Depositor will deliver or cause
to be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed, without
recourse, in blank or to the order of the Trustee, the original Mortgage (or a
certified copy thereof) with evidence of recording indicated thereon and an
assignment of the Mortgage to the Trustee in recordable form. Notwithstanding
the foregoing, a Trust Fund may include Mortgage Loans where the original
Mortgage Note is not delivered to the Trustee if the Depositor 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.
Unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be required to agree to repurchase, or substitute for, each such
Mortgage Loan that is subsequently in default if the enforcement thereof or of
the related Mortgage is materially adversely affected by the absence of the
original Mortgage Note. Unless otherwise provided in the related Prospectus
Supplement, the related Agreement will require the Depositor or another party
specified therein to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, except in
the State of California or in other states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Whole Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, the
Master Servicer, the relevant Asset Seller or any other prior holder of the
Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Asset Seller. If the Asset Seller cannot cure the omission
or defect within a specified number of days after receipt of such notice, then
unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be obligated, within a specified number of days of receipt of such
notice, to repurchase the related Whole Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that an
Asset Seller will fulfill this repurchase or substitution obligation, and
neither the Master Servicer nor the Depositor will be obligated to repurchase
or substitute for such Mortgage Loan if the Asset Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
related Prospectus Supplement, in lieu of curing any omission or defect in the
Asset or repurchasing or substituting for such Asset, the Asset Seller may
agree to cover any losses suffered by the Trust Fund as a result of such breach
or defect.
If so provided in the related Prospectus Supplement, the Depositor
will, as to some or all of the Mortgage Loans, assign or cause to be assigned
to the Trustee the related Lease Assignments. In certain cases, the Trustee, or
Master Servicer, as applicable, may collect all moneys under the related Leases
and distribute amounts, if any, required under the Lease for the payment of
maintenance, insurance and taxes, to the extent specified in the related Lease
agreement. The Trustee, or if so specified in the Prospectus Supplement, the
Master Servicer, as agent for the Trustee, may hold the Lease in trust for the
benefit of the Certificateholders.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of
the Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of a financial intermediary in the name of the Trustee
for the benefit of the Certificateholders. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause any MBS and Government Securities
in certificated form not registered in the name of the Trustee to be
re-registered, with the applicable persons, in the name of the Trustee.
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REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, make or assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the "Warrantying Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information
set forth for such Whole Loan on the schedule of Assets appearing as an exhibit
to the related Agreement; (ii) the existence of title insurance insuring the
lien priority of the Whole Loan; (iii) the authority of the Warrantying Party
to sell the Whole Loan; (iv) the payment status of the Whole Loan and the
status of payments of taxes, assessments and other charges affecting the
related Mortgaged Property; (v) the existence of customary provisions in the
related Mortgage Note and Mortgage to permit realization against the Mortgaged
Property of the benefit of the security of the Mortgage; and (vi) the existence
of hazard and extended perils insurance coverage on the Mortgaged Property.
Any Warrantying Party, if other than the Depositor, shall be an Asset
Seller or an affiliate thereof or such other person acceptable to the Depositor
and shall be identified in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may
have been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warrantying
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made,
the Warrantying Party will have a reimbursement, cure, repurchase or
substitution obligation in connection with a breach of such a representation
and warranty only if the relevant event that causes such breach occurs prior to
such date. Such party would have no such obligations if the relevant event that
causes such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warrantying Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that
materially and adversely affects the value of such Whole Loan or the interests
therein of the Certificateholders. If such Warrantying Party cannot cure such
breach within a specified period following the date on which such party was
notified of such breach, then such Warrantying Party will be obligated to
repurchase such Whole Loan from the Trustee within a specified period from the
date on which the Warrantying Party was notified of such breach, at the
Purchase Price therefor. As to any Whole Loan, unless otherwise specified in
the related Prospectus Supplement, the "Purchase Price" is equal to the sum of
the unpaid principal balance thereof, plus unpaid accrued interest thereon at
the Mortgage Rate from the date as to which interest was last paid to the due
date in the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are reimbursable to the Master Servicer. If so provided
in the Prospectus Supplement for a series, a Warrantying Party, rather than
repurchase a Whole Loan as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Certificates, to cause the removal of such Whole Loan from the Trust Fund and
substitute in its place one or more other Whole Loans, in accordance with the
standards described in the related Prospectus Supplement. If so provided in the
Prospectus Supplement for a series, a Warrantying Party, rather than repurchase
or substitute a Whole Loan as to which a breach has occurred, will have the
option to reimburse the Trust Fund or the Certificateholders for any losses
caused by such breach. Unless otherwise specified in the related Prospectus
Supplement, this reimbursement, repurchase or substitution obligation will
constitute the sole remedy available to holders of Certificates or the Trustee
for a breach of representation by a Warrantying Party.
Neither the Depositor (except to the extent that it is the Warrantying
Party) nor the Master Servicer will be obligated to purchase or substitute for
a Whole Loan if a Warrantying Party defaults on its obligation to do so, and no
assurance can be given that Warrantying Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warrantying Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of
a specified date, with respect to such Government Securities or MBS, covering
(i) the accuracy of the information set forth therefor on the
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[VERSION 2]
schedule of Assets appearing as an exhibit to the related Agreement and (ii)
the authority of the Warrantying Party to sell such Assets. The related
Prospectus Supplement will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests of
the Certificateholders and which continues unremedied for thirty days after the
giving of written notice of such breach to the Master Servicer by the Trustee
or the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of Certificates evidencing not less than 25% of the Voting Rights
(unless otherwise specified in the related Prospectus Supplement), will
constitute an Event of Default under such Pooling and Servicing Agreement. See
"Events of Default" and "Rights Upon Event of Default."
CERTIFICATE ACCOUNT AND OTHER COLLECTION ACCOUNTS
GENERAL
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Certificate Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Certificateholders have a claim with
respect to the funds in the Certificate Account or a perfected first priority
security interest against any collateral securing such funds that is superior
to the claims of any other depositors or general creditors of the institution
with which the Certificate Account is maintained or (ii) otherwise maintained
with a bank or trust company, and in a manner, satisfactory to the Rating
Agency or Agencies rating any class of Certificates of such series. The
collateral eligible to secure amounts in the Certificate Account is limited to
United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Certificate Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Certificate Account will be paid to a Master Servicer or its designee as
additional servicing compensation. The Certificate Account may be maintained
with an institution that is an affiliate of the Master Servicer, if applicable,
provided that such institution meets the standards imposed by the Rating Agency
or Agencies. If permitted by the Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Certificate Account may contain funds
relating to more than one series of mortgage pass-through certificates and may
contain other funds respecting payments on mortgage loans belonging to the
Master Servicer or serviced or master serviced by it on behalf of others.
DEPOSITS
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Certificate Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee
or on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any
portion thereof retained by a Master Servicer, a
Sub-Servicer or a Special Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard, business interruption and
general liability insurance policies to be maintained in
respect of each Mortgaged Property securing a Whole Loan in
the Trust Fund (to the extent such proceeds are not applied
to the restoration of the property or released to the
mortgagor in accordance with the normal servicing procedures
of a Master Servicer or the related Sub-Servicer, subject to
the terms
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and conditions of the related Mortgage and Mortgage Note)
and all proceeds of rental interruption policies, if any,
insuring against losses arising from the failure of Lessees
under a Lease to make timely rental payments because of
certain casualty events (collectively, "Insurance Proceeds")
and all other amounts received and retained in connection
with the liquidation of defaulted Mortgage Loans in the
Trust Fund, by foreclosure or otherwise ("Liquidation
Proceeds"), together with the net proceeds on a monthly
basis with respect to any Mortgaged Properties acquired for
the benefit of Certificateholders by foreclosure or by deed
in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of
Certificates as described under "Description of Credit
Support";
(v) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(vi) any amounts representing Prepayment Premiums;
(vii) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow
Agreements";
(viii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the
Depositor, any Asset Seller or any other specified person as
described under "Assignment of Assets; Repurchases" and
"Representations and Warranties; Repurchases," all proceeds
of any defaulted Mortgage Loan purchased as described under
"Realization Upon Defaulted Whole Loans," and all proceeds
of any Asset purchased as described under "Description of
the Certificates Termination" (also, "Liquidation
Proceeds");
(ix) any amounts paid by a Master Servicer to cover certain
interest shortfalls arising out of the prepayment of Whole
Loans in the Trust Fund as described under "Description of
the Agreements Retained Interest; Servicing Compensation and
Payment of Expenses";
(x) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any
payments on account of modification or assumption fees, late
payment charges, Prepayment Premiums or Equity
Participations on the Mortgage Assets; (xi) all payments
required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance
policy described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or
the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the
Trustee, as the case may be, of funds held in the
Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Agreement and
described in the related Prospectus Supplement.
WITHDRAWALS
A Master Servicer or the Trustee may, from time to time, unless
otherwise provided in the related Agreement and described in the related
Prospectus Supplement, make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
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[VERSION 2]
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under "Description of the Certificates Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and principal
of the particular Whole Loans with respect to which the advances were made or
out of amounts drawn under any form of Credit Support with respect to such
Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Whole Loans and properties, and net income
collected on the particular properties, with respect to which such fees were
earned or such expenses were incurred or out of amounts drawn under any form of
Credit Support with respect to such Whole Loans and properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii) above
which, in the Master Servicer's good faith judgment, will not be recoverable
from the amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and to
the extent so provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected on other
Assets that is otherwise distributable on one or more classes of Subordinate
Certificates, if any, remain outstanding, and otherwise any outstanding class
of Certificates, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances described
in clause (ii) above and the servicing expenses described in clause (iii) above
while such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments with respect to, and for containment, clean-up
or remediation of hazardous wastes, substances and materials on, Mortgaged
Properties securing defaulted Whole Loans as described under "Realization Upon
Defaulted Whole Loans";
(vii) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the extent
described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(viii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(ix) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(x) unless otherwise provided in the related Prospectus Supplement, to
pay a Master Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Certificate Account;
(xi) to pay the person entitled thereto any amounts deposited in the
Certificate Account that were identified and applied by the Master Servicer as
recoveries of Retained Interest;
(xii) to pay for costs reasonably incurred in connection with the
proper operation, management and maintenance of any Mortgaged Property acquired
for the benefit of Certificateholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received on
such property;
(xiii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Certain Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes";
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[VERSION 2]
(xiv) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a defaulted
Whole Loan or a property acquired in respect thereof in connection with the
liquidation of such Whole Loan or property;
(xv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Certificateholders;
(xvi) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Certificateholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warrantying Party to remedy any breach of
representation or warranty under the Agreement;
(xvii) to pay the person entitled thereto any amounts deposited in the
Certificate Account in error, including amounts received on any Asset after its
removal from the Trust Fund whether by reason of purchase or substitution as
contemplated by "Assignment of Assets; Repurchase" and "Representations and
Warranties; Repurchases" or otherwise;
(xviii) to make any other withdrawals permitted by the related
Agreement and described in the related Prospectus Supplement; and
(xix) to clear and terminate the Certificate Account at the
termination of the Trust Fund.
OTHER COLLECTION ACCOUNTS
Notwithstanding the foregoing, if so specified in the related
Prospectus Supplement, the Agreement for any series of Certificates may provide
for the establishment and maintenance of a separate collection account into
which the Master Servicer or any related Sub-Servicer or Special Servicer will
deposit on a daily basis the amounts described under "--Deposits" above for one
or more series of Certificates. Any amounts on deposit in any such collection
account will be withdrawn therefrom and deposited into the appropriate
Certificate Account by a time specified in the related Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, any amounts which
could be withdrawn from the Certificate Account as described under
"--Withdrawals" above, may also be withdrawn from any such collection account.
The Prospectus Supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any restrictions
with respect to financial institutions with which any such collection account
may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Whole Loans
and will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans
and held for its own account, provided such procedures are consistent with (i)
the terms of the related Agreement and any related hazard, business
interruption, rental interruption or general liability insurance policy or
instrument of Credit Support included in the related Trust Fund described
herein or under "Description of Credit Support," (ii) applicable law and (iii)
the general servicing standard specified in the related Prospectus Supplement
or, if no such standard is so specified, its normal servicing practices (in
either case, the "Servicing Standard"). In connection therewith, the Master
Servicer will be permitted in its discretion to waive any late payment charge
or penalty interest in respect of a late Whole Loan payment.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining (or causing
the mortgagor or Lessee on each Mortgage or Lease to maintain) hazard, business
interruption and general liability insurance policies (and, if applicable,
rental interruption policies) as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to the Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Whole Loans. Unless otherwise specified in
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[VERSION 2]
the related Prospectus Supplement, the Master Servicer will be responsible for
filing and settling claims in respect of particular Whole Loans under any
applicable instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of
any Whole Loan in a manner consistent with the Servicing Standard so long as
the modification, waiver or amendment will not (i) affect the amount or timing
of any scheduled payments of principal or interest on the Whole Loan or (ii) in
its judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent and
(ii) in its judgment, such modification, waiver or amendment is reasonably
likely to produce a greater recovery with respect to the Whole Loan on a
present value basis than would liquidation. The Master Servicer is required to
notify the Trustee in the event of any modification, waiver or amendment of any
Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Certificates is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest, Servicing
Compensation and Payment of Expenses."
SPECIAL SERVICERS
To the extent so specified in the related Prospectus Supplement, a
special servicer (the "Special Servicer") may be appointed. The related
Prospectus Supplement will describe the rights, obligations and compensation of
a Special Servicer. The Master Servicer will only be responsible for the duties
and obligations of a Special Servicer to the extent set forth in the Prospectus
Supplement.
REALIZATION UPON DEFAULTED WHOLE LOANS
A mortgagor's failure to make required payments may reflect inadequate
income or the diversion of that income from the service of payments due under
the Mortgage Loan, and may call into question such mortgagor's ability to make
timely payment of taxes and to pay for necessary maintenance of the related
Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer is required to monitor any Whole Loan which is
in default, contact the mortgagor concerning the default, evaluate whether the
causes of the default can be cured over a reasonable period without significant
impairment of the value of the Mortgaged Property, initiate corrective action
in cooperation with the mortgagor if cure is likely, inspect the Mortgaged
Property and take such other actions as are consistent with the Servicing
Standard. A significant period of time may elapse before the Master Servicer is
able to assess the success of such corrective action or the need for additional
initiatives.
The time within which the Master Servicer makes the initial
determination of appropriate action, evaluates the success of corrective
action, develops additional initiatives, institutes foreclosure proceedings and
actually forecloses (or takes a deed to a Mortgaged Property in lieu of
foreclosure) on behalf of the Certificateholders, may vary considerably
depending on the particular Whole Loan, the Mortgaged Property, the mortgagor,
the presence of an acceptable party to assume the Whole Loan
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and the laws of the jurisdiction in which the Mortgaged Property is located.
Under federal bankruptcy law, the Master Servicer in certain cases may not be
permitted to accelerate a Whole Loan or to foreclose on a Mortgaged Property
for a considerable period of time. See "Certain Legal Aspects of the
Mortgage--Loans and the Leases."
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes of
Certificates a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Certificate will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may offer to sell any defaulted Whole Loan described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure or similar proceeding. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified
period and that the Master Servicer accept the highest cash bid received from
any person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Whole Loan.
In the absence of any bid determined in accordance with the related Agreement
to be fair, the Master Servicer shall proceed with respect to such defaulted
Mortgage Loan as described below. Any bid in an amount at least equal to the
Purchase Price described under "Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a Whole Loan by operation of law or otherwise, if
such action is consistent with the Servicing Standard and a default on such
Whole Loan has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may not acquire title to any related Mortgaged Property or take any
other action that would cause the Trustee, for the benefit of
Certificateholders, or any other specified person to be considered to hold
title to, to be a "mortgagee-in-possession" of, or to be an "owner" or an
"operator" of such Mortgaged Property within the meaning of certain federal
environmental laws, unless the Master Servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws, and there are no circumstances present at the Mortgaged
Property relating to the use, management or disposal of any hazardous
substances, hazardous materials, wastes, or petroleum-based materials for which
investigation, testing, monitoring, containment, clean-up or remediation could
be required under any federal, state or local law or regulation; or
(ii) if the Mortgaged Property is not so in compliance or such
circumstances are so present, then it would be in the best economic interest of
the Trust Fund to acquire title to the Mortgaged Property and further to take
such actions as would be necessary and appropriate to effect such compliance
and/or respond to such circumstances (the cost of which actions will be an
expense of the Trust Fund).
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property prior to the close of the third
calendar year following the year of acquisition of such Mortgaged Property by
the Trust Fund, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the Trust
Fund subsequent to such period will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the
Code at any time that any Certificate is outstanding. Subject to the foregoing,
the Master Servicer will be required to (i) solicit bids for any Mortgaged
Property so acquired in such a manner as will be reasonably likely to realize a
fair price for such property and (ii) accept the first (and, if multiple bids
are contemporaneously received, the highest) cash bid received from any person
that constitutes a fair price.
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If the Trust Fund acquires title to any Mortgaged Property, the Master
Servicer, on behalf of the Trust Fund, may retain an independent contractor to
manage and operate such property. The retention of an independent contractor,
however, will not relieve the Master Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, any such property
acquired by the Trust Fund will be managed in a manner consistent with the
management and operation of similar property by a prudent lending institution.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the operations and ownership of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of the Mortgage Loans and the Leases--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan. If the proceeds of any liquidation of the property securing the
defaulted Whole Loan are less than the outstanding principal balance of the
defaulted Whole Loan plus interest accrued thereon at the Mortgage Rate plus
the aggregate amount of expenses incurred by the Master Servicer in connection
with such proceedings and which are reimbursable under the Agreement, the Trust
Fund will realize a loss in the amount of such difference. The Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Certificate
Account out of the Liquidation Proceeds recovered on any defaulted Whole Loan,
prior to the distribution of such Liquidation Proceeds to Certificateholders,
amounts representing its normal servicing compensation on the Whole Loan,
unreimbursed servicing expenses incurred with respect to the Whole Loan and any
unreimbursed advances of delinquent payments made with respect to the Whole
Loan.
If any property securing a defaulted Whole Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
the related instrument of Credit Support, if any, the Master Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of
itself, the Trustee and the Certificateholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Certificate Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund that includes Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance
policy. The ability of the Master Servicer to assure that hazard insurance
proceeds are appropriately applied may be
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dependent upon its being named as an additional insured under any hazard
insurance policy and under any other insurance policy referred to below, or
upon the extent to which information in this regard is furnished by mortgagors.
All amounts collected by the Master Servicer under any such 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 Master Servicer's normal
servicing procedures, subject to the terms and conditions of the related
Mortgage and Mortgage Note) will be deposited in the Certificate Account. The
Agreement will provide that the Master Servicer may satisfy its obligation to
cause each mortgagor to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Whole Loans. If such blanket policy contains a deductible clause, the Master
Servicer will be required to deposit in the Certificate Account all sums that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole 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
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that 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 generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of such improvements.
Each Agreement for a Trust Fund that includes Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan, or, in certain
cases, the related Lessee, to maintain all such other insurance coverage with
respect to the related Mortgaged Property as is consistent with the terms of
the related Mortgage and the Servicing Standard, which insurance may typically
include flood insurance (if the related Mortgaged Property was located at the
time of origination in a federally designated flood area).
In addition, to the extent required by the related Mortgage, the
Master Servicer may require the mortgagor or related Lessee to maintain other
forms of insurance including, but not limited to, loss of rent endorsements,
business interruption insurance and comprehensive public liability insurance,
and the related Agreement may require the Master Servicer, Sub-Servicer or
Special Servicer to maintain public liability insurance with respect to any REO
Properties. Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by the Master Servicer, Sub-Servicer or Special Servicer, as the
case may be, from the Collection Account, with interest thereon, as provided by
the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability
of the Master Servicer to present or cause to be presented such claims is
dependent upon the extent to which information in this regard is furnished to
the Master Servicer by mortgagors.
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RENTAL INTERRUPTION INSURANCE POLICY
If so specified in the related Prospectus Supplement, the Master
Servicer or the mortgagors will maintain rental interruption insurance policies
in full force and effect with respect to some or all of the Leases. Although
the terms of such policies vary to some degree, a rental interruption insurance
policy typically provides that, to the extent that a Lessee fails to make
timely rental payments under the related Lease due to a casualty event, such
losses will be reimbursed to the insured. If so specified in the related
Prospectus Supplement, the Master Servicer will be required to pay from its
servicing compensation the premiums on the rental interruption policy on a
timely basis. If so specified in the Prospectus Supplement, if such rental
interruption policy is canceled or terminated for any reason (other than the
exhaustion of total policy coverage), the Master Servicer will exercise its
best reasonable efforts to obtain from another insurer a replacement policy
comparable to the rental interruption policy with a total coverage that is
equal to the then existing coverage of the terminated rental interruption
policy; provided that if the cost of any such replacement policy is greater
than the cost of the terminated rental interruption policy, the amount of
coverage under the replacement policy will, unless otherwise specified in the
related Prospectus Supplement, be reduced to a level such that the applicable
premium does not exceed, by a percentage that may be set forth in the related
Prospectus Supplement, the cost of the rental interruption policy that was
replaced. Any amounts collected by the Master Servicer under the rental
interruption policy in the nature of insurance proceeds will be deposited in
the Certificate Account.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer and any Special Servicer obtain
and maintain in effect a fidelity bond or similar form of insurance coverage
(which may provide blanket coverage) or any combination thereof insuring
against loss occasioned by fraud, theft or other intentional misconduct of the
officers, employees and agents of the Master Servicer or the Special Servicer,
as applicable. The related Agreement will allow the Master Servicer and any
Special Servicer to self-insure against loss occasioned by the errors and
omissions of the officers, employees and agents of the Master Servicer or the
Special Servicer so long as certain criteria set forth in the Agreement are
met.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent
of the mortgagee to any sale or other transfer of the related Mortgaged
Property, or due-on-sale clauses entitling the mortgagee to accelerate payment
of the Whole Loan upon any sale or other transfer of the related Mortgaged
Property. Certain of the Whole Loans may contain clauses requiring the consent
of the mortgagee to the creation of any other lien or encumbrance on the
Mortgaged Property or due-on-encumbrance clauses entitling the mortgagee to
accelerate payment of the Whole Loan upon the creation of any other lien or
encumbrance upon the Mortgaged Property. Unless otherwise provided in the
related Prospectus Supplement, the Master Servicer, on behalf of the Trust
Fund, will exercise any right the Trustee may have as mortgagee to accelerate
payment of any such Whole Loan or to withhold its consent to any transfer or
further encumbrance in a manner consistent with the Servicing Standard. Unless
otherwise specified in the related Prospectus Supplement, any fee collected by
or on behalf of the Master Servicer for entering into an assumption agreement
will be retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Mortgage Loans and the
Leases--Due-on-Sale and Due-on-Encumbrance."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Certificates will come from the periodic payment to it
of a portion of the
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interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of
each Asset, such amounts will decrease in accordance with the amortization of
the Assets. The Prospectus Supplement with respect to a series of Certificates
evidencing interests in a Trust Fund that includes Whole Loans may provide
that, as additional compensation, the Master Servicer or the Sub-Servicers may
retain all or a portion of assumption fees, modification fees, late payment
charges or Prepayment Premiums collected from mortgagors and any interest or
other income which may be earned on funds held in the Certificate Account or
any account established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Certificateholders, and payment of any other
expenses described in the related Prospectus Supplement. Certain other
expenses, including certain expenses relating to defaults and liquidations on
the Whole Loans and, to the extent so provided in the related Prospectus
Supplement, interest thereon at the rate specified therein, and the fees of any
Special Servicer, may be borne by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will
provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for the
Federal Home Loan Mortgage Corporation ("FHLMC"), the servicing by or on behalf
of the Master Servicer of mortgage loans under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with the terms of such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
either the Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of
the Uniform Single Attestation Program for Mortgage Bankers, requires it to
report. In rendering its statement such firm may rely, as to matters relating
to the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC (rendered within one year of such statement)
of firms of independent public accountants with respect to the related
Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on
or before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of such annual accountants' statement and such statements of officers will be
obtainable by Certificateholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the
Master Servicer shall be deemed to be to the servicer of substantially all of
the Whole Loans, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a
conflict being of a type and nature carried on by
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the Master Servicer at the date of the Agreement. No such resignation will
become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be protected
against any breach of a representation, warranty or covenant made in such
Agreement, or against any liability specifically imposed thereby, or against
any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Unless otherwise specified in the related Prospectus Supplement,
each Agreement will further provide that any Master Servicer, the Depositor and
any director, officer, employee or agent of a Master Servicer or the Depositor
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates; provided, however,
that such indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to such Agreement); (ii)
incurred in connection with any breach of a representation, warranty or
covenant made in such Agreement; (iii) incurred by reason of misfeasance, bad
faith or gross negligence in the performance of obligations or duties
thereunder, or by reason of reckless disregard of such obligations or duties;
(iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
related Agreement. In addition, each Agreement will provide that neither any
Master Servicer nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. Any such Master Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the 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
Certificateholders, and the Master Servicer or the Depositor, as the case may
be, will be entitled to be reimbursed therefor and to charge the Certificate
Account.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or
consolidation to which the Master Servicer or the Depositor is a party, or any
person succeeding to the business of the Master Servicer or the Depositor, will
be the successor of the Master Servicer or the Depositor, as the case may be,
under the related Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the related Prospectus Supplement for a
Trust Fund that includes Whole Loans, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Certificateholders, or to remit to the Trustee for
distribution to Certificateholders, any required payment; (ii) any failure by
the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for thirty days after written notice of such failure has been given
to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights; (iii) any breach of a
representation or warranty made by the Master Servicer under the Agreement
which materially and adversely affects the interests of Certificateholders and
which continues unremedied for thirty days after written notice of such breach
has been given to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by or on behalf of the
Master Servicer indicating its insolvency or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with
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notice or lapse of time or both, would constitute an Event of Default and five
days after certain officers of the Trustee become aware of the occurrence of
such an event, transmit by mail to the Depositor and all Certificateholders of
the applicable series notice of such occurrence, unless such default shall have
been cured or waived.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Certificates evidencing not less than 51% of the Voting Rights, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement and in and to the Mortgage Loans (other than as a
Certificateholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding delinquent
mortgage loans, or if the related Prospectus Supplement so specifies, then the
Trustee will not be obligated to make such advances) and will be entitled to
similar compensation arrangements. Unless otherwise specified in the related
Prospectus Supplement, in the event that the Trustee is unwilling or unable so
to act, it may or, at the written request of the holders of Certificates
entitled to at least 51% of the Voting Rights, it shall appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the Rating Agency with a net worth at the time of
such appointment of at least $15,000,000 to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and any such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Certificates representing at least 66 2/3% of the Voting Rights
allocated to the respective classes of Certificates affected by any Event of
Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Certificateholders described in clause (i) under "Events of Default" may be
waived only by all of the Certificateholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Certificateholder will have the right under any Agreement to
institute any proceeding with respect thereto unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Rights 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 sixty days has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of the
trusts or powers vested in it by any Agreement 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 holders of Certificates covered by such Agreement, 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
Each Agreement may be amended by the parties thereto without the
consent of any of the holders of Certificates covered by the Agreement, (i) to
cure any ambiguity, (ii) to correct, modify or supplement any provision therein
which may be inconsistent with any other provision therein, (iii) to make any
other provisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, or (iv) to
comply with any requirements imposed by the Code; provided that such amendment
(other than an amendment for the purpose specified in clause (iv) above) will
not (as evidenced by an opinion of counsel to such effect) adversely affect in
any material respect the interests of any holder of Certificates covered by the
Agreement. Unless otherwise specified in the related Prospectus Supplement,
each Agreement may also be amended by the Depositor, the Master Servicer, if
any, and the Trustee, with the consent of the holders of Certificates affected
thereby evidencing not less than 51% of the Voting Rights, for any purpose;
provided, however, that unless otherwise specified in the related Prospectus
Supplement, no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received or advanced on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the holder
of such Certificate, (ii) adversely affect in any material respect the
interests of the holders of any class
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of Certificates in a manner other than as described in (i), without the consent
of the holders of all Certificates of such class or (iii) modify the provisions
of such Agreement described in this paragraph without the consent of the
holders of all Certificates covered by such Agreement then outstanding.
However, with respect to any series of Certificates as to which a REMIC
election is to be made, the Trustee will not consent to any amendment of the
Agreement unless it shall first have received an opinion of counsel to the
effect that such amendment will not result in the imposition of a tax on the
related Trust Fund or cause the related Trust Fund to fail to qualify as a
REMIC at any time that the related Certificates are outstanding.
THE TRUSTEE
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with the Depositor and its affiliates and with any Master Servicer
and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Certificates or any Asset or related document
and is not accountable for the use or application by or on behalf of any Master
Servicer of any funds paid to the Master Servicer or its designee or any
Special Servicer in respect of the Certificates or the Assets, or deposited
into or withdrawn from the Certificate Account or any other account by or on
behalf of the Master Servicer or any Special Servicer. If no Event of Default
has occurred and is continuing, the Trustee is required to perform only those
duties specifically required under the related Agreement. However, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Certificate Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, and enforcing the rights and remedies, of the
Certificateholders during the continuance of an Event of Default, (ii)
defending or prosecuting any legal action in respect of the related Agreement
or series of Certificates, (iii) being the mortgagee of record with respect to
the Mortgage Loans in a Trust Fund and the owner of record with respect to any
Mortgaged Property acquired in respect thereof for the benefit of
Certificateholders, or (iv) acting or refraining from acting in good faith at
the direction of the holders of the related series of Certificates entitled to
not less than 25% (or such higher percentage as is specified in the related
Agreement with respect to any particular matter) of the Voting Rights for such
series; provided, however, that such indemnification will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Master Servicer, if any, and all Certificateholders. Upon receiving such notice
of resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition
any court of competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the
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purpose of rehabilitation, conservation or liquidation, then the Depositor may
remove the Trustee and appoint a successor trustee acceptable to the Master
Servicer, if any. Holders of the Certificates of any series entitled to at
least 51% of the Voting Rights for such series may at any time remove the
Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Certificates, Credit Support may be provided with
respect to one or more classes thereof or the related Assets. Credit Support
may be in the form of the subordination of one or more classes of Certificates,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or another method of Credit Support described in the related
Prospectus Supplement, or any combination of the foregoing. If so provided in
the related Prospectus Supplement, any form of Credit Support may be structured
so as to be drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Certificate
Balance of the Certificates and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Certificateholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one series
of Certificates (each, a "Covered Trust"), holders of Certificates evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such
Credit Support may be terminated or replaced and (d) the material provisions
relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor under
any instrument of Credit Support, including (i) a brief description of its
principal business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to
do business, (iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' or policyholders' surplus, if applicable,
as of the date specified in the Prospectus Supplement. See "Risk
Factors--Credit Support Limitations."
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Certificates to receive distributions of principal and
interest from the Certificate Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Certificates. If so
provided in the related Prospectus Supplement, the subordination of a class may
apply only in the event of (or may be limited to) certain types of losses or
shortfalls. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Certificates in a series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of subordination will be
effected.
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CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Certificates of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Certificates evidencing interests in one group
of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a series of
Certificates, the Whole Loans in the related Trust Fund will be covered for
various default risks by insurance policies or guarantees. A copy of any such
material instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified in
the related Prospectus Supplement, the letter of credit may permit draws in the
event of only certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Certificates will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund. A copy of any such letter of credit for a series will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Certificates of the related series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or
determined in the manner specified in the related Prospectus Supplement. A copy
of any such instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in
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the related Prospectus Supplement, reserve funds may be established to provide
limited protection against only certain types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained therein may be released from the reserve fund
under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application to the
Certificates.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited to
the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund may
be applied to make distributions to Certificateholders and use of investment
earnings from the Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of
Certificates, the MBS in the related Trust Fund and/or the Mortgage Loans
underlying such MBS may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify as to
each such form of Credit Support the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE LEASES
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties
that are general in nature. Because such legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the Mortgage
Loans is situated. The summaries are qualified in their entirety by reference
to the applicable federal and state laws governing the Mortgage Loans. See
"Description of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate taxes
and assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is
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conveyed, and a beneficiary (the lender) for whose benefit the conveyance is
made. As used in this Prospectus, unless the context otherwise requires,
"mortgagor" includes the trustor under a deed of trust and a grantor under a
security deed or a deed to secure debt. Under a deed of trust, the mortgagor
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale as security for the indebtedness evidenced by the related
note. A deed to secure debt typically has two parties. By executing a deed to
secure debt, the grantor conveys title to, as opposed to merely creating a lien
upon, the subject property to the grantee until such time as the underlying
debt is repaid, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the benefit
of the mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage
note. The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the mortgage, the law of the state in
which the real property is located, certain federal laws (including, without
limitation, the Soldiers' and Sailors' Civil Relief Act of 1940) and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to the Mortgage Loans which are
secured by an interest in a leasehold estate. Such representation and
warranties will be set forth in the Prospectus Supplement if applicable.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the mortgagor assigns its
right, title and interest as landlord under each lease and the income derived
therefrom to the lender, while the mortgagor retains a revocable license to
collect the rents for so long as there is no default. Under such assignments,
the mortgagor typically assigns its right, title and interest as lessor under
each lease and the income derived therefrom to the mortgagee, while retaining a
license to collect the rents for so long as there is no default under the
mortgage loan documentation. The manner of perfecting the mortgagee's interest
in rents may depend on whether the mortgagor's assignment was absolute or one
granted as security for the loan. Failure to properly perfect the mortgagee's
interest in rents may result in the loss of substantial pool of funds, which
could otherwise serve as a source of repayment for such loan. If the mortgagor
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents. In most states, hotel and motel room revenues are considered
accounts receivable under the UCC; generally these revenues are either assigned
by the mortgagor, which remains entitled to collect such revenues absent a
default, or pledged by the mortgagor, as security for the loan. In general, the
lender must file financing statements in order to perfect its security interest
in the revenues and must file continuation statements, generally every five
years, to maintain perfection of such security interest. Even if the lender's
security interest in room revenues is perfected under the UCC, the lender will
generally be required to commence a foreclosure or otherwise take possession of
the property in order to collect the room revenues after a default.
Even after a foreclosure, the potential rent payments from the
property may be less than the periodic payments that had been due under the
mortgage. For instance, the net income that would otherwise be generated from
the property may be less than the amount that would have been needed to service
the mortgage debt if the leases on the property are at below-market rents, or
as the result of excessive maintenance, repair or other obligations which a
lender succeeds to as landlord.
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Lenders that actually take possession of the property, however, may
incur potentially substantial risks attendant to being a mortgagee in
possession. Such risks include liability for environmental clean-up costs and
other risks inherent in property ownership. See "Environmental Legislation"
below.
PERSONALTY
Certain types of Mortgaged Properties, such as hotels, motels and
industrial plants, are likely to derive a significant part of their value from
personal property which does not constitute "fixtures" under applicable state
real property law and, hence, would not be subject to the lien of a mortgage.
Such property is generally pledged or assigned as security to the lender under
the UCC. In order to perfect its security interest therein, the lender
generally must file UCC financing statements and, to maintain perfection of
such security interest, file continuation statements generally every five
years.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having a subordinate interest
of record in the real property and all parties in possession of the property,
under leases or otherwise, whose interests are subordinate to the mortgage.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. Upon successful
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other officer to conduct a
public sale of the mortgaged property, the proceeds of which are used to
satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of 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 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 mortgage is not
monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these
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cases have upheld the reasonableness of the notice provisions or have found
that a public sale under a mortgage providing for a power of sale does not
involve sufficient state action to afford constitutional protections to the
mortgagor.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes require several years to complete. Moreover, as discussed below, a
non-collusive, regularly conducted foreclosure sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the mortgagor was insolvent (or the mortgagor was rendered insolvent as a
result of such sale) and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration) plus the expenses incurred in
enforcing the obligation. In other states, the mortgagor or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and
vary among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of
trust, except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to
secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will have the obligation to pay debt service on any senior
mortgages, to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale.
Frequently, the lender employs a third party management company to manage and
operate the property. The costs of operating and maintaining a commercial or
multifamily residential property may be significant and may be greater than the
income derived from that property. The costs of management and operation of
those mortgaged properties which are hotels, motels, restaurants, nursing or
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and, with respect to nursing or convalescent homes or
hospitals, regulatory compliance, required to run such operations and the
effect which foreclosure and a change in ownership may have on the public's and
the industry's (including franchisors') perception of the quality of such
operations. 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.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or
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bankruptcy proceedings. Furthermore, a few states require that any
environmental contamination at certain types of properties be cleaned up before
a property may be resold. In addition, a lender may be responsible under
federal or state law for the cost of cleaning up a mortgaged property that is
environmentally contaminated. See "Environmental Legislation." Generally state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will be
subject to all senior mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
REO PROPERTIES
If title to any Mortgaged Property is acquired by the Trustee on
behalf of the Certificateholders, the Master Servicer or any related
Sub-servicer or the Special Servicer, on behalf of such holders, will be
required to sell the Mortgaged Property prior to the close of the third
calendar year following the year of acquisition of such Mortgaged Property by
the Trust Fund, unless (i) the Internal Revenue Service grants an extension of
time to sell such property (an "REO Extension") or (ii) it obtains an opinion
of counsel generally to the effect that the holding of the property beyond the
close of the third calendar year after its acquisition will not result in the
imposition of a tax on the Trust Fund or cause any REMIC created pursuant to
the Pooling and Servicing Agreement to fail to qualify as a REMIC under the
Code. Subject to the foregoing, the Master Servicer or any related Sub-servicer
or the Special Servicer will generally be required to solicit bids for any
Mortgaged Property so acquired in such a manner as will be reasonably likely to
realize a fair price for such property. The Master Servicer or any related
Sub-servicer or the Special Servicer may retain an independent contractor to
operate and manage any REO Property; however, the retention of an independent
contractor will not relieve the Master Servicer or any related Sub-servicer or
the Special Servicer of its obligations with respect to such REO Property.
In general, the Master Servicer or any related Sub-servicer or the
Special Servicer or an independent contractor employed by the Master Servicer
or any related Sub-servicer or the Special Servicer at the expense of the Trust
Fund will be obligated to operate and manage any Mortgaged Property acquired as
REO Property in a manner that would, to the extent commercially feasible,
maximize the Trust Fund's net after-tax proceeds from such property. After the
Master Servicer or any related Sub-servicer or the Special Servicer reviews the
operation of such property and consults with the Trustee to determine the Trust
Fund's federal income tax reporting position with respect to the income it is
anticipated that the Trust Fund would derive from such property, the Master
Servicer or any related Sub-servicer or the Special Servicer could determine
(particularly in the case of an REO Property that is a hospitality or
residential health care facility) that it would not be commercially feasible to
manage and operate such property in a manner that would avoid the imposition of
a tax on "net income from foreclosure property," within the meaning of Section
857(b)(4)(B) of the Code (an "REO Tax") at the highest marginal corporate tax
rate (currently 35%). The determination as to whether income from an REO
Property would be subject to an REO Tax will depend on the specific facts and
circumstances relating to the management and operation of each REO Property.
Any REO Tax imposed on the Trust Fund's income from an REO Property would
reduce the amount available for distribution to Certificateholders.
Certificateholders are advised to consult their tax advisors regarding the
possible imposition of REO Taxes in connection with the operation of commercial
REO Properties by REMICs. See "Certain Federal Income Tax Consequences" herein
and "Certain Federal Income Tax Consequences-REMICs" in the Prospectus.
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RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying
the entire debt with interest. In addition, in some states, when a foreclosure
action has been commenced, the redeeming party must pay certain costs of such
action. Those having an equity of redemption must generally be made parties and
joined in the foreclosure proceeding in order for their equity of redemption to
be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held beyond the close of the third calendar
year following the year of acquisition. Unless otherwise provided in the
related Prospectus Supplement, with respect to a series of Certificates for
which an election is made to qualify the Trust Fund or a part thereof as a
REMIC, the Agreement will permit foreclosed property to be held beyond the
close of the third calendar year following the year of acquisition if the
Internal Revenue Service grants an extension of time within which to sell such
property or independent counsel renders an opinion to the effect that holding
such property for such additional period is permissible under the REMIC
Provisions.
ANTI-DEFICIENCY LEGISLATION
Some or all of the Mortgage Loans may be nonrecourse loans, as to
which recourse may be had only against the specific property securing the
related Mortgage Loan and a personal money judgment may not be obtained against
the mortgagor. Even if a mortgage loan by its terms provides for recourse to
the mortgagor, some states impose prohibitions or limitations on such recourse.
For example, statutes in some states limit the right of the lender to obtain a
deficiency judgment against the mortgagor following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former mortgagor equal to the difference between the net amount realized upon
the public sale of the real property and the amount due to the lender. Some
states require the lender to exhaust the security afforded under a mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the mortgagor. In certain other states, the lender has the
option of bringing a personal action against the mortgagor on the debt without
first exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. 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 purpose of these statutes is generally 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.
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LEASEHOLD RISKS
Mortgage Loans may be secured by a mortgage on a ground lease.
Leasehold mortgages are subject to certain risks not associated with mortgage
loans secured by the fee estate of the mortgagor. The most significant of these
risks is that the ground lease creating the leasehold estate could terminate,
leaving the leasehold mortgagee without its security. The ground lease may
terminate if, among other reasons, the ground lessee breaches or defaults in
its obligations under the ground lease or there is a bankruptcy of the ground
lessee or the ground lessor. This risk may be minimized if the ground lease
contains certain provisions protective of the mortgagee, but the ground leases
that secure Mortgage Loans may not contain some of these protective provisions,
and mortgages may not contain the other protections discussed in the next
paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults
by the mortgagor; the right to cure such defaults, with adequate cure periods;
if a default is not susceptible of cure by the leasehold mortgagee, the right
to acquire the leasehold estate through foreclosure or otherwise; the ability
of the ground lease to be assigned to and by the leasehold mortgagee or
purchaser at a foreclosure sale and for the concomitant release of the ground
lessee's liabilities thereunder; and the right of the leasehold mortgagee to
enter into a new ground lease with the ground lessor on the same terms and
conditions as the old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may
require that the ground lease or leasehold mortgage prohibit the ground lessee
from treating the ground lease as terminated in the event of the ground
lessor's bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Reform Act of 1978, as amended (Title
11 of the United States Code) (the "Bankruptcy Code"), although the
enforceability of such clause has not been established. Without the protections
described above, a leasehold mortgagee may lose the collateral securing its
leasehold mortgage. In addition, terms and conditions of a leasehold mortgage
are subject to the terms and conditions of the ground lease. Although certain
rights given to a ground lessee can be limited by the terms of a leasehold
mortgage, the rights of a ground lessee or a leasehold mortgagee with respect
to, among other things, insurance, casualty and condemnation will be governed
by the provisions of the ground lease.
BANKRUPTCY LAWS
The Bankruptcy Code and related state laws may interfere with or
affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of the bankruptcy petition, and, usually,
no interest or principal payments are made during the course of the bankruptcy
case. The delay and the consequences thereof caused by such automatic stay can
be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor may stay the senior lender from
taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage secured
by property of the debtor may be modified under certain circumstances. In many
jurisdictions, the outstanding amount of the loan secured by the real property
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Other modifications may include the reduction in the
amount of each scheduled payment, which reduction may result from a reduction
in the rate of interest and/or the alteration of the repayment schedule (with
or without affecting the unpaid principal balance of the loan), and/or an
extension (or reduction) of the final maturity date. 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. Also, under federal bankruptcy law, a
bankruptcy court may permit a debtor through its rehabilitative plan to
de-accelerate a secured loan and to reinstate the loan even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's petition. This may be done even if the full
amount due under the original loan is never repaid.
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Federal bankruptcy law provides generally that rights and obligation
under an unexpired lease of the debtor/lessee may not be terminated or modified
at any time after the commencement of a case under the Bankruptcy Code solely
on the basis of a provision in the lease to such effect or because of certain
other similar events. This prohibition on so-called "ipso facto clauses" could
limit the ability of the Trustee for a series of Certificates to exercise
certain contractual remedies with respect to the Leases. In addition, Section
362 of the Bankruptcy Code operates as an automatic stay of, among other
things, any act to obtain possession of property from a debtor's estate, which
may delay a Trustee's exercise of such remedies for a related series of
Certificates in the event that a related Lessee or a related mortgagor becomes
the subject of a proceeding under the Bankruptcy Code. For example, a mortgagee
would be stayed from enforcing a Lease Assignment by a mortgagor related to a
Mortgaged Property if the related mortgagor was in a bankruptcy proceeding. The
legal proceedings necessary to resolve the issues could be time-consuming and
might result in significant delays in the receipt of the assigned rents.
Similarly, the filing of a petition in bankruptcy by or on behalf of a Lessee
of a Mortgaged Property would result in a stay against the commencement or
continuation of any state court proceeding for past due rent, for accelerated
rent, for damages or for a summary eviction order with respect to a default
under the Lease that occurred prior to the filing of the Lessee's petition.
Rents and other proceeds of a Mortgage Loan may also escape an assignment
thereof if the assignment is not fully perfected under state law prior to
commencement of the bankruptcy proceeding. See "--Leases and Rents" above.
In addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (a) assume the
lease and retain it or assign it to a third party or (b) reject the lease. If
the lease is assumed, the trustee in bankruptcy on behalf of the lessee, or the
lessee as debtor-in-possession, or the assignee, if applicable, must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. Such remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was assigned, and any assurances provided to the lessor may, in fact, be
inadequate. If the lease is rejected, such rejection generally constitutes a
breach of the executory contract or unexpired lease immediately before the date
of filing the petition. As a consequence, the other party or parties to such
lease, such as the mortgagor, as lessor under a Lease, would have only an
unsecured claim against the debtor for damages resulting from such breach,
which could adversely affect the security for the related Mortgage Loan. In
addition, pursuant to Section 502(b)(6) of the Bankruptcy Code, a lessor's
damages for lease rejection in respect of future rent installments are limited
to the rent reserved by the lease, without acceleration, for the greater of one
year or 15%, not to exceed three years, of the remaining term of the lease.
If a trustee in bankruptcy on behalf of a lessor, or a lessor as
debtor-in-possession, rejects an unexpired lease of real property, the lessee
may treat such lease as terminated by such rejection or, in the alternative,
the lessee may remain in possession of the leasehold for the balance of such
term and for any renewal or extension of such term that is enforceable by the
lessee under applicable nonbankruptcy law. The Bankruptcy Code provides that if
a lessee elects to remain in possession after such a rejection of a lease, the
lessee may offset against rents reserved under the lease for the balance of the
term after the date of rejection of the lease, and any such renewal or
extension thereof, any damages occurring after such date caused by the
nonperformance of any obligation of the lessor under the lease after such date.
To the extent provided in the related Prospectus Supplement, the Lessee will
agree under certain Leases to pay all amounts owing thereunder to the Master
Servicer without offset. To the extent that such a contractual obligation
remains enforceable against the Lessee, the Lessee would not be able to avail
itself of the rights of offset generally afforded to lessees of real property
under the Bankruptcy Code.
In a bankruptcy or similar proceeding of a mortgagor, action may be
taken seeking the recovery, as a preferential transfer or on other grounds, of
any payments made by the mortgagor, or made directly by the related Lessee,
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may
have the power to grant liens senior to the lien of a mortgage, and analogous
state statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
Moreover, the laws of certain states also give priority to certain tax liens
over the lien of a
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mortgage or deed of trust. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
To the extent described in the related Prospectus Supplement, certain
of the Mortgagors may be partnerships. The laws governing limited partnerships
in certain states provide that the commencement of a case under the Bankruptcy
Code with respect to a general partner will cause a person to cease to be a
general partner of the limited partnership, unless otherwise provided in
writing in the limited partnership agreement. This provision may be construed
as an "ipso facto" clause and, in the event of the general partner's
bankruptcy, may not be enforceable. To the extent described in the related
Prospectus Supplement, certain limited partnership agreements of the Mortgagors
may provide that the commencement of a case under the Bankruptcy Code with
respect to the related general partner constitutes an event of withdrawal
(assuming the enforceability of the clause is not challenged in bankruptcy
proceedings or, if challenged, is upheld) that might trigger the dissolution of
the limited partnership, the winding up of its affairs and the distribution of
its assets, unless (i) at the time there was at least one other general partner
and the written provisions of the limited partnership permit the business of
the limited partnership to be carried on by the remaining general partner and
that general partner does so or (ii) the written provisions of the limited
partnership agreement permit the limited partner to agree within a specified
time frame (often 60 days) after such withdrawal to continue the business of
the limited partnership and to the appointment of one or more general partners
and the limited partners do so. In addition, the laws governing general
partnerships in certain states provide that the commencement of a case under
the Bankruptcy Code or state bankruptcy laws with respect to a general partner
of such partnerships triggers the dissolution of such partnership, the winding
up of its affairs and the distribution of its assets. Such state laws, however,
may not be enforceable or effective in a bankruptcy case. The dissolution of a
Mortgagor, the winding up of its affairs and the distribution of its assets
could result in an acceleration of its payment obligation under a related
Mortgage Loan, which may reduce the yield on the related series of Certificates
in the same manner as a principal prepayment.
In addition, the bankruptcy of the general partner of a Mortgagor that
is a partnership may provide the opportunity for a trustee in bankruptcy for
such general partner, such general partner as a debtor-in-possession, or a
creditor of such general partner to obtain an order from a court consolidating
the assets and liabilities of the general partner with those of the Mortgagor
pursuant to the doctrines of substantive consolidation or piercing the
corporate veil. In such a case, the respective Mortgaged Property, for example,
would become property of the estate of such bankrupt general partner. Not only
would the Mortgaged Property be available to satisfy the claims of creditors of
such general partner, but an automatic stay would apply to any attempt by the
Trustee to exercise remedies with respect to such Mortgaged Property. However,
such an occurrence should not affect the Trustee's status as a secured creditor
with respect to the Mortgagor or its security interest in the Mortgaged
Property.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
To the extent specified in the related Prospectus Supplement, some of
the Mortgage Loans for a series will be secured by junior mortgages or deeds of
trust which are subordinated to senior mortgages or deeds of trust held by
other lenders or institutional investors. The rights of the Trust Fund (and
therefore the related Certificateholders), as beneficiary under a junior deed
of trust or as mortgagee under a junior mortgage, are subordinate to those of
the mortgagee or beneficiary under the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
rents, hazard insurance and condemnation proceeds and to cause the Mortgaged
Property securing the Mortgage Loan to be sold upon default of the Mortgagor or
trustor, thereby extinguishing the junior mortgagee's or junior beneficiary's
lien unless the Master Servicer or Special Servicer, as applicable, asserts its
subordinate interest in a Mortgaged Property in foreclosure litigation or
satisfies the defaulted senior loan. As discussed more fully below, in many
states a junior mortgagee or beneficiary may satisfy a defaulted senior loan in
full, or may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. Absent
a provision in the senior mortgage, no notice of default is required to be
given to the junior mortgagee unless otherwise required by law.
The form of the mortgage or deed of trust used by many institutional
lenders confers on the mortgagee or beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are
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damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under the senior mortgage
or deed of trust will have the prior right to collect any insurance proceeds
payable under the hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed. The laws of certain states may
limit the ability of mortgagees or beneficiaries to apply the proceeds of
hazard insurance and partial condemnation awards to the secured indebtedness.
In such states, the mortgagor or trustor must be allowed to use the proceeds of
hazard insurance to repair the damage unless the security of the mortgagee or
beneficiary has been impaired. Similarly, in certain states, the mortgagee or
beneficiary is entitled to the award for a partial condemnation of the real
property security only to the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional
lenders typically contains a "future advance" clause, which provides in
essence, that additional amounts advanced to or on behalf of the mortgagor or
trustor by the mortgagee or beneficiary are to be secured by the mortgage or
deed of trust. While such a clause is valid under the laws of most states, the
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the mortgagee
or beneficiary is obligated to advance the additional amounts, the advance may
be entitled to receive the same priority as amounts initially made under the
mortgage or deed of trust, notwithstanding that there may be intervening junior
mortgages or deeds of trust and other liens between the date of recording of
the mortgage or deed of trust and the date of the future advance, and
notwithstanding that the mortgagee or beneficiary had actual knowledge of such
intervening junior mortgages or deeds of trust and other liens at the time of
the advance. Where the mortgagee or beneficiary is not obligated to advance the
additional amounts and has actual knowledge of the intervening junior mortgages
or deeds of trust and other liens, the advance may be subordinated to such
intervening junior mortgages or deeds of trust and other liens. Priority of
advances under a "future advance" clause rests, in many other states, on state
law giving priority to all advances made under the loan agreement up to a
"credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed
of trust used by many institutional lenders obligates the mortgagor or trustor
to pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary on behalf of the mortgagor or trustor. All sums so expended by
the mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust.
The form of mortgage or deed of trust used by many institutional
lenders typically requires the mortgagor or trustor to obtain the consent of
the mortgagee or beneficiary in respect of actions affecting the mortgaged
property, including, without limitation, leasing activities (including new
leases and termination or modification of existing leases), alterations and
improvements to buildings forming a part of the mortgaged property and
management and leasing agreements for the mortgaged property. Tenants will
often refuse to execute a lease unless the mortgagee or beneficiary executes a
written agreement with the tenant not to disturb the tenant's possession of its
premises in the event of a foreclosure. A senior mortgagee or beneficiary may
refuse to consent to matters approved by a junior mortgagee or beneficiary with
the result that the value of the security for the junior mortgage or deed of
trust is diminished. For example, a senior mortgagee or beneficiary may decide
not to approve the lease or to refuse to grant a tenant a non-disturbance
agreement. If, as a result, the lease is not executed, the value of the
mortgaged property may be diminished.
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to
unforeseen environmental liabilities. Of particular concern may be those
Mortgaged Properties which are, or have been, the site of manufacturing,
industrial or disposal activity. Such environmental liabilities may give rise
to (i) a diminution in value of property securing any Mortgage Loan, (ii)
limitation on the ability to foreclose against such property or (iii) in
certain circumstances, as more fully described below,
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liability for clean-up costs or other remedial actions, which liability could
exceed the value of the principal balance of the related Mortgage Loan or of
such Mortgaged Property.
Under the laws of many states, contamination on a property may give
rise to a lien on the property for cleanup costs. In several states, such a
lien has priority over all existing liens (a "superlien") including those of
existing mortgages; in these states, the lien of a mortgage contemplated by
this transaction may lose its priority to such a superlien.
The presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the market value of the
property, as well as the owner's ability to sell or use the real estate or to
borrow using the real estate as collateral. In addition, certain environmental
laws and common law principles govern the responsibility for the removal,
encapsulation or disturbance of asbestos containing materials ("ACMs") when
these ACMs are in poor condition or when a property with ACMs is undergoing
repair, renovation or demolition. Such laws could also be used to impose
liability upon owners and operators of real properties for release of ACMs into
the air that cause personal injury or other damage. In addition to cleanup and
natural resource damages actions brought by federal, state, and local agencies
and private parties, the presence of hazardous substances on a property may
lead to claims of personal injury, property damage, or other claims by private
plaintiffs.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), and under other federal law
and the law of certain states, a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a Mortgaged Property may become liable in some circumstances either to the
government or to private parties for cleanup costs, even if the lender does not
cause or contribute to the contamination. Liability under some federal or state
statutes may not be limited to the original or unamortized principal balance of
a loan or to the value of the property securing a loan. CERCLA imposes strict,
as well as joint and several, liability on several classes of potentially
responsible parties, including current owners and operators of the property,
regardless of whether they caused or contributed to the contamination. Many
states have laws similar to CERCLA.
Lenders may be held liable under CERCLA as owners or operators.
Excluded from CERCLA's definition of "owner or operator," however, is a person
"who without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest." This exemption for
holders of a security interest such as a secured lender applies only in
circumstances where the lender acts to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities encroach on
the actual management of such facility or property, the lender faces potential
liability as an "owner or operator" under CERCLA. Similarly, when a lender
forecloses and takes title to a contaminated facility or property (whether it
holds the facility or property as an investment or leases it to a third party),
the lender may incur potential CERCLA liability.
Whether actions taken by a lender would constitute such an
encroachment on the actual management of a facility or property, so as to
render the secured creditor exemption unavailable to the lender has been a
matter of judicial interpretation of the statutory language, and court
decisions have historically been inconsistent.
This scope of the secured creditor exemption has been clarified by the
enactment of the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996 (the "Asset Conservation Act"), which was signed into
law by President Clinton on September 30, 1996, and which lists permissible
actions that may be undertaken by a lender holding security in a contaminated
facility without exceeding the bounds of the secured creditor exemption,
subject to certain conditions and limitations. The Asset Conservation Act
provides that in order to be deemed to have participated in the management of a
secured property, a lender must actually participate in the operational affairs
of the property or the borrower. The Asset Conservation Act also provides that
a lender will continue to have the benefit of the secured creditor exemption
even if it forecloses on a mortgaged property, purchases it at a foreclosure
sale or accepts a deed-in-lieu of foreclosure provided that the lender seeks to
sell the mortgaged property at the earliest practicable commercially reasonable
time on commercially reasonable terms. The protections afforded lenders under
the Asset Conversion Act are subject to terms and conditions that have not been
clarified by the courts.
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The secured creditor exemption does not protect a lender from
liability under CERCLA in cases where the lender arranges for disposal of
hazardous substances or for transportation of hazardous substances. In
addition, the secured creditor exemption does not govern liability for cleanup
costs under federal laws other than CERCLA or under state law. CERCLA's
jurisdiction extends to the investigation and remediation of releases of
"hazardous substances." The definition of "hazardous substances" under CERCLA
specifically excludes petroleum products. Therefore, a federal statute of
particular significance is Subtitle I of the Resource Conservation and Recovery
Act ("RCRA"), which governs the operation and management of underground
petroleum storage tanks. Under the Asset Conservation Act, the holders of
security interests in underground storage tanks or properties containing such
tanks are accorded protections similar to the protections accorded to lenders
under CERCLA. It should be noted, however, that liability for cleanup of
petroleum contamination may be governed by state law, which may not provide for
any specific protection for secured creditors.
In a few states, transfer of some types of properties is conditioned
upon clean up of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed-in-lieu of
foreclosure or otherwise, may be required to cleanup the contamination before
selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold
a lender liable in such cases, unanticipated or uninsurable liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
If a lender is or becomes liable, it may bring an action for
contribution against the owner or operator who created the environmental
hazard, but that person or entity may be bankrupt or otherwise judgment proof.
It is possible that cleanup costs could become a liability of the Trust Fund
and occasion a loss to Certificateholders in certain circumstances described
above if such remedial costs were incurred.
Unless otherwise provided in the related Prospectus Supplement, the
Warrantying Party with respect to any Whole Loan included in a Trust Fund for a
particular series of Certificates will represent that a "Phase I Assessment" as
described in and meeting the requirements of the then current version of
Chapter 5 of the Federal National Mortgage Association ("FNMA") Multifamily
Guide has been received and reviewed. In addition, unless otherwise provided in
the related Prospectus Supplement, the related Agreement will provide that the
Master Servicer, acting on behalf of the Trustee, may not acquire title to a
Mortgaged Property or take over its operation unless the Master Servicer has
previously determined, based on a report prepared by a person who regularly
conducts environmental audits, that: (i) such Mortgaged Property is in
compliance with applicable environmental laws, and there are no circumstances
present at the Mortgaged Property relating to the use, management or disposal
of any hazardous substances, hazardous materials, wastes, or petroleum based
materials for which investigation, testing, monitoring, containment, clean-up
or remediation could be required under any federal, state or local law or
regulation; or (ii) if such Mortgaged Property is not so in compliance or such
circumstances are so present, then it would be in the best economic interest of
the Trust Fund to acquire title to the Mortgaged Property and further to take
such actions as would be necessary and appropriate to effect such compliance
and/or respond to such circumstances. This requirement effectively precludes
enforcement of the security for the related Mortgage Note until a satisfactory
environmental inquiry is undertaken or any required remedial action is provided
for, reducing the likelihood that a given Trust Fund will become liable for any
condition or circumstance that may give rise to any environmental claim (an
"Environmental Hazard Condition") affecting a Mortgaged Property, but making it
more difficult to realize on the security for the Mortgage Loan. However, there
can be no assurance that any environmental assessment obtained by the Master
Servicer or a Special Servicer, as the case may be, will detect all possible
Environmental Hazard Conditions or that the other requirements of the
Agreement, even if fully observed by the Master Servicer or Special Servicer,
as the case may be, will in fact insulate a given Trust Fund from liability for
Environmental Hazard Conditions. See "Description of the
Agreements--Realization Upon Defaulted Whole Loans."
Unless otherwise specified in the related Prospectus Supplement, the
Depositor generally will not have determined whether environmental assessments
have been conducted with respect to the Mortgaged Properties relating to the
Mortgage Loans included in the Mortgage Pool for a Series, and it is likely
that any environmental assessments which would have been conducted with respect
to any of the Mortgaged Properties would have been conducted at the time of the
origination of the related Mortgage Loans and not thereafter. If specified in
the related Prospectus Supplement, a Warrantying Party will
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represent and warrant that, as of the date of initial issuance of the
Certificates of a Series or as of another specified date, no related Mortgaged
Property is affected by a Disqualifying Condition (as defined below). In the
event that, following a default in payment on a Mortgage Loan that continues
for 60 days, (i) the environmental inquiry conducted by the Master Servicer or
Special Servicer, as the case may be, prior to any foreclosure indicates the
presence of a Disqualifying Condition that arose prior to the date of initial
issuance of the Certificates of a Series and (ii) the Master Servicer or the
Special Servicer certify that it has acted in compliance with the Servicing
Standard and has not, by any action, created, caused or contributed to a
Disqualifying Condition the Warrantying Party, at its option, will reimburse
the Trust Fund, cure such Disqualifying Condition or repurchase or substitute
the affected Whole Loan, as described under "Description of the
Agreements--Representations and Warranties; Repurchases." No such person will
however, be responsible for any Disqualifying Condition which may arise on a
Mortgaged Property after the date of initial issuance of the Certificates of
the related Series, whether due to actions of the Mortgagor, the Master
Servicer, the Special Servicer or any other person. It may not always be
possible to determine whether a Disqualifying Condition arose prior or
subsequent to the date of the initial issuance of the Certificates of a Series.
A "Disqualifying Condition" is defined generally as a condition,
existing as a result of, or arising from, the presence of Hazardous Materials
(as defined below) on a Mortgaged Property, such that the Mortgage Loan secured
by the affected Mortgaged Property would be ineligible, solely by reason of
such condition, for purchase by FNMA under the relevant provisions of FNMA's
Multifamily Seller/Servicer Guide in effect as of the date of initial issuance
of the Certificates of such series, including a condition that would constitute
a material violation of applicable federal state or local law in effect as of
their date of initial issuance of the Certificates of such series.
"Hazardous Materials" are generally defined under several federal and
state statutes, and include dangerous toxic or hazardous pollutants, chemicals,
wastes or substances, including, without limitation, those so identified
pursuant to CERCLA and RCRA, and specifically including, asbestos and asbestos
containing materials, polychlorinated biphenyls, radon gas, petroleum and
petroleum products, urea formaldehyde and any substances classified as being
"in inventory," "usable work in process" or similar classification which would,
if classified as unusable, be included in the foregoing definition.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain due-on-sale and
due-on-encumbrance clauses. These clauses generally provide that the lender may
accelerate the maturity of the loan if the mortgagor sells or otherwise
transfers or encumbers the related Mortgaged Property. Certain of these clauses
may provide that, upon an attempted breach thereof by the mortgagor of an
otherwise non-recourse loan, the mortgagor becomes personally liable for the
mortgage debt. The enforceability of due-on-sale clauses has been the subject
of legislation or litigation in many states and, in some cases, the
enforceability of these clauses was limited or denied. However, with respect to
certain loans the Garn-St Germain Depository Institutions Act of 1982 preempts
state constitutional, 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. Unless otherwise
provided in the related Prospectus Supplement, a Master Servicer, on behalf of
the Trust Fund, will determine whether to exercise any right the Trustee may
have as mortgagee to accelerate payment of any such Mortgage Loan or to
withhold its consent to any transfer or further encumbrance in a manner
consistent with the Servicing Standard.
In addition, under federal bankruptcy laws, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally
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burdened. Third, if the mortgagor defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover,
the bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
DEFAULT INTEREST, PREPAYMENT CHARGES AND PREPAYMENTS
Forms of notes and mortgages used by lenders may contain provisions
obligating the mortgagor to pay a late charge or additional interest if
payments are not timely made, and in some circumstances may provide for
prepayment fees or yield maintenance penalties if the obligation is paid prior
to maturity or prohibit such prepayment for a specified period. In certain
states, there are or may be specific limitations upon the late charges which a
lender may collect from a mortgagor for delinquent payments. Certain states
also limit the amounts that a lender may collect from a mortgagor as an
additional charge if the loan is prepaid. The enforceability, under the laws of
a number of states of provisions providing for prepayment fees or penalties
upon, or prohibition of, an involuntary prepayment is unclear, and no assurance
can be given that, at the time a Prepayment Premium is required to be made on a
Mortgage Loan in connection with an involuntary prepayment, the obligation to
make such payment, or the provisions of any such prohibition, will be
enforceable under applicable state law. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirements of
the Mortgage Loans.
ACCELERATION ON DEFAULT
Unless otherwise specified in the related prospectus Supplement, some
of the Mortgage Loans included in the Mortgage Pool for a Series will include a
"debt-acceleration" clause, which permits the lender to accelerate the full
debt upon a monetary or nonmonetary default of the Mortgagor. The courts of all
states will enforce clauses providing for acceleration in the event of a
material payment default after giving effect to any appropriate notices. The
equity courts of the state, however, may refuse to foreclose a mortgage or deed
of trust when an acceleration of the indebtedness would be inequitable or
unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the mortgagor may avoid foreclosure and reinstate
an accelerated loan by paying only the defaulted amounts and the costs and
attorneys' fees incurred by the lender in collecting such defaulted payments.
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 (including
multifamily but not other commercial) 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
statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting
Title V would hold that residential first mortgage loans that are originated on
or after January 1, 1980 are subject to federal preemption. Therefore, in a
state that has not taken the requisite action to reject application of Title V
or to adopt a provision limiting discount points or other charges prior to
origination of such mortgage loans, any such limitation under such state's
usury law would not apply to such mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no Mortgage Loan originated after the date of such state action will be
eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof shall be
construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
mortgagor's counsel has rendered an opinion that such choice of law provision
would be given effect.
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Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the mortgagor may cancel the recorded mortgage or deed
of trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in the
invalidation of the transaction, thereby permitting the mortgagor to cancel the
recorded mortgage or deed of trust without any payment or prohibiting the
lender from foreclosing.
CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTIES
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgage Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(e.g., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan. Mortgages on
Mortgaged Properties which are owned by the Mortgagor under a condominium form
of ownership are subject to the declaration, by-laws and other rules and
regulations of the condominium association. Mortgaged Properties which are
hotels or motels may present additional risk in that hotels and motels are
typically operated pursuant to franchise, management and operating agreements
which may be terminable by the operator, and the transferability of the hotel's
operating, liquor and other licenses to the entity acquiring the hotel either
through purchases or foreclosure is subject to the vagaries of local law
requirements. In addition, Mortgaged Properties which are multifamily
residential properties may be subject to rent control laws, which could impact
the future cash flows of such properties.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the Mortgagor in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the Mortgagor as owner of landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
Mortgagor of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the Mortgagor is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
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 was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) 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. The Relief Act
applies to mortgagors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of any servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfalls in interest collections
resulting from the application of the Relief Act would result in a reduction of
the amounts distributable to the holders of the related series of Certificates,
and would not be covered by advances or, unless otherwise specified in the
related Prospectus Supplement, any form of Credit Support provided in
connection with such Certificates. In addition, the Relief Act imposes
limitations that would impair the ability of the servicer to foreclose on an
affected Mortgage Loan during the mortgagor's
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period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned
thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction.
The government must publish notice of the forfeiture proceeding and may give
notice to all parties "known to have an alleged interest in the property,"
including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood LLP or Cadwalader, Wickersham & Taft or
Latham & Watkins or such other counsel as may be specified in the related
Prospectus Supplement, counsel to the Depositor. This summary is based on laws,
regulations, including the REMIC regulations promulgated by the Treasury
Department (the "REMIC Regulations"), rulings and decisions now in effect or
(with respect to regulations) proposed, all of which are subject to change
either prospectively or retroactively. This summary does not address the
federal income tax consequences of an investment in Certificates applicable to
all categories of investors, some of which (for example, banks and insurance
companies) may be subject to special rules. Prospective investors should
consult their tax advisors regarding the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Certificates as a REMIC under the Code. The Prospectus
Supplement
for each Series of Certificates will specify whether a REMIC election will be
made.
GRANTOR TRUST FUNDS
If a REMIC election is not made, Brown & Wood LLP or Cadwalader,
Wickersham & Taft or Latham & Watkins or such other counsel as may be specified
in the related Prospectus Supplement will deliver its opinion that the Trust
Fund will not be classified as an association taxable as a corporation and that
each such Trust Fund will be classified as a grantor trust under subpart E,
Part I of subchapter J of Chapter 1 of Subtitle A of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as
owners of a portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
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Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162
or 212 each Grantor Trust Certificateholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the Master
Servicer, provided that such amounts are reasonable compensation for services
rendered to the Trust Fund. Grantor Trust Certificateholders that are
individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all other
Code Section 212 expenses exceed two percent of its adjusted gross income. In
addition, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount under Code Section 68(b) (which amount will be adjusted for inflation)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount and (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. In general, a Grantor Trust
Certificateholder using the cash method of accounting must take into account
its pro rata share of income as and deductions as and when collected by or paid
to the Master Servicer or, with respect to original issue discount or certain
other income items for which the Certificateholder has made an election, as
such amounts are accrued by the Trust Fund on a constant interest basis, and
will be entitled to claim its pro rata share of deductions (subject to the
foregoing limitations) when such amounts are paid or such Certificateholder
would otherwise be entitled to claim such deductions had it held the Mortgage
Assets directly. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income as payment
becomes due or is made to the Master Servicer, whichever is earlier and may
deduct its pro rata share of expense items (subject to the foregoing
limitations) when such amounts are paid or such Certificateholder otherwise
would be entitled to claim such deductions had it held the Mortgage Assets
directly. If the servicing fees paid to the Master Servicer are deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement or
otherwise provided below, as to each Series of Certificates, counsel to the
Depositor will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent "loans . . . secured by an interest in real property which is . . .
residential property" within the meaning of Code Section 7701(a)(19)(C)(v), to
the extent that the Mortgage Assets represented by that Grantor Trust
Certificate are of a type described in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and interest income on the Mortgage Assets will be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B), to the extent that the Mortgage Assets represented by
that Grantor Trust Certificate are of a type described in such Code section;
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] . . . which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3); and
(iv) a Grantor Trust Certificate owned by a financial asset
securitization investment trust will represent "permitted assets" with the
meaning of Code Section 860L(c).
The Small Business Job Protection Act of 1996, as part of the repeal
of the bad debt reserve method for thrift institutions, repealed the
application of Code Section 593(d) to any taxable year beginning after December
31, 1995.
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Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities that constitute "stripped bonds" or "stripped coupons" as
those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under
these rules, such Government Securities are treated as having original issue
discount based on the purchase price and the stated redemption price at
maturity of each Security. As such, Grantor Trust Certificateholders would be
required to include in income their pro rata share of the original issue
discount on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the Grantor
Trust Certificateholder in any taxable year may exceed amounts actually
received during such year.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such
holder's undivided interest in each Mortgage Asset will have its own tax basis.
A Grantor Trust Certificateholder that acquires an interest in Mortgage Assets
at a premium may elect to amortize such premium under a constant interest
method, provided that the underlying mortgage loans with respect to such
Mortgage Assets were originated after September 27, 1985. Premium allocable to
mortgage loans originated on or before September 27, 1985 should be allocated
among the principal payments on such mortgage loans and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Grantor Trust Certificate. The
basis for such Grantor Trust Certificate will be reduced to the extent that
amortizable premium is applied to offset interest payments. It is not clear
whether a reasonable prepayment assumption should be used in computing
amortization of premium allowable under Code Section 171. A Certificateholder
that makes this election for a Mortgage Asset or any other debt instrument that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Certificateholder acquires during the year of the election or
thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate representing
an interest in a Mortgage Asset or Mortgage Loan acquired at a premium should
recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or
underlying mortgage loan) that is allocable to the Certificate and the portion
of the adjusted basis of the Certificate that is allocable to such Mortgage
Loan (or underlying mortgage loan). If a reasonable prepayment assumption is
used to amortize such premium, it appears that such a loss would be available,
if at all, only if prepayments have occurred at a rate faster than the
reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
On December 30, 1997, the Internal Revenue Service (the "IRS") issued
final regulations (the "Amortizable Bond Premium Regulations") dealing with
amortizable bond premium. These regulations, which generally are effective for
bonds issued or acquired on or after March 2, 1998 (or, for holders making an
election for the taxable year that includes March 2, 1998 or any subsequent
taxable year, shall apply to bonds held on or after the first day of the
taxable year of the election). The Amortizable Bond Premium Regulations
specifically do not apply to prepayable debt instruments or any pool of debt
instruments the yield on which may be affected by prepayments, such as the
Trust Fund, which are subject to Section 1272(a)(6) of the Code. Absent further
guidance from the IRS and unless otherwise specified in the related Prospectus
Supplement, the Trustee will account for amortizable bond premium in the manner
described above. Prospective purchasers should consult their tax advisors
regarding amortizable bond premium and the Amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
under such Sections (the "OID Regulations"), will be applicable to a Grantor
Trust Certificateholder's interest in those Mortgage Assets meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of OID income are applicable to mortgages of corporations originated
after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such OID could arise by the financing of points
or other charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable Code provisions or are not for services provided by
the lender. OID generally must be
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reported as ordinary gross income as it accrues under a constant interest
method. See "--Multiple Classes of Grantor Trust Certificates--Accrual of
Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than
0.25% of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following methods.
If a Grantor Trust Certificate is issued with OID, the amount of market
discount that accrues during any accrual period would be equal to the product
of (i) the total remaining market discount and (ii) a fraction, the numerator
of which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the accrual period. For Grantor
Trust Certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (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 accrual period. For purposes of calculating market discount under any of
the above methods in the case of instruments (such as the Grantor Trust
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor
Trust Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
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 Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. 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.
Election to Treat All Interest as OID. 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 for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount 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 will be deemed to have made an election to amortize bond premium
with respect to all debt instruments
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having amortizable bond premium that such Certificateholder owns or acquires.
See "--Premium" herein. The election to accrue interest, discount and premium
on a constant yield method with respect to a Certificate is irrevocable without
consent of the IRS.
Anti-Abuse Rule. The IRS can apply or depart from the rules contained
in the OID Regulations as necessary or appropriate to achieve a reasonable
result where a principal purpose in structuring a Mortgage Asset, Mortgage Loan
or Grantor Trust Certificate or applying the otherwise applicable rules is to
achieve a result that is unreasonable in light of the purposes of the
applicable statutes (which generally are intended to achieve the clear
reflection of income for both issuers and holders of debt instruments).
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of Code
Sections 1271 through 1288, Code Section 1286 treats a stripped bond or a
stripped coupon as an obligation issued on the date that such stripped interest
is created. If a Trust Fund is created with two classes of Grantor Trust
Certificates, one class of Grantor Trust Certificates may represent the right
to principal and interest, or principal only, on all or a portion of the
Mortgage Assets (the "Stripped Bond Certificates"), while the second class of
Grantor Trust Certificates may represent the right to some or all of the
interest on such portion (the "Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Mortgage
Asset principal balance) or the Certificates are initially sold with a de
minimis discount (assuming no prepayment assumption is required), any non-de
minimis discount arising from a subsequent transfer of the Certificates should
be treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Mortgage Asset by Mortgage Asset basis, which
could result in some Mortgage Assets being treated as having more than 100
basis points of interest stripped off. See "--Non-REMIC Certificates" and
"Multiple Classes of Grantor Trust Certificates--Stripped Bonds and Stripped
Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either (i) the amount of
OID with respect to the Mortgage Assets is treated as zero under the OID de
minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable
servicing fees) is stripped off of the Trust Fund's Mortgage Assets. Pursuant
to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of Stripped
Bond Certificates using an inconsistent method of accounting must change their
method of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return
filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each Mortgage Asset. Unless
otherwise specified in the related prospectus supplement, all payments from a
Mortgage Asset underlying a Stripped Coupon Certificate will be treated as a
single installment obligation subject to the OID rules of the Code, in which
case, all payments from such Mortgage Asset would be included in the Mortgage
Asset's stated redemption price at maturity for purposes of calculating income
on such Certificate under the OID rules of the Code.
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It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Grantor Trust Certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate sufficiently faster than the assumed prepayment
rate so that the Certificateholder will not recover its investment. However, if
such Certificate is treated as an interest in discrete Mortgage Assets, or if
no prepayment assumption is used, then when a Mortgage Asset is prepaid, the
holder of such Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of such Certificate that is allocable to
such Mortgage Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped
obligation as a separate obligation for purposes of the Code provisions
addressing OID, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from doubt,
each class of Grantor Trust Certificates, unless otherwise specified in the
related Prospectus Supplement, should be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A) and "loans . . .
secured by, an interest in real property which is . . . residential real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
income attributable to Grantor Trust Certificates should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Assets and interest on such Mortgage Assets qualify for
such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be "obligation[s] . . . which [are]
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A) and "permitted assets" within the meaning of Code Section
860L(c).
2. Grantor Trust Certificates Representing Interests in Loans Other
Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to a Certificateholder's interest in those Mortgage Assets
as to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Under the OID Regulations, such original issue discount could arise by the
charging of points by the originator of the mortgage in an amount greater than
the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage
Assets. OID on each Grantor Trust Certificate must be included in the owner's
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
amount of OID required to be included in an owner's income in any taxable year
with respect to a Grantor Trust Certificate representing an interest in
Mortgage Assets other than Mortgage Assets with interest rates that adjust
periodically ("ARM Loans") likely will be computed as described below under
"--Accrual of Original Issue Discount." The following discussion is based in
part on the OID Regulations and in part on the provisions of the Tax Reform Act
of 1986 (the "1986 Act"). The OID Regulations generally are effective for debt
instruments issued on or after April 4, 1994, but may be relied upon as
authority with respect to debt instruments, such as the Grantor Trust
Certificates, issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the Mortgage Assets should be used, or, in the case of
Stripped Bond Certificates or Stripped Coupon Certificates, the date such
Certificates are
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acquired. The holder of a Certificate should be aware, however, that neither
the proposed OID Regulations nor the OID Regulations adequately address certain
issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described below
under "--Accrual of Original Issue Discount," will, unless otherwise specified
in the related Prospectus Supplement, utilize the original yield to maturity of
the Grantor Trust Certificate calculated based on a reasonable assumed
prepayment rate for the mortgage loans underlying the Grantor Trust
Certificates (the "Prepayment Assumption") on the issue date of such Grantor
Trust Certificate, and will take into account events that occur during the
calculation period. The Prepayment Assumption will be determined in the manner
prescribed by regulations that have not yet been issued. In the absence of such
regulations, the Prepayment Assumption used will be the prepayment assumption
that is used in determining the offering price of such Certificate. No
representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the
Code literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent.
However, no other legal authority provides guidance with regard to the proper
method for accruing OID on obligations that are subject to prepayment, and,
until further guidance is issued, the Master Servicer intends to calculate and
report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding
the date of disposition. In the case of an original owner, the daily portions
of OID with respect to each component generally will be determined as set forth
under the OID Regulations. A calculation will be made by the Master Servicer or
such other entity specified in the related Prospectus Supplement of the portion
of OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
stated redemption price at maturity received during such accrual period, and
(ii) subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of
a Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received. However,
the amount of original issue discount includible in the income of a holder of
an obligation is reduced when the obligation is acquired after its initial
issuance at a price greater than the sum of the original issue price and the
previously accrued original issue discount, less prior payments of principal.
Accordingly, if such Mortgage Assets acquired by a Certificateholder are
purchased at a price equal to the then unpaid principal amount of such Mortgage
Asset, no original issue discount attributable to the difference between the
issue price and the original principal amount of such Mortgage Asset (i.e.
points) will be includible by such holder. Other original issue discount on the
Mortgage Assets (e.g., that arising from a "teaser" rate) would still need to
be accrued.
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3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion
of income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal
payments on the Grantor Trust Certificate previously received by the seller.
Such gain or loss will be capital gain or loss to an owner for which a Grantor
Trust Certificate is a "capital asset" within the meaning of Code Section 1221,
and will generally be long-term capital gain if the Grantor Trust Certificate
has been owned for more than one year. Long-term capital gains of individuals
are subject to reduced maximum tax rates while capital gains recognized by
individuals on capital assets held less than twelve months are generally
subject to ordinary income tax rates. The use of capital losses is limited.
It is possible that capital gain realized by holders of one or more
classes of Grantor Trust Certificates could be considered gain realized upon
the disposition of property that was part of a "conversion transaction." A sale
of a Grantor Trust Certificate will be part of a conversion transaction if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and (i) the holder entered the contract
to sell the Grantor Trust Certificate substantially contemporaneously with
acquiring the Grantor Trust Certificate, (ii) the Grantor Trust Certificate is
part of a straddle, (iii) the Grantor Trust Certificate is marketed or sold as
producing capital gain, or (iv) other transactions to be specified in Treasury
regulations that have not yet been issued. If the sale or other disposition of
a Grantor Trust Certificate is part of a conversion transaction, all or any
portion of the gain realized upon the sale or other disposition would be
treated as ordinary income instead of capital gain.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a Grantor Trust Certificate by a bank or a thrift institution to which
such section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificateholder holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for
interest by an applicable tax treaty, unless such income is effectively
connected with a U.S. trade or business of such owner or beneficial owner.
Accrued OID recognized by the owner on the sale or exchange of such a Grantor
Trust Certificate also will be subject to federal income tax at the same rate.
Generally, such payments would not be
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subject to withholding to the extent that a Grantor Trust Certificate evidences
ownership in Mortgage Assets issued after July 18, 1984, by natural persons if
such Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor
Trust Certificateholder is not a U.S. Person and providing the name and address
of such Grantor Trust Certificateholder). To the extent payments to Grantor
Trust Certificateholders that are not U.S. Persons are payments of "contingent
interest" on the underlying Mortgage Assets, or such Grantor Trust
Certificateholder is ineligible for the exemption described in the preceding
sentence, the 30% withholding tax will apply unless such withholding taxes are
reduced or eliminated by an applicable tax treaty and such holder meets the
eligibility and certification requirements necessary to obtain the benefits of
such treaty. Additional restrictions apply to Mortgage Assets where the
mortgagor is not a natural person in order to qualify for the exemption from
withholding. If capital gain derived from the sale, retirement or other
disposition of a Grantor Trust Certificate is effectively connected with a U.S.
trade or business of a Grantor Trust Certificateholder that is not a U.S.
Person, such Certificateholder will be taxed on the net gain under the
graduated U.S. federal income tax rates applicable to U.S. Persons (and, with
respect to Grantor Trust Certificates held by or on behalf of corporations,
also may be subject to branch profits tax). In addition, if the Trust Fund
acquires a United States real property interest through foreclosure, deed in
lieu of foreclosure or otherwise on a Mortgage Asset secured by such an
interest (which for this purpose includes real property located in the United
States and the Virgin Islands), a Grantor Trust Certificateholder that is not a
U.S. Person will potentially be subject to federal income tax on any gain
attributable to such real property interest that is allocable to such holder.
Non-U.S. Persons should consult their tax advisors regarding the application to
them of the foregoing rules.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the laws of
the United States or any political subdivision thereof (other than a
partnership that is not treated as a U.S. Person under any applicable Treasury
regulations), an estate the income of which from sources outside the United
States is includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the United
States or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the trust.
In addition, certain trusts treated as U.S. Persons before August 20, 1996 may
elect to continue to be so treated to the extent provided in regulations.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a
reasonable time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not reported all interest and dividend income required to be shown
on its federal income tax return, 31% backup withholding may be required with
respect to any payments to registered owners who are not "exempt recipients."
In addition, upon the sale of a Grantor Trust Certificate to (or through) a
broker, the broker must withhold 31% of the entire purchase price, unless
either (i) the broker determines that the seller is a corporation or other
exempt recipient, or (ii) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Person, certifies that
such seller is a Non-U.S. Person, and certain other conditions are met. Such as
sale must also be reported by the broker to the IRS, unless either (a) the
broker determines that the seller is an exempt recipient or (b) the seller
certifies its non-U.S. Person status (and certain other conditions are met).
Certification of the registered owner's non-U.S. Person status normally would
be made on IRS Form W-8 under penalties of perjury, although in certain cases
it may be possible to submit other documentary evidence. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax liability.
On October 6, 1997, the Treasury Department 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
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payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Although a REMIC is not generally subject to federal income
tax (see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including
the implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, 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 in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP or Cadwalader, Wickersham
& Taft or Latham & Watkins or such other counsel as may be specified in the
related Prospectus Supplement will deliver its opinion generally to the effect
that, under then existing law and assuming compliance with all provisions of
the related Pooling and Servicing Agreement, such Trust Fund will qualify as a
REMIC, and the related Certificates will be considered to be regular interests
("REMIC Regular Certificates") or a sole class of residual interests ("REMIC
Residual Certificates") in the REMIC. The related Prospectus Supplement for
each Series of Certificates will indicate whether the Trust Fund will make a
REMIC election and whether a class of Certificates will be treated as a regular
or residual interest in the REMIC.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation and any "regular interest"
in another REMIC) that is principally secured by an interest in real property
and that is transferred to the REMIC within a prescribed time period in
exchange for regular or residual interests in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) Certificates held by a thrift institution taxed as
a "domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A); and (iii) interest on Certificates held by a real estate
investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets.
Tiered REMIC Structures. For certain Series of Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such Series
of Certificates, Brown & Wood LLP or Cadwalader, Wickersham & Taft or Latham &
Watkins or such other counsel as may be specified in the related Prospectus
Supplement, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC
or REMICs, respectively, will be considered to evidence ownership of regular
interests ("REMIC Regular Certificates") or residual interests ("REMIC Residual
Certificates") in the related REMIC within the meaning of the REMIC provisions.
Other than the residual interest in a Subsidiary REMIC, only REMIC
Certificates issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC or REMICs and the Master REMIC will be treated as one REMIC
solely for purposes of determining whether the REMIC Certificates will be (i)
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code;
(ii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and (iii) whether the income on such Certificates
is interest described in Section 856(c)(3)(B) of the Code.
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A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, 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.
Original Issue Discount and Premium. The REMIC Regular Certificates
may be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any class of Certificates issued
with OID will be required to include such OID in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest
method based on the compounding of interest as it accrues rather than in
accordance with receipt of the interest payments. The following discussion is
based in part on the OID Regulations and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Holders of REMIC Regular Certificates (the
"REMIC Regular Certificateholders") should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that
Congress intended the regulations to require that the Prepayment Assumption be
the prepayment assumption that is used in determining the initial offering
price of such REMIC Regular Certificates. The Prospectus Supplement for each
Series of REMIC Regular Certificates will specify the Prepayment Assumption to
be used for the purpose of determining the amount and rate of accrual of OID.
No representation is made that the REMIC Regular Certificates will prepay at
the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price
of a REMIC Regular Certificate is the first price at which a substantial amount
of REMIC Regular Certificates of that class are first sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of REMIC Regular Certificates is sold
for cash on or prior to the date of their initial issuance (the "Closing
Date"), the issue price for such class will be treated as the fair market value
of such class on the Closing Date. The issue price of a REMIC Regular
Certificate also includes the amount paid by an initial Certificateholder for
accrued interest that relates to a period prior to the issue date of the REMIC
Regular Certificate. The stated redemption price at maturity of a REMIC Regular
Certificate includes the original principal amount of the REMIC Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Qualified stated interest
generally means interest payable at a single fixed rate or qualified variable
rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the REMIC Regular Certificate. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on REMIC Regular Certificates with
respect to which Deferred Interest will accrue will not constitute qualified
stated interest payments, and the stated redemption price at maturity of such
REMIC Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during
the first period is treated as the amount by which the stated redemption price
at maturity of the Certificate exceeds its issue price for purposes of the de
minimis rule described below. The OID Regulations suggest that all interest on
a long first period REMIC Regular Certificate that is issued with non-de
minimis OID, as determined under the foregoing rule, will be treated as OID.
Where the interval between the issue date and the first Distribution Date on a
REMIC Regular Certificate is shorter than the interval between subsequent
Distribution Dates, interest due on the first Distribution Date in excess of
the amount that accrued during the first period would be added to the
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Certificates, stated redemption price at maturity. REMIC Regular
Certificateholders should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and
the denominator of which is the stated redemption price at maturity of the
REMIC Regular Certificate. Although currently unclear, it appears that the
schedule of such distributions should be determined in accordance with the
Prepayment Assumption. The Prepayment Assumption with respect to a Series of
REMIC Regular Certificates will be set forth in the related Prospectus
Supplement. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the REMIC
Regular Certificate is held as a capital asset. However, accrual method holders
may elect to accrue all de minimis OID as well as market discount under a
constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be
issued with OID. The calculation of income in this manner could result in
negative original issue discount (which delays future accruals of OID rather
than being immediately deductible) when prepayments on the Mortgage Assets
exceed those estimated under the Prepayment Assumption. The IRS might contend,
however, that certain contingent payment rules contained in final regulations
issued on June 11, 1996, with respect to original issue discount, should apply
to such Certificates. Although such rules are not applicable to instruments
governed by Code Section 1272(a)(6), they represent the only guidance regarding
the current views of the IRS with respect to contingent payment instruments.
These proposed regulations, if applicable, generally would require holders of
Regular Interest Certificates to take the payments considered contingent
interest payments into income on a yield to maturity basis in accordance with a
schedule of projected payments provided by the Depositor and to make annual
adjustments to income to account for the difference between actual payments
received and projected payment amounts accrued. In the alternative, the IRS
could assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to be
issued at a premium. If such a position were to prevail, the rules described
below under "--Taxation of Owners of REMIC Regular Certificates--Premium" would
apply. It is unclear when a loss may be claimed for any unrecovered basis for a
Super-Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates--Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an original holder of a REMIC Regular Certificate, a
calculation will be made of the portion of the OID that accrues during each
successive period ("an accrual period") that ends on the day in the calendar
year corresponding to a Distribution Date (or if Distribution Dates are on
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the first day or first business day of the immediately preceding month,
interest may be treated as payable on the last day of the immediately preceding
month) and begins on the day after the end of the immediately preceding accrual
period (or on the issue date in the case of the first accrual period). This
will be done, in the case of each full accrual period, by (i) adding (a) the
present value at the end of the accrual period (determined by using as a
discount factor the original yield to maturity of the REMIC Regular
Certificates as calculated under the Prepayment Assumption) of all remaining
payments to be received on the REMIC Regular Certificates under the Prepayment
Assumption and (b) any payments included in the stated redemption price at
maturity received during such accrual period, and (ii) subtracting from that
total the adjusted issue price of the REMIC Regular Certificates at the
beginning of such accrual period. The adjusted issue price of a REMIC Regular
Certificate at the beginning of the first accrual period is its issue price;
the adjusted issue price of a REMIC Regular Certificate at the beginning of a
subsequent accrual period is the adjusted issue price at the beginning of the
immediately preceding accrual period plus the amount of OID allocable to that
accrual period and reduced by the amount of any payment other than a payment of
qualified stated interest made at the end of or during that accrual period. The
OID accrued during an accrual period will then be divided by the number of days
in the period to determine the daily portion of OID for each day in the accrual
period. The calculation of OID under the method described above will cause the
accrual of OID to either increase or decrease (but never below zero) in a given
accrual period to reflect the fact that prepayments are occurring faster or
slower than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue
price but less than the stated redemption price at maturity), however, the
daily portion is reduced by the amount that would be the daily portion for such
day (computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that REMIC Regular Certificate exceeds the following amount:
(a) the sum of the issue price plus the aggregate amount of OID that would have
been includible in the gross income of an original REMIC Regular
Certificateholder (who purchased the REMIC Regular Certificate at its issue
price), less (b) any prior payments included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
that REMIC Regular Certificate for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption. A holder who pays an acquisition premium instead may elect to
accrue OID by treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a variable
rate will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates "--that do not operate in a manner
that significantly accelerates or defers interest payments on such REMIC
Regular Certificates.
The amount of OID with respect to a REMIC Regular Certificate bearing
a variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest
on a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through the
life of the REMIC Regular Certificates. It is possible, however, that the IRS
may treat some or all of the interest on REMIC Regular Certificates with a
weighted average rate as taxable under the rules relating to obligations
providing for contingent payments. Such treatment may effect the timing of
income accruals on such REMIC Regular Certificates.
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Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market discount or original issue discount) and premium in income as
interest, based on a constant yield method. If such an election were to be made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount 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 will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" herein. The election to accrue
interest, discount and premium on a constant yield method with respect to a
Certificate is irrevocable without the consent of the IRS.
Market Discount. A purchaser of a REMIC Regular Certificate may also
be subject to the market discount provisions of Code Sections 1276 through
1278. Under these provisions and the OID Regulations, "market discount" equals
the excess, if any, of (i) the REMIC Regular Certificate's stated principal
amount or, in the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had purchased such
REMIC Regular Certificate from an original holder) over (ii) the price for such
REMIC Regular Certificate paid by the purchaser. A Certificateholder that
purchases a REMIC Regular Certificate at a market discount will recognize
income upon receipt of each distribution representing amounts included in such
certificate's stated redemption price at maturity. In particular, under Section
1276 of the Code such a holder generally will be required to allocate each such
distribution first to accrued market discount not previously included in
income, and to recognize ordinary income to that extent. 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.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at
the beginning of the period. For REMIC Regular Certificates issued without OID,
the amount of market discount that accrues during a period is equal to the
product of (a) the total remaining market discount and (b) 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. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the REMIC Regular Certificates) that provide for payments
that may be accelerated by reason of prepayments of other obligations securing
such instruments, the same Prepayment Assumption applicable to calculating the
accrual of OID will apply.
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A holder who acquired a REMIC Regular Certificate at a market discount
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 Certificate purchased with market discount. For these purposes,
the de minimis rule referred to above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in
which such market discount is includible in income. 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.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will
be considered to have purchased the REMIC Regular Certificate at a premium and
may elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose.
However, the Legislative History states that the same rules that apply to
accrual of market discount (which rules require use of a Prepayment Assumption
in accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have OID) will also apply in amortizing
bond premium under Code Section 171. The Code provides that amortizable bond
premium will be allocated among the interest payments on such REMIC Regular
Certificates and will be applied as an offset against such interest payment. On
June 27, 1996, the IRS published in the Federal Register proposed regulations
on the amortization of bond premium. The foregoing discussion is based in part
on such proposed regulations. On December 30, 1997, the IRS issued the
Amortizable Bond Premium Regulations, which generally are effective for bonds
acquired on or after March 2, 1998 or, for holders making an election to
amortize bond premium as described above for the taxable year that includes
March 2, 1998 or any subsequent taxable year, will apply to bonds held on or
after the first day of the taxable year in which the election is made. Neither
the proposed regulations nor the final regulations, by their express terms,
apply to prepayable securities described in Section 1272(a)(6) of the Code,
such as the REMIC Regular Certificates. Certificateholders should consult their
tax advisors regarding the possibility of making an election to amortize any
such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all
or a portion of the interest payable on such Certificates must be included in
the stated redemption price at maturity of the Certificates and accounted for
as OID (which could accelerate such inclusion). Interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method by the
holders of such Certificates and, therefore, applying the latter analysis may
result only in a slight difference in the timing of the inclusion in income of
interest on such REMIC Regular Certificates.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption,
or retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment that is part of the stated
redemption price at maturity of a REMIC Regular Certificate will recognize gain
equal to the excess, if any, of the amount of the payment over an allocable
portion of the holder's adjusted basis in the REMIC Regular Certificate. A
REMIC Regular Certificateholder who receives a final payment that is less than
the holder's adjusted basis in the REMIC Regular Certificate will generally
recognize a loss. Except as provided in the following paragraph and as provided
under "--Market Discount" above, any such gain or loss will be capital gain or
loss, provided that the REMIC Regular Certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of Code Section
1221.
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Such capital gain or loss will generally be long-term capital gain or
loss if the REMIC Regular Certificate was held for more than one year.
Long-term capital gains of individuals are subject to reduced maximum tax rates
while capital gains recognized by individual on capital assets held less than
twelve months are generally subject to ordinary income tax rates. The use of
capital losses is limited.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to the
extent that such gain does not exceed the excess, if any, of (i) the amount
that would have been includible in such holder's income with respect to the
REMIC Regular Certificate had income accrued thereon at a rate equal to 110% of
the AFR as defined in Code Section 1274(d) determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount actually
includible in such holder's income. Gain from the sale or other disposition of
a REMIC Regular Certificate that might otherwise be capita gain will be treated
as ordinary income if the REMIC Regular Certificate is held as part of a
"conversion transaction" as defined in Code section 1258(c), up to the amount
of interest that would have accrued on the REMIC Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable federal rate under Code section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, or if the REMIC Regular Certificate is held as
part of a straddle. Potential investors should consult their tax advisors with
respect to tax consequences of ownership and disposition of an investment in
REMIC Regular Certificates in their particular circumstances.
It is possible that capital gain realized by holders of one or more
classes of REMIC Regular Certificates could be considered gain realized upon
the disposition of property that was part of a "conversion transaction." A sale
of a REMIC Regular Certificate will be part of a "conversion transaction" if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and (i) the holder entered the contract
to sell the REMIC Regular Certificate substantially contemporaneously with
acquiring the REMIC Regular Certificate, (ii) the REMIC Regular Certificate is
part of a straddle, (iii) the REMIC Regular Certificate is marketed or sold as
producing capital gains, or (iv) other transactions to be specified in Treasury
regulations that have not yet been issued. If the sale or other disposition of
a REMIC Regular Certificate is part of a conversion transaction, all or a
portion of the gain realized upon the sale or other disposition of the REMIC
Regular Certificate would be treated as ordinary income instead of capital
gain.
The Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a REMIC Regular Certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will 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 may
not have, it appears that the information reports will only provide information
pertaining to the appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of interest
based on a period that corresponds to the interval between Distribution Dates
but that ends prior to each such Distribution Date. The period between the
Closing Date for Payment Lag Certificates and their first Distribution Date may
or may not exceed such interval. Purchasers of Payment Lag Certificates for
which the period between the Closing Date and the first Distribution Date does
not exceed such interval could pay upon purchase of the REMIC Regular
Certificates accrued interest in excess of the accrued interest that would be
paid if the interest paid on the Distribution Date were interest accrued from
Distribution Date to Distribution Date. If a portion of the initial purchase
price of a REMIC Regular Certificate is allocable to interest that has accrued
prior to the issue date ("pre-issuance accrued interest") and the REMIC Regular
Certificate provides for a payment of stated interest on the first payment date
(and the first payment date is within one year of the issue date) that equals
or exceeds the amount of the pre-issuance accrued interest, then the REMIC
Regular Certificate's issue price may be computed by subtracting from the issue
price the amount of pre-issuance accrued interest, rather than as an amount
payable on the REMIC Regular Certificate. However, it is unclear under this
method how the OID Regulations treat
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interest on Payment Lag Certificates. Therefore, in the case of a Payment Lag
Certificate, the Trust Fund intends to include accrued interest in the issue
price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will
be allocated as a separate item to those REMIC Regular Certificateholders that
are "pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of
these rules on an investment in the REMIC Regular Certificates. See
"Pass-Through of Non-Interest Expenses of the REMIC" under "Taxation of Owners
of REMIC Residual Certificates" below.
Effects of Defaults, Delinquencies and Losses. Certain Series of
Certificates may contain one or more classes of Subordinated Certificates, and
in the event there are defaults or delinquencies on the Mortgage Assets,
amounts that would otherwise be distributed on the Subordinated Certificates
may instead be distributed on the Senior Certificates. Subordinated
Certificateholders nevertheless will be required to report income with respect
to such Certificates under an accrual method without giving effect to delays
and reductions in distributions on such Subordinated Certificates attributable
to defaults and delinquencies on the Mortgage Assets, except to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income reported by a Subordinated Certificateholder in any period
could significantly exceed the amount of cash distributed to such holder in
that period. The holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of
defaults and delinquencies on the Mortgage Assets.
Although not entirely clear, it appears that holders of REMIC Regular
Certificates that are corporations should in general be allowed to deduct as an
ordinary loss any loss sustained during the taxable year on account of any such
Certificates becoming wholly or partially worthless, and that, in general,
holders of Certificates that are not corporations should be allowed to deduct
as a short-term capital loss any loss sustained during the taxable year on
account of any such Certificates becoming wholly worthless. Potential investors
and holders of the Certificates are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to such Certificates, including any loss resulting from the
failure to recover previously accrued interest or discount income. Special loss
rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged in
a trade or business within the United States will not be subject to federal
withholding tax if (i) such REMIC Regular Certificateholder does not actually
or constructively own 10 percent or more of the combined voting power of all
classes of equity in the issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions
of interest to such holder, including distributions in respect of accrued OID,
may be subject to a 30% withholding tax, subject to reduction under any
applicable tax treaty. If the interest on a REMIC Regular Certificate is
effectively connected with the conduct by the Non-U.S. REMIC Regular
Certificateholder of a trade or business within the United States, then the
Non-U.S. REMIC Regular Certificateholder will be subject to U.S. income tax at
regular graduated rates. Such a Non-U.S. REMIC Regular Certificateholder also
may be subject to the branch profits tax.
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Further, a REMIC Regular Certificate will not be included in the
estate of a non-resident alien individual that does not actually or
constructively own 10% or more of the combined voting power of all classes of
equity in the Issuer and will not be subject to United States estate taxes.
However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so. In addition, the IRS may assert
that non-U.S Persons that own directly or indirectly, a greater than 10%
interest in any Mortgagor, and foreign corporations that are "controlled
foreign corporations" as to the United States of which such a Mortgagor is a
"United States shareholder" within the meaning of Section 951(b) of the Code,
are subject to United States withholding tax on interest distributed to them to
the extent of interest concurrently paid by the related Mortgagor.
For these purposes, a "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in, or under the laws of, the United States or any political subdivision
thereof, an estate the income of which from sources without the United States
is includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business or a trust
as to which (i) a court in the United States is able to exercise primary
supervision over its administration and (ii) one or more U.S. Persons have the
right to control all substantial decisions of the trust.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income
tax returns, or to enable holders to make such information available to
beneficial owners or financial intermediaries that hold such REMIC Regular
Certificates on behalf of beneficial owners. If a holder, beneficial owner,
financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments
with respect to any payments to registered owners who are not "exempt
recipients." In addition, upon the sale of a REMIC Regular Certificate to (or
through) a broker, the broker must withhold 31% of the entire purchase price,
unless either (i) the broker determines that the seller is a corporation or
other exempt recipient, or (ii) the seller provides, in the required manner,
certain identifying information and, in the case of a non-U.S. Person,
certifies that such seller is a Non-U.S. Person, and certain other conditions
are met. Such as sale must also be reported by the broker to the IRS, unless
either (a) the broker determines that the seller is an exempt recipient or (b)
the seller certifies its non-U.S. Person status (and certain other conditions
are met). Certification of the registered owner's non-U.S. Person status
normally would be made on IRS Form W-8 under penalties of perjury, although in
certain cases it may be possible to submit other documentary evidence. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
On October 6, 1997, the Treasury Department issued the New
Regulations, which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on
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which such holder owns any REMIC Residual Certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. Such a
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding REMIC Residual Certificates that such holder
owns on that day. The taxable income of the REMIC will be determined under an
accrual method and will be taxable to the holders of REMIC Residual
Certificates without regard to the timing or amounts of cash distributions by
the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to the
limitations on the deductibility of "passive losses." As residual interests,
the REMIC Residual Certificates will be subject to tax rules, described below,
that differ from those that would apply if the REMIC Residual Certificates were
treated for federal income tax purposes as direct ownership interests in the
Certificates or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder or
cause the REMIC Residual Certificate to have negative "value." Investors should
consult their own tax advisors concerning the federal income tax treatment of a
REMIC Residual Certificate and the impact of such tax treatment on the
after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would equal
the amounts that would have been reported for the same days by an original
REMIC Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that
purchased such REMIC Residual Certificate at a price greater than (or less
than) the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder. See "--Sale or Exchange
of REMIC Residual Certificates" below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable income
of an individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, reduced by amortization of any premium on the
Mortgage Loans, plus income on reinvestment of cash flows and reserve assets,
plus any cancellation of indebtedness income upon allocation of realized losses
to the REMIC Regular Certificates. Note that the timing of cancellation of
indebtedness income recognized by REMIC Residual Certificateholders resulting
from defaults and delinquencies on Mortgage Assets may differ from the time of
the actual loss on the Mortgage Asset. The REMIC's deductions include interest
and original issue discount expense on the REMIC Regular Certificates,
servicing fees on the Mortgage Loans, other administrative expenses of the
REMIC and realized losses on the Mortgage Loans. The requirement that REMIC
Residual Certificateholders report their pro rata share of taxable income or
net loss of the REMIC will continue until there are no Certificates of any
class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been
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acquired with discount or premium to the extent that the REMIC's basis therein
is less than or greater than its principal balance, respectively. Any such
discount (whether market discount or OID) will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing OID
on the REMIC Regular Certificates. The REMIC may elect under Code Section 171
to amortize any premium on the Mortgage Assets. Premium on any Mortgage Asset
to which such election applies would be amortized under a constant yield
method. It is not clear whether the yield of a Mortgage Asset would be
calculated for this purpose based on scheduled payments or taking account of
the Prepayment Assumption. Additionally, such an election would not apply to
the yield with respect to any underlying mortgage loan originated on or before
September 27, 1985. Instead, premium with respect to such a mortgage loan would
be allocated among the principal payments thereon and would be deductible by
the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the
REMIC Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with respect
to REMIC Regular Certificates except that the 0.25% per annum de minimis rule
and adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize
the cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular Certificates
in determining the REMIC's initial basis in its assets. See "--Sale or Exchange
of REMIC Residual Certificates" below. For a discussion of possible adjustments
to income of a subsequent holder of a REMIC Residual Certificate to reflect any
difference between the actual cost of such REMIC Residual Certificate to such
holder and the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder, see "--Allocation of the
Income of the REMIC to the REMIC Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net loss
would be allocated among the REMIC Residual Certificateholders in the same
manner as the REMIC's taxable income. The net loss allocable to any REMIC
Residual Certificate will not be deductible by the holder to the extent that
such net loss exceeds such holder's adjusted basis in such REMIC Residual
Certificate. Any net loss that is not currently deductible by reason of this
limitation may only be used by such REMIC Residual Certificateholder to offset
its share of the REMIC's taxable income in future periods (but not otherwise).
The ability of REMIC Residual Certificateholders that are individuals or
closely held corporations to deduct net losses may be subject to additional
limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS has finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-Market
Regulations replaced the temporary regulations which allowed a Residual
Certificate to be marked to market provided that it was not a "negative value"
residual interest and did not have the same economic effect as a "negative
value" residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders
of the REMIC Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related REMIC Residual Certificates in their
entirety and not to holders of the related REMIC Regular Certificates.
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In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in
a REMIC Regular Certificate or a REMIC Residual Certificate directly or through
a pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the
lesser of (i) 3% of the excess of the individual's adjusted gross income over
the Applicable Amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. Accordingly, investment in REMIC Residual Certificates will in general
not be suitable for individuals or for certain pass-through entities, such as
partnerships and S corporations, that have individuals as partners or
shareholders.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any calendar
quarter will be subject to federal income tax in all events. Thus, for example,
an excess inclusion (i) may not, except as described below, be offset by any
unrelated losses, deductions or loss carryovers of a REMIC Residual
Certificateholder; (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the REMIC Residual Certificateholder
is a pension fund or any other organization that is subject to tax only on its
unrelated business taxable income (see "--Tax-Exempt Investors" below); and
(iii) is not eligible for any reduction in the rate of withholding tax in the
case of a REMIC Residual Certificateholder that is a foreign investor. See
"--Non-U.S. Persons" below.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar
quarter is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual Certificate
over (ii) the sum of the "daily accruals" (as defined below) for all days
during the calendar quarter on which the REMIC Residual Certificateholder holds
such REMIC Residual Certificate. For this purpose, the daily accruals with
respect to a REMIC Residual Certificate are determined by allocating to each
day in the calendar quarter its ratable portion of the product of the "adjusted
issue price" (as defined below) of the REMIC Residual Certificate at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the REMIC Residual Certificate is issued. For this
purpose, the "adjusted issue price" of a REMIC Residual Certificate at the
beginning of any calendar quarter equals the issue price of the REMIC Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the REMIC Residual Certificate before the beginning of such quarter. The
"federal long-term rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published
monthly by the IRS.
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. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
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In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special
rule that taxable income cannot be less than excess inclusions. Second, the
amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions. Third, a residual holder's
alternative minimum taxable income for a tax year cannot be less than excess
inclusions for the year. The effect of this last statutory amendment is to
prevent the use of nonrefundable tax credits to reduce a taxpayer's income tax
below its tentative minimum tax computed only on excess inclusions. These rules
are effective for tax years beginning after December 31, 1986, unless a
residual holder elects to have such rules apply only to tax years beginning
after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
exceeds such adjusted basis, it will be treated as gain from the sale of the
REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except that
the recognition of loss may be limited under the "wash sale" rules described
below). A holder's adjusted basis in a REMIC Residual Certificate generally
equals the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. Such capital gain or loss will
generally be long-term capital gain or loss if the REMIC Regular Certificate
was held for more than one year. Long-term capital gains of individuals are
subject to reduced maximum tax rates while capital gains recognized by
individuals on capital assets held less than twelve months are generally
subject to ordinary income tax rates. The use of capital losses is limited.
However, REMIC Residual Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from
sale of a REMIC Residual Certificate by a bank or thrift institution to which
such section applies would be ordinary income or loss. In addition, a transfer
of a REMIC Residual Certificate that is a "noneconomic residual interest" may
be subject to different rules. See "--Tax Related Restrictions on Transfers of
REMIC Residual Certificates--Noneconomic REMIC Residual Certificates" below.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool" (as
defined in Code Section 7701(i)) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject
to the "wash sale" rules of Code Section 1091. In that event, any loss realized
by the REMIC Residual Certificateholder on the sale will not be deductible,
but, instead, will increase such REMIC Residual Certificateholder's adjusted
basis in the newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Asset, the receipt of income from a source
other than a Mortgage Asset or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the Mortgage Assets for temporary investment
pending distribution on the Certificates. It is not anticipated that the Trust
Fund for any Series of Certificates will engage in any prohibited transactions
in which it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the
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Trust Fund equal to 100% of the value of the contributed property (the
"Contributions Tax"). No Trust Fund for any Series of Certificates will accept
contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to
treat such Trust Fund as a REMIC may also be subject to federal income tax at
the highest corporate rate on "net income from foreclosure property,"
determined by reference to the rules applicable to real estate investment
trusts. "Net income from foreclosure property" generally means income from
foreclosure property other than qualifying income for a real estate investment
trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC relating to any Series of Certificates arises out of
or results from (i) a breach of the related Servicer's, Trustee's or
Depositor's obligations, as the case may be, under the related Agreement for
such Series, such tax will be borne by such Servicer, Trustee or Depositor, as
the case may be, out of its own funds or (ii) the Depositor's obligation to
repurchase a Mortgage Loan, such tax will be borne by the Depositor. In the
event that such Servicer, Trustee or Depositor, as the case may be, fails to
pay or is not required to pay any such tax as provided above, such tax will be
payable out of the Trust Fund for such Series and will result in a reduction in
amounts available to be distributed to the Certificateholders of such Series.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be subject
to such tax on that
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portion of the distributions received on a REMIC Residual Certificate that is
considered an excess inclusion. See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above.
RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Amounts distributed to holders of
REMIC Residual Certificates should qualify as "portfolio interest," subject to
the conditions described in "--Taxation of Owners of REMIC Regular
Certificates" above, but only to the extent that the underlying mortgage loans
were originated after July 18, 1984. Furthermore, the rate of withholding on
any income on a REMIC Residual Certificate that is excess inclusion income will
not be subject to reduction under any applicable tax treaties. See "--Taxation
of Owners of REMIC Residual Certificates--Excess Inclusions" above. If the
portfolio interest exemption is unavailable, such amount will be subject to
United States withholding tax when paid or otherwise distributed (or when the
REMIC Residual Certificate is disposed of) under rules similar to those for
withholding upon disposition of debt instruments that have OID. The Code,
however, grants the Treasury Department authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (for example, where the
REMIC Residual Certificates do not have significant value). See "--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" above. If the amounts
paid to REMIC Residual Certificateholders that are not U.S. Persons are
effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U.S.
federal income taxation at regular graduated rates. For special restrictions on
the transfer of REMIC Residual Certificates, see "--Tax-Related Restrictions on
Transfers of REMIC Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that residual
interests in such entity are not held by "disqualified organizations" (as
defined below). Further, a tax is imposed on the transfer of a residual
interest in a REMIC to a "disqualified organization." The amount of the tax
equals the product of (A) an amount (as determined under the REMIC Regulations)
equal to the present value of the total anticipated "excess inclusions" with
respect to such interest for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The tax is imposed
on the transferor unless the transfer is through an agent (including a broker
or other middleman) for a disqualified organization, in which event the tax is
imposed on the agent. The person otherwise liable for the tax shall be relieved
of liability for the tax if the transferee furnished to such person an
affidavit that the transferee is not a disqualified organization and, at the
time of the transfer, such person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means (A) the United States,
any State, possession or political subdivision thereof, any foreign government,
any international organization or any agency or instrumentality of any of the
foregoing (provided that such term does not include an instrumentality if all
its activities are subject to tax and, except for FHLMC, a majority of its
board of directors is not selected by any such governmental agency), (B) any
organization (other than certain farmers' cooperatives) generally exempt from
federal income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or telephone
cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding
a residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity, provided that all partners of an "electing large
partnership" as defined in Section 775 of the Code, are deemed to be
disqualified organizations. The amount of the tax is equal to the product of
(A) the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization and (B) the highest marginal
federal income tax rate applicable to corporations. The pass-through entity
otherwise liable for the tax, for any period during which the disqualified
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organization is the record holder of an interest in such entity, will be
relieved of liability for the tax if such record holder furnishes to such
entity an affidavit that such record holder is not a disqualified organization
and, for such period, the pass-through entity does not have actual knowledge
that the affidavit is false. For this purpose, a "pass-through entity" means
(i) a regulated investment company, real estate investment trust or common
trust fund, (ii) a partnership, trust or estate and (iii) certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will,
with respect to such interest, be treated as a pass-through entity. Electing
large partnerships (generally, non-service partnerships with 100 or more
members electing to be subject to simplified IRS reporting provisions under
Code sections 771 through 777) will be taxable on excess inclusion income as if
all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that
no record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic REMIC
Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up calls
or required liquidation provided for in the REMIC's organizational documents,
(i) the present value of the expected future distributions on the REMIC
Residual Certificate at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. A significant
purpose to impede the assessment or collection of tax exists if the transferor,
at the time of the transfer, either knew or should have known that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such
knowledge if (i) the transferor conducted a reasonable investigation of the
transferee and (ii) the transferee acknowledges to the transferor that the
residual interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes associated with the
residual interest as they become due. If a transfer of a Noneconomic REMIC
Residual Certificate is disregarded, the transferor would continue to be
treated as the owner of the REMIC Residual Certificate and would continue to be
subject to tax on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of
a REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect 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 the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the REMIC
Residual Certificate to a U.S. Person, the transfer will be disregarded, and
the foreign transferor will continue to be treated as the owner, if the
transfer has the effect of allowing the transferor to avoid tax on accrued
excess inclusions. The provisions in the REMIC Regulations regarding transfers
of REMIC Residual Certificates that have tax avoidance potential to foreign
persons are effective for all transfers after June 30, 1992. The Pooling and
Servicing Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with a
duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
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Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in REMIC Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state. Therefore,
potential investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
CERTAIN ERISA CONSIDERATIONS
GENERAL
Title I of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), imposes certain restrictions on employee benefit plans
subject thereto ("ERISA Plans") and on persons who are parties in interest or
disqualified persons ("parties in interest") with respect to such ERISA Plans.
Certain employee benefit plans, such as governmental plans and church plans (if
no election has been made under Section 410(d) of the Code), are not subject to
the restrictions of ERISA, and assets of such plans may be invested in the
Certificates without regard to the ERISA considerations described below,
subject to other applicable federal, state or local law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that an ERISA Plan's investments be made in
accordance with the documents governing the ERISA Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to an
ERISA Plan from engaging in certain transactions involving such Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. In some cases, a civil penalty may be assessed on non-exempt
prohibited transactions pursuant to Section 502(i) of ERISA. Section 4975 of
the Code imposes certain excise taxes on similar transactions between employee
benefit plans and certain other retirement plans and arrangements, subject
thereto including individual retirement accounts or annuities and Keogh plans,
subject thereto and disqualified persons with respect to such plans and
arrangements (together with ERISA Plans, "Plans").
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity investment"
will be deemed for purposes of ERISA and Section 4975 of the Code to be assets
of the Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust.
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In such an event, the Depositor, the Master Servicer, any Sub-Servicer, the
Trustee, any insurer of the Mortgage Assets and other persons, in providing
services with respect to the assets of the Trust, may become fiduciaries
subject to the fiduciary responsibility provisions of Title I of ERISA, or may
otherwise become parties in interest or disqualified persons, with respect to
such Plan. In addition, transactions involving such assets could constitute or
result in prohibited transactions under Section 406 of ERISA or Section 4975 of
the Code unless such transactions are subject to a statutory or administrative
exemption.
The regulations contain a de minimis safe-harbor rule that exempts the
assets of an entity from plan assets status as long as the aggregate equity
investment in such entity by plans is not significant. For this purpose, equity
participation in the entity will be significant if immediately after any
acquisition of any equity interest in the entity, "benefit plan investors" in
the aggregate, own at least 25% of the value of any class of equity interest
(excluding equity interests held by persons who have discretionary authority or
control with respect to the assets of the entity (or held by affiliates of such
persons)). "Benefit plan investors" are defined as Plans as well as employee
benefit plans not subject to Title I of ERISA (e.g., governmental plans and
foreign plans) and entities whose underlying assets include plan assets by
reason of plan investment in such entities. The 25% limitation must be met with
respect to each class of equity interests, regardless of the portion of total
equity value represented by such class, on an ongoing basis.
AVAILABILITY OF UNDERWRITER'S EXEMPTION FOR CERTIFICATES
Labor has granted to Morgan Stanley & Co. Incorporated Prohibited
Transaction Exemption 90-24, Exemption Application No. D-8019, 55 Fed. Reg.
20548 (1990) (the "Exemption") which exempts from the application of the
prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Morgan Stanley & Co. Incorporated or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate; and (2)
the servicing, operation and management of such asset-backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or
a transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable to
the investing Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
certificates of the Trust with respect to the right to receive payment in the
event of default or delinquencies in the underlying assets of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic rating
categories from any of Duff & Phelps Credit Rating Co., Fitch Investors
Service, L.P., Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services;
(4) The Trustee is not an affiliate of the Depositor, any Underwriter,
the Master Servicer, any insurer of the Mortgage Assets, any borrower whose
obligations under one or more Mortgage Loans constitute more than 5% of the
aggregate unamortized principal balance of the assets in the Trust, or any of
their respective affiliates (the "Restricted Group");
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more than
reasonable compensation for underwriting such Certificates; the sum of all
payments made to and retained by the Asset Seller pursuant to the sale of the
Mortgage Loans to the Trust represents not more than the fair market value of
such Mortgage Loans; the sum of all payments made to and retained by the Master
Servicer represent not more than reasonable compensation for the Master
Servicer's services under the Pooling Agreement and reimbursement of the Master
Servicer's reasonable expenses in connection therewith; and
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(6) The Plan investing in the Certificates is 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.
Before purchasing a Certificate in reliance on the Exemption, a
fiduciary of a Plan should itself confirm (a) that the Certificates constitute
"certificates" for purposes of the Exemption and (b) that the general
conditions and other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. In
this regard, purchasers that are insurance companies should determine the
extent to which Prohibited Transaction Class Exemption 95-60 (for certain
transactions involving insurance company general accounts) may be available.
The Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the application of the Exemption, Prohibited
Transaction Class Exemption 83-1 (for certain transactions involving mortgage
pool investment trusts), or any other exemption, with respect to the
Certificates offered thereby.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Offered Certificates will
identify those classes of Offered Certificates, if any, which constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Generally, only those classes of
Offered Certificates that (i) are rated in one of the two highest rating
categories by one or more Rating Agencies and (ii) are part of a series
representing interests in a Trust Fund consisting of Mortgage Loans or MBS,
provided that such Mortgage Loans (or the Mortgage Loans underlying the MBS)
are secured by first liens on Mortgaged Property and were originated by certain
types of originators as specified in SMMEA, will be "mortgage related
securities" for purposes of SMMEA (the "SMMEA Certificates"). As "mortgage
related securities," the SMMEA Certificates will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, depository insitutions,
insurance companies, trustees and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cutoff established by SMMEA for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in mortgage related securities, in most cases by
requiring the affected investors to rely solely upon existing state law, and
not SMMEA. Pursuant to Section 347 of the Riegle Community Development and
Regulatory Improvement Act of 1994, which amended the definition of "mortgage
related security" (effective December 31, 1996) to include, in relevant part,
Offered Certificates satisfying the rating, first lien and qualified originator
requirements for "mortgage related securities," but representing interests in a
Trust Fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial
structures, states were authorized to enact legislation, on or before September
23, 2001, specifically referring to Section 347 and prohibiting or restricting
the purchase, holding or investment by state-regulated entities in such types
of Offered Certificates. Accordingly, investors affected by such legislation,
when and if enacted, will be authorized to invest in SMMEA Certificates only to
the extent provided in such legislation.
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 in "mortgage related securities" without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. Section 24 (Seventh), subject in each case to
such regulations as the applicable
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federal regulatory authority may prescribe. In this connection, the Office of
the Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. Section 1.5), certain "Type IV
securities," defined in 12 C.F.R. Section 1.2(1) to include certain "commercial
mortgage-related securities" and "residential mortgage-related securities." As
so defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, "mortgage-related security"
within the meaning of SMMEA, provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of
loans to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," no
representation is made as to whether any class of Offered Certificates will
qualify as "commercial mortgage-related securities," and thus as "Type IV
securities," for investment by national banks. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Section 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement")
of the Federal Financial Institutions Examination Council (the "FFIEC"), which
has been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the Office of Thrift
Supervision effective May 26, 1998, and by the NCUA, effective October 1, 1998.
The 1998 Policy Statement sets forth general guidelines which depository
institutions must follow in managing risks (including market, credit,
liquidity, operational (transaction), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes. Until October 1, 1998, federal credit
unions will still be subject to the FFIEC's now-superseded "Supervisory Policy
Statement on Securities Activities" dated January 28, 1992, as adopted by the
NCUA with certain modifications, which prohibited depository institutions from
investing in certain "high-risk mortgage securities," except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed to be unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Offered Certificates
issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
If specified in the related Prospectus Supplement, other classes of
Offered Certificates offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
such Offered Certificates under various legal investment restrictions, and thus
the ability of investors subject to these restrictions to purchase such Offered
Certificates, may be subject to significant interpretive uncertainties.
Except as to the status of certain classes of Offered Certificates
identified in the Prospectus Supplement for a series as "mortgage related
securities" under SMMEA, no representations are made as to the proper
characterization of the Offered Certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Certificates under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Certificates)
may adversely affect the liquidity of the Offered Certificates.
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Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their own legal advisors
in determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
The Offered Certificates offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Certificates may
be effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Certificates will
be distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Morgan Stanley & Co. Incorporated
("Morgan Stanley") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Certificates agreed
to be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters
may receive compensation from the Depositor or from purchasers of Offered
Certificates in the form of discounts, concessions or commissions. The
Prospectus Supplement will describe any such compensation paid by the
Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Certificates will be distributed by Morgan Stanley acting as agent or in some
cases as principal with respect to Offered Certificates that it has previously
purchased or agreed to purchase. If Morgan Stanley acts as agent in the sale of
Offered Certificates, Morgan Stanley will receive a selling commission with
respect to such Offered Certificates, depending on market conditions, expressed
as a percentage of the aggregate Certificate Balance or notional amount of such
Offered Certificates as of the Cut-off Date. The exact percentage for each
series of Certificates will be disclosed in the related Prospectus Supplement.
To the extent that Morgan Stanley elects to purchase Offered Certificates as
principal, Morgan Stanley may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Offered
Certificates of such series.
The Depositor will indemnify Morgan Stanley and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Morgan Stanley and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Morgan Stanley and the Depositor
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Certificates.
Offered Certificates will be sold primarily to institutional
investors. Purchasers of Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Offered Certificates. Certificateholders
should consult with their legal advisors in this regard prior to any such
reoffer or sale.
As to each series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor, and
may be sold by the Depositor at any time in private transactions.
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LEGAL MATTERS
Certain legal matters in connection with the Certificates, including
certain federal income tax consequences, will be passed upon for the Depositor
by Cadwalader, Wickersham & Taft, New York, New York or Brown & Wood LLP, New
York, New York or Latham & Watkins, New York, New York or such other counsel
as may be specified in the related Prospectus Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of all distributions on the underlying
mortgage loans. These ratings address the structural, legal and issuer-related
aspects associated with such certificates, the nature of the underlying
mortgage loans and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
TERM PAGE(S) ON WHICH
TERM IS DEFINED
IN THE PROSPECTUS
Accrual Certificates..........................................................7
ADA..........................................................................66
Applicable Amount............................................................87
ARM Loans................................................................20, 72
Asset Conservation Act.......................................................62
Asset Seller.................................................................17
Assets........................................................................1
Balloon Mortgage Loans.......................................................13
Bankruptcy Code..............................................................58
Book-Entry Certificates......................................................27
Cash Flow Agreement...........................................................6
Cash Flow Agreements..........................................................1
Cede......................................................................3, 33
CERCLA...................................................................15, 62
Certificate Account..........................................................37
Certificate Balance...........................................................7
Certificate Owners...........................................................33
Certificateholders............................................................3
Closing Date.................................................................77
Commercial Loans.............................................................17
Commercial Properties.........................................................5
Commission....................................................................2
Contributions Tax............................................................89
Cooperatives.................................................................17
Covered Trust................................................................50
CPR..........................................................................25
Credit Support.........................................................1, 6, 22
Crime Control Act............................................................67
Deferred Interest............................................................74
Definitive Certificates..................................................27, 33
Depositor....................................................................17
Determination Date...........................................................27
DTC.......................................................................3, 33
Due Period...................................................................27
Environmental Hazard Condition...............................................63
Equity Participations........................................................21
ERISA........................................................................92
Exchange Act..................................................................3
Exemption....................................................................93
FDIC.........................................................................37
FHLMC........................................................................46
FNMA.........................................................................63
Government Securities..................................................1, 6, 17
Indirect Participants........................................................33
Insurance Proceeds...........................................................38
IRS..........................................................................69
L/C Bank.....................................................................51
Labor........................................................................92
Lease.........................................................................3
Lease Assignment..............................................................1
98
<PAGE>
Legislative History..........................................................77
Lessee........................................................................3
Liquidation Proceeds.........................................................38
Lock-out Date................................................................21
Lock-out Period..............................................................21
Mark-to-Market Regulations...................................................86
Master REMIC.................................................................76
MBS....................................................................1, 5, 16
MBS Agreement................................................................21
MBS Issuer...................................................................21
MBS Servicer.................................................................21
MBS Trustee..................................................................21
Morgan Stanley...............................................................96
Mortgage Loans.........................................................1, 5, 16
Mortgage Notes...............................................................17
Mortgage Rate.............................................................5, 20
Mortgages....................................................................17
Multifamily Loans............................................................17
Multifamily Properties....................................................5, 17
NCUA.........................................................................95
Nonrecoverable Advance.......................................................30
OID......................................................................68, 69
OID Regulations..............................................................69
Originator...................................................................17
Participants.................................................................33
Pass-Through Rate.........................................................7, 28
Payment Lag Certificates.....................................................82
Permitted Investments........................................................37
Plans........................................................................92
Prepayment Assumption........................................................73
Prepayment Premium...........................................................21
Prohibited Transactions Tax..................................................88
RCRA.........................................................................63
Record Date..................................................................27
Related Proceeds.............................................................30
Relief Act...................................................................66
REMIC Certificates...........................................................76
REMIC Regular Certificateholders.............................................77
REMIC Regular Certificates................................................8, 76
REMIC Regulations............................................................67
REMIC Residual Certificateholder.............................................84
REMIC Residual Certificates..............................................76, 85
REO Extension................................................................56
REO Tax......................................................................56
Restricted Group.............................................................93
RICO.........................................................................67
Senior Certificates.......................................................7, 26
Servicing Standard...........................................................40
SMMEA........................................................................94
SMMEA Certificates...........................................................94
Special Servicer..........................................................5, 41
Stripped ARM Obligations.....................................................74
Stripped Bond Certificates...................................................71
Stripped Coupon Certificates.................................................71
Stripped Interest Certificates............................................7, 26
Stripped Principal Certificates...........................................7, 26
Subordinate Certificates..................................................7, 26
Sub-Servicer.................................................................41
99
<PAGE>
Sub-Servicing Agreement......................................................41
Subsidiary REMIC.............................................................76
Super-Premium Certificates...................................................78
Title V......................................................................65
Trust Assets..................................................................2
Trust Fund....................................................................1
UCC..........................................................................33
Voting Rights................................................................16
Warrantying Party............................................................36
100
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates, other than underwriting
discounts and commissions:
SEC Registration Fee..........................................$1,475,000**
Blue Sky Fees......................................................3,000
NASD Fees............................................................N/A
Printing and Engraving Fees.......................................50,000
Legal Fees and Expenses..........................................200,000
Accounting Fees and Expenses......................................40,000
Trustee Fees and Expenses.........................................25,000
Rating Agency Fees................................................60,000
Miscellaneous.....................................................35,000
Total.........................................................$1,888,000**
- --------------------------
* All amounts except the SEC Registration Fee are estimates of
expenses incurred or to be incurred in connection with the
issuance and distribution of a single Series of Certificates
in an aggregate principal amount assumed for these purposes
to be equal to $100,000,000 of Certificates registered
hereby.
** Includes $295 previously paid.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section VII of the proposed form of Underwriting Agreement, the
Underwriter is obligated under certain circumstances to indemnify officers and
directors of Morgan Stanley Capital I Inc. (the "Company") who sign the
Registration Statement, and certain controlling persons of the Company, against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Act").
The Company's By-laws provide for indemnification of directors and
officers of the Company to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are
or were such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding.
<PAGE>
The Pooling and Servicing Agreement will provide that no director,
officer, employee or agent of the Company will be liable to the Trust Fund or
the Certificateholders for any action taken or for refraining from the taking
of any action pursuant to the Pooling and Servicing Agreement, except for such
person's own misfeasance, bad faith or gross negligence in the performance of
duties. The Pooling and Servicing Agreements will provide further that, with
the exceptions stated above, any director, officer, employee or agent of the
Company will be indemnified and held harmless by the Trust Fund against any
loss, liability or expense incurred in connection with any legal action
relating to the Pooling and Servicing Agreement or the Certificates, other than
any loss, liability or expense (i) related to any specific Mortgage Loan or
Mortgage Loans (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to the Pooling and Servicing Agreement), (ii)
incurred in connection with any violation by him or her of any state or federal
securities law or (iii) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
Pooling and Servicing Agreement.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates**
5.2 Opinion of Cadwalader, Wickersham & Taft as to legality of the
Certificates**
5.3 Opinion of Latham & Watkins as to legality of the Certificates
8.1 Opinion of Brown & Wood LLP as to certain tax matters (included in
Exhibit 5.1)**
8.2 Opinion of Cadwalader, Wickersham & Taft as to certain tax matters
(included in Exhibit 5.2)**
8.3 Opinion of Latham & Watkins as to certain tax matters
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1
hereto)**
23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.2)**
23.3 Consent of Latham & Watkins (included in Exhibit 5.3 and Exhibit 8.3
hereto)
25.1 Powers of Attorney**
- - - - - - - - - - -
* Incorporated by reference to Registration Statement No. 333-45467 as
previously filed by Registrant on Form S-3, Registration No. 33-45042
as previously filed by the Registrant on Form S-11, Registration
Statement No. 33-46723 as previously filed by the Registrant on Form
S-3 to Form S-11 and Registration Statement No. 333-26667 as
previously filed by the Registrant on Form S-3 to Form S-11.
** Previously filed.
ITEM 17. UNDERTAKINGS.
A. Undertaking in respect of indemnification.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
B. Undertaking pursuant to Rule 415 Offering.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Act;
(ii) to reflect in the Prospectus any facts or
events arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;
(iii) to include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change of such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
C. Undertaking in respect of incorporation by reference.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Act, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities and Exchange Act of 1934
that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
II-3
<PAGE>
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
D. Undertaking in respect of equity offerings of nonreporting Registrants.
The Registrant hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit delivery to each purchaser.
E. Undertaking pursuant to Rule 430A
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Post-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on September 29, 1998.
MORGAN STANLEY CAPITAL I INC.
By: /s/ David R. Warren
---------------------------
Name: David R. Warren
Title: President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons
in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ David R. Warren President (Principal Executive September 29, 1998
- ------------------------------------------- Officer) and Director
David R. Warren
* Director September 29, 1998
- -------------------------------------------
Craig S. Phillips
* Director September 29, 1998
- -------------------------------------------
John E. Westerfield
* Treasurer (Principal September 29, 1998
- ------------------------------------------- Financial Officer) and Controller
Eileen K. Murray
</TABLE>
*/s/ David R. Warren
- ----------------------------------------
David R. Warren
as Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates**
5.2 Opinion of Cadwalader, Wickersham & Taft as to legality of the
Certificates**
5.3 Opinion of Latham & Watkins as to legality of the Certificates
8.1 Opinion of Brown & Wood LLP as to certain tax matters (included in
Exhibit 5.1)**
8.2 Opinion of Cadwalader, Wickersham & Taft as to certain tax matters
(included in Exhibit 5.2)**
8.3 Opinion of Latham & Watkins as to certain tax matters
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1
hereto)**
23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibit
5.2)**
23.3 Consent of Latham & Watkins (included in Exhibit 5.3 and Exhibit
8.3 hereto)
25.1 Powers of Attorney**
- - - - - - - - - - - - - - - - - - - -
* Incorporated by reference to Registration Statement No. 333-45467 as
previously filed by the Registrant on Form S-3, Registration Statement No.
33-45042 as previously filed by the Registrant on Form S-11, No. 33-46723 as
previously filed by the Registrant on Form S-3 to Form S-11 and No. 333-26667
as previously filed by the Registrant on Form S-3 to Form S-11.
** Previously filed.
II-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LATHAM & WATKINS
ATTORNEYS AT LAW
PAUL R. WATKINS (I899 - I973 53rd AT THIRD, SUITE I000
DANA LATHAM (I898 - I974) 885 THIRD AVENUE ORANGE COUNTY OFFICE
NEW YORK, NEW YORK I0022-4802 ------------------------
TELEPHONE (2I2) 906-I200 650 TOWN CENTER DRIVE, SUITE 2000
FAX (2I2) 75I-4864 COSTA MESA, CALIFORNIA 92626-I925
CHICAGO OFFICE __________ PHONE (7I4) 540-I235, FAX 755-8290
--------------
SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60606 SAN DIEGO OFFICE
PHONE (3I2) 876-7700, FAX 993-9 -----------------
70I "B" STREET, SUITE 2I00
SAN DIEGO, CALIFORNIA 92I0I-8I97
HONG KONG OFFICE PHONE (6I9) 236-I234, FAX 696-74I9
---------------
SUITE 2205A, 22ND FLOOR
NO. 9 QUEEN'S ROAD CENTRAL SAN FRANCISCO OFFICE
HONG KONG --------------------
PHONE + 852-2522-7886, FAX 2522-7006 505 MONTGOMERY STREET, SUITE I900
SAN FRANCISCO, CALIFORNIA 94III-2562
PHONE (4I5) 39I-0600, FAX 395-8095
September 28, 1998
LONDON OFFICE
-------------
ONE ANGEL COURT SILICON VALLEY OFFICE
LONDON EC2R 7HJ ENGLAND ---------------------
PHONE + 44-I7I-374 4444, FAX 374 4460 75 WILLOW ROAD
MENLO PARK, CALIFORNIA 94025-3656
PHONE (650) 328-4600, FAX 463-2600
LOS ANGELES OFFICE
-------------------
633 WEST FIFTH STREET, SUITE 4000 SINGAPORE OFFICE
LOS ANGELES, CALIFORNIA 9007I-2007 ----------------
PHONE (2I3) 485-I234, FAX 89I-8763 20 CECIL STREET, #25-02/03/04
THE EXCHANGE, SINGAPORE 049705
PHONE + 65-536-II6I, FAX 536-II7I
MOSCOW OFFICE
-------------
ULITSA GASHEKA, 7, 9th Floor TOKYO OFFICE
MOSCOW I23056, RUSSIA ------------
PHONE + 7-095 785-I234, FAX 785-I235 INFINI AKASAKA, 8-7-I5, AKASAKA, MINATO-KU
TOKYO I07-0052, JAPAN
PHONE +8I3-3423-3970, FAX 3423-397I
NEW JERSEY OFFICE
-----------------
ONE NEWARK CENTER, I6th FLOOR WASHINGTON, D.C. OFFICE
NEWARK, NEW JERSEY 07I0I-3I74 -----------------------
PHONE (973) 639-I234, FAX 639-7298 I00I PENNSYLVANIA AVE., N.W., SUITE I300
WASHINGTON, D.C. 20004-2505
PHONE (202) 637-2200, FAX 637-220I
</TABLE>
Morgan Stanley Capital I Inc.
1585 Broadway
New York, New York 10036
Re: Morgan Stanley Capital I Inc.
Registration Statement on Form S-3
Registration No. 333-62911
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Morgan Stanley Capital I Inc., a
Delaware corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") which has
been filed with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), for the registration under
the Act of Mortgage Pass-Through Certificates (the "Certificates"), issuable in
series (each, a "Series"). As set forth in the Registration Statement, each
Series will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement (each, an "Agreement") among the Company, a
trustee (the "Trustee") and, where appropriate, a master servicer (the "Master
Servicer") and a special servicer (the "Special Servicer"), each to be
identified (together with any other relevant parties) in the prospectus
supplement for such Series.
We are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the authorization and issuance of the
Certificates, and for the purposes of this opinion, have assumed such
proceedings will be completed in the manner presently proposed by the
Registration Statement. In addition, we have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
<PAGE>
LATHAM & WATKINS
September 28, 1998
Page 2
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.
We are opining only as to the effect of the Federal laws of
the United States, the internal laws of the State of New York and the General
Corporation Law of the State of Delaware, and we express no opinion with
respect to the applicability or the effect of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any other local agencies within any state.
Subject to the foregoing and the other matters set forth
herein, we are of the opinion that:
1. When an Agreement relating to a Series has been duly and
validly authorized, executed and delivered by the Company, the Master Servicer
and the Special Servicer, if any, the Trustee and any other party thereto, such
Agreement will constitute a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
2. When a Series has been duly authorized by all necessary
action on the part of the Company (subject to the terms thereof being otherwise
in compliance with applicable law at such time) and has been duly executed,
authenticated and delivered by the Trustee against payment in accordance with
the terms of the related underwriting agreement, such Series will be validly
issued, fully paid and nonassessable, and the holders thereof will be entitled
to the benefits of the related Agreement.
The opinions rendered above are subject to the following
exceptions, limitations and qualifications: (i) the effect of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws relating to or affecting the rights and remedies of creditors, (ii) the
effect of general principles of equity, whether enforcement is considered in a
proceeding in equity or law, and the discretion of the court before which any
proceeding therefor may be brought, (iii) the unenforceability under certain
circumstances under law or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a liability where
such indemnification or contribution is contrary to public policy, and (iv)
possible limitations arising from applicable laws other than those referred to
in the preceding clause (i) upon the remedial provisions contained in any
Agreement, but such limitations do not in our opinion of themselves make the
remedies afforded inadequate for the practical realization of the benefits
purported to be provided thereby.
We hereby consent to the filing of this letter as Exhibit 5-3
to the Registration Statement and to the references to this firm under the
caption "Legal Matters" in the prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Act or the Rules and Regulations of the Commission issued thereunder with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Latham & Watkins
<PAGE>
LATHAM & WATKINS
September 28, 1998
Page 3
LATHAM & WATKINS
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LATHAM & WATKINS
ATTORNEYS AT LAW
PAUL R. WATKINS (I899 - I973 53rd AT THIRD, SUITE I000
DANA LATHAM (I898 - I974) 885 THIRD AVENUE ORANGE COUNTY OFFICE
NEW YORK, NEW YORK I0022-4802 ------------------------
TELEPHONE (2I2) 906-I200 650 TOWN CENTER DRIVE, SUITE 2000
FAX (2I2) 75I-4864 COSTA MESA, CALIFORNIA 92626-I925
CHICAGO OFFICE __________ PHONE (7I4) 540-I235, FAX 755-8290
--------------
SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60606 SAN DIEGO OFFICE
PHONE (3I2) 876-7700, FAX 993-9 -----------------
70I "B" STREET, SUITE 2I00
SAN DIEGO, CALIFORNIA 92I0I-8I97
HONG KONG OFFICE PHONE (6I9) 236-I234, FAX 696-74I9
---------------
SUITE 2205A, 22ND FLOOR
NO. 9 QUEEN'S ROAD CENTRAL SAN FRANCISCO OFFICE
HONG KONG --------------------
PHONE + 852-2522-7886, FAX 2522-7006 505 MONTGOMERY STREET, SUITE I900
SAN FRANCISCO, CALIFORNIA 94III-2562
PHONE (4I5) 39I-0600, FAX 395-8095
September 28, 1998
LONDON OFFICE
-------------
ONE ANGEL COURT SILICON VALLEY OFFICE
LONDON EC2R 7HJ ENGLAND ---------------------
PHONE + 44-I7I-374 4444, FAX 374 4460 75 WILLOW ROAD
MENLO PARK, CALIFORNIA 94025-3656
PHONE (650) 328-4600, FAX 463-2600
LOS ANGELES OFFICE
-------------------
633 WEST FIFTH STREET, SUITE 4000 SINGAPORE OFFICE
LOS ANGELES, CALIFORNIA 9007I-2007 ----------------
PHONE (2I3) 485-I234, FAX 89I-8763 20 CECIL STREET, #25-02/03/04
THE EXCHANGE, SINGAPORE 049705
PHONE + 65-536-II6I, FAX 536-II7I
MOSCOW OFFICE
-------------
ULITSA GASHEKA, 7, 9th Floor TOKYO OFFICE
MOSCOW I23056, RUSSIA ------------
PHONE + 7-095 785-I234, FAX 785-I235 INFINI AKASAKA, 8-7-I5, AKASAKA, MINATO-KU
TOKYO I07-0052, JAPAN
PHONE +8I3-3423-3970, FAX 3423-397I
NEW JERSEY OFFICE
-----------------
ONE NEWARK CENTER, I6th FLOOR WASHINGTON, D.C. OFFICE
NEWARK, NEW JERSEY 07I0I-3I74 -----------------------
PHONE (973) 639-I234, FAX 639-7298 I00I PENNSYLVANIA AVE., N.W., SUITE I300
WASHINGTON, D.C. 20004-2505
PHONE (202) 637-2200, FAX 637-220I
</TABLE>
Morgan Stanley Capital I Inc.
1585 Broadway
New York, New York 10036
Re: Morgan Stanley Capital I Inc.
Registration Statement on Form S-3
Registration No. 333-62911
--------------------------
Ladies and Gentlemen:
We have acted as special counsel to Morgan Stanley Capital I Inc. (the
"Company") in connection with the preparation of a registration statement on
Form S-3 (Registration No. 333-62911) (the "Registration Statement"), which has
been filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), for the registration under the Act of Mortgage
Pass-Through Certificates (the "Certificates"), issuable in series (the
"Series"). As described in the Registration Statement, each Series of
Certificates will be issued under and pursuant to the terms and conditions of a
separate pooling and servicing agreement (each, an "Agreement") between the
Company, a trustee (the "Trustee"), a master servicer (the "Master Servicer")
and, where appropriate, a special servicer (the "Special Servicer"), each to be
identified (together with any other relevant parties) in the prospectus
supplement for such Series of Certificates.
In rendering our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Registration Statement and the prospectuses (the "Prospectuses") and the
forms of prospectus supplements (the "Prospectus Supplements") included
therein, and such other documents as we have deemed necessary or appropriate as
a basis for the opinion set forth below.
<PAGE>
LATHAM & WATKINS
September 28, 1998
Page 2
In rendering our opinion, we have examined the Internal Revenue Code
of 1986, as amended, as of the date hereof, the Treasury Regulations
promulgated thereunder, judicial decisions, legislative history and such other
authorities as we have deemed appropriate. The statutory provisions,
regulations, interpretations, and other authorities upon which our opinion is
based are subject to change, and such changes could apply retroactively.
We express no opinion as to any laws other than the federal laws of
the United States of America as of the date hereof.
Based upon and subject to the foregoing, it is our opinion that the
information in each Prospectus under the captions "Summary of Prospectus-Tax
Status of the Certificates" and "Certain Federal Income Tax Consequences," to
the extent they constitute matters of law or legal conclusions, are correct in
all material respects, based on existing law and the assumptions stated
therein.
The foregoing opinion and the discussion contained in each Prospectus
under the captions "Summary of Prospectus-Tax Status of the Certificates" and
"Certain Federal Income Tax Consequences" represent our conclusions as to the
application of existing law. No assurance can be given that the Internal
Revenue Service will not assert contrary positions or that the law (including
the interpretation thereof) will not change. We also note that the Prospectuses
and Prospectus Supplements filed with the Registration Statement do not relate
to any specific transaction. Accordingly, the above-referenced description of
federal income tax consequences may require modifications in the context of an
actual transaction. We express no opinion either as to any matter not
specifically covered by the foregoing opinion or as to the effect on the
matters covered by this opinion of the laws of any other jurisdiction.
Any change in applicable law, which may change at any time and which
is subject to differing interpretation, or in the facts or documents on which
our opinion is based, or any inaccuracy in the representations or warranties on
which we have relied, may affect the validity of the foregoing opinion. This
firm undertakes no obligation to update this opinion in the event that there is
either a change in the legal authorities, facts or documents on which this
opinion is based, or an inaccuracy in any of the representations or warranties
upon which we have relied in rendering this opinion.
We hereby consent to the filing of this opinion as Exhibit 8.3 to the
Registration Statement. We also consent to the references to Latham & Watkins
under the caption "Certain Federal Income Tax Consequences" in each Prospectus.
Very truly yours,
/s/ Latham & Watkins
LATHAM & WATKINS
