<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-45467
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 25, 1998)
$373,562,000
BANC ONE FINANCIAL SERVICES HOME EQUITY LOAN TRUST 1999-2,
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-2
BANC ONE FINANCIAL SERVICES, INC.
SELLER
BANK ONE, INDIANA, NATIONAL ASSOCIATION
MASTER SERVICER
MORGAN STANLEY CAPITAL I INC.
DEPOSITOR
------------------
o THE CLASS A CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND WILL NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF ANY OTHER ENTITY.
o CREDIT ENHANCEMENT WILL CONSIST OF EXCESS SPREAD, OVERCOLLATERALIZATION AND AN
IRREVOCABLE AND UNCONDITIONAL CERTIFICATE GUARANTY INSURANCE POLICY ISSUED BY
AMBAC ASSURANCE CORPORATION. THE POLICY WILL GUARANTEE TIMELY PAYMENT OF
INTEREST AND CERTAIN PAYMENTS OF PRINCIPAL ON THE CLASS A CERTIFICATES.
[AMBAC LOGO]
o THE TRUST WILL ISSUE THE FOLLOWING CERTIFICATES WHICH ARE OFFERED HEREBY:
<TABLE>
<CAPTION>
INITIAL UNDERWRITING PROCEEDS TO
CLASS PRINCIPAL BALANCE(1) CERTIFICATE RATE PRICE TO PUBLIC(2) DISCOUNT DEPOSITOR(3)
- - ---------- -------------------- ---------------- ------------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Class A-1 $183,484,000 6.46% 99.9934% 0.0750% 99.9184%
Class A-2 $ 56,388,000 6.69% 99.9896% 0.3250% 99.6646%
Class A-3 $ 47,183,000 6.94% 99.9898% 0.3500% 99.6398%
Class A-4 $ 15,404,000 7.10% 99.9691% 0.4000% 99.5691%
Class A-5 $ 20,133,000 7.31% 99.9682% 0.5250% 99.4432%
Class A-6 $ 12,058,000 7.50% 99.9668% 0.6320% 99.3348%
Class A-7 $ 38,912,000 7.18% 99.9833% 0.5250% 99.4583%
Total $373,562,000 $ 373,517,549.35 $933,823.31 $372,583,726.04
</TABLE>
- - ------------------
(1) Plus or minus 5%.
(2) Plus accrued interest, if any, from June 1, 1999.
(3) Before deducting expenses, estimated to be approximately $993,705.00.
THE UNDERWRITING DISCOUNT WILL BE 3% FOR UP TO $7,000,000 INITIAL PRINCIPAL
BALANCE OF EACH CLASS OF CLASS A CERTIFICATES SOLD TO VARIOUS NONINSTITUTIONAL
INVESTORS. TO THE EXTENT CLASS A CERTIFICATES ARE SOLD TO THESE INVESTORS, THE
UNDERWRITING DISCOUNT WILL BE MORE THAN, AND THE PROCEEDS TO THE DEPOSITOR FROM
SALES OF THE CLASS A CERTIFICATES WILL BE LESS THAN, THE AMOUNTS SHOWN ABOVE.
THE CLASS A CERTIFICATES REPRESENT INTERESTS IN A POOL CONSISTING OF FIXED RATE,
CLOSED-END HOME EQUITY LOANS. THE CERTIFICATES CONSIST OF SEVEN CLASSES OF
CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT AND ONE CLASS OF
CLASS R CERTIFICATES NOT OFFERED BY THIS PROSPECTUS SUPPLEMENT. MONTHLY
DISTRIBUTIONS ON THE CLASS A CERTIFICATES ARE SCHEDULED TO BE PAID ON THE 25TH
DAY OF EACH MONTH OR, IF THE 25TH IS NOT A BUSINESS DAY, ON THE NEXT BUSINESS
DAY, BEGINNING IN JULY 1999.
MORGAN STANLEY & CO. INCORPORATED AND BANC ONE CAPITAL MARKETS, INC. ARE ACTING
AS UNDERWRITERS FOR THE ISSUANCE OF THE CLASS A CERTIFICATES. DELIVERY OF THE
CLASS A CERTIFICATES IS EXPECTED TO BE MADE IN BOOK ENTRY FORM ONLY THROUGH THE
DEPOSITORY TRUST COMPANY, CEDELBANK AND THE EUROCLEAR SYSTEM ON OR ABOUT
JUNE 17, 1999.
------------------
THIS PROSPECTUS SUPPLEMENT MAY BE USED TO OFFER AND SELL THE CERTIFICATES ONLY
IF ACCOMPANIED BY THE PROSPECTUS.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 IN THIS PROSPECTUS
SUPPLEMENT AND PAGE 12 IN THE PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE CERTIFICATES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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.
------------------
MORGAN STANLEY DEAN WITTER BANC ONE CAPITAL MARKETS, INC.
June 10, 1999
<PAGE>
Important notice about information presented in this prospectus supplement
and the accompanying prospectus
We provide information to you about the certificates in two separate documents
that provide progressively more detailed information:
o the accompanying prospectus, which provides general
information, some of which may not apply to your series of
certificates; and
o this prospectus supplement, which describes the specific terms
of your series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
You should rely on the information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset Backed Certificates, Series
1999-2 in any state where the offer is not permitted.
This prospectus supplement and the prospectus include cross-references to
captions in these materials where you can find further related discussions. The
following table of contents and the table of contents contained in the
accompanying prospectus indicate the pages on which those captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Definitions" beginning on page S-62 in this prospectus supplement and under the
caption "Index of Principal Definitions" beginning on page 90 in the
accompanying prospectus.
This prospectus supplement and the attached prospectus may be used by Banc One
Capital Markets, Inc. and its successors in connection with offers and sales
related to market-making transactions in the certificates offered by this
prospectus supplement and the prospectus. Banc One Capital Markets, Inc. may act
as principal or agent in such transactions. Such sales will be made at prices
related to prevailing market prices at the time of sale.
For 90 days following the date of this prospectus supplement, all dealers
selling certificates will deliver a prospectus supplement and prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters of the certificates with respect to their unsold
allotments or subscriptions.
The depositor's principal offices are located at 1585 Broadway, 37th Floor, New
York, New York 10036 and its telephone number is (212) 761-4700.
S-2
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.............................................S-4
RISK FACTORS.......................................S-10
THE SELLER, SERVICER AND THE MASTER SERVICER.......S-15
General....................................S-15
The Master Servicer........................S-15
BANK ONE Year 2000 Readiness...............S-15
The Seller and Servicer....................S-16
Loan Origination...........................S-16
Credit and Underwriting Guidelines.........S-16
Income Verification........................S-17
Specific Underwriting Criteria.............S-18
Quality Control and Audit Procedures.......S-19
Servicing and Collection Procedures........S-20
Delinquency, Foreclosure and Loss
Experience of BOFS......................S-20
THE HOME EQUITY LOAN POOL..........................S-23
General....................................S-23
Statistical Information....................S-24
PREPAYMENT AND YIELD
CONSIDERATIONS..................................S-24
General....................................S-24
General Prepayment Considerations..........S-24
Payment Delay Affects Yield................S-26
Weighted Average Lives.....................S-26
Last Scheduled Distribution Dates..........S-35
DESCRIPTION OF THE CERTIFICATES....................S-35
General....................................S-35
Assignment of Home Equity Loans............S-36
Payments on Home Equity Loans;
Deposits to Collection Account and
Certificate Account.....................S-37
Priority of Distributions..................S-38
Interest Distributions.....................S-39
Principal Distributions....................S-40
Overcollateralization Provisions...........S-41
Monthly Advances...........................S-42
Reports to Certificateholders..............S-42
Book-Entry Registration and Definitive
Certificates............................S-43
DTC and Year 2000 Compliance...............S-46
THE CERTIFICATE INSURER............................S-47
THE POLICY.........................................S-48
POOLING AND SERVICING AGREEMENT....................S-50
Collection and Other Servicing
Procedures on Home Equity Loans.........S-50
Hazard Insurance...........................S-50
Realization Upon Defaulted Home Equity
Loans...................................S-51
Servicing Compensation and Payment of
Expenses................................S-51
Evidence as to Compliance..................S-52
Certain Matters Regarding the Depositor,
Seller and Master Servicer..............S-52
Servicer Default...........................S-53
Rights Upon a Servicer Default.............S-53
Amendment..................................S-53
Termination; Purchase of Home Equity Loans.S-54
The Trustee................................S-54
DESCRIPTION OF THE PURCHASE AGREEMENT..............S-55
USE OF PROCEEDS....................................S-55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...........S-55
STATE TAXES........................................S-56
ERISA CONSIDERATIONS...............................S-57
Availability of Exemptions for Class A
Certificates............................S-57
Review by Benefit Plan Fiduciaries.........S-58
LEGAL INVESTMENT...................................S-58
UNDERWRITING.......................................S-59
EXPERTS............................................S-60
LEGAL MATTERS......................................S-60
RATINGS............................................S-61
INDEX OF PRINCIPAL DEFINITIONS.....................S-62
ANNEX I GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES......................................A-I-1
ANNEX II THE HOME EQUITY LOAN
POOL--STATISTICAL INFORMATION...................A-II-1
S-3
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the Class
A Certificates, read carefully this entire document and the accompanying
prospectus.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
Title of Series: Banc One Home Equity Loan Asset Backed
Certificates, Series 1999-2
Trust: Banc One Financial Services Home Equity Loan
Trust 1999-2
Offered Certificates: Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-7 Certificates
Non-Offered Certificates: Class R Certificates
Seller: Banc One Financial Services, Inc.
Master Servicer: Bank One, Indiana, National Association
Depositor: Morgan Stanley Capital I Inc.
Trustee: Norwest Bank Minnesota, National Association
Certificate Insurer: Ambac Assurance Corporation
Cut-off Date: June 1, 1999
Closing Date: On or about June 17, 1999
The Trust
The trust will be formed under a pooling and servicing agreement dated as of
June 1, 1999 among the seller, the master servicer, the depositor and the
trustee. The trustee, a national banking association, will act as trustee for
the benefit of the certificateholders.
The Certificates
On the closing date, the trust will issue seven classes of Class A Certificates.
The Class A Certificates are senior certificates and are being offered to you.
The trust is also issuing one class of Class R Certificates, which are
subordinate certificates and are not being offered to you.
Master Servicer
The master servicer, a national banking association, is an affiliate of the
seller. The master servicer is also an affiliate of Banc One Capital Markets,
Inc., one of the underwriters. Under the terms of the pooling and servicing
agreement, the master servicer will have the contractual responsibility for
servicing, managing and making collections on the home equity loans. Each
calendar month, the master servicer will retain a portion of the interest
payments on the home equity loans as a fee for its services and those of the
servicer.
The master servicer expects that Banc One Financial Services, Inc. will act as
servicer of the home equity loans.
Depositor
The depositor is a Delaware corporation and a direct wholly-owned subsidiary of
Morgan Stanley Group Inc. The depositor is also an affiliate of one of the
underwriters, Morgan Stanley & Co. Incorporated. The depositor will acquire the
home equity loans from the seller, and will then sell them to the trust in
exchange for the Class A and Class R Certificates.
S-4
<PAGE>
Certificate Insurer
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation.
See "THE CERTIFICATE INSURER" in this prospectus supplement.
Trust Fund
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a pool of fixed rate, closed-end home equity loans, secured by first or
second liens on primarily one- to four-family residential properties;
o payments on the home equity loans received on or after June 1, 1999;
o such assets as shall from time to time be deposited in the collection
and certificate accounts in accordance with the pooling and servicing
agreement;
o property that secured a home equity loan and has been acquired after
the closing date by foreclosure or deed in lieu of foreclosure;
o rights of the depositor under the home equity loan purchase agreement
pursuant to which the depositor purchased the home equity loans from
the seller. Under certain circumstances, if the representations and
warranties made by the seller about the home equity loans are breached,
then the seller will be obligated to repurchase those home equity
loans;
o rights of the seller under certain hazard insurance policies covering
the mortgaged properties; and
o an irrevocable and unconditional certificate guaranty insurance policy
issued by Ambac Assurance Corporation for your benefit.
No Obligor or Guarantor
The Class A Certificates do not represent the obligation of any entity other
than the trust. Except for the protection afforded by the certificate guaranty
insurance policy to the extent described in this prospectus supplement, the
Class A Certificates are not insured or guaranteed. Payments on the home equity
loans are not insured or guaranteed by any entity.
Offered Certificates
The Class A Certificates will have the initial certificate principal balances,
certificate rates and prices to the public set forth on the cover page of this
prospectus supplement. The Class A Certificates represent an undivided ownership
interest in the assets of the trust.
Denominations
You will be offered Class A Certificates for purchase in minimum denominations
of $1,000 and multiples of $1 in excess thereof.
Distribution Date
You will receive distributions on the Class A Certificates on the 25th day of
each month, beginning in July 1999. If the 25th day is not a business day, then
the distribution date will be the next business day.
Book-Entry Registration
The trust will initially issue the Class A Certificates in book-entry form. You
may elect to hold your interest in the Class A Certificates through The
Depository Trust Company in the United States, or Cedelbank or the Euroclear
System in Europe, or indirectly through participants in such systems.
You will not be entitled to receive a definitive certificate representing your
interest unless definitive certificates are issued.
See "DESCRIPTION OF THE CERTIFICATES--Book-Entry Registration and Definitive
Certificates" in this prospectus supplement and "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Registration and Definitive Certificates" in the
prospectus.
Ratings and Rating Agencies
The Class A Certificates are expected to be rated "Aaa" by Moody's Investors
Service, Inc., and "AAA" by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc.
S-5
<PAGE>
Ratings such as the ratings obtained for the Class A Certificates address credit
risk. When evaluating credit risk, the rating agencies evaluate the likelihood
of whether or not you will receive your interest and principal payments. Credit
risk does not relate to the likelihood or rate of prepayments on the home equity
loans. Prepayments affect the timing of your payments, such that your actual
return could differ substantially from your anticipated return on your
investment.
See "RATINGS" in this prospectus supplement.
Interest Distributions
The per annum certificate rate on each class of the Class A Certificates is
fixed and is set forth on the cover page of this prospectus supplement. Interest
payments will be made to all classes of the Class A Certificates pro rata.
Interest on the Class A Certificates accrues from the first day of each calendar
month through the last day of that calendar month on the basis of a 360-day year
consisting of twelve 30-day months. You will receive interest on the
distribution date in the next calendar month. On each distribution date, to the
extent funds are available, you will be paid the following:
o interest that accrued at the related certificate rate on the related
certificate principal balance immediately prior to such distribution
date; and
o any interest that was due on a prior distribution date and not paid,
together with interest on that amount.
See "DESCRIPTION OF THE CERTIFICATES--Interest Distributions" in this prospectus
supplement.
Principal Distributions
On each distribution date, to the extent funds are available, you will be
entitled to distributions of principal in the order of priority described in
this prospectus supplement. The maximum distribution of principal to all Class A
Certificateholders on any distribution date will be equal to the sum of:
o payments of principal on the home equity loans received during the
prior calendar month, and all other amounts relating to principal on
the home equity loans;
o plus, the amount of any principal losses realized on the home equity
loans during the prior calendar month;
o plus, the amount of any excess receipts of interest required to be
distributed to satisfy the required level of overcollateralization.
This will increase the difference between the certificate principal
balance of the Class A Certificates and the aggregate principal balance
of the home equity loans, thereby increasing the level of
overcollateralization; and
o minus, the amount of any principal collections not required to be
distributed to you. This will reduce the difference between the
certificate principal balance of the Class A Certificates and the
aggregate principal balance of the home equity loans, thereby
maintaining or decreasing the level of overcollateralization.
On each distribution date, so long as the certificate insurer has not defaulted,
principal will be distributable to the Class A Certificateholders as follows:
o first, to the Class A-7 Certificateholders, starting on the
distribution date in July 2002 in an amount equal to a fixed percentage
(which will increase over time) of the total amount distributable as
principal;
o second, sequentially, to the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5 and Class A-6 Certificateholders, in that order, until
the certificate principal balance of each such class is reduced to
zero; and
o third, to the Class A-7 Certificateholders, without regard to the
amount paid pursuant to the first step, until the certificate principal
balance of such class is reduced to zero.
If there has been a default by the certificate insurer, then the Class A
Certificateholders will share distributions pro rata according to their
principal balance, irrespective of class designations.
See "DESCRIPTION OF THE CERTIFICATES--Principal Distributions" in this
prospectus supplement.
Credit Enhancement
Credit enhancement reduces the harm caused to holders of certificates by
shortfalls in payments
S-6
<PAGE>
received and losses incurred on the home equity loans. The credit enhancement
provided for the benefit of the Class A Certificates consists of the following:
o Application of Excess Receipts of Interest. Generally, because more
interest is paid by the borrowers than is necessary to pay the accrued
interest on the Class A Certificates and certain expenses of the trust,
there will be excess interest each month. Some of the excess interest
may be used to pay interest on the Class A Certificates that was
previously accrued but not paid in a prior month and some of the excess
interest may be used to reimburse holders of the Class A Certificates
for losses on the home equity loans. To the extent of any excess
interest after such applications, the trust will apply excess interest
as principal payments on the Class A Certificates, in the manner set
forth herein, to create overcollateralization until the
overcollateralization amount as described below has reached the
required overcollateralization amount.
See "DESCRIPTION OF THE CERTIFICATES --Priority of Distributions" and
"--Principal Distributions" in this prospectus supplement.
o Overcollateralization. As indicated above, on each distribution date
the interest payments on the home equity loans are expected to exceed
the amount of accrued interest on the Class A Certificates, plus the
amount of any accrued and unpaid interest and any losses on the home
equity loans. This excess may be applied as principal payments to the
class or classes then entitled to principal on that distribution date
until the required level of overcollateralization is reached.
Overcollateralization is the amount by which the principal balance of
the home equity loans exceeds the principal balance of the Class A
Certificates. The required amount of overcollateralization is based on
certain minimum and maximum levels of overcollateralization and may
increase and decrease over time.
See "DESCRIPTION OF THE CERTIFICATES --Overcollateralization
Provisions" in this prospectus supplement.
o Certificate Insurance Policy. The certificate insurer will issue an
unconditional and irrevocable certificate guaranty insurance policy for
your benefit. The policy will unconditionally and irrevocably guarantee
the payment of: (i) accrued and unpaid interest on the Class A
Certificates; (ii) the amount, if any, by which the principal balance
of the Class A Certificates exceeds the principal balance of the home
equity loans; and (iii) any principal amounts owed to the holders of
the Class A Certificates on the last scheduled distribution date. The
policy will not cover certain shortfalls in interest collections as
described in this prospectus supplement. If for any reason the
certificate insurer does not make the payments required in the policy,
you must rely solely on the home equity loans for their payments of
interest and principal and you may suffer a loss.
See "THE CERTIFICATE INSURER" and "THE POLICY" in this prospectus
supplement.
Advances and Compensating Interest
The master servicer will be obligated, subject to certain limitations, to make a
monthly interest advance equal to 30 days of interest on each home equity loan
for which a monthly payment has not been received with respect to the related
collection period.
See "DESCRIPTION OF THE CERTIFICATES--Monthly Advances" in this prospectus
supplement.
The master servicer will also be obligated, up to the amount of the master
servicing fee paid to the master servicer for the related collection period, to
pay to the trust an amount equal to any interest shortfalls that resulted from
principal prepayments in full on the home equity loans during the related
collection period.
See "POOLING AND SERVICING AGREEMENT--Servicing Compensation and Payment of
Expenses" in this prospectus supplement.
S-7
<PAGE>
Home Equity Loan Data
As of June 1, 1999, there were 7,001 home equity loans secured by mortgages or
deeds of trust on residential properties and having the following
characteristics:
Aggregate Principal Balance $389,126,977.32
Average Principal Balance $55,581.63
Range of Principal Balances $4,935.51 to
$385,320.02
Average Original Principal
Balance $56,252.96
Range of Original Principal $5,231.93 to
Balances $399,137.00
Weighted Average Loan Rate 11.80%
7.0140% to
Range of Loan Rates 17.4880%
Weighted Average Combined
Loan-to-Value Ratio 90.26%*
Range of Combined Loan-to-Value
Ratios 20.29% to 103.00%
Weighted Average Original Term
to Maturity (months) 213
Weighted Average Remaining Term
to Maturity (months) 208
Mortgaged Premises
Single-family dwellings 92.83%
Two-to-four family dwellings 3.64%
Townhouses 1.79%
Condominiums 1.75%
Maximum Zip Code
Concentration (%) 0.22%
Geographic Concentration (above
5% of pool)
Michigan 11.39%
Ohio 10.76%
Indiana 8.09%
Arizona 6.28%
Illinois 6.16%
Oklahoma 5.07%
See "THE HOME EQUITY LOAN POOL" in this prospectus supplement.
Optional Termination of the Trust
At its option, the holder of the largest percentage interest of the Class R
Certificates may purchase all of the home equity loans, together with any
mortgaged properties acquired by the trustee, and thereby effect early
retirement of the certificates. Such option may be exercised on any distribution
date on which the total principal balance of the home equity loans and such
properties remaining is 5% or less of the total principal balance of the home
equity loans as of the cut-off date. If such holder does not exercise such
option, the master servicer or, if the master servicer declines, the certificate
insurer, may exercise such option. If the holder of the largest percentage
interest of the Class R Certificates or the master servicer exercises this
option, such holder or the master servicer must get the consent of the
certificate insurer if the exercise of such option would cause a draw on the
policy to occur.
See "POOLING AND SERVICING AGREEMENT--Termination; Purchase of Home Equity
Loans" in this prospectus supplement and "DESCRIPTION OF THE
CERTIFICATES--Termination" in the prospectus.
Upon receipt of the purchase price from the holder of the largest percentage
interest of the Class R Certificates, the master servicer or the certificate
insurer, as applicable, the trustee will make a final payment to the
certificateholders.
Federal Income Tax Considerations
Brown & Wood LLP, as counsel to the depositor, is of the opinion that:
o the trust will be treated as a real estate mortgage investment conduit,
or REMIC, for federal income tax purposes; and
o the Class A Certificates will be "regular interests" in the REMIC and
will be treated as debt instruments of the REMIC for federal income tax
purposes with payment terms equivalent to the terms of such
certificates.
See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in this prospectus supplement and
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the prospectus for further
information regarding the federal income tax consequences of investing in the
Class A Certificates.
- - ----------
* The weighted average Combined Loan-to-Value Ratio is calculated using the
original principal balance of the home equity loans.
S-8
<PAGE>
ERISA Considerations
An employee benefit plan subject to the fiduciary responsibility provisions of
the Employee Retirement Income Security Act of 1974, as amended, or ERISA, or
the provisions of Section 4975 of the Internal Revenue Code of 1986, as amended,
contemplating the purchase of the Class A Certificates should consult its
counsel before making a purchase, and the fiduciary and such legal advisors
should consider whether the Class A Certificates will satisfy all of the
requirements of the "publicly offered securities" exemption described herein and
the possible application of other ERISA prohibited transaction exemptions
described herein. Although we anticipate that the "publicly offered securities"
exemption will apply to certain purchases of the Class A Certificates by
employee benefit plans, we cannot assure you that such exemption will apply or
that there will be an exemption for all prohibited transactions that may arise
in connection with purchases of the Class A Certificates by or with assets of
such plans.
See "ERISA Considerations" in this prospectus supplement.
Legal Investment Considerations
Because the pool of home equity loans includes second-lien mortgages, the Class
A Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended.
See "LEGAL INVESTMENT" in this prospectus supplement.
S-9
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following factors (as well as the factors set forth under "RISK FACTORS" in the
prospectus) in connection with their purchase of the Class A Certificates.
Prepayments Affect All of the home equity loans may be prepaid
Timing and Rates of in whole or in part at any time. A majority of
Return the home equity loans (by principal balance as
of June 1, 1999) are subject to prepayment
penalties. Home equity loans, such as the home
equity loans included in the trust, have been
originated in significant volume only during the
past few years and neither the seller nor the
depositor is aware of any publicly available
studies or statistics on the rate of prepayment
of such loans. Generally, home equity loans are
not viewed by borrowers as permanent financing;
therefore, the home equity loans may experience
a higher rate of prepayment than traditional
mortgage loans. The trust's prepayment
experience may be effected by a wide variety of
factors, including general economic conditions,
interest rates, the availability of alternative
financing (including alternative financing
provided by the seller) and homeowner mobility.
Prepayments on the home equity loans will result
in earlier distributions of principal on your
certificates.
See "PREPAYMENT AND YIELD CONSIDERATIONS--
General Prepayment Considerations" in this
prospectus supplement.
All of the home equity loans contain
"due-on-sale" provisions requiring the borrower
to prepay the home equity loan in full when the
mortgaged property is sold. The master servicer
will be required to enforce such provisions
unless enforcement is not permitted by
applicable law or the master servicer permits
the purchaser of the related mortgaged property
to assume the home equity loan. Enforcement of
"due-on-sale" provisions results in the trust
receiving proceeds on a home equity loan earlier
than it otherwise would.
All of the home equity loans compute
interest based on a simple interest method. This
means that interest is computed and charged to
the borrower on the outstanding balance of the
loan based on the number of days elapsed between
the date through which interest was last paid on
the loan through receipt of the borrower's most
current payment. The portions of each monthly
payment that are allocated to interest and
principal are adjusted based on the actual
amount of interest charged on such basis. This
means that the amount of each monthly payment
applied to the payment of principal and interest
will vary each month depending on when the
monthly payment is received. As a result, the
amount distributed to you as principal will vary
depending on the timing of the payments made on
the home equity loans.
Since amounts received on a home equity
loan are distributed on the next following
distribution date, the rate at which the amounts
described above are paid on the home equity
loans will affect the payment rate on the Class
A Certificates. If the timing and amount of such
payment is not as anticipated, your rate of
return will differ from your anticipated rate of
return.
If you are purchasing the certificates at a
discount, you should consider the risk that if
principal payments on the home equity loans
occur at a rate slower than you expected, your
rate of return may be lower than you expected.
If you are purchasing the certificates at a
premium, you should consider the risk that if
principal payments on the home equity loans
occur at a rate faster than you expected, your
rate of return may be lower than you expected.
S-10
<PAGE>
Underwriting Standards The seller's underwriting standards
May Affect Performance generally are less stringent than those of
Fannie Mae or Freddie Mac. For example, a
borrower's past credit history may not preclude
the seller from purchasing or originating a home
equity loan; however, it will reduce the size,
and consequently, the combined loan-to-value
ratio of the home equity loan that the seller is
willing to originate or purchase. As a result of
this approach to underwriting, the home equity
loans may experience higher rates of
delinquencies, defaults and foreclosures than
home equity loans underwritten in accordance
with Fannie Mae or Freddie Mac's guidelines. If
losses occur and the certificate insurer fails
to perform its obligations under the certificate
guaranty insurance policy, you may experience a
loss.
Geographic Concentration To the extent that specific geographic
May Affect Performance regions have experienced or may experience
weaker economic conditions or greater rates of
decline in real estate values than the United
States generally, a concentration of the home
equity loans in those regions may be expected to
exacerbate all of the risks relating to the home
equity loans. The seller and the depositor can
neither quantify the impact of any recent
property value declines on the home equity loans
nor predict whether, to what extent or for how
long such declines may continue.
The concentration of home equity loans by
state, representing more than 5% of the total
principal balance of the home equity loans as of
June 1, 1999, is as follows:
State Home equity loans
----- -----------------
Michigan 11.39%
Ohio 10.76%
Indiana 8.09%
Arizona 6.28%
Illinois 6.16%
Oklahoma 5.07%
Documents Maintained by The seller is required to maintain
Seller and Not by Trustee possession of the documentation relating to each
home equity loan, other than (i) the promissory
note, (ii) the mortgage or deed of trust and
(iii) the assignment of the mortgage or deed of
trust, all of which will be delivered to the
trustee. The assignment of a mortgage or deed of
trust for each home equity loan will be
delivered to the trustee in recordable form but
will not be recorded to show the transfer of the
related mortgage or deed of trust to the trust
unless an assignment event occurs.
An assignment event will occur on the day
following (i) the occurrence and continuance of
a servicer default, (ii) the reduction of the
master servicer's long-term unsecured senior
debt rating below "Baa2" by Moody's or "BBB" by
Standard & Poor's, (iii) 30 days after the
request of the certificate insurer, if in the
judgment of the certificate insurer, it deems
such action necessary to protect its interest or
(iv) with respect to a particular mortgage loan,
the occurrence of a foreclosure proceeding or
the insolvency of the related borrower.
Within 90 days of the occurrence of an
assignment event, the seller is required to
deliver the remaining home equity loan documents
to the trustee, and to either cause the
assignment of each mortgage or deed of trust to
be recorded or to deliver to the trustee and the
certificate insurer an opinion of counsel
acceptable to the certificate insurer to the
effect that recordation of such assignments is
not necessary in order to perfect the interests
of the trust in such mortgages or deeds of
trust. Prior to delivery of the remaining home
equity loan documents to the trustee and the
recording of the assignments, the home equity
loans and any related proceeds may be subject to
the claims of creditors or to sale to a third
party, and may also be subject to claims of a
receiver or conservator appointed in the event
of the insolvency of the
S-11
<PAGE>
seller. Claims by any of these parties, even if
unsuccessful, could result in delays in
distributions to you. If these claims were
successful, then you will experience losses to
the extent that the certificate insurer fails to
perform its obligations under the certificate
guaranty insurance policy.
Priority of Liens As of June 1, 1999, approximately 17.30% of
the home equity loans (by principal balance) are
secured by second-lien mortgages or deeds of
trust. For home equity loans in the trust
secured by second-lien mortgages, the master
servicer or servicer may consent under certain
circumstances to a new first priority lien
regardless of the principal amount of such new
lien.
Home equity loans that are secured by
second-lien mortgages or deeds of trust will
receive proceeds from the sale of the related
mortgaged property only after any first-lien
mortgages and prior statutory liens have been
paid. If the remaining proceeds are insufficient
to satisfy the home equity loans in the trust
and the certificate insurer fails to perform its
obligations under the certificate guaranty
insurance policy, then:
o there will be a delay in distributions
to you while a deficiency judgment
against the borrower is sought; and
o you may incur a loss if a deficiency
judgment cannot be obtained or
collected upon.
Risks Posed by High Approximately 25.45% of the home equity
Combined Loan-To-Value loans (by principal balance as of June 1, 1999)
Ratios had combined loan-to-value ratios at origination
between and including 100.01% and 103.00%. Based
on the appraised value or purchase price of the
related mortgaged property at the time of
origination of such a home equity loan with a
combined loan-to-value ratio in excess of 100%,
the value or price of the related mortgaged
property was less than the sum of the principal
balance of the home equity loan and the
principal balance of any related senior
mortgage. Home equity loans with high combined
loan-to-value ratios, in particular those home
equity loans with original combined
loan-to-value ratios in excess of 100%, will be
more sensitive to declining property values than
those loans with lower combined loan-to-value
ratios and may present a greater risk of loss
upon liquidation.
Delay In Receipt of Substantial delays could be encountered in
Liquidation Proceeds; connection with the liquidation of delinquent
Liquidation Proceeds May home equity loans. Further, liquidation expenses
Be Less Than Home such as legal fees, real estate taxes and
Equity Loan Balance maintenance and preservation expenses will
reduce the portion of liquidation proceeds
payable to you. In addition, there may be
certain instances where based upon the relevant
costs associated with the foreclosure process,
the master servicer or servicer will decide not
to foreclose on the loan. If a mortgaged
property fails to provide adequate security for
the home equity loan, you will incur a loss on
your investment if the certificate insurer fails
to perform its obligations under the certificate
guaranty insurance policy.
Other Legal Federal and state laws, public policy and
Considerations general principles of equity relating to the
protection of consumers, unfair and deceptive
practices and debt collection practices:
o regulate interest rates and other
charges on home equity loans;
o require certain disclosures to
borrowers;
o require licensing of the seller and the
other originators; and
S-12
<PAGE>
o regulate generally the origination,
servicing and collection process for
the home equity loans.
Depending on the specific facts and
circumstances involved, violations may limit the
ability of the trust to collect on the home
equity loans and may entitle the borrower to a
refund of amounts previously paid. Violations
could also result in damages and administrative
enforcement against the seller or the master
servicer.
The seller has represented that all
applicable federal and state laws were complied
with in connection with the origination of the
home equity loans. If there is a material and
adverse breach of such representation, the
seller will be obligated to repurchase any
affected home equity loan or to substitute a new
home equity loan for such affected home equity
loan.
See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS" in the prospectus.
Limitation and Reduction Credit enhancement will be provided for the
and Substitution of Credit Class A Certificates by the application of
Enhancement excess interest, overcollateralization and the
certificate guaranty insurance policy. None of
the depositor, the seller, the master servicer,
the trustee, the certificate insurer or any of
their respective affiliates will have any
obligation to replace or supplement such credit
enhancement, or to take any other action to
maintain any rating of the Class A Certificates.
Insolvency of the Seller; The sale of the home equity loans from the
Reclassification of Sale as seller to the depositor will be treated by the
a Loan seller, the depositor and the trust as a sale of
the home equity loans. The seller will warrant
that the transfer is a sale of its interest in
the home equity loans. The depositor will
warrant that the transfer of the home equity
loans is a sale of its interest in the home
equity loans to the trust. In the event of an
insolvency of the seller, it is possible that a
receiver or conservator for, or a creditor of,
the seller would argue that the transaction
between the seller and the depositor was a
pledge of the home equity loans in connection
with a borrowing by the seller rather than a
true sale. Such an attempt, even if
unsuccessful, could result in delays in
distributions to you.
Limited Obligations The Class A Certificates will not represent
an interest in, or obligation of, the depositor,
the seller, the master servicer, the trustee or
any of their respective affiliates. The only
obligations of the foregoing entities with
respect to the Class A Certificates or any home
equity loan will be the obligations of the
depositor and of the seller pursuant to certain
limited representations and warranties made with
respect to the home equity loans and of the
master servicer with respect to its servicing
obligations under the pooling and servicing
agreement (including the limited obligation to
make certain monthly advances). Except for the
protection afforded by the certificate guaranty
insurance policy to the extent described in this
prospectus supplement, neither the Class A
Certificates nor the underlying home equity
loans will be guaranteed or insured by any
governmental agency or instrumentality, or by
the depositor, the master servicer, the seller,
the trustee or any of their respective
affiliates.
Limited Liquidity Prior to their issuance there has been no
market for the Class A Certificates and there
can be no assurance that one will develop or, if
it does develop, that it will provide
certificate owners with liquidity or will
continue for the lives of the Class A
Certificates. The underwriters intend, but are
not obligated, to make a market in the Class A
Certificates.
S-13
<PAGE>
Difficulty in Pledging Since transactions in the Class A
Certificates can be effected only through The
Depository Trust Company, Cedelbank or
Euroclear, their participants and indirect
participants, the ability of the owner of a
Class A Certificate to pledge a Class A
Certificate to persons or entities that do not
participate in The Depository Trust Company,
Cedelbank or Euroclear systems, or otherwise to
take actions in respect of such Certificates,
may be limited due to lack of a physical
certificate representing such Certificates.
See "DESCRIPTION OF THE CERTIFICATES--
Book-Entry Registration and Definitive
Certificates" in this Prospectus Supplement.
Potential Delays in Receipt Owners of Class A Certificates may
of Distributions experience some delay in their receipt of
distributions of interest and principal on the
Class A Certificates since such distributions
will be forwarded by the trustee to The
Depository Trust Company and The Depository
Trust Company will credit such distributions to
the accounts of its participants which will
thereafter credit them to the accounts of
Certificate owners either directly or indirectly
through indirect participants.
See "DESCRIPTION OF THE CERTIFICATES--
Book-Entry Registration and Definitive
Certificates" in this Prospectus Supplement.
Credit Ratings Relate to The ratings of the Class A Certificates
Credit Risk Only will depend primarily on an assessment by
Standard & Poor's and Moody's Investors Service,
Inc. of the home equity loans and upon the
financial strength of the certificate insurer.
Any future reduction in a rating assigned to the
financial strength of the certificate insurer
may result in a corresponding reduction in the
rating of the Class A Certificates. There is no
assurance that the ratings will remain in place
for any given period of time or that the ratings
will not be lowered or withdrawn by the rating
agencies. In general, the ratings address the
likelihood that you will receive distributions
of principal and interest and do not address the
likelihood or rate of prepayments on the home
equity loans or the possibility that you might
realize a lower than anticipated yield.
Year 2000 Readiness Solving the Year 2000 problem is a top
priority for the corporate parent of the master
servicer and the servicer. The Year 2000 issue
is being addressed by either modifying, retiring
or replacing existing software applications and
systems or installing vendor upgrades. A plan
has been developed and is being followed to
ensure that the modifications, replacements and
upgrades are implemented and thoroughly tested
on a timely basis. However, the actual results
could differ materially from those in the plan.
See "THE SELLER, SERVICER AND THE MASTER
SERVICER--BANK ONE Year 2000 Readiness" in this
Prospectus Supplement.
S-14
<PAGE>
THE SELLER, SERVICER AND THE MASTER SERVICER
General
The information set forth in this section has been provided by Banc One
Financial Services, Inc. ("BOFS", in its capacity as seller, the "Seller" and,
in its capacity as servicer, the "Servicer") and Bank One, Indiana, National
Association (the "Master Servicer"). None of Morgan Stanley Capital I Inc. (the
"Depositor"), the Underwriters, Norwest Bank Minnesota, National Association
(the "Trustee"), the Certificate Insurer, or any of their respective affiliates
has made or will make any representation as to the accuracy or completeness of
the information provided by BOFS and the Master Servicer.
The Master Servicer
Bank One, Indiana, National Association, a national banking
association, is a subsidiary of BANK ONE CORPORATION ("BANK ONE"). BANK ONE is
the fifth-largest bank holding company in the United States with over $250
billion in assets as of March 31, 1999. BANK ONE is a registered multi-bank
holding company organized in 1998 under the laws of the State of Delaware to
effect the merger, effective October 2, 1998, of First Chicago NBD Corporation
with BANC ONE CORPORATION.
The following unaudited financial information regarding the Master
Servicer was calculated on the basis of regulatory accounting principles and not
on the basis of generally accepted accounting principles, is based on the Master
Servicer's Consolidated Report of Condition as of March 31, 1999 (the "Call
Report") and is qualified in its entirety by detailed information included in
such Call Report. As of March 31, 1999 the Master Servicer had total assets of
approximately $7.584 billion, total deposits of approximately $5.263 billion and
total equity capital of approximately $0.647 billion.
The principal executive offices of the Master Servicer are located at
111 Monument Circle, Indianapolis, IN 46277, and its telephone number is (317)
321-3000.
BANK ONE Year 2000 Readiness
BANK ONE continues to execute project plans established by its
predecessor companies to assure Year 2000 readiness. Total project costs are
estimated to reach $350 million over the life of the project. Year 2000 costs
incurred through March 31, 1999, were approximately $265 million, with $30
million incurred during the first quarter of 1999.
The inventory and assessment phase has been completed for all
information and non-information technology. At March 31, 1999, 91% of BANK ONE's
affected information technology applications were tested and returned to
production. BANK ONE expects that all information technology applications,
systems and equipment will be Year 2000 compliant by mid-1999. Ongoing
facilities and equipment improvements are expected to result in Year 2000
readiness for non-information systems technology by mid-1999.
Year 2000 readiness is highly dependent on external entities and is not
limited to operating risk. BANK ONE is working extensively with external
entities to ensure that their systems will be Year 2000 compliant; however, BANK
ONE bears risk and could be adversely affected if outside parties, such as
customers, vendors, utilities and government agencies, do not appropriately
address Year 2000 readiness issues. In addition, BANK ONE may have increased
credit risk related to customers whose ability to repay debt is impaired due to
Year 2000 readiness costs or risk or whose collateral becomes impaired due to
lack of Year 2000 readiness.
Detailed contingency plans exist for critical business system
applications to mitigate potential problems or delays associated with systems
replacements or vendor delivery dates. Critical business processes have been
identified, and the most reasonable recovery strategies have been selected.
Contingency plans have been documented and validated for effectiveness. BANK ONE
will continue to review and validate the scope and content of its contingency
plans throughout 1999.
S-15
<PAGE>
The Seller and Servicer
BOFS was incorporated under the laws of the State of Indiana on
December 30, 1971. BOFS is a subsidiary of Finance One Corporation, which, in
turn, is a wholly-owned subsidiary of BANK ONE. On March 5, 1999, BANK ONE
consolidated the home equity lending business of BOFS with its other consumer
lending businesses into the BANK ONE Consumer Lending group ("Consumer
Lending"). Reporting through BANK ONE's First USA credit card division, this new
national organization unites BANK ONE's traditional direct home-equity products
with its non-prime and broker home-equity businesses, while also including other
consumer related products such as conventional mortgages, education loans and
tax related products.
As of March 31, 1999, BOFS had assets totaling over $4.48 billion and
total equity of $270 million. As of March 31, 1999, BOFS had 1,876 total
full-time equivalent employees located at one of the following locations:
Indianapolis, Indiana Headquarters; Phoenix, Arizona Service Center; or one of
its retail or wholesale origination branches.
Loan Origination
BOFS originates and purchases first, second, and other junior lien
mortgage loans on residential dwellings nationwide through both its retail and
wholesale business channels. BOFS specializes in mortgage loans that do not
conform to the underwriting standards of Fannie Mae or Freddie Mac, particularly
with regard to an applicant's credit history. Substantially all of the simple
interest mortgage loans originated or purchased by BOFS are retained and
serviced by BOFS, while a portion are sold in pools to other financial
institutions. BOFS originates or acquires mortgage loans primarily on suburban
and urban single-family homes in major metropolitan areas.
At March 31, 1999 BOFS conducted mortgage loan origination operations
from 114 retail branch locations and 2 wholesale origination sites in 45 states
including: Arizona, California, Connecticut, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska,
Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West
Virginia, Wisconsin, and Wyoming.
The retail application and approval process for mortgage loans is
generally conducted by telephone. BOFS obtains potential customers through
either direct mail solicitations or on a referral basis from other affiliates of
BANK ONE. Loan officers are trained to structure mortgage loans that enable the
applicant to reduce total finance charges, lower monthly payments and/or shorten
the payment period.
BOFS also purchases mortgage loans from independent mortgage bankers
and others. Prior to funding, wholesale mortgage loans are re-underwritten using
BOFS wholesale underwriting guidelines. Entities participating in this program
generally must satisfy certain requirements established by BOFS pertaining to
experience, size of business and various licenses and approvals. Substantially
all of the precomputed mortgage loans purchased by BOFS are sub-serviced by a
third party.
If an existing borrower indicates that he plans on refinancing a BOFS
mortgage loan, BOFS may refinance such mortgage loan. If the mortgage loan is
one of the Home Equity Loans, this would result in a prepayment of such Home
Equity Loan.
The dollar amount of mortgage loans originated or purchased by BOFS
during the years ended December 31, 1996, 1997, and 1998 were $1,137.0,
$2,008.4, and $2,870.0 million, respectively. The dollar amount of mortgage
loans originated or purchased by BOFS during the three-months ended March 31,
1999 was $1,106.7 million.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by BOFS with respect to mortgage loans, which
it purchases or originates. Each mortgage loan is centrally underwritten
according to these guidelines. BOFS believes its guidelines are consistent with
those generally utilized by most
S-16
<PAGE>
home equity and sub-prime lenders. The underwriting process is intended to
assess both the applicant's ability to repay and the adequacy of the value of
collateral securing the mortgage loan.
BOFS generally originates or purchases mortgage loans, which either
fully amortize over a period not to exceed 360 months for first liens and 180
months for second or more junior liens (fixed rate or variable rate) or provide
for amortization over a 360 month period with a "balloon" payment required at
the maturity date. The actual maturity date will generally range between fifteen
and thirty years after origination. The mortgage loan amounts generally range
from a minimum of $5,000 to a maximum of $300,000, depending on credit risk. The
appraised value of a mortgaged property generally can not exceed $500,000.
The properties used for collateral to secure the mortgage loans are
residential (including second homes), single family and two-to-four family
dwellings, condominiums, townhouses or manufactured housing. Each property
proposed as security for a mortgage loan must be appraised not more than twelve
months prior to the date of such mortgage loan.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit events that can be discovered through a search of public records. A new
credit report is required if a mortgage loan is not originated within 60 days
from the application date.
For all first lien mortgage loans and for all second or more junior
lien mortgage loans with balances in excess of $50,000, BOFS requires that a
full appraisal of the property used as collateral has been performed in
connection with either the origination or the purchase of that mortgage loan.
Appraisals of substantially all of the properties are completed on standard
Fannie Mae forms. Each such appraisal includes, among other things, an
inspection of the exterior of the subject property, photographs of two or more
different views of the property and data from sales within the preceding 12
months of similar properties within the same general location as the subject
property. BOFS will accept a drive-by appraisal with pictures on either a second
or more junior lien mortgage loan with a balance of $50,000 or less.
Certain laws protect mortgage loan applicants by offering them a period
of time after loan closing documents are signed, termed the rescission period,
during which the applicant has the right to cancel the mortgage loan. The
rescission period must have expired prior to the funding of the mortgage loan
and may not be waived by the applicant except as permitted by law.
BOFS requires title insurance coverage issued by an approved American
Land Title Association title insurance company for all first lien mortgages and
for all second or more junior lien mortgages in excess of $50,000. Title
searches are performed on second or more junior lien mortgages with balances
less than $50,000. BOFS and its assignees are generally named as the insured.
Title insurance policies indicate the lien position of the mortgage loan and
protect BOFS against loss if the title or lien position is not as indicated. The
applicant is also required to secure hazard and, in certain instances, flood
insurance in an amount sufficient to cover the new mortgage loan and any senior
mortgage. If the applicant does not obtain or maintain hazard and/or flood
insurance with sufficient coverage, BOFS, to the extent permitted by the terms
of the mortgage loan and applicable law, has the right to obtain such insurance
coverage and charge the applicant for the costs of obtaining such coverage.
Income Verification
BOFS offers applicants Full Documentation, Lite Documentation, or No
Documentation programs. Under the Full Documentation program, income is verified
through various means, including, but not limited to, applicant interviews,
written verification, review of paycheck stubs, tax returns, and other similar
documents, and the applicant's demonstration of sufficient levels of disposable
income to satisfy debt repayment requirements. The following further specifies
the Full Documentation program verification methods used by BOFS.
o Employment: A loan applicant must provide most recent paycheck
stubs covering at least one month, preferably showing year-to-date income and
the most recent year's Form W2. If the required documentation cannot be provided
a VOE (Verification of Employment) is required to be completed. A VOE is
required if the applicant receives a handwritten paycheck or to verify bonus,
commission, or overtime income.
S-17
<PAGE>
o Self-employed: Federal tax returns for at least the most recent
two years (with schedules) signed by the applicant are required from
self-employed applicants. A self-employed applicant must also provide two years
completed and signed partnership or corporate tax returns (with schedules), if
applicable, and year-to-date completed financial statements, including balance
sheet and profit and loss statements. BOFS's underwriters, in the exercise of
their judgment, may also request year-to-date bank statements to verify cash
flow.
o Rental Income: Rental income must be documented by completed
personal federal tax returns, including Schedule E, for the most recent two
years. If ownership of a property has been for less than one year or federal tax
returns do not recognize the income, the applicant must provide copies of the
signed lease agreement and a completed VOM (Verification of Mortgage).
o Social Security and Veteran's Compensation: Compensation from the
Social Security Administration or the Department of Veterans Affairs must be
supported by an awards letter from the appropriate agency. Applicants must also
provide one of the following: previous year's federal tax form 1099; most recent
bank statement verifying direct deposit from the United States' Treasury
Department; or photocopy of recent check.
o Pension and Annuity Income: Income must be supported by an
annuity letter or similar award document describing all details of income. The
applicant must also provide one of the following: federal tax form 1099; most
recent bank statement verifying deposit by income source; or current month's
paycheck stub or statement.
o Alimony: An applicant must submit to BOFS a copy of the complete
divorce decree and one of the following: most recent federal tax form 1040
reflecting alimony received; three months of bank statements reflecting deposit
of the alimony; or three consecutive months of canceled checks verifying receipt
of the alimony.
o Child Support: Child support income must be documented by a copy
of the complete divorce decree and a monthly statement from the local
courthouse. If the child support is not paid through the court, the applicant
must provide three months of bank statements reflecting deposit of the child
support or three consecutive months of canceled checks verifying receipt of the
child support.
Under the Lite Documentation program, BOFS does not require review of
an applicant's paycheck stubs. Under the No Documentation program, BOFS does not
verify an applicant's income or assets.
Specific Underwriting Criteria
Although BOFS's underwriting guidelines change from time to time, the
following summarizes the underwriting guidelines used with respect to the Home
Equity Loans except as described below. Prior to February 1998, applicants and
mortgage loans were characterized by FICO Scores and other credit bureau report
factors instead of by specific FICO Score ranges. In June 1998 BOFS's guidelines
were modified such that applicants and mortgage loans are slotted automatically
in BOFS's computer system by FICO Score ranges into credit grades. From time to
time exceptions are made to the underwriting guidelines and it is possible that
exceptions may have been made for a substantial number of the Home Equity Loans
based on compensating factors. However, BOFS believes that such exceptions did
not materially impact the credit decision on any particular Home Equity Loan.
Management permits deviations from the specific criteria to reflect local
economic trends and real estate valuations, as well as other mitigating factors
specific to each applicant and/or each portfolio acquired. All such deviations
are monitored and regularly reviewed by BOFS's Credit Committee. BOFS strives to
maintain the overall integrity of its credit and underwriting policies and
simultaneously provide its lending officers with the flexibility to consider the
specific circumstances of the mortgage loan application or purchase.
Under the underwriting guidelines, the mortgage loans in each credit
grade will generally have the FICO Scores, acceptable delinquency experience,
maximum Combined Loan-to-Value Ratio and maximum debt-to-income ratio listed set
forth below. "FICO Scores" are statistical credit scores obtained by many
mortgage lenders in connection with the loan application to help assess a
borrower's creditworthiness. FICO Scores are generated by models developed by a
third party and are made available to lenders through three national credit
bureaus. Neither the Seller nor the Depositor makes any representation or
warranty that a particular FICO Score should be relied upon as a basis for an
expectation that the related applicant will repay the Home Equity Loan according
to its terms.
S-18
<PAGE>
<TABLE>
<CAPTION>
Grade A Grade B Grade C Grade D
<S> <C> <C> <C> <C>
Consumer Credit History (FICO Score)............ 620+ 580+ 540+ (less than)540
Maximum Past Due
One 30 day delinquency in last 12 months.... yes yes yes yes
Two 30 day delinquency in last 12 months.... no yes yes yes
Three 30 day delinquency in last 12 months
or one 60 day delinquency in last 12 months no no yes yes
One 120 day delinquency in last 12 months or
in foreclosure in last 12 months.......... no no no yes
Maximum Combined Loan-to-Value Ratio* +
First lien.................................. 100% 100% 90% 80%
Second or more junior lien.................. 100% 90% 80% 70%
Maximum Debt-to-Income Ratio
First lien.................................. 60% 55% 55% 55%
Second or more junior lien.................. 55% 55% 55% 55%
</TABLE>
* Maximum Combined Loan-to-Value. Percentages exclude points, processing fees
and closing fees.
+ BOFS's credit policy limits the Maximum Combined Loan-to-Value Ratios
including points and fees to 103% for each credit grade. BOFS's credit policy
allows the Maximum Combined Loan-to-Value Ratio to exceed 103% when credit
insurance is included in this calculation.
BOFS's credit policy states that downward adjustments are made to
maximum Combined Loan-to-Value Ratios to compensate for different property types
and credit factors. In addition, BOFS charges a higher interest rate for
mortgage loans in lower alphabetical credit grades and may also charge higher
interest rates for mortgage loans in the same credit grade based on other credit
factors.
Quality Control and Audit Procedures
BOFS's quality control and audit procedures consist of post-funding
examinations at the operational level and through independent verification by
the Quality Assurance group. Examinations are performed on a sample of all
mortgage loan applications whether originated or purchased by BOFS, and include
review of legal documentation, credit documentation, and underwriting. Those
items reviewed specifically include the following items:
o Legal Documentation: The mortgage note, mortgage, deed of trust,
Truth-in-Lending disclosures, Real Estate Settlement Procedures Act and Equal
Credit Opportunity Act documents, title abstract, affidavits, riders, and all
other documents required by statutory law are reviewed for existence, accuracy
and proper signatures.
o Credit Documentation: All credit verifications (such as
verification of mortgage, verification of employment and verification of
income), credit applications, and credit reports are reviewed for existence,
accuracy and proper signatures as appropriate based on credit policy.
o Underwriting: A verification that all mortgage loan conditions
required by the Underwriting Department have been satisfied.
Some mortgage loans are reviewed for compliance with BOFS's credit
underwriting guidelines. This second review process is applied to 100% of the
denied mortgage loan applications and between 5% and 10% of approved mortgage
loans. In addition, documentation examinations are performed on 100% of all
mortgage loans originated or purchased. Reports with major exceptions noted are
distributed to the senior management team of BOFS for review and pursuit of
action plans.
Due diligence examinations are performed on national vendors that
provide appraisal services for BOFS. Furthermore, retail and wholesale mortgage
loans are randomly selected for an appraisal audit. Appraisers not conforming to
BOFS's guidelines are removed from BOFS's acceptable appraiser list.
S-19
<PAGE>
Servicing and Collection Procedures
The following is a description of the servicing policies and procedures
customarily and currently employed by BOFS with respect to the mortgage loans
that it services. BOFS intends to service the Home Equity Loans in accordance
with these policies and procedures and in accordance with the Agreement. BOFS
revises such policies and procedures from time to time, based upon its business
judgment, in connection with changes in economic conditions, its mortgage loan
portfolio and applicable laws and regulations.
Servicing of the mortgage loans includes, but is not limited to,
post-closing review, lien perfection, payment processing, and customer service.
Servicing of its mortgage loan portfolio is generally conducted through its
principal office in Indianapolis, Indiana; however, customer service operations
are located in Phoenix, Arizona. Collections and liquidations are managed
through offices located in Indianapolis, Indiana, and Phoenix, Arizona.
Borrowers are billed monthly in advance of the date on which mortgage
loan payments are due. BOFS's collection policy emphasizes working with
borrowers in default in an effort to bring payments current and to avoid
foreclosures. Delinquent accounts are divided into groups of accounts of 0-29,
30-59, 60-89, and 90 or more days past due. If timely payment is not received,
collection procedures are generally initiated within 10 days after the due date.
Initial collection procedures involve contacting the borrower by phone. When an
account becomes 30 days delinquent, it is assigned to a higher level collector
experienced in default accounts in Indianapolis. Thereafter, all accounts
delinquent for 90 days or more are worked by pre-foreclosure specialists in
Indianapolis.
Prior to submitting an account for foreclosure, a 30 day right-to-cure
notice is sent by certified mail to the borrower. If the mortgage loan is not
cured, the Collection Department attempts personal contact with the borrower to
determine that all avenues of resolution have been considered. Accounts
delinquent for 90 or more days are actively supervised by the Vice President of
Collections.
If foreclosure is necessary, BOFS's Collection Department supervises
and monitors all related procedures (including bankruptcy proceedings) conducted
by its foreclosure attorney. If title to the mortgaged property is taken in the
name of the mortgagee, the BOFS's Real Estate Owned area attempts to ensure that
the property is preserved and protected. After review and analysis, a
disposition strategy is developed and the property is marketed for sale.
Delinquency, Foreclosure and Loss Experience of BOFS
The delinquency experience table below sets forth, as of March 31,
1999, December 31, 1998, December 31, 1997 and December 31, 1996, certain
information relating to the delinquency experience (including imminent
foreclosures, foreclosures in progress and bankruptcies) of the combined
portfolios of (i) mortgage loans owned and serviced by BOFS, including mortgage
loans which have been securitized (the "Serviced Portfolio"), and (ii) mortgage
loans owned by BOFS but sub-serviced by Advanta Mortgage Corp (the "Sub-Serviced
Portfolio"). The delinquency experience of BOFS with respect to the Serviced
Portfolio only may be different, and in some cases higher, than the delinquency
experience presented in the first table. For example, 4.53% of the loans (by
principal balance) in the combined Serviced and Sub-Serviced Portfolios were 30
or more days delinquent as of March 31, 1999 compared to 5.59% of the loans (by
principal balance) in the Serviced Portfolio as of March 31, 1999.
The information in the loss experience table below reflects the
historical loss experience of the combined Serviced Portfolio and Sub-Serviced
Portfolio. As a result, the loss experience in the loss experience table below
may be different, and in some cases understate the loss experience of BOFS with
respect to the Serviced Portfolio only. BOFS does not have available separate
loss information for the Serviced Portfolio and for the Sub-Serviced Portfolio.
The indicated periods of delinquency are based on the number of days
past due on a contractual basis. The delinquency, foreclosure and loss
experience shown below may be affected by the increase in size of, and the
relative lack of seasoning of, a substantial portion of the portfolio. There can
be no assurance that the delinquency and loss experience on the Home Equity
Loans will be consistent with the historical information provided below.
S-20
<PAGE>
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
FOR THE THREE MONTHS ENDED -------------------------------------------
MARCH 31, 1999 1998
------------------------------------------- -------------------------------------------
NUMBER PERCENT PERCENT OF NUMBER PERCENT PERCENT OF
OF OF DOLLAR DOLLAR OF OF DOLLAR DOLLAR
LOANS LOANS AMOUNT AMOUNT LOANS LOANS AMOUNT AMOUNT
------ ------- ---------- ---------- ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loans............. 85,909 $4,506,034 71,103 $3,639,941
------ ---------- ------ ----------
------ ---------- ------ ----------
Delinquency (1)(2)(3)(4)
30-59 days............ 1,693 1.97% $ 80,842 1.79% 2,176 3.06% $ 99,797 2.74%
60-89 days.............. 390 0.45 17,369 0.39 671 0.94 29,643 0.81
90 or more days......... 2,153 2.51 105,764 2.35 2,001 2.81 95,219 2.62
------ ----- ---------- ---- ------ ----- ---------- ----
Total Delinquency....... 4,236 4.93% 203,975 4.53% 4,848 6.82% $ 224,659 6.17%
------ ----- ---------- ---- ------ ----- ---------- ----
------ ----- ---------- ---- ------ ----- ---------- ----
Real Estate Owned....... 509 $ 24,987 446 $ 19,438
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------- ---------------------------------------------
NUMBER PERCENT PERCENT OF NUMBER PERCENT PERCENT OF
OF OF DOLLAR DOLLAR OF OF DOLLAR DOLLAR
LOANS LOANS AMOUNT AMOUNT LOANS LOANS AMOUNT AMOUNT
------ ---------- ---------- ---------- ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loans............. 53,573 $2,261,026 31,229 $1,250,691
------ ---------- ------ ----------
------ ---------- ------ ----------
Delinquency (1)(2)(3)(4)
30-59 days............ 1,195 2.23% $ 53,202 2.35% 373 1.19% $ 15,258 1.22%
60-89 days.............. 255 0.48 12,202 0.54 68 0.22 2,922 0.23
90 or more days......... 907 1.69 40,678 1.80 254 0.81 9,225 0.74
------ ---- ---------- ---- ------ ----- ---------- ----
Total Delinquency....... 2,357 4.40% $ 106,082 4.69% 695 2.23% $ 27,405 2.19%
------ ---- ---------- ---- ------ ----- ---------- ----
------ ---- ---------- ---- ------ ----- ---------- ----
Real Estate Owned....... 130 $ 6,141 38 $ 1,434
</TABLE>
- - ------------------
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with payments contractually past due.
(2) Includes properties in foreclosure and mortgage loans for which the
mortgagor is in bankruptcy.
(3) The total period of delinquency is based on the number of days payments are
contractually past due.
(4) As of March 31, 1999, of the 54,163 mortgage loans in the Serviced
Portfolio, having an aggregate principal balance of $2,601,676, 1,318
mortgage loans, having an aggregate principal amount of $59,366, or 2.28% by
aggregate principal balance of the mortgage loans in the Serviced Portfolio,
were 30 to 59 days delinquent, 288 mortgage loans, having an aggregate
principal balance of $11,457, or 0.44%, were 60 to 89 days delinquent and
1,669 mortgage loans, having an aggregate principal balance of $74,708, or
2.87%, were 90 or more days delinquent.
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE AS OF DECEMBER 31,
MONTHS ENDED --------------------------------------
MARCH 31, 1999(7) 1998 1997 1996
----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Amount Outstanding (1)(5)................. $ 4,051,080 $2,907,746 $1,856,040 $ 844,242
Gross Charge-offs (2)(6).......................... $ 31,604 $ 19,962 $ 8,773 $ 2,070
Recoveries (3).................................... 148 393 382 481
----------- ---------- ---------- ----------
Net Charge-offs (4)(6)............................ $ 31,456 $ 19,569 $ 8,391 $ 1,589
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Net Losses as a Percentage of Average Amount
Outstanding..................................... 0.78% 0.67% 0.45% 0.19%
</TABLE>
- - ------------------
(1) "Average Amount Outstanding" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Charge-offs" are amounts which have been determined uncollectible for
each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Charge-offs" represent "Gross Charge-offs" minus "Recoveries."
(5) "Average Amount Outstanding" does not include real estate owned balances.
(6) Gross and Net Charge-offs include real estate owned Charge-offs.
(7) Annualized.
S-21
<PAGE>
The information above should not be considered as a basis for assessing
the likelihood, amount or severity of delinquencies, foreclosures or losses on
the Home Equity Loans and no assurances can be given that the delinquency,
foreclosure and loss experience presented in the tables above will be indicative
of such experience on the Home Equity Loans. The statistics shown above
represent the respective delinquency and foreclosure experiences only at the
dates presented, whereas the aggregate delinquency, foreclosure and loss
experience on the Home Equity Loans will depend on the results obtained over the
life of the Trust. It should be noted that if the residential real estate market
should experience an overall decline in property values, the actual rates of
delinquencies, foreclosures and losses could be higher than those previously
experienced by BOFS. In addition, adverse economic conditions may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the Home Equity Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Home Equity Loans.
S-22
<PAGE>
THE HOME EQUITY LOAN POOL
General
The description herein of the home equity loans (the "Home Equity
Loans") comprising part of the property of the Trust (the "Trust Fund")
describes the pool (the "Home Equity Loan Pool") as of the opening of business
on the Cut-off Date. The Home Equity Loan Pool will consist of approximately
7,001 Home Equity Loans having an aggregate principal balance as of the Cut-off
Date (the "Cut-off Date Pool Principal Balance") of approximately
$389,126,977.32, after application of payments of principal received before the
Cut-off Date and subject to a permitted variance of plus or minus 5%. All of the
Home Equity Loans are fixed rate, closed-end home equity loans secured by
mortgages or deeds of trust or other similar security instruments (the
"Mortgages") creating first or second liens on residential real properties (the
"Mortgaged Properties") and are evidenced by promissory notes (the "Mortgage
Notes"). The "Loan Rate" of each Home Equity Loan is the per annum interest rate
required to be paid by the borrower under the terms of the related Mortgage
Note.
The "Principal Balance" of any Home Equity Loan (other than a
Liquidated Home Equity Loan which has a Principal Balance of zero) on any date
of determination is equal to the balance thereof on the Cut-off Date, minus all
collections applied in reduction of such balance in accordance with the related
Mortgage Note.
The Depositor will acquire the Home Equity Loans to be included in the
Home Equity Loan Pool from the Seller on the Closing Date pursuant to the
Agreement, and will simultaneously convey the Home Equity Loans to the Trust.
All of the Home Equity Loans will be master serviced by the Master Servicer. The
Home Equity Loans will have been originated or acquired by the Seller in
accordance with the underwriting criteria described herein. See "THE SELLER,
SERVICER AND THE MASTER SERVICER--Credit and Underwriting Guidelines," "--Income
Verification" and "--Specific Underwriting Criteria."
Each Home Equity Loan was selected by the Seller for inclusion in the
Trust from among those home equity loans that met the following criteria as of
the Cut-off Date: (i) no Home Equity Loan was 30 or more days delinquent; (ii)
no Home Equity Loan had a Combined Loan-to-Value Ratio at origination of more
than 103%; and (iii) was a retail origination. The Seller believes that no
adverse selection procedures were employed in making such selection.
As of the Cut-off Date, the weighted average original term to stated
maturity of the Home Equity Loans was approximately 213 months. As of the
Cut-off Date, the weighted average remaining term to stated maturity of the Home
Equity Loans was approximately 208 months and the latest scheduled maturity date
of any Home Equity Loan is May 1, 2029.
With respect to each Home Equity Loan, the "Combined Loan-to-Value
Ratio" generally will be the ratio, expressed as a percentage, the numerator of
which is the Home Equity Loan's original principal balance (including
capitalized costs) plus the principal balance of any related senior mortgage
loan as of the date of origination of such Home Equity Loan, and the denominator
of which is the lesser of (i) the appraised value of the Mortgaged Property used
by the Seller or the originator to underwrite the Home Equity Loan and (ii) the
purchase price for the Mortgaged Property if the Mortgaged Property was
purchased within twelve months of the time of origination of the Home Equity
Loan. With respect to each Home Equity Loan, the "Junior Lien Ratio" generally
will be the ratio, expressed as a percentage, the numerator of which is the Home
Equity Loan's original principal balance, and the denominator of which is the
Home Equity Loan's original principal balance plus the original principal
balance of any related senior mortgage loan as of the date of origination of
such Home Equity Loan.
The Home Equity Loans were originated between May 1, 1998 and April 30,
1999 in the ordinary course of the Seller's business. The weighted average
original Combined Loan-to-Value Ratio of the Home Equity Loans at origination
was approximately 90.26% (by original principal balance). The weighted average
Junior Lien Ratio for Home Equity Loans in a junior lien position was 27.52% (by
original principal balance). As of the Cut-off Date, approximately 82.70%, and
17.30% of the Home Equity Loans (in each case, by Cut-off Date Pool Principal
Balance) are secured by first liens and second liens, respectively.
S-23
<PAGE>
As of the Cut-off Date, the scheduled Principal Balances ranged from
approximately $4,935.51 to approximately $385,320.02; the average Principal
Balance was approximately $55,581.63; the Loan Rates ranged from approximately
7.0140% to 17.4880%; and the weighted average Loan Rate was approximately
11.80%.
Approximately 95.13% of the Home Equity Loans (by Cut-off Date Pool
Principal Balance) are secured by properties which are owner occupied.
Approximately 90.4% of the Home Equity Loans (by Cut-off Date Pool Principal
Balance) were originated under the Seller's Full Documentation program.
All of the Home Equity Loans (by Cut-off Date Pool Principal Balance)
accrue interest on a "simple interest" basis pursuant to which interest is
computed and charged to the mortgagor on the outstanding Principal Balance of
the related Home Equity Loan based on the number of days elapsed between the
date through which interest was last paid on the Home Equity Loan through the
date of receipt of the mortgagor's most current payment. Accordingly, portions
of each monthly payment that are allocated to interest and principal are
adjusted based on the actual amount of interest charged on such basis.
Statistical Information
Certain summary statistical information regarding the Home Equity Loans
expected to be included in the Trust as of the Closing Date is set forth in
Annex II hereto. All such information is given as of the Cut-off Date (except as
otherwise indicated). All percentages of the Home Equity Loans are approximate
percentages by Cut-off Date Pool Principal Balance (except as otherwise
indicated). Totals may not sum to 100% due to rounding. Unless otherwise
specified, all principal balances of the Home Equity Loans are aggregate unpaid
principal balance of the Home Equity Loans as of the Cut-off Date and are
rounded to the nearest dollar.
Prior to the Closing Date, certain home equity loans that were selected
to be included in the Trust may be removed as a result of incomplete
documentation or otherwise, if the Depositor or the Seller deems such removal
necessary or appropriate. Other home equity loans may be substituted by the
Seller for the loans that are removed. As a result, certain characteristics of
the Home Equity Loans included the Trust on the Closing Date may vary from the
characteristics set forth below as of the Cut-off Date. The Depositor believes
that the information set forth in Annex II hereto will be substantially
representative of the characteristics of the Home Equity Loan Pool to be
included in the Trust as it will be constituted on the Closing Date.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The rate of principal payments on the Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and the yield to
maturity of the Class A Certificates will be related to the rate and timing of
payments of principal on the Home Equity Loans. The rate of principal payments
on the Home Equity Loans will in turn be affected by a number of factors,
including the amortization schedules of the Home Equity Loans, by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Home Equity Loans due to defaults, casualties,
condemnations and repurchases by the Seller) and by the terms of the related
Mortgage Notes and Mortgages. A majority of the Home Equity Loans (by Cut-off
Date Pool Principal Balance) are subject to prepayment penalties. In addition,
all of the Home Equity Loans contain "due-on-sale" clauses.
General Prepayment Considerations
Prepayments, liquidations and repurchases of the Home Equity Loans will
result in distributions in respect of principal to the Holders of the Class A
Certificates then entitled to receive such distributions that otherwise would be
distributed over the remaining terms of the Home Equity Loans. See "YIELD
CONSIDERATIONS" in the Prospectus. Since the rate of payment of principal on the
Home Equity Loans will depend on future events and a variety of factors (as
described more fully herein and in the Prospectus under "YIELD CONSIDERATIONS"),
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of the Class A Certificates may vary
from the anticipated yield will depend upon the degree to which such
Certificates are purchased at a discount or premium and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
repurchases of the Home Equity
S-24
<PAGE>
Loans. Further, in the case of Class A Certificates purchased at a discount, an
investor should consider the risk that a slower than anticipated rate of
principal payments on the Home Equity Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of Class
A Certificates purchased at a premium, an investor should consider the risk that
a faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield. In general, the
earlier a prepayment of principal on the Home Equity Loans, the greater will be
the effect on the yield to maturity of an investor in the Class A Certificates.
As a result, the effect on an investor's yield of principal payments occurring
on the Home Equity Loans at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Class A Certificates would not be fully offset by a subsequent like reduction
(or increase) in the rate of principal payments.
It is highly unlikely that the Home Equity Loans will prepay at any
constant rate until maturity or that all of the Home Equity Loans will prepay at
the same rate. Moreover, the timing of prepayments on the Home Equity Loans may
significantly affect the actual yield to maturity on the Class A Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
The rate of prepayment on the Home Equity Loans cannot be predicted.
Home equity loans such as the Home Equity Loans have been originated in
significant volume only during the past few years and neither the Depositor nor
the Seller is aware of any publicly available studies or statistics on the rate
of prepayment of such home equity loans. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the Home Equity Loans
may experience a higher rate of prepayment than traditional first mortgage
loans. The prepayment experience of the Trust with respect to the Home Equity
Loans may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility and changes affecting the deductibility for
federal income tax purposes of interest payments on home equity loans. Other
factors affecting prepayment of home equity loans include changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
related mortgaged properties and servicing decisions. All of the Home Equity
Loans contain "due-on-sale" provisions and the Master Servicer is required by
the Agreement to enforce such provisions unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Home Equity Loan. If
prevailing mortgage rates fall significantly below the Loan Rates on the Home
Equity Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Loan Rates on the Home Equity Loans, the rate of prepayment on the Home Equity
Loans would be expected to decrease. There can be no certainty as to the rate of
prepayments on the Home Equity Loans during any period or over the life of the
Certificates. See "YIELD CONSIDERATIONS" in the Prospectus.
In general, defaults on home equity loans are expected to occur with
greater frequency in their early years. In addition, defaults on the Home Equity
Loans will be affected by the general economic condition of the region of the
country in which the related Mortgaged 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 facts, increasing unemployment or falling property values. See "YIELD
CONSIDERATIONS" and "RISK FACTORS" in the Prospectus.
If an existing borrower indicates that he plans to refinance a Home
Equity Loan, the Master Servicer may permit the Home Equity Loan to be
refinanced. Any such refinancing would result in the prepayment of the Home
Equity Loan. Any such prepayments would be passed through to holders of the
Class A Certificates and may affect the weighted average lives of the Class A
Certificates.
In addition to the foregoing factors, the use of Distributable Excess
Spread to pay principal of the Class A Certificates to the extent required by
the Agreement will result in the acceleration of the Class or Classes of Class A
Certificates then entitled to principal, relative to the amortization of the
Home Equity Loans in the early months of the transaction. This acceleration
feature will create overcollateralization which results from the excess of the
total principal balance of the Home Equity Loans over the total certificate
principal balance of the Class A Certificates. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
needed to maintain the required level of overcollateralization. See "DESCRIPTION
OF THE CERTIFICATES--Overcollateralization Provisions" herein.
Because the Certificate Rate on each Class of Class A Certificates is
fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Class A Certificates were to rise, the market value of the Class
A Certificates may decline.
S-25
<PAGE>
Payment Delay Affects Yield
The effective yield to the Certificateholders of each Class of the
Class A Certificates will be lower than the yield otherwise produced by the
Certificate Rate for each such Class and the purchase price of such Certificates
because distributions will not be payable to the Certificateholders of the Class
A Certificates until the Distribution Date following the month of accrual
(without any additional distribution of interest or earnings thereon in respect
of such delay).
Weighted Average Lives
Weighted average life refers to the average amount of time that will
elapse 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 lives of the
Class A Certificates will be influenced by the rate at which principal on the
Home Equity Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower), and the timing
thereof. The weighted average lives of the Class A Certificates will also be
affected by the amount and timing of delinquencies and defaults on the Home
Equity Loans and the recoveries, if any, on defaulted Home Equity Loans and
foreclosed properties.
The prepayment model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of home equity
loans for the life of such home equity loans. The "100% Prepayment Assumption"
assumes a conditional prepayment rate of 5% per annum of the then outstanding
principal balance of such home equity loans in the first month of the life of
such home equity loans and an additional 1.81818181% (precisely 20/11% per
annum) in each month thereafter until the twelfth month. Beginning in the
twelfth month and in each month thereafter during the life of such home equity
loans, the 100% Prepayment Assumption assumes a conditional prepayment rate of
25% per annum each month. The "120% Prepayment Assumption" assumes a conditional
prepayment rate of 6% per annum of the then outstanding principal balance of
such home equity loans in the first month of the life of such home equity loans
and an additional 2.18181818% (precisely 24/11% per annum) in each month
thereafter until the twelfth month. Beginning in the twelfth month and in each
month thereafter during the life of such home equity loans, the 120% Prepayment
Assumption assumes a conditional prepayment rate of 30% per annum each month. As
used in the tables below, 0% Prepayment Assumptions assumes prepayment rates
equal to 0% of the Prepayment Assumption. Correspondingly, 100% Prepayment
Assumption assumes prepayment rates equal to 100% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of home equity loans, including the Home Equity Loans.
S-26
<PAGE>
The tables following the next paragraph indicate the percentage of the
initial principal balance of each Class of Class A Certificates that would be
outstanding after each of the dates shown at various percentages of the
Prepayment Assumption and the corresponding weighted average life. The tables
are based on the following assumptions (the "Modeling Assumptions"): (i) the
Home Equity Loan Pool consists of Home Equity Loans with the characteristics set
forth in the table below, (ii) distributions on the Class A Certificates are
made on the 25th day of each month, commencing in July 1999, (iii) the Home
Equity Loans prepay at the percentages of the Prepayment Assumption indicated,
(iv) no defaults, delinquencies or late payments occur in the payment by
borrowers of principal and interest on the Home Equity Loans, (v) none of the
Depositor, the Seller, the holder of the largest percentage interest of the
Class R Certificates, the Master Servicer, the Certificate Insurer or any other
person purchases from the Trust Fund any Home Equity Loan pursuant to any
obligation or option under the Agreement, except as indicated in footnote two in
the tables, (vi) scheduled monthly payments on the Home Equity Loans are
received on the first day of each month commencing in June 1999, and are
computed prior to giving effect to any prepayments received in the prior month,
(vii) prepayments representing payment in full of individual Home Equity Loans
are received on the last day of each month commencing in June 1999, and include
30 days of interest thereon, (viii) the Class A Certificates of each Class have
the respective initial principal balances as set forth herein, (ix) the
Certificate Rates for the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-7 Certificates are 6.46%, 6.69%, 6.94%, 7.10%, 7.31%,
7.50% and 7.18%, respectively, (x) the Closing Date for the Class A Certificates
is June 17, 1999 and (xi) the overcollateralization levels are set initially as
specified in the Agreement, and thereafter increase or decrease in accordance
with the provisions of the Agreement.
HYPOTHETICAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
Number of
Home Equity Gross Original Term to Remaining Term to
Pool Number Loans Principal Balance Loan Rate Maturity (Months) Maturity (Months)
----------- ----- ----------------- --------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1 443 $ 9,546,076.68 10.715% 57 52
2 1,660 60,512,939.35 11.522% 112 107
3 3,084 162,779,935.68 11.878% 179 173
4 885 69,156,662.19 11.960% 234 229
5 175 14,299,370.40 12.147% 296 291
6 754 72,831,993.02 11.779% 360 355
------ ----------------
Totals 7,001 $ 389,126,977.32
====== ================
</TABLE>
There will be discrepancies between the characteristics of the actual
Home Equity Loans and the characteristics assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the initial
principal balance outstanding (and the weighted average life) of each Class of
Class A Certificates set forth in the tables. In addition, since the actual Home
Equity Loans will have characteristics that differ from those assumed in
preparing the tables set forth below, the Class A Certificates may mature
earlier or later than indicated by the tables. Variations in the prepayment
experience and the balance of the Home Equity Loans that prepay may increase or
decrease the percentages of initial principal balances (and weighted average
lives) shown in the following tables. Such variations may occur even if the
average prepayment experience of all such Home Equity Loans equals any of the
specified Prepayment Assumption percentages.
S-27
<PAGE>
Class A-1 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100 100
June 25, 2000........... 86 63 40 31 17 0 0
June 25, 2001........... 78 34 0 0 0 0 0
June 25, 2002........... 70 9 0 0 0 0 0
June 25, 2003........... 61 0 0 0 0 0 0
June 25, 2004........... 53 0 0 0 0 0 0
June 25, 2005........... 44 0 0 0 0 0 0
June 25, 2006........... 34 0 0 0 0 0 0
June 25, 2007........... 26 0 0 0 0 0 0
June 25, 2008........... 17 0 0 0 0 0 0
June 25, 2009........... 10 0 0 0 0 0 0
June 25, 2010........... 1 0 0 0 0 0 0
June 25, 2011........... 0 0 0 0 0 0 0
June 25, 2012........... 0 0 0 0 0 0 0
June 25, 2013........... 0 0 0 0 0 0 0
June 25, 2014........... 0 0 0 0 0 0 0
June 25, 2015........... 0 0 0 0 0 0 0
June 25, 2016........... 0 0 0 0 0 0 0
June 25, 2017........... 0 0 0 0 0 0 0
June 25, 2018........... 0 0 0 0 0 0 0
June 25, 2019........... 0 0 0 0 0 0 0
June 25, 2020........... 0 0 0 0 0 0 0
June 25, 2021........... 0 0 0 0 0 0 0
June 25, 2022........... 0 0 0 0 0 0 0
June 25, 2023........... 0 0 0 0 0 0 0
June 25, 2024........... 0 0 0 0 0 0 0
June 25, 2025........... 0 0 0 0 0 0 0
June 25, 2026........... 0 0 0 0 0 0 0
June 25, 2027........... 0 0 0 0 0 0 0
June 25, 2028........... 0 0 0 0 0 0 0
June 25, 2029........... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2)...... 5.36 1.60 0.94 0.81 0.67 0.53 0.44
Weighted Average
Life (years)(1)(3)...... 5.36 1.60 0.94 0.81 0.67 0.53 0.44
</TABLE>
- - ----------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-28
<PAGE>
Class A-2 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 78 3
June 25, 2001.......... 100 100 86 40 0 0 0
June 25, 2002.......... 100 100 0 0 0 0 0
June 25, 2003.......... 100 66 0 0 0 0 0
June 25, 2004.......... 100 20 0 0 0 0 0
June 25, 2005.......... 100 0 0 0 0 0 0
June 25, 2006.......... 100 0 0 0 0 0 0
June 25, 2007.......... 100 0 0 0 0 0 0
June 25, 2008.......... 100 0 0 0 0 0 0
June 25, 2009.......... 100 0 0 0 0 0 0
June 25, 2010.......... 100 0 0 0 0 0 0
June 25, 2011.......... 76 0 0 0 0 0 0
June 25, 2012.......... 44 0 0 0 0 0 0
June 25, 2013.......... 6 0 0 0 0 0 0
June 25, 2014.......... 0 0 0 0 0 0 0
June 25, 2015.......... 0 0 0 0 0 0 0
June 25, 2016.......... 0 0 0 0 0 0 0
June 25, 2017.......... 0 0 0 0 0 0 0
June 25, 2018.......... 0 0 0 0 0 0 0
June 25, 2019.......... 0 0 0 0 0 0 0
June 25, 2020.......... 0 0 0 0 0 0 0
June 25, 2021.......... 0 0 0 0 0 0 0
June 25, 2022.......... 0 0 0 0 0 0 0
June 25, 2023.......... 0 0 0 0 0 0 0
June 25, 2024.......... 0 0 0 0 0 0 0
June 25, 2025.......... 0 0 0 0 0 0 0
June 25, 2026.......... 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
June 25, 2028.......... 0 0 0 0 0 0 0
June 25, 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2)..... 12.83 4.45 2.40 2.00 1.60 1.18 0.93
Weighted Average
Life (years)(1)(3)..... 12.83 4.45 2.40 2.00 1.60 1.18 0.93
</TABLE>
- - ----------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-29
<PAGE>
Class A-3 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 100 100 73 0 0
June 25, 2002.......... 100 100 90 41 0 0 0
June 25, 2003.......... 100 100 23 0 0 0 0
June 25, 2004.......... 100 100 0 0 0 0 0
June 25, 2005.......... 100 83 0 0 0 0 0
June 25, 2006.......... 100 49 0 0 0 0 0
June 25, 2007.......... 100 33 0 0 0 0 0
June 25, 2008.......... 100 13 0 0 0 0 0
June 25, 2009.......... 100 0 0 0 0 0 0
June 25, 2010.......... 100 0 0 0 0 0 0
June 25, 2011.......... 100 0 0 0 0 0 0
June 25, 2012.......... 100 0 0 0 0 0 0
June 25, 2013.......... 100 0 0 0 0 0 0
June 25, 2014.......... 78 0 0 0 0 0 0
June 25, 2015.......... 64 0 0 0 0 0 0
June 25, 2016.......... 48 0 0 0 0 0 0
June 25, 2017.......... 29 0 0 0 0 0 0
June 25, 2018.......... 8 0 0 0 0 0 0
June 25, 2019.......... 0 0 0 0 0 0 0
June 25, 2020.......... 0 0 0 0 0 0 0
June 25, 2021.......... 0 0 0 0 0 0 0
June 25, 2022.......... 0 0 0 0 0 0 0
June 25, 2023.......... 0 0 0 0 0 0 0
June 25, 2024.......... 0 0 0 0 0 0 0
June 25, 2025.......... 0 0 0 0 0 0 0
June 25, 2026.......... 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
June 25, 2028.......... 0 0 0 0 0 0 0
June 25, 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2)..... 16.82 7.37 3.65 2.99 2.25 1.61 1.23
Weighted Average
Life (years)(1)(3)..... 16.82 7.37 3.65 2.99 2.25 1.61 1.23
</TABLE>
- - ----------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-30
<PAGE>
Class A-4 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 100 100 100 0 0
June 25, 2002.......... 100 100 100 100 35 0 0
June 25, 2003.......... 100 100 100 38 0 0 0
June 25, 2004.......... 100 100 29 0 0 0 0
June 25, 2005.......... 100 100 0 0 0 0 0
June 25, 2006.......... 100 100 0 0 0 0 0
June 25, 2007.......... 100 100 0 0 0 0 0
June 25, 2008.......... 100 100 0 0 0 0 0
June 25, 2009.......... 100 83 0 0 0 0 0
June 25, 2010.......... 100 29 0 0 0 0 0
June 25, 2011.......... 100 0 0 0 0 0 0
June 25, 2012.......... 100 0 0 0 0 0 0
June 25, 2013.......... 100 0 0 0 0 0 0
June 25, 2014.......... 100 0 0 0 0 0 0
June 25, 2015.......... 100 0 0 0 0 0 0
June 25, 2016.......... 100 0 0 0 0 0 0
June 25, 2017.......... 100 0 0 0 0 0 0
June 25, 2018.......... 100 0 0 0 0 0 0
June 25, 2019.......... 100 0 0 0 0 0 0
June 25, 2020.......... 78 0 0 0 0 0 0
June 25, 2021.......... 53 0 0 0 0 0 0
June 25, 2022.......... 24 0 0 0 0 0 0
June 25, 2023.......... 0 0 0 0 0 0 0
June 25, 2024.......... 0 0 0 0 0 0 0
June 25, 2025.......... 0 0 0 0 0 0 0
June 25, 2026.......... 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
June 25, 2028.......... 0 0 0 0 0 0 0
June 25, 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2)..... 22.10 10.67 4.91 3.99 3.02 1.95 1.47
Weighted Average
Life (years)(1)(3)..... 22.10 10.67 4.91 3.99 3.02 1.95 1.47
</TABLE>
- - --------------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-31
<PAGE>
Class A-5 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 100 100 100 96 0
June 25, 2002.......... 100 100 100 100 100 0 0
June 25, 2003.......... 100 100 100 100 13 0 0
June 25, 2004.......... 100 100 100 38 0 0 0
June 25, 2005.......... 100 100 62 0 0 0 0
June 25, 2006.......... 100 100 25 0 0 0 0
June 25, 2007.......... 100 100 23 0 0 0 0
June 25, 2008.......... 100 100 0 0 0 0 0
June 25, 2009.......... 100 100 0 0 0 0 0
June 25, 2010.......... 100 100 0 0 0 0 0
June 25, 2011.......... 100 83 0 0 0 0 0
June 25, 2012.......... 100 49 0 0 0 0 0
June 25, 2013.......... 100 0 0 0 0 0 0
June 25, 2014.......... 100 0 0 0 0 0 0
June 25, 2015.......... 100 0 0 0 0 0 0
June 25, 2016.......... 100 0 0 0 0 0 0
June 25, 2017.......... 100 0 0 0 0 0 0
June 25, 2018.......... 100 0 0 0 0 0 0
June 25, 2019.......... 100 0 0 0 0 0 0
June 25, 2020.......... 100 0 0 0 0 0 0
June 25, 2021.......... 100 0 0 0 0 0 0
June 25, 2022.......... 100 0 0 0 0 0 0
June 25, 2023.......... 93 0 0 0 0 0 0
June 25, 2024.......... 71 0 0 0 0 0 0
June 25, 2025.......... 48 0 0 0 0 0 0
June 25, 2026.......... 22 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
June 25, 2028.......... 0 0 0 0 0 0 0
June 25, 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2)..... 25.84 12.99 6.74 4.99 3.69 2.20 1.65
Weighted Average
Life (years)(1)(3)..... 25.92 13.07 6.77 4.99 3.69 2.20 1.65
</TABLE>
- - --------------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-32
<PAGE>
Class A-6 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 100 100 100 100 0
June 25, 2002.......... 100 100 100 100 100 14 0
June 25, 2003.......... 100 100 100 100 100 0 0
June 25, 2004.......... 100 100 100 100 21 0 0
June 25, 2005.......... 100 100 100 95 0 0 0
June 25, 2006.......... 100 100 100 62 0 0 0
June 25, 2007.......... 100 100 100 0 0 0 0
June 25, 2008.......... 100 100 0 0 0 0 0
June 25, 2009.......... 100 100 0 0 0 0 0
June 25, 2010.......... 100 100 0 0 0 0 0
June 25, 2011.......... 100 100 0 0 0 0 0
June 25, 2012.......... 100 100 0 0 0 0 0
June 25, 2013.......... 100 0 0 0 0 0 0
June 25, 2014.......... 100 0 0 0 0 0 0
June 25, 2015.......... 100 0 0 0 0 0 0
June 25, 2016.......... 100 0 0 0 0 0 0
June 25, 2017.......... 100 0 0 0 0 0 0
June 25, 2018.......... 100 0 0 0 0 0 0
June 25, 2019.......... 100 0 0 0 0 0 0
June 25, 2020.......... 100 0 0 0 0 0 0
June 25, 2021.......... 100 0 0 0 0 0 0
June 25, 2022.......... 100 0 0 0 0 0 0
June 25, 2023.......... 100 0 0 0 0 0 0
June 25, 2024.......... 100 0 0 0 0 0 0
June 25, 2025.......... 100 0 0 0 0 0 0
June 25, 2026.......... 100 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
June 25, 2028.......... 0 0 0 0 0 0 0
June 25, 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2)..... 27.11 13.94 8.86 7.12 4.79 2.67 1.84
Weighted Average
Life (years)(1)(3)..... 28.68 17.85 11.38 8.87 4.79 2.67 1.84
</TABLE>
- - --------------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-33
<PAGE>
Class A-7 Certificates
at the following Prepayment Assumption percentages
<TABLE>
<CAPTION>
Distribution Date 0% 50% 100% 120% 150% 200% 250%
- - ----------------- -- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 100 100 100 100 76
June 25, 2002.......... 100 100 100 100 100 100 23
June 25, 2003.......... 98 91 86 83 79 50 0
June 25, 2004.......... 95 84 74 70 63 0 0
June 25, 2005.......... 90 72 56 50 0 0 0
June 25, 2006.......... 83 58 39 33 0 0 0
June 25, 2007.......... 62 30 14 0 0 0 0
June 25, 2008.......... 44 14 0 0 0 0 0
June 25, 2009.......... 33 8 0 0 0 0 0
June 25, 2010.......... 24 4 0 0 0 0 0
June 25, 2011.......... 16 2 0 0 0 0 0
June 25, 2012.......... 10 1 0 0 0 0 0
June 25, 2013.......... 5 0 0 0 0 0 0
June 25, 2014.......... 3 0 0 0 0 0 0
June 25, 2015.......... 3 0 0 0 0 0 0
June 25, 2016.......... 2 0 0 0 0 0 0
June 25, 2017.......... 1 0 0 0 0 0 0
June 25, 2018.......... 1 0 0 0 0 0 0
June 25, 2019.......... 1 0 0 0 0 0 0
June 25, 2020.......... 0 0 0 0 0 0 0
June 25, 2021.......... 0 0 0 0 0 0 0
June 25, 2022.......... 0 0 0 0 0 0 0
June 25, 2023.......... 0 0 0 0 0 0 0
June 25, 2024.......... 0 0 0 0 0 0 0
June 25, 2025.......... 0 0 0 0 0 0 0
June 25, 2026.......... 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
June 25, 2028.......... 0 0 0 0 0 0 0
June 25, 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)(2).... 9.28 7.16 6.24 5.87 5.16 3.90 2.40
Weighted Average
Life (years)(1)(3).... 9.28 7.16 6.28 6.06 5.75 4.34 2.66
</TABLE>
- - --------------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
months from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
The above tables have been prepared based on the assumptions described
above (including the assumptions regarding the characteristics and performance
of the Home Equity Loans, which may differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
S-34
<PAGE>
Last Scheduled Distribution Dates
The last scheduled distribution date (the "Last Scheduled Distribution
Date") for each Class of Class A Certificates will be the following:
Class Distribution Date in
----- --------------------
A-1 May 2011
A-2 September 2013
A-3 May 2018
A-4 July 2021
A-5 March 2025
A-6 February 2027
A-7 December 2026
The Last Scheduled Distribution Date for each Class of Class A
Certificates has been calculated on the basis of the Modeling Assumptions and
the assumptions that there are no prepayments and Distributable Excess Spread is
not used to make accelerated payments of principal to the holders of the Class A
Certificates. Since the rate of distributions in reduction of the principal
balance of each Class of Class A Certificates will depend on the rate of payment
(including prepayments) of the Home Equity Loans, the principal balance of each
such Class could be reduced to zero significantly earlier or later than the
related Last Scheduled Distribution Date. The rate of payments on the Home
Equity Loans will depend on their particular characteristics, as well as on
prevailing interest rates from time to time and other economic factors, and no
assurance can be given as to the actual payment experience of the Home Equity
Loans.
DESCRIPTION OF THE CERTIFICATES
General
The Banc One Home Equity Loan Asset Backed Certificates, Series 1999-2
(the "Certificates") will consist of seven classes of senior certificates (each,
a "Class"), the Class A-1 Certificates, the Class A-2 Certificates, the Class
A-3 Certificates, the Class A-4 Certificates, the Class A-5 Certificates, the
Class A-6 Certificates and the Class A-7 Certificates (collectively, the "Class
A Certificates") and one Class of subordinate certificates (the "Class R
Certificates"). The Certificates will be issued pursuant to a pooling and
servicing agreement (the "Agreement"), dated as of June 1, 1999, among the
Seller, the Depositor, the Master Servicer and the Trustee. Only the Class A
Certificates are offered hereby.
The Class A Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. The property of the Trust will include, to the extent
provided in the Agreement: (i) the Home Equity Loans; (ii) payments on the Home
Equity Loans received on or after the Cut-Off Date; (iii) Mortgaged Properties
relating to the Home Equity Loans that are acquired by foreclosure or deed in
lieu of foreclosure; (iv) the Collection Account and the Certificate Account and
funds on deposit therein (excluding net earnings thereon); (v) rights under
certain hazard insurance policies, if any, covering the Mortgaged Properties and
rights under a blanket hazard insurance policy obtained by the Master Servicer
as protection against coverage lapses in such individual hazard insurance
policies; and (vi) an assignment of the Depositor's rights under the home equity
loan purchase agreement (the "Purchase Agreement"). In addition, the Depositor
has caused the Certificate Insurer to issue an irrevocable and unconditional
certificate guaranty insurance policy (the "Policy") for the benefit of the
holders of the Class A Certificates, pursuant to which the Certificate Insurer
will guarantee certain payments to the Class A Certificateholders as described
herein. The Policy will also be included in the property of the Trust.
Definitive Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will initially act as Certificate Registrar.
See "--Book-Entry Certificates and Definitive Certificates" below. No service
charge will be made for any registration of exchange or transfer of Class A
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The principal balance of any Class of Class A Certificates on any
Distribution Date is equal to the principal balance of such Class of Class A
Certificates on the Closing Date minus the aggregate of amounts actually
distributed as principal to the holders thereof. On any date, the "Certificate
Principal Balance" is the aggregate of the principal balances of all Classes of
Class A Certificates.
S-35
<PAGE>
Only the Class A Certificates are being offered hereby. Each Class of
Class A Certificates represents the right to receive payments of interest at the
Certificate Rate for such Class and payments of principal as described below.
The "Percentage Interest" represented by a Class A Certificate of a
Class as of any date of determination will be equal to the percentage obtained
by dividing the denomination of such Certificate by the aggregate principal
balance of all Certificates of such Class as of the Cut-Off Date.
Assignment of Home Equity Loans
On the Closing Date the Depositor will transfer to the Trust all of its
right, title and interest in and to each Home Equity Loan, the related Mortgage
Notes, Mortgages and other related documents (collectively, the "Related
Documents"), including all payments received on each such Home Equity Loan on or
after the Cut-Off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Home Equity Loan transferred to
the Trust will be identified on a schedule (the "Home Equity Loan Schedule")
delivered to the Trustee pursuant to the Agreement. Such schedule will include
information such as the Principal Balance of each Home Equity Loan as of the
Cut-Off Date, its Loan Rate as well as other information.
The terms of the Agreement provide that the Seller will maintain
possession of the documentation relating to each Home Equity Loan (the "Mortgage
File"), other than the Mortgage Note, the Mortgage and an assignment of the
Mortgage. No later than the Closing Date, the Seller is required to deliver to
the Trustee the Mortgage Note, the Mortgage (or a certified copy of the
Mortgage) and an assignment of the Mortgage in recordable form.
Within 45 days of the date of delivery thereof, the Trustee will review
the Home Equity Loans and the Related Documents delivered to it pursuant to the
Agreement and if any Home Equity Loan or Related Document delivered to it is
found to be defective in any material respect and such defect is not cured
within 135 days following notification thereof to the Seller by the Trustee, the
Seller will be obligated to either (i) substitute for such Home Equity Loan an
Eligible Substitute Home Equity Loan; provided, however, such substitution is
permitted only within two years of the Closing Date and may not be made unless
an opinion of counsel is provided to the effect that such substitution will not
disqualify the Trust as a REMIC or result in a prohibited transaction tax under
the Code or (ii) purchase such Home Equity Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Home Equity Loan as
of the date of purchase, plus all accrued and unpaid interest thereon, computed
at the Loan Rate, plus the amount of any unreimbursed Servicing Advances made by
the Master Servicer. The obligation of the Seller to repurchase or substitute
for a Defective Home Equity Loan is the sole remedy regarding any defects in the
Home Equity Loans and Related Documents available to the Trustee or the
Certificateholders. Within 90 days of the occurrence of an Assignment Event, the
Seller, at its own expense, is required to (i) except with respect to an
Assignment Event described in clause (iv) of the definition thereof, deliver the
remainder of each Mortgage File to the Trustee and (ii) either cause the
assignment of each Mortgage to be recorded, at its expense, or to deliver to the
Trustee and the Certificate Insurer an opinion of counsel acceptable to the
Certificate Insurer to the effect that recordation of such assignments is not
necessary in order to perfect the interests of the Trust in such Mortgages.
Any Home Equity Loan required to be purchased by the Seller because of
defective documentation or a material breach of representation or warranty as
described below is referred to as a "Defective Home Equity Loan".
An "Assignment Event" will occur on the day following either (i) the
occurrence and continuance of a Servicer Default, (ii) the reduction of the
Master Servicer's long-term unsecured senior debt rating below "Baa2" by Moody's
or "BBB+" by Standard & Poor's, (iii) 30 days after the request of the
Certificate Insurer, if in the judgment of the Certificate Insurer, it deems
such action necessary to protect its interest or (iv) with respect to a
particular Home Equity Loan, the occurrence of a foreclosure proceeding or the
insolvency of the related mortgagor.
In connection with the substitution of an Eligible Substitute Home
Equity Loan, the Seller will be required to deposit in the Collection Account an
amount (the "Substitution Adjustment Amount") equal to the excess of the
Principal Balance of the related Defective Home Equity Loan over the Principal
Balance of such Eligible Substitute Home Equity Loan.
An "Eligible Substitute Home Equity Loan" is a home equity loan
substituted by the Seller for a Defective Home Equity Loan which must, on the
date of such substitution, (i) have an outstanding Principal Balance (or in the
case of a substitution of more than one Home Equity Loan for a Defective Home
Equity Loan, an aggregate Principal Balance), not in
S-36
<PAGE>
excess of, and not more than 5% less than, the Principal Balance of the
Defective Home Equity Loan; (ii) have a Loan Rate not less than the Loan Rate of
the Defective Home Equity Loan and not more than 1% in excess of the Loan Rate
of such Defective Home Equity Loan; (iii) have a mortgage of the same or higher
level of priority as the mortgage relating to the Defective Home Equity Loan;
(iv) have a remaining term to maturity not more than six months earlier and not
later than the remaining term to maturity of the Defective Home Equity Loan; (v)
have a Combined Loan-to-Value Ratio the same or lower than the Combined
Loan-to-Value Ratio of the Defective Home Equity Loan; (vi) have a credit score
the same or higher than the credit score of the Defective Home Equity Loan;
(vii) comply with each representation and warranty as to the Home Equity Loans
set forth in the Agreement (deemed to be made as of the date of substitution);
and (viii) satisfy certain other conditions specified in the Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Home Equity Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and warrant,
on the Closing Date, that, among other things: (i) at the time of transfer to
the Depositor, the Seller has transferred or assigned all of its right, title
and interest in each Home Equity Loan and the Related Documents, free of any
lien; and (ii) each Home Equity Loan complied, at the time of origination, in
all material respects with applicable state and federal laws. Upon discovery of
a breach of any such representation and warranty which materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer in
the related Home Equity Loan and Related Documents, the Seller will have a
period of 90 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 90-day period, the Seller will be
obligated to (i) substitute for such Defective Home Equity Loan an Eligible
Substitute Home Equity Loan or (ii) purchase such Defective Home Equity Loan
from the Trust. The same procedure and limitations that are set forth above for
the substitution or purchase of Defective Home Equity Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Home Equity Loan as a result of a breach of a
representation or warranty in the Agreement that materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer.
Pursuant to the Agreement, the Master Servicer will be responsible for
the servicing of the Home Equity Loans as more fully set forth below.
Payments on Home Equity Loans; Deposits to Collection Account and Certificate
Account
The Trustee shall establish and maintain in the name of the Trustee a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. Within two Business Days (as defined in the Agreement) of
receipt by the Master Servicer of amounts in respect of the Home Equity Loans
(excluding amounts representing the Master Servicing Fee, reimbursement for
Monthly Advances, Servicing Advances and Nonrecoverable Advances and insurance
proceeds to be applied to the restoration or repair of a Mortgaged Property or
similar items), the Master Servicer will deposit such amounts in the Collection
Account. Notwithstanding the foregoing, for as long as Bank One, Indiana,
National Association remains the Master Servicer under the Agreement and
maintains a short-term unsecured debt rating of at least "A-1" by Standard &
Poor's and "P-1" by Moody's, the Master Servicer need not deposit collections
into the Collection Account upon receipt but may use for its own benefit all
such collections until two Business Days preceding the related Distribution
Date. A "Distribution Date" is the 25th day of each month, or if such day is not
a Business Date, then the next succeeding Business Day, commencing in July 1999.
While such ratings are maintained, on or prior to the second Business Day
preceding each Distribution Date, the Master Servicer will deposit in the
Collection Account amounts which are to be included in the Available Funds for
the related Distribution Date. Amounts so deposited may be invested in Eligible
Investments maturing not later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Certificate
Account or on such Distribution Date if approved by the Rating Agencies and the
Certificate Insurer. Not later than 2:00 p.m., New York time, on the Business
Day immediately prior to each Distribution Date or on such Distribution Date if
approved by the Rating Agencies and the Certificate Insurer, the Master Servicer
will transfer from the Collection Account for deposit into a separate trust
account (the "Certificate Account") established in the name of the Trustee the
Available Funds for such Distribution Date. All net income and gain realized
from the investment of funds on deposit in the Collection Account or the
Certificate Account shall be paid to the Master Servicer as servicing
compensation (in addition to the Master Servicing Fee).
S-37
<PAGE>
With respect to each Distribution Date, the "Available Funds" will be
the sum of:
(i) payments of principal and interest on the Home Equity
Loans received with respect to the related Collection Period (net of
amounts representing the Master Servicing Fee with respect to each Home
Equity Loan and reimbursement for related Monthly Advances, Servicing
Advances and Nonrecoverable Advances);
(ii) Liquidation Proceeds and Insurance Proceeds (each as
defined in the Prospectus) with respect to the Home Equity Loans
received during the related Collection Period (net of amounts applied
to the restoration or repair of Mortgaged Properties);
(iii) the Purchase Price for any repurchased Defective Home
Equity Loans and any related Substitution Adjustment Amounts received
for such Distribution Date; and
(iv) payments from the Master Servicer received for such
Distribution Date in connection with (a) Monthly Advances, (b)
Compensating Interest and (c) the termination of the Trust as provided
in the Agreement.
Investments that qualify as "Eligible Investments" are specified in the
Agreement and are limited to investments which meet the criteria of the Rating
Agencies from time to time as being consistent with their then current ratings
of the Class A Certificates.
Priority of Distributions
On each Distribution Date the Trustee shall withdraw from the
Certificate Account (a) all Available Funds then on deposit and (b) the amount
of any Insured Payment under the Policy, and make the following disbursements
and transfers as described below (except that amounts paid under the Policy
shall only be available for distribution to Class A Certificateholders):
(i) to the Trustee, the Trustee fee for such Distribution Date
and to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for the premium;
(ii) to the Master Servicer, the amount of any accrued and
unpaid Master Servicing Fee;
(iii) concurrently, to the holders of each Class of Class A
Certificates pro rata, interest at the applicable Certificate Rate that
accrued during the related Interest Period on the related principal
balance of such Class immediately prior to such Distribution Date, less
(A) such Class's pro rata share of any shortfalls in interest due to
the application of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (a "Relief Act Shortfall") and less (B) such Class's pro
rata share of the excess, if any, of the aggregate shortfalls in
interest due to Principal Prepayments in Full received during the
related Collection Period over the Compensating Interest received by
the Trustee for the related Collection Period (the "Prepayment Interest
Shortfall");
(iv) concurrently, to the holders of each Class of Class A
Certificates pro rata, any unpaid shortfalls in interest on such Class
that were required to be paid on prior Distribution Dates pursuant to
clause (iii) (for each Class, the "Unpaid Interest Shortfall"), with
interest thereon (to the extent permitted by applicable law) at the
applicable Certificate Rate that accrued during the related Interest
Period;
(v) to the holders of the Class A Certificates in reduction of
their principal balances, an aggregate amount equal to the Formula
Principal Distribution Amount (but not in excess of the aggregate
amount, if any, necessary to be distributed on such Distribution Date
so that the Overcollateralization Amount equals the Required
Overcollateralization Amount), such amount to be allocated among the
Class A Certificates as follows:
(A) to the Class A-7 Certificates, up to the Priority
Amount for such Distribution Date;
(B) sequentially, to the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-6 Certificates, in that
order, until the principal balance of each such Class has been
reduced to zero; and
(C) to the Class A-7 Certificates, without regard to
the Priority Amount for such Distribution Date, until the
principal balance for such Class has been reduced to zero;
(vi) to the Certificate Insurer, any amount owing to it under
the Insurance Agreement for reimbursement of prior draws made on the
Policy;
S-38
<PAGE>
(vii) to the Master Servicer, the amount of any
Nonrecoverable Advances not previously reimbursed;
(viii) to the holders of the Class A Certificates in reduction
of their principal balances, an amount equal to the Distributable
Excess Spread, such amount to be allocated among the Class A
Certificates as follows:
(A) to the Class A-7 Certificates, after taking
into account the amount paid pursuant to clause (v)(A) above,
up to the Priority Amount for such Distribution Date;
(B) sequentially, to the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-6 Certificates, in that
order, until the principal balance of each such Class has been
reduced to zero; and
(C) to the Class A-7 Certificates, without regard to
the Priority Amount for such Distribution Date, until the
principal balance for such Class has been reduced to zero;
(ix) to the Certificate Insurer, any other amounts owing to it
under the Insurance Agreement;
(x) concurrently, to the holders of each Class of Class A
Certificates pro rata, any Prepayment Interest Shortfall for such
Distribution Date and any Prepayment Interest Shortfalls that were not
paid on prior Distribution Dates pursuant to this clause (x), with
interest thereon (to the extent permitted by applicable law) at the
applicable Certificate Rate;
(xi) to the Master Servicer, first to the reimbursement for
any Compensating Interest, second, to the reimbursement of any
unreimbursed Servicing Advances and third, to the reimbursement of any
unreimbursed Monthly Advances;
(xii) to the Trustee, certain fees, costs or expenses payable
pursuant to the terms of the Pooling and Servicing Agreement in
connection with a transfer of servicing, the termination of any
servicing agreement and, to the extent not paid by the Master Servicer,
any indemnification for losses due to the Trustee; and
(xiii) to the holder of the Class R Certificate, any remaining
amount.
Notwithstanding the foregoing, on any Distribution Date during the
continuance of a default by the Certificate Insurer, the Formula Principal
Distribution Amount and any Distributable Excess Spread for such Distribution
Date will be distributed to each outstanding Class of Class A Certificates on a
pro rata basis in accordance with the principal balance of each such Class
immediately prior to such Distribution Date instead of in accordance with the
priorities set forth above.
Interest Distributions
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Priority of
Distributions," interest will be distributed to each Class of Class A
Certificates in an amount equal to the sum of (i) interest at the applicable
Certificate Rate that accrued during the related Interest Period on the related
principal balance of such Class immediately prior to such Distribution Date less
such Class's pro rata share of any Relief Act Shortfall and Prepayment Interest
Shortfall, (ii) any Unpaid Interest Shortfall for such Class and (iii) interest
on such Unpaid Interest Shortfall (to the extent permitted by applicable law) at
the applicable Certificate Rate that accrued during the related Interest Period.
On each Distribution Date, the accrued interest for each Class of Class
A Certificates will be distributed on an equal priority and any shortfall in the
amount required to be distributed as interest thereon to each such Class will be
allocated between such Classes pro rata based on the amount which would have
been distributed to each such Class in the absence of such shortfall.
The "Interest Period" means, with respect to each Distribution Date and
the Class A Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. Interest on the Class A Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
S-39
<PAGE>
Principal Distributions
On each Distribution Date, to the extent of funds available therefor,
in accordance with the priorities described above under "--Priority of
Distributions," principal will be distributed to the holders of Class A
Certificates then entitled to distributions of principal in an amount (but not
in excess of the Certificate Principal Balance of the Class A Certificates or in
excess of the aggregate amount, if any, necessary to be distributed on such
Distribution Date so that the Overcollateralization Amount equals the Required
Overcollateralization Amount) equal to the sum of (i) the Formula Principal
Distribution Amount for such Distribution Date and (ii) the Distributable Excess
Spread for such Distribution Date.
The "Formula Principal Distribution Amount" means, as to any
Distribution Date, the sum of the Principal Distributable Amount and any Unpaid
Principal Shortfall for such Distribution Date.
The "Principal Distributable Amount" means, with respect to any
Distribution Date, an amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding Collection Period of:
(i) each payment of principal on a Home Equity Loan received
by the Master Servicer during such Collection Period, including all
full and partial principal prepayments;
(ii) the Principal Balance as of the end of the immediately
preceding Collection Period of each Home Equity Loan that became a
Liquidated Home Equity Loan for the first time during such Collection
Period;
(iii) all Insurance Proceeds on a Home Equity Loan received by
the Master Servicer during such Collection Period that are not part of
Liquidation Proceeds and were applied to principal of the related Home
Equity Loan;
(iv) the portion of the Purchase Price allocable to principal
of all repurchased Defective Home Equity Loans with respect to such
Collection Period; and
(v) any Substitution Adjustment Amounts deposited by the
Seller in the Collection Account with respect to the substitution of an
Eligible Substitute Home Equity Loan during such Collection Period.
The "Collection Period" with respect to any Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs.
The "Excess Spread" means, with respect to any Distribution Date, the
excess, if any, of (a) the Available Funds and the amount of any draws under the
Policy for such Distribution Date, over (b) the portion thereof required to be
distributed on such Distribution Date pursuant to clauses (i) through (vii) as
set forth under the heading "--Priority of Distributions".
The "Distributable Excess Spread" means, with respect to any
Distribution Date, the amount, if any, of the Excess Spread necessary to be
distributed on such Distribution Date so that the Overcollateralization Amount
equals the Required Overcollateralization Amount (after giving effect to the
distribution of the Formula Principal Distribution Amount on such Distribution
Date).
The application of Excess Spread as described above is intended to
create overcollateralization to provide a source of additional cashflow to cover
net losses realized in respect of Liquidated Home Equity Loans. A draw on the
Policy in respect of principal will not be made until the Certificate Principal
Balance exceeds the aggregate Principal Balance of the Home Equity Loans. See
"THE POLICY" herein. Accordingly, there may be Distribution Dates on which Class
A Certificateholders receive little or no distributions in respect of principal.
The "Unpaid Principal Shortfall" means, with respect to any
Distribution Date, the amount, if any, by which the Certificate Principal
Balance as of the immediately preceding Distribution Date (after giving effect
to the distribution of the Formula Principal Distribution Amount, any
Distributable Excess Spread and any draws under the Policy applied on such
preceding Distribution Date) exceeds the aggregate Principal Balance of the Home
Equity Loans at the end of the second preceding Collection Period.
The "Priority Amount" means, for any Distribution Date, the product of
(i) the Priority Percentage for such Distribution Date and (ii) the Class A-7
Pro Rata Principal Amount for such Distribution Date. In no event will the
Priority
S-40
<PAGE>
Amount for any Distribution Date exceed the principal balance of the Class A-7
Certificates immediately prior to such Distribution Date.
The "Priority Percentage" for each Distribution Date will be the
percentage indicated below:
Distribution Dates Occurring in Priority Percentage
------------------------------- -------------------
July 1999 through June 2002 0%
July 2002 through June 2004 45%
July 2004 through June 2005 80%
July 2005 through June 2006 100%
July 2006 and thereafter 300%
The "Class A-7 Pro Rata Principal Amount" for any Distribution Date
will be an amount equal to the product of (i) a fraction, the numerator of which
is the principal balance of the Class A-7 Certificates immediately prior to such
Distribution Date and the denominator of which is the Certificate Principal
Balance immediately prior to such Distribution Date, and (ii) the Formula
Principal Distribution Amount for such Distribution Date.
If the required level of overcollateralization is reduced below the
then existing amount of overcollateralization (as described below) or if the
required level of overcollateralization is satisfied on any Distribution Date,
the amount of the Formula Principal Distribution Amount and Excess Spread
required to be distributed to the holders of the Class A Certificates on such
Distribution Date will be correspondingly reduced by the amount of such
reduction or by the amount necessary such that the overcollateralization will
not exceed the required level of overcollateralization after giving effect to
the distribution in respect of principal to be made on such Distribution Date.
See "--Overcollateralization Provisions" below.
On each Distribution Date, to the extent that net losses realized in
respect of Liquidated Home Equity Loans are not covered by the application of
Available Funds as described above, the amount of overcollateralization, if any,
will be reduced.
A "Liquidated Home Equity Loan" with respect to any Distribution Date
is a Home Equity Loan with respect to which the Master Servicer has determined,
in accordance with the servicing procedures specified in the Agreement, as of
the end of the preceding Collection Period, that all Liquidation Proceeds which
it expects to recover with respect to such Home Equity Loan have been recovered.
Overcollateralization Provisions
"Overcollateralization Amount" means, with respect to any Distribution
Date, the excess, if any, of (i) the aggregate Principal Balances of the Home
Equity Loans at the end of the related Collection Period over (ii) the
Certificate Principal Balance as of such Distribution Date (after giving effect
to the distribution of principal on such Distribution Date).
"Required Overcollateralization Amount", means, with respect to any
Distribution Date, the amount specified in the Agreement.
In general, the Agreement requires that, on each Distribution Date, the
Distributable Excess Spread will be applied on such Distribution Date as an
accelerated payment of principal on the Class or Classes of Class A Certificates
then entitled to principal distributions in accordance with the priorities
specified under "--Priority of Distributions" above. This has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Home Equity Loans. Such overcollateralization will be
available to absorb any net losses on Liquidated Home Equity Loans that are not
covered by the application of Available Funds as described in "--Priority of
Distributions" above.
As of the Closing Date, the Cut-off Date Pool Principal Balance will
exceed the initial Certificate Principal Balance by approximately
$15,564,977.32. After the Closing Date, overcollateralization generally will
increase only as a result of the distribution to the Class A Certificateholders
of Distributable Excess Spread.
The required level of overcollateralization will be satisfied as of
each Distribution Date when the Overcollateralization Amount equals or exceeds
the Required Overcollateralization Amount. Thereafter, the level of
S-41
<PAGE>
overcollateralization necessary to satisfy the required level of
overcollateralization may be increased or decreased from time to time based on
the loss and delinquency experience of the Home Equity Loans in accordance with
the provisions of the Agreement. In addition, the Required Overcollateralization
Amount may be decreased, at the sole discretion of the Certificate Insurer, as
low as zero, which would have the effect of reducing the amortization of the
Class A Certificates below what it otherwise would have been.
Monthly Advances
Not later than two Business Days prior to each Distribution Date, the
Master Servicer will remit to the Trustee for deposit in the Certificate Account
as part of the Available Funds an amount (the "Monthly Advance"), to be
distributed on the related Distribution Date, equal to the sum of 30 days of
interest on each Home Equity Loan for which a monthly payment has not been
received by the Master Servicer with respect to the related Collection Period
(net of the Master Servicing Fee). Except as provided below, such obligation of
the Master Servicer continues with respect to each Home Equity Loan until such
Home Equity Loan becomes a Liquidated Home Equity Loan.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and protection
of the Mortgaged Properties, (ii) any enforcement or judicial proceedings,
including foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Home Equity Loan, including
Liquidation Proceeds, released mortgaged property proceeds, Insurance Proceeds
and such other amounts as may be collected by the Master Servicer from the
related borrower or otherwise relating to the Home Equity Loan in respect of
which such unreimbursed amounts are owed. The Master Servicer's right to
reimbursement for Monthly Advances shall be limited to late collections of
interest on any Home Equity Loan and to Liquidation Proceeds and Insurance
Proceeds on the related Home Equity Loan. The Master Servicer's right to such
reimbursements is prior to the rights of Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Monthly Advance or Servicing Advance if in the good faith judgment and
sole discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
related borrower in respect of the related Home Equity Loan or other recoveries
in respect of such Home Equity Loan. However, if any Servicing Advance or
Monthly Advance made by the Master Servicer is determined by the Master Servicer
to be nonrecoverable from such sources, such amounts may be reimbursed to the
Master Servicer out of Available Funds in accordance with the priorities
specified in "--Priority of Distributions" above. A Monthly Advance or Servicer
Advance that the Master Servicer (or its delegate) determines to be
nonrecoverable is referred to as a "Nonrecoverable Advance".
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the
Trustee will forward each Certificateholder a statement prepared by the Master
Servicer setting forth among other items with respect to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i)
above in respect of interest and the amount thereof in respect of any
Unpaid Interest Shortfalls, and the amount of any Unpaid Interest
Shortfalls remaining;
(iii) the amount of distribution set forth in paragraph (i)
above in respect of principal and the amount thereof in respect of the
Unpaid Principal Shortfall, and any remaining Unpaid Principal
Shortfall;
(iv) the amount applied as a distribution of Distributable
Excess Spread on the Certificates;
(v) the amount paid under the Policy for such Distribution
Date in respect of the interest to each Class of Certificates;
S-42
<PAGE>
(vi) the Master Servicing Fee;
(vii) the aggregate Principal Balance of the Home Equity Loans
as of the close of business on the last day of the preceding Collection
Period;
(viii) the Certificate Principal Balance after giving effect
to payments allocated to principal above;
(ix) the amount of overcollateralization as of the close of
business on the Distribution Date, after giving effect to distributions
of principal on such Distribution Date;
(x) the number and aggregate Principal Balances of the Home
Equity Loans as to which the minimum monthly payment is delinquent for
30-59 days, 60-89 days and 90 or more days, respectively, as of the end
of the preceding Collection Period;
(xi) the book value of any real estate which is acquired by
the Trust through foreclosure or grant of deed in lieu of foreclosure;
(xii) the aggregate amount of prepayments received on the Home
Equity Loans during the previous Collection Period; and
(xiii) the weighted average Loan Rate on the Home Equity Loans
as of the first day of the month prior to the Distribution Date.
In the case of information furnished pursuant to clauses (ii) and
(iii) above, the amounts shall be expressed as a dollar amount per Certificate
with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
Book-Entry Registration and Definitive Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificate Owners") will hold their Class A
Certificates through The Depository Trust Company ("DTC") in the United States,
or Cedelbank ("Cedelbank") or Euroclear System ("Euroclear") (in Europe) if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate principal balance of the Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as depositary for Cedelbank
and The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Class A Principal
Balances of $1,000 and in multiples of $1 in excess thereof. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Class A
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be Certificateholders as that term is used in the Agreement. Certificate Owners
are only permitted to exercise their rights indirectly through Participants and
DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest
S-43
<PAGE>
will in turn be recorded on the records of DTC, if the beneficial owner's
Financial Intermediary is not a DTC participant and on the records of Cedelbank
or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Class A Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Offered Certificates,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of Class
A Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus and "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations ("Cedelbank Participants") and facilitates the clearance and
settlement of securities
S-44
<PAGE>
transactions between Cedelbank Participants through electronic book-entry
changes in accounts of Cedelbank Participants, thereby eliminating the need for
physical movement of certificates. Transactions may be settled in Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to its
Cedelbank Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic markets
in several countries. As a professional depository, Cedelbank is subject to
regulation by the Luxembourg Monetary Institute. Cedelbank participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Cedelbank is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedelbank Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
S-45
<PAGE>
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Cedelbank or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Cedelbank Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of a Servicer Default (as defined
herein), beneficial owners having Percentage Interests aggregating not less than
51% of the aggregate Certificate Principal Balance of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Seller, the Master Servicer, the Certificate
Insurer nor the Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DTC and Year 2000 Compliance
DTC management is aware that some computer applications, systems, and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information of the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact)
S-46
<PAGE>
third party vendors from whom DTC acquires services to: (i) impress upon them
the importance of such services being year 2000 compliant; and (ii) determine
the extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind. The Master Servicer, the Depositor, the Servicer, the Trustee and the
Underwriters make no representation as to the accuracy or completeness of such
information.
THE CERTIFICATE INSURER
The following information has been supplied by Ambac Assurance
Corporation (the "Certificate Insurer") for inclusion in this Prospectus
Supplement. No representation is made by the Seller, the Depositor, the Master
Servicer, the Trustee, the Underwriters or any of their respective affiliates as
to the accuracy or completeness of such information.
The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly-issued municipal and structured
finance obligations. The Certificate Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly AMBAC, Inc.), a 100% publicly-held
company. Moody's, Standard & Poor's and Fitch IBCA, Inc. have each assigned a
triple-A financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
its subsidiaries as of December 31, 1998 and December 31, 1997 and for each of
the years in the three-year period ended December 31, 1998, prepared in
accordance with generally accepted accounting principles, included in the Annual
Report on Form 10-K of Ambac Financial Group, Inc. (which was filed with the
Securities and Exchange Commission (the "Commission") on March 30, 1999,
Commission File No. 1-10777) and the unaudited consolidated financial statements
of the Certificate Insurer and its subsidiaries as of March 31, 1999 and for the
periods ending March 31, 1999 and March 31, 1998, included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended March
31, 1999 (which was filed with the Commission on May 12, 1999) are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained herein by reference herein
also modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Class A Certificates shall be deemed
to be incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1996, December 31, 1997, December 31, 1998 and March
31, 1999, respectively, in conformity with generally accepted accounting
principles.
S-47
<PAGE>
Ambac Assurance Corporation
CONSOLIDATED CAPITALIZATION TABLE
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, March 31,
1996 1997 1998 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Unearned Premiums......................... $ 995 $ 1,184 $ 1,303 $ 1,324
Other Liabilities......................... 259 562 548 544
Total Liabilities......................... $ 1,254 $ 1,746 $ 1,851 $ 1,868
Stockholder's equity (1)
Common Stock............................ $ 82 $ 82 $ 82 $ 82
Additional paid-in-capital.............. 515 521 541 541
Accumulated other comprehensive income.. 66 118 138 112
Retained earnings....................... 992 1,180 1,405 1,467
Total stockholder's equity................ $ 1,655 $ 1,901 $ 2,166 $ 2,202
Total liabilities and stockholder's equity $ 2,909 $ 3,647 $ 4,017 $ 4,070
</TABLE>
- - ------------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Certificate Insurer
effective January 1, 1998. As this new standard only requires
additional information in the financial statements, it does not affect
the Certificate Insurer's financial position or results of operations.
For additional financial information concerning the Certificate
Insurer, see the audited and unaudited financial statements of the Certificate
Insurer incorporated by reference herein. Copies of the financial statements of
the Certificate Insurer incorporated herein by reference and copies of the
Certificate Insurer's annual statement for the year ended December 31, 1998
prepared in accordance with statutory accounting standards are available,
without charge, from the Certificate Insurer. The address of the Certificate
Insurer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Class A
Certificates or the advisability of investing in the Class A Certificates and
makes no representation regarding, nor has it participated in the preparation
of, this Prospectus Supplement other than the information supplied by the
Certificate Insurer and presented under the headings "THE POLICY" and "THE
CERTIFICATE INSURER" and in the financial statements incorporated herein by
reference.
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. The
information in this section regarding the Policy has been supplied by the
Certificate Insurer for inclusion herein. Only the Class A Certificates will be
entitled to the benefit of the Policy to be issued by the Certificate Insurer.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Policy, has agreed unconditionally and
irrevocably to pay to the Trustee for the benefit of the related Holders of the
Insured Obligations, that portion of the Insured Amounts which shall become Due
for Payment but shall be unpaid by reason of Nonpayment.
The Certificate Insurer will make such payments to the Trustee from its
own funds on the later of (a) three Business Days following delivery of the
Notice to the Certificate Insurer of Nonpayment or (b) the Business Day on which
the Insured Amounts are Due for Payment. The Certificate Insurer shall be
subrogated to all the Holders' rights to payment on the Insured Obligations to
the extent of the insurance disbursements so made. Once payments of the Insured
Amounts have been made to the Trustee, the Certificate Insurer shall have no
further obligation in respect of such Insured Amounts. Payment of Insured
Amounts shall be made only at the time set forth in the Policy and no
accelerated payment of Insured Amounts shall be made regardless of any
acceleration of any of the Class A Certificates, unless such acceleration is at
the sole option of the Certificate Insurer.
S-48
<PAGE>
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Trustee
for withholding taxes, if any (including interest and penalties in respect of
any such liability), any prepayment penalty or other accelerated payment which
at any time may become due on or with respect to any Insured Obligation, other
than at the sole option of the Certificate Insurer, nor against any risk other
than Nonpayment, including failure of the Trustee to make any payment due to the
Holders of the Insured Obligations. The Policy does not cover, and Insured
Amounts do not include, any Prepayment Interest Shortfalls or shortfalls due to
the application of the Relief Act.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the third Business Day following receipt on a Business Day
of a certified copy of the order requiring the return of a preference payment,
and such other documentation as is reasonably required by the Certificate
Insurer, such documentation being in a form satisfactory to the Certificate
Insurer, provided that if such documents are received after 12:00 noon, New York
City time on such Business Day, they will be deemed to be received on the
following Business Day.
Insured Payments due under the Policy unless otherwise stated therein
will be disbursed by the Certificate Insurer to the Trustee on behalf of the
Holders by wire transfer of immediately available funds in the amount of the
Insured Payment.
The Certificate Insurer's obligation under the Policy will be
discharged to the extent that funds are received by the Trustee for distribution
to the Holders, whether or not such funds are properly distributed by the
Trustee.
As used in the Policy, the following terms have the following meanings:
"Deficiency Amount" means the excess, if any, of Required Payments over
the Net Available Distribution Amount for such Distribution Date.
"Due for Payment" means with respect to any Insured Amount or
Preference Amount, such amount is due and payable pursuant to the terms of the
Agreement.
"Holder" means any person who is the registered owner or beneficial
owner of any Insured Obligation.
"Insured Amounts" means, with respect to any Distribution Date, the
Deficiency Amount for such Distribution Date.
"Insured Obligations" means the Class A Certificates.
"Insured Payments" means the aggregate amount paid by the Certificate
Insurer to the Trustee in respect of (i) Insured Amounts for a Distribution Date
and (ii) Preference Amounts for any given Business Day.
"Net Available Distribution Amount" means, with respect to any
Distribution Date, the Available Funds on deposit in the Certificate Account to
be distributed on such Distribution Date, less the aggregate amount applied to
the payment of the Trustee fee, the premium on the Policy and any accrued and
unpaid Master Servicing Fee on such Distribution Date.
"Nonpayment" means, with respect to any Distribution Date, an Insured
Amount is Due for Payment but has not been paid pursuant to the terms of the
Agreement.
"Notice" means the telephonic or telegraphic notice promptly confirmed
in writing by telecopy, substantially in the form of Exhibit A attached to the
Policy, from the Trustee specifying the Insured Amount that is due and owing on
the applicable Distribution Date.
"Preference Amount" means any payment of principal or interest on a
Class A Certificate which has become Due for Payment, which is made to a Holder
by or on behalf of the Trustee and which has been deemed a preferential transfer
and therefore recovered from its Holder pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
non-appealable order of a court having competent jurisdiction.
S-49
<PAGE>
"Required Payments" means, with respect to the Class A Certificates,
the sum of (i) for any Distribution Date, the aggregate amount of interest at
the applicable Certificate Rate that accrued during the related Interest Period
on the related principal balance of each Class of Class A Certificates
immediately prior to such Distribution Date (less each Class's pro rata share of
any Relief Act Shortfall and Prepayment Interest Shortfall) plus any Unpaid
Interest Shortfall for each Class of Class A Certificates, (ii) for any
Distribution Date (other than the Distribution Date in June 2029 the amount, if
any, by which the Certificate Principal Balance as of such Distribution Date
(after giving effect to all distributions of principal on the Class A
Certificates on such Distribution Date) exceeds the aggregate Principal Balance
of the Home Equity Loans as of end of the related Collection Period; and (iii)
on the Distribution Date in June 2029, an amount equal to the Certificate
Principal Balance as of such Distribution Date (after giving effect to all
distributions of principal on the Class A Certificates on such Distribution
Date).
Any notice under the Policy may be made at the address listed below for
the Certificate Insurer.
The notice address of the Certificate Insurer is One State Street
Plaza, New York, New York 10004 Attention: General Counsel, or such other
address as the Certificate Insurer shall specify to the Trustee in writing. The
Policy is being issued under and pursuant to, and will be construed under; the
laws of the State of New York, without giving effect to the conflict of laws
principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason.
POOLING AND SERVICING AGREEMENT
Collection and Other Servicing Procedures on Home Equity Loans
The Master Servicer will make reasonable efforts to collect all
payments called for under the Home Equity Loans and will, consistent with the
Agreement, follow such collection procedures as it follows from time to time
with respect to the home equity loans in its servicing portfolio comparable to
the Home Equity Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Home Equity
Loans.
Initially, the Master Servicer expects BOFS to perform the servicing of
the Home Equity Loans and to perform all of the duties of the Master Servicer,
as permitted by the Agreement. See "--Certain Matters Regarding the Depositor,
Seller and Master Servicer" below.
With respect to the Home Equity Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's or the Servicer's policies with respect to the home equity mortgage
loans it owns or services. With respect to Home Equity Loans that are junior in
priority to a first lien on a Mortgaged Property, the Master Servicer has the
power under certain circumstances to consent to a new mortgage lien on such
Mortgaged Property having priority over such Home Equity Loan in connection with
the refinancing of such first lien.
Hazard Insurance
Under the terms of the Home Equity Loans, each obligor is required to
maintain for the related Mortgaged Property a hazard insurance policy which
contains a standard mortgagee's clause and which insures against loss by fire
and by hazards included within the term "extended coverage." Any amounts
collected by the Master Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property or to be
released to the obligor in accordance with customary mortgage servicing
procedures) will be deposited in the Collection Account, subject to retention by
the Master Servicer to the extent such amounts constitute servicing compensation
or to withdrawal pursuant to the Agreement.
S-50
<PAGE>
After the origination of a home equity loan, the Servicer will not
monitor whether or not the obligor maintains a hazard insurance policy or flood
insurance for the related Mortgaged Property. The Agreement provides that as
protection against coverage lapses in the individual hazard insurance policies
(not including flood insurance policies), the Master Servicer will obtain and
maintain a blanket policy insuring against fire and hazard losses on all of the
Home Equity Loans. The blanket policy may not in all cases insure against losses
resulting from floods. To the extent that such blanket policy names the Master
Servicer and the Servicer as named insured parties and their designee as loss
payee, and provides coverage in an amount not less than the aggregate unpaid
principal balance of the Home Equity Loans without coinsurance, then the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
Realization Upon Defaulted Home Equity Loans
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Home Equity Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided the Master Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, the Master Servicer will
receive from interest payments in respect of the Home Equity Loans a portion of
such interest payments as a servicing fee (the "Master Servicing Fee"). The
Master Servicing Fee will be computed monthly and will be equal to 0.50% per
annum (the "Master Servicing Fee Rate") on the aggregate Principal Balance of
the Home Equity Loans as of the first day of the Collection Period preceding
each Distribution Date. All assumption fees, prepayment fees, late payment
charges for such Collection Period and other fees and charges, to the extent
collected from borrowers, will be retained by the Master Servicer as additional
servicing compensation.
The Master Servicing Fee will include the fee payable to the Servicer
for its servicing activities related to the Home Equity Loans.
The Master Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Home Equity Loan,
including Liquidation Proceeds, released mortgaged property proceeds, Insurance
Proceeds and such other amounts as may be collected by the Master Servicer from
the related Mortgagor or otherwise relating to the Home Equity Loan in respect
of which such unreimbursed amounts are owed. The Master Servicer's right to
reimbursement for unreimbursed Monthly Advances is prior to the rights of
Certificateholders. However, if any Servicing Advance or Monthly Advance is
determined by the Master Servicer to be non-recoverable from such sources, and
therefore a Nonrecoverable Advance, the amount of such Nonrecoverable Advance
may be reimbursed to the Master Servicer from other amounts on deposit in the
Collection Account.
Not later than two Business Days prior to each Distribution Date, the
Master Servicer is required to remit to the Trustee for deposit in the
Certificate Account an amount ("Compensating Interest") to be distributed on
such Distribution Date equal to, with respect to those Home Equity Loans for
which a Principal Prepayment in Full was received during the related Collection
Period, the lesser of (a) the excess, if any, of 30 days of interest on the
Principal Balance of each such Home Equity Loan at the Loan Rate, minus the
Master Servicing Fee for such Home Equity Loan, over the interest collections
actually received by the Master Servicer from the related borrowers in
connection with such Principal Prepayments in Full, and (b) the aggregate Master
Servicing Fee received by the Master Servicer for the related Collection Period.
A "Principal Prepayment in Full" occurs with respect to a Home Equity Loan when
a borrower pays the remaining Principal Balance of such Home Equity Loan prior
to the final due date for such Home Equity Loan.
The Master Servicing Fee will not be reduced to cover shortfalls in
interest collections resulting from partial prepayments on the Home Equity Loans
or the application of the Relief Act.
S-51
<PAGE>
Evidence as to Compliance
The Agreement provides for delivery on or before May 31st of each year,
beginning in 2000, to the Trustee, the Depositor, the Certificate Insurer and
the Rating Agencies of an annual statement signed by an officer of the Master
Servicer to the effect that the Master Servicer has fulfilled its material
obligations under the Agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before May 31st of each year, beginning in 2000, the Master
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the Master
Servicer or the Depositor) to the Trustee, the Depositor, the Certificate
Insurer and the Rating Agencies to the effect that such firm has examined
certain documents and the records relating to servicing of the Home Equity Loans
under the Uniform Single Attestation Program for Mortgage Bankers and such
firm's conclusion with respect thereto.
Certain Matters Regarding the Depositor, Seller and Master Servicer
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel delivered
to the Certificate Insurer or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates; and (c) such proposed successor servicer is reasonably acceptable
to the Certificate Insurer. 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.
The Master Servicer may perform any of its duties and obligations under
the Agreement through one or more servicers or delegates, which may be
affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations. Initially,
the Master Servicer expects BOFS to act as the Servicer with respect to the Home
Equity Loans.
The Agreement provides that the Master Servicer will indemnify the
Trust and the Trustee from and against, among other things, any loss, liability,
expense, damage or injury suffered or sustained as a result of the Master
Servicer's willful misconduct, bad faith or gross negligence in connection with
the servicing and administration of the Home Equity Loans. The Agreement
provides that neither the Depositor, the Seller nor the Master Servicer nor
their affiliates, directors, officers, employees or agents will be under any
other liability to the Trust, the Trustee, the Certificateholders or any other
person for any action taken or for refraining from taking any action pursuant to
the Agreement. However, neither the Depositor, the Seller nor the Master
Servicer will be protected against any liability which would otherwise be
imposed by reason of willful misconduct, bad faith or gross negligence of the
Depositor, the Seller or the Master Servicer, as the case may be, in the
performance of its duties under the Agreement or by reason of reckless disregard
of its obligations thereunder. In addition, the Agreement provides that the
Master Servicer will not be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Agreement. The Master Servicer and any director or
officer or employee or agent of the Master Servicer shall be indemnified by the
Trust against a loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Home Equity Loan or Home Equity
Loans (except as any such loss, liability or expense would otherwise be
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of its willful misfeasance, bad faith or negligence in the
performance of its duties under the Agreement or by reason of its reckless
disregard of obligations and duties under the Agreement. The Master Servicer
may, in its sole discretion, undertake any such legal action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interest of the Certificateholders thereunder.
Any corporation or other entity into which the Master Servicer may be
merged or consolidated, or any corporation or other entity resulting from any
merger, conversion or consolidation to which the Master Servicer shall be a
party, or any corporation or other entity succeeding to the business of the
Master Servicer shall be the successor of the Master Servicer
S-52
<PAGE>
under the Agreement, without the execution or filing of any paper or any further
act on the part of any of the parties to the Agreement, anything in the
Agreement to the contrary notwithstanding.
Servicer Default
"Servicer Default" will consist of: (i) (A) any failure by the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or Certificate Account any
deposit required to be made under the Agreement, which failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Certificate Insurer or Certificateholders holding Certificates
evidencing a Percentage Interest in the Trust of at least 25%; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any
other of its covenants or agreements in the Agreement which continues unremedied
for 30 days after the giving of written notice of such failure to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by the
Certificate Insurer or any Certificateholders holding Certificates evidencing a
Percentage Interest in the Trust of at least 25%; (iii) any failure by the
Master Servicer to make any required Servicing Advance, which failure continues
unremedied for a period of 30 days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Certificate Insurer or any Certificateholders holding
Certificates evidencing a Percentage Interest in the Trust of at least 25%; (iv)
certain events of insolvency, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the Master Servicer
and certain actions by the Master Servicer indicating insolvency, reorganization
or inability to pay its obligations (an "Insolvency Event"); and (v) the loss
and delinquency performance of the Home Equity Loans exceeding certain levels
specified in the Agreement. All references to "Events of Default" in the
Prospectus should be read to be references to Servicer Defaults as described in
this Prospectus Supplement.
Rights Upon a Servicer Default
So long as a Servicer Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, with the consent of the Certificate Insurer,
or the Certificate Insurer may terminate all of the rights and obligations of
the Master Servicer under the Agreement and in and to the Home Equity Loans.
Upon the termination of the Master Servicer, the Trustee has agreed to succeed
the Master Servicer or appoint another entity as successor Master Servicer in
accordance with the Agreement. The Trustee, as successor to the Master Servicer,
will be obligated to make Monthly Advances and Servicing Advances and certain
other advances unless it determines reasonably and in good faith that such
advances would not be recoverable. In the event that the Trustee would be
obligated to succeed the Master Servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the Agreement and having a net worth of at least $50,000,000
and acceptable to the Certificate Insurer to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee will be
obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the Master Servicer would
otherwise have received (or such lesser compensation as the Trustee and such
successor may agree). A receiver or conservator for the Master Servicer may be
empowered to prevent the termination and replacement of the Master Servicer if
the only Event of Default that has occurred is an Insolvency Event.
Amendment
The Agreement may be amended from time to time by the Seller, the
Master Servicer, the Depositor and the Trustee and with the consent of the
Certificate Insurer, but without the consent of the Certificateholders, to cure
any ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties of
the Depositor or the Master Servicer to comply with any requirements imposed by
the Internal Revenue Code or any regulation thereunder, or to add or amend any
provisions of the Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Class A Certificates (it being understood
that, after obtaining the ratings in effect on the Closing Date, neither the
Depositor, the Seller, the Trustee, the Certificate Insurer nor the Master
Servicer is obligated to obtain, maintain, or improve any such rating) or to add
any other provisions with respect to matters or questions arising under the
Agreement which shall not be inconsistent with the provisions of the Agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any Certificateholder or the
Certificate Insurer; provided, that any such amendment will not be deemed to
materially and adversely affect the
S-53
<PAGE>
Certificateholders and no such opinion will be required to be delivered if the
person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the then
current rating of the Class A Certificates. The Agreement may also be amended
from time to time by the Seller, the Master Servicer, the Depositor, and the
Trustee, with the consent of Certificateholders evidencing at least 51% of the
Percentage Interests of each Class affected thereby (or 51% of the Percentage
Interests of all Classes if all Classes are affected) and the Certificate
Insurer for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the Certificateholders, provided that no such amendment will (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments on the Certificates or distributions or payments under the Policy which
are required to be made on any Certificate without the consent of the
Certificateholder or (ii) reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all Class A
Certificates then outstanding. Notwithstanding the foregoing, the provisions of
the Agreement relating to overcollateralization may be modified such that the
required overcollateralization may be reduced or eliminated by the Certificate
Insurer without the consent of the Certificateholders so long as an Insurer
Default does not exist.
Termination; Purchase of Home Equity Loans
The Trust will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer unless
the Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Certificate Principal Balance has been reduced to
zero, (ii) the final payment or other liquidation of the last Home Equity Loan
in the Trust, (iii) the optional purchase by the holder of the largest
percentage interest of the Class R Certificates, the Master Servicer, or the
Certificate Insurer of the Home Equity Loans, as described below, and (iv) the
Distribution Date on which a draw on the Policy will be applied to pay the
outstanding Certificate Principal Balance.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation and to the consent of the Certificate Insurer if the
termination would result in any draw under the Policy, the holder of the largest
percentage interest of the Class R Certificates may, at its option, terminate
the Agreement on any date on which the aggregate Principal Balance of the Home
Equity Loans is 5% or less of the Cut-Off Date Pool Principal Balance by
purchasing, on the next succeeding Distribution Date, all of the outstanding
Home Equity Loans at a price equal to the outstanding aggregate Principal
Balance of the Home Equity Loans (subject to reduction as provided in the
Agreement if the purchase price is based in part on the appraised value of any
REO Property included in the Trust and such appraised value is less than the
Principal Balance of the related Home Equity Loan) and accrued and unpaid
interest thereon at the weighted average of the Loan Rates through the end of
the Collection Period preceding the final Distribution Date together with all
amounts due and owing to the Certificate Insurer and any amounts owed to the
Master Servicer (such amount, the "Termination Price"). If the Termination Price
is reduced because it is based in part on the appraised value of REO Property in
the Trust and the Certificate Insurer fails to perform its obligation under the
Policy, the Termination Price to be distributed to Certificateholders on the
final Distribution Date may be insufficient to pay the outstanding principal
balance of each Class A Certificate and accrued and unpaid interest thereon. To
the extent the holder of the largest percentage interest of the Class R
Certificates does not exercise its option to terminate the Agreement as
described above, the Master Servicer or the Certificate Insurer shall have the
right to terminate the Agreement at the Termination Price. Any such purchase
shall be accomplished by deposit into the Certificate Account of the purchase
price specified above.
The Trustee
Norwest Bank Minnesota, National Association, a national banking
association, has been named Trustee pursuant to the Agreement. In accordance
with the Agreement, following the termination of the Master Servicer, the
Trustee has agreed to succeed the Master Servicer or appoint another entity as
successor Master Servicer in accordance with the Agreement. As successor to the
Master Servicer, the Trustee will be entitled to compensation as Master Servicer
as provided in the Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller and the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Master Servicer. The Depositor and, in certain instances, the
Master Servicer may also remove the Trustee if the Trustee ceases to be eligible
to continue as such under the Agreement or if the Trustee becomes insolvent.
Upon becoming aware of such circumstances, the Depositor will be obligated to
appoint a successor
S-54
<PAGE>
Trustee, as approved by the Certificate Insurer and the Master Servicer (such
Master Servicer approval not to be unreasonably withheld). Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, have made written requests upon the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceeding. The Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
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 Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
The Trustee has undertaken a company-wide initiative to address the
Year 2000 issue. The Trustee does not believe that the Year 2000 issue will
materially affect its ability to perform its functions on behalf of the Trust or
have a material financial impact on the Trust. However, there can be no
guarantee that the systems of other companies on which the Trustee's systems
rely will be timely converted or that a failure to convert by another company or
a conversion that is incompatible with the Trustee's systems will not have a
material adverse effect on the Trust.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will
be purchased by the Depositor from the Seller pursuant to the home equity loan
purchase agreement to be entered into between the Depositor, as purchaser of the
Home Equity Loans, and the Seller, as seller of the Home Equity Loans (the
"Purchase Agreement"). Under the Purchase Agreement, the Seller will agree to
transfer the Home Equity Loans to the Depositor. Pursuant to the Agreement, the
Home Equity Loans will be immediately transferred by the Depositor to the Trust,
and the Depositor will assign its rights in, to and under the Purchase
Agreement, to the Trust.
In the Purchase Agreement, the Seller will make the same
representations and warranties made in the Agreement. In the event of a breach
of any such representations and warranties which has a material adverse effect
on the interests of the Certificateholders or the Certificate Insurer, the
Seller will be required to repurchase or substitute for the Home Equity Loans as
described herein under "DESCRIPTION OF THE CERTIFICATES--Assignment of Home
Equity Loans."
The Seller has also agreed to indemnify the Depositor and the Trust
from and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Class A Certificates will be applied by the Depositor to the purchase price
of the Home Equity Loans.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"). In the opinion of Brown & Wood
LLP, counsel to the Trust and the Underwriters, the Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute the sole class of "residual interests" in the REMIC. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES--REMICs" in the Prospectus.
The Class A Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on such Certificates
must be reported under an accrual method of accounting.
The Class A Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. Holders of
such Certificates issued with OID will be required to include OID in income as
it
S-55
<PAGE>
accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The Internal Revenue Service (the "IRS") has issued
regulations (the "OID Regulations") under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with OID or should
be treated in some other manner not yet set forth in regulations. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Class A Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
Certificates, the IRS could assert that the Class A Certificates should be
treated as issued with OID. Until the Treasury issues guidance to the contrary,
the Trustee intends to base its OID computation on Code Section 1272(a)(6) and
the OID Regulations as described in the Prospectus. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6), there can be
no assurance that such methodology represents the correct manner of calculating
OID. Prospective purchasers of the Class A Certificates are advised to consult
their tax advisors concerning the tax treatment of such Certificates. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount and Premium" in the Prospectus.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Home Equity Loans will prepay in
accordance with a 120% of the Prepayment Assumption. No representation is made
as to the actual rate at which the Home Equity Loans will prepay.
The Class A Certificates will be treated as regular interests in a
REMIC under Section 860G of the Code. Accordingly, the Offered Certificates will
be treated as (i) assets described in Section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of Section 856(c)(4) of the Code,
in each case to the extent described in the Prospectus. The Class A Certificates
also will be treated as "qualified mortgages" under Section 860G(a)(3) of the
Code. Interest on the Class A Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of Section
856(c)(3)(B) of the Code to the same extent that the Class A Certificates are
treated as real estate assets. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMICs" in the Prospectus.
It is not anticipated that the Trust Fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the tax on contributions after the startup
date as defined in Section 860G(d) of the Code or the tax on net income from
foreclosure property as defined in Section 860G(c) of the Code. However, in the
event that any such tax is imposed on the Trust Fund, such tax will be borne (i)
by the Trustee, if the Trustee has breached its obligations with respect to
REMIC compliance under the Agreement, (ii) the Master Servicer, if the Master
Servicer has breached its obligations with respect to REMIC compliance under the
Agreement, and (iii) otherwise by the Trust Fund, with a resulting reduction in
amounts otherwise distributable to Holders of the Class A Certificates. See
"DESCRIPTION OF THE CERTIFICATES" and "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMICs--Prohibited Transactions and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee and/or the Master Servicer.
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMICs" in the Prospectus.
STATE TAXES
No representation is made regarding the tax consequences of purchase,
ownership or disposition of the Class A Certificates under the tax laws of any
state. Investors considering an investment in the Class A Certificates should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Certificates.
S-56
<PAGE>
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under Section 4975 of the Code with
respect to the plan. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code for such
person. For example, the Trustee, the Depositor and the Underwriters are likely
to be parties in interest with respect to many Benefit Plans; a purchase of a
Certificate by such a Benefit Plan would constitute a prohibited transaction
unless a statutory, regulatory or administrative exemption were available. There
are five class exemptions issued by the Department of Labor (the "DOL") that may
apply in such event: Prohibited Transaction Exemption 84-14 (Class Exemption for
Plan Asset Transactions Determined by Independent Qualified Professional Asset
Managers), 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds), 90-1 (Class Exemption for Transactions Involving
Insurance Company Pooled Separate Accounts), 95-60 (Class Exemption for
Transactions Involving Insurance Company General Accounts), and 96-23 (Class
Exemption for Plan Asset Transactions Determined by In-House Asset Managers).
There is no assurance that these exemptions, even if all of the conditions
specified therein are satisfied, will apply to all transactions involving the
Trust's assets.
Moreover, additional prohibited transactions could arise if the assets
of the Trust were deemed to constitute assets of any plan that owned Class A
Certificates. The DOL has issued a final regulation (the "Plan Assets
Regulation") concerning the definition of what constitutes the "plan assets" of
an employee benefit plan subject to ERISA or the Code, or an individual
retirement account ("IRA") (collectively referred to as "Benefit Plans"). Under
the Plan Assets Regulation the assets and properties of certain corporations,
partnerships, trusts and certain other entities in which a Benefit Plan acquires
an "equity interest" could be deemed to be assets of the Benefit Plan in certain
circumstances. Accordingly, if Benefit Plans purchase Class A Certificates, the
Trust could be deemed to hold plan assets of such Benefit Plan unless one of the
exceptions under the Plan Assets Regulation is applicable to the Trust.
Availability of Exemptions for Class A Certificates
The Plan Assets Regulation contains an exception (the "Publicly-Offered
Securities Exemption") that provides that if a Benefit Plan acquires a
"publicly-offered security", the issuer of the security is not deemed to hold
plan assets. A publicly-offered security is a security that is (i) freely
transferable, (ii) part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another and (iii) either is (A)
part of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (B) sold to the Benefit Plan as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and the class of securities of which such security is a part
is registered under the Exchange Act within 120 days (or such later time as may
be allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred.
It is anticipated that one or more Classes of the Class A Certificates
will meet the criteria of the Publicly-Offered Securities Exemption as set forth
above. The Underwriters expect (although no assurance can be given) that one or
more Classes of the Class A Certificates will be held by at least 100 persons
independent of the Trust and of each other at the conclusion of the offering;
there are no restrictions imposed on the transfer of the Class A Certificates;
and the Class A Certificates will be sold as part of an offering pursuant to an
effective registration statement under the Securities Act, and then will be
timely registered under the Exchange Act under Section 12(b) or 12(g) of the
Exchange Act. The Underwriters will notify the Trustee as to whether or not one
or more Classes of the Class A Certificates will be held by 100 independent
persons at the conclusion of the offering. The Seller will not, however,
determine whether the 100-investor requirement of the Publicly-Offered
Securities Exemption is satisfied with respect to the Class A Certificates.
If one or more Classes of the Class A Certificates fail to meet the
criteria of the Publicly-Offered Securities Exemption and the Trust's assets are
deemed to include assets of Benefit Plans that are holders of such Classes of
Class A Certificates, transactions involving the Trust and "parties in interest"
or "disqualified persons" with respect to such Benefit Plans might be prohibited
under Section 406 of ERISA and Section 4975 of the Code unless another ERISA
prohibited transaction exemption is applicable. Thus, for example, if a
participant in any Benefit Plan is an obligor or guarantor of one of the Home
Equity Loans, under DOL interpretations the purchase of the Class A Certificates
by such Benefit Plan could constitute a prohibited transaction. The five class
exemptions mentioned above are not likely to apply to many of the prohibited
transactions that may arise in connection with the operations of the Trust.
S-57
<PAGE>
Review by Benefit Plan Fiduciaries
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is especially important that any
Benefit Plan fiduciary who proposes to cause a Benefit Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Benefit Plan's acquisition and
ownership of Class A Certificates. Assets of a Benefit Plan should not be
invested in the Class A Certificates unless it is clear that the assets of the
Trust will not be plan assets or unless it is clear that a prohibited
transaction class exemption will apply and exempt all potential prohibited
transactions.
In addition, prospective Benefit Plan investors should consult with
their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Publicly-Offered Securities Exemption, and the potential
consequences in their specific circumstances, prior to making an investment in
the Class A Certificates. Moreover, each Benefit Plan fiduciary should determine
whether under the general fiduciary standards of investment prudence and
diversification, an investment in the Class A Certificates is appropriate for
the Benefit Plan, taking into account the overall investment policy of the
Benefit Plan and the composition of the Benefit Plan's investment portfolio.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") because some of the mortgages securing the Home
Equity Loans are not first mortgages. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgages
(i.e. "mortgage-related securities" under SMMEA) may not be legally authorized
to invest in the Class A Certificates. No representation is made as to whether
the Class A Certificates constitute legal investments for any entity under any
applicable statute, law, rule, regulation or order. Prospective purchasers are
urged to consult with their counsel concerning the status of the Class A
Certificates as legal investments for such purchasers prior to investing in the
Class A Certificates. See "LEGAL INVESTMENT" in the Prospectus.
S-58
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Class A Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to the underwriters named below (the
"Underwriters"), and the Underwriters have agreed to purchase, severally but not
jointly, the following principal amounts of the Class A Certificates.
Underwriter Class A-1 Class A-2 Class A-3
----------- Certificates Certificates Certificates
------------ ------------ -------------
Morgan Stanley & Co. Incorporated.. $110,090,400 $33,832,800 $28,309,800
Banc One Capital Markets, Inc...... $ 73,393,600 $22,555,200 $18,873,200
------------- ----------- -----------
Total........................ $183,484,000 $56,388,000 $47,183,000
Underwriter Class A-4 Class A-5 Class A-6
----------- Certificates Certificates Certificates
------------ ------------ ------------
Morgan Stanley & Co. Incorporated.. $ 9,242,400 $12,079,800 $7,234,800
Banc One Capital Markets, Inc...... $ 6,161,600 $ 8,053,200 $4,823,200
------------ ------------ ----------
Total........................ $15,404,000 $20,133,000 $12,058,000
Underwriter Class A-7
----------- Certificates
------------
Morgan Stanley & Co. Incorporated.. $23,347,200
Banc One Capital Markets, Inc...... $15,564,800
-----------
Total........................ $38,912,000
The Depositor has been advised that the Underwriters propose initially
to offer the Class A Certificates to the public at the respective offering
prices set forth on the cover hereof and to certain dealers at such prices less
a selling concession not to exceed the percentage of the Class A Certificate
denomination set forth below, and that the Underwriters may allow and such
dealers may reallow a reallowance discount not to exceed the percentage of the
Class A Certificate denomination set forth below.
Class of Certificate Selling Concession Reallowance Discount
-------------------- ------------------ --------------------
Class A-1............. 0.0450% 0.0225%
Class A-2............. 0.1950% 0.0975%
Class A-3............. 0.2100% 0.1050%
Class A-4............. 0.2400% 0.1200%
Class A-5............. 0.3150% 0.1575%
Class A-6............. 0.3792% 0.1896%
Class A-7............. 0.3150% 0.1575%
The underwriting discount will be 3% up to $7,000,000 initial principal
balance of each class of Class A Certificates sold to various noninstitutional
investors. To the extent Class A Certificates are sold to these investors, the
actual Class A underwriting discount will be more than, and the proceeds to the
Depositor from sales of the Class A Certificates will be less than, the amounts
set forth on the cover hereof.
S-59
<PAGE>
Until the distribution of the Class A Certificates is completed, the
rules of the Commission may limit the ability of the Underwriters to bid for and
purchase the Class A Certificates. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Class A Certificates. Such transactions may consist of bids and
purchases for the purpose of pegging, fixing or maintaining the price of such
Classes of Class A Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A Certificates. In addition,
neither the Depositor nor the Underwriters make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriters that they presently
intend to make a market in the Class A Certificates; however, they are not
obligated 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 A Certificates
will develop.
It is expected that delivery of the Class A Certificates will be made
only in book entry form through The Depository Trust Company, Cedelbank or the
Euroclear System.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase the Class A Certificates
offered hereby, if any are purchased.
The Depositor has agreed to indemnify each Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the Underwriters may be required to make in respect
thereof.
The Depositor is an affiliate of Morgan Stanley & Co. Incorporated
("Morgan Stanley"). The Seller and the Master Servicer are affiliates of Banc
One Capital Markets, Inc. ("BOCM"). Any obligations of Morgan Stanley and BOCM
are the sole obligations of Morgan Stanley and BOCM, respectively, and do not
create any obligations on the part of any of their respective affiliates.
BOCM or any successor may from time to time purchase or acquire a
position in the Class A Certificates and may, at its option, hold or resell the
Class A Certificates. BOCM expects to offer and sell previously issued Class A
Certificates in the course of its business as a broker-dealer. BOCM may act as a
principal or agent in such transactions. This Prospectus Supplement and the
attached Prospectus may be used by BOCM and its successors in connection with
such transactions. Such sales, if any, will be made at varying prices related to
prevailing market prices at the time of sale.
EXPERTS
The consolidated financial statements of the Certificate Insurer, Ambac
Assurance Corporation and subsidiaries, as of December 31, 1998 and 1997 and for
each of the years in the three-year period ended December 31, 1998, are
incorporated by reference herein and in the Registration Statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be
passed upon for the Depositor and the Underwriters by Brown & Wood LLP, New
York, New York. Certain legal matters will be passed upon for the Seller by
Stroock & Stroock & Lavan LLP, New York, New York.
S-60
<PAGE>
RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's") and "Aaa" by Moody's Investors Service, Inc.
("Moody's" and, together with Standard & Poor's, the "Rating Agencies").
Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of payments required under
the pooling and servicing agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Class A Certificates, and the extent to which the
payment stream in the home equity pool is adequate to make payments required
under the Class A Certificates. Standard & Poor's rating on the Class A
Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See "PREPAYMENT AND YIELD CONSIDERATIONS" herein.
The rating process of Moody's addresses the structural and legal
aspects associated with the Class A Certificates, including the nature of the
underlying Home Equity Loans. The ratings assigned to the Class A Certificates
do not represent any assessment of the likelihood or rate of principal
prepayments. The ratings do not address the possibility that Certificateholders
might suffer a lower than anticipated yield.
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. In the event that the ratings
initially assigned to the Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Class A Certificates. The
Depositor has not requested that any rating agency rate the Class A Certificates
other than as stated above. However, there can be no assurance as to whether any
other rating agency will rate the Class A Certificates, or, if it does, what
rating would be assigned by any such other rating agency. A rating on the Class
A Certificates by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Class A Certificates as stated above.
S-61
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
Agreement...............................................................S-35
Assignment Event........................................................S-36
Available Funds.........................................................S-38
BANK ONE................................................................S-15
beneficial owner........................................................S-43
Benefit Plans...........................................................S-57
BOCM....................................................................S-60
BOFS....................................................................S-15
Book-Entry Certificates.................................................S-43
Call Report.............................................................S-15
Cedelbank...............................................................S-43
Cedelbank Participants..................................................S-44
Certificate Account.....................................................S-37
Certificate Insurer.....................................................S-47
Certificate Owners......................................................S-43
Certificate Principal Balance...........................................S-35
Certificateholder.......................................................S-43
Certificates............................................................S-35
Class...................................................................S-35
Class A Certificates....................................................S-35
Class A-7 Pro Rata Principal Amount.....................................S-41
Class R Certificates....................................................S-35
Code....................................................................S-55
Collection Account......................................................S-37
Collection Period.......................................................S-40
Combined Loan-to-Value Ratio............................................S-23
Commission..............................................................S-47
Compensating Interest...................................................S-51
Consumer Lending........................................................S-16
Cooperative.............................................................S-45
Cut-off Date Pool Principal Balance.....................................S-23
Defective Home Equity Loan..............................................S-36
Deficiency Amount.......................................................S-49
Definitive Certificate..................................................S-43
Depositor...............................................................S-15
Distributable Excess Spread.............................................S-40
Distribution Date.......................................................S-37
DOL.....................................................................S-57
DTC.....................................................................S-43
Due for Payment.........................................................S-49
Eligible Investments....................................................S-38
Eligible Substitute Home Equity Loan....................................S-36
ERISA...................................................................S-57
Euroclear...............................................................S-43
Euroclear Operator......................................................S-45
Euroclear Participants..................................................S-45
Excess Spread...........................................................S-40
Financial Intermediary..................................................S-43
Formula Principal Distribution Amount...................................S-40
Global Securities......................................................A-I-1
Holder..................................................................S-49
Home Equity Loan Pool...................................................S-23
S-62
<PAGE>
Home Equity Loan Schedule...............................................S-36
Home Equity Loans.......................................................S-23
Insolvency Event........................................................S-53
Insured Amounts.........................................................S-49
Insured Obligations.....................................................S-49
Insured Payments........................................................S-49
Interest Period.........................................................S-39
IRA.....................................................................S-57
IRS.....................................................................S-56
Junior Lien Ratio.......................................................S-23
Last Scheduled Distribution Date........................................S-35
Liquidated Home Equity Loan.............................................S-41
Loan Rate...............................................................S-23
Master Servicer.........................................................S-15
Master Servicing Fee....................................................S-51
Master Servicing Fee Rate...............................................S-51
Modeling Assumptions....................................................S-27
Monthly Advance.........................................................S-42
Moody's.................................................................S-61
Morgan Stanley..........................................................S-60
Mortgage File...........................................................S-36
Mortgage Notes..........................................................S-23
Mortgaged Properties....................................................S-23
Mortgages...............................................................S-23
Net Available Distribution Amount.......................................S-49
Nonpayment..............................................................S-49
Nonrecoverable Advance..................................................S-42
Notice..................................................................S-49
OID.....................................................................S-55
OID Regulations.........................................................S-56
Overcollateralization Amount............................................S-41
Percentage Interest.....................................................S-36
Plan Assets Regulation..................................................S-57
Policy..................................................................S-35
Preference Amount.......................................................S-49
Prepayment Assumption...................................................S-26
Prepayment Interest Shortfall...........................................S-38
Principal Balance.......................................................S-23
Principal Distributable Amount..........................................S-40
Principal Prepayment in Full............................................S-51
Priority Amount.........................................................S-40
Priority Percentage.....................................................S-41
Publicly-Offered Securities Exemption...................................S-57
Purchase Agreement......................................................S-35
Purchase Price..........................................................S-36
Rating Agencies.........................................................S-61
Related Documents.......................................................S-36
Relief Act Shortfall....................................................S-38
REMIC...................................................................S-55
Required Overcollateralization Amount...................................S-41
Required Payments.......................................................S-50
Rules...................................................................S-44
Seller..................................................................S-15
Serviced Portfolio......................................................S-20
Servicer................................................................S-15
Servicer Default........................................................S-53
S-63
<PAGE>
Servicing Advance.......................................................S-42
SMMEA...................................................................S-58
Standard & Poor's.......................................................S-61
Sub-Serviced Portfolio..................................................S-20
Substitution Adjustment Amount..........................................S-36
Termination Price.......................................................S-54
Terms and Conditions....................................................S-45
Trust Fund..............................................................S-23
Trustee.................................................................S-15
U.S. Person............................................................A-I-3
Underwriters............................................................S-59
Underwriting Agreement..................................................S-59
Unpaid Interest Shortfall...............................................S-38
Unpaid Principal Shortfall..............................................S-40
S-64
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home
Equity Loan Asset Backed Certificates, Series 1999-2, Class A Certificates (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, Cedelbank
or Euroclear. The Global Securities will be traceable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary
market trading between Cedelbank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedelbank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business
A-I-1
<PAGE>
day prior to settlement. Cedelbank or Euroclear will instruct the Relevant
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the Relevant Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their account one day later. As an
alternative, if Cedelbank or Euroclear has extended a line of credit to them,
Cedelbank Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedelbank Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedelbank
Participant's or Euroclear Participant's particular cost of funds. Since the
settlement is taking place during New York business hours, DTC Participants can
employ their usual procedures for crediting Global Securities to the respective
European Depositary for the benefit of Cedelbank Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross- market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to credit the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist to 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until
the purchase side of the trade is reflected in their Cedelbank
or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be
reflected in their Cedelbank or
A-I-2
<PAGE>
Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for
the sale to the Cedelbank Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Holders of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Holders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "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
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States Persons have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
A-I-3
<PAGE>
ANNEX II
THE HOME EQUITY LOAN POOL--STATISTICAL INFORMATION
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
HOME EQUITY CUT-OFF DATE CUT-OFF DATE
STATE LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------- ----------- ----------------- ------------
<S> <C> <C> <C>
Arizona............................................................ 555 $ 24,440,542.00 6.28%
California......................................................... 187 12,457,982.28 3.21
Colorado........................................................... 182 10,297,073.77 2.65
Delaware........................................................... 24 1,327,877.49 0.34
Florida............................................................ 250 14,680,361.03 3.77
Georgia............................................................ 178 10,938,400.47 2.81
Illinois........................................................... 396 23,983,981.80 6.16
Indiana............................................................ 572 31,492,573.37 8.09
Kansas............................................................. 6 515,852.70 0.13
Kentucky........................................................... 206 11,151,045.62 2.87
Louisiana.......................................................... 150 6,767,269.32 1.74
Maryland........................................................... 128 6,103,200.60 1.57
Michigan........................................................... 775 44,313,150.19 11.39
Minnesota.......................................................... 32 1,512,716.84 0.39
Missouri........................................................... 130 8,364,965.49 2.15
Nevada............................................................. 32 1,890,009.65 0.49
New Jersey......................................................... 226 14,101,470.76 3.62
New York........................................................... 237 17,016,931.86 4.37
North Carolina..................................................... 110 6,798,940.31 1.75
Ohio............................................................... 698 41,884,111.19 10.76
Oklahoma........................................................... 362 19,732,984.33 5.07
Pennsylvania....................................................... 277 14,968,686.96 3.85
South Carolina..................................................... 43 2,857,205.44 0.73
Tennessee.......................................................... 283 13,580,247.03 3.49
Texas.............................................................. 411 17,491,901.21 4.50
Utah............................................................... 87 4,476,083.06 1.15
Washington......................................................... 108 6,501,658.22 1.67
West Virginia...................................................... 133 5,693,529.72 1.46
Wisconsin.......................................................... 223 13,786,224.61 3.54
----- --------------- ------
Total............................................................ 7,001 $389,126,977.32 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
CUT-OFF DATE PRINCIPAL BALANCE
<TABLE>
NUMBER OF PERCENT OF
RANGE OF CUT-OFF DATE HOME EQUITY CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------- ----------- ----------------- ------------
<S> <C> <C> <C>
0 to 20,000.00........................................... 1,182 $ 16,566,164.68 4.26%
20,000.01 to 40,000.00........................................... 1,969 58,106,792.09 14.93
40,000.01 to 60,000.00........................................... 1,493 74,176,808.81 19.06
60,000.01 to 80,000.00........................................... 951 65,429,141.36 16.81
80,000.01 to 100,000.00........................................... 535 47,656,277.83 12.25
100,000.01 to 120,000.00........................................... 310 33,898,846.32 8.71
120,000.01 to 140,000.00........................................... 215 27,740,805.14 7.13
140,000.01 to 160,000.00........................................... 116 17,366,052.15 4.46
160,000.01 to 180,000.00........................................... 77 13,008,374.12 3.34
180,000.01 to 200,000.00........................................... 45 8,533,706.21 2.19
200,000.01 to 220,000.00........................................... 37 7,728,585.22 1.99
220,000.01 and Greater............................................. 71 18,915,423.39 4.86
----- --------------- ------
Total............................................................ 7,001 $389,126,977.32 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
The minimum and maximum current principal balances of the Home Equity Loans
as of the Cut-off Date were approximately $4,935.51 and $385,320.02,
respectively, and the average current principal balance was approximately
$55,581.63.
A-II-1
<PAGE>
ORIGINAL PRINCIPAL BALANCE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
RANGE OF ORIGINAL HOME EQUITY CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------ ----------- ----------------- ------------
<S> <C> <C> <C>
0 to 20,000.00......................................... 1,129 $ 15,541,037.88 3.99%
20,000.01 to 40,000.00.......................................... 1,986 57,718,664.59 14.83
40,000.01 to 60,000.00.......................................... 1,484 72,947,906.45 18.75
60,000.01 to 80,000.00.......................................... 970 66,039,136.82 16.97
80,000.01 to 100,000.00.......................................... 545 48,134,875.31 12.37
100,000.01 to 120,000.00.......................................... 316 34,316,360.31 8.82
120,000.01 to 140,000.00.......................................... 216 27,718,160.54 7.12
140,000.01 to 160,000.00.......................................... 120 17,813,625.57 4.58
160,000.01 to 180,000.00.......................................... 77 12,922,558.45 3.32
180,000.01 to 200,000.00.......................................... 49 9,131,954.01 2.35
200,000.01 to 220,000.00.......................................... 38 7,927,274.00 2.04
220,000.01 and Greater............................................ 71 18,915,423.39 4.86
----- --------------- ------
Total........................................................ 7,001 $389,126,977.32 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
The minimum and maximum original principal balances of the Home Equity
Loans as of the Cut-off Date were approximately $5,231.93 and $399,137.00,
respectively, and the average original principal balance was approximately
$56,252.96.
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
RANGE OF ORIGINAL TERMS HOME EQUITY CUT-OFF DATE CUT-OFF DATE
TO MATURITY (MONTHS) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------ ----------- ----------------- ------------
<S> <C> <C> <C>
1 to 60........................................................ 443 $ 9,546,076.68 2.45%
61 to 120........................................................ 1,660 60,512,939.35 15.55
121 to 180........................................................ 3,084 162,779,935.68 41.83
181 to 240........................................................ 885 69,156,662.19 17.77
241 to 300........................................................ 175 14,299,370.40 3.67
301 to 360........................................................ 754 72,831,993.02 18.72
----- --------------- ------
Total........................................................ 7,001 $389,126,977.32 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
The minimum and maximum Original Terms to Maturity of the Home Equity Loans
as of the Cut-off Date were approximately 24 months and 360 months,
respectively, and the weighted average Original Term to Maturity was
approximately 213 months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
RANGE OF REMAINING TERMS HOME EQUITY CUT-OFF DATE CUT-OFF DATE
TO MATURITY (MONTHS) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------ ----------- ----------------- ------------
<S> <C> <C> <C>
1 to 60........................................................ 459 $ 9,924,331.91 2.55%
61 to 120........................................................ 1,649 60,387,834.11 15.52
121 to 180........................................................ 3,129 165,667,645.95 42.57
181 to 240........................................................ 838 66,230,677.74 17.02
241 to 300........................................................ 172 14,084,494.59 3.62
301 to 360........................................................ 754 72,831,993.02 18.72
----- --------------- ------
Total........................................................ 7,001 $389,126,977.32 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
The minimum and maximum Remaining Terms to Maturity of the Home Equity
Loans as of the Cut-off Date were approximately 18 months and 359 months,
respectively, and the weighted average Remaining Term to Maturity was
approximately 208 months.
A-II-2
<PAGE>
SEASONING
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
HOME EQUITY CUT-OFF DATE CUT-OFF DATE
SEASONING (MONTHS) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -------------
<S> <C> <C> <C>
1............................................................... 214 $ 10,883,141.78 2.80%
2............................................................... 1,110 63,850,667.91 16.41
3............................................................... 1,164 67,486,394.46 17.34
4............................................................... 736 44,899,309.69 11.54
5............................................................... 725 41,455,727.38 10.65
6............................................................... 808 44,027,274.79 11.31
7............................................................... 527 29,301,548.59 7.53
8............................................................... 420 24,476,996.62 6.29
9............................................................... 339 17,748,705.73 4.56
10............................................................... 290 14,988,271.61 3.85
11............................................................... 379 16,356,173.02 4.20
12............................................................... 245 11,950,796.36 3.07
13............................................................... 44 1,701,969.38 0.44
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
The minimum and maximum seasonings of the Home Equity Loans as of the
Cut-off Date were approximately 1 month and 13 months, respectively, and the
weighted average seasoning was approximately 5 months.
FICO SCORE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
HOME EQUITY CUT-OFF DATE CUT-OFF DATE
RANGE OF FICO SCORES LOANS PRINCIPAL BALANCE POOL BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -------------
<S> <C> <C> <C>
0 to 550....................................................... 985 $ 54,114,041.33 13.91%
551 to 600....................................................... 1,670 85,528,000.51 21.98
601 to 650....................................................... 2,336 115,837,550.57 29.77
651 to 700....................................................... 1,481 94,424,665.04 24.27
701 to 750....................................................... 445 33,061,683.33 8.50
751 and Greater.................................................. 84 6,161,036.54 1.58
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
The minimum and maximum FICO Scores of the Home Equity Loans as of the
Cut-off Date were approximately 500 and 802, respectively, and the weighted
average FICO Score was approximately 622.95.
OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
HOME EQUITY CUT-OFF DATE CUT-OFF DATE
OCCUPANCY STATUS LOANS PRINCIPAL BALANCE POOL BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -------------
<S> <C> <C> <C>
Owner occupied................................................... 6,616 $370,188,820.70 95.13%
Non-owner occupied............................................... 331 15,904,496.31 4.09
Secondary........................................................ 54 3,033,660.31 0.78
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
A-II-3
<PAGE>
LIEN POSITION
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
NUMBER OF DATE
HOME EQUITY CUT-OFF DATE POOL
LIEN POSITION LOANS PRINCIPAL BALANCE BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -----------
<S> <C> <C> <C>
First............................................................ 4,600 $321,820,199.85 82.70%
Second........................................................... 2,401 67,306,777.47 17.30
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
MORTGAGED PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
NUMBER OF DATE
HOME EQUITY CUT-OFF DATE POOL
MORTGAGED PROPERTY TYPE LOANS PRINCIPAL BALANCE BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -----------
<S> <C> <C> <C>
Single Family.................................................... 6,472 $361,222,899.23 92.83%
2-4 Family....................................................... 224 14,159,876.39 3.64
Townhouse........................................................ 164 6,950,249.39 1.79
Condominium...................................................... 141 6,793,952.31 1.75
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
COMBINED LOAN-TO-VALUE RATIO AT ORIGINATION(1)
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
RANGE OF COMBINED NUMBER OF DATE
LOAN-TO-VALUE RATIOS HOME EQUITY CUT-OFF DATE POOL
AT ORIGINATION (%) LOANS PRINCIPAL BALANCE BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -----------
<S> <C> <C> <C>
Less than 30.01................................................. 88 $ 2,188,206.03 0.56%
30.01 to 40.00................................................. 111 3,351,978.37 0.86
40.01 to 50.00................................................. 164 6,520,177.95 1.68
50.01 to 60.00................................................. 223 9,545,510.48 2.45
60.01 to 70.00................................................. 297 13,501,820.05 3.47
70.01 to 80.00................................................. 770 36,969,230.39 9.50
80.01 to 90.00................................................. 1,051 62,412,794.70 16.04
90.01 to 95.00................................................. 905 53,016,442.90 13.62
95.01 to 100.00................................................. 1,590 102,570,560.60 26.36
100.01 to 103.00................................................. 1,802 99,050,255.85 25.45
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
- - ------------------
(1) The Combined Loan-to-Value Ratio includes points, processing fees, closing
fees and credit insurance.
The minimum and maximum Combined Loan-to-Value Ratios of the Home Equity
Loans at origination were approximately 20.29% and 103.00%, respectively, and
the weighted average Combined Loan-to-Value Ratio was approximately 90.26%.
METHOD OF ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
NUMBER OF DATE
HOME EQUITY CUT-OFF DATE POOL
METHOD OF ORIGINATION LOANS PRINCIPAL BALANCE BALANCE
- - ----------------------------------------------------------------- ----------- ----------------- -----------
<S> <C> <C> <C>
Retail........................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
Total....................................................... 7,001 $389,126,977.32 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
A-II-4
<PAGE>
JUNIOR LIEN RATIO(1)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
HOME EQUITY CUT-OFF DATE CUT-OFF DATE
RANGE OF JUNIOR LIEN RATIOS (%) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------- ----------- ----------------- ------------
<S> <C> <C> <C>
Less than 10.01.................................................... 177 $ 1,967,783.84 2.92%
10.01 to 15.00.................................................... 463 7,851,204.20 11.66
15.01 to 20.00.................................................... 482 11,017,171.84 16.37
20.01 to 25.00.................................................... 436 12,635,883.19 18.77
25.01 to 30.00.................................................... 280 9,652,672.82 14.34
30.01 to 35.00.................................................... 217 8,141,718.88 12.10
35.01 to 40.00.................................................... 142 6,108,510.93 9.08
40.01 to 45.00.................................................... 92 4,189,432.55 6.22
45.01 to 50.00.................................................... 44 2,105,757.79 3.13
50.01 to 55.00.................................................... 25 1,447,196.76 2.15
55.01 to 60.00.................................................... 15 585,833.30 0.87
60.01 to 65.00.................................................... 5 310,818.52 0.46
65.01 to 70.00.................................................... 6 249,755.73 0.37
70.01 to 75.00.................................................... 6 353,993.02 0.53
75.01 to 80.00.................................................... 3 195,953.81 0.29
80.01 to 100.00.................................................... 8 493,090.29 0.73
----- --------------- ------
Total......................................................... 2,401 $ 67,306,777.47 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
- - ------------------
(1) The Junior Lien Ratio of a Home Equity Loan is the ratio, expressed as a
percentage, the numerator of which is the Home Equity Loan's original
principal balance, and the denominator of which is the Home Equity Loan's
original principal balance plus the original principal balance of any
related senior mortgage loan as of the date of origination of such Home
Equity Loan.
The weighted average Junior Lien Ratio of the Home Equity Loans as of the
Cut-Off Date was approximately 27.52%.
LOAN RATE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
HOME EQUITY CUT-OFF DATE CUT-OFF DATE
RANGE OF LOAN RATES (%) LOANS PRINCIPAL BALANCE POOL BALANCE
- - ------------------------------------------------------------------ ----------- ----------------- ------------
<S> <C> <C> <C>
7.00 to 7.99.................................................... 59 $ 3,675,044.15 0.94%
8.00 to 8.99.................................................... 437 37,034,576.58 9.52
9.00 to 9.99.................................................... 329 32,770,698.93 8.42
10.00 to 10.99.................................................... 789 52,461,097.13 13.48
11.00 to 11.99.................................................... 1,065 61,595,230.04 15.83
12.00 to 12.99.................................................... 1,985 97,378,941.99 25.02
13.00 to 13.99.................................................... 1,459 66,548,750.87 17.10
14.00 to 14.99.................................................... 645 30,291,316.24 7.78
15.00 to 15.99.................................................... 180 6,278,197.59 1.61
16.00 to 16.99.................................................... 49 1,044,091.30 0.27
17.00 to 17.49.................................................... 4 49,032.50 0.01
----- --------------- ------
Total........................................................ 7,001 $389,126,977.32 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
The minimum and maximum Loan Rates of the Home Equity Loans as of the
Cut-Off Date were approximately 7.01% and 17.49%, respectively, and the weighted
average Loan Rate was approximately 11.80%.
A-II-5
<PAGE>
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 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,
repurchases 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 DEAN WITTER
March 25, 1998
<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.
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.
2
<PAGE>
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.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT...................................................................................... 2
AVAILABLE INFORMATION...................................................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 3
SUMMARY OF PROSPECTUS...................................................................................... 5
RISK FACTORS............................................................................................... 12
DESCRIPTION OF THE TRUST FUNDS............................................................................. 17
USE OF PROCEEDS............................................................................................ 21
YIELD CONSIDERATIONS....................................................................................... 21
THE DEPOSITOR.............................................................................................. 25
DESCRIPTION OF THE CERTIFICATES............................................................................ 25
DESCRIPTION OF THE AGREEMENTS.............................................................................. 32
DESCRIPTION OF CREDIT SUPPORT.............................................................................. 48
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.................................................................... 50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... 60
STATE TAX CONSIDERATIONS................................................................................... 84
ERISA CONSIDERATIONS....................................................................................... 84
LEGAL INVESTMENT........................................................................................... 86
PLAN OF DISTRIBUTION....................................................................................... 88
LEGAL MATTERS.............................................................................................. 89
FINANCIAL INFORMATION...................................................................................... 89
RATING..................................................................................................... 89
INDEX OF PRINCIPAL DEFINITIONS............................................................................. 90
</TABLE>
4
<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>
<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 -- General'
and ' -- 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 -- 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 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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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 -- 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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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 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............... 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 ' -- Distributions on Certificates'
and 'Description of the Certificates -- 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.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
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 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 -- 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'
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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 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 or the outstanding principal balance of the
Mortgage Loans by a specified percentage or amount or on and after a
date specified in such Prospectus Supplement, the party
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
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.
(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.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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 '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 -- General' and '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 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>
11
<PAGE>
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 -- 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 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.
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
12
<PAGE>
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 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
13
<PAGE>
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 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 refinanced 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 ' -- 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
14
<PAGE>
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 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.
15
<PAGE>
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 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.
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 'ERISA
Considerations.'
16
<PAGE>
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 -- 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)
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 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
17
<PAGE>
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
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
18
<PAGE>
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 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
19
<PAGE>
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 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.'
20
<PAGE>
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.
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 ' -- 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
21
<PAGE>
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 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.
22
<PAGE>
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).
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
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.
23
<PAGE>
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.
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.
24
<PAGE>
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 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 (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
25
<PAGE>
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 -- 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
26
<PAGE>
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.
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
27
<PAGE>
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.'
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
28
<PAGE>
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 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,
29
<PAGE>
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;
(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;
30
<PAGE>
(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.'
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').
31
<PAGE>
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.
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
32
<PAGE>
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 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, 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
33
<PAGE>
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.
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
34
<PAGE>
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 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
35
<PAGE>
(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 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');
36
<PAGE>
(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';
(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;
(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';
37
<PAGE>
(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.
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
38
<PAGE>
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 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,
39
<PAGE>
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 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 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
40
<PAGE>
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 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
41
<PAGE>
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 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
42
<PAGE>
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.
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
43
<PAGE>
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.
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,
44
<PAGE>
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
Unless otherwise specified in the related Prospectus Supplement, 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
Unless otherwise specified in the related Prospectus Supplement, 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
45
<PAGE>
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 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
Unless otherwise specified in the related Prospectus Supplement, 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
46
<PAGE>
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.
Unless otherwise specified in the related Prospectus Supplement, 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. If otherwise provided in the related Prospectus Supplement, 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.
47
<PAGE>
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.
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
48
<PAGE>
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 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.
49
<PAGE>
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 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 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.
50
<PAGE>
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
Certificates, 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 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's 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
51
<PAGE>
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.
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.
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
52
<PAGE>
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 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.
53
<PAGE>
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 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.
54
<PAGE>
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
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.
55
<PAGE>
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.
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 ' -- 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
56
<PAGE>
debtor through his or her Chapter 11 or Chapter 13 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.
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.
57
<PAGE>
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
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
58
<PAGE>
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 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
59
<PAGE>
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 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 Latham & Watkins or Brown & Wood LLP, 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, Latham & Watkins or Brown & Wood LLP 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
60
<PAGE>
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 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).
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.
61
<PAGE>
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 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, as
amended on June 11, 1996, 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
62
<PAGE>
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.
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
63
<PAGE>
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).
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.
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
64
<PAGE>
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 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
65
<PAGE>
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.
66
<PAGE>
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 be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
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
67
<PAGE>
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 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, any state thereof or the District of Columbia (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,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
68
<PAGE>
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, Latham & Watkins or Brown & Wood LLP 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 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, Latham & Watkins or Brown & Wood LLP, 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.
69
<PAGE>
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 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.
70
<PAGE>
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 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.
71
<PAGE>
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 (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.
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
72
<PAGE>
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
current 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, 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
73
<PAGE>
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 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
74
<PAGE>
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.
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 capital 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
75
<PAGE>
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 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 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
76
<PAGE>
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 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 a 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,
2000, 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 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
77
<PAGE>
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 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
78
<PAGE>
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 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
79
<PAGE>
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.
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 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
80
<PAGE>
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.
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 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
81
<PAGE>
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 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
82
<PAGE>
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. 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 nomidnee 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
83
<PAGE>
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 States trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time 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.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
and Section 4975 of the Code impose certain restrictions on employee benefit and
other plans, such as individual retirement accounts subject to ERISA or to
Section 4975 of the Code ('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 or Section 4975 of the Code, and assets of such plans may
be invested in the Certificates without regard to the 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.
84
<PAGE>
Investments by Plans that are subject to ERISA 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, regulatory 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, regulatory 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 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;
85
<PAGE>
(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.
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, state chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) 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
86
<PAGE>
Dakota, Utah, Virginia and West Virginia enacted legislation before the October
4, 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.
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. In this connection,
federal credit unions should review the National Credit Union Administration
('NCUA') Letter to Credit Unions No. 96, as modified by Letter to Credit Unions
No. 108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities, and the NCUA's regulation
'Investment and Deposit Activities' (12 C.F.R. Part 703), which sets forth
certain restrictions on investment by federal credit unions in mortgage related
securities.
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, for example, has issued a Supervisory Policy Statement on
Securities Activities effective February 10, 1992 (the 'Policy Statement')
setting forth guidelines for and significant restrictions on investments in
'high-risk mortgage securities.' The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement generally indicates that a
mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance that any classes of Offered Certificates will not be treated
as high-risk under the Policy Statement.
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 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
characteriza-
87
<PAGE>
tion 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.
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.
88
<PAGE>
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 Latham & Watkins or Brown & Wood LLP, 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.
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.
89
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON
WHICH TERM
IS DEFINED
TERMS IN THE PROSPECTUS
- - ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
1986 Act........................................................................................ 65
Act............................................................................................. 67
Accrual Certificates............................................................................ 8, 26
Accrued Certificate Interest.................................................................... 27
Applicable Amount............................................................................... 79
ARM Loans....................................................................................... 19, 65
Asset Seller.................................................................................... 18
Assets.......................................................................................... 1, 17
Available Distribution Amount................................................................... 26
Balloon Mortgage Loans.......................................................................... 14
Book-Entry Certificates......................................................................... 26
Buydown Mortgage Loans.......................................................................... 24
Buydown Period.................................................................................. 24
Cash Flow Agreement............................................................................. 7, 21
Cede............................................................................................ 2, 32
Certificate..................................................................................... 33
Certificate Account............................................................................. 36
Certificate Balance............................................................................. 7, 28
Certificateholders.............................................................................. 2, 17
Certificates.................................................................................... 5
Commission...................................................................................... 2
Contributions Tax............................................................................... 81
Cooperatives.................................................................................... 18
Covered Trust................................................................................... 15, 48
CPR............................................................................................. 23
Credit Support.................................................................................. 1, 6, 20
Cut-off Date.................................................................................... 9
Definitive Certificates......................................................................... 26, 32
Depositor....................................................................................... 18
Determination Date.............................................................................. 26
Distribution Date............................................................................... 8
DTC............................................................................................. 2, 31
Due Period...................................................................................... 26
ERISA........................................................................................... 11, 84
Exchange Act.................................................................................... 2
Exemption....................................................................................... 85
FDIC............................................................................................ 36, 87
FHLMC........................................................................................... 43
Grantor Trust Certificates...................................................................... 10
Indirect Participants........................................................................... 32
Insurance Proceeds.............................................................................. 36
L/C Bank........................................................................................ 49
Liquidation Proceeds............................................................................ 36
Loan-to-Value Ratio............................................................................. 18
Lock-out Date................................................................................... 19
Lock-out Period................................................................................. 19
Master Servicer................................................................................. 5
MBS............................................................................................. 1, 5, 17
MBS Agreement................................................................................... 19
MBS Issuer...................................................................................... 19
MBS Servicer.................................................................................... 19
MBS Trustee..................................................................................... 19
Model Law....................................................................................... 87
Morgan Stanley.................................................................................. 88
Mortgage Assets................................................................................. 1
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON
WHICH TERM
IS DEFINED
TERMS IN THE PROSPECTUS
- - ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
Mortgage Loan Group............................................................................. 26
Mortgage Loans.................................................................................. 1, 5, 17
Mortgage Notes.................................................................................. 18
Mortgages....................................................................................... 18
New Regulations................................................................................. 68
Nonrecoverable Advance.......................................................................... 29
Offered Certificates............................................................................ 1
Originator...................................................................................... 18
Participants.................................................................................... 32
Pass-Through Rate............................................................................... 7, 27
Permitted Investments........................................................................... 36
Plans........................................................................................... 84
Prepayment Assumption........................................................................... 66
Prepayment Premium.............................................................................. 19
Purchase Price.................................................................................. 35
PTCE 83-1....................................................................................... 86
Rating Agency................................................................................... 11
Record Date..................................................................................... 26
Refinance Loans................................................................................. 18
Related Proceeds................................................................................ 29
Relief Act...................................................................................... 59
REMIC........................................................................................... 10
REMIC Certificates.............................................................................. 69
REMIC Regular Certificates...................................................................... 10, 69
REMIC Regulations............................................................................... 60
REMIC Residual Certificates..................................................................... 10, 69
REMIC Residual Certificateholder................................................................ 76
Restricted Group................................................................................ 86
Senior Certificates............................................................................. 7, 25
Servicing Standard.............................................................................. 39
SMMEA........................................................................................... 11, 86
SMMEA Certificates.............................................................................. 86
SPA............................................................................................. 23
Stripped ARM Obligations........................................................................ 67
Stripped Bond Certificates...................................................................... 64
Stripped Coupon Certificates.................................................................... 64
Stripped Interest Certificates.................................................................. 8, 26
Stripped Principal Certificates................................................................. 8, 26
Sub-Servicer.................................................................................... 39
Sub-Servicing Agreement......................................................................... 39
Subordinate Certificates........................................................................ 8, 25
Title V......................................................................................... 58
Trust Assets.................................................................................... 2
Trust Fund...................................................................................... 1
Trustee......................................................................................... 5
Underlying MBS.................................................................................. 18
Value........................................................................................... 18
Voting Rights................................................................................... 17
Warrantying Party............................................................................... 34
</TABLE>
91
