<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 25, 2000)
$337,800,000 (APPROXIMATE)
MORGAN STANLEY DEAN WITTER CAPITAL I 2000-1 TRUST
ISSUER
MORGAN STANLEY DEAN WITTER CAPITAL I INC.
DEPOSITOR
MORGAN STANLEY DEAN WITTER CREDIT CORPORATION
SELLER AND SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-1
------------------------------
THE TRUST FUND
o will issue six classes of certificates, four classes of which will be
subordinated to the offered certificates as described in this prospectus
supplement. Only the offered certificates are offered by this prospectus
supplement and the accompanying prospectus.
o will make payments on the certificates primarily from collections on two
groups of first lien, one- to four-family mortgage loans.
o will also hold cash to purchase additional mortgage loans subsequent to
the issuance of the certificates.
THE OFFERED CERTIFICATES
o will accrue interest at a pass-through rate that will adjust monthly, as
described in this prospectus supplement.
o will represent interests in the trust fund only and will not represent
interests in or obligations of any other person or entity.
CREDIT ENHANCEMENT
To the extent provided in this prospectus supplement, credit enhancement
will be provided to the offered certificates by
o excess cash flow on the mortgage loans and overcollateralization; and
o a certificate insurance policy issued by Ambac Assurance Corporation, as
certificate insurer.
[LOGO]
INVESTING IN THE OFFERED CERTIFICATES INVOLVES RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE S-8 IN THIS PROSPECTUS SUPPLEMENT AND PAGE 10 OF THE
PROSPECTUS.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE REGULATIONS HAVE NOT
APPROVED OR DISAPPROVED THE OFFERED CERTIFICATES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS ARE TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Morgan Stanley & Co. Incorporated, CIBC Worldmarkets plc and Unibank will
offer the offered certificates to the public from time to time at negotiated
prices determined at the time of sale. The offered certificates are expected to
be delivered in book entry form on or about July 28, 2000. Morgan Stanley Dean
Witter Capital I Inc. expects to receive from this offering approximately 99.98%
of the initial principal amount of the offered certificates, plus accrued
interest on the Class A-II Certificates from July 1, 2000, before deducting
expenses.
------------------------------
MORGAN STANLEY DEAN WITTER
CIBC WORLDMARKETS PLC
UNIBANK
July 25, 2000
<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.
You should rely only on the information contained in this prospectus
supplement and the accompanying prospectus. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus supplement and the prospectus.
Morgan Stanley Dean Witter Capital I Inc.'s principal offices are located
at 1585 Broadway, New York, New York 10036 and its telephone number is
(212) 761-4700.
Until the date that is ninety days after the date of this prospectus
supplement, all dealers that buy, sell or trade the offered certificates,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and the accompanying prospectus. This is in addition to
the dealers' obligation to deliver a prospectus supplement and the accompanying
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
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<S> <C>
Summary of Terms............................... S-1
Risk Factors................................... S-8
Introduction................................... S-13
The Mortgage Pool.............................. S-13
The Seller and Its Mortgage Programs........... S-31
Servicing of the Mortgage Loans................ S-34
Description of the Certificates................ S-36
Glossary of Terms.............................. S-46
Prepayment and Yield Considerations............ S-51
The Certificate Insurance Policy and the
Certificate Insurer.......................... S-58
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
----------------------------------------------- ----
<S> <C>
Federal Income Tax Consequences................ S-61
ERISA Considerations........................... S-62
Legal Investment Considerations................ S-64
Use of Proceeds................................ S-64
Method of Distribution......................... S-64
Experts........................................ S-65
Legal Matters.................................. S-65
Certificate Rating............................. S-65
Annex I: Global Clearance, Settlement and Tax
Documentation Procedures..................... I-1
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
----------------------------------------------- ----
<S> <C>
Summary of Prospectus.......................... 5
Risk Factors................................... 10
Description of the Trust Fund.................. 16
Use of Proceeds................................ 20
Yield Considerations........................... 20
The Depositor.................................. 25
Description of the Certificates................ 25
Description of the Agreements.................. 33
Description of the Credit Support.............. 49
Legal Aspects of Mortgage Loans................ 52
<CAPTION>
PROSPECTUS PAGE
----------------------------------------------- ----
<S> <C>
Federal Income Tax Consequences................ 63
REMICs......................................... 73
State Tax Considerations....................... 93
ERISA Considerations........................... 93
Legal Investments.............................. 97
Plan of Distribution........................... 98
Legal Matters.................................. 99
Financial Information.......................... 99
Rating......................................... 100
Incorporation of Information by Reference...... 100
Glossary of Terms.............................. 101
</TABLE>
i
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. IT DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER WHEN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE
CERTIFICATES, READ THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS CAREFULLY.
RELEVANT PARTIES AND DATES
<TABLE>
<S> <C>
Issuer............................ Morgan Stanley Dean Witter Capital I 2000-1 Trust.
Depositor......................... Morgan Stanley Dean Witter Capital I Inc., a Delaware corporation
and a wholly-owned limited purpose finance subsidiary of Morgan
Stanley Group Inc.
Seller and Servicer............... Morgan Stanley Dean Witter Credit Corporation.
Trustee........................... Wells Fargo Bank Minnesota, N.A., a national banking association.
Certificate Insurer............... Ambac Assurance Corporation.
Cut-off Date...................... July 1, 2000.
Closing Date...................... July 28, 2000.
Distribution Date................. The 15th day of each month or, if any such day is not a business
day, then the next succeeding business day, beginning in August
2000.
Record Date....................... With respect to each distribution date, the last business day of the
month preceding such distribution date (or the closing date with
respect to the first distribution date).
</TABLE>
S-1
<PAGE>
EXECUTIVE SUMMARY
This executive summary highlights selected information regarding the
offered certificates. It does not contain all of the information you need to
consider in making your investment decision. To understand all of the terms of
the offering of the offered certificates and the underlying mortgage loans, read
this entire prospectus supplement and the accompanying prospectus carefully.
OFFERED CERTIFICATES
<TABLE>
<CAPTION>
PASS-THROUGH INITIAL CERTIFICATE INITIAL RATING FINAL SCHEDULED
CLASS RATE PRINCIPAL BALANCE (MOODY'S/S&P) DISTRIBUTION DATE
-------------------------------------------- ------------ ------------------- -------------- -----------------
<S> <C> <C> <C> <C>
A-I......................................... Adjustable $ 230,000,000 Aaa/AAA October 15, 2026
A-II........................................ Adjustable $ 107,800,000 Aaa/AAA October 15, 2031
-------------
Total Class A Certificates.................. $ 337,800,000
=============
</TABLE>
o your certificates will have the approximate aggregate certificate
principal balance set forth above, subject to a variance of plus or minus
5%.
o the offered certificates will be issuable in denominations of $25,000 and
integrals of $1 in excess thereof (except with respect to two Class A-I
and two Class A-II Certificates).
o the offered certificates will be issued in book-entry form. Persons
acquiring beneficial ownership interests in the offered certificates may
elect to hold their beneficial interests through The Depository Trust
Company or "DTC", in the United States, or Clearstream, Luxembourg or the
Euroclear System, in Europe.
o CLASS A-I:
The pass-through rate on the Class A-I Certificates will be the least of:
o certificate LIBOR plus 0.33% per annum, or, starting on the first
Distribution Date after the first possible clean-up call date,
certificate LIBOR plus 0.66% per annum,
o 12.51% per annum and
o the weighted average of the net mortgage rates of the mortgage loans in
loan group I, adjusted to a rate based on the actual number of days in
the interest accrual period and a 360-day year.
o CLASS A-II:
The pass-through rate on the Class A-II Certificates will be the weighted
average of the net mortgage rates of the mortgage loans in loan group II,
adjusted to a rate based on twelve 30-day months and a 360-day year.
S-2
<PAGE>
SECURITIES
Morgan Stanley Dean Witter Capital I 2000-1 Trust Mortgage Pass-Through
Certificates, Series 2000-1. The securities will represent beneficial ownership
interests in the trust. The securities will be divided into six classes, of
which only the Class A-I and Class A-II Certificates are offered hereby. The
other classes of certificates will be subordinated to the Class A-I and
Class A-II Certificates as described herein. The subordinated certificates are
not offered hereby and the seller may retain or sell the subordinated
certificates.
See "Description of the Certificates--General" in this prospectus
supplement.
THE MORTGAGE LOANS
THE STATISTICAL INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
CONCERNING THE MORTGAGE LOANS DESCRIBES THE INITIAL MORTGAGE LOANS AND DOES NOT
INCLUDE ADDITIONAL MORTGAGE LOANS WHICH MAY BE INCLUDED IN A LOAN GROUP AFTER
THE CLOSING DATE. SEE "THE MORTGAGE POOL--CONVEYANCE OF SUBSEQUENT MORTGAGE
LOANS" AND "DESCRIPTION OF THE CERTIFICATES--PRE-FUNDING ACCOUNT."
The mortgage loans to be deposited into the trust will be divided into two
loan groups:
LOAN GROUP I. The per annum mortgage rate for the mortgage loans in loan
group I will be adjusted monthly or every six months on the related interest
adjustment date. The mortgage rate borne by a mortgage loan in loan group I
initially will be calculated based on one of three indices, as of the cut-off
date. The indices are "one-month LIBOR", "six-month LIBOR" and "one-year
Treasury". The index on the mortgage loans in loan group I may be converted to a
different index as described under "The Mortgage Pool--Group I Loan
Characteristics."
All of the mortgage loans in loan group I will be subject to a maximum
mortgage rate. None of the mortgage loans in loan group I will be subject to a
periodic interest rate cap. Each mortage loan in loan group I is scheduled to
pay only interest for the first 10 years of its term.
66.71% of the mortgage loans in loan group I have a loan-to-value ratio as
of the cut-off date in excess of 80%. None of the mortgage loans in loan group
I, including mortgage loans having a loan-to-value ratio greater than 80%, are
insured under any primary mortgage insurance policy or other credit insurance
policy.
The following table summarizes the characteristics of the mortgage loans in
loan group I as of the cut-off date.
<TABLE>
<S> <C>
Outstanding Aggregate Principal
Balance............................ $211,842,433
Number of Mortgage Loans............. 343
Weighted Average Mortgage Rate....... 8.434%
Range of Mortgage Rates.............. 7.500%
to 9.250%
Percent of Mortgage Loans Using the
following Index in determining the
Mortgage Rate:
One-Month LIBOR.................... 77.83%
Six-Month LIBOR.................... 15.43%
One-Year Treasury.................. 6.740%
Weighted Average Margins:
One-Month LIBOR Mortgage Loans..... 1.850%
Six-Month LIBOR Mortgage Loans..... 1.893%
One-Year Treasury Mortgage Loans... 2.207%
Frequency of Interest Adjustment
Dates:
Monthly............................ 80.64%
Semi-Annual........................ 19.36%
Range of Maximum Mortgage Rates...... 12.000%
to 14.250%
Weighted Average of Maximum Mortgage
Rates.............................. 12.996%
Weighted Average Remaining Term to
Stated Maturity.................... 297 months
Range of Remaining Terms to Stated
Maturity........................... 278 months
to 300 months
Range of Outstanding Principal
Balance of Mortgage Loans.......... $30,000
to $6,200,000
Average Outstanding Principal Balance
of Mortgage Loans.................. $617,616
Latest Maturity Date................. July 2025
Weighted Average Loan-to-Value Ratio
at Origination..................... 88.41%
Weighted Average Loan-to-Value Ratio
as of the Cut-Off Date............. 87.08%
Weighted Average Effective Loan-
to-Value Ratio as of the Cut-Off
Date............................... 60.50%
</TABLE>
LOAN GROUP II. The per annum mortgage rate for the mortgage loans in loan
group II will initially be fixed. Their respective mortgage rates will be
adjusted approximately five (5) years after the origination thereof and
semi-annually thereafter.
S-3
<PAGE>
The mortgage rate borne by a mortgage loan in loan group II will be calculated
based on six-month LIBOR.
All of the mortgage loans in loan group II will be subject to a maximum
mortgage interest rate. The mortgage loans in loan group II will be subject to a
periodic interest rate cap of 6.00% per annum for the initial rate adjustment
and 2.00% per annum for each subsequent adjustment. Each mortgage loan in loan
group II is scheduled to pay only interest for the first 5 years of its term.
67.55% of the mortgage loans in loan group II have a loan-to-value ratio in
excess of 80% as of the cut-off date. None of the mortgage loans in loan group
II, including mortgage loans having a loan-to-value ratio greater than 80%, are
insured under any primary mortgage insurance policy or other credit insurance
policy.
The following table summarizes the characteristics of the mortgage loans in
loan group II as of the cut-off date.
<TABLE>
<S> <C>
Outstanding Aggregate Principal
Balance............................. $90,005,337
Number of Mortgage Loans.............. 307
Weighted Average Mortgage Rate........ 8.524%
Range of Mortgage Rates............... 7.250%
to 9.375%
Range of Maximum Mortgage Rates....... 12.000%
to 15.375%
Maximum Periodic Mortgage Rate
Adjustments
Initial Adjustment.................. 6.000%
Subsequent Adjustment............... 2.000%
Weighted Average of Maximum Mortgage
Rates............................... 14.518%
Weighted Average Remaining Term to
Stated Maturity..................... 359 months
Range of Remaining Terms to Stated
Maturity............................ 358 months
to 360 months
Range of Outstanding Principal Balance
of Mortgage Loans................... $39,975
to $1,550,000
Average Outstanding Principal Balance
of Mortgage Loans................... $293,177
Latest Maturity Date.................. July 2030
Weighted Average Loan-to-Value Ratio
at Origination...................... 89.34%
Weighted Average Loan-to-Value Ratio
as of the Cut-off Date.............. 89.33%
Weighted Average Effective Loan-
to-Value Ratio as of the Cut-off
Date................................ 66.57%
</TABLE>
ADDITIONAL COLLATERAL LOANS. The initial mortgage loans in loan groups I
and II with loan-to-value ratios in excess of 80% are, in general,
FlexSource(TM) loans, which, in addition to being secured by real property, are
secured by a security interest in a limited amount of additional collateral
owned by the borrower or a third-party guarantor. Such additional collateral may
no longer be required when the principal balance of such additional collateral
mortgage loan is reduced to a predetermined amount set forth in the related
pledge agreement or guaranty agreement, as applicable, or when the loan-to-value
ratio for such additional collateral mortgage loan is reduced to the servicer's
applicable loan-to-value ratio limit for such mortgage loan by virtue of an
increase in the appraised value of the mortgaged property as determined by the
servicer.
In connection with the FlexSource(TM) loans, a limited purpose surety bond
is in effect to cover a limited amount of losses that may be realized upon the
liquidation of any required additional collateral securing an additional
collateral mortgage loan.
See "The Mortgage Pool" and "the Seller and Its Mortgage Programs" in this
prospectus supplement.
PRE-FUNDING ACCOUNT
On the closing date, an aggregate cash amount up to $20,000,000 with
respect to loan group I and up to $20,000,000 with respect to loan group II will
be deposited in a pre-funding account and will be used to purchase subsequent
mortgage loans to be added to the related loan group. An additional amount will
be deposited with respect to each loan group to cover interest at the related
pass-through rate on the portion of the principal balance of the related
certificates representing an interest in the amounts on deposit in the
pre-funding account. During the pre-funding period from the closing date to the
earlier to occur of (i) the date on which the aggregate amount on deposit in the
pre-funding account is less than $100,000, (ii) a servicer event of default
under the pooling and servicing agreement or (iii) August 31, 2000, amounts on
deposit in the pre-funding account may be withdrawn from time to time to acquire
subsequent mortgage loans in accordance with the pooling and servicing
agreement. Any amount remaining in the pre-funding account at the end of the
pre-funding period will be distributed as principal to the offered related
certificateholders on the following distribution date.
See "The Mortgage Pool" in this prospectus supplement.
S-4
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL. The principal balance of the initial mortgage loans on the
cut-off date and principal balances of the Class A-I, Class A-II and Class B
Certificates are as follows:
<TABLE>
<S> <C>
Principal Balance of the Mortgage
Loans as of the Cut- off Date.... $ 301,847,771
Pre-Funded Amount (not to
exceed).......................... $ 40,000,000
Original Class A-I Principal
Balance.......................... $ 230,000,000
Original Class A-II Principal
Balance.......................... $ 107,800,000
Original Class B Principal
Balance.......................... $ 2,200,000
</TABLE>
AMOUNT AVAILABLE FOR MONTHLY DISTRIBUTION. On each monthly Distribution
Date, the trustee will make distributions to certificateholders. The Class A-I
Certificates will relate to and will receive payments primarily from loan group
I. The Class A-II Certificates will relate to and will receive payments
primarily from loan group II. The amounts available for distribution will be
calculated on a loan group by loan group basis and will include:
o collections of monthly payments on the mortgage loans in the related loan
group, including prepayments and other unscheduled collections plus
o advances for delinquent payments on the mortgage loans in the related
loan group plus
o to a limited extent, excess cash flow from the non-related loan group
minus
o fees and expenses of the servicer and the trustee, including
reimbursement for advances to the extent allocable to the related loan
group minus
o the premium paid to the certificate insurer for the certificate insurance
policy, to the extent allocable to the related loan group.
See "Description of the Certificates--Glossary of Terms--Available
Distribution Amount" in this prospectus supplement.
PRIORITY OF PAYMENTS. Payments to the certificateholders will be made from
the available amount (after adjustments described under "--Amount available for
monthly distributions" above) from each loan group as follows:
o Distribution of interest to the related offered certificates
o Distribution of principal to the related offered certificates
o Distribution to the related offered certificates to cover realized losses
o Distribution of principal to the related certificates and subsequently to
the non-related certificates to the extent the principal balance of the
related certificates exceeds the principal balance of the mortgage loans
in the related loan group
o Reimbursement to the certificate insurer for prior draws made on the
certificate insurance policy and other amounts due to the certificate
insurer
o Distribution of excess cash flow to the related offered certificates
until the required level of over-collateralization is reached
o Distribution of excess cash flow to the non-related offered certificates
from the excess interest on the related mortgage loans, until the
required level of overcollateralization of the non-related loan group
reduced by realized losses is restored
o Payment to the Class A-I Certificates in respect of basis risk shortfalls
from the related loan group
o Distribution of any remaining funds to the non-offered certificates
INTEREST DISTRIBUTIONS. The amount of interest owed to each class of
offered certificates on each distribution date will equal:
o The pass-through rate for that class of certificates multiplied by
o The principal balance of that class of certificates as of the day
immediately prior to the related distribution date multiplied by
o In the case of the Class A-I Certificates, the actual number of days in
the related interest accrual period divided by 360 and in the case of the
Class A-II Certificates one-twelfth, minus
o The share of net prepayment interest shortfalls and Relief Act shortfalls
allocated to that class.
See "Description of the Certificates--Interest Distributions" in this
prospectus supplement.
ALLOCATIONS OF PRINCIPAL. Principal distributions on the certificates made
from principal payments on the mortgage loans in the corresponding loan group
will be allocated among the offered certificates as described in this prospectus
supplement.
In addition, the offered certificates may receive a distribution of
principal from excess cash flow available to cover realized losses or to
increase the
S-5
<PAGE>
amount of overcollateralization until the required amount of
overcollateralization for that loan group is reached.
See "Description of the Certificates--Principal Distributions on the
Class A Certificates" in this prospectus supplement.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the offered certificates consists
of:
EXCESS CASH FLOW. Because more interest with respect to the mortgage loans
in a loan group is payable by the mortgagors than is necessary to pay the
interest on the related offered certificates each month, there may be excess
cash flow with respect to that loan group. Some of this excess cash flow may be
used to protect the related and, to a more limited extent, non-related offered
certificates against some realized losses by making an additional payment of
principal.
OVERCOLLATERALIZATION. On each Distribution Date, to the extent not used
to cover losses, excess cash flow with respect to the mortgage loans in loan
group I will be used to pay principal to the Class A-I Certificates, reducing
the aggregate principal amount of the offered certificates below the aggregate
principal balance of the mortgage loans in loan group I. On the closing date,
the trust will issue an aggregate principal amount of Class A-II Certificates
which is less than the sum of the aggregate principal balance of the mortgage
loans in loan group II and the related pre-funded amount as of the cut-off date.
The excess of the balance of the mortgage loans in either loan group over the
outstanding principal balance of the related class of offered certificates
represents overcollateralization, which may absorb some losses on the mortgage
loans in the related loan group, if not covered by excess cash flow. If the
level of overcollateralization falls below required levels, the excess cash flow
with respect to a loan group described above will be paid first to the related
offered certificates, and then to the non-related offered certificates, as
principal and to the extent described in this prospectus supplement. This
allocation is intended to reduce the principal balance of the offered
certificates faster than the principal balance of the related mortgage loans in
the related loan group, until the required level of overcollateralization is
reached with respect to each loan group.
CERTIFICATE INSURANCE POLICY. On the closing date, the certificate insurer
will issue the certificate insurance policy for the benefit of the offered
certificates in favor of the trustee solely on behalf of the holders of the
Class A-I and Class A-II Certificates. The certificate insurance policy will
unconditionally and irrevocably guarantee (i) shortfalls in amounts available to
pay the interest distribution amount for the offered certificates on any
distribution date, (excluding certain interest shortfalls as further described
herein), (ii) distributions on each Distribution Date and on each of the
Class A-I Certificates and the Class A-II Certificates, to the extent that the
outstanding principal balance of such classes of certificates exceeds the
principal balance of the mortgages in the related loan group, and (iii) amounts
necessary to reduce the principal balance of the offered certificates to zero on
the Distribution Date in October 2026 for the Class A-I Certificates and
October 2031 for the Class A-II Certificates. However, the certificate insurance
policy does not guarantee to the holders of the offered certificates and does
not protect holders of the offered certificates against any adverse consequences
caused by (i) any specified rate of prepayment of the mortgage loans and
(iii) any net interest shortfalls or basis risk shortfalls.
See "The Certificate Insurance Policy and the Certificate Insurer" in this
prospectus supplement.
ADVANCES
The servicer is obligated to make advances of cash, which will be included
with mortgage collections, in an amount equal to the delinquent monthly payments
due on the mortgage loans on the immediately preceding monthly payment date. The
servicer is under no obligation to make advances to the extent it determines
such advances are not recoverable from future payments or collections on the
related mortgage loan or to otherwise guarantee or insure against losses.
See "Servicing of the Mortgage Loans--Advances" in this prospectus
supplement.
CLEAN-UP CALL
On any Distribution Date on or after which the aggregate outstanding
principal balance of the mortgage loans in loan group I is 10% or less of the
sum of the aggregate unpaid principal balance of the mortgage loans in loan
group I and the amount deposited in the pre-funding account for loan group I as
of the cut-off date, the holders of the Class R-I Certificates may, at their
option, either (1) purchase from the trust fund all mortgage loans in loan group
I remaining outstanding or (2) purchase, in whole but not in part, all
outstanding Class A-I Certificates. On any Distribution Date on or after which
the aggregate
S-6
<PAGE>
outstanding principal balance of the mortgage loans in loan group II is 10% or
less of the sum of the aggregate unpaid principal balance of the mortgage loans
in loan group II and the amount deposited in the pre-funding account for loan
group II as of the cut-off date, the holders of the Class R-II Certificates may,
at their option, either (1) purchase from the trust fund all mortgage loans in
loan group II remaining outstanding or (2) purchase in whole or in part, all
outstanding Class A-II Certificates. In the absence of the exercise of any of
such purchase options, the certificate insurer or the surety bond provider may,
at its option, purchase from the trust fund all mortgage loans in a loan group
remaining outstanding on any distribution date on or after the distribution date
on which the aggregate outstanding principal balance of the mortgage loans in
the loan group is 10% or less of the aggregate unpaid principal balance of the
mortgage loans in the loan group and the amount deposited in the pre-funding
account for the loan group as of the cut-off date.
See "Description of the Certificates--Clean-up Call" in this prospectus
supplement.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the trust fund (exclusive of the rights in
any additional collateral and the basis risk reserve fund) will comprise three
real estate mortgage investment conduits, organized in a tiered REMIC structure.
The Class A-I, Class A-II and Class B Certificates will represent beneficial
ownership of REMIC "regular interests" in the upper tier REMIC identified in the
pooling and servicing agreement.
The treatment of the rights of the Class A-I Certificates to receive any
basis risk carry-forward amounts is unclear for federal income tax purposes.
Such rights may be treated as representing beneficial interests in the right to
receive payments from a separate reserve fund pursuant to an interest rate cap
agreement treated as a notional principal contract. Alternatively, the rights of
such certificates to receive any basis risk carryover amounts may be treated as
representing beneficial interests in partnership with the Class B Certificates
in respect of the Class B Certificates' entitlement to interest.
The Class R-I, Class R-II and Class R-III Certificates will represent the
beneficial ownership of the sole class of "residual interest" in the upper tier
REMIC and the lower tier REMICs, respectively.
See "Federal Income Tax Consequences" in this prospectus supplement and in
the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
After the amount in the pre-funding account has been reduced to zero, so
long as the offered certificates are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating agency, the
offered certificates will constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984. Until the amount in the
pre-funding account has been reduced to zero, the offered certificates will not
constitute "mortgage related securities."
See "Legal Investment Considerations" in this prospectus supplement.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue
Code of 1986, as amended, should carefully review with its legal advisors
whether the purchase or holding of Class A-I or Class A-II Certificates could
give rise to a transaction prohibited or not otherwise permissible under
applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
CERTIFICATE RATINGS
It is a condition to the issuance of the offered certificates that they be
rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. A security rating does not address the frequency of prepayments on the
mortgage loans or the corresponding effect on yield to investors.
See "Certificate Rating" in this prospectus supplement.
S-7
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase any class of offered certificates unless you
understand the prepayment, credit liquidity and market risks associated with
that class.
The offered certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
prospectus in the context of your financial situation and tolerance for risk.
THE STATISTICAL INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
CONCERNING THE MORTGAGE LOANS DESCRIBES THE INITIAL MORTGAGE LOANS AND DOES NOT
INCLUDE ADDITIONAL MORTGAGE LOANS WHICH MAY BE INCLUDED IN A LOAN GROUP AFTER
THE CLOSING DATE. SEE "THE MORTGAGE POOL--CONVEYANCE OF SUBSEQUENT MORTGAGE
LOANS" AND "DESCRIPTION OF THE CERTIFICATES--PRE-FUNDING ACCOUNT."
You should carefully consider, among other things, the following factors in
connection with the purchase of the offered certificates. The risks and
uncertainties described below and those risks described under "Risk Factors" in
the prospectus, summarize material risks relating to your certificates.
<TABLE>
<S> <C>
YOU MAY HAVE DIFFICULTY RESELLING There is currently no market for the Class A Certificates. While the
CERTIFICATES underwriter currently intends to make a market in the Class A
Certificates, it is under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a secondary
market does develop, that it will provide holders of the Class A
Certificates with liquidity of investment or that it will continue
for the lives of the Class A Certificates.
YOU COULD BE ADVERSELY AFFECTED BY LOCAL An overall decline in the residential real estate markets in the
REAL ESTATE MARKETS states in which the mortgaged properties are located could adversely
affect the values of the mortgaged properties such that the
outstanding Mortgage Loan balances equal or exceed the value of the
affected mortgaged properties. Such declines would adversely affect
the position of the trust fund as the holder of the mortgage loans.
Residential real estate markets in some states have declined in
recent years. Approximately 36.5% and 14.4% of the mortgage
properties in loan group I and 34.9% and 10.6% in loan group II are
located in California and Florida, respectively.
See "The Mortgage Pool" and "the Seller and Its Mortgage
Programs--Delinquency and Loan Loss Experience" in this prospectus
supplement.
THE WEIGHTED AVERAGE LIFE OF THE OFFERED The mortgage loans may be prepaid in whole or in part at any time
CERTIFICATES WILL BE AFFECTED BY without payment of a prepayment penalty. The trust fund's prepayment
PREPAYMENTS AND REPURCHASES experience may be affected by a wide variety of factors, including
general economic conditions, the level of prevailing interest rates,
the availability of alternative financing and homeowner mobility. The
weighted average lives of the Class A Certificates will be sensitive
to the rate and timing of principal payments (including prepayments)
on the mortgage loans in the related loan group, which may fluctuate
significantly from time to time.
Prepayments, liquidation and repurchases of the mortgage loans in a
loan group (including repurchases by the seller of defective mortgage
loans or mortgage loans as to which a breach of a representation or
warranty has occurred) will result in distributions on the related
certificates of principal amounts which would otherwise have been
distributed over the remaining terms of the mortgage loans.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
The mortgage loans in loan group II have fixed interest rates for
5 years from the date of origination and then adjust semi-annually.
These mortgage loans may have higher prepayments as they approach
their first adjustment dates because the mortgagors may want to avoid
periodic changes to their monthly payments.
The holders of the Class R-I Certificate may, at their option, effect
a clean-up call on the Class A-I Certificates, and the holders of the
Class R-II Certificates may, at their option, effect a clean-up call
on the Class A-II Certificates by purchasing all of the outstanding
certificates of the class, instead of purchasing all of the mortgage
loans in the loan group. No assurance can be given as to the level of
prepayments that the trust fund will experience as a result of
prepayments, liquidations or any such purchases of mortgage loans.
AMOUNTS IN THE PRE-FUNDING ACCOUNT MAY BE If the aggregate principal balance of the additional mortgage loans
APPLIED TO PAY PRINCIPAL ON THE in loan group I or loan group II sold to the trust fund by the end of
CERTIFICATES the pre-funding period is less than the related pre-funded amount,
the amount of such differential will be distributed to the Class A-I
or Class A-II Certificateholders, respectively, as principal. Any
such distribution will affect the weighted average life of the
Class A-I and Class A-II Certificates, as applicable, and may
adversely affect the yield thereon. The Class A-I and Class A-II
Certificateholders would bear the risk of being unable to invest such
distribution at a yield at least equal to their yield on the
Class A-I and Class A-II Certificates.
YOUR YIELD MAY BE AFFECTED BY CHANGES IN No prediction can be made as to future levels of certificate LIBOR,
INTEREST RATES one-month LIBOR, six-month LIBOR, the one-year Treasury Index or as
to the timing of any changes therein, each of which will directly
affect the yields of the related offered certificates. In addition,
the mortgagors under the mortgage loans in loan group I may elect to
convert the index upon which the related mortgage rate is based from
(a) one-month LIBOR to one-year Treasury or to prime rate (in each
case adjustable monthly), (b) from six-month LIBOR to one-year
Treasury or prime rate (in each case adjustable semi-annually),
(c) from one-year Treasury (adjustable monthly) to one-month LIBOR or
prime rate (adjustable monthly) or (d) from one-year Treasury
(adjustable semi-annually) to six-month LIBOR or prime rate
(adjustable semi-annually); provided, however, that such conversion
may only be made once, generally, between the 13th and 60th month of
the mortgage loan term. No prediction can be made as to any such
conversions, each of which may affect the yield on the Class A-I
Certificates. Except for any payments made from the basis risk
reserve fund, the holders of the Class A-I Certificates will absorb
the yield risk associated with a possible elimination or inversion of
the spread between the pass-through rate on the Class A-I
Certificates calculated on the basis of the certificate LIBOR formula
and the weighted average net mortgage rate on the mortgage loans in
loan group I. The mortgage rates reset at different times and are
subject to lifetime interest rate caps.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
The Class A-I Certificates may not always receive interest at a rate
equal to certificate LIBOR plus the applicable margin. If the
weighted average net mortgage rate on the mortgage loans in loan
group I is less than the lesser of (a) certificate LIBOR plus the
related margin and (b) 12.51%, the interest rate on the Class A-I
Certificates will be reduced to that weighted average net mortgage
rate. Thus, the yield to investors in the Class A-I Certificates will
be sensitive to fluctuations in the level of certificate LIBOR and
will be adversely affected by the application of the weighted average
net mortgage rate on the mortgage loans in loan group I.
The pass-through rate on the Class A-II Certificates will always
equal the weighted average net mortgage rate of the mortgage loans in
loan group II.
The prepayment of mortgage loans with higher net mortgage rates may
result in a lower weighted average net mortgage rate for the related
loan group. If on any Distribution Date the application of the
related weighted average net mortgage rate results in an interest
payment lower than certificate LIBOR plus the related margin on the
Class A-I Certificates during the related interest accrual period,
the value of those certificates may be temporarily or permanently
reduced.
Investors in the Class A-I Certificates should be aware that the
mortgage rates on the mortgage loans in loan group I are generally
adjustable monthly or semi-annually based on the related index.
Consequently, the interest that becomes due on the mortgage loans in
loan group I during the related due period may be less than interest
that would accrue on the Class A-I Certificates, at the rate of
certificate LIBOR plus the related margin. In a rising interest rate
environment, the Class A-I Certificates may receive interest at the
lesser of (a) the weighted average net mortgage rate of the mortgage
loans in loan group I or (b) 12.51% for a protracted period of time.
In addition, in this situation, there would be little or no excess
cash flow to cover losses and to create overcollateralization.
To the extent the related weighted average net mortgage rate is paid
to the Class A-I Certificates, the difference between the related
weighted average net mortgage rate and the lesser of certificate
LIBOR plus the related margin and 12.51%, will create a shortfall
that will carry forward, with interest thereon. Any resulting
shortfall will not be payable by the certificate insurance policy and
will only be payable from the excess cash flow on the mortgage loans
in loan group I. These shortfalls may remain unpaid on the related
clean-up call date or final Distribution Date.
See "Prepayment and Yield Considerations" in this prospectus
supplement.
YOU MAY SUFFER LOSSES IF THE CERTIFICATE Credit enhancement with respect to the offered certificates will be
INSURER FAILS TO PERFORM ITS OBLIGATIONS provided by the certificate insurance policy. If the certificate
insurer fails or is unable to perform its obligations under the
certificate insurance policy, the offered certificateholders will be
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
directly affected by losses on the mortgage loans in the related loan
group.
See "The Certificate Insurance Policy and the Certificate Insurer" in
this prospectus supplement.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE Approximately 66.71% of the mortgage loans in loan group I and 67.55%
RATIOS WILL BE MORE AFFECTED THAN THE of the mortgage loans in loan group II (as of the cut-off date) will
OTHER MORTGAGE LOANS BY A DECLINE IN have loan-to-value ratios in excess of 80% but will not be covered by
VALUE OF THE RELATED MORTGAGED PROPERTY, a primary mortgage insurance policy. Such mortgage loans will be
WHICH MAY RESULT IN A GREATER RISK OF affected to a greater extent than the other mortgage loans in the
LOSS WITH RESPECT TO SUCH MORTGAGE LOANS mortgage pool by any decline in the value of the related mortgaged
property. No assurance can be given that values of the mortgaged
properties have remained or will remain at their levels on the dates
of origination. 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. Any decrease
in the value of the mortgaged properties underlying such mortgage
loans may result in the allocation of losses to the certificates, to
the extent such losses are not covered by additional collateral
pledged to secure such mortgage loans, the limited purpose surety
bond or credit support hereunder.
REPURCHASES OF MORTGAGE LOANS WILL DEPEND Substantially all of the mortgage loans have been originated by the
UPON THE CREDIT OF A THIRD PARTY seller in the ordinary course of its real estate lending activities.
The seller will make certain representations and warranties in the
mortgage loan purchase agreement regarding the mortgage loans and, in
the event of a breach of any such representation or warranty that
materially and adversely affects the certificateholders or the
certificate insurer, the seller will be required either to cure such
breach or to repurchase the related mortgage loan or loans.
BANKRUPTCY OR INSOLVENCY MAY AFFECT THE The transfer of the mortgage loans by the seller to the depositor, in
TIMING AND AMOUNT OF DISTRIBUTIONS ON each case will be characterized in the mortgage loan purchase
THE CERTIFICATES agreement as a sale transaction. Nevertheless, in the event of a
bankruptcy of the seller, the trustee in bankruptcy could attempt to
recharacterize the sale of the mortgage loans to the depositor as a
borrowing secured by a pledge of the mortgage loans.
If such an attempt to recharacterize the transfer of the mortgage
loans were successful, a trustee in bankruptcy could elect to
accelerate payment of the certificates and liquidate the mortgage
loans, with the holders of the certificates entitled to no more than
the outstanding class principal balances, if any, of the classes of
certificates, together with interest thereon at the applicable pass-
through rate to the date of payment. In the event of an acceleration
of the certificates, the holders of the certificates would lose the
right to future payments of interest, might suffer reinvestment
losses in a lower interest rate environment and may
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
fail to recover their initial investment. Whether or not an
acceleration takes place, delays in payments on the certificates and
possible reductions in the amount of such payments could occur. The
depositor will warrant in the pooling and servicing agreement that
the transfer of the mortgage loans to the trust fund is a valid
transfer and sale of all of the depositor's right, title and interest
in the mortgage loans to the trust fund.
YOU COULD BE ADVERSELY AFFECTED BY Applicable state laws generally regulate interest rates and other
VIOLATIONS OF CONSUMER PROTECTION LAWS charges and require certain disclosures. In addition, state and
federal consumer protection laws, unfair and deceptive practices acts
and debt collection practices acts may apply to the origination or
collection of the mortgage loans. Depending on the provisions of the
applicable law, violations of these laws may limit the ability of the
servicer to collect all or part of the principal of or interest on
the mortgage loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the servicer to
damages and administrative enforcement.
See "Legal Aspects of the Mortgage Loans" in the Prospectus.
</TABLE>
S-12
<PAGE>
INTRODUCTION
The depositor will establish a trust on the closing date, under a pooling
and servicing agreement (the "Agreement"), dated as of July 1, 2000, among the
depositor, the seller and servicer and the trustee. On the closing date, the
depositor will deposit into the trust two groups of mortgage loans that, in the
aggregate, will constitute a mortgage pool, secured by first lien one- to
four-family residential properties.
THE STATISTICAL INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
CONCERNING THE MORTGAGE LOANS DESCRIBES THE INITIAL MORTGAGE LOANS AND DOES NOT
INCLUDE ADDITIONAL MORTGAGE LOANS WHICH MAY BE INCLUDED IN A LOAN GROUP AFTER
THE CLOSING DATE. SEE "THE MORTGAGE POOL--CONVEYANCE OF SUBSEQUENT MORTGAGE
LOANS" AND "DESCRIPTION OF THE CERTIFICATES--PRE-FUNDING ACCOUNT."
You can find a listing of definitions for capitalized terms used both in
the prospectus and this prospectus supplement under the caption "Glossary"
beginning on page 101 in the prospectus and under the caption "Glossary of
Terms" in this prospectus supplement.
THE MORTGAGE POOL
GENERAL
The mortgage pool will consist of mortgage loans with an aggregate unpaid
principal balance of $301,847,771 as of the cut-off date (the "Cut-off Date Pool
Balance") after deducting payments due during the month of July 2000. The
mortgage loans are secured by first liens on fee simple interests in one- to
four-family residential properties. The mortgage pool will consist of two groups
of mortgage loans, Loan Group I and Loan Group II. The mortgage loans in the two
groups are referred to as the Group I Loans and the Group II Loans.
The trust fund will include, in addition to the mortgage pool, (i) the
amounts held from time to time in one or more accounts maintained in the name of
the trustee pursuant to the Agreement, by and among Morgan Stanley Dean Witter
Capital I Inc., as depositor, Morgan Stanley Dean Witter Credit Corporation, as
seller and servicer, and Wells Fargo Bank Minnesota, N.A., as trustee, (ii) the
amounts held from time to time in the Collection Account and the Distribution
Account maintained in the name of the Trustee pursuant to the Agreement,
(iii) any property which initially secured a mortgage loan and which is acquired
by foreclosure or deed in lieu of foreclosure, (iv) all insurance policies and
any insurance proceeds, (v) all of the right, title and interest of the
depositor to the mortgage loan purchase agreement as described under
"--Assignment of the mortgage loans" below, (vi) the pledge agreements or
guaranty agreements, as applicable, in respect of the FlexSource(TM) Loans,
(vii) the Certificate Insurance Policy and the proceeds thereof, (viii) a
beneficial interest in the Limited Purpose Surety Bond in respect of the
FlexSource(TM) Loans and the proceeds thereof, (ix) any amounts on deposit in
the Pre-Funding Account and (x) any amounts on deposit in the Basis Risk Reserve
Fund. The rights in respect of the Additional Collateral and the Basis Risk
Reserve Fund will not be part of any REMIC.
Monthly payments of interest and, to the extent described herein, principal
on the mortgage loans will be due on each due date for the mortgage loan.
As set forth in the "Credit Scores" tables below, credit scores have been
supplied with respect to the mortgagors. Credit scores are obtained by many
mortgage lenders in connection with mortgage loan applications to help assess a
borrower's credit-worthiness. Credit scores are generated by models developed by
a third party which analyzed data on consumers in order to establish patterns
which are believed to be indicative of the borrower's probability of default.
The credit score is based on a borrower's historical credit data, including,
among other things, payment history, delinquencies on accounts, levels of
outstanding indebtedness, length of credit history, types of credit, and
bankruptcy experience. Credit scores range from approximately 250 to
approximately 900, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a credit score purports only to be a measurement of the relative degree of risk
a borrower represents to a lender, i.e., that a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that credit scores were
developed to indicate a level of default
S-13
<PAGE>
probability over a two-year period which does not correspond to the life of a
mortgage loan. Furthermore, credit scores were not developed specifically for
use in connection with mortgage loans, but for consumer loans in general.
Therefore, a credit score does not take into consideration the effect of
mortgage loan characteristics (which may differ from consumer loan
characteristics) on the probability of repayment by the borrower. There can be
no assurance that a credit score will be an accurate predictor of the likely
risk or quality of the related mortgage loan.
GROUP I LOAN CHARACTERISTICS
On the Closing Date, the Group I Loans will consist of approximately 343
mortgage loans having an aggregate principal balance as of the Cut-off Date of
approximately $211,842,433 (for the Group I Loans, the "CUT-OFF DATE LOAN GROUP
BALANCE"). Substantially all of the Group I Loans were originated by the seller
in the ordinary course of its real estate lending activities.
The mortgage rate for the Group I Loans will be adjusted monthly or every
six months on the related interest adjustment date. The index for the mortgage
rate borne by a Group I Loan may be calculated as follows (in each case rounded
to the nearest 1/8th of one percent):
One-Month LIBOR. The mortgage rate borne by approximately 77.83% of
the Group I Loans (by Cut-off Date Loan Group Balance) which is adjusted
every month to equal the London interbank offered rate for one-month U.S.
dollar deposits as listed under "Money Rates" in The Wall Street Journal
most recently available as of the first day of the month prior to the month
in which the related interest adjustment date occurs ("ONE-MONTH LIBOR")
plus a margin ranging from 0.875% to 2.750%.
Six-Month LIBOR. The mortgage rate borne by approximately 15.43% of
the Group I Loans (by Cut-off Date Loan Group Balance) which is adjusted
every six months to equal the London interbank offered rate for six-month
U.S. dollar deposits (the "Six-Month LIBOR Index") as listed under "Money
Rates" in The Wall Street Journal most recently available as of 45 days
prior to the related Interest Adjustment Date plus a margin ranging from
1.000% to 2.375%.
One-Year Treasury. The mortgage rate borne by approximately 6.74% of
the Group I Loans (by Cut-off Date Loan Group Balance) may be adjusted
monthly or semi-annually to equal the weekly average yield on the United
States Treasury Securities adjusted to a constant maturity of one year, as
made available by the Federal Reserve board in Statistical Release H.15
most recently available, in the case of six-month adjustable Group I Loans
45 days prior to the related interest adjustment date, or as of the first
day of the month prior to the month in which the related interest
adjustment date occurs, in the case of the monthly adjustable Group I
Loans, in each case plus a margin ranging from 1.750% to 3.500%.
In addition, the mortgagors under the Group I Loans may elect to convert
the index upon which the related mortgage rate is based from (a) One-Month LIBOR
to One-Year Treasury or Prime Rate (in each case adjustable monthly), (b) from
Six-Month LIBOR to One-Year Treasury or Prime Rate (in each case adjustable
semi-annually), (c) from One-Year Treasury (adjustable monthly) to One-Month
LIBOR or Prime Rate (adjustable monthly) or (d) from One-Year Treasury
(adjustable semi-annually) to Six-Month LIBOR or Prime Rate (adjustable
semi-annually); provided, however, that such conversion may only be made once,
generally, between the 13th and 60th month of the mortgage loan term. The margin
for any index to which a mortgagor elects to convert to may be different from
the margin on the original index.
The prime rate for the Group I Loans may be equal to the highest prime rate
(the "PRIME RATE") as listed under "Money Rates" in The Wall Street Journal most
recently available, in the case of the six-month adjustable Group I Loans, 45
days prior to the related interest adjustment date, or as of the first day of
the month prior to the month in which the related interest adjustment date
occurs, in the case of monthly adjustable Group I Loans. The mortgage rate on
the Group I Loans with an index based on Prime Rate will be Prime Rate plus or
minus a specified margin.
Notwithstanding the foregoing, each of the mortgage loans will be subject
to a maximum mortgage rate. The maximum mortgage rates for the mortgage loans
range from 12.000% to 14.250%. None of the Group I Loans will be subject to a
periodic interest rate cap.
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<PAGE>
Approximately 66.71% of the Group I Loans have a Loan-to-Value Ratio in
excess of 80%. None of the Group I Loans, including Group I Loans having a
Loan-to-Value Ratio greater than 80%, are insured under any policy of primary
mortgage insurance or other credit insurance policy. Group I Loans having a
Loan-to-Value Ratio at origination greater than 80% are generally FlexSource(TM)
Loans, which, in addition to being secured by real property, are secured by a
security interest in a limited amount of additional collateral owned by the
borrower or are supported by a third-party guarantee (the "FLEXSOURCE(TM)
LOANS"). The weighted average Effective Loan-to-Value Ratio (by Cut-off Date
Loan Group Balance) of Group I Loans will be approximately 60.50%. The servicer
will attempt to realize for the benefit of the trust fund and the Certificate
Insurer on the security interest in the Additional Collateral of a defaulted
FlexSource(TM) Loan that is in liquidation. See "The Seller and Its Mortgage
Programs" herein.
Based upon representations obtained from the mortgagors at the time of
origination of the Group I Loans, approximately 82.97% of the related mortgaged
properties are owner-occupied. As of the Cut-off Date, none of the Group I Loans
will be delinquent more than one month.
The Group I Loans were originated from September 1998 through July 2000. No
more than 3.53% (by Cut-Off Date Loan Group Balance) of the mortgaged properties
securing the Group I Loans are located in any one zip code area. At origination,
the Group I Loans had terms to stated maturity of 25 years. Each Group I Loan is
scheduled to pay only interest for the first 10 years of its term. Commencing in
its 11th year, each Group I Loan is scheduled to amortize on a 15-year, fully
amortizing basis. The latest month and year in which any Group I Loan matures is
July 2025. The Group I Loans had remaining terms to stated maturity, calculated
as of the Cut-off Date, of between approximately 278 and 300 months and a
weighted average remaining term to stated maturity as of the Cut-off Date of
approximately 297 months. The mortgage rates borne by the Group I Loans as of
the Cut-off Date ranged from 7.500% per annum to 9.250% per annum and the
weighted average mortgage rate as of the Cut-off Date was approximately 8.434%
per annum. Employees of the seller and servicer and its affiliates are the
mortgagors under 6.10% of the Group I Loans.
Each Group I Loan had an outstanding principal balance as of the Cut-off
Date of not less than $30,000 nor more than $6,200,000. The average outstanding
principal balance of the Group I Loans as of the Cut-off Date was approximately
$617,616.
Certain additional characteristics with respect to the Group I Loans are
set forth below. References herein to percentages of Group I Loans refer in each
case to the percentage of the Cut-off Date Loan Group Balance after giving
effect to scheduled monthly payments due on or prior to the Cut-off Date. The
sum of the percentages in each table below may not equal the total because of
rounding. The information set forth below relates to the initial Group I Loans
and does not include any additional Group I Loans which may be included after
the Cut-off Date.
GROUP I LOANS
MORTGAGE RATES (%)
<TABLE>
<CAPTION>
NUMBER OF % OF
MORTGAGE TOTAL TOTAL
MORTGAGE RATES (%) LOANS BALANCE BALANCE
------------------------------------------------------------------------ --------- --------------- -------
<S> <C> <C> <C>
7.251-7.500............................................................. 3 $ 2,000,000.00 0.94%
7.501-7.750............................................................. 2 1,205,000.00 0.57
7.751-8.000............................................................. 8 3,027,743.61 1.43
8.001-8.250............................................................. 63 39,149,720.89 18.48
8.251-8.500............................................................. 226 106,429,567.78 50.24
8.501-8.750............................................................. 20 34,762,137.04 16.41
8.751-9.000............................................................. 16 19,802,019.17 9.35
9.001-9.250............................................................. 5 5,466,245.00 2.58
--- --------------- -------
Total:.................................................................. 343 $211,842,433.49 100.00%
=== =============== =======
</TABLE>
Weighted Average: 8.434% per annum
S-15
<PAGE>
MORTGAGE LOAN PRINCIPAL BALANCE ($)
<TABLE>
<CAPTION>
NUMBER OF % OF
MORTGAGE LOAN MORTGAGE TOTAL TOTAL
PRINCIPAL BALANCE ($) LOANS BALANCE BALANCE
------------------------------------------------------------------------ --------- --------------- -------
<S> <C> <C> <C>
0.01- 50,000.00............................................... 4 $ 168,000.00 0.08%
50,000.01- 100,000.00............................................... 31 2,628,849.72 1.24
100,000.01- 150,000.00............................................... 42 5,337,474.79 2.52
150,000.01- 200,000.00............................................... 37 6,748,425.41 3.19
200,000.01- 250,000.00............................................... 27 6,005,626.39 2.83
250,000.01- 300,000.00............................................... 21 5,672,236.16 2.68
300,000.01- 350,000.00............................................... 19 6,154,771.00 2.91
350,000.01- 400,000.00............................................... 19 7,189,642.00 3.39
400,000.01- 450,000.00............................................... 11 4,717,550.00 2.23
450,000.01- 500,000.00............................................... 16 7,762,231.46 3.66
500,000.01- 750,000.00............................................... 46 29,283,974.05 13.82
750,000.01-1,000,000.00............................................... 20 17,997,964.17 8.50
1,000,000.01-1,250,000.00............................................... 10 11,470,500.00 5.41
1,250,000.01-1,500,000.00............................................... 10 14,144,500.00 6.68
1,500,000.01-1,750,000.00............................................... 8 13,051,297.36 6.16
1,750,000.01-2,000,000.00............................................... 4 7,705,000.00 3.64
2,000,000.01-2,250,000.00............................................... 2 4,230,000.00 2.00
2,250,000.01-2,500,000.00............................................... 1 2,400,000.00 1.13
2,500,000.01-2,750,000.00............................................... 2 5,435,000.00 2.57
2,750,000.01-3,000,000.00............................................... 1 2,999,750.00 1.42
3,000,000.01-3,250,000.00............................................... 1 3,250,000.00 1.53
3,250,000.01-3,500,000.00............................................... 3 10,200,000.00 4.81
3,500,000.01-3,750,000.00............................................... 1 3,546,400.00 1.67
3,750,000.01-4,000,000.00............................................... 2 7,998,729.17 3.78
4,250,000.01-4,500,000.00............................................... 1 4,500,000.00 2.12
4,500,000.01-4,750,000.00............................................... 1 4,560,828.58 2.15
4,750,000.01-5,000,000.00............................................... 1 4,997,395.83 2.36
5,250,000.01-5,500,000.00............................................... 1 5,486,287.40 2.59
6,000,000.01-6,250,000.00............................................... 1 6,200,000.00 2.93
--- --------------- -------
Total:.................................................................. 343 $211,842,433.49 100.00%
=== =============== =======
</TABLE>
Average: $617,616
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<PAGE>
LOAN-TO-VALUE RATIO (%) (1)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
LOAN-TO-VALUE RATIO (%) LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
10.01-15.00.............................................................. 1 $ 50,000.00 0.02%
20.01-25.00.............................................................. 3 219,900.00 0.10
25.01-30.00.............................................................. 1 157,474.99 0.07
30.01-35.00.............................................................. 4 2,899,331.11 1.37
35.01-40.00.............................................................. 4 3,897,116.86 1.84
40.01-45.00.............................................................. 3 861,000.00 0.41
45.01-50.00.............................................................. 7 6,375,000.00 3.01
50.01-55.00.............................................................. 6 3,299,999.63 1.56
55.01-60.00.............................................................. 4 1,578,934.38 0.75
60.01-65.00.............................................................. 9 12,607,395.83 5.95
65.01-70.00.............................................................. 13 7,381,282.70 3.48
70.01-75.00.............................................................. 9 10,965,631.67 5.18
75.01-80.00.............................................................. 57 20,229,376.31 9.55
80.01-85.00.............................................................. 7 3,529,880.57 1.67
85.01-90.00.............................................................. 5 4,133,000.00 1.95
90.01-95.00.............................................................. 13 13,751,109.58 6.49
95.01-100.00............................................................. 195 118,763,269.86 56.06
100.01 >=................................................................ 2 1,142,730.00 0.54
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
Weighted Average: 87.08%
------------------
(1) "Loan-to-Value Ratio" means a fraction, expressed as a percentage, the
numerator of which is the outstanding principal amount of the related
mortgage loan as of the Cut-off Date and the denominator of which is the
appraised value of the related mortgaged property at such time or, in the
case of a mortgage loan financing the acquisition of the mortgaged property,
the sales price of the mortgaged property, if such sales price is less than
such appraised value.
MARGIN (%)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MARGIN (%) LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
0.751-1.000.............................................................. 2 $ 1,900,000.00 0.90%
1.251-1.500.............................................................. 21 12,127,938.00 5.72
1.501-1.750.............................................................. 218 96,719,145.85 45.66
1.751-2.000.............................................................. 52 64,362,115.94 30.38
2.001-2.250.............................................................. 39 29,428,530.54 13.89
2.251-2.500.............................................................. 7 5,332,703.16 2.52
2.501-2.750.............................................................. 1 95,000.00 0.04
2.751-3.000.............................................................. 2 997,000.00 0.47
3.251-3.500.............................................................. 1 880,000.00 0.42
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
Weighted Average: 1.881% per annum
S-17
<PAGE>
MAXIMUM MORTGAGE RATES (%)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MAXIMUM MORTGAGE RATES (%) LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
11.751-12.000............................................................ 5 $ 11,843,131.74 5.59%
12.251-12.500............................................................ 10 8,998,000.29 4.25
12.501-12.750............................................................ 63 35,054,344.31 16.55
12.751-13.000............................................................ 126 62,704,140.11 29.60
13.001-13.250............................................................ 73 49,417,325.03 23.33
13.251-13.500............................................................ 48 26,207,692.01 12.37
13.501-13.750............................................................ 10 7,642,000.00 3.61
13.751-14.000............................................................ 5 8,087,500.00 3.82
14.001-14.250............................................................ 3 1,888,300.00 0.89
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
Weighted Average: 12.996% per annum
MONTH OF NEXT RATE ADJUSTMENT
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MONTH OF NEXT RATE ADJUSTMENT LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
July 2000................................................................ 243 $151,763,003.38 71.64%
August 2000.............................................................. 39 20,688,179.00 9.77
September 2000........................................................... 1 4,997,395.83 2.36
October 2000............................................................. 26 14,354,554.15 6.78
November 2000............................................................ 12 9,928,713.17 4.69
December 2000............................................................ 10 5,805,472.80 2.74
January 2001............................................................. 12 4,305,115.16 2.03
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
Weighted Average: July 2000
S-18
<PAGE>
GEOGRAPHIC DISTRIBUTION BY MORTGAGE LOAN BALANCE
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
GEOGRAPHIC DISTRIBUTION BY MORTGAGE LOAN BALANCE LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
California............................................................... 81 $ 77,270,525.72 36.48%
Florida.................................................................. 37 30,518,310.83 14.41
Washington............................................................... 17 14,881,628.58 7.02
Texas.................................................................... 23 14,872,260.57 7.02
Georgia.................................................................. 8 9,265,784.37 4.37
New York................................................................. 19 7,215,787.34 3.41
New Jersey............................................................... 18 6,697,880.94 3.16
Connecticut.............................................................. 6 6,437,300.00 3.04
Massachusetts............................................................ 6 5,187,500.00 2.45
Arizona.................................................................. 17 5,123,717.89 2.42
Illinois................................................................. 12 4,079,948.40 1.93
Maryland................................................................. 7 3,827,906.00 1.81
Virginia................................................................. 9 3,585,080.00 1.69
Wisconsin................................................................ 2 3,511,927.81 1.66
Ohio..................................................................... 10 1,894,621.59 0.89
Colorado................................................................. 5 1,739,800.00 0.82
Nevada................................................................... 6 1,260,877.75 0.60
Tennessee................................................................ 3 1,211,299.00 0.57
South Carolina........................................................... 3 1,120,000.00 0.53
Indiana.................................................................. 4 1,094,116.67 0.52
Hawaii................................................................... 5 1,066,500.00 0.50
Kansas................................................................... 2 1,042,560.00 0.49
Oklahoma................................................................. 8 1,003,800.00 0.47
Kentucky................................................................. 2 928,000.00 0.44
Maine.................................................................... 3 883,315.16 0.42
Pennsylvania............................................................. 3 833,500.00 0.39
Missouri................................................................. 2 702,900.00 0.33
Oregon................................................................... 3 624,912.50 0.29
Idaho.................................................................... 2 489,342.00 0.23
Louisiana................................................................ 2 481,098.00 0.23
Arkansas................................................................. 3 442,300.00 0.21
New Mexico............................................................... 3 415,000.00 0.20
Michigan................................................................. 1 400,000.00 0.19
North Carolina........................................................... 2 354,272.00 0.17
District of Columbia..................................................... 1 340,000.00 0.16
Minnesota................................................................ 3 274,460.37 0.13
Rhode Island............................................................. 1 269,000.00 0.13
Alabama.................................................................. 1 260,000.00 0.12
Alaska................................................................... 1 120,000.00 0.06
New Hampshire............................................................ 1 67,200.00 0.03
Vermont.................................................................. 1 48,000.00 0.02
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
Number of States Represented: 41 (includes the District of Columbia)
S-19
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
PROPERTY TYPE LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
Single Family Residence.................................................. 236 $159,175,351.55 75.14%
PUD...................................................................... 56 32,621,413.20 15.40
Condo.................................................................... 41 13,712,469.11 6.47
2-4 Family............................................................... 6 5,721,199.63 2.70
Townhouse................................................................ 4 612,000.00 0.29
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
OCCUPANCY
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
OCCUPANCY LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
Primary.................................................................. 283 $175,759,253.60 82.97%
Second Home.............................................................. 56 35,262,079.89 16.65
Investment............................................................... 4 821,100.00 0.39
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
PURPOSE
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
PURPOSE LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
Purchase................................................................. 299 $178,966,209.26 84.48%
Refinance--Cashout....................................................... 39 31,988,421.86 15.10
Refinance--Rate Term..................................................... 5 887,802.37 0.42
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
DOCUMENTATION LEVEL
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
DOCUMENTATION LEVEL LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
Lite..................................................................... 198 $121,087,071.65 57.16%
Alternative.............................................................. 130 80,734,784.89 38.11
Unknown.................................................................. 2 5,231,698.99 2.47
No Income Verifier....................................................... 12 3,033,877.96 1.43
Full..................................................................... 1 1,755,000.00 0.83
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
S-20
<PAGE>
CREDIT SCORE(1)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
CREDIT SCORE LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
<501..................................................................... 6 $ 2,644,050.00 1.25%
501-525.................................................................. 1 234,303.16 0.11
526-550.................................................................. 1 612,000.00 0.29
551-575.................................................................. 5 3,075,865.00 1.45
576-600.................................................................. 6 3,907,399.64 1.84
601-625.................................................................. 11 13,782,771.72 6.51
626-650.................................................................. 17 7,227,570.00 3.41
651-675.................................................................. 33 17,791,817.91 8.40
676-700.................................................................. 39 32,181,776.17 15.19
701-725.................................................................. 50 37,737,573.22 17.81
726-750.................................................................. 59 36,881,500.08 17.41
751-775.................................................................. 65 39,825,423.51 18.80
776-800.................................................................. 42 12,823,983.08 6.05
801-825.................................................................. 8 3,116,400.00 1.47
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
------------------
(1) See discussion above under "--General."
EFFECTIVE LOAN-TO-VALUE RATIO (%)(1)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
EFFECTIVE LOAN-TO-VALUE RATIO (%) LOANS BALANCE BALANCE
------------------------------------------------------------------------- -------- --------------- -------
<S> <C> <C> <C>
(less
than) 15.00.............................................................. 4 $ 4,208,874.99 1.99%
15.01-25.00.............................................................. 6 4,284,900.00 2.02
25.01-35.00.............................................................. 6 8,942,220.68 4.22
35.01-45.00.............................................................. 8 6,508,116.86 3.07
45.01-55.00.............................................................. 28 31,499,328.21 14.87
55.01-65.00.............................................................. 57 57,912,350.73 27.34
65.01-70.00.............................................................. 161 67,890,722.64 32.05
70.01-75.00.............................................................. 11 8,486,662.50 4.01
75.01-80.00.............................................................. 56 20,079,376.31 9.48
80.01-85.00.............................................................. 6 2,029,880.57 0.96
---- --------------- -------
Total:................................................................... 343 $211,842,433.49 100.00%
==== =============== =======
</TABLE>
------------------
Weighted Average by Current Balance: 60.50%
------------------
(1) "Effective Loan-to-Value Ratio" means a fraction, expressed as a percentage,
the numerator of which is the outstanding principal amount of the related
mortgage loan as of the Cut-off Date, less the amount secured by the
additional collateral required at the time of origination, if any, and the
denominator of which is the appraised value of the related mortgaged
property at such time or, in the case of a mortgage loan financing the
acquisition of the mortgaged property, the sales price of the mortgaged
property, if such sales price is less than such appraised value.
S-21
<PAGE>
GROUP II LOAN CHARACTERISTICS
On the Closing Date, the Group II Loans will consist of approximately 307
mortgage loans having an aggregate principal balance as of the Cut-off Date of
approximately $90,005,337 (for the Group II Loans, the "Cut-off Date Loan Group
Balance"). Substantially all of the Group II Loans were originated by the seller
in the ordinary course of its real estate lending activities.
The mortgage rate for the Group II Loans will be fixed until adjusted
approximately five years after the origination thereof and semi-annually
thereafter. The adjusted mortgage rate borne by a Group II Loan will be
calculated based on Six-Month LIBOR.
Notwithstanding the foregoing, each of the Group II Loans will be subject
to a maximum mortgage rate. The maximum mortgage rates for the Group II Loans
range from 12.00% to 15.375%. The Group II Loans will be subject to a periodic
interest rate cap of 6.00% per annum, in respect of the first adjustment and
2.00% per annum in respect of each subsequent adjustment.
Approximately 67.55% of the Group II Loans have a Loan-to-Value Ratio as of
the Cut-off Date in excess of 80%. None of the Group II Loans, including
Group II Loans having a Loan-to-Value Ratio greater than 80%, are insured under
any policy of primary mortgage insurance or other credit insurance policy.
Group II Loans having a Loan-to-Value Ratio at origination greater than 80% are
generally FlexSource(TM) Loans, which, in addition to being secured by real
property, are secured by a security interest in a limited amount of additional
collateral owned by the borrower or are supported by a third-party guarantee
(the "FLEXSOURCE(TM) LOANS"). The weighted average Effective Loan-to-Value Ratio
(by Cut-off Date Loan Group Balance) on the Group II Loans will be approximately
66.57%. The servicer will attempt to realize for the benefit of the trust fund
and the Certificate Insurer on the security interest in the Additional
Collateral of a defaulted FlexSource(TM) Loan that is in liquidation. See "The
Seller and Its Mortgage Programs" herein.
Based upon representations obtained from the mortgagors at the time of
origination of the Group II Loans, approximately 81.01% of the related mortgaged
properties are owner-occupied. As of the Cut-off Date, none of the Group II
Loans will be delinquent one or more months.
The Group II Loans were originated from May 2000 through July 2000. No more
than 1.72% (by Cut-Off Date Loan Group Balance) of the mortgaged properties
securing the Group II Loans are located in any one zip code area. At
origination, the Group II Loans had terms to stated maturity of 30 years. Each
Group II Loan is scheduled to pay only interest for the first 5 years of its
term. Commencing in its 6th year, each Group II Loan is scheduled to amortize on
a 25-year, fully amortizing basis. The latest month and year in which any Group
II Loan matures is July 2030. The mortgage loans had remaining terms to stated
maturity, calculated as of the Cut-off Date, of between approximately 358 and
360 months and a weighted average remaining term to stated maturity as of the
Cut-off Date of approximately 359 months. The mortgage rates borne by the Group
II Loans as of the Cut-off Date ranged from 7.250% per annum to 9.375% per annum
and the weighted average mortgage rate as of the Cut-off Date was approximately
8.524% per annum.
Each Group II Loan has an outstanding principal balance as of the Cut-off
Date of not less than $39,975 nor more than $1,550,000. The average outstanding
principal balance of the Group II Loans as of the Cut-off Date was approximately
$293,177.
Certain additional characteristics with respect to the Group II Loans are
set forth below. References herein to percentages of Group II Loans refer in
each case to the percentage of the Cut-off Date Loan Group Balance after giving
effect to scheduled monthly payments due on or prior to the Cut-off Date. The
sum of the percentages in each table below may not equal the total because of
rounding. The information set forth below relates to the initial Group II Loans
and does not include any additional Group II Loans which may be included after
the Cut-off Date.
S-22
<PAGE>
GROUP II COLLATERAL
MORTGAGE RATES (%)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MORTGAGE RATES (%) LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
7.001-7.250............................................................... 1 $ 186,000.00 0.21%
7.501-7.750............................................................... 2 633,500.00 0.70
7.751-8.000............................................................... 2 1,213,990.00 1.35
8.001-8.250............................................................... 63 15,670,482.50 17.41
8.251-8.500............................................................... 134 39,249,288.63 43.61
8.501-8.750............................................................... 44 14,238,365.59 15.82
8.751-9.000............................................................... 58 15,919,210.40 17.69
9.001-9.250............................................................... 2 2,595,000.00 2.88
9.251-9.500............................................................... 1 299,500.00 0.33
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
Weighted Average: 8.524% per annum
MORTGAGE LOAN PRINCIPAL BALANCE ($)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MORTGAGE LOAN PRINCIPAL BALANCE ($) LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
0.01- 50,000.00................................................. 4 $ 176,475.00 0.20%
50,000.01- 100,000.00................................................. 37 2,935,019.80 3.26
100,000.01- 150,000.00................................................. 51 6,502,697.94 7.22
150,000.01- 200,000.00................................................. 48 8,528,440.24 9.48
200,000.01- 250,000.00................................................. 29 6,627,322.25 7.36
250,000.01- 300,000.00................................................. 27 7,574,605.00 8.42
300,000.01- 350,000.00................................................. 25 8,082,231.96 8.98
350,000.01- 400,000.00................................................. 23 8,784,755.00 9.76
400,000.01- 450,000.00................................................. 13 5,521,649.00 6.13
450,000.01- 500,000.00................................................. 14 6,706,245.00 7.45
500,000.01- 750,000.00................................................. 22 13,678,395.93 15.20
750,000.01-1,000,000.00................................................. 9 8,392,500.00 9.32
1,000,000.01-1,250,000.00................................................. 2 2,270,000.00 2.52
1,250,000.01-1,500,000.00................................................. 2 2,675,000.00 2.97
1,500,000.01-1,750,000.00................................................. 1 1,550,000.00 1.72
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
Average: $293,177
S-23
<PAGE>
LOAN-TO-VALUE RATIO (%)(1)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
LOAN-TO-VALUE RATIO (%) LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
15.01- 20.00............................................................. 1 $ 1,000,000.00 1.11%
25.01- 30.00............................................................. 1 600,000.00 0.67
30.01- 35.00............................................................. 1 50,000.00 0.06
35.01- 40.00............................................................. 4 524,500.00 0.58
40.01- 45.00............................................................. 1 200,000.00 0.22
45.01- 50.00............................................................. 3 2,442,500.00 2.71
50.01- 55.00............................................................. 4 528,000.00 0.59
55.01- 60.00............................................................. 4 795,400.00 0.88
60.01- 65.00............................................................. 8 1,661,085.00 1.85
65.01- 70.00............................................................. 4 1,275,000.00 1.42
70.01- 75.00............................................................. 13 3,913,170.00 4.35
75.01- 80.00............................................................. 72 16,214,631.86 18.02
80.01- 85.00............................................................. 2 464,000.00 0.52
85.01- 90.00............................................................. 6 1,836,725.00 2.04
90.01- 95.00............................................................. 9 2,991,851.76 3.32
95.01-100.00............................................................. 173 54,872,973.50 60.97
100.01 >=................................................................. 1 635,500.00 0.71
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
Weighted Average: 89.33%
------------------
(1) "Loan-to-Value Ratio" means a fraction, expressed as a percentage, the
numerator of which is the outstanding principal amount of the related
mortgage loan as of the Cut-off Date and the denominator of which is the
appraised value of the related mortgaged property at such time or, in the
case of a mortgage loan financing the acquisition of the mortgaged property,
the sales price of the mortgage property, if such sales price is less than
such appraised value.
MARGIN (%)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MARGIN (%) LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
2.000..................................................................... 307 $90,005,337.12 100.00%
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
Weighted Average: 2.000% per annum
S-24
<PAGE>
MAXIMUM MORTGAGE RATES (%)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MAXIMUM MORTGAGE RATES (%) LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
11.751-12.000............................................................. 1 $ 227,941.25 0.25%
13.001-13.250............................................................. 1 186,000.00 0.21
13.501-13.750............................................................. 2 633,500.00 0.70
13.751-14.000............................................................. 2 1,213,990.00 1.35
14.001-14.250............................................................. 63 15,670,482.50 17.41
14.251-14.500............................................................. 133 39,021,347.38 43.35
14.501-14.750............................................................. 44 14,238,365.59 15.82
14.751-15.000............................................................. 58 15,919,210.40 17.69
15.001-15.250............................................................. 2 2,595,000.00 2.88
15.251-15.500............................................................. 1 299,500.00 0.33
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
Weighted Average: 14.518% per annum
MONTH OF NEXT RATE ADJUSTMENT
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
MONTH OF NEXT RATE ADJUSTMENT LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
May 2005................................................................. 85 $27,380,252.49 30.42%
June 2005................................................................. 114 30,327,321.47 33.70
July 2005................................................................. 108 32,297,763.16 35.88
-------- -------------- --------
Total:............................................................... 307 $90,005,337.12 100.00%
======== ============== ========
</TABLE>
Weighted Average: June 2005
S-25
<PAGE>
GEOGRAPHIC DISTRIBUTION BY MORTGAGE LOAN BALANCE
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
GEOGRAPHIC DISTRIBUTION BY MORTGAGE LOAN BALANCE LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
California................................................................ 75 $31,413,392.32 34.90%
Florida................................................................... 44 9,559,925.03 10.62
New Jersey................................................................ 16 5,694,200.00 6.33
Illinois.................................................................. 19 5,177,736.00 5.75
New York.................................................................. 11 4,771,470.00 5.30
Texas..................................................................... 16 4,177,351.50 4.64
Massachusetts............................................................. 7 3,159,000.00 3.51
Arizona................................................................... 13 2,769,951.00 3.08
Washington................................................................ 9 2,419,860.31 2.69
Virginia.................................................................. 6 1,938,367.00 2.15
Georgia................................................................... 6 1,862,400.00 2.07
Colorado.................................................................. 5 1,383,163.69 1.54
Tennessee................................................................. 8 1,326,340.00 1.47
Kentucky.................................................................. 2 1,121,500.00 1.25
Hawaii.................................................................... 3 973,000.00 1.08
Michigan.................................................................. 5 894,151.76 0.99
North Carolina............................................................ 2 813,290.00 0.90
Maryland.................................................................. 3 807,000.00 0.90
Connecticut............................................................... 4 746,900.00 0.83
Oregon.................................................................... 3 704,500.00 0.78
Indiana................................................................... 3 692,190.00 0.77
Pennsylvania.............................................................. 6 690,275.00 0.77
Minnesota................................................................. 4 682,400.00 0.76
New Mexico................................................................ 4 682,000.00 0.76
Idaho..................................................................... 3 598,010.00 0.66
Missouri.................................................................. 2 569,000.00 0.63
Louisiana................................................................. 2 430,000.00 0.48
Wisconsin................................................................. 2 429,986.46 0.48
Ohio...................................................................... 3 384,098.54 0.43
Mississippi............................................................... 2 345,425.21 0.38
Delaware.................................................................. 2 340,400.00 0.38
Nevada.................................................................... 2 316,900.00 0.35
Vermont................................................................... 2 293,941.25 0.33
Oklahoma.................................................................. 2 278,900.00 0.31
Maine..................................................................... 2 276,000.00 0.31
South Carolina............................................................ 1 275,000.00 0.31
District of Columbia...................................................... 1 235,000.00 0.26
Kansas.................................................................... 2 204,312.05 0.23
Nebraska.................................................................. 1 173,000.00 0.19
Alabama................................................................... 1 152,000.00 0.17
Montana................................................................... 1 101,000.00 0.11
Rhode Island.............................................................. 1 92,000.00 0.10
Arkansas.................................................................. 1 50,000.00 0.06
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
Number of States Represented: 43 (includes the District of Columbia)
S-26
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
PROPERTY TYPE LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
Single Family Residence................................................... 180 $56,860,557.13 63.17%
PUD....................................................................... 58 17,264,334.45 19.18
Condo..................................................................... 56 11,951,382.71 13.28
2-4 Family................................................................ 8 3,180,526.83 3.53
Townhouse................................................................. 5 748,536.00 0.83
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
OCCUPANCY
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
OCCUPANCY LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
Primary................................................................... 243 $72,911,000.83 81.01%
Second Home............................................................... 57 15,259,404.25 16.95
Investment................................................................ 7 1,834,932.04 2.04
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
PURPOSE
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
PURPOSE LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
Purchase.................................................................. 283 $82,539,535.20 91.71%
Refinance-Cashout......................................................... 22 6,963,607.96 7.74
Refinance-Rate Term....................................................... 2 502,193.96 0.56
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
DOCUMENTATION LEVEL
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
DOCUMENTATION LEVEL LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
Lite...................................................................... 155 $48,074,476.06 53.41%
Alternative............................................................... 145 40,400,121.06 44.89
No Income Verifier........................................................ 2 664,500.00 0.74
Unknown................................................................... 2 463,000.00 0.51
Full...................................................................... 3 403,240.00 0.45
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
S-27
<PAGE>
CREDIT SCORE(1)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
CREDIT SCORE LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
<526...................................................................... 4 $ 841,500.00 0.93%
526-550.................................................................. 2 760,000.00 0.84
551-575.................................................................. 1 248,000.00 0.28
576-600.................................................................. 8 1,890,320.00 2.10
601-625.................................................................. 16 5,164,881.04 5.74
626-650.................................................................. 33 12,117,157.99 13.46
651-675.................................................................. 33 8,656,010.25 9.62
676-700.................................................................. 29 7,247,382.29 8.05
701-725.................................................................. 33 9,800,684.92 10.89
726-750.................................................................. 47 16,948,049.32 18.83
751-775.................................................................. 50 13,438,588.31 14.93
776-800.................................................................. 43 11,780,463.00 13.09
801-825.................................................................. 8 1,112,300.00 1.24
==== ============== ======
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
------------------
(1) See discussion above under "--General."
EFFECTIVE LOAN-TO-VALUE RATIO (%)(1)
<TABLE>
<CAPTION>
NUMBER
OF % OF
MORTGAGE TOTAL TOTAL
EFFECTIVE LOAN-TO-VALUE RATIO (%) LOANS BALANCE BALANCE
-------------------------------------------------------------------------- -------- -------------- --------
<S> <C> <C> <C>
<15.00.................................................................... 1 $ 710,000.00 0.79%
15.01-25.00.............................................................. 3 1,562,770.00 1.74
25.01-35.00.............................................................. 3 788,010.00 0.88
35.01-45.00.............................................................. 8 1,630,400.00 1.78
45.01-55.00.............................................................. 15 5,717,957.04 6.35
55.01-65.00.............................................................. 39 14,424,237.69 16.03
65.01-70.00.............................................................. 154 45,447,160.53 50.49
70.01-75.00.............................................................. 11 3,313,170.00 3.68
75.01-80.00.............................................................. 72 16,214,631.86 18.02
80.01-85.00.............................................................. 1 224,000.00 0.25
---- -------------- ------
Total:............................................................... 307 $90,005,337.12 100.00%
==== ============== ======
</TABLE>
------------------
Weighted Average by Current Balance: 66.57%
(1) "Effective Loan-to-Value Ratio" means a fraction, expressed as a percentage,
the numerator of which is the outstanding principal amount of the related
mortgage loan as of the Cut-off Date less the amount secured by the
additional collateral required at the time of origination, if any, and the
denominator of which is the appraised value of the related mortgaged
property at such time or, in the case of a mortgage loan financing the
acquisition of the mortgaged property, the sales price of the mortgaged
property, if such sales price is less than such appraised value.
S-28
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
On the closing date the excess of the Class A-I Principal Balance over the
Cut-off Date Loan Group Balance for the Group I Loans (which excess is not
expected to exceed $20,000,000) and the excess of the Class A-II Principal
Balance over 98% of the Cut-off Date Loan Group Balance for the Group II Loans
(which is not expected to exceed $20,000,000) will be deposited in two
sub-accounts in the Pre-Funding Account established and maintained by the
trustee on behalf of the certificateholders. The amount on deposit in one
sub-account will be allocated to purchase adjustable rate mortgage loans based
on the same indices as the initial Group I Loans to be included in the Group I
Loans and the amount on deposit in the second sub-account will be allocated to
purchase mortgage loans with fixed mortgage rates adjusting five years after
origination pursuant to terms similar to the initial Group II Loans to be
included in the Group II Loans. During the pre-funding period, the depositor is
expected to purchase mortgage loans originated by the seller after July 1, 2000
from the seller and sell those subsequent mortgage loans to the trust fund as
described below. The purchase price for each subsequent mortgage loan will equal
the principal balance of such subsequent mortgage loan as of the date of
origination of such subsequent mortgage loan (reduced by principal payments due
or paid prior to the purchase date, if any) and will be paid from the related
sub-accounts account. Accordingly, the purchase of subsequent mortgage loans
will decrease the amount on deposit in the related sub-account and increase the
aggregate Stated Principal Balance of the mortgage loans in the related loan
group. Amounts on deposit in the sub-account for one loan group may not be used
to purchase loans for the other loan group.
Pursuant to the Agreement, the conveyance of subsequent mortgage loans may
be made on any business day during the pre-funding period, subject to certain
conditions in the Agreement being satisfied, including that:
o the subsequent mortgage loans conveyed on the subsequent transfer
date satisfy the same representations and warranties applicable to
all mortgage loans,
o the subsequent mortgage loans conveyed on the subsequent transfer
date were selected in a manner reasonably believed not to be adverse
to the interests of the certificateholders,
o the trustee receives an opinion of counsel with respect to the
validity of the conveyance of the subsequent mortgage loans conveyed
on the subsequent transfer date and the absence of any adverse
effect on the REMICs,
o the conveyance of the subsequent mortgage loans on the subsequent
transfer date will not result in a reduction or withdrawal of any
ratings assigned to the offered certificates,
o no subsequent mortgage loan conveyed on the subsequent transfer date
was 30 or more days delinquent,
o each subsequent mortgage loan conveyed on the subsequent transfer
date is secured by a first lien on the related mortgaged property,
o following the conveyance of the subsequent mortgage loans on the
subsequent transfer date, the characteristics of each loan group to
which mortgage loans were added pursuant to such conveyance will
remain substantially similar to the characteristics of each loan
group as of the Cut-off Date; and
o the Certificate Insurer must consent, which consent shall not be
unnecessarily withheld, to the purchase of the subsequent mortgage
loans notwithstanding the fact that the subsequent mortgage loans
meet the parameters stated herein.
ASSIGNMENT OF THE MORTGAGE LOANS
The depositor will purchase the mortgage loans from the seller pursuant to
a mortgage loan purchase agreement dated as of July 1, 2000 among the seller and
the depositor. Under the mortgage loan purchase agreement, the seller will make
certain representations, warranties and covenants to the depositor relating to,
among other things, certain characteristics of the mortgage loans and, subject
to the limitations described
S-29
<PAGE>
below, will be obligated as herein described to repurchase or substitute a
similar mortgage loan for any mortgage loan as to which there exists deficient
documentation or as to which there has been an uncured breach of any
representation or warranty relating to the characteristics of the mortgage loans
that materially and adversely affects the value of such mortgage loan or the
interests of the certificateholders or the Certificate Insurer in such mortgage
loan.
Pursuant to the Agreement, on the Closing Date the depositor will sell,
transfer, assign, set over and otherwise convey without recourse to the trustee,
in trust for the benefit of the holders of the certificates and the Certificate
Insurer, all right, title and interest of the depositor in and to (i) each
mortgage loan, (ii) the mortgage loan purchase agreement and (iii) certain other
assets included in the trust fund, including all principal and interest due and
received by the servicer with respect to the mortgage loans after the Cut-off
Date (to the extent not applied in computing the Cut-off Date Pool Balance).
Under the Agreement, the depositor will assign all its right, title and interest
in and to the representations, warranties and covenants made by the seller in
the mortgage loan purchase agreement (including the repurchase obligations
described above) to the trustee for the benefit of the certificateholders and
the Certificate Insurer. Except for a representation and warranty by the
depositor with respect to its ownership of the mortgage loans free of any liens,
the depositor will make no representations or warranties with respect to the
mortgage loans and will have no obligation to repurchase or substitute for
mortgage loans with deficient documentation or which are otherwise defective.
The seller is selling the mortgage loans without recourse and will have no
obligation with respect to the certificates other than the repurchase or
substitution obligations described above and below.
In connection with such transfer and assignment of the mortgage loans, the
seller will deliver or cause to be delivered to the trustee, among other things,
the original mortgage note (and any modification or amendment thereto) endorsed
pursuant to the Agreement, the original mortgage with evidence of recording
indicated thereon, an assignment in recordable form of the mortgage, the title
policy with respect to the related mortgaged property and, if applicable, all
recorded intervening assignments of the mortgage and any riders or modifications
to such mortgage note and Mortgage (except for any such document not returned
from the public recording office, which will be delivered to the custodian for
the Trustee as soon as the same is available to the seller). Assignments of the
mortgage loans to the trustee (or its nominee) will be delivered to the trustee
within 90 days following the Closing Date. The Agreement will generally not
require the servicer to record the assignments of the mortgage loans delivered
to the trustee provided that the long-term senior unsecured debt obligations of
Morgan Stanley Dean Witter & Co., the indirect parent of the seller, have not
been downgraded below a rating of "A3" by Moody's or "A-" by
Standard & Poor's, or the short-term senior unsecured debt rating of Morgan
Stanley Dean Witter & Co. has not been downgraded below "A-1" by Standard &
Poor's and certain other conditions are met. In the event that the conditions
are not met, the servicer will record the assignments of the mortgage for each
such mortgage loan delivered to the trustee except as otherwise provided in the
Agreement.
The trustee will review, or cause to be reviewed, each Mortgage File within
90 days of the Closing Date (or promptly after the trustee's receipt of any
document permitted to be delivered after the Closing Date) and will hold such
documents in trust for the benefit of the certificateholders and the Certificate
Insurer. If any document is found to be missing or defective in any material
respect, the trustee is required to notify the seller and the Certificate
Insurer in writing. If the seller cannot or does not cure such omission or
defect within 90 days after its receipt of notice from the trustee, the seller
is required to repurchase such defective mortgage loan from the trust fund at a
price equal to the sum of (a) 100% of the outstanding principal balance thereof,
(b) unpaid accrued interest thereon from the due date to which interest was last
paid by the mortgagor to the due date immediately preceding the repurchase and
(c) any unreimbursed servicing advances not included in clauses (a) and
(b) above. Rather than repurchase the defective mortgage loan as provided above,
the seller may remove such mortgage loan (a "DELETED MORTGAGE LOAN") from the
Trust Fund and substitute in its place one or more mortgage loans of like kind
(such loan or loans, collectively, a "REPLACEMENT MORTGAGE LOAN"); provided,
however, that such substitution is permitted only within two years after the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution would not disqualify the REMIC elections of the
trust fund or result in a prohibited transaction tax under the Internal Revenue
Code.
S-30
<PAGE>
Any Replacement Mortgage Loan generally will, on the date of substitution,
among other characteristics set forth in the Agreement, (i) have an outstanding
principal balance, after deduction of the principal portion of the monthly
payment due in the month of substitution, not in excess of (and not less than
90% of) the outstanding principal balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited by the seller in the Collection Account
not later than the succeeding Determination Date and held for distribution to
the holders of the certificates on the related Distribution Date), (ii) have a
maximum mortgage rate not less than (and not more than two percentage points
greater than) the maximum mortgage rate of the Deleted Mortgage Loan,
(iii) have a gross margin not less than that of the Deleted Mortgage Loan and,
if mortgage loans equal to 1% or more of the aggregate Cut-off Date Loan Group
Balance of a loan group have become Deleted mortgage loans, not more than two
percentage points more than that of the Deleted Mortgage Loan in the loan group,
(iv) have an Effective Loan-to-Value Ratio not higher than that of the Deleted
Mortgage Loan, (v) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Mortgage Loan, (vi) not permit
conversion of the related Mortgage Rate to a permanent fixed Mortgage Rate,
(vii) have the same or higher credit score, (viii) have an initial interest
adjustment date no earlier than five months before (and no later than five
months after) the initial interest adjustment date of the Deleted Mortgage Loan,
(ix) be a "qualified replacement mortgage" within the meaning of
Section 860G(a)(4) of the Internal Revenue Code, and (x) comply with all of the
representations and warranties set forth in the Agreement as of the date of
substitution. This cure, repurchase or substitution obligation constitutes the
sole remedy available to the certificateholders or the trustee for omission of,
or a material defect in, a mortgage loan document.
THE SELLER AND ITS MORTGAGE PROGRAMS
GENERAL
The Seller is an indirect wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co. In August 1999, it changed it name from NOVUS Financial Corporation
to Morgan Stanley Dean Witter Credit Corporation. The Seller is a retail
residential mortgage lender that originates and services loans for borrowers who
are clients of Morgan Stanley Dean Witter & Co. Clients are introduced to the
Seller typically through Morgan Stanley Dean Witter brokerage account
relationships, and through Discover Card cardmember relationships. The Seller
utilizes each of these companies' sales forces to reinforce brand identity and
customer relationships, in addition to marketing to these consumers directly
through the mail or via inserts in existing account statements.
The Seller is structured to operate nationally on a remote basis and
through the World Wide Web. Clients are provided toll-free telephone number
access to loan officers who will discuss alternative products to meet specific
needs. Loan officers take mortgage loan applications, and lead customers through
the entire mortgage loan origination process. The Seller's loan origination,
servicing, and collection systems are fully integrated providing a more
flexible, user-friendly technology foundation and enhanced customer service. In
order to provide convenient customer service for all U.S. properties, the Seller
maintains corporate licensing/authorization to conduct business in all 50
states.
ORIGINATION
Generally, a potential borrower may submit written or telephone
applications which provide pertinent information about the applicant's ability
to repay the proposed loan. Information supporting the potential borrower's
assets, liabilities, income and expenses is required. Such information typically
includes verification of income, deposits and mortgage payment history.
Additionally, the Seller obtains and reviews a property appraisal, title policy,
credit bureau reporting credit history, analysis of income supporting repayment
ability and proof of insurance coverage.
A potential borrower's ability to make the proposed loan payments is
measured by the applicant's income ratio, credit, residence stability and
assets. One test to determine this ability is the debt-to-income ratio, which is
the borrower's total monthly debt service divided by total monthly gross income.
The Seller typically allows for a debt-to-income of 40% when the borrower's
annual income is less than or equal to
S-31
<PAGE>
$75,000 or 45% when the borrower's annual income is greater than $75,000.
Debt-to-income exceptions must be approved by the appropriate level underwriter,
and supported by compensating factors.
The adequacy of the mortgaged property as security for the proposed mortage
loan will generally be determined by an appraisal acceptable to the Seller.
Appraisals are conducted by independent appraisers acceptable to the Seller.
Appraisals over 180 days old will not be sufficient if conducted by an
independent appraiser engaged by the potential borrower. If the proposed loan
amount exceeds $1,000,000, a second appraisal will be required.
Loans that have a loan-to-value ratio in excess of 80% are, in general,
also either (i) secured by a security interest in additional collateral
(generally securities) owned by the borrower or (ii) supported by a third party
guarantee (generally a parent of the borrower), which in turn is secured by a
security interest in collateral (generally securities). Such loans are also
referred to herein as "FLEXSOURCE(TM) LOANS", and the collateral referred to in
clauses (i) and (ii) is herein referred to as "ADDITIONAL COLLATERAL". The
amount of such Additional Collateral generally does not exceed 30% of the loan
amount, although the amount of the Additional Collateral may exceed 30% of the
loan amount if the original principal amount of the loan exceeds $1,000,000. In
limited cases, the seller may require Additional Collateral in excess of 30% of
the loan amount as part of the underwriting decision. The requirement to
maintain Additional Collateral generally terminates when the principal balance
of such FlexSource(TM) Loan is reduced to a predetermined amount set forth in
the related pledge agreement or guaranty agreement, as applicable, or when the
loan-to-value ratio for such FlexSource(TM) Loan is reduced to the seller's
applicable loan-to-value ratio limit for such loan by virtue of an increase in
the appraised value of the mortgaged property securing such loan as determined
by the seller. The pledge agreement and the guaranty agreement, as applicable,
and the security interest in such Additional Collateral, if any, provided in the
case of a FlexSource(TM) Loan will be assigned to the trustee but will not be
part of a REMIC. No assurance can be given as to the amount of proceeds, if any,
that might be realized from such Additional Collateral. Proceeds from the
liquidation of any such Additional Collateral will be included in net proceeds
only when permitted by applicable state law and by the terms of the related
pledge agreement or guaranty agreement, as applicable. Ambac Assurance
Corporation, as surety bond provider (the "SURETY BOND PROVIDER"), has provided
a "LIMITED PURPOSE SURETY BOND" which is intended to guarantee the receipt by
the trust fund of certain shortfalls in the net proceeds realized from the
liquidation of any required Additional Collateral (such amount not to exceed 30%
of the original principal amount of the related FlexSource(TM) Loan) to the
extent any such shortfall results in a loss of principal on such FlexSource(TM)
Loan that becomes a Liquidated Mortgage Loan, as more particularly described in,
and as limited by, the terms and provisions of the Limited Purpose Surety Bond.
The Limited Purpose Surety Bond will not cover any losses on the FlexSource(TM)
Loans that are recoverable or sought to be recovered as a voidable preference
under applicable law.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The table below sets forth information relating to the delinquency and loan
loss experience on the loans originated under the Morgan Stanley Dean Witter
First Mortgage Program which includes the mortgage loans originated pursuant to
guidelines similar to those applicable to the Group I Loans and Group II Loans.
These loans were originated by the seller and were being serviced by the seller
on November 30, 1995, November 30, 1996, November 30, 1997, November 30, 1998,
November 30, 1999 and June 30, 2000. The delinquency and loan loss experience
represents the historical experience of the seller, and there can be no
assurance that the future experience on the mortgage loans in the trust fund
will be more or less favorable than set forth below.
S-32
<PAGE>
DELINQUENCY AND LOSS HISTORY
<TABLE>
<CAPTION>
SEVEN
FISCAL YEAR ENDED NOVEMBER 30, MONTHS
---------------------------------------------------------------------------------------------- ENDED
JUNE 30,
1995 1996 1997 1998 1999 2000
---------------- ---------------- ---------------- ---------------- ------------------ ----------
$ # $ # $ # $ # $ # $
-------- ----- -------- ----- -------- ----- -------- ----- ---------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Mortgage
Program
Mortgage Loans
Outstanding.... $118,743 626 $177,371 1,011 $347,419 2,095 $747,776 4,507 $1,322,472 6,880 $1,712,093
Delinquency
Period:(1).....
30-59 Days $ 56 1 $ 617 4 $ 760 6 $ 182 2 $ 1,126 6 $ 2,344
60-89 Days..... $ -- -- $ 1,931 3 $ -- -- $ -- -- $ -- -- $ --
90 Days or
More......... $ -- -- $ 1,449 3 $ 318 2 $ 800 5 $ 218 3 $ 316
-------- ----- -------- ----- -------- ----- -------- ----- ---------- ----- ----------
Total
Delinquency.... $ 56 1 $ 3,997 10 $ 1,078 8 $ 982 7 $ 1,344 9 $ 2,660
Percent of Loan
Portfolio...... 0.05% 0.16% 2.25% 0.99% 0.31% 0.38% 0.13% 0.16% 0.10% 0.13% 0.16%
Foreclosures:
Outstanding.... -- 2,511 4 318 2 800 5 264 3 614
Percent of Loan
Portfolio.... 0.00% 0.00% 1.42% 0.40% 0.09% 0.10% 0.11% 0.11% 0.02% 0.04% 0.04%
Average Portfolio
Balance (2).... $ 69,486 378 $141,620 780 $248,051 1,467 $527,914 3,231 $1,019,303 5,770 $1,495,032
Gross Losses..... $ (1) $ (1) $ 400 $ (13) $ 41 $ 39
Recoveries....... $ -- $ -- $ (5) $ -- $ (6) $ (0)
Net Losses....... $ (1) $ (1) $ 395 $ (13) $ 35 $ 39
Percent of
Average
Portfolio
Balance........ 0.00% 0.00% 0.16% 0.00% 0.00% 0.00%
<CAPTION>
#
-----
<S> <C>
First Mortgage
Program
Mortgage Loans
Outstanding.... 8,129
Delinquency
Period:(1).....
30-59 Days 13
60-89 Days..... --
90 Days or
More......... 4
-----
Total
Delinquency.... 17
Percent of Loan
Portfolio...... 0.21%
Foreclosures:
Outstanding.... 3
Percent of Loan
Portfolio.... 0.04%
Average Portfolio
Balance (2).... 7,461
Gross Losses.....
Recoveries.......
Net Losses.......
Percent of
Average
Portfolio
Balance........
</TABLE>
------------------
(1) Delinquency is based on the number of days payments are contractually past
due. Any loans in foreclosure status are included in the respective aging
category in the chart.
(2) Average portfolio balance is the sum of the prior fiscal year-end balance
plus the sum of each month-end balance for the year indicated divided by
thirteen periods (or eight periods in the case of June 30, 2000).
No assurance can be given that values of the mortgaged properties as of the
dates of origination of the related mortgage loans have remained or will remain
constant. See "The Mortgage Pool" for a listing of the geographic distribution
of the mortgaged properties as of the Cut-off Date. If the residential real
estate market in an area should experience an overall decline in property values
such that the outstanding balances of the mortgage loans in that area equal or
exceed the value of the related mortgaged properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those currently
experienced in the mortgage lending industry in general. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the mortgage loans. In
addition, primary residences with above average values may experience greater
declines in value during adverse economic conditions than properties with lower
values. To the extent that such losses are not covered by the Excess Cash Flow,
overcollateralization or the Certificate Insurance Policy, they will be borne by
holders of the Class A Certificates.
S-33
<PAGE>
SERVICING OF THE MORTGAGE LOANS
SERVICING AND COLLECTION PROCEDURES
Servicing functions to be performed by the servicer under the Agreement,
dated as of July 1, 2000, among the depositor, the trustee and the seller and
servicer, include collection and remittance of principal and interest payments,
administration of mortgage escrow accounts, collection of certain insurance
claims and, if necessary, foreclosure. The servicer may contract with
subservicers to perform some or all of the servicer's servicing duties. When
used herein with respect to servicing obligations, the term servicer includes
any such subservicer.
Under the Agreement, the servicer will deposit collections on the mortgage
loans into a collection account (the "COLLECTION ACCOUNT") established by it.
Such account is required to be kept segregated from operating accounts of the
servicer and to meet the eligibility criteria set forth in the Agreement. Under
the Agreement, amounts on deposit in the Collection Account may be invested in
permitted investments as therein defined. Any losses resulting from such
investments are required to be reimbursed to the Collection Account by the
servicer out of its own funds.
On or before the Closing Date, the trustee will establish the Distribution
Account into which the servicer will remit all amounts required to be deposited
therein pursuant to the Agreement (net of its related servicing compensation) on
the second business day immediately preceding each Distribution Date. Not later
than the 10th day of each month, the servicer will furnish to the trustee
information with respect to loan level remittance data for such month's
remittance.
In the event of a default by the servicer under the Agreement, the
Certificate Insurer will have the right to remove the servicer and the trustee
will have the right, with the consent of the Certificate Insurer, and shall, at
the direction of the Certificate Insurer, remove the servicer. In the event that
the servicer is removed, the Certificate Insurer will appoint a successor
servicer acceptable to the Certificate Insurer. In connection with the removal
of the servicer, the trustee will be entitled to be reimbursed from the trust
fund for all of its reasonable costs associated with the transfer of servicing
to the successor servicer.
SERVICING COMPENSATION
The primary compensation payable to the servicer is the aggregate of the
servicing fees applicable to the related mortgage loans. The servicer shall be
entitled to receive, from interest actually collected on each mortgage loan, a
servicing fee rate per annum equal to 0.25%, with respect to the Group I Loans,
and 0.60%, with respect to the Group II Loans, on the aggregate Stated Principal
Balance for the mortgage loans.
The amount of the servicing fee is subject to adjustment with respect to
prepaid mortgage loans, as described herein under "--Adjustment to Servicing Fee
in Connection with Certain Mortgage Loans Prepaid in Full and Shortfalls in
Interest Payments." The servicer is also entitled to receive, as additional
servicing compensation, all late payment fees, assumption fees and other similar
charges and all reinvestment income earned on amounts on deposit in the
Collection Account. Reinvestment income earned on amounts on deposit in the
Distribution Account shall not be available to the certificateholders.
ADJUSTMENT TO THE SERVICING FEE IN CONNECTION WITH MORTGAGE LOANS PREPAID IN
FULL AND SHORTFALLS IN INTEREST PAYMENTS
When a borrower prepays a mortgage loan in full between due dates, the
borrower is required to pay interest on the amount prepaid only to the date of
prepayment and not thereafter. Principal prepayments in full by borrowers
received by the servicer during the Due Period for a Distribution Date will be
distributed to Certificateholders on the related Distribution Date. Pursuant to
the Agreement, the aggregate Servicing Fee for the mortgage loans in a loan
group for any Distribution Date will be reduced by an amount not in excess of
the aggregate Servicing Fee for the loan group sufficient to pass through to the
holders of the related certificates up to the full amount of interest to
compensate for any resulting Prepayment Interest Shortfall. If Prepayment
Interest Shortfalls for a Distribution Date exceed the Servicing Fee for the
loan group, the Servicing Fee for the mortgage loans in the other loan group
will not be available to compensate for this
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shortfall. The amount of interest available to be distributed on the Class A-I
and Class A-II Certificates will be reduced by any uncompensated Prepayment
Interest Shortfall. The Certificate Insurance Policy will not cover any
Prepayment Interest Shortfall.
ADVANCES
Subject to the limitations described in the following paragraph, the
servicer will be required to advance prior to each Distribution Date, from its
own funds or funds in the Collection Account that do not constitute Available
Distribution Amounts for such Distribution Date, an amount equal to the
scheduled payment of interest at the related mortgage rate (less the related
Servicing Fee Rate) and scheduled principal payment on each mortgage loan which
were due on the related due date and which were not paid during the month in
which such due date falls.
Monthly Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the certificates rather than to guarantee or
insure against losses. The servicer is obligated to make Monthly Advances with
respect to delinquent payments of interest and principal on each mortgage loan
to the extent that such Monthly Advances are, in its reasonable judgment,
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related mortgage loan. If the servicer determines
on any Determination Date to make a Monthly Advance, such Monthly Advance will
be included with the distribution to certificateholders on the related
Distribution Date. The successor servicer or the trustee will be obligated to
make such Monthly Advances under the same conditions as the servicer, if the
servicer fails in its obligations to do so, to the extent provided in the
Agreement. The trustee may rely conclusively upon any determination by the
servicer that a Monthly Advance is nonrecoverable.
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DESCRIPTION OF THE CERTIFICATES
The Class A-I Certificates, the Class A-II Certificates, Class B
Certificates and the Class R Certificates will be issued pursuant to the
Agreement, a copy of which (exclusive of the list of mortgage loans) will be
attached as an exhibit to the Current Report on Form 8-K to be filed with the
Securities and Exchange Commission after the date of delivery of the
certificates. Reference is made to the Prospectus for additional information
regarding the terms and conditions of the Agreement to the extent not revised by
the following description. The approximate original Principal Balance of the
Class A-I and Class A-II Certificates will be $230,000,000 and $107,800,000,
respectively subject to a permitted variance of plus or minus 5%.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Agreement. When particular provisions or terms used in the Agreement are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
GENERAL
The Class A-I Certificates initially will evidence in the aggregate a
beneficial interest of 100% in the Group I Loans and the related funds in the
Pre-Funding Account. The Class A-II Certificates initially will evidence in the
aggregate a beneficial interest of approximately 98% in the Group II Loans and
the related funds in the Pre-Funding Account.
The Class A Certificates will be issued in fully registered form only, in
denominations of $25,000 and integral multiples of $1.00 in excess thereof
(except for two Class A-I Certificates). As of the Closing Date, the trustee has
designated its offices with respect to this trust located at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota 55479, for such purposes. No service
charge will be made for any registration of exchange or transfer, but the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Distributions of principal and interest on the Class A Certificates to
which it is entitled will be made on the 15th day of each month, or, if such day
is not a business day, the next succeeding business day beginning in August
2000, to the persons in whose names the Class A Certificates are registered at
the close of business on the last business day of the calendar month immediately
preceding the calendar month in which the Distribution Date occurs (or on the
Closing Date, with respect to the first Distribution Date). The Class A
Certificates will initially be represented by certificates registered in the
name of Cede & Co. as the nominee of The Depository Trust Company. See
"--Registration of Class A Certificates" below. If definitive Class A
Certificates are issued, distributions will be made by wire transfer of funds
pursuant to written instructions delivered to the Trustee at least five days
prior to the Distribution Date or otherwise by check mailed to the address of
the person entitled thereto as it appears on the certificate register. The final
distribution in retirement of Class A Certificates will be made only upon
presentation and surrender of the Class A Certificates at the office or agency
of the trustee specified in the final distribution notice to Class A
Certificateholders.
MULTIPLE LOAN GROUP STRUCTURE
The mortgage loans in the trust consist of Group I Loans and Group II
Loans, as described above under "Description of the Mortgage Pool."
Distributions of principal on the Class A-I Certificates and Class A-II
Certificates will be based primarily on principal received or advanced with
respect to the Group I Loans and Group II Loans, respectively. However, the
Excess Cash Flow for a loan group will be available to pay amounts related to
the following for the non-related loan group:
o paying down any excess of the Principal Balance of the class of Class A
Certificates over the related loan group
o reimbursing the certificate insurer for Cumulative Insurance Payments;
and
o restoring overcollateralization reduced by Realized Losses.
See "--Overcollateralization Provisions" below.
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DISTRIBUTIONS ON THE CERTIFICATES
Distributions will be made to the extent of the Available Distribution
Amount remaining following payment therefrom of any fees, advances, premiums and
expenses pursuant to the Agreement.
Distributions of interest and principal to which a holder is entitled will
be made on each Distribution Date, commencing in August 2000, to each holder of
a Class A-I and Class A-II Certificate in an amount equal to each such holder's
respective Percentage Interest multiplied by the amount distributed in respect
of Class A-I and Class A-II Certificates, respectively. Distributions on the
Class A Certificates will be applied first to interest and then to principal.
All calculations of interest on the Class A-I Certificates will be made on the
basis of the actual number of days in the related Interest Accrual Period, and a
360-day year. All calculations of interest on the Class A-II Certificates will
be made on the basis of twelve 30-day calendar months and a 360-day year.
Interest will accrue with respect to each Distribution Date during the related
Interest Accrual Period.
INTEREST DISTRIBUTIONS
On each Distribution Date, holders of each class of Class A Certificates
will be entitled to receive interest distributions in an amount equal to the
related Accrued Certificate Interest thereon for that Distribution Date to the
extent of the related Available Distribution Amount for the related class of
Certificates for that Distribution Date, plus any Accrued Certificate Interest
remaining unpaid from any prior Distribution Date, less any related Net
Prepayment Interest Shortfalls for that Distribution Date and less any related
Relief Act Shortfalls.
Any Net Interest Shortfalls for a loan group will be allocated to the
related Class A Certificates and the related components of the Class B
Certificates in accordance with the amount of Accrued Certificate Interest that
would have accrued on that class of certificates absent these shortfalls as more
fully described in the Agreement.
In addition, if the Pass-Through Rate on the Class A-I Certificates is
calculated solely by reference to the related Weighted Average Net Mortgage
Rate, a Basis Risk Shortfall will occur. See "--Basis Risk Reserve Fund" below.
The ratings assigned to the Class A Certificates do not address the
likelihood of the receipt of any amount in respect of any Prepayment Interest
Shortfalls, Relief Act Shortfalls or Basis Risk Shortfalls. The Certificate
Insurance Policy does not cover any of these shortfalls and these shortfalls may
remain unpaid on the final Distribution Date. See "--Overcollateralization
Provisions" and "The Certificate Insurance Policy and the Certificate Insurer"
herein.
With respect to any Distribution Date, any Prepayment Interest Shortfalls
during the preceding calendar month will be offset by the servicer, but only to
the extent of Servicing Fees derived from that loan group as described under
"Servicing of the Mortgage Loans--Adjustment to the Servicing Fee in Connection
with Certain Mortgage Loans Prepaid in Full and Shortfalls in Interest
Payments."
CALCULATION OF CERTIFICATE LIBOR
The London interbank offered rate or LIBOR for the Class A-I Certificates
with respect to any Distribution Date will be determined by the trustee and will
equal the posted rate for United States dollar deposits for one month which
appears on Telerate Page 3750 (as defined below) as of 11:00 a.m., London time,
on the second LIBOR Business Day prior to the immediately preceding Distribution
Date (or, in the case of the first Distribution Date, July 26, 2000). If no such
posted rate appears, Certificate LIBOR will be determined on such date as
described in the paragraph below.
If on such date no posted rate appears on the Telerate Page 3750 as
described above, the trustee will request the principal London office of each of
the reference banks (which shall be four major banks specified in the Agreement
that are engaged in transactions in the London interbank market) ("REFERENCE
BANKS") to provide the trustee with such bank's offered quotation for United
States dollar deposits for one month to prime banks in the London interbank
market as of 11:00 a.m., London time, on such date. If at least two
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Reference Banks provide the trustee with such offered quotations, then
Certificate LIBOR on such date will be the arithmetic mean (rounded, if
necessary, to the nearest 1/100th of a percent (0.0001), with a 5/1,000th of a
percent (0.00005) rounded upwards) of all such quotations. If on such date fewer
than two of the Reference Banks provide the trustee with such an offered
quotation, Certificate LIBOR on such date will be the arithmetic mean (rounded,
if necessary, to the nearest 1/100th of a percent (0.0001), with a 5/1,000th of
a percent (0.00005) rounded upwards) of the offered per annum rates which one or
more leading banks in The City of New York selected by the trustee (after
consultation with the Seller and the Certificate Insurer) are quoting as of
11:00 a.m., New York City time, on such date to leading European banks for
United States dollar deposits for one month; provided, however, that if such
banks are not quoting as described above, Certificate LIBOR will be the
Certificate LIBOR applicable to the immediately preceding Distribution Date.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Class A-I and Class A-II Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount for the Group I Loans and Group II Loans, respectively,
remaining after the Interest Distribution Amount of the Class A-I and
Class A-II Certificates, as applicable, is distributed and in the manner set
forth below, a distribution allocable to principal equal to the related
Principal Distribution Amount subject to the priorities described below under
"--Overcollateralization Provisions" with respect to any related
Overcollateralization Increase Amount.
The Principal Distribution Amount with respect to Loan Group I will be
distributed on each Distribution Date on the Class A-I Certificates in reduction
of the Class A-I Principal Balance, until the Class A-I Principal Balance has
been reduced to zero.
The Principal Distribution Amount with respect to Loan Group II will be
distributed on each Distribution Date on the Class A-II Certificates in
reduction of the Class A-II Principal Balance, until the Class A-II Principal
Balance has been reduced zero.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, Excess Cash Flow on
each loan group, if any, be applied on that Distribution Date as an accelerated
payment of principal on the related class of certificates, but only in the
manner and to the extent hereafter described. After payment of the Interest
Distribution Amount and the Principal Distribution Amount (except for amounts in
clauses (iv) and (v) of the definition of Principal Distribution Amount) on the
Class A-I Certificates, Excess Cash Flow for the Group I Loans will be applied
on any Distribution Date as follows:
first, to pay to the holders of the Class A-I Certificates, the
principal portion of Realized Losses incurred on the Group I Loans during
the related Due Period;
second, to pay any Overcollateralization Increase Amount for the
Group I Loans to the Class A-I Certificates, but only to the extent the
Class A-I Principal Balance exceeds the aggregate Stated Principal Balance
of the Group I Loans after giving effect to the application of Excess Cash
Flow pursuant to clause first, above;
third, to pay any Overcollateralization Increase Amount for the Group
II Loans to the Class A-II Certificates, but only to the extent the
Class A-II Principal Balance exceeds the aggregate Stated Principal Balance
of the Group II Loans after application of the Excess Cash Flow for Group
II Loans;
fourth, to pay to the Certificate Insurer any Cumulative Insurance
Payments relating to the Group I Loans;
fifth, to pay to the Certificate Insurer any Cumulative Insurance
Payments relating to the Group II Loans, to the extent not covered by the
Excess Cash Flow for Group II Loans;
sixth, to pay any related Overcollateralization Increase Amount to the
Class A-I Certificates after giving effect to application of Excess Cash
Flow pursuant to clauses first and second above;
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seventh, to pay any Overcollateralization Increase Amount for the
Group II Loans to the Class A-II Certificates not covered pursuant to
clause third above, to the extent not covered by the Excess Cash Flow to
the Group II Loans, but only to the extent of reductions in the
Overcollateralization Amount for the Group II Loans as a result of Realized
Losses;
eighth, with respect to the remaining Excess Cash Flow for the Group I
Loans, to the Basis Risk Reserve Fund to pay to the holders of the
Class A-I Certificates the related Basis Risk Shortfall Carry-Forward
Amount; and
ninth, to pay to the holders of the Class B and Class R Certificates
any balance remaining, in accordance with the terms of the Agreement.
After payment of interest and principal on the Class A-II Certificates,
Excess Cash Flow for the Group II Loans will be applied on each Distribution
Date as follows:
first, to pay to the holders of the Class A-II Certificates, the
principal portion of Realized Losses incurred on the Group II Loans during
the related Due Period;
second, to pay any Overcollateralization Increase Amount for the
Group II Loans to the Class A-II Certificates, but only to the extent the
Class A-II Principal Balance exceeds the aggregate Stated Principal Balance
of the Group II Loans after giving effect to the application of Excess Cash
Flow pursuant to clause first, above;
third, to pay any Overcollateralization Increase Amount for the Group
I Loans to the Class A-I Certificates, but only to the extent the
Class A-I Principal Balance exceeds the aggregate Stated Principal Balance
of the Group I Loans after application of the Excess Cash Flow for Group I
Loans;
fourth, to pay to the Certificate Insurer any Cumulative Insurance
Payments relating to the Group II Loans;
fifth, to pay to the Certificate Insurer any Cumulative Insurance
Payments relating to the Group I Loans, to the extent not covered by the
Excess Cash Flow for Group I Loans;
sixth, to pay any related Overcollateralization Increase Amount to the
Class A-II Certificates after giving effect to the application of Excess
Cash Flow pursuant to clauses first and second above;
seventh, to pay any Overcollateralization Increase Amount for the
Group I Loans to the Class A-I Certificates not covered pursuant to clause
third above, to the extent not covered by the Excess Cash Flow to the Group
I Loans, but only to the extent of reductions in the Overcollateralization
Amount for the Group I Loans as a result of Realized Losses; and
eighth, to pay the holders of the Class B and Class R Certificates any
balance remaining, in accordance with the terms of the Agreement.
The Agreement requires that the Excess Cash Flow for each loan group, to
the extent available as described above, will be applied as an accelerated
payment of principal, on the Class A Certificates, to the extent that the
Required Overcollateralization Amount for that class exceeds the related
Overcollateralization Amount for that class as of that Distribution Date. The
application of Excess Cash Flow to the payment of principal on the Class A
Certificates has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the mortgage loans.
The Required Overcollateralization Amount for either loan group may be
permitted to decrease or "step down" as described in the Agreement. In that
event, a portion of the principal which would otherwise be distributed to the
holders of the related Class A Certificates on that Distribution Date shall not
be distributed to the holders of the related Class A Certificates on that
Distribution Date. This has the effect of decelerating the amortization of those
Class A Certificates relative to the amortization of the related mortgage loans,
and of reducing the related Overcollateralization Amount.
The Agreement provides that, on any Distribution Date, the unscheduled
collections on account of principal with respect to the mortgage loans during
the related Due Period will be distributed to the Class A Certificates as part
of the Principal Distribution Amount. If any Mortgage Loan becomes a Liquidated
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Mortgage Loan, the net liquidation proceeds related thereto and allocated to
principal may be less than the Principal Balance of the related Mortgage Loan
and therefore give rise to a Realized Loss.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "PRE-FUNDED AMOUNT") of
up to $20,000,000 with respect to the Group I Loans and up to $20,000,000 with
respect to the Group II Loans will be deposited in an account (the "PRE-FUNDING
ACCOUNT") and will be used to purchase additional Group I Loans and Group II
Loans, respectively. An additional amount will be deposited with respect to each
loan group to cover interest at the related pass-through rate on the portion of
the principal balance of the related Certificates representing an interest in
the amounts on deposit in the Pre-Funding Account. During the pre-funding period
from the Closing Date to the earliest to occur of (i) the date on which the
aggregate Pre-Funding Account is less than $100,000, (ii) a servicer Event of
Default under the Agreement and (iii) August 31, 2000, amounts on deposit in the
Pre-Funding Account may be withdrawn from time to time to acquire additional
mortgage loans in accordance with the Agreement. Any Pre-Funded Amount with
respect to Group I Loans or Group II Loans remaining in the Pre-Funding Account
at the end of the pre-funding period will be distributed as principal on the
Class A-I and Class A-II Certificates, respectively, on the Distribution Date
occurring at or immediately following the end of the pre-funding period.
OVERCOLLATERALIZATION AND SUBORDINATED CERTIFICATES
The rights of the Class B and Class R Certificateholders to receive
distributions with respect to the mortgage loans will be subordinated to the
rights of the holders of the Class A Certificates to the extent described
herein. This subordination is intended to enhance the likelihood of regular
receipt by the holders of the Class A Certificates of the full amount of monthly
distributions due them and to protect the holders of the Class A Certificates
against losses. The protection afforded to the holders of the Class A
Certificates by means of the subordination, to the extent provided herein, of
the Class B and Class R Certificates as described above will be accomplished by
the application of the Available Distribution Amount in the order specified
under "--Distributions on the Certificates" above.
If, because of liquidation losses, the aggregate outstanding principal
balance for either loan group were to decrease disproportionately faster than
distributions to the Class A Certificates reduce the Principal Balance of the
related Class A Certificates, the level of protection afforded to that Class of
Certificateholders by the subordination of the Class B Certificates would be
reduced. But for the application of Excess Cash Flow and the effect of the
Certificate Insurance Policy, the holders of Class A Certificates will bear all
losses and delinquencies on the related mortgage loans, and could incur losses
on their investment, if the aggregate outstanding principal balance of a loan
group becomes equal to or less than the outstanding Principal Balance of the
related Class A Certificates.
BASIS RISK RESERVE FUND
The Agreement also establishes an account (the "BASIS RISK RESERVE FUND"),
which is held in trust by the trustee on behalf of the holders of the Class A-I
Certificates. The Basis Risk Reserve Fund will not be an asset of any REMIC. On
any Distribution Date on which the Class A-I Pass-Through Rate is based upon the
applicable Weighted Average Net Mortgage Rate for the Group I Loans, the
Class A-I Certificateholders will be entitled to receive payments from the Basis
Risk Reserve Fund in an amount equal to the excess of:
(1) the amount of interest that the Class A-I Certificates would have
been entitled to receive on such Distribution Date (but not in excess of
12.51% per annum) had the Class A-I Pass-Through Rate not been calculated
based on the Weighted Average Net Mortgage Rate, over
(2) the amount of interest that the Class A-I Certificates received on
such Distribution Date based on the Weighted Average Net Mortgage Rate (but
not in excess of 12.51% per annum),
together with any unpaid Basis Risk Shortfall Carry-Forward Amount from prior
Distribution Dates, plus interest thereon (to the extent legally permitted) at
the then applicable Class A-I Pass-Through Rate (without
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giving effect to the Weighted Average Net Mortgage Rate, but not in excess of
12.51% per annum) to the extent not previously reimbursed from amounts withdrawn
from the Basis Risk Reserve Fund.
The amount (the "BASIS RISK RESERVE FUND DEPOSIT") required to be deposited
in the Basis Risk Reserve Fund on any Distribution Date will equal the greater
of:
(1) any Basis Risk Carry-Forward Amount for such Distribution Date,
and
(2) the amount, if any, necessary to be deposited so that the amount
on deposit in the Basis Risk Reserve Fund is at least $5,000 (after taking
into account any other amount already on deposit therein).
To the extent of any unpaid Basis Risk Shortfall Carry-Forward Amount on a
Distribution Date, such amount will also be distributable on such date even if
the Class A-I Pass-Through Rate is not based on the Weighted Average Net
Mortgage Rate. Any investment earnings on amounts on deposit in the Basis Risk
Reserve Fund will be paid to (and for the benefit of) the holders of the
Class B Certificates and will not be available to pay any Basis Risk Shortfall
Carry-Forward Amount.
CLEAN-UP CALL
On any Distribution Date on or after the Distribution Date on which the
aggregate Stated Principal Balance for the Group I Loans (after giving affect to
distribution on the Class A-I Certificates on such Distribution Date) is 10% or
less of the sum of the Cut-off Date Loan Group Balance for the Group I Loans and
the amount deposited in the Pre-Funding Account for Group I Loans on the Cut-off
Date, the Class R-I Certificateholders may, at their option, either
(1) purchase from the trust fund all the Group I Loans remaining outstanding
(and thereby effect the early retirement of the Class A-I Certificates) or
(2) purchase all Class A-I Certificates remaining outstanding. On any
Distribution Date on which the aggregated Stated Principal Balance for the Group
II Loans (after giving effect to distributions on the Class A-II Certificates on
such Distribution Date) is 10% or less of the sum of the Cut-off Date Loan Group
Balance for the Group II Loans and the amount deposited in the Pre-funding
Account for Group II Loans on the Cut-off Date, the Class R-II
Certificateholders may, at their option, either (1) purchase from the trust fund
all the Group II Loans remaining outstanding (and thereby effect the early
retirement of the Class A-II Certificates or (2) purchase all the Class A-II
Certificates remaining outstanding. In the absence of the exercise of such
purchase options by the Class R-I Certificateholders or the Class R-II
Certificateholders, the Certificate Insurer or the Surety Bond Provider may, at
its option, purchase from the trust fund all the Group I Loans or Group II
Loans, as applicable, remaining outstanding (and thereby effect the early
retirement of the Class A-I or Class A-II Certificates, as applicable) on any
Distribution Date on or after the Distribution Date such purchase option could
have been exercised pursuant to the preceding sentence.
The purchase price to be paid to the trust fund for purchase of all of the
mortgage loans in a loan group will generally equal the sum of (i) 100% of the
Stated Principal Balance of each mortgage loan in the related loan group (other
than in respect of any REO Property), together with accrued and unpaid interest
thereon minus the related Servicing Fee, (ii) unreimbursed servicer advances,
(iii) the appraised value of any REO Property (up to the Stated Principal
Balance of the related mortgage loan), and (iii) any amounts due and owing the
Certificate Insurer.
The price to be paid to holders of the Class A-I or Class A-II Certificates
for purchase of their certificates outstanding will generally equal the sum of
the aggregate of the Class A-I or Class A-II Principal Balance, as applicable,
together with accrued and unpaid interest thereon at the related Pass-Through
Rate and any previously undistributed Accrued Certificate Interest, net of Net
Interest Shortfalls, and will not include any Basis Risk Shortfalls. The
purchase price to be paid for any class of Class A Certificates will also
include any amounts due and owing the Certificate Insurer in respect of such
class.
MISCELLANEOUS
In determining the percentage of ownership interest in the trust fund
evidenced by a certificate for purposes of determining the consent of
certificateholders or other action by certificateholders as discussed under
"Description of the Agreements--Amendment" in the Prospectus, such percentage
shall be based upon the relative outstanding principal balances of the
certificates. Amendments to the Agreement requiring the
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consent of certificateholders shall require only the consent of the holders of
certificates of each class affected thereby, evidencing, as to such class,
Percentage Interests aggregating at least 66%. Amendments to the Agreement may
be made only with the prior written consent of the Certificate Insurer and the
Surety Bond Provider. Certain other actions under the Agreement also require the
prior written consent of the Certificate Insurer and the Surety Bond Provider.
The Certificate Insurer and the Surety Bond Provider may direct the trustee to
waive any default under the Agreement, except that a default in making any
required distribution on any certificate may only be waived by the affected
certificateholder. Upon any default by the servicer under the Agreement, the
trustee may terminate the rights of the servicer but only with the consent of
the Certificate Insurer, and the trustee shall terminate the servicer at the
direction of the Certificate Insurer. So long as there does not exist a default
by the Certificate Insurer, the Certificate Insurer will have the right to
exercise all rights of the holders of the Class A Certificates under the
Agreement without any consent of those holders, and those holders may exercise
their rights only with the prior written consent of the Certificate Insurer
except as provided in the Agreement.
THE TRUSTEE
Wells Fargo Bank Minnesota, N.A., a national banking association, will act
as trustee of the trust fund. The offices of the trustee's corporate trust
office with respect to this trust are located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479, Attention: Corporate Trust Services-Morgan
Stanley Dean Witter Capital I 2000-1 Trust and the telephone number for inquires
is (410) 884-2000.
The trustee may resign at any time, in which event the servicer will be
obligated to appoint a successor Trustee. The 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 servicer will be obligated to appoint a successor trustee. If
a downgrading in the credit rating of the trustee would materially and adversely
affect the ratings of the Class A Certificates (without regard to the
Certificate Insurance Policy), the servicer, under certain circumstances, may
remove the trustee and appoint a successor trustee. Any resignation or removal
of the trustee and appointment of a successor trustee will not become effective
until acceptance of the appointment of the successor trustee. The appointment of
any successor trustee is subject to the prior consent of the Certificate
Insurer.
REGISTRATION OF CLASS A CERTIFICATES
The Class A Certificates will initially be registered in the name of Cede,
the nominee of DTC. Certificateholders may hold their Certificates through DTC
(in the United States) or Clearstream or Euroclear (each as defined below) (in
Europe) if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Class A Certificates.
Clearstream and Euroclear will hold omnibus positions on behalf of the
Clearstream Participants and the Euroclear Participants (each as defined below),
respectively, through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries (collectively,
the "DEPOSITARIES") which in turn will hold such positions in customers'
securities accounts in the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "1934 ACT"). DTC accepts
securities for deposit from its participating organizations ("PARTICIPANTS") and
facilitates the clearance and settlement of securities transactions between
Participants in such securities through electronic book-entry changes in
accounts of Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also 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.
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Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
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 its 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 its 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. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in Clearstream or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Clearstream Participant or Euroclear Participant on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or a Euroclear Participant to a Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
Owners of the Class A Certificates ("CERTIFICATE OWNERS") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
Class A Certificates may do so only through Participants (unless and until
Definitive Class A Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of and interest
on the Class A Certificates from the Trustee through DTC and Participants.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below.
Unless and until Definitive Class A Certificates (as defined below) are
issued, it is anticipated that the only "Certificateholder" of the Class A
Certificates will be Cede, 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 the rights of Certificateholders indirectly through
Participants and DTC.
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, 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. Unless and until
Definitive Class A Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants by instructing such Participants to transfer Class A Certificates,
by book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the DTC 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.
Class A Certificates will be issued in registered and certificated form to
Certificate Owners, or their nominees, rather than to DTC (such Certificates
being referred to herein as "DEFINITIVE CLASS A CERTIFICATES"), only if (i) DTC
or the depositor advises the trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Class A Certificates and the depositor or the trustee is unable
to locate a qualified successor, (ii) the Depositor, at its sole option and with
the consent of the trustee, elects to terminate the book-entry system through
DTC or (iii) after the occurrence of an Event of Default (as defined in the
Agreement), DTC, at the direction of Certificate Owners having a majority in
Percentage Interests of the Class A Certificates together, advises the trustee
in writing that the continuation of a book-entry system through DTC (or a
successor thereto) to the
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exclusion of any physical certificates being issued to Certificate Owners is no
longer in the best interest of Certificate Owners. Upon issuance of Definitive
Class A Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and registered
holders will deal directly with the Trustee with respect to transfers, notices
and distributions.
DTC has advised the depositor and the trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a holder of Class A Certificates under the Agreement only at the
direction of one or more Participants to whose DTC account the Class A
Certificates are credited. DTC has advised the Depositor that DTC will take such
action with respect to any Percentage Interests of the Class A Certificates only
at the direction of and on behalf of such Participants with respect to such
Percentage Interests of the Class A Certificates. 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.
Clearstream, Luxembourg ("CLEARSTREAM") is incorporated under the laws of
Luxembourg as a professional depository. Clearstream holds securities for its
participating organizations ("CLEARSTREAM PARTICIPANTS") and facilitates the
clearance and settlement of securities transactions between Clearstream
Participants through electronic book-entry changes in accounts of Clearstream
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream in any of 28
currencies, including United States dollars. Clearstream provides to its
Clearstream Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. As a professional depository, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations and may include the underwriters of
any class of Certificates. Indirect access to Clearstream is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Clearstream Participant, either
directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("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 now be settled in any of 32
currencies, including United States dollars. The Euroclear System 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. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "EUROCLEAR OPERATOR" or "EUROCLEAR"), under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"EUROCLEAR 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 Euroclear
Cooperative. The Euroclear Cooperative establishes policy for the Euroclear
System on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to the Euroclear System 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 the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities
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in the Euroclear System 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 with respect to Certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its 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" herein. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificate Owner under the Agreement on behalf of a
Clearstream Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to its Depositary's ability to effect
such actions on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
In the event that any of DTC, Clearstream or Euroclear should discontinue
its services, the Depositor would seek an alternative depositary (if available)
or cause the issuance of Definitive Class A Certificates to Certificate Owners
or their nominees in the manner described above.
Issuance of the Class A Certificates in book-entry form rather than as
physical certificates may adversely affect the liquidity of the Class A
Certificates in the secondary market and the ability of Certificate Owners to
pledge them. In addition, since distributions on the Class A Certificates will
be made by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants, which will further credit them to the accounts of
indirect participants of Certificate Owners, Certificate Owners may experience
delays in the receipt of such distributions.
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GLOSSARY OF TERMS
"ACCRUED CERTIFICATE INTEREST" means, with respect to any class of Class A
Certificates and any Distribution Date, an amount equal to interest accrued
during the related Interest Accrual Period on its Principal Balance immediately
prior to that Distribution Date at the related Pass-Through Rate.
"ADDITIONAL COLLATERAL" means, with respect to any FlexSource(TM) Loan,
(i) a security interest in securities owned by the borrower or (ii) a security
interest in collateral (generally securities) pledged pursuant to a third party
guarantee.
"AGREEMENT" means the Pooling and Servicing Agreement dated as of July 1,
2000 among the depositor, the seller and servicer and the trustee.
"AVAILABLE DISTRIBUTION AMOUNT" means, for any Distribution Date and each
loan group, an amount equal to the sum of the following amounts, net of amounts
payable or reimbursable therefrom to the servicer, and the trustee:
o the aggregate amount of scheduled payments on the mortgage loans in
the related loan group due during the related Due Period and
received on or prior to the related Determination Date, after
deduction of the related servicing fees in respect of the mortgage
loans, the related trustee fees and the related premium paid to the
Certificate Insurer for that Distribution Date;
o unscheduled payments, including mortgagor prepayments on the
mortgage loans in the related loan group, insurance proceeds and
liquidation proceeds from the related mortgage loans including
amounts collected from the liquidation of Additional Collateral and
payments under the Surety Bond, and proceeds from repurchases of and
with respect to substitutions amounts representing principal
adjustments for the related mortgage loans occurring during the
related Due Period;
o all Monthly Advances made for that Distribution Date in respect of
the mortgage loans in the related loan group; and
o any amounts deposited by the servicer with respect to the mortgage
loans in the related loan group, in connection with Prepayment
Interest Shortfalls for the related mortgage loans.
"BASIS RISK SHORTFALL" means, with respect to the Class A-I Certificates
and any Distribution Date on which the Weighted Average Net Mortgage Rate of the
Group I Loans is used to determine the Pass-Through Rate of the Class A-I
Certificates, an amount equal to the excess of (x) Accrued Certificate Interest
calculated at a rate (not to exceed 12.51%) equal to Certificate LIBOR plus
0.33% (and 0.66% following the first Distribution Date on which a clean-up call
may be exercised) over (y) Accrued Certificate Interest calculated using the
Weighted Average Net Mortgage Rate of the Group I Loans.
"BASIS RISK SHORTFALL CARRY-FORWARD AMOUNT" means, with respect to the
Class A-I Certificates and any Distribution Date, an amount equal to the
aggregate amount of related Basis Risk Shortfall for this class on that
Distribution Date, plus any unpaid related Basis Risk Shortfall from prior
Distribution Dates, plus interest thereon at a rate equal to the lesser of
(a) Certificate LIBOR plus 0.33% (and 0.66% following the first Distribution
Date on which a clean-up call may be exercised) and (b) 12.51%.
"CEDE" means Cede & Co.
"CERTIFICATE LIBOR" means, for any Distribution Date, the rate per annum
calculated as described under "Description of the Certificates--Calculation of
Certificate LIBOR" above.
"CERTIFICATES" means the Class A-I, Class A-II, Class B and Class R
Certificates.
"CLASS A CERTIFICATES" means any of the Class A-I and Class A-II
Certificates.
"CLASS A-I PASS-THROUGH RATE" for a Distribution Date will be equal to the
least of (i) Certificate LIBOR (calculated as described below under
"--Calculation of LIBOR" above) plus 0.33%; (ii) the Weighted Average Net
Mortgage Rate for the Group I loans as of the due date in the preceding month;
and (iii) 12.51% per annum.
Notwithstanding the foregoing, the 0.33% margin added to the Certificate
LIBOR for the calculation of the Class A-I Pass-Through Rate will instead be
0.66% for each Distribution Date occurring after the first
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Distribution Date for which the aggregate Stated Principal Balance (after giving
effect to distributions on the Class A-I Certificates on such Distribution Date)
of the Group I Loans is 10% or less of the sum of the Cut-off Date Loan Group
Balance for the Group I Loans and the related amount on deposit in the
Pre-Funding Account as of the Cut-off Date. The Class A-I Pass-Through Rate thus
calculated will still be subject to the limitation of the Weighted Average Net
Mortgage Rate for the Group I Loans (and the maximum rate of 12.51% per annum)
as described above. Additional interest for a Distribution Date in excess of the
applicable Weighted Average Net Mortgage Rate may be payable on the Class A-I
Certificates from the Basis Risk Reserve Fund to the extent described above
under "--Basis Risk Reserve Fund."
"CLASS A-II PASS THROUGH RATE" for a Distribution Date will be equal to the
Weighted Average Net Mortgage Rate for the Group II loans as of the due date in
the preceding month.
The "CLASS A-I PRINCIPAL BALANCE" at any time is the original Class A-I
Principal Balance reduced (but not below $0) by all prior distributions to the
Class A-I Certificateholders with respect to principal.
The "CLASS A-II PRINCIPAL BALANCE" at any time is the original Class A-II
Principal Balance reduced (but not below $0) by all prior distributions to the
Class A-II Certificateholders with respect to principal.
"CLASS B CERTIFICATES" means, any one of the Certificates designated as a
Class B Certificate.
"CLASS R CERTIFICATES" means, any of the Class R-I, Class R-II and
Class R-III Certificates.
"CUMULATIVE INSURANCE PAYMENTS" means, for either loan group, the aggregate
of any payment made with respect to the related Class A Certificates by the
Certificate Insurer under the Certificate Insurance Policy to the extent not
previously reimbursed, plus interest on that amount at the rate set forth in the
insurance agreement.
"CUT-OFF DATE" means July 1, 2000.
"DETERMINATION DATE" means the 7th day of each month, or if such day is not
a business day, the immediately preceding business day beginning in August 2000.
"DISTRIBUTION DATE" means the 15th day of each month, or if such day is not
a business day, the next succeeding business day beginning in August 2000.
"DTC" means The Depository Trust Company.
"DUE PERIOD" means, with respect to any Distribution Date, the period
commencing on the second preceding Determination Date and ending on the day
preceding the immediately preceding Determination Date; provided that for
purposes of principal prepayments in part, the Due Period for any distribution
will be the prior calendar month.
"EFFECTIVE LOAN-TO-VALUE RATIO" means a fraction, expressed as a
percentage, the numerator of which is the outstanding principal amount of the
related mortgage loan as of the Cut-off Date (or at origination if so
specified), less the amount secured by the additional collateral required at the
time of origination, if any, and the denominator of which is the appraised value
of the related mortgaged property at such time or, in the case of a mortgage
loan financing the acquisition of the mortgaged property, the sales price of the
mortgaged property, if such sales price is less than such appraised value.
"EXCESS CASH FLOW" means, for either loan group and with respect to any
Distribution Date, an amount generally equal to the sum of (a) one month's
interest on the mortgage loans in the related loan group at the Weighted Average
Net Mortgage Rate for the related mortgage loans, to the extent paid or
advanced, minus the related Interest Distribution Amount and (b) the
Overcollateralization Reduction Amount, if any, with respect to that loan group.
"EXCESS OVERCOLLATERALIZATION AMOUNT" means, with respect to any
Distribution Date and either loan group, the excess, if any, of the related
Overcollateralization Amount on that Distribution Date over the related Required
Overcollateralization Amount.
The "EXPENSE FEE RATE" for a mortgage loan is the per annum rate (generally
not to exceed approximately 0.38% for the Class A-I Certificates and 0.73% for
the Class A-II Certificates) equal to the sum of (i) the related Servicing Fee
Rate, (ii) the per annum premium rate payable on the Certificate Insurance
Policy and (iii) the Trustee Fee Rate.
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"INTEREST ACCRUAL PERIOD" means, with respect to each Distribution Date and
(a) the Class A-I Certificates, the period beginning on the immediately
preceding Distribution Date (or July 28, 2000 in the case of the first Interest
Accrual Period) through the day preceding the Distribution Date and (b) the
Class A-II Certificates, the prior calendar month.
"INTEREST DISTRIBUTION AMOUNT" means, for either loan group and any
Distribution Date, the aggregate amount of Accrued Certificate Interest to be
distributed to the holders of the related Class A Certificates for that
Distribution Date to the extent of the related Available Distribution Amount for
that Distribution Date, plus any Accrued Certificate Interest remaining unpaid
from any prior Distribution Date, reduced by Net Interest Shortfalls as
described under "Description of the Certificates--Interest Distributions" above.
"LIBOR BUSINESS DAY" for purposes of the Agreement, is a Business Day (as
defined in the Agreement) and a day on which banking institutions in the City of
London, England, are not required or authorized by law to be closed.
"LIQUIDATED MORTGAGE LOAN" means, generally, a defaulted Mortgage Loan as
to which all amounts that the servicer believes can be recovered with respect to
such mortgage loan or the related REO Property have been recovered.
"LOAN-TO-VALUE RATIO" means a fraction, expressed as a percentage, the
numerator of which is the outstanding principal amount of the related mortgage
loan as of the Cut-off Date (or at origination if so specified) and the
denominator of which is the appraised value of the related mortgaged property at
such time or, in the case of a mortgage loan financing the acquisition of the
mortgaged property, the sales price of the mortgaged property, if such sales
price is less than such appraised value.
"MONTHLY ADVANCE" means an amount equal to the aggregate of payments of
interest and principal (net of any related Servicing Fee) which were due on the
related due date and which were not paid during the Due Period such due date
falls.
"MONTHLY PAYMENT" means for each date for a mortgage loan the scheduled
interest and, if any, principal payment due on such due date.
"NET INTEREST SHORTFALL" means, as to any Distribution Date, an amount
equal to the sum of (i) any Relief Act shortfall and (ii) any Net Prepayment
Interest Shortfall.
The "NET MORTGAGE RATE" of a mortgage loan is its mortgage rate minus
(a) the related Expense Fee Rate and minus (b) with respect to the Group I Loans
with a mortgage rate which adjusts on a semi-annual basis, 0.50%.
"NET PREPAYMENT INTEREST SHORTFALL" means for any Distribution Date and the
Class A-I or Class A-II Certificates, any excess of Prepayment Interest
Shortfalls for the Group I Loans or Group II Loans over the Servicing Fee for
the related loan group available to compensate for the shortfalls as described
under "Servicing of the Mortgage Loans--Adjustments to the Servicing Fee in
Connection with Mortgage Loans Prepaid in Full and Shortfalls in Interest
Payments."
An "OUTSTANDING MORTGAGE LOAN" in respect of a due date is a mortgage loan
which was not the subject of a principal prepayment in full prior to such due
date, which did not become a Liquidated Mortgage Loan prior to such due date and
which was not repurchased pursuant to the Agreement on account of certain
breaches of a representation or warranty or conversion or otherwise prior to
such due date.
"OVERCOLLATERALIZATION AMOUNT" means, with respect to any Distribution Date
and each loan group, the excess, if any, of the aggregate Stated Principal
Balances of the mortgage loans in the related loan group before giving effect to
distributions of principal to be made on that Distribution Date, over the
aggregate Principal Balance of the related Class A Certificates as of such date,
before taking into account distributions of principal to be made on the
Distribution Date.
"OVERCOLLATERALIZATION INCREASE AMOUNT" means, with respect to any
Distribution Date and each loan group, an amount equal to the lesser of (i) the
related Excess Cash Flow for that Distribution Date and (ii) the excess, if any,
of (x) the related Required Overcollateralization Amount for that Distribution
Date over (y) the related Overcollateralization Amount for that Distribution
Date.
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"OVERCOLLATERALIZATION REDUCTION AMOUNT" means, with respect to any
Distribution Date and each loan group for which the Excess Overcollateralization
Amount is, or would be, after taking into account all other distributions to be
made on that Distribution Date, greater than zero, an amount equal to the lesser
of (i) the related Excess Overcollateralization Amount for that Distribution
Date and (ii) any amounts described in clauses (b)(i) through (iv) of the
definition of "Principal Distribution Amount" for that loan group for that
Distribution Date.
"PASS-THROUGH RATE" means the Class A-I Pass-Through Rate or the
Class A-II Pass-Through Rate.
The "PERCENTAGE INTEREST" of a certificate of a class is the percentage
obtained from dividing its denomination by the original Principal Balance of all
the certificates of the same class.
The "POOL PRINCIPAL BALANCE" means, as of any Distribution Date and with
respect to either loan group, the aggregate Stated Principal Balance of the
related Outstanding mortgage loans on the due date in the month of such
Distribution Date.
"PREPAYMENT INTEREST SHORTFALLS" means, with respect to any Distribution
Date and either loan group, the aggregate shortfall, if any, in collections of
interest resulting from mortgagor prepayments on the mortgage loans in the
related loan group during the related Due Period.
"PRINCIPAL BALANCE" means the Class A-I Principal Balance or the
Class A-II Principal Balance.
"PRINCIPAL DISTRIBUTION AMOUNT" means, on any Distribution Date and with
respect to each loan group, the lesser of (a) the excess of (i) the related
Available Distribution Amount over (ii) the related Interest Distribution Amount
and (b) the aggregate amount described below:
(i) the principal portion of all scheduled monthly payments on the
mortgage loans in the related loan group received or advanced with respect
to the related due period;
(ii) the principal portion of all proceeds of the repurchase of
mortgage loans in the related loan group, or, in the case of a
substitution, amounts representing a principal adjustment, as required by
the Agreement during the related Due Period;
(iii) the principal portion of all other unscheduled collections
received on the mortgage loans in the related loan group during the related
Due Period, or deemed to be received during the related Due Period,
including, without limitation, full and partial principal prepayments made
by the respective mortgagors, to the extent not distributed on the
preceding Distribution Date;
(iv) the principal portion of any Realized Losses incurred, or deemed
to have been incurred, on any mortgage loans in the related loan group in
the related Due Period to the extent covered by related Excess Cash Flow
for that Distribution Date as described under "--Overcollateralization
Provisions" above; and
(v)
the amount of any related Overcollateralization Increase Amount for that
Distribution Date;
minus
(vi) the amount of any related Overcollateralization Reduction Amount
for that Distribution Date.
In no event will the Principal Distribution Amount for either loan group on
any Distribution Date be less than zero or greater than the outstanding
Principal Balance of the related Class A Certificates.
"REALIZED LOSS" means, as to any Distribution Date and Liquidated Mortgage
Loan, the portion, if any, of the principal of such Liquidated Mortgage Loan
that was not recovered upon the completion of its liquidation during the related
Due Period.
"RECORD DATE" means, with respect to each Distribution Date, the last
business day of the calendar month immediately preceding the calendar month in
which the Distribution Date occurs.
A "RELIEF ACT SHORTFALL" is a shortfall resulting from a reduction in the
amount of monthly interest on a mortgage loan pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended, or similar legislation or
regulations.
An "REO PROPERTY" means a mortgaged property acquired by the trust fund
through foreclosure or deed-in-lieu of foreclosure in connection with a
defaulted mortgage loan.
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"REQUIRED OVERCOLLATERALIZATION AMOUNT" means, with respect to any
Distribution Date and each loan group, the required level of the related
Overcollateralization Amount as set forth in the Agreement. These amounts may be
reduced from time to time with the consent of the Certificate Insurer and
notification to the rating agencies.
"SERVICING FEE" means the fee received by the servicer calculated based on
the Servicing Fee Rate.
"SERVICING FEE RATE" means, 0.25% per annum, with respect to the Group I
Loans, and 0.60% per annum, with respect to the Group II Loans.
"STATED PRINCIPAL BALANCE" means, with respect to any mortgage loan, the
outstanding principal balance remaining to be paid at the close of business on
the Cut-off Date (after deduction of all principal payments due on or before the
Cut-off Date, whether or not paid, but without deducting Monthly Payments due
after the Cut-off Date and received on or before the Cut-off Date) reduced by
all amounts (including Monthly Advances, if any) distributed to
certificateholders relating to principal of such mortgage loan.
"TELERATE PAGE 3750" means the display page designated on the Bridge
Information Systems Telerate Service (or such other page as may replace that
page on that service, or such other service as may be nominated as the
information vendor, for the purpose of displaying London interbank offered rates
of major banks).
"TRUSTEE FEE RATE" means 0.04% per annum.
"WEIGHTED AVERAGE NET MORTGAGE RATE," with respect to any Distribution Date
and either loan group, is the weighted average of the Net Mortgage Rates for the
mortgage loans in the related loan group as of the due date of the month
preceding the month of such Distribution Date weighted on the basis of their
outstanding Stated Principal Balances (after giving effect to the Monthly
Payments due on or before such due date and unscheduled principal payments
received prior to such due date).
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PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on the Class A Certificates and the yields to
maturity of the Class A Certificates are related to and affected by the rate and
timing of payments of principal on the mortgage loans in the related loan group.
The principal payments on the mortgage loans may be in the form of scheduled
principal payments, prepayments or liquidation proceeds due to default,
casualty, condemnation and the like. Any such payments will result in
distributions to the holders of the related certificates of amounts attributable
to principal which would otherwise be distributed over the remaining term of the
mortgage loans. In general, the prepayment rate may be influenced by a number of
factors, including general economic conditions, homeowner mobility and the level
of mortgage market interest rates. Mortgagors are generally permitted to prepay
the mortgage loans, in whole or in part, at any time without penalty. If a
mortgagor makes a partial prepayment of a mortgage loan, the servicer will
adjust the interest and principal components of the monthly payment of such
mortgage loan in the following month to reflect the reduced loan amount.
The rate of payment of principal may also be affected by the purchase or
repurchase of the mortgage loans or the certificates by the holders of the Class
R-I or Class R-II Certificates, the Certificate Insurer or the Surety Bond
Provider as described herein. See "The Mortgage Pool--General," "--Assignment of
the Mortgage Loans" and "Description of the Certificates--Clean-up Call" herein.
In such event, the purchase or repurchase price for a Group I or Group II loan
will be passed through to the holders of the Class A-I or Class A-II
Certificates, respectively, as a prepayment of principal on the following
Distribution Date. If the aggregate principal balance of the Subsequent Mortgage
Loans sold to the trust fund by the end of the pre-funding period is less than
the Pre-Funded Amount for the Group I or Group II Loans, the amount of such
differential will be distributed to the holders of the Class A-I or Class A-II
Certificates, respectively, as principal.
All of the Group I Loans are adjustable rate loans for which only interest
is due during the first ten years of their terms. All of the Group II Loans have
a mortgage rate which will remain fixed until approximately the fifth year after
origination and will be adjustable thereafter. Only interest is due on the
Group II Loans during the first five years of their terms. Neither the depositor
nor the seller is aware of any publicly available statistics that set forth
principal prepayment experience or prepayment forecasts of similar mortgage
loans over an extended period of time, and the experience of the seller is
insufficient to draw any conclusions with respect to the expected prepayment
rates on the mortgage loans. The rate of principal prepayments with respect to
similar mortgage loans has fluctuated in recent years. As is the case with
conventional fixed rate mortgage loans, adjustable rate mortgage loans may be
subject to a greater rate of principal prepayments in a declining interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable rate mortgage loans could be subject to higher prepayment rates than
if prevailing interest rates remain constant because the availability of fixed
rate or other adjustable rate mortgage loans at competitive interest rates may
encourage borrowers to refinance their adjustable rate loans to "lock in" a
lower adjustable or fixed interest rate. No prediction can be made as to the
rate of prepayments on the mortgage loans in stable or changing interest rate
environments.
To the extent that amounts paid to the holders of the Class A Certificates
on any Distribution Date are less than the amount due to the holders of the
Class A Certificates on such date, the weighted average life of the Class A
Certificates will be longer than if shortfalls had not occurred.
In the case of any Class A Certificates purchased at a discount to their
original principal amounts, a slower than anticipated rate of principal payments
is likely to result in a lower than anticipated yield. In the case of Class A
Certificates purchased at a premium to their original principal amounts, a
faster than anticipated rate of principal payments is likely to result in a
lower than anticipated yield.
In the event of the acceleration of the Group I or Group II loans as a
result of enforcement of "due-on-sale" provisions in connection with transfers
of the related mortgaged properties or the occurrence of certain other events
resulting in acceleration, the level of prepayments on the Group I or Group II
loans, as applicable, will be affected, thereby shortening the weighted average
life of the Class A-I or Class A-II Certificates, respectively. If the servicer
acquires actual knowledge that a mortgagor has transferred or proposes to
transfer the related mortgaged property, the servicer is obligated to enforce
any due-on-sale
S-51
<PAGE>
clause contained in the mortgage loan consistent with its practices for mortgage
loans it services for its own account. If the servicer elects not to enforce any
due-on-sale clause, the servicer is authorized to enter into an assumption and
modification agreement with the person to whom such mortgaged property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the mortgage loan.
Any refinancing of a mortgage loan by a mortgagor would have the effect of
a prepayment in full. Any such prepayments on the Group I and Group II loans
would be passed through to holders of the Class A-I and Class A-II Certificates,
respectively, and may affect the weighted average life of the related Class A
Certificates.
If a mortgage loan is prepaid in full, interest thereon will cease to
accrue on the date of the prepayment. Consequently, the timing of prepayments in
full on the Group I and Group II loans will affect the amount of the Available
Distribution Amount available to make distributions of interest on the
Class A-I and Class A-II Certificates, respectively, and will therefore affect
the ability of the trust fund to make a full distribution of interest on the
Class A Certificates. The Servicing Fee with respect to a loan group in respect
of the month of prepayment will be applied to the related class of Class A
Certificates as described under "Servicing of the Mortgage Loans--Adjustment to
the Servicing Fee in connection with Mortgage Loans Prepaid in Full and
Shortfalls in Interest Payments" above to make up for any reduced amount of
interest collections on account of the timing of the receipt of principal
prepayments, but no assurance can be given that the amount of the Servicing Fee
will be sufficient for such purpose. Net Interest Shortfalls with respect to a
loan group will be borne by the related class of Class A Certificates as
described under "Description of the Certificates--Distributions on the
Certificates" and will result in a lower than anticipated yield.
No prediction can be made as to future levels of Certificate LIBOR,
One-Month LIBOR, Six-Month LIBOR or One-Year Treasury (or the Prime Rate if the
conversion option is exercised) or as to the timing of any changes therein or as
to the rate or timing of any index conversion. The yields of the Class A-I and
Class A-II Certificates will be affected by Certificate LIBOR and the indices on
the Group I and Group II Loans, respectively. In addition, except for any
payments from the Basis Risk Reserve Fund, the holders of the Class A-I
Certificates will absorb the yield risk associated with a possible elimination
or inversion of the spread between the related Pass-Through Rate (which rate,
except as otherwise provided, is based on Certificate LIBOR) and the Weighted
Average Net Mortgage Rate for the Group I Loans. If such spread disappears
(i.e., if Certificate LIBOR plus the applicable margin exceeds the related
Weighted Average Net Mortgage Rate for the Group I Loans), then the Class A-I
Pass-Through Rate for such Distribution Date will be limited to such lower
Weighted Average Net Mortgage Rate for the Group I Loans.
The Pass-Through Rate on the Class A-II Certificates will equal the
Weighted Average Net Mortgage Rate for the Group II Loans. The mortgage rates on
the Group II Loans will be initially fixed. The mortgage rate on a Group II Loan
will be adjusted approximately 5 years following origination and semi-annually
thereafter. These rates will not change in response to changes in market
interest rates during the initial 5-year period from origination period.
Accordingly, if market interest rates or market yields for securities similar to
the Class A-II Certificates were to rise, the market value of these certificates
may decline. Therefore, the prepayment of the Group II Loans with higher
mortgage rates may result in a lower Pass-Through Rate on the Class A-II
Certificates.
WEIGHTED AVERAGE LIFE OF THE CLASS A CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the mortgage loans on the weighted average lives of the Class A
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the mortgage loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Class A Certificates
will be affected by the rate at which principal on the related mortgage loans is
paid. Principal payments on mortgage loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to default or other dispositions of mortgage
loans). Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this Prospectus Supplement is a Constant Prepayment
Rate ("CPR"). The CPR represents an
S-52
<PAGE>
assumed constant rate of prepayment each month, expressed as a per annum
percentage of the scheduled principal balance of the pool of mortgage loans for
that month. As used in the following table, the column headed "0%" assumes that
none of the mortgage loans is prepaid before maturity. The columns headed "10%",
"15%", "20%", "25%", "30%" and "40%", assume that prepayments on the mortgage
loans are made at CPRs of "10%", "15%", "20%", "25%", "30%", and "40%"
respectively. THE CPR DOES NOT PURPORT TO BE A HISTORICAL DESCRIPTION OF
PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT OF
ANY POOL OF MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS.
There is no assurance, however, that prepayments of the mortgage loans will
conform to any level of CPR, and no representation is made that the mortgage
loans will prepay at the CPRs shown or any other prepayment rate. The rate of
principal payments on pools of mortgage loans is influenced by a variety of
economic, geographic, social and other factors, including the level of interest
rates and the rate at which homeowners sell their homes or default on their
mortgage loans. Other factors affecting prepayment of mortgage loans include
changes in borrowers' housing needs, job transfers, unemployment and obligors'
net equity in their homes.
The percentages and weighted average lives in the following table were
determined assuming that (i) scheduled interest and principal payments on the
mortgage loans are received in a timely manner and prepayments are made at the
indicated constant percentages of CPR; (ii) principal prepayments on the
mortgage loans will be received on the last day of each month commencing in July
2000 at the respective constant percentages of CPR set forth in such table and
there are no Prepayment Interest Shortfalls; (iii) except as indicated with
respect to the weighted average lives, the clean-up call is not exercised;
(iv) each mortgage loan will pay only interest for the first ten years from
origination, with respect to the Group I Loans, and for the first five years
from origination, with respect to the Group II Loans, and will fully amortize
thereafter until maturity; (v) each mortgage loan will, as of the Cut-off Date,
have the applicable original term to maturity and the applicable remaining term
to maturity specified below; (vi) each mortgage loan bears interest at the
applicable current mortgage rate specified in the table below until the next
applicable interest adjustment date and thereafter bears interest at the sum of
the applicable index and margin specified in the table below; (vii) there are no
losses or delinquencies on the mortgage loans; (viii) the Class A Certificates
are issued on July 28, 2000; (ix) the Distribution Date is the 15th day of each
month commencing in August 2000; and (x) none of the indices on the mortgage
loans are converted into a new index. In addition, it is assumed that the
following indices have the following per annum values:
<TABLE>
<S> <C>
Certificate LIBOR........................................................ 6.62%
One-Month LIBOR.......................................................... 6.62%
Six-Month LIBOR.......................................................... 6.89375%
One-Year Treasury........................................................ 6.04%
</TABLE>
No representation is made that the actual losses and delinquencies on the
mortgage loans will be experienced at the assumed rate or at any other rate. In
addition, the mortgage loans are assumed to have the following characteristics:
S-53
<PAGE>
<TABLE>
<CAPTION>
(%)
CUT-OFF DATE CURRENT REMAINING ORIGINAL IO GROSS
PRINCIPAL MORTGAGE TERM TERM PERIOD MARGIN
INDEX NAME BALANCE RATE (MONTHS) (MONTHS) (MONTHS) (%)
-------------- -------------- -------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Group I Loans 6 Month LIBOR $ 4,403,399.64 8.71139 300 300 120 1.98629
6 Month LIBOR 245,395.00 8.65293 290 300 120 2.25000
1 Month LIBOR 164,872,140.42 8.46319 298 300 120 1.84985
1 Year
Treasury 7,333,646.96 8.34566 299 300 120 2.11178
1 Year
Treasury 1,402,073.16 8.40980 297 300 120 2.16678
1 Year
Treasury 2,479,415.16 8.60745 300 300 120 2.61302
1 Year
Treasury 2,867,331.11 7.96852 298 300 120 2.12500
6 Month LIBOR 11,487,223.04 8.17964 298 300 120 1.81545
6 Month LIBOR 4,997,395.83 8.12500 279 300 120 1.87500
6 Month LIBOR 9,728,900.67 8.38924 293 300 120 1.96829
1 Year
Treasury 199,812.50 7.87500 299 300 120 2.12500
6 Month LIBOR 1,825,700.00 8.66288 300 300 120 1.75068
Subsequent Group I
Loans 6 Month LIBOR 2,801,774.80 8.33584 300 300 120 1.89270
1 Month LIBOR 14,131,620.40 8.46319 300 300 120 1.84985
1 Year
Treasury 1,224,171.31 8.31510 300 300 120 2.20703
Group II Loans 6 Month LIBOR 21,130,273.40 8.72338 360 360 60 2.00000
6 Month LIBOR 16,284,711.46 8.30406 359 360 60 2.00000
6 Month LIBOR 11,073,120.01 8.72998 359 360 60 2.00000
6 Month LIBOR 8,533,989.76 8.33930 360 360 60 2.00000
6 Month LIBOR 15,730,689.60 8.53633 358 360 60 2.00000
6 Month LIBOR 10,649,562.89 8.27950 358 360 60 2.00000
6 Month LIBOR 1,000,000.00 7.87500 358 360 60 2.00000
6 Month LIBOR 2,269,500.00 9.10704 359 360 60 2.00000
6 Month LIBOR 333,500.00 7.75000 360 360 60 2.00000
6 Month LIBOR 513,990.00 7.80204 359 360 60 2.00000
6 Month LIBOR 186,000.00 7.25000 359 360 60 2.00000
6 Month LIBOR 2,300,000.00 9.08424 360 360 60 2.00000
Subsequent Group II
Loans 6 Month LIBOR $19,994,662.88 8.52425 360 360 60 2.0000
<CAPTION>
NEXT CURRENT CURRENT NEXT NEXT
PERIOD RATE GROSS GROSS PERIODIC PERIODIC PERIODIC PERIODIC
RATE CAP RESET LIFE LIFE RATE RATE RATE RATE
RESET FREQ FLOOR CAP FLOOR CAP FLOOR CAP
(MONTHS) (MONTHS) (%) (%) (%) (%) (%) (%)
-------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Group I Loans 6 6 1.98629 13.68220 NA NA NA NA
2 6 2.25000 12.83530 NA NA NA NA
2 1 1.84985 12.97015 NA NA NA NA
2 2 2.11178 13.16061 NA NA NA NA
6 6 2.16678 13.15913 NA NA NA NA
7 6 2.61302 13.60745 NA NA NA NA
4 6 2.12500 12.96852 NA NA NA NA
4 6 1.81545 13.17964 NA NA NA NA
3 6 1.87500 12.50000 NA NA NA NA
5 6 1.96829 12.73910 NA NA NA NA
5 6 2.12500 12.87500 NA NA NA NA
7 6 1.75068 13.66288 NA NA NA NA
Subsequent Group I
Loans 7 6 1.89270 13.03672 NA NA NA NA
2 1 1.84985 12.97015 NA NA NA NA
7 6 2.20703 13.19548 NA NA NA NA
Group II Loans 61 6 2.00000 14.72998 6 6 2 2
60 6 2.00000 14.29646 6 6 2 2
60 6 2.00000 14.72998 6 6 2 2
61 6 2.00000 14.33930 6 6 2 2
59 6 2.00000 14.53633 6 6 2 2
59 6 2.00000 14.22867 6 6 2 2
59 6 2.00000 13.87500 6 6 2 2
60 6 2.00000 15.10704 6 6 2 2
61 6 2.00000 13.75000 6 6 2 2
60 6 2.00000 13.80204 6 6 2 2
60 6 2.00000 13.25000 6 6 2 2
61 6 2.00000 15.08424 6 6 2 2
Subsequent Group II
Loans 61 6 2.00000 14.51686 6 6 2 2
</TABLE>
S-54
<PAGE>
Since the table was prepared on the basis of the assumptions in the
preceding paragraph, there will be discrepancies between the characteristics of
the actual mortgage loans and the characteristics of the mortgage loans assumed
in preparing the table. Any such discrepancy may have an effect upon the
percentages of the original Principal Balances outstanding and the weighted
average life of the Class A Certificates set forth in the tables. In particular,
the mortgage rates are adjustable (with respect to Group II Loans, five years
after origination) and will most likely vary from the assumed interest rates,
which may have a significant effect on the percentages of the original Principal
Balances outstanding and the weighted average life. In addition, since the
actual mortgage loans in the trust fund have characteristics which differ from
those assumed in preparing the table set forth below, the distributions of
principal on the Class A Certificates may be made earlier or later than as
indicated in the table.
It is not likely that the mortgage loans will prepay at any constant CPR to
maturity or that all mortgage loans will prepay at the same rate. In addition,
the diverse remaining terms to maturity of the mortgage loans could produce
slower or faster distributions of principal than as indicated in the related
table at the various CPRs specified even if the weighted average remaining term
to maturity of the mortgage loans is as assumed above.
Investors are urged to make their investment decisions on a basis that
includes their determination of anticipated prepayment rates under a variety of
the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
resulting weighted average life of the Class A Certificates and sets forth the
percentage of the original Principal Balances of the Class A Certificates that
would be outstanding after each of the dates shown at the indicated CPR.
S-55
<PAGE>
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE
OF THE CLASS A-I CERTIFICATES OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
-------------------------------------------------------------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................................ 100% 100% 100% 100% 100% 100% 100%
July 15, 2001................................................. 99 89 84 79 74 69 59
July 15, 2002................................................. 99 80 71 63 55 48 35
July 15, 2003................................................. 99 72 60 50 41 33 21
July 15, 2004................................................. 99 65 51 40 31 23 12
July 15, 2005................................................. 99 58 44 32 23 16 7
July 15, 2006................................................. 99 52 37 26 17 11 4
July 15, 2007................................................. 99 47 31 20 13 8 2
July 15, 2008................................................. 99 42 27 16 9 5 1
July 15, 2009................................................. 99 38 22 13 7 3 0
July 15, 2010................................................. 98 34 19 10 5 2 0
July 15, 2011................................................. 95 29 15 7 3 1 0
July 15, 2012................................................. 91 25 12 6 2 1 0
July 15, 2013................................................. 87 22 10 4 1 0 0
July 15, 2014................................................. 82 18 8 3 1 0 0
July 15, 2015................................................. 77 15 6 2 0 0 0
July 15, 2016................................................. 72 13 5 1 0 0 0
July 15, 2017................................................. 66 10 3 1 0 0 0
July 15, 2018................................................. 60 8 3 0 0 0 0
July 15, 2019................................................. 53 7 2 0 0 0 0
July 15, 2020................................................. 46 5 1 0 0 0 0
July 15, 2021................................................. 38 3 1 0 0 0 0
July 15, 2022................................................. 29 2 0 0 0 0 0
July 15, 2023................................................. 19 1 0 0 0 0 0
July 15, 2024................................................. 9 0 0 0 0 0 0
July 15, 2025................................................. 0 0 0 0 0 0 0
July 15, 2026................................................. 0 0 0 0 0 0 0
July 15, 2027................................................. 0 0 0 0 0 0 0
July 15, 2028................................................. 0 0 0 0 0 0 0
July 15, 2029................................................. 0 0 0 0 0 0 0
July 15, 2030................................................. 0 0 0 0 0 0 0
July 15, 2031................................................. 0 0 0 0 0 0 0
Weighted Average Life without exercise of a clean-up call
(years)(1).................................................. 18.63 7.86 5.61 4.22 3.31 2.68 1.88
Weighted Average Life with exercise of a clean-up call
(years)(1)(2)............................................... 18.59 7.60 5.31 3.96 3.08 2.48 1.74
</TABLE>
------------------
(1) The weighted average life of a Class A-I Certificate is determined by
(i) multiplying the amount of each net reduction by the number of years from
the date of the issuance of such Certificate to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the original
Principal Balance of such Certificate.
(2) The weighted average life is determined assuming the exercise of the 10%
clean-up call as soon as it is exercisable. See "Description of the
Certificates--Clean-up Call."
S-56
<PAGE>
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE
OF THE CLASS A-II CERTIFICATES OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
-------------------------------------------------------------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................................ 100% 100% 100% 100% 100% 100% 100%
July 15, 2001................................................. 100 90 85 80 75 70 60
July 15, 2002................................................. 100 81 72 63 56 48 35
July 15, 2003................................................. 100 72 61 50 41 33 20
July 15, 2004................................................. 100 65 51 40 31 24 13
July 15, 2005................................................. 100 58 44 32 23 16 7
July 15, 2006................................................. 99 52 37 25 17 11 4
July 15, 2007................................................. 98 46 31 20 13 7 2
July 15, 2008................................................. 96 41 26 16 9 5 1
July 15, 2009................................................. 95 36 22 12 7 3 0
July 15, 2010................................................. 93 32 18 9 5 2 0
July 15, 2011................................................. 91 28 15 7 3 1 0
July 15, 2012................................................. 89 25 12 6 2 1 0
July 15, 2013................................................. 87 22 10 4 1 0 0
July 15, 2014................................................. 85 19 8 3 1 0 0
July 15, 2015................................................. 82 17 7 2 0 0 0
July 15, 2016................................................. 79 14 5 2 0 0 0
July 15, 2017................................................. 76 12 4 1 0 0 0
July 15, 2018................................................. 73 10 3 1 0 0 0
July 15, 2019................................................. 69 9 2 0 0 0 0
July 15, 2020................................................. 65 7 2 0 0 0 0
July 15, 2021................................................. 61 6 1 0 0 0 0
July 15, 2022................................................. 56 5 1 0 0 0 0
July 15, 2023................................................. 51 4 0 0 0 0 0
July 15, 2024................................................. 45 3 0 0 0 0 0
July 15, 2025................................................. 39 2 0 0 0 0 0
July 15, 2026................................................. 32 1 0 0 0 0 0
July 15, 2027................................................. 25 1 0 0 0 0 0
July 15, 2028................................................. 17 0 0 0 0 0 0
July 15, 2029................................................. 8 0 0 0 0 0 0
July 15, 2030................................................. 0 0 0 0 0 0 0
July 15, 2031................................................. 0 0 0 0 0 0 0
Weighted Average Life without exercise of a clean-up call
(years)(1).................................................. 21.62 8.08 5.66 4.24 3.33 2.70 1.89
Weighted Average Life assuming a prepayment in full
(years)(1)(2)............................................... 5.05 3.90 3.42 3.01 2.64 2.32 1.79
</TABLE>
------------------
(1) The weighted average life of a Class A-II Certificate is determined by (i)
multiplying the amount of each net reduction by the number of years from the
date of the issuance of such Certificate to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum by the original Principal
Balance of such Certificate.
(2) The weighted average life is determined assuming that each Group II Loan is
subject to a prepayment in full on the 60th distribution date.
S-57
<PAGE>
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. No representation is made by any of the
underwriter, the depositor, the seller, the trustee or any of their affiliates
as to the accuracy or completeness of any such information.
Ambac Assurance Corporation (the "CERTIFICATE INSURER"), in consideration
of the payment of the premium and subject to the terms of the certificate
guarantee insurance policy relating to the Class A Certificates (the
"CERTIFICATE INSURANCE POLICY"), unconditionally and irrevocably agrees to pay
to the trustee for distribution to holders of the Class A Certificates in
accordance with the terms of the Agreement that portion of Insured Amounts which
shall become Due for Payment but shall be unpaid by reason of Nonpayment. The
Certificate Insurer's obligations under the Certificate Insurance Policy with
respect to a particular Insured Amount shall be finally and completely
discharged to the extent funds equal to the applicable Insured Amount are
received from the Certificate Insurer by the Trustee. The Certificate Insurer is
not responsible for the application of any Insured Amount subsequent to the
receipt thereof by the Trustee. Insured Amounts shall be paid only at the time
set forth in the Certificate Insurance Policy.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust
Fund or the trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Certificate Insurance Policy
does not protect against the adverse consequences of, and does not guarantee,
any specified rate of prepayments nor protect against any risk other than
Nonpayment, including failure of the trustee to make any Insured Payment due to
holders of the Class A Certificates. In addition, the Certificate Insurance
Policy does not cover any Net Interest Shortfalls in respect of the Class A
Certificates or any Basis Risk Carry-Forward Amount.
The Certificate Insurer will pay in immediately available funds any amount
payable under the Certificate Insurance Policy (other than Preference Amounts)
from its own funds on the later of (a) the Business Day next following the
Business Day on which the Certificate Insurer receives a notice of Nonpayment or
(b) the applicable Distribution Date. Such payments shall be made only upon
presentation of an instrument in form and substance satisfactory to the
Certificate Insurer who shall be subrogated to all rights of the holders of the
Class A Certificates to payment on the Class A Certificates to the extent of the
Insured Payments 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 Certificate Insurance Policy and no acceleration 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.
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the
Certificate Insurer of a certified copy of the order requiring the return of a
preference payment, and other documentation as is reasonably required by the
Certificate Insurer. This documentation shall be in a form satisfactory to the
Certificate Insurer, provided that if the documents are received after 12:00
noon New York City time on that Business Day, they will be deemed to be received
on the following Business Day.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As used in the Certificate Insurance Policy, the following terms have the
following meanings:
"BUSINESS DAY" means any day other than (i) a Saturday or a Sunday, (ii) a
legal holiday in the States of Minnesota, Maryland or New York or (iii) any day
on which banking or savings and loan institutions in the State of New York or
the State in which the corporate trust office of the Trustee is located are
authorized or obligated by law or executive order to be closed.
"DUE FOR PAYMENT" means, with respect to any Insured Amounts, such amount
that is due and payable under the Agreement on the related Distribution Date.
"INSURED AMOUNT" means with respect to any Distribution Date, the Required
Payment for such Distribution Date (exclusive of any Net Interest Shortfalls and
Basis Risk Carry-Forward Amounts).
S-58
<PAGE>
"INSURED PAYMENT" means the aggregate amount actually 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.
"NONPAYMENT" means, with respect to any Distribution Date, an Insured
Amount which is Due for Payment but has not and will not be paid in respect of
such Distribution Date pursuant to the Agreement.
"OVERCOLLATERALIZATION DEFICIT AMOUNT" means with respect to each of the
Class A-I Certificates and the Class A-II Certificates, and any Distribution
Date the excess, if any, of (a) the Class A-I Principal Balance or the
Class A-II Principal Balance, as applicable, over (b) the Stated Principal
Balance of the Group I Loans or the Group II Loans, as applicable, in each case
as of the close of business on the last day of the prior Due Period, plus any
amount on deposit in the related sub-account of the Pre-Funding Account and
available for purchase of Subsequent Mortgage Loans.
"PREFERENCE AMOUNT" means any payment of principal or interest on any
Class A Certificate which has become Due for Payment, the nonpayment of which
would have been covered by the Certificate Insurance Policy, and that has been
made to a holder of the Class A Certificates, by or on behalf of the trustee
which has been deemed a preferential transfer and theretofore recovered from its
registered owner pursuant to the United States Bankruptcy Code in accordance
with a final, nonappealable order of a court of competent jurisdiction.
"REQUIRED PAYMENT" means, with respect to the Class A-I Certificates and
the Class A-II Certificates and any Distribution Date, the sum of:
(a) the amount, if any, by which (x) the aggregate of the full amount
of the Interest Distribution Amount (exclusive of any Net Interest
Shortfall or, with respect to the Class A-I Certificates, Basis Risk
Carry-Forward Amount for such Distribution Date) and the
Overcollateralization Deficit Amount due to be distributed to such class of
Class A Certificateholders, exceeds (y) the amount of funds (exclusive of
funds representing the Insured Payment in respect of such Distribution
Date) that will be on deposit in the Distribution Account in respect of
such Distribution Date and payable on such class of Class A Certificates,
after taking into account all deposits to be made to the Distribution
Account on or prior to such Distribution Date and payable to such class of
Class A Certificates, including without limitation all Monthly Advances
with respect to the related loan group and payments under the Limited
Purpose Surety Bond with respect to the related loan group, and including
amounts available and payable from the unrelated loan group.
(b) on the Distribution Date in October 2026, with respect to the
Class A-I Certificates, and October 2031, with respect to the Class A-II
Certificates the amount, if any, necessary to reduce the Principal Balance
of such class of Class A Certificates to zero (after giving effect to all
other distributions of principal to be made on such Distribution Date in
respect of such class of Class A Certificates).
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The Certificate Insurance Policy is not cancelable for any reason. The
premiums on the Certificate Insurance Policy are not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Certificates.
The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly-issued municipal and structured
finance obligations. The Certificate Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly AMBAC, Inc.), a 100% publicly-held
company. Moody's Investors Service, Inc., Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. and Fitch, Inc. have each assigned a
triple-A financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
subsidiaries as of December 31, 1999 and December 31, 1998, and for each of the
years in the three-year period ended December 31, 1999,
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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 on March 30, 2000; Securities
and Exchange Commission File No. 1-10777--and the unaudited consolidated
financial statements of the Certificate Insurer and subsidiaries as of
March 31, 2000 and for the periods ended March 31, 2000 and March 31, 1999
included in the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for
the period ended--which was filed with the Securities and Exchange Commission on
May 12, 2000--are incorporated by reference into this prospectus supplement and
are deemed to be a part of this prospectus supplement. 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 by reference in this prospectus supplement also modifies or supersedes
that statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus
supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securitites
and Exchange Commission under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the Class A
Certificates are deemed to be incorporated by reference into this prospectus
supplement and to be a part of this prospectus supplement from the respective
dates of filing of the financial statements.
The following table sets forth the capitalization of the Certificate
Insurer and subsidiaries as of December 31, 1998, December 31, 1999 and
March 31, 2000, respectively, in conformity with generally accepted accounting
principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Unearned premiums..................................................... $1,303 $1,442 $1,428
Other liabilities..................................................... 548 524 477
------ ------ ------
$1,851 $1,966 $1,905
------ ------ ------
Stockholder's equity
Common stock........................................................ $ 82 $ 82 $ 82
Additional paid-in capital.......................................... 541 752 752
Accumulated other comprehensive income (loss)....................... 138 (92) (36)
Retained earnings................................................... 1,405 1,674 1,749
------ ------ ------
Total stockholder's equity............................................ 2,166 2,416 2,547
------ ------ ------
Total liabilities and stockholder's equity............................ $4,017 $4,382 $4,452
====== ====== ======
</TABLE>
For additional financial information concerning the Certificate Insurer,
see the audited financial statements of the Certificate Insurer incorporated by
reference in this prospectus supplement. 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, 1999
prepared in accordance with statutory accounting standards are available,
without charge, from the Certificate Insurer. The address of the Certificate
Insurer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Certificates
or the advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, the prospectus or this
prospectus supplement other than the information supplied by the Certificate
Insurer and presented under the heading "The Certificate Insurance Policy and
the Certificate Insurer" in this prospectus supplement and in the financial
statements incorporated in this prospectus supplement by reference.
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<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust Fund (exclusive of the rights in
respect of the Additional Collateral and the Basis Risk Reserve Fund) will
consist of three segregated asset pools (the "UPPER-TIER REMIC" and the
"LOWER-TIER REMICS"), the first of which shall consist of the group I loans and,
the second of which shall consist of the group II loans and the third of which
shall consist of the regular interests in each Lower-Tier REMIC. Elections will
be made to treat each pool as a separate "real estate mortgage investment
conduit" ("REMIC") for federal income tax purposes. The Class A Certificates and
Class B Certificates will be designated as "regular interests" in the Upper-Tier
REMIC, the Class R Certificates will represent the "residual interest" in the
Upper-Tier REMIC and each Lower-Tier REMIC.
In addition, the Class A-I Certificates will represent a beneficial
interest in the right to receive payments from the Basis Risk Reserve Fund
pursuant to the provisions of the Agreement. Due to their entitlement to such
payments, the Class A-I Certificates will be treated as also representing
beneficial interests in contractual rights that would either be treated for
United States federal income tax purposes as an interest rate cap agreement (the
"INTEREST RATE CAP AGREEMENT") as a notional principal contract or as an
interest in an entity taxable as a partnership with the Class B Certificates in
respect of each Class B Certificates' entitlement to interest for federal income
tax purposes. In the event that the rights of the Class A-I Certificates to
Basis Risk Carry-Forward Amounts are treated as representing beneficial
interests in an entity taxable as a partnership for federal income tax purposes,
such Certificateholders may be subject to different tax timing consequences and
withholding on such amounts with respect to holders of the Class A-I
Certificates who are non-U.S. Persons. Prospective investors in the Class A-I
Certificates should consult their tax advisors regarding the tax treatment of
the rights of the holders of such Certificates to Basis Risk Carry-Forward
Amounts.
A holder of a Class A-I Certificate must allocate its purchase price for
such Certificate between its two components--the REMIC regular interest
component and the Interest Rate Cap Agreement component or the partnership
interest component, as applicable. For information reporting purposes, the
Trustee will assume that, with respect to any Class A-I Certificate, the
Interest Rate Cap Agreement component or the partnership interest component, as
applicable, will have only nominal value relative to the value of the regular
interest component. The IRS could argue, however, that the Interest Rate Cap
Agreement component or the partnership interest component, as applicable, has
significant value, and if that argument were to be sustained, the regular
interest component could be viewed as having been issued with an additional
amount of original issue discount ("OID") (which could cause the total amount of
discount to exceed a statutorily defined de minimis amount). See "Material
Federal Income Tax Consequences--REMICs" in the Prospectus.
Upon the sale, exchange, or other disposition of a Class A-I Certificate,
the holder must allocate the amount realized between the two components of the
Class A-I Certificate based on the relative fair market values of those
components at the time of sale. Assuming that a Class A-I Certificate is held as
a "capital asset" within the meaning of section 1221 of the Code, gain or loss
on the disposition of an interest in the Interest Rate Cap Agreement component
or the partnership interest component, as applicable, should be capital gain or
loss, and, gain or loss on the disposition of the regular interest component
should, subject to the limitation described below, be capital gain or loss.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Class A-I Certificate realized by an investor who holds such Certificate as a
capital asset will be gain or loss and will be long-term or short-term depending
on whether the Certificate has been held for the long-term capital gain holding
period (currently more than one year). Such gain will be treated as ordinary
income (i) if the Certificate is held as part of a "conversion transaction" as
described in Code Section 1258(c), up to the amount of interest that would have
accrued on the holder'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 holder entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as a part of such transaction, (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates, or (iii) to the extent that such gain does not exceed the excess,
if any, of (a) the amount that would have been includable in the gross income of
the holder if its yield on such Certificate were 110% of the applicable Federal
rate as of the date of purchase,
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<PAGE>
over (b) the amount of income actually includable in the gross income of such
holder with respect to such Certificate. In addition, gain or loss recognized
from the sale of a Certificate by certain banks or thrift institutions will be
treated as ordinary income or loss pursuant to Code Section 582(c). Long-term
capital gains of certain non-corporate taxpayers are subject to a lower minimum
tax rate than ordinary income of such taxpayers for property held for more than
one year. The maximum tax rate for corporations is the same with respect to both
ordinary income and capital gains.
The following discussion assumes that the right of each of the holders of
the Class A-I Certificates to receive payments from the Basis Risk Reserve Fund
will be treated as an interest rate cap agreement for federal income tax
purposes. As indicated above, a portion of the purchase price paid by a holder
to acquire a Class A-I Certificate will be attributable to the Interest Rate Cap
Agreement component of such Certificate. The portion of the overall purchase
price attributable to the Interest Rate Cap Agreement component must be
amortized over the life of a Class A-I Certificate, taking into account the
declining balance of the related Regular Interest component. Treasury
regulations concerning notional principal contracts provide alternative methods
for amortizing the purchase price of an interest rate cap contract. Under one
method--the level yield constant interest method--the price paid for an interest
rate cap agreement is amortized over the life of the cap as though it were the
principal amount of a loan bearing interest at a reasonable rate. Holders are
urged to consult their tax advisors concerning the methods that can be employed
to amortize the portion of the purchase price paid for the Interest Rate Cap
Agreement component of a Class A Certificate.
Any payments made to a holder of a Class A Certificate from the Basis Risk
Reserve Fund, will be treated as periodic payments on an interest rate cap
agreement. To the extent the sum of such periodic payments for any year exceed
that year's amortized cost of the Interest Rate Cap Agreement component, such
excess is ordinary income. If for any year the amount of that year's amortized
cost exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction.
In general, as a result of the qualification of the Class A Certificates as
regular interests in a REMIC, the regular interest component of the Class A
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" under Section 856(c)(4)(A) of the Code, in the same
proportion that the assets of the Trust Fund, exclusive of the Basis Risk
Reserve Fund, would be so treated. The Interest Rate Cap Agreement component or
the partnership interest component, as applicable, of the Class A Certificates
will not be treated as assets described in Section 7701(a)(19)(C) of the Code or
"real estate assets" under Section 856(c)(4)(A) of the Code.
The Class A Certificates may be treated as having been issued with original
issue discount. The prepayment assumption that will be used for purposes of
computing original issue discount, if any, for federal income tax purposes is a
CPR of 20%. No representation is made that the mortgage loans will, in fact,
prepay at this or any other rate.
President Clinton's Fiscal Year 2001 Budget Proposal contains a provision
under which a REMIC would be secondarily liable for the tax liability of its
residual interest holders with respect to such residual interest. The proposal
would be effective for REMICs created after the date of enactment. It is unknown
whether this provision will be included in any bill introduced to Congress this
year or, if introduced, whether it will be enacted. Prospective investors in
REMIC residual interests should consult their tax advisors regarding the Fiscal
Year 2001 Budget Proposal.
See "Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes requirements on employee benefit plans subject to ERISA (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds, separate
accounts and other entities in which such plans, accounts or arrangements are
invested subject to the requirements of ERISA and/or the Code) (collectively,
"PLANS") and on persons who are fiduciaries with respect to such Plans. See
"ERISA Considerations" in the Prospectus.
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The U.S. Department of Labor (the "DOL") has granted to Morgan Stanley &
Co. Incorporated, one of the Underwriters, an administrative exemption
(Prohibited Transaction Exemption 90-24, Exemption Application No. D-8019, 55
Fed. Reg. 20548 (1990)) (the "EXEMPTION") from certain of the prohibited
transaction rules of ERISA with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the Exemption.
The receivables covered by the Exemption include mortgage loans such as the
mortgage loans in the Trust Fund. The Exemption will apply to the acquisition,
holding and resale of the Class A Certificates by a Plan, provided that specific
conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinate to the rights and interests
evidenced by other certificates of the trust fund;
(3) The Class A 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 either Standard & Poor's, Moody's or Fitch,
Inc. (each, a "RATING AGENCY");
(4) The trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection
with the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates. The sum
of all payments made to and retained by the depositor pursuant to the sale
of the Class A Certificates to the trust fund represents not more than the
fair market value of such mortgage loans. The sum of all payments made to
and retained by the servicer represents not more than reasonable
compensation for the servicer's services under the Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Plan investing in the Class A 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.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest prohibited transactions that may arise when a
Plan fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which the fiduciary (or its affiliate) is an obligor only if,
among other requirements, (i) in the case of the acquisition of Class A
Certificates in connection with the initial issuance, at least fifty (50)
percent of the Class A Certificates are acquired by persons independent of the
Restricted Group (as defined below), (ii) the Plan's investment in Class A
Certificates does not exceed twenty-five (25) percent of all of the Class A
Certificates outstanding at the time of the acquisition, (iii) immediately after
the acquisition, no more than twenty-five (25) percent of the assets of any Plan
for which the fiduciary has discretionary authority or renders investment advice
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity, and (iv) the fiduciary or
its affiliate is an obligor with respect to obligors representing five (5)
percent or less of the fair market value of the obligations in the trust. The
Exemption does not apply to Plans sponsored by the depositor, any underwriter,
the trustee, the servicer, any obligor with respect to mortgage loans included
in the trust fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust fund, or any affiliate
of such parties (the "RESTRICTED GROUP").
The Depositor believes that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates sold by the Underwriters and that
all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, there is no obligor
with
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respect to mortgage loans included in the Trust Fund constituting more than five
percent of the aggregate unamortized principal balance of the assets of the
Trust Fund.
Employee benefit plans that are governmental plans (as defined in
section 3(32) of ERISA) and certain church plans (as defined in
section 3(33) of ERISA) are not subject to ERISA requirements. Accordingly,
assets of such plans may be invested in the Class A Certificates without regard
to the ERISA restrictions described above, subject to applicable provisions of
other federal and state laws.
Any Plan fiduciary who proposes to cause a 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 Plan's acquisition and ownership of
Class A Certificates. Assets of a Plan or individual retirement account should
not be invested in the Class A Certificates unless it is clear that the assets
of the Trust Fund will not be plan assets or unless it is clear that the
Exemption or another applicable prohibited transaction exemption will apply and
exempt all potential prohibited transactions.
LEGAL INVESTMENT CONSIDERATIONS
After the amount in the pre-funding account has been reduced to zero, so
long as the Class A Certificates are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating agency, the
Class A Certificates will constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") and, as such, will
be "legal investments" for certain types of institutional investors to the
extent provided in SMMEA. See "Legal Investment" in the Prospectus.
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 mortgage loans from the seller and expenses connected with pooling the
mortgage loans and issuing the certificates.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "UNDERWRITING AGREEMENT") relating to the Class A Certificates, the
depositor has agreed to sell the Class A Certificates to the underwriters
specified below (the "Underwriters"), and the Underwriters have agreed to
purchase the Class A Certificates in the respective principal amounts set forth
opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
UNDERWRITER CLASS A-I CERTIFICATES CLASS A-II CERTIFICATES
-------------------------------------------------- ---------------------- -----------------------
<S> <C> <C>
Morgan Stanley & Co. Incorporated................. $229,998,000 $ 107,798,000
CIBC Worldmarkets plc............................. 1,000 1,000
Unibank a/s....................................... 1,000 1,000
------------ -------------
Total........................................ $230,000,000 $ 107,800,000
============ =============
</TABLE>
The Class A Certificates may be distributed from time to time in one or
more negotiated transactions or otherwise at varying prices to be determined, in
each case, at the time of sale. Proceeds to the depositor from the sale of the
Class A Certificates are expected to be approximately 99.98% of the initial
principal amount of the Class A Certificates, before deducting expenses payable
by the depositor. The Underwriters may effect such transactions by selling the
Class A Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriters. In connection with the sale of the Class A Certificates,
each Underwriter may be deemed to have received compensation from the depositor
in the form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Class A
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A
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<PAGE>
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The Underwriting Agreement and certain indemnity letters provide that the
depositor and the seller, will indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or
contribute to payments the Underwriters may be required to make in respect
thereof.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
Underwriters have no obligation to make a secondary market in the Class A
Certificates. Any such market-making by the Underwriters may be discontinued by
it at any time without notice, in its sole discretion. The Class A Certificates
will not be listed on any securities exchange.
Morgan Stanley & Co. Incorporated, one of the Underwriters, is an affiliate
of the depositor, the seller and the servicer.
EXPERTS
The consolidated financial statements of the Certificate Insurer, and
subsidiaries, as of December 31, 1999 and 1998 and for each of the years in the
three year period ended December 31, 1999 have been incorporated by reference in
this prospectus supplement and in the depositor's registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference in this prospectus supplement, and upon the authority
of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters and the material federal income tax consequences of
the Certificates will be passed upon for the depositor, the seller and Morgan
Stanley & Co. Incorporated by Brown & Wood LLP, New York, New York.
CERTIFICATE RATING
It is a condition to the issuance of the certificates that the Class A
Certificates 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").
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 rating agency.
The ratings assigned to the Class A Certificates address the likelihood of the
receipt of distributions due on the Class A Certificates according to their
terms. The ratings take into consideration, among other things, the credit
quality of the mortgage loans, the structural and legal aspects associated with
the Class A Certificates, and the financial strength of the Certificate Insurer.
An adverse change in any of such factors or in other factors may be a basis for
the downward revision or withdrawal of the rating of the Class A Certificates.
The ratings assigned to the Class A Certificates do not represent any assessment
of the likelihood that principal prepayments might differ from those originally
anticipated. The rating does not address the possibility that the holders of the
Class A Certificates might suffer a lower than anticipated yield or the
likelihood or frequency of payment of any Basis Risk Carry-Forward Amounts with
respect to the Class A-I Certificates. There can be no assurance as to whether
any other rating agency will rate the Class A Certificates, or if it does, what
rating it will assign to the Class A Certificates.
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[INTENTIONALLY LEFT BLANK]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered, Morgan
Stanley Dean Witter Capital I 2000-1 Trust Mortgage Pass-Through Certificates,
Series 2000-1 (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, Clearstream, or Euroclear. The Global Securities will be tradable 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. Capitalized
terms used but not defined in this Annex I have the meanings assigned to them in
the Prospectus Supplement and the Prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice. Secondary market trading between investors
holding interests in Global Securities through DTC will be conducted according
to the rules and procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between investors holding interests in
Global Securities through Clearstream or Euroclear and investors holding
interests in Global Securities through DTC Participants will be effected on a
delivery-against-payment basis through the respective depositories of
Clearstream and Euroclear (in such capacity) and other DTC Participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described below in order to facilitate transfers of interests in the
Global Securities among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the Trustee
will have any responsibility for the performance by DTC, Euroclear and
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
obligations.
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
The Global Securities will be registered 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. Clearstream and Euroclear will hold positions on
behalf of their participants through their respective depositories, which in
turn will hold such positions in accounts as DTC Participants.
Investors electing to hold interests in Global Securities through DTC
Participants, rather than through Clearstream or Euroclear accounts, will be
subject to the settlement practices applicable to similar issues of pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in Global Securities through
Clearstream 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. Interests in 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.
I-1
<PAGE>
Transfers between DTC Participants. Secondary market trading between DTC
Participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
Transfers between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants and/or
investors holding interests in Global Securities through them will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Transfers between DTC seller and Clearstream or Euroclear purchaser. When
interests in Global Securities are to be transferred on behalf of a seller from
the account of a DTC Participant to the account of a Clearstream Participant or
a Euroclear Participant for a purchaser, the purchaser will send instructions to
Clearstream or Euroclear through a Clearstream Participant or Euroclear
Participant at least one business day prior to settlement. Clearstream or the
Euroclear Operator will instruct its respective depository to receive an
interest in the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last Distribution Date
to but excluding the settlement date. Payment will then be made by the
respective depository to the DTC Participant's account against delivery of an
interest in the Global Securities. After such settlement has been completed,
such interest will be credited to the respective clearing system, and by the
clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The credit of such interest
will appear on the next business day and the cash debit 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 through DTC on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debit will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement from cash on hand, in which case such Clearstream
Participants or Euroclear Participants will take on credit exposure to
Clearstream or the Euroclear Operator until interests in the Global Securities
are credited to their accounts one day later.
As an alternative, if Clearstream or the Euroclear Operator has extended a
line of credit to them, Clearstream Participants or Euroclear Participants can
elect not to pre-position funds and allow that credit line to be drawn upon.
Under this procedure, Clearstream Participants or Euroclear Participants
receiving interests in Global Securities for purchasers would incur overdraft
charges for one day, to the extent they cleared the overdraft when interests in
the Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, the investment
income on the interest in the Global Securities earned during that one-day
period would tend to offset the amount of such overdraft charges, although this
result will depend on each Clearstream Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC Participants are subject to DTC procedures for transferring interests
in Global Securities to the respective depository of Clearstream or Euroclear
for the benefit of Clearstream Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the seller settling the sale through a DTC Participant, a cross-market
transaction will settle no differently than a sale to a purchaser settling
through a DTC Participant.
Finally, intra-day traders that use Clearstream Participants or Euroclear
Participants to purchase interests in Global Securities from DTC Participants or
sellers settling through them for delivery to Clearstream Participants or
Euroclear Participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be available to eliminate this potential condition:
(a) borrowing interests in Global Securities through Clearstream or
Euroclear for one day (until the purchase side of the intra-day trade is
reflected in the relevant Clearstream or Euroclear accounts) in accordance
with the clearing system's customary procedures;
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(b) borrowing interests in Global Securities in the United States from
a DTC Participant no later than one day prior to settlement, which would
give sufficient time for such interests, to be reflected in the relevant
Clearstream or Euroclear accounts 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 Clearstream
Participant or Euroclear Participant.
Transfers between Clearstream or Euroclear seller and DTC purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
interests in Global Securities are to be transferred by the respective clearing
system, through the respective depository, to a DTC Participant. The seller will
send instructions to Clearstream or the Euroclear Operator through a Clearstream
Participant or Euroclear Participant at least one business day prior to
settlement. Clearstream or Euroclear will instruct its respective depository, to
credit an interest in 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 Distribution Date to but excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
Participant or Euroclear Participant the following business day, and receipt of
the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred through DTC in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), receipt of the
cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would instead be valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the United States) 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, 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 or Form W-8BEN). Beneficial Owners
of Certificates that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign Status)
or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United
States Tax Withholding). If the information shown on Form W-8 changes, a new
Form W-8 or Form W-8BEN must be filed within 30 days of such change. After
December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form 4224
or Form W-8ECI). A non-U.S. Person, 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) or Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding 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 or Form W-8BEN). Non-U.S. Persons that are Beneficial Owners 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 (Ownership, Exemption or Reduced Rate Certificate) or Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If Form 1001 is provided and 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 the Beneficial Owner or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
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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 Beneficial Owner 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 clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date the form is signed.
The term "U.S. PERSON" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership or other entity treated as a
corporation or partnership for federal income tax purposes created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia or (iii) an estate the income of which is includable in gross income
for United States tax purposes, regardless of its source or (iv) 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 United States fiduciaries have the
authority to control all substantial decisions of the trust. 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.
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PROSPECTUS
MORGAN STANLEY DEAN WITTER CAPITAL I INC.
(FORMERLY KNOWN AS MORGAN STANLEY CAPITAL I INC.)
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES BY SEPARATE TRUSTS)
------------------------------
Morgan Stanley Dean Witter Capital I Inc. will offer one or more series of
certificates, which represent beneficial ownership interests in the related
trust. The assets of each trust will primarily be:
o conventional, fixed or adjustable interest rate mortgage loans
secured by first liens or junior liens, or first and junior liens on
one- to four-family residential properties, including mortgage
participations;
o mortgage pass-through certificates and mortgage-backed securities;
o direct obligations of the United States or other governmental
agencies; or
o any combination of the above.
The certificates of any series will not be obligations of Morgan Stanley
Dean Witter Capital I Inc. or any of its affiliates, and neither the
certificates of any series nor the underlying mortgage loans are insured or
guaranteed by any governmental agency.
------------------------------
INVESTING IN ANY SERIES OF CERTIFICATES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
------------------------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved the certificates or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
------------------------------
MORGAN STANLEY DEAN WITTER
The date of this prospectus is July 25, 2000.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about the certificates being offered to you is contained in two
separate documents that progressively provide more detail:
o this prospectus, which provides general information, some of which may
not apply to a particular series of certificates; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of certificates. If the terms of a particular series
of certificates vary between this prospectus and the accompanying
prospectus supplement, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the prospectus supplement. This prospectus and the accompanying prospectus
supplement include cross references to sections in these materials where you can
find further related discussions. The tables of contents in this prospectus and
the prospectus supplement identify the pages where these sections are located.
Morgan Stanley Dean Witter Capital I Inc.'s principal executive office is
located at 1585 Broadway, 37th Floor, New York, New York 10036, and Morgan
Stanley Dean Witter Capital I Inc.'s telephone number is (212) 761-4700.
2
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TABLE OF CONTENTS
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SUMMARY OF PROSPECTUS...................................................................................... 5
RISK FACTORS............................................................................................... 10
DESCRIPTION OF THE TRUST FUNDS............................................................................. 16
Assets..................................................................................................... 16
Mortgage Loans............................................................................................. 16
Mortgage-Backed Securities................................................................................. 18
Government Securities...................................................................................... 19
Accounts................................................................................................... 19
Credit Support............................................................................................. 19
Cash Flow Agreements....................................................................................... 20
USE OF PROCEEDS............................................................................................ 20
YIELD CONSIDERATIONS....................................................................................... 20
General.................................................................................................... 20
Pass-Through Rate.......................................................................................... 20
Timing of Payment of Interest.............................................................................. 21
Payments of Principal; Prepayments......................................................................... 21
Prepayments, Maturity and Weighted Average Life............................................................ 22
Other Factors Affecting Weighted Average Life.............................................................. 23
THE DEPOSITOR.............................................................................................. 25
DESCRIPTION OF THE CERTIFICATES............................................................................ 25
General.................................................................................................... 25
Distributions.............................................................................................. 26
Available Distribution Amount.............................................................................. 26
Distributions of Interest on the Certificates.............................................................. 26
Distributions of Principal of the Certificates............................................................. 27
Components................................................................................................. 27
Distributions on the Certificates of Prepayment Premiums................................................... 27
Allocation of Losses and Shortfalls........................................................................ 28
Advances in Respect of Delinquencies....................................................................... 28
Reports to Certificateholders.............................................................................. 29
Termination................................................................................................ 30
Book-Entry Registration and Definitive Certificates........................................................ 31
DESCRIPTION OF THE AGREEMENTS.............................................................................. 33
Assignment of Assets; Repurchases.......................................................................... 33
Representations and Warranties; Repurchases................................................................ 35
Certificate Account and Other Collection Accounts.......................................................... 36
Collection and Other Servicing Procedures.................................................................. 39
Subservicers............................................................................................... 40
Realization Upon Defaulted Mortgage loans.................................................................. 40
Hazard Insurance Policies.................................................................................. 42
Fidelity Bonds and Errors and Omissions Insurance.......................................................... 43
Due-on-Sale Provisions..................................................................................... 44
Retained Interest; Servicing Compensation and Payment of Expenses.......................................... 44
Evidence as to Compliance.................................................................................. 44
Matters Regarding a Master Servicer and the Depositor...................................................... 45
Events of Default.......................................................................................... 46
Rights Upon Event of Default............................................................................... 47
Amendment.................................................................................................. 48
The Trustee................................................................................................ 48
Duties of the Trustee...................................................................................... 48
Matters Regarding the Trustee.............................................................................. 49
Resignation and Removal of the Trustee..................................................................... 49
DESCRIPTION OF CREDIT SUPPORT.............................................................................. 49
General.................................................................................................... 49
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Subordinate Certificates................................................................................... 50
Cross-Support Provisions................................................................................... 50
Insurance or Guarantees for the Mortgage loans............................................................. 51
Letter of Credit........................................................................................... 51
Insurance Policies and Surety Bonds........................................................................ 51
Reserve Funds.............................................................................................. 51
Credit Support for Mortgage-Backed Securities.............................................................. 52
LEGAL ASPECTS OF MORTGAGE LOANS............................................................................ 52
General.................................................................................................... 52
Types of Mortgage Instruments.............................................................................. 52
Interest in Real Property.................................................................................. 53
Cooperative Loans.......................................................................................... 53
Foreclosure................................................................................................ 54
Junior Mortgages........................................................................................... 59
Anti-Deficiency Legislation and Other Limitations on Lenders............................................... 59
Environmental Legislation.................................................................................. 60
Due-on-Sale Clauses........................................................................................ 60
Prepayment Charges......................................................................................... 61
Subordinate Financing...................................................................................... 61
Applicability of Usury Laws................................................................................ 61
Alternative Mortgage Instruments........................................................................... 62
Soldiers' and Sailors' Civil Relief Act of 1940............................................................ 62
Forfeitures in Drug and RICO Proceedings................................................................... 63
FEDERAL INCOME TAX CONSEQUENCES............................................................................ 63
General.................................................................................................... 64
Grantor Trust Funds........................................................................................ 64
a. Single Class of Grantor Trust Certificates.............................................................. 64
b. Multiple Classes of Grantor Trust Certificates.......................................................... 68
c. Sale or Exchange of a Grantor Trust Certificate......................................................... 71
d. Non-U.S. Persons........................................................................................ 72
e. Information Reporting and Backup Withholding............................................................ 73
REMICs..................................................................................................... 73
a. Taxation of Owners of REMIC Regular Certificates........................................................ 75
b. Taxation of Owners of REMIC Residual Certificates....................................................... 83
Prohibited Transactions and Other Taxes.................................................................... 88
Liquidation and Termination................................................................................ 89
Administrative Matters..................................................................................... 89
Tax-Exempt Investors....................................................................................... 90
Residual Certificate Payments--Non-U.S. Persons............................................................ 90
Tax Related Restrictions on Transfers of REMIC Residual Certificates....................................... 90
STATE TAX CONSIDERATIONS................................................................................... 93
ERISA CONSIDERATIONS....................................................................................... 93
General.................................................................................................... 93
Prohibited Transactions.................................................................................... 93
Review by Plan Fiduciaries................................................................................. 96
LEGAL INVESTMENT........................................................................................... 97
PLAN OF DISTRIBUTION....................................................................................... 98
LEGAL MATTERS.............................................................................................. 99
FINANCIAL INFORMATION...................................................................................... 99
RATING..................................................................................................... 100
INCORPORATION OF INFORMATION BY REFERENCE.................................................................. 100
GLOSSARY OF TERMS.......................................................................................... 101
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SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus. It does
not contain all of the information you need to consider in making your
investment decision. TO UNDERSTAND ALL OF THE TERMS OF A SERIES OF CERTIFICATES,
READ THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT CAREFULLY.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
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Issuer.................................... Each series of certificates will be issued by a separate trust. Each
trust will be formed pursuant to a pooling and servicing agreement
among Morgan Stanley Dean Witter Capital I Inc., one or more
servicers and a trustee.
Depositor................................. Morgan Stanley Dean Witter Capital I Inc., a wholly-owned subsidiary
of Morgan Stanley Group Inc.
Master Servicer........................... The servicer or servicers for substantially all the mortgage loans
for each series of certificates, which servicer(s) may be affiliates
of Morgan Stanley Dean Witter Capital I Inc., will be named in the
related prospectus supplement.
Trustee................................... The trustee for each series of certificates will be named in the
related prospectus supplement.
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THE MORTGAGE ASSETS
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General................................... Each trust will own the related mortgage loan, including mortgage
participations, or mortgage-backed securities or both or, if
specified in the applicable prospectus supplement, direct obligations
of the United States or other governmental agencies. You should refer
to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the mortgage loans and
mortgage-backed securities included in each trust fund.
Mortgage Loans............................ The mortgage loans in each trust will be conventional, fixed or
adjustable interest rate mortgage loans, or mortgage participations,
secured by first liens or junior liens or first and junior liens on
one- to four-family residential properties or shares issued by
cooperative housing corporations. 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
Morgan Stanley Dean Witter Capital I Inc.
Mortgage-Backed Securities................ The mortgage-backed securities in each trust will be mortgage
pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by conventional, fixed or
adjustable rate mortgage loans secured by first liens or junior liens
or first and junior liens on one- to four-family residential
properties or shares issued by cooperative housing corporations.
Government Securities..................... Each trust may own, in addition to the mortgage loans and
mortgage-backed securities, direct obligations of the United States
or other governmental agencies which provide for payment of interest
or principal or both.
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OTHER ASSETS
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Other Assets.............................. If so specified in the applicable prospectus supplement, the trust
fund may include the following agreements and other similar
agreements:
o guaranteed investment contracts;
o interest rate exchange agreements;
o interest rate cap or floor contracts;
o currency exchange contracts; or
o other swap or notional balance contracts.
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CREDIT ENHANCEMENT
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Subordination............................. A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinate certificates. The
rights of the holders of subordinate certificates of a series to
receive distributions will be subordinated to such rights of the
holders of the senior certificates of the same series to the extent
and in the manner specified in the applicable prospectus supplement.
Subordination is intended to enhance the likelihood of the timely
receipt by the senior certificateholders of their proportionate
shares of scheduled monthly principal and interest payments on the
related mortgage loans and to protect them from losses. This
protection will be effected by:
o the preferential right of the senior certificateholders to receive,
prior to any distribution being made in respect of the related
subordinate certificates on each distribution date, current
distributions on the related mortgage loans and mortgage-backed
securities of principal and interest due them on each distribution
date out of the funds available for distributions on such date;
o the right of such holders to receive future distributions on the
mortgage loans and mortgage-backed securities that would otherwise
have been payable to the holders of subordinate certificates;
o the prior allocation to the subordinate certificates of all or a
portion of losses realized on the underlying mortgage loans and
mortgage-backed securities; or
o any combination of the above.
Other Types of Credit Enhancement......... If so specified in the applicable prospectus supplement, the
certificates of any series, or any one or more classes of a series
may be entitled to the benefits of other types of credit enhancement,
including but not limited to:
o limited guarantee
o financial guaranty insurance policy
o surety bond
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6
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o letter of credit
o mortgage pool insurance policy
o reserve fund
o cross-support
Any credit support will be described in the applicable prospectus
supplement.
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DISTRIBUTIONS ON CERTIFICATES
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General................................... Each series of certificates will consist of one or more classes of
certificates that will be entitled, to the extent of funds available,
to one of the following:
o principal and interest payments in respect of the related mortgage
loans and mortgage-backed securities;
o principal distributions, with no interest distribution;
o interest distributions, with no principal distributions;
o sequential or concurrent distributions of principal;
o senior or subordinate distributions of interest or principal or
both;
o distributions of interest after an interest accrual period; or
o such other distributions as are described in the applicable
prospectus supplement.
Interest Distributions.................... With respect to each series of certificates, other than classes of
certificates which may be entitled to disproportionately low, nominal
or no interest distributions, interest on the related mortgage loans
and mortgage-backed securities at the weighted average of their
mortgage rates--net of servicing fees and other amounts as described
in this prospectus or in the applicable prospectus supplement, will
be passed through to holders of the related classes of certificates
in accordance with the particular terms of each such class of
certificates. The terms of each class of certificates will be
described in the related prospectus supplement.
Except as otherwise specified in the applicable prospectus
supplement, interest on each class of certificates of each series
will accrue at the fixed, floating or weighted average pass-through
rate for each class indicated in the applicable prospectus supplement
on their outstanding principal balance or notional amount.
Principal................................. With respect to a series of certificates, principal payments
including prepayments on the related mortgage loans and
mortgage-backed securities will be passed through to holders of the
related certificates or otherwise applied in accordance with the
related pooling and servicing agreement on each distribution date.
Distributions in reduction of certificate balance will be allocated
among the classes of certificates of a series in the manner specified
in the applicable prospectus supplement.
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Distribution Dates........................ The dates upon which distributions on each series of certificates
will be made will be specified in the related prospectus supplement.
Advances.................................. Unless otherwise provided in the related prospectus supplement, in
the event that a payment on a mortgage loan is delinquent, the master
servicer will be obligated to make advances that the master servicer
determines are recoverable. The master servicer will be reimbursed
for advances as described in this prospectus and in the related
prospectus supplement. The prospectus supplement for any series of
certificates relating to a trust that includes mortgage-backed
securities will describe any corresponding advancing obligation of
any person in connection with such mortgage-backed securities.
</TABLE>
ADDITIONAL ASPECTS OF EACH SERIES OF CERTIFICATES
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Termination............................... If so specified in the prospectus supplement with respect to a series
of certificates, all, but not less than all, of the mortgage loans
and mortgage-backed securities in the related trust fund and any
property acquired with respect to such mortgage loans may be
purchased by the party as is specified in the applicable prospectus
supplement. Any such purchase must be made in the manner and at the
price specified in such prospectus supplement. If so provided in the
related prospectus supplement with respect to a series, upon the
reduction of the certificate balance of a specified class or classes
of certificates by a specified percentage or amount or on and after a
date specified in the related prospectus supplement, the party
specified in the related prospectus supplement will solicit bids for
the purchase of all of the trust's assets, 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.
Forms of Certificates..................... The certificates will be issued either:
o in book-entry form through the facilities of The Depository Trust
Company; or
o in fully registered, certificated form.
If you own book-entry certificates, you will not receive physical
certificates representing your ownership interest in such book-entry
certificates, except under extraordinary circumstances. Instead, The
Depository Trust Company will effect payments and transfers by means
of its electronic recordkeeping services, acting through
participating organizations. This may result in delays in your
receipt of distributions and may restrict your ability to pledge your
securities. Your rights with respect to book-entry certificates may
generally only be exercised through The Depository Trust Company and
its participating organizations.
Tax Status of Certificates................ The treatment of the certificates for federal income tax purposes
will depend on:
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o whether a "real estate mortgage investment conduit" election is
made with respect to a series of certificates;
o if a "real estate mortgage investment conduit" election is made,
whether the certificates are regular interests or residual
interests; and
o if a "real estate mortgage investment conduit" election is not
made, the certificates will be treated as interests in a grantor
trust.
ERISA Considerations...................... If you are a fiduciary of any employee benefit plan subject to the
fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, as amended--also known as ERISA, you should
carefully review with your own legal advisors whether the purchase or
holding of certificates could give rise to a transaction prohibited
or otherwise impermissible under ERISA or the Internal Revenue Code.
Legal Investment.......................... The applicable prospectus supplement will specify whether the class
or classes of certificates offered will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended. If your investment authority is subject to
legal restrictions, you should consult your own legal advisors to
determine whether and to what extent such certificates constitute
legal investments for you.
Rating.................................... Certificates of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered class of
certificates offered is rated in one of the four highest rating
categories by at least one nationally recognized statistical rating
organization.
o A security rating is not a recommendation to buy, sell or hold the
certificates of any series and is subject to revision or withdrawal
at any time by the assigning rating agency.
o Ratings do not address the effect of prepayments on the yield you
may anticipate when you purchase your certificates.
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RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of certificates. The risks and uncertainties
described below, together with those in the related prospectus supplement under
"Risk Factors," summarize the material risks relating to your certificates.
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LACK OF A SECONDARY MARKET MAY MAKE IT The liquidity of your certificates may be limited. You should
DIFFICULT FOR YOU TO RESELL YOUR consider that:
CERTIFICATES
o a secondary market for the certificates of any series may not
develop, or if it does, it may not provide you with liquidity of
investment, or it may not continue for the life of the certificates
of any series;
o the prospectus supplement for any series of certificates may
indicate that an underwriter intends to establish a secondary
market in such certificates, but no underwriter will be obligated
to do so; and
o unless specified in the applicable prospectus supplement, the
certificates will not be listed on any securities exchange.
THE TRUST FUND'S ASSETS MAY BE Except for any related insurance policies and any reserve fund or
INSUFFICIENT TO PAY YOUR CERTIFICATES IN credit enhancement described in the applicable prospectus supplement,
FULL the sole source of payment on your certificates will be proceeds from
the assets included in the trust fund for each series of certificates
and any form of credit enhancement specified in the related
prospectus supplement. You will not have any claim against, or
security interest in, the trust fund for any other series. In
addition, in general, there is no recourse to Morgan Stanley Dean
Witter Capital I Inc. or any other entity, and neither the
certificates nor the underlying mortgage loans are guaranteed or
insured by any governmental agency or instrumentality or any other
entity. Therefore, if the trust fund's assets are insufficient to pay
you your expected return, in most situations you will not receive
payment from any other source. Exceptions include:
o loan repurchase obligations in connection with a breach of certain
of the representations and warranties; and
o advances on delinquent loans, to the extent the master servicer
deems the advance will be recoverable.
Because some of the representations and warranties with respect to
the mortgage loans and mortgage-backed securities may have been made
or assigned in connection with transfers of the mortgage loans and
mortgage-backed securities prior to the closing date, the rights of
the trustee and the certificateholders with respect to those
representations or warranties will be limited to their rights as
assignees. Unless the related prospectus supplement so specifies,
neither Morgan Stanley Dean Witter Capital I Inc., the master
servicer nor any affiliate thereof will have any obligation with
respect to representations or warranties made by any other entity.
There may be accounts, as described in the related prospectus
supplement maintained as credit support. The amounts in these
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10
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accounts may be withdrawn amounts will not be available for the
future payment of principal or interest on the certificates.
If a series of certificates consists of one or more classes of
subordinate certificates, the amount of any losses or shortfalls in
collections of assets on any distribution date will be borne first by
one or more classes of the subordinate certificates, as described in
the related prospectus supplement. Thereafter, those losses or
shortfalls will be borne by the remaining classes of certificates, in
the priority and manner and subject to the limitations specified in
the related prospectus supplement.
CREDIT ENHANCEMENT IS LIMITED IN AMOUNT With respect to each series of certificates, credit enhancement may
AND COVERAGE be provided to cover losses on the underlying mortgage loans and
mortgage-backed securities up to specified amounts.
Regardless of the form of credit enhancement provided:
o 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;
o the amount of coverage may provide only very limited coverage as to
certain types of losses such as hazard losses, bankruptcy losses
and fraud losses, and may provide no coverage as to certain other
types of losses; and
o all or a portion of the credit enhancement for any series of
certificates will generally be permitted to be reduced, terminated
or substituted for, if each applicable rating agency indicates that
the then-current ratings will not be adversely affected.
In the event losses exceed the amount of coverage provided by any
credit enhancement or losses of a type not covered by any credit
enhancement occur, such losses will be borne by the holders of the
related certificates.
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
loans in excess of the levels contemplated by such rating agency at
the time of its initial rating analysis.
None of Morgan Stanley Dean Witter Capital I Inc., any 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 class of certificates.
CHANGES IN CONDITIONS IN THE REAL ESTATE An investment in securities such as the certificates, which generally
MARKET WILL AFFECT MORTGAGE LOAN represent interests in pools of residential mortgage loans, may be
PERFORMANCE affected by a decline in real estate values and changes in the
borrower's financial condition. There is no assurance that the values
of the mortgaged properties securing the mortgage loans underlying
any series of certificates have remained or will remain at their
levels on the dates of origination of the related mortgage loans.
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If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the
mortgage loans contained in a particular trust fund and any secondary
financing on the mortgaged properties, become equal to or greater
than the value of the mortgaged properties, delinquencies,
foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry and those experienced in
the servicer's or other servicers' servicing portfolios.
To the extent that losses on mortgage loans underlying a series are
not covered by credit enhancement, holders of certificates of the
series will bear all risk of loss resulting from default by
borrowers. Such loss may also be greater than anticipated as a result
of a decline in real estate values.
GEOGRAPHIC CONCENTRATION MAY INCREASE In addition to risk factors related to the residential real estate
RATES OF LOSS AND DELINQUENCY market generally, certain geographic regions of the United States
from time to time will experience weaker regional economic conditions
and housing markets or be directly or indirectly affected by natural
disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. Mortgage assets in such areas will
experience higher rates of loss and delinquency than on mortgage
loans generally. Although mortgaged properties located in certain
identified flood zones will be required to be covered, to the maximum
extent available, by flood insurance, no mortgaged properties will
otherwise be required to be insured against earthquake damage or any
other loss not covered by standard hazard insurance policies.
The ability of borrowers to make payments on the mortgage assets may
also be affected by factors which do not necessarily affect property
values, such as adverse economic conditions generally, in particular
geographic areas or industries, or affecting particular segments of
the borrowing community--such as borrowers relying on commission
income and self-employed borrowers. Such occurrences may accordingly
affect the actual rates of delinquencies, foreclosure and losses with
respect to any trust fund.
THE RATE OF PREPAYMENT ON MORTGAGE ASSETS The yield of the certificates of each series will depend in part on
MAY ADVERSELY AFFECT AVERAGE LIVES AND the rate of principal payment on the mortgage loans and
YIELDS ON CERTIFICATES mortgage-backed securities, including prepayments, liquidations due
to defaults and mortgage loan repurchases. Such yield may be
adversely affected, depending upon whether a particular certificate
is purchased at a premium or a discount, by a higher or lower than
anticipated rate of prepayments on the related mortgage loans and
mortgage-backed securities, in particular:
The yield on classes of certificates entitling their holders
primarily or exclusively to payments of interest or primarily or
exclusively to payments of principal will be extremely sensitive to
the rate of prepayments on the related mortgage loans and
mortgage-backed securities; and The yield on certain classes of
certificates may be relatively more sensitive to the rate of
prepayment of specified
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mortgage loans and mortgage-backed securities than other classes of
certificates.
The rate of prepayments on mortgage loans is influenced by a number
of factors, including:
o prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain refinancing.
In addition, your yield may be adversely affected by interest
shortfalls which may result from the timing of the receipt of
prepayments or liquidations to the extent that such interest
shortfalls are not covered by aggregate fees payable to the servicer
or other mechanisms specified in the applicable prospectus
supplement. Your yield will be also adversely affected to the extent
that losses on the mortgage loans and mortgage-backed securities in
the related trust fund are allocated to your certificates and may be
adversely affected to the extent of unadvanced delinquencies on the
mortgage loans and mortgage-backed securities in the related trust
fund. Classes of certificates identified in the applicable prospectus
supplement as subordinate certificates are more likely to be affected
by delinquencies and losses than other classes of certificates.
RATINGS ON CERTIFICATES REFLECT LIMITED Any rating assigned by a rating agency to a class of certificates
ASSESSMENTS will reflect such rating agency's assessment solely of the likelihood
that holders of certificates of such class will receive payments to
which they are entitled under the related pooling and servicing
agreement. A rating will not constitute an assessment of the
likelihood that principal prepayments, including those caused by
defaults, on the related mortgage loans and mortgage-backed
securities 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. A 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 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. These criteria
are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. The historical data supporting any
such actuarial analysis may not accurately reflect future experience
or accurately predict the actual delinquency, foreclosure or loss
experience of the mortgage loans and mortgage-backed securities
included in any trust fund.
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RATINGS DO NOT GUARANTY VALUE If one or more rating agencies downgrade certificates of a series,
your certificate will decrease in value. Because none of Morgan
Stanley Dean Witter Capital I Inc., the seller, the master servicer,
the trustee or any affiliate has any obligation to maintain a rating
of a class of certificates, you will have no recourse if your
certificate decreases in value.
PAYMENTS IN FULL OF A BALLOON LOAN DEPEND Certain of the mortgage loans may not be fully amortizing over their
ON THE BORROWER'S ABILITY TO REFINANCE terms to maturity and, thus, will require substantial principal
THE BALLOON LOAN OR SELL THE MORTGAGED payments, i.e., balloon payments, at their stated maturity. Mortgage
PROPERTY loans with balloon payments involve a greater degree of risk because
the ability of a borrower 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 borrower
to accomplish either of these goals will be affected by a number of
factors, including:
o the level of available mortgage interest rates at the time of sale
or refinancing;
o the borrower's equity in the related mortgaged property;
o the financial condition of the mortgagor;
o tax laws;
o prevailing general economic conditions; and
o the availability of credit for single family real properties
generally.
MORTGAGE LOANS SECURED BY JUNIOR LIENS MAY Certain of the mortgage loans may be secured by junior liens and the
ONLY BE SATISFIED AFTER THE RELATED related first liens may not be included in the trust fund. The
FIRST LIEN MORTGAGE HAS BEEN SATISFIED 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. 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.
OBLIGORS MAY DEFAULT IN PAYMENT OF If so specified in the related prospectus supplement, in order to
MORTGAGE LOANS maximize recoveries on defaulted mortgage loans, a servicer or a
subservicer will be permitted within prescribed parameters to
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extend and modify mortgage 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, such extensions or modifications may not increase the
present value of receipts from or proceeds of mortgage loans.
THE HOLDERS OF SUBORDINATE CERTIFICATES The rights of holders of subordinate certificates to receive
WILL BEAR A GREATER RISK OF PAYMENT distributions to which they would otherwise be entitled with respect
DELAYS AND LOSSES to the mortgage loans and mortgage-backed securities will be
subordinate to the rights of the servicer to receive its fee and
reimbursement for advances and the holders of senior certificates to
the extent described in this prospectus. 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.
The yields on the subordinate certificates may be extremely sensitive
to the loss experience of the mortgage loans and mortgage-backed
securities and the timing of any such losses. If the actual rate and
amount of losses experienced by the mortgage loans and
mortgage-backed securities 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.
MORTGAGE LOAN ACCELERATION CLAUSES MAY NOT Mortgages may contain a due-on-sale clause, which permits the lender
BE ENFORCEABLE to accelerate the maturity of the mortgage loan if the borrower
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 borrower. 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.
THERE ARE RESTRICTIONS ON INVESTORS Generally, ERISA applies to investments made by employee benefit
SUBJECT TO ERISA 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 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.
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DESCRIPTION OF THE TRUST FUNDS
Capitalized terms are defined in the "Glossary of Terms" beginning on page
135.
ASSETS
The primary assets of each trust fund will include:
o single family mortgage loans, including mortgage participations;
o pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by one or more mortgage loans or
mortgage participations;
o direct obligations of the United States or other governmental
agencies which are not subject to redemption prior to maturity at
the option of the issuer and are:
o interest-bearing securities,
o non-interest-bearing securities,
o originally interest-bearing securities from which coupons
representing the right to payment of interest have been removed,
or
o interest-bearing securities from which the right to payment of
principal has been removed; or
o a combination of mortgage loans, mortgage-backed securities and
government securities.
The mortgage loans and mortgage-backed securities will not be guaranteed or
insured by Morgan Stanley Dean Witter Capital I Inc. 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
Morgan Stanley Dean Witter Capital I Inc. for inclusion in a trust fund from
among those purchased, either directly or indirectly, from a prior holder
thereof, which may be an affiliate of Morgan Stanley Dean Witter Capital I Inc.
and, with respect to mortgage loans and mortgage-backed securities, which prior
holder may or may not be the originator of the mortgage loans or the issuer of
the mortgage-backed securities.
The certificates will be entitled to payment from the assets of the related
trust fund. If so specified in the related prospectus supplement, the
certificates will also be entitled to payments in respect of the assets of
another trust fund or trust funds established by Morgan Stanley Dean Witter
Capital I Inc. 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
To the extent specified in the related prospectus supplement, the mortgage
loans will be secured by:
o liens on mortgaged properties consisting of one- to four-family
residential properties or security interests in shares issued by
private cooperative housing corporations; or
o liens on mortgaged properties located in any one of the fifty
states, the District of Columbia or the Commonwealth of Puerto Rico,
or, if so specified in the related prospectus supplement, mortgaged
properties may be located elsewhere.
To the extent specified in the related prospectus supplement, the mortgage loans
will be secured by first liens or junior liens, or both, 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. To the extent
specified in the related 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 other than Morgan Stanley
Dean Witter Capital I Inc. The related prospectus
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supplement will indicate if any originator is an affiliate of Morgan Stanley
Dean Witter Capital I Inc. The mortgage loans will be evidenced by promissory
notes secured by mortgages or deeds of trust creating a lien on the mortgaged
properties.
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the date of that
prospectus supplement and to the extent then applicable and specifically known
to Morgan Stanley Dean Witter Capital I Inc., with respect to the mortgage
loans, including:
o 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;
o the type of property securing the mortgage loans;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the mortgage loans;
o the earliest and latest origination date and maturity date of the
mortgage loans;
o the weighted average, by principal balance, of the loan-to-value
ratios at origination of the mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the states or, if applicable, countries in which most of the
mortgaged properties are located;
o information with respect to the prepayment provisions, if any, of
the mortgage loans;
o any interest retained by a seller;
o with respect to mortgage loans with adjustable mortgage rates, 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 loan and the
frequency of monthly payment adjustments; and
o 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
Morgan Stanley Dean Witter Capital I Inc. 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 the initial issuance.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related prospectus supplement, all of the
mortgage loans will:
o have individual principal balances at origination of not less than
$25,000;
o have original terms to maturity of not more than 40 years; and
o provide for payments of principal, interest or both, on due dates
that occur monthly, quarterly or semi-annually or at another
interval as is specified in the related prospectus supplement.
Each mortgage loan may provide for no accrual of interest or for accrual of
interest at a Mortgage Rate. 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 specified events.
Each mortgage loan may also 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
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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.
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 these amounts will be allocated.
MORTGAGE-BACKED SECURITIES
Any mortgage-backed security will have been issued pursuant to a pooling
and servicing agreement, a trust agreement, an indenture or similar agreement. A
seller or servicer or both of the underlying mortgage loans or underlying
mortgage-backed securities will have entered into an agreement with a trustee or
a custodian or with the original purchaser of the interest in the underlying
mortgage loans or mortgage-backed securities evidenced by the mortgage-backed
securities.
Distributions of any principal or interest, as applicable, will be made on
mortgage-backed securities on the dates specified in the related prospectus
supplement. The mortgage-backed securities 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
mortgage-backed securities by the related trustee or servicer. The issuer of the
mortgage-backed securities or a servicer or other person specified in the
related prospectus supplement may have the right or obligation to repurchase or
substitute assets underlying the mortgage-backed securities 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 mortgage-backed
securities. The type, characteristics and amount of the credit support, if any,
will be a function of certain characteristics of the mortgage loans or
underlying mortgage-backed securities evidenced by or securing the
mortgage-backed securities and other factors. The type, characteristics and
amount of the credit support generally will have been established for the
mortgage-backed securities on the basis of requirements of any rating agency
that may have assigned a rating to the mortgage-backed securities or the initial
purchasers of the mortgage-backed securities.
The prospectus supplement for a series of certificates evidencing interests
in mortgage assets that include mortgage-backed securities will specify, to the
extent available:
o the aggregate approximate initial and outstanding principal amount
or notional amount, as applicable, and type of the mortgage-backed
securities to be included in the trust fund;
o the original and remaining term to stated maturity of the
mortgage-backed securities, if applicable;
o whether the mortgage-backed securities are entitled only to interest
payments, only to principal payments or to both;
o the pass-through or bond rate of the mortgage-backed securities or
formula for determining the rates, if any;
o the applicable payment provisions for the mortgage-backed
securities, including, but not limited to, any priorities, payment
schedules and subordination features;
o the issuer, servicer and trustee, as applicable;
o 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 mortgage-backed securities or directly to such
mortgage-backed securities;
o the terms on which the related underlying mortgage loans or
underlying mortgage-backed securities for such mortgage-backed
securities or the mortgage-backed securities may, or are required
to, be purchased prior to their maturity;
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o the terms on which mortgage loans or underlying mortgage-backed
securities may be substituted for those originally underlying the
mortgage-backed securities,
o the applicable servicing fees;
o 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 mortgage-backed securities described in
this paragraph;
o the characteristics of any cash flow agreements that are included as
part of the trust fund evidenced or secured by the mortgage-backed
securities; and
o whether the mortgage-backed securities are 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:
o 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;
o the original and remaining terms to stated maturity of the
government securities;
o whether the government securities are entitled only to interest
payments, only to principal payments or to both;
o the interest rates of the government securities or the formula to
determine the rates, if any;
o the applicable payment provisions for the government securities; and
o 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 in
this prospectus 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 in the account 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."
CREDIT SUPPORT
If so provided in the related prospectus supplement, partial or full
protection against 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:
o in the form of subordination of one or more other classes of
certificates in the series; or
o 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.
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 Enhancement
is Limited in Amount and Coverage" and "Description of Credit Support."
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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 other agreements, such as:
o interest rate exchange agreements,
o interest rate cap or floor agreements,
o currency exchange agreements,
o swap agreements,
o notional balance agreements, or
o 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 loans and
mortgage-backed securities, 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 guaranteed investment contract or other agreement, including,
without limitation, provisions relating to the timing, manner and
amount of payments and provisions relating to termination, will be
described in the prospectus supplement for the related series. In
addition, the related prospectus supplement will provide information
with respect to the obligor under any cash flow agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the certificates will be
applied by Morgan Stanley Dean Witter Capital I Inc. to the purchase of assets
and to pay for certain expenses incurred in connection with the purchase of
assets and sale of certificates. Morgan Stanley Dean Witter Capital I Inc.
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 Morgan Stanley Dean Witter Capital I Inc.,
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:
o the pass-through rate for each class of certificates or, in the case
of a variable or adjustable pass-through rate, the method of
determining the pass-through rate;
o the effect, if any, of the prepayment of any mortgage loan or
mortgage-backed security on the pass-through rate of one or more
classes of certificates; and
o 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 the certificate because, while interest
may accrue on each asset during a certain period, the distribution of interest
will be made on a day which may be several days, weeks or months following the
period of accrual.
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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 in this prospectus under "-- Pass-Through Rate" above, 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 the certificates may be
lower than the yield that would result if the interest accrual period ended on
that 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:
o distributions of principal,
o additions to the certificate balance of accrual certificates and
o 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 that distribution date. This 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 borrowers 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, the mortgage loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by the mortgage loans. In this regard, it
should be noted that assets may consist of mortgage loans with different
mortgage rates and the stated pass-through or pay-through interest rate of
mortgage-backed securities 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:
o will correspond to the rate of principal payments on the assets in
the related trust fund;
o is likely to be affected by the existence of lock-out periods and
prepayment premium provisions of the mortgage loans underlying or
comprising the assets; and
o is likely to be affected to the extent the servicer of any mortgage
loan is able to enforce the lockout period and prepayment premium
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 these
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 the 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 these
classes.
When a full prepayment is made on a mortgage loan, the borrower 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. To the
extent 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
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only to the date of prepayment rather than for a full month. To the extent
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 the partial
prepayment is received. As a result, to the extent set forth 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 the 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
loans and mortgage-backed securities 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 loans and mortgage-backed
securities and distributed on a certificate, the greater the effect on the
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher or lower than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
or increase in the rate of principal payments.
PREPAYMENTS, MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the assets included
in or comprising a trust fund and the rate at which payments are made from any
credit support or cash flow agreement for the related series of certificates may
affect the ultimate maturity and the weighted average life of each class of a
series. Prepayments on the mortgage loans comprising or underlying the mortgage
loans and mortgage-backed securities 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 that series set forth in the related prospectus supplement.
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 the
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 loans and
mortgage-backed securities is paid to that class. The principal may be in the
form of scheduled amortization or prepayments which include 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
mortgage-backed securities. 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 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 the 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 prepayment model--also
known as CPR--or the Standard Prepayment Assumption prepayment model--also known
as SPA, 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 the 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 the 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
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loans, including the mortgage loans underlying or comprising the mortgage loans
and mortgage-backed securities.
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 the series and the percentage of the
initial certificate balance of each class that would be outstanding on specified
distribution dates. The information in these tables will be based on the
assumptions stated in the 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 other
rates specified in the prospectus supplement. These 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 loans and mortgage-backed securities
for any series will conform to any particular level of CPR, SPA or any other
rate specified in the related prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
If so specified in the related prospectus supplement, a number of mortgage
loans may have balloon payments due at maturity. Because the ability of a
borrower 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 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 borrower 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 adjustable rate 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 borrower under each mortgage loan
generally will be qualified on the basis of the mortgage rate in effect at
origination. The repayment of any mortgage loan may thus be dependent on the
ability of the borrower 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 pursuant to which the monthly payments made by the borrower during the
early years of the mortgage loan will be less than the scheduled monthly
payments thereon. The periodic increase in the amount paid by the borrower of a
buydown mortgage loan during or at the end of the applicable buydown period may
create a greater financial burden for the borrower, 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 adjustable rate 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 the index at
which interest accrues), the amount of interest accruing on the principal
balance of the 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 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
those certificates were purchased.
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In addition, with respect to an adjustable rate loan subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on that mortgage loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
of that mortgage loan. Since the excess will be applied to reduce the principal
balance of the related class or classes of certificates, the weighted average
life of those certificates will be reduced and may adversely affect yield to
holders thereof, depending upon the price at which those 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 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 factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures and the principal amount of the mortgage loans
comprising or underlying the mortgage loans and mortgage-backed securities 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 loans and
mortgage-backed securities and that of the related series of certificates.
Refinancing
At the request of a borrower, the servicer or a subservicer may allow the
refinancing of a mortgage loan in any trust fund by accepting prepayments on
that loan and permitting a new loan secured by a mortgage on the same property.
In the event of a refinancing, the new loan would not be included in the related
trust fund and, therefore, the refinancing would have the same effect as a
prepayment in full of the related mortgage loan. The master servicer or a
subservicer may, from time to time, implement programs designed to encourage
refinancing. These 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, subservicers may encourage the refinancing of mortgage
loans, including defaulted mortgage loans, that would permit creditworthy
borrowers to assume the outstanding indebtedness of those mortgage loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of 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 mortgage loans, unless otherwise provided in the related
prospectus supplement, the 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. However, the 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 "Legal Aspects of
Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Due-on-Sale Provisions."
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THE DEPOSITOR
Morgan Stanley Dean Witter Capital I Inc., the depositor, formerly known as
Morgan Stanley Capital I Inc., 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 Morgan Stanley Dean Witter Capital I
Inc. are located at 1585 Broadway, 37th Floor, New York, New York 10036. Its
telephone number is (212) 761-4700.
Morgan Stanley Dean Witter Capital I Inc. 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 by this prospectus, 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:
o provide for the accrual of interest thereon based on fixed, variable
or adjustable rates;
o be senior or subordinate to one or more other classes of
certificates in respect of distributions on the certificates;
o be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions;
o be entitled to interest distributions, with disproportionately low,
nominal or no principal distributions;
o provide for distributions of accrued interest thereon commencing
only following the occurrence of events, such as the retirement of
one or more other classes of certificates of the series;
o provide for payments of principal sequentially, based on specified
payment schedules, from only a portion of the assets in the trust
fund or based on specified calculations, to the extent of available
funds, in each case as described in the related prospectus
supplement;
o 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; or
o do all or any combination of the above
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 mortgage loans in the related mortgage pool. Any of
the foregoing may be included in the certificates being offered to you.
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 these certificates may be exchanged without the payment of any
service charge payable in connection with the registration of transfer or
exchange. However, Morgan Stanley Dean Witter Capital I Inc. 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 or in book-entry form, as provided in the related
prospectus supplement. See "Risk Factors--Book-Entry Certificates May Experience
Decreased Liquidity and Payment Delay" 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--Lack of a
Secondary Market May Make it Difficult for You to Resell Your Certificates" and
"--The Trust Fund's Assets May be Insufficient to Pay Your Certificates in
Full."
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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 the series and
the 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 on 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. All distributions
with respect to each class of certificates on each distribution date will be
allocated pro rata among the outstanding certificates in the class or by random
selection, as described in the related prospectus supplement or otherwise
established by the related trustee. Payments will be made either:
o by wire transfer in immediately available funds to the account of a
certificateholder at a bank or other entity having appropriate wire
transfer facilities, if the certificateholder has so notified the
trustee or other person required to make the 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 in the related prospectus supplement,
or
o 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 the 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, in accordance with the
terms described in the related prospectus supplement.
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 the class or a component thereof. 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. If so 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 the class and the distribution date, subject to the sufficiency of
the portion of the Available Distribution Amount allocable to the class on the
distribution date. Prior to the time interest is distributable on any class of
accrual certificates, the amount of accrued certificate interest otherwise
distributable on the class will be added to the certificate balance thereof on
each distribution date. 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 certificate balance
of the stripped interest certificates immediately prior to the distribution
date, at the applicable pass-through rate, reduced as described below. To the
extent specified 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 of the stripped interest certificates
immediately prior to each distribution date, at the applicable pass-through
rate, reduced as described below in the next paragraph.
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
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provided in the related prospectus supplement, the accrued certificate interest
on a series of certificates will be reduced in the event of prepayment interest
shortfalls, which are shortfalls in collections of interest for a full accrual
period resulting from prepayments prior to the due date in the accrual period on
the mortgage loans comprising or underlying the mortgage loans and
mortgage-backed securities in the trust fund for the series. The particular
manner in which these 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:
o delinquencies,
o losses, and
o Deferred Interest
on or in respect of the mortgage loans comprising or underlying the mortgage
loans and mortgage-backed securities in the related trust fund. To the extent
specified 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 the class of a portion of any Deferred Interest
on the mortgage loans comprising or underlying the mortgage loans and
mortgage-backed securities in the related trust fund will result in a
corresponding increase in the certificate balance of the class. See "Risk
Factors--Rate of Prepayment on Mortgage Assets May Adversely Affect Average
Lives and Yields on Certificates" 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. The certificate balance
will equal the maximum principal amount that the holder will be entitled to
receive out of future cash flow on the assets in the trust fund. The outstanding
certificate balance of a certificate will be reduced to the extent of
distributions of principal 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. The outstanding certificate balance may be increased in respect
of Deferred Interest on the related mortgage loans to the extent provided in the
related prospectus supplement. The outstanding certificate balance may be
increased, in the case of accrual certificates prior to the distribution date on
which distributions of interest are required to commence, 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 to the
distributions of principal in accordance with the provisions described in the
prospectus supplement until the certificate balance of that 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. The descriptions set
forth under "--Distributions of Interest on the Certificates" and
"--Distributions of Principal of the Certificates" above also relate to
components of a class of certificates. In this case, references to certificate
balance and pass-through rate refer to the principal balance, if any, of any
component and the pass-through rate, if any, on any 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 loans and mortgage-backed securities 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 the prospectus supplement.
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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 loans and mortgage-backed securities have been incurred, the amount of
losses or shortfalls will be borne first by a class of subordinate certificates
in the priority and manner and subject to the limitations specified in the
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 loans and mortgage-backed securities comprising the 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 in the prospectus supplement 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 the 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 loans and mortgage-backed securities, that were due on the mortgage
loans in the trust fund during the related Due Period and were delinquent on the
related determination date. The advances will be made subject to the master
servicer's or another entity's good faith determination that the advances will
be reimbursable from Related Proceeds. 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 the delinquencies
necessary to make the required distributions on one or more classes of senior
certificates. The advance obligation may be subject to the master servicer's or
another entity's good faith determination that the advances will be reimbursable
not only from Related Proceeds but also from collections on other assets
otherwise distributable on one or more classes of 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. Advances
do not guaranty 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 Proceeds and, if so
provided in the prospectus supplement, out of any amounts otherwise
distributable on one or more classes of subordinate certificates of the series.
However, advances will be reimbursable from amounts in the certificate account
prior to distributions being made on the certificates, to the extent that the
master servicer or another entity shall determine in good faith that the advance
is a nonrecoverable advance. If advances have been made by the master servicer
from excess funds in the certificate account, the master servicer is required to
replace the funds in the certificate account on any future distribution date to
the extent that funds in the certificate account on the distribution date are
less than payments required to be made to certificateholders on that 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 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 in the related prospectus supplement on its outstanding advances
and will be entitled to pay itself 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 the prospectus
supplement.
The prospectus supplement for any series of certificates evidencing an
interest in a trust fund that includes mortgage-backed securities will describe
any corresponding advancing obligation of any person in connection with such
mortgage-backed securities.
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REPORTS TO CERTIFICATEHOLDERS
Unless otherwise provided in the prospectus supplement, with each
distribution to holders of any class of certificates of a series, the servicer
or the trustee, as provided in the related prospectus supplement, will forward
or cause to be forwarded to each holder, to Morgan Stanley Dean Witter Capital I
Inc. and to the other parties as may be specified in the related Agreement, a
statement setting forth, in each case to the extent applicable and available:
(1) the amount of the distribution to holders of certificates of that
class applied to reduce the certificate balance thereof;
(2) the amount of the distribution to holders of certificates of that
class allocable to accrued certificate interest;
(3) the amount of the distribution allocable to prepayment premiums;
(4) the amount of related servicing compensation received by a servicer
and, if payable directly out of the related trust fund, by any subservicer and
any other customary information as that servicer or trustee deems necessary or
desirable, or that a certificateholder reasonably requests, to enable
certificateholders to prepare their tax returns;
(5) the aggregate amount of advances included in that distribution, and
the aggregate amount of unreimbursed advances at the close of business on that
distribution date;
(6) the aggregate principal balance of the assets at the close of business
on that distribution date;
(7) the number and aggregate principal balance of mortgage loans in
respect of which:
o one scheduled payment is delinquent;
o two scheduled payments are delinquent;
o three or more scheduled payments are delinquent; and
o foreclosure proceedings have been commenced;
(8) with respect to any mortgage loan liquidated during the related Due
Period:
o the portion of liquidation proceeds payable or reimbursable to the
servicer or any other entity in respect of such mortgage loan; and
o the amount of any loss to certificateholders;
(9) with respect to each REO property relating to a mortgage loan and
included in the trust fund as of the end of the related Due Period:
o the loan number of the related mortgage loan; and
o the date of acquisition;
(10) with respect to each REO property relating to a mortgage loan and
included in the trust fund as of the end of the related Due Period:
o the book value;
o the principal balance of the related mortgage loan immediately
following the distribution date, calculated as if the mortgage loan
were still outstanding taking into account certain limited
modifications to the terms thereof specified in the Agreement;
o the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof; and
o if applicable, the aggregate amount of interest accrued and payable
on related servicing expenses and related advances;
(11) with respect to any REO property sold during the related Due Period:
o the aggregate amount of sale proceeds;
o the portion of sales proceeds payable or reimbursable to the
servicer in respect of the REO property or the related mortgage
loan; and
o the amount of any loss to certificateholders in respect of the
related mortgage loan;
(12) 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 the distribution date, separately
identifying any reduction in the certificate balance due to the allocation of
any loss and
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increase in the certificate balance of a class of accrual certificates in the
event that accrued certificate interest has been added to the balance;
(13) the aggregate amount of principal prepayments made during the related
Due Period;
(14) the amount deposited in the reserve fund, if any, on the distribution
date;
(15) the amount remaining in the reserve fund, if any, as of the close of
business on the distribution date;
(16) the aggregate unpaid accrued certificate interest, if any, on each
class of certificates at the close of business on the distribution date;
(17) in the case of certificates with a variable pass-through rate, the
pass-through rate applicable to the distribution date, and, if available, the
immediately succeeding distribution date, as calculated in accordance with the
method specified in the related prospectus supplement;
(18) 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 the distribution date and the
immediately succeeding distribution date as calculated in accordance with the
method specified in the related prospectus supplement;
(19) 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 the distribution date; and
(20) the aggregate amount of payments by the borrowers of:
o default interest;
o late charges; and
o assumption and modification fees collected during the related Due
Period.
In the case of information furnished pursuant to subclauses (1)-(4) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
certificates or for another specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (1), (2), (12), (16) and (17)
above, the amounts shall also be provided with respect to each component, if
any, of a class of certificates. The servicer or the trustee, as specified in
the related prospectus supplement, will forward or cause to be forwarded to each
holder, to Morgan Stanley Dean Witter Capital I Inc. and to any other parties as
may be specified in the Agreement, a copy of any statements or reports received
by the servicer or the trustee, as applicable, with respect to any
mortgage-backed securities. The prospectus supplement for each series of offered
certificates will describe any additional information to be included in reports
to the holders of certificates.
Within a reasonable period of time after the end of each calendar year, the
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
(1)-(4) above, aggregated for the calendar year or the applicable portion of the
calendar year during which the person was a certificateholder. This obligation
of the servicer or the trustee shall be deemed to have been satisfied to the
extent that substantially comparable information shall be provided by the
servicer or the trustee pursuant to any requirements of the Internal Revenue
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 servicer, if
any, or the trustee and required to be paid to them pursuant to the Agreement
following the earlier of:
o the final payment or other liquidation of the last asset subject
thereto or the disposition of all property acquired upon foreclosure
of any mortgage loan subject thereto; and
o the purchase of all of the assets of the trust fund by the party
entitled to effect the termination, under the circumstances and in
the manner set forth in the related prospectus supplement.
In no event, however, will the trust fund 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.
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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 in the related
prospectus supplement, under the circumstances and in the manner set forth in
the related prospectus supplement. 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 in the related prospectus supplement will solicit bids for the
purchase of all assets of the trust fund, or of a sufficient portion of the
assets to retire the class or classes or purchase the 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 in the related prospectus supplement.
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 class will be represented by one or more single
certificates registered in the name of a nominee for the depository, The
Depository Trust Company.
The Depository Trust Company 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 and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. The Depository Trust Company was
created to hold securities for its 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 other organizations. Indirect access to
The Depository Trust Company system also is available to indirect participants.
If so 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, these
certificate owners will receive all distributions on the book-entry certificates
through The Depository Trust Company 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 The Depository Trust Company, on each distribution date, The
Depository Trust Company will forward the payments to its participants. The
participants will then be required to forward the payments to indirect
participants or certificate owners. Unless otherwise provided in the related
prospectus supplement, the only certificateholder will be Cede & Co., as nominee
for The Depository Trust Company, 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 The Depository Trust Company.
Under the rules, regulations and procedures creating and affecting The
Depository Trust Company and its operations, The Depository Trust Company 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 the payments on
behalf of their respective certificate owners.
Because The Depository Trust Company 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
Depository Trust Company 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 the interest.
The Depository Trust Company has advised Morgan Stanley Dean Witter Capital
I Inc. that it will take any action permitted to be taken by a certificateholder
under the Agreement only at the direction of one or more participants to whose
account with The Depository Trust Company interests in the book-entry
certificates are credited.
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Unless otherwise specified in the related prospectus supplement,
certificates initially issued in book-entry form will be issued as definitive
certificates, rather than to The Depository Trust Company or its nominee only
if:
o Morgan Stanley Dean Witter Capital I Inc. advises the trustee in
writing that The Depository Trust Company is no longer willing or
able to properly discharge its responsibilities as depository with
respect to the certificates and Morgan Stanley Dean Witter Capital I
Inc. is unable to locate a qualified successor; or
o Morgan Stanley Dean Witter Capital I Inc., at its option, elects to
terminate the book-entry system through The Depository Trust
Company.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, The Depository Trust Company is required to notify all
participants of the availability through The Depository Trust Company of
definitive certificates for the certificate owners. Upon surrender by The
Depository Trust Company 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 the instructions the definitive certificates to which they are entitled. The
trustee will then recognize the holders of the definitive certificates as
certificateholders under the Agreement.
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DESCRIPTION OF THE AGREEMENTS
The certificates will be offered pursuant to a pooling and servicing
agreement or a trust agreement.
o A pooling and servicing agreement will be used where the trust fund
includes mortgage loans. The parties to a pooling and servicing agreement
will be Morgan Stanley Dean Witter Capital I Inc., a trustee and a master
servicer appointed as of the date of the pooling and servicing agreement.
If a master servicer is not appointed, a servicer, with, generally, the
same obligations as described in this prospectus with respect to the master
servicer, unless otherwise specified in the prospectus supplement, will be
appointed. This servicer will service all or a significant number of
mortgage loans directly without a subservicer. References in this
prospectus to master servicer and its rights and obligations, to the extent
set forth in the related prospectus supplement, shall be deemed to also be
references to any servicer servicing mortgage loans directly.
o A trust agreement will be used where the trust fund does not include
mortgage loans. The parties to a trust agreement will be Morgan Stanley
Dean Witter Capital I Inc. and a trustee. A manager or administrator may be
appointed pursuant to the trust agreement for any trust fund to administer
the 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 mortgage loans. The following summaries describe some of the
provisions that may appear in each Agreement. The prospectus supplement for a
series of certificates will describe any provision of the Agreement relating to
a 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 the provisions in the
related prospectus supplement. Morgan Stanley Dean Witter Capital I Inc. 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
a series addressed to Morgan Stanley Dean Witter Capital I Inc., c/o Morgan
Stanley & Co. Incorporated, 1585 Broadway, 37th Floor, New York, New York 10036.
Attention: Mortgage Securities.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of certificates, Morgan Stanley Dean
Witter Capital I Inc. 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 the 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
the assignment, deliver the certificates to Morgan Stanley Dean Witter Capital I
Inc. in exchange for the assets and the other assets comprising the trust fund
for the series. Each mortgage loan and mortgaged-backed security will be
identified in a schedule appearing as an exhibit to the related Agreement.
Unless otherwise provided in the related prospectus supplement, the schedule
will include detailed information:
o in respect of each mortgage loan included in the related trust fund,
including without limitation, the address of the related mortgaged property
and type of the 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
o in respect of each mortgage-backed security included in the related
trust fund, including without limitation, the related issuer, servicer and
trustee, the pass-through or bond rate or formula for determining the rate,
the issue date and original and remaining term to maturity, if applicable,
the original and outstanding principal amount and payment provisions, if
applicable.
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With respect to each mortgage loan, Morgan Stanley Dean Witter Capital I
Inc. will deliver or cause to be delivered to the trustee or to the custodian,
loan documents, which to the extent specified in the related prospectus
supplement will include:
o the original mortgage note endorsed, without recourse, in blank or
to the order of the trustee,
o the original mortgage or a certified copy with evidence of
recording, and
o 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 Morgan Stanley Dean
Witter Capital I Inc. 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 these
mortgage loans, the trustee or its nominee may not be able to enforce the
mortgage note against the related borrower. To the extent specified in the
related prospectus supplement, the asset seller will be required to agree to
repurchase, or substitute for, this type of 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 Morgan Stanley Dean Witter Capital I Inc. or another
party specified in the related prospectus supplement to promptly cause each
assignment of mortgage to be recorded in the appropriate public office for real
property records. However, recordation of the assignment of mortgage is not
required in the State of California or in other states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related mortgage loan against the claim of any
subsequent transferee or any successor to or creditor of Morgan Stanley Dean
Witter Capital I Inc., the master servicer, the relevant asset seller or any
other prior holder of the mortgage loan.
The trustee or a custodian will review the mortgage loan documents within a
specified period of days after receipt thereof, and the trustee or a custodian
will hold the documents in trust for the benefit of the certificateholders.
Unless otherwise specified in the related prospectus supplement, if any of these
documents are found to be missing or defective in any material respect, the
trustee or custodian shall immediately notify the master servicer and Morgan
Stanley Dean Witter Capital I Inc., 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 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 notice, to
repurchase the related mortgage loan from the trustee at the Purchase Price or
substitute for the mortgage loan. There can be no assurance that an asset seller
will fulfill this repurchase or substitution obligation, and neither the master
servicer nor Morgan Stanley Dean Witter Capital I Inc. will be obligated to
repurchase or substitute the mortgage loan if the asset seller defaults on its
obligation. To the extent 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 the asset, the asset seller may agree to cover
any losses suffered by the trust fund as a result of this type of breach or
defect.
With respect to each government security or mortgage-backed security in
certificated form, Morgan Stanley Dean Witter Capital I Inc. will deliver or
cause to be delivered to the trustee or the custodian the original certificate
or other definitive evidence of the government security or mortgage-backed
security, as applicable, together with bond power or other instruments,
certifications or documents required to transfer fully the government security
or mortgage-backed security, as applicable, to the trustee for the benefit of
the certificateholders. With respect to each government security or
mortgage-backed security in uncertificated or book-entry form or held through a
"clearing corporation" within the meaning of the Uniform Commercial Code, Morgan
Stanley Dean Witter Capital I Inc. and the trustee will cause the government
security or mortgage-backed security to be registered directly or on the books
of the 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 Morgan Stanley Dean Witter Capital I Inc. or the trustee promptly cause
any mortgage-backed securities and government
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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, Morgan
Stanley Dean Witter Capital I Inc. will, with respect to each mortgage loan,
make or assign certain representations and warranties, as of a specified date
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for the mortgage loan on
the schedule of assets appearing as an exhibit to the related Agreement;
o the existence of title insurance insuring the lien priority of the
mortgage loan;
o the authority of the warrantying party to sell the mortgage loan;
o the payment status of the mortgage loan and the status of payments
of taxes, assessments and other charges affecting the related mortgaged
property;
o 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
o the existence of hazard and extended perils insurance coverage on
the mortgaged property.
Any warrantying party, if other than Morgan Stanley Dean Witter Capital I
Inc., shall be an asset seller or an affiliate thereof or another person
acceptable to Morgan Stanley Dean Witter Capital I Inc. and shall be identified
in the related prospectus supplement.
Representations and warranties made in respect of a mortgage 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 the date on which the representations
are made and the date of initial issuance of the related series of certificates
evidencing an interest in the mortgage loan. Unless otherwise specified in the
related prospectus supplement, in the event of a breach of any representation or
warranty, the warrantying party will be obligated to reimburse the trust fund
for losses caused by the breach or either cure the breach or repurchase or
replace the affected mortgage loan as described in the next paragraph. 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 the date on which they were made. The
warrantying party would have no obligations if the relevant event that causes
the breach occurs after that date.
Unless otherwise provided in the related prospectus supplement, each
Agreement will provide that the master servicer or trustee or both, 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 mortgage loan that
materially and adversely affects the value of the mortgage loan or the interests
in the mortgage loan of the certificateholders. If the warrantying party cannot
cure the breach within a specified period following the date on which the party
was notified of the breach, then:
o the warrantying party will be obligated to repurchase the mortgage
loan from the trustee within a specified period from the date on which the
warrantying party was notified of the breach, at the Purchase Price or;
o if so provided in the prospectus supplement for a series, the
warrantying party will have the option, within a specified period after
initial issuance of such series of certificates, to cause the mortgage loan
to be removed from the trust fund and substitute in its place one or more
other mortgage loans, in accordance with the standards described in the
related prospectus supplement; or
o if so provided in the prospectus supplement for a series, the
warrantying party will have the option to reimburse the trust fund or the
certificateholders for any losses caused by the breach.
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Unless otherwise provided 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 Morgan Stanley Dean Witter Capital I Inc. except to the extent that
it is the warrantying party, nor the master servicer will be obligated to
purchase or substitute for a mortgage loan if a warrantying party defaults on
its obligation to do so, and no assurance can be given that warrantying parties
will carry out their obligations with respect to mortgage loans.
Unless otherwise provided in the related prospectus supplement the
warrantying party will, with respect to a trust fund that includes government
securities or mortgage-backed securities, make or assign certain representations
or warranties, as of a specified date, with respect to the government securities
or mortgage-backed securities, covering:
o the accuracy of the information set forth therefor on the schedule
of assets appearing as an exhibit to the related Agreement; and
o the authority of the warrantying party to sell the 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 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 the breach to the master servicer by the trustee or
Morgan Stanley Dean Witter Capital I Inc., or to the master servicer, Morgan
Stanley Dean Witter Capital I Inc. and the trustee by the holders of
certificates evidencing not less than 25% of the voting rights unless otherwise
provided in the related prospectus supplement, will constitute an Event of
Default under the Agreement. See "Events of Default" and "Rights Upon Event of
Default" below.
CERTIFICATE ACCOUNT AND OTHER COLLECTION ACCOUNTS
General
The master servicer or the trustee or both will, as to each trust fund,
establish and maintain or cause to be established and maintained the certificate
account, which must be either an account or accounts:
o the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation, to the limits established by the Federal Deposit Insurance
Corporation, 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 the 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
o 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 the series.
The collateral eligible to secure amounts in the certificate account is limited
to Permitted Investments. A certificate account may be maintained as an interest
bearing or a non-interest bearing account and the funds held in the account may
be invested pending each succeeding distribution date in 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 the 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.
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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:
(1) all payments on account of principal, including principal prepayments,
on the assets;
(2) 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 subservicer as its servicing compensation and net of any
retained interest;
(3) all proceeds of the hazard insurance policies to be maintained in
respect of each mortgaged property securing a mortgage loan in the trust fund,
to the extent the proceeds are not applied to the restoration of the property or
released to the borrower in accordance with the normal servicing procedures of a
master servicer or the related subservicer, subject to the terms and conditions
of the related mortgage and mortgage note, insurance proceeds and all
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;
(4) 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";
(5) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(6) any amounts paid under any cash flow agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements";
(7) all proceeds of any asset or, with respect to a mortgage loan, property
acquired in respect thereof purchased by Morgan Stanley Dean Witter Capital I
Inc., any asset seller or any other specified person as described above under
"--Assignment of Assets; Repurchases" and "--Representations and Warranties;
Repurchases," all proceeds of any defaulted mortgage loan purchased as described
under "--Realization Upon Defaulted Mortgage loans," and all proceeds of any
asset purchased as described above under "Description of the
Certificates--Termination";
(8) any amounts paid by a master servicer to cover certain interest
shortfalls arising out of the prepayment of mortgage loans in the trust fund as
described under "Description of the Agreements--Retained Interest; Servicing
Compensation and Payment of Expenses";
(9) to the extent that any 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
loans and mortgage-backed securities;
(10) 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";
(11) 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
(12) any other amounts required to be deposited in the certificate account
as provided in the related Agreement and described in the related prospectus
supplement.
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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:
(1) to make distributions to the certificateholders on each distribution
date;
(2) to reimburse a master servicer for unreimbursed amounts advanced as
described under "Description of the Certificates--Advances in Respect of
Delinquencies," the 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 mortgage loans with respect to which the advances were made or out of
amounts drawn under any form of credit support with respect to those mortgage
loans;
(3) to reimburse a master servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to mortgage 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 mortgage loans and properties, and net income collected on the
particular properties, with respect to which the fees were earned or the
expenses were incurred or out of amounts drawn under any form of credit support
with respect to such mortgage loans and properties;
(4) to reimburse a master servicer for any advances described in clause (2)
above and any servicing expenses described in clause (3) above which, in the
master servicer's good faith judgment, will not be recoverable from the amounts
described in clauses (2) and (3), respectively, the 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;
(5) if and to the extent described in the related prospectus supplement, to
pay a master servicer interest accrued on the advances described in clause (2)
above and the servicing expenses described in clause (3) above while these
remain outstanding and unreimbursed;
(6) to reimburse a master servicer, Morgan Stanley Dean Witter Capital I
Inc., 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 "--Matters Regarding a Master Servicer and
the Depositor;
(7) 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;
(8) 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 below under "--Matters
Regarding the Trustee";
(9) 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;
(10) 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;
(11) 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, these payments to be made out of income received on this type of
property;
(12) 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 below under "Federal Income Tax Consequences--REMICS--Prohibited
Transactions and Other Taxes";
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(13) 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
mortgage loan or a property acquired in respect thereof in connection with the
liquidation of the defaulted mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained pursuant
to the related Agreement for the benefit of certificateholders;
(15) to pay for the costs of recording the related Agreement if recordation
materially and beneficially affects the interests of certificateholders,
provided that the 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;
(16) 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; Repurchases" and "Representations and
Warranties; Repurchases" or otherwise;
(17) to make any other withdrawals permitted by the related Agreement and
described in the related prospectus supplement; and
(18) 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 subservicer 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 collection account will be withdrawn
from the collection account 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 collection account. The prospectus supplement
will set forth any restrictions with respect to any collection account,
including investment restrictions and any restrictions with respect to financial
institutions with which any collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer, directly or through subservicers, is required to make
reasonable efforts to collect all scheduled payments under the mortgage loans
and will follow or cause to be followed the collection procedures as it would
follow with respect to mortgage loans that are comparable to the mortgage loans
and held for its own account, provided the procedures are consistent with 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 mortgage 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 in this prospectus and in any related prospectus
supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of borrowers for payment of taxes, insurance and other
items required to be paid by any borrower pursuant to the mortgage 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 mortgage loans. To the extent specified in the related
prospectus supplement, the master servicer will be responsible for filing and
settling claims in respect of particular mortgage loans under any applicable
instrument of credit support. See "Description of Credit Support."
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The master servicer may agree to modify, waive or amend any term of any
mortgage loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not:
o affect the amount or timing of any scheduled payments of principal
or interest on the mortgage loan; or
o in its judgment, materially impair the security for the mortgage
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 mortgage
loan if, unless otherwise provided in the related prospectus supplement:
o in its judgment, a material default on the mortgage loan has
occurred or a payment default is imminent; and
o in its judgment, that modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
mortgage 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 mortgage loan.
SUBSERVICERS
A master servicer may delegate its servicing obligations in respect of the
mortgage loans to a subservicer, but the master servicer will remain obligated
under the related Agreement. Each 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 the capacity, the trustee or any successor master servicer may assume the
master servicer's rights and obligations under a subservicing agreement.
Unless otherwise provided in the related prospectus supplement, the master
servicer will be solely liable for all fees owed by it to any subservicer,
irrespective of whether the master servicer's compensation pursuant to the
related Agreement is sufficient to pay those fees. However, a subservicer may be
entitled to a retained interest in certain mortgage loans. Each subservicer 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 MORTGAGE LOANS
A borrower'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 the borrower'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:
o monitor any mortgage loan which is in default;
o contact the borrower concerning the default;
o evaluate whether the causes of the default can be cured over a
reasonable period without significant impairment of the value of the
mortgaged property;
o initiate corrective action in cooperation with the borrower if cure
is likely;
o inspect the mortgaged property; and
o take any 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 the 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
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certificateholders, may vary considerably depending on the particular mortgage
loan, the mortgaged property, the borrower, the presence of an acceptable party
to assume the mortgage 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 mortgage loan or to
foreclose on a mortgaged property for a considerable period of time. See "Legal
Aspects of Mortgage Loans."
Any Agreement relating to a trust fund that includes mortgage loans may
grant to the master servicer or the holder or holders of certain classes of
certificates, or both, a right of first refusal to purchase from the trust fund
at a predetermined purchase price any mortgage 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 mortgage 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 this 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 sale of this
type 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 the defaulted mortgage 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 the defaulted mortgage loan as
described in the paragraphs 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.
If a default on a mortgage loan has occurred or, in the master servicer's
judgment is imminent, and the action is consistent with the Servicing Standard,
the master servicer, on behalf of the trustee, may at any time:
o institute foreclosure proceedings;
o exercise any power of sale contained in any mortgage;
o obtain a deed in lieu of foreclosure; or
o otherwise acquire title to a mortgaged property securing the
mortgage loan.
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:
o the Internal Revenue Service grants an extension of time to sell the
property; or
o the trustee receives an opinion of independent counsel to the effect
that the holding of the property by the trust fund 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 Internal Revenue Code at any time that any
certificate is outstanding.
Subject to the foregoing, the master servicer will be required to:
o solicit bids for any mortgaged property so acquired by the trust
fund as will be reasonably likely to realize a fair price for the property;
and
o accept the first and, if multiple bids are contemporaneously
received, the highest cash bid received from any person that constitutes a
fair price.
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The limitations imposed by the related Agreement and the REMIC provisions
of the Internal Revenue 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 "Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted mortgage 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 normal practices and procedures as
it deems necessary or advisable to realize upon the defaulted mortgage loan. If
the proceeds of any liquidation of the property securing the defaulted mortgage
loan are less than the outstanding principal balance of the defaulted mortgage
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 that 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 mortgage loan, prior to
the distribution of the liquidation proceeds to certificateholders, amounts
representing its normal servicing compensation on the mortgage loan,
unreimbursed servicing expenses incurred with respect to the mortgage loan and
any unreimbursed advances of delinquent payments made with respect to the
mortgage loan.
If any property securing a defaulted mortgage 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:
o that the restoration will increase the proceeds to
certificateholders on liquidation of the mortgage loan after reimbursement
of the master servicer for its expenses; and
o that the expenses will be recoverable by it from related insurance
proceeds or liquidation proceeds.
As servicer of the mortgage 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 mortgage loans.
If a master servicer or its designee recovers payments under any instrument
of credit support with respect to any defaulted mortgage loan, the master
servicer will be entitled to withdraw or cause to be withdrawn from the
certificate account out of those proceeds, prior to distribution thereof to
certificateholders, amounts representing its normal servicing compensation on
the mortgage loan, unreimbursed servicing expenses incurred with respect to the
mortgage loan and any unreimbursed advances of delinquent payments made with
respect to the mortgage loan. See "Hazard Insurance Policies" and "Description
of Credit Support."
HAZARD INSURANCE POLICIES
To the extent specified in the related prospectus supplement, each
Agreement for a trust fund that includes mortgage loans will require the master
servicer to cause the borrower on each mortgage loan to maintain a hazard
insurance policy providing for the coverage required under the related mortgage
or, if any mortgage permits the holder thereof to dictate to the borrower the
insurance coverage to be maintained on the related mortgaged property, then the
coverage that is consistent with the Servicing Standard. To the extent specified
in the related prospectus supplement, the coverage will be in general in an
amount equal to the lesser of the principal balance owing on the mortgage 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
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insurance policy and under any other insurance policy referred to below, or upon
the extent to which information in this regard is furnished by borrowers. All
amounts collected by the master servicer under any policy, except for amounts to
be applied to the restoration or repair of the mortgaged property or released to
the borrower 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
borrower to maintain a hazard insurance policy by the master servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the 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 in the certificate account but for that 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 mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most of these 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 mortgage loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage,
generally 80% to 90%, of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, the co-insurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of:
o the replacement cost of the improvements less physical depreciation;
and
o the proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of the
improvements.
Each Agreement for a trust fund that includes mortgage loans will require
the master servicer to cause the borrower on each mortgage loan to maintain all
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 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 this
cost will not be taken into account for purposes of calculating the distribution
to be made to certificateholders. These costs may be recovered by the master
servicer or subservicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers 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 mortgage loans. However, the ability of the master
servicer to present or cause to be presented these claims is dependent upon the
extent to which information in this regard is furnished to the master servicer
by borrowers.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
To the extent 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
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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 criteria set forth in the Agreement
are met.
DUE-ON-SALE PROVISIONS
Some of the mortgage loans may contain clauses requiring the consent of the
lender to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses entitling the lender to accelerate payment of the mortgage
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. To the extent 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 "Legal Aspects of
Mortgage Loans--Due-on-Sale Clauses."
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.
To the extent specified in the related prospectus supplement, the master
servicer's and a subservicer's primary servicing compensation with respect to a
series of certificates will come from the periodic payment to it of a portion of
the interest payment on each asset. Since any retained interest and a master
servicer's primary compensation are percentages of the principal balance of each
asset, these 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 mortgage loans may provide
that, as additional compensation, the master servicer or the subservicers may
retain all or a portion of assumption fees, modification fees, late payment
charges or prepayment premiums collected from borrowers and any interest or
other income which may be earned on funds held in the certificate account or any
account established by a subservicer 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 mortgage loans and, to the
extent so provided in the related prospectus supplement, interest thereon at the
rate specified in the related prospectus supplement 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 mortgage loans in the
related trust fund during that period prior to their respective due dates
therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to assets which include mortgage 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 that 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
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Home Loan Mortgage Corporation, 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 that firm may rely, as to matters relating to the direct
servicing of mortgage loans by subservicers, 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 that statement, of firms of
independent public accountants with respect to the related subservicer.
Each 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
annual accountants' statement and 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.
MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The master servicer, if any, or a servicer for substantially all the
mortgage loans under each Agreement will be named in the related prospectus
supplement. The entity serving as master servicer or as servicer may be an
affiliate of Morgan Stanley Dean Witter Capital I Inc. and may have other normal
business relationships with Morgan Stanley Dean Witter Capital I Inc. or Morgan
Stanley Dean Witter Capital I Inc.'s affiliates. Reference to the master
servicer shall be deemed to be to the servicer of substantially all of the
mortgage loans, if applicable.
To the extent specified in the related prospectus supplement, the related
Agreement will provide that the master servicer may resign from its obligations
and duties thereunder only upon a determination that its duties under the
Agreement are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities carried on by it;
provided that the other activities of the master servicer causing the conflict
were carried on by the master servicer at the date of the Agreement. No
resignation will become effective until the trustee or a successor servicer has
assumed the master servicer's obligations and duties under the Agreement.
To the extent specified in the related prospectus supplement, each
Agreement will further provide that neither any master servicer, Morgan Stanley
Dean Witter Capital I Inc. nor any director, officer, employee, or agent of a
master servicer or Morgan Stanley Dean Witter Capital I Inc. 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, Morgan Stanley
Dean Witter Capital I Inc. nor any director, officer, employee or agent of a
master servicer or Morgan Stanley Dean Witter Capital I Inc. will be protected
against any breach of a representation, warranty or covenant made in the
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 described in the related prospectus supplement, each Agreement will
further provide that any master servicer, Morgan Stanley Dean Witter Capital I
Inc. and any director, officer, employee or agent of a master servicer or Morgan
Stanley Dean Witter Capital I Inc. 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 the indemnification will not extend
to any loss, liability or expense:
o specifically imposed by the Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the
case of a master servicer, the prosecution of an
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enforcement action in respect of any specific mortgage loan or
mortgage loans, except as any loss, liability or expense shall be
otherwise reimbursable pursuant to the Agreement;
o incurred in connection with any breach of a representation, warranty
or covenant made in the Agreement;
o 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 its obligations or duties;
o incurred in connection with any violation of any state or federal
securities law; or
o imposed by any taxing authority if the 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 Morgan Stanley Dean Witter Capital I Inc. 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. The master servicer or Morgan Stanley
Dean Witter Capital I Inc. 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 this event, the legal expenses and costs of
the action and any liability resulting therefrom will be expenses, costs and
liabilities of the certificateholders, and the master servicer or Morgan Stanley
Dean Witter Capital I Inc., 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 Morgan Stanley Dean Witter
Capital I Inc. may be merged or consolidated, or any person resulting from any
merger or consolidation to which the master servicer or Morgan Stanley Dean
Witter Capital I Inc. is a party, or any person succeeding to the business of
the master servicer or Morgan Stanley Dean Witter Capital I Inc., will be the
successor of the master servicer or Morgan Stanley Dean Witter Capital I Inc.,
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 mortgage loans, Events of Default under the related Agreement
will include:
o 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;
o 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 the failure has been given to the master servicer by the
trustee or Morgan Stanley Dean Witter Capital I Inc., or to the
master servicer, Morgan Stanley Dean Witter Capital I Inc. and the
trustee by the holders of certificates evidencing not less than 25%
of the voting rights;
o 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 that breach has been given
to the master servicer by the trustee or Morgan Stanley Dean Witter
Capital I Inc., or to the master servicer, Morgan Stanley Dean
Witter Capital I Inc. and the trustee by the holders of certificates
evidencing not less than 25% of the voting rights; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
or on behalf of the master servicer indicating its insolvency or
inability to pay its obligations.
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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 described 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 Morgan Stanley Dean Witter Capital I Inc. and all
certificateholders of the applicable series notice of the occurrence, unless the
default shall have been cured or waived.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied,
Morgan Stanley Dean Witter Capital I Inc. 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 the advances, and will be entitled to
similar compensation arrangements. Unless otherwise described 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
appointment of at least $15,000,000 to act as successor to the master servicer
under the Agreement. Pending appointment, the trustee is obligated to act in the
capacity of master servicer. The trustee and any 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 that Event of Default; provided, however, that
an Event of Default involving a failure to distribute a required payment to
certificateholders described in clause (1) under "--Events of Default" may be
waived only by all of the certificateholders. Upon any waiver of an Event of
Default, the 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 the 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 the 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 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
the Agreement, unless the certificateholders have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
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AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any of the holders of certificates covered by the Agreement:
o to cure any ambiguity;
o to correct, modify or supplement any provision in the Agreement
which may be inconsistent with any other provision in the Agreement;
o to make any other provisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the
provisions thereof; or
o to comply with any requirements imposed by the Internal Revenue
Code;
provided that the amendment--other than an amendment for the purpose specified
in clause (4) above--will not, as evidenced by an opinion of counsel to that
effect, adversely affect in any material respect the interests of any holder of
certificates covered by the Agreement.
To the extent specified in the related prospectus supplement, each
Agreement may also be amended by Morgan Stanley Dean Witter Capital I Inc., 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 to the extent specified in the related
prospectus supplement, no such amendment may:
o 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
that certificate;
o adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as
described in (1), without the consent of the holders of all
certificates of that class; or
o modify the provisions of the Agreement described in this paragraph
without the consent of the holders of all certificates covered by
the 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 the 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 Morgan Stanley Dean Witter Capital I Inc. 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 the documents and to
determine whether they conform to the requirements of the Agreement.
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MATTERS REGARDING THE TRUSTEE
Unless otherwise described 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:
o 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;
o defending or prosecuting any legal action in respect of the related
Agreement or series of certificates;
o being the lender 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
o 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 a higher percentage as is specified in the related
Agreement with respect to any particular matter of the voting rights
for the series; provided, however, that the 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 under the related
Agreement, or by reason of its reckless disregard of the obligations
or duties, or as may arise from a breach of any representation,
warranty or covenant of the trustee made in the related Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to Morgan Stanley Dean Witter Capital
I Inc., the master servicer, if any, and all certificateholders. Upon receiving
the notice of resignation, Morgan Stanley Dean Witter Capital I Inc. is required
promptly to appoint a successor trustee acceptable to the master servicer, if
any. If no successor trustee shall have been so appointed and have accepted
appointment within 30 days after the giving of the notice of resignation, the
resigning trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the trustee shall cease to be eligible to continue as
trustee 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 Morgan Stanley
Dean Witter Capital I Inc. may remove the trustee and appoint a successor
trustee acceptable to the master servicer, if any. Holders of the certificates
of any series entitled to at least 51% of the voting rights for that series may
at any time remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of certificates, credit support may be provided with respect
to one or more classes thereof or the related assets. Credit support may be in
the form of the subordination of one or more classes of certificates, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of credit support described in the related prospectus
supplement, or any combination of the foregoing. If so provided in the related
prospectus supplement, any form of credit support may be structured so as to be
drawn upon by more than one series to the extent described in the related
prospectus supplement.
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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, holders of certificates evidencing interests in any of the trusts
will be subject to the risk that the credit support will be exhausted by the
claims of other trusts prior to the trust fund receiving any of its intended
share of 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:
o the nature and amount of coverage under the credit support;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o the conditions, if any, under which the amount of coverage under the
credit support may be reduced and under which the credit support may
be terminated or replaced;
o the material provisions relating to such credit support; and
o information regarding the obligor under any instrument of credit
support, including:
o a brief description of its principal business activities;
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
o if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business; and
o its total assets, and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the prospectus
supplement.
See "Risk Factors--Credit Enhancement is Limited in Amount and Coverage."
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 the
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 the 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
loans and mortgage-backed securities prior to distributions on subordinate
certificates evidencing interests in a different group of mortgage loans and
mortgage-backed securities within the trust fund. The prospectus supplement for
a series that includes a cross-support provision will describe the manner and
conditions for applying these provisions.
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INSURANCE OR GUARANTEES FOR THE MORTGAGE LOANS
If so provided in the prospectus supplement for a series of certificates,
the mortgage loans in the related trust fund will be covered for various default
risks by insurance policies or guarantees. A copy of any material instrument for
a series will be filed with the Securities and Exchange 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 the certificates or certain classes
thereof will be covered by one or more letters of credit, issued by the letter
of credit bank. Under a letter of credit, the letter of credit 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 loans and mortgage-backed securities 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 letter of credit 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 letter of credit for a series will be filed with the Securities and Exchange
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 the certificates or certain classes
thereof will be covered by insurance policies or surety bonds provided by one or
more insurance companies or sureties. The instruments may cover, with respect to
one or more classes of certificates of the related series, timely distributions
of interest 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 instrument for a series will be
filed with the Securities and Exchange Commission as an exhibit to a Current
Report on Form 8-K to be filed with the Securities and Exchange 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 the 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 the prospectus supplement. The reserve
funds for a series may also be funded over time by depositing in the reserve
funds 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 described 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 in the reserve fund 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 described in the related prospectus supplement, any
reinvestment income or other gain from these investments will be credited to the
related reserve fund for the series, and any loss resulting from these
investments will be charged to the reserve fund.
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However, the 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 described in the
related prospectus supplement.
Additional information concerning any reserve fund will be set forth in the
related prospectus supplement, including the initial balance of the reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which the required balance will decrease over time, the manner of funding the
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 FOR MORTGAGE-BACKED SECURITIES
If so provided in the prospectus supplement for a series of certificates,
the mortgage-backed securities in the related trust fund or the mortgage loans
underlying the mortgage-backed securities may be covered by one or more of the
types of credit support described in this prospectus. The related prospectus
supplement will specify as to each form of credit support the information
indicated above under "Description of Credit Support--General," to the extent
the information is material and available.
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by single-family residential properties. The legal
aspects are governed primarily by applicable state law, which laws may differ
substantially. As such, the summaries do not purport to:
o be complete;
o reflect the laws of any particular state; or
o 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. The instrument
granting a security interest may be a mortgage, deed of trust, security deed or
deed to secure debt, depending upon the prevailing practice and law in the state
in which the mortgaged property is located. Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property. The priority of the mortgage 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 the 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:
o a mortgagor--the borrower and usually the owner of the subject
property, and
o a mortgagee--the lender.
In contrast, a deed of trust is a three-party instrument, among:
o a trustor--the equivalent of a borrower,
o a trustee to whom the mortgaged property is conveyed, and
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o a beneficiary--the lender--for whose benefit the conveyance is made.
Under a deed of trust, the borrower 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 the time that the underlying debt is repaid, generally with a power of
sale as security for the indebtedness evidenced by the related mortgage note. If
a borrower 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 borrower. At origination of a mortgage loan
involving a land trust, the borrower executes a separate undertaking to make
payments on the mortgage note. The lender's authority under a mortgage, the
trustee's authority under a deed of trust and the grantee's authority under a
deed to secure debt are governed by the express provisions of the mortgage, the
law of the state in which the real property is located, certain federal laws
including, without limitation, the Soldiers' and Sailors' Civil Relief Act of
1940 and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, the mortgage or other instrument may encumber other interests in real
property such as:
o a tenant's interest in a lease of land or improvements, or both, and
o the leasehold estate created by the lease.
A mortgage or other instrument covering an interest in real property other than
the fee estate requires special provisions in the instrument creating the
interest to protect the lender against termination of the interest before the
note secured by the mortgage, deed of trust, security deed or deed to secure
debt is paid. To the extent specified in the prospectus supplement, Morgan
Stanley Dean Witter Capital I Inc. 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. The representations
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
secured by security interests in shares issued by 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. This type of 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 borrower, 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
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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:
o arising under a blanket mortgage, the lender holding a blanket
mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements, or
o 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 the
final payment could lead to foreclosure by the lender. Similarly, a land lease
has an expiration date and the inability of the cooperative to extend its term
or, in the alternative, to purchase the land could lead to termination of the
cooperatives' interest in the property and termination of all proprietary leases
and occupancy agreement. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the mortgage loans, the collateral securing the cooperative
loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing the tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperative
Loans" below.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the lender to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender 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.
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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. The 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 lender in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on these 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 borrower's default and the likelihood that the borrower 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 borrowers 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
borrower failed to maintain the mortgaged property adequately or the borrower
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 borrower 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 borrower.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower 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 the sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the borrower 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 borrower 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 borrower 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.
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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 the 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 borrower'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 the 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 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 lender 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 lender 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 borrower is in default. Any additional
proceeds are generally payable to the borrower. 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 these holders.
REO Properties
If title to any mortgaged property is acquired by the trustee on behalf of
the certificateholders, the master servicer or any related subservicer, on
behalf of the certificateholders, will be required to sell the mortgaged
property by the close of the third calendar year following the year of
acquisition, unless:
o the Internal Revenue Service grants an REO extension or
o 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 Agreement
to fail to qualify as a REMIC under the Internal Revenue Code.
Subject to the foregoing, the master servicer or any related subservicer will
generally be required to solicit bids for any mortgaged property so acquired in
a manner as will be reasonably likely to realize a fair price for the property.
The master servicer or any related subservicer 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
subservicer of its obligations with respect to the REO property.
In general, the master servicer or any related subservicer or an
independent contractor employed by the master servicer or any related
subservicer 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 the property. After the master
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servicer or any related subservicer reviews the operation of the 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 the property, the master servicer or any related
subservicer 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 the property in a manner that would
avoid the imposition of 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" that income would be subject to federal income tax at the
highest marginal corporate tax rate--currently 35% or (ii) "prohibited
transactions," that 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 subservicer would be apportioned and classified as "service" or
"non-service" income. The "service" portion of the 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 the
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 "Federal Income Tax Consequences" in
this prospectus and "Federal Income Tax Consequences" in the prospectus
supplement.
Rights of Redemption
The purposes of a foreclosure action are to enable the lender to realize
upon its security and to bar the borrower, 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 lender 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 the action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law or non-statutory right which
exists prior to completion of the foreclosure, is not waivable by the borrower,
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 borrower 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 borrower 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 the property or
independent counsel renders an opinion to the effect that holding the property
for such additional period is permissible under the REMIC provisions.
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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 the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the cooperative to terminate the 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 which 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 the 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 the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the 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 Uniform Commercial
Code and the security agreement relating to those shares. Article 9 of the
Uniform Commercial Code requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the Uniform Commercial Code provides that the proceeds of the
sale will be applied first to pay the costs and expenses of the sale and then to
satisfy the indebtedness secured by the lender's security interest. The
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperatives to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building was so converted.
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JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first mortgages or deeds of trust held by other
lenders. The rights of the trust fund as the holder of a junior deed of trust or
a junior mortgage are subordinate in lien and in payment to those of the holder
of the senior mortgage or deed of trust, including the prior rights of the
senior lender or beneficiary to receive and apply hazard insurance and
condemnation proceeds and, upon default of the borrower, 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
lender'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" in this
prospectus.
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 borrower or trustor to
perform any of its obligations, the senior lender 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 lender or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust. To the
extent a first lender expends these 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 lender under a mortgage to obtain a deficiency judgment against the
borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower 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 borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on a 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 borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower 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 borrower as
a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 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
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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 Uniform Commercial Code governs foreclosure on
cooperative shares and the related proprietary lease or occupancy agreement.
Some courts have interpreted section 9-504 of the Uniform Commercial Code 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 borrower sells, transfers
or conveys the related mortgaged property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of these 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-
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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 the 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 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
the loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks including:
o the borrower may have difficulty servicing and repaying multiple
loans;
o if the junior loan permits recourse to the borrower--as junior loans
often do--and the senior loan does not, a borrower may be more
likely to repay sums due on the junior loan than those on the senior
loan;
o 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 borrower 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 borrower is additionally burdened;
o if the borrower defaults on the senior loan 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; and
o 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, 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 or to limit discount points or other charges.
Morgan Stanley Dean Witter Capital I Inc. 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
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or to adopt a provision limiting discount points or other charges prior to
origination of mortgage loans, any such limitation under the state's usury law
would not apply to the 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 the state action will be eligible for
inclusion in a trust fund unless the mortgage loan provides:
o the interest rate, discount points and charges as are permitted in
that state; or
o that the terms of the loan shall be construed in accordance with the
laws of another state under which the interest rate, discount points
and charges would not be usurious and the borrower's counsel has
rendered an opinion that the 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 borrower 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 borrower 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. The
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 of the Garn-St Germain Act provides that,
notwithstanding any state law to the contrary:
o 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;
o 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
o 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 of the Garn-St Germain Act provides that any state may reject
applicability of the provisions of Title VIII of the Garn-St Germain Act by
adopting, prior to October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of the provisions. Certain states have taken this
type of action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, a borrower who enters military service after the origination of a
mortgage loan, including a borrower 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 the
borrower's active duty status, unless a court orders otherwise upon application
of the lender. The Soldiers' and Sailors' Civil Relief Act of 1940, as amended,
applies to borrowers 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
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the military. Because the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, applies to borrowers 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 Soldiers' and Sailors' Civil Relief Act of 1940, as amended. Application of
the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, 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
Soldiers' and Sailors' Civil Relief Act of 1940, as amended, 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, to the extent specified
in the related prospectus supplement, any form of credit support provided in
connection with the certificates. In addition, the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended, imposes limitations that would impair the
ability of the servicer to foreclose on an affected mortgage loan during the
borrower's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that an
affected 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 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 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:
o its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based, or
o 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.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of offered certificates
is based on the advice of Brown & Wood LLP or Latham & Watkins or Cadwalader,
Wickersham & Taft, counsel to Morgan Stanley Dean Witter Capital I Inc. This
summary is based on laws, regulations, including the REMIC Regulations
promulgated by the Treasury Department, 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.
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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 Internal Revenue Code.
The prospectus supplement for each series of certificates will specify whether a
REMIC election will be made.
GRANTOR TRUST FUNDS
If a REMIC election is not made, Brown & Wood LLP or Cadwalader, Wickersham
& Taft or Latham & Watkins will deliver its opinion that the trust fund will not
be classified as an association taxable as a corporation and that the 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 Internal Revenue 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 in this section of the
prospectus.
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 loans and mortgage-backed securities in the
pool. Any amounts received by a grantor trust certificateholder in lieu of
amounts due with respect to any mortgage loan and mortgage-backed security
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 the grantor trust
certificateholder's method of accounting its pro rata share of the entire income
from the mortgage loans in the trust fund represented by grantor trust
certificates, including interest, original issue discount, if any, prepayment
fees, assumption fees, any gain recognized upon an assumption and late payment
charges received by the master servicer. Under Internal Revenue Code
Section 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 the 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 these expenses plus all other
Internal Revenue 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 Internal Revenue Code Section 68(b)--which amount will
be adjusted for inflation--will be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the applicable amount
and
o 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 the 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 the amounts are
paid or the certificateholder would otherwise be entitled to claim the
deductions had it held the mortgage loans and mortgage-backed securities
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 the amounts are paid or the certificateholder otherwise would
be entitled to claim the deductions had it
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held the mortgage loans and mortgage-backed securities directly. If the
servicing fees paid to the master servicer are deemed to exceed reasonable
servicing compensation, the amount of the 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 loans and mortgage-backed
securities. The mortgage loans and mortgage-backed securities would then be
subject to the "coupon stripping" rules of the Internal Revenue Code discussed
below under "--Stripped Bonds and Coupons."
Unless otherwise described in the related prospectus supplement or
otherwise provided below in this section of the prospectus, as to each series of
certificates counsel to Morgan Stanley Dean Witter Capital I Inc. will have
advised Morgan Stanley Dean Witter Capital I Inc. that:
o a grantor trust certificate owned by a "domestic building and loan
association" within the meaning of Internal Revenue Code
Section 7701(a)(19) representing principal and interest payments on
mortgage loans and mortgage-backed securities will be considered to
represent "loans . . . secured by an interest in real property which
is . . . residential property" within the meaning of Internal
Revenue Code Section 7701(a)(19)(C)(v), to the extent that the
mortgage loans and mortgage-backed securities represented by that
grantor trust certificate are of a type described in that Internal
Revenue Code section;
o a grantor trust certificate owned by a real estate investment trust
representing an interest in mortgage loans and mortgage-backed
securities will be considered to represent "real estate assets"
within the meaning of Internal Revenue Code Section 856(c)(4)(A),
and interest income on the mortgage loans and mortgage-backed
securities will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Internal Revenue
Code Section 856(c)(3)(B), to the extent that the mortgage loans and
mortgage-backed securities represented by that grantor trust
certificate are of a type described in that Internal Revenue Code
section; and
o 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 Internal Revenue 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
Internal Revenue 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 Internal Revenue Code, and, as a result,
these assets would be subject to the stripped bond provisions of the Internal
Revenue Code. Under these rules, these government securities are treated as
having original issue discount based on the purchase price and the stated
redemption price at maturity of each Security. As such, grantor trust
certificateholders would be required to include in income their pro rata share
of the original issue discount on each government security recognized in any
given year on an economic accrual basis even if the grantor trust
certificateholder is a cash method taxpayer. Accordingly, the sum of the income
includible to the grantor trust certificateholder in any taxable year may exceed
amounts actually received during such year.
Buydown Loans. The assets constituting certain trust funds may include
buydown loans. The characterization of any investment in buydown loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that 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 Internal Revenue 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.
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Premium. The price paid for a grantor trust certificate by a holder will
be allocated to the holder's undivided interest in each mortgage loan and
mortgage-backed security based on each asset's relative fair market value, so
that the holder's undivided interest in each asset will have its own tax basis.
A grantor trust certificateholder that acquires an interest in mortgage loans
and mortgage-backed securities at a premium may elect to amortize the premium
under a constant interest method, provided that the underlying mortgage loans
with respect to the mortgage loans and mortgage-backed securities 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 the
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 Internal Revenue 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 an 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 the mortgage loan or underlying mortgage
loan. If a reasonable Prepayment Assumption is used to amortize the 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.
The Internal Revenue Service has issued Amortizable Bond Premium
Regulations. 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 Internal Revenue Code. Absent further guidance from
the Internal Revenue Service and unless otherwise described 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 Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described in this
prospectus, the OID Regulations will be applicable to a grantor trust
certificateholder's interest in those mortgage loans and mortgage-backed
securities meeting the conditions necessary for these sections to apply. Rules
regarding periodic inclusion of original issue discount income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate borrowers other than individuals originated after July 1, 1982, and
mortgages of individuals originated after March 2, 1984. Such original issue
discount 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 Internal Revenue Code provisions or are not for services provided by
the lender. Original issue discount 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 loans and mortgage-backed securities may be
subject to the market discount rules of Internal Revenue Code Sections 1276
through 1278 to the extent an undivided interest in the 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 the
mortgage loan or mortgage-backed security allocable to the holder's undivided
interest over the 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
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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 Internal Revenue Code
Sections 1276 through 1278.
The Internal Revenue 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 Internal Revenue 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 original issue discount,
the amount of market discount that accrues during any accrual period would be
equal to the product of
o the total remaining market discount and
o a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the accrual period.
For grantor trust certificates issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of
o the total remaining market discount and
o 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 original issue discount 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
the 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 the 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 Original Issue Discount. 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 this 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
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a certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such certificateholder owns or acquires. See
"Premium" in this prospectus. The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate is irrevocable.
Anti-abuse Rule. The Internal Revenue Service 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 loan,
mortgage-backed security 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 Internal Revenue 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
Internal Revenue Code Sections 1271 through 1288, Internal Revenue Code
Section 1286 treats a stripped bond or a stripped coupon as an obligation issued
on the date that such stripped interest is created.
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 Internal Revenue Service appears to require
that reasonable servicing fees be calculated on a mortgage asset by mortgage
asset basis, which could result in some mortgage loans and mortgage-backed
securities being treated as having more than 100 basis points of interest
stripped off. See "Multiple Classes of Grantor Trust Certificates--Stripped
Bonds and Stripped Coupons" in this prospectus.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an interest in mortgage loans and mortgage-backed securities
issued on the day the certificate is purchased for purposes of calculating any
original issue discount. Generally, if the discount on a mortgage loan or
mortgage-backed security is larger than a de minimis amount, as calculated for
purposes of the original issue discount rules, a purchaser of such a certificate
will be required to accrue the discount under the original issue discount rules
of the Internal Revenue Code. See "--Single Class of Grantor Trust
Certificates--Original Issue Discount" in this prospectus. However, a purchaser
of a Stripped Bond Certificate will be required to account for any discount on
the mortgage loans and mortgage-backed securities as market discount rather than
original issue discount if either
o the amount of original issue discount with respect to the mortgage loans
and mortgage-backed securities is treated as zero under the original
issue discount de minimis rule when the certificate was stripped or
o 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 loans and mortgage-backed securities.
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 Internal
Revenue Service 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 Internal Revenue Code could be read literally to require that
original issue discount computations be made for each payment from each mortgage
loan or mortgage-backed security. Unless otherwise described in the related
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prospectus supplement, all payments from a mortgage loan or mortgage-backed
security underlying a Stripped Coupon Certificate will be treated as a single
installment obligation subject to the original issue discount rules of the
Internal Revenue Code, in which case, all payments from the mortgage loan or
mortgage-backed security would be included in the stated redemption price at
maturity for the mortgage loan and mortgage-backed security purposes of
calculating income on the certificate under the original issue discount rules of
the Internal Revenue Code.
It is unclear under what circumstances, if any, the prepayment of mortgage
loans and mortgage-backed securities will give rise to a loss to the holder of a
Stripped Bond Certificate purchased at a premium or a Stripped Coupon
Certificate. If the 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 the grantor trust certificate, it
appears that no loss will be available as a result of any particular prepayment
unless prepayments occur at a rate faster than the assumed prepayment rate.
However, if the certificate is treated as an interest in discrete mortgage loans
or mortgage-backed securities, or if no Prepayment Assumption is used, then when
a mortgage loan or mortgage-backed security is prepaid, the holder of the
certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the certificate that is allocable to the mortgage loan
or mortgage-backed security.
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 Internal Revenue Code sections
provide beneficial treatment to certain taxpayers that invest in mortgage loans
and mortgage-backed securities of the type that make up the trust fund. With
respect to these Internal Revenue 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
loans and mortgage-backed securities. While Internal Revenue Code Section 1286
treats a stripped obligation as a separate obligation for purposes of the
Internal Revenue Code provisions addressing original issue discount, it is not
clear whether such characterization would apply with regard to these other
Internal Revenue Code sections. Although the issue is not free from doubt, each
class of grantor trust certificates, unless otherwise described in the related
prospectus supplement, should be considered to represent "real estate assets"
within the meaning of Internal Revenue Code Section 856(c)(4)(A) and "loans
. . . secured by, an interest in real property which is . . . residential real
property" within the meaning of Internal Revenue 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 Internal Revenue Code
Section 856(c)(3)(B), provided that in each case the underlying mortgage loans
and mortgage-backed securities and interest on such mortgage loans and
mortgage-backed securities 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 Internal Revenue Code Section 860G(a)(3)(A).
2. Grantor Trust Certificates Representing Interests in Loans Other Than
Adjustable Rate Loans
The original issue discount rules of Internal Revenue Code Sections 1271
through 1275 will be applicable to a certificateholder's interest in those
mortgage loans and mortgage-backed securities 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 borrowers--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
Internal Revenue Code provisions, or under certain circumstances, by the
presence of "teaser" rates on the mortgage loans and mortgage-backed securities.
Original issue discount on each grantor trust certificate must be included in
the owner's ordinary income for federal income tax purposes as it accrues, in
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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 original issue discount 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 loans and mortgage-backed securities other
than adjustable rate 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 OID Regulations generally are effective for debt instruments issued
on or after April 4, 1994, but may be relied upon as authority with respect to
debt instruments, such as the grantor trust certificates, issued after December
21, 1992. Alternatively, proposed Treasury regulations issued December 21, 1992
may be treated as authority for debt instruments issued after December 21, 1992
and prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issue date of the mortgage loans and
mortgage-backed securities 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 Internal Revenue Code, the mortgage loans and mortgage-backed
securities underlying the grantor trust certificate will be treated as having
been issued on the date they were originated with an amount of original issue
discount equal to the excess of such asset's stated redemption price at maturity
over its issue price. The issue price of a mortgage loan or mortgage-backed
security is generally the amount lent to the lender, which may be adjusted to
take into account certain loan origination fees. The stated redemption price at
maturity of a mortgage loan or mortgage-backed security is the sum of all
payments to be made on these assets other than payments that are treated as
qualified stated interest payments. The accrual of this original issue discount,
as described below under "--Accrual of Original Issue Discount," will, unless
otherwise described in the related prospectus supplement, utilize 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.
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 in this section, of the original issue discount on the grantor
trust certificate for each day on which it owns the certificate, including the
date of purchase but excluding the date of disposition. In the case of an
original owner, the daily portions of original issue discount 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 original
issue discount 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
o adding (1) 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 (2) any payments included in the stated
redemption price at maturity received during such accrual period, and
o 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 original issue discount 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
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original issue discount accruing during such accrual period will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period. With respect to an initial accrual
period shorter than a full monthly accrual period, the daily portions of
original issue discount 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 the mortgage loans and mortgage-backed securities acquired by a
certificateholder are purchased at a price equal to the then unpaid principal
amount of the asset, no original issue discount attributable to the difference
between the issue price and the original principal amount of the asset--i.e.,
points--will be includible by the holder. Other original issue discount on the
mortgage loans and mortgage-backed securities--e.g., that arising from a
"teaser" rate--would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in Adjustable Rate
Loans
The OID Regulations do not address the treatment of instruments, such as
the grantor trust certificates, which represent interests in adjustable rate
loans. Additionally, the Internal Revenue Service has not issued guidance under
the Internal Revenue Code's coupon stripping rules with respect to such
instruments. In the absence of any authority, the master servicer will report
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 Adjustable Rate 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 Deferred Interest to the
principal balance of an adjustable rate loan may require the inclusion of the
amount in the income of the grantor trust certificateholder when the amount
accrues. Furthermore, the addition of Deferred Interest to the grantor trust
certificate's principal balance will result in additional income, including
possibly original issue discount 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 original issue discount 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 Internal
Revenue Code Section 1221, except to the extent described above with respect to
the market discount, and will generally be long-term capital gain if the grantor
trust certificate has been owned for more than one year.
Long-term capital gains of individuals are subject to reduced maximum tax
rates while capital gains recognized by individuals on capital assets held less
than twelve months are generally subject to ordinary income tax rates. The use
of capital losses is limited.
It is possible that capital gain realized by holders of one or more classes
of grantor trust certificates could be considered gain realized upon the
disposition of property that was part of a "conversion
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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:
o the holder entered the contract to sell the grantor trust
certificate substantially contemporaneously with acquiring the
grantor trust;
o the grantor trust certificate is part of a straddle;
o the grantor trust certificate is marketed or sold as producing
capital gain; or
o 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 Internal Revenue 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 loans and mortgage-backed securities that were
issued on or before July 18, 1984, interest or original issue discount paid by
the person required to withhold tax under Internal Revenue Code Section 1441 or
1442 to
o an owner that is not a U.S. Person or
o a grantor trust certificate holder 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 original issue discount 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 loans and mortgage-backed securities issued after July 18, 1984, by
natural persons if such grantor trust certificateholder complies with certain
identification requirements, including delivery of a statement, signed by the
grantor trust certificateholder under penalties of perjury, certifying that the
grantor trust certificateholder is not a U.S. Person and providing the name and
address of the 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 loans and mortgage-backed
securities, 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 loans and mortgage-backed securities of where the borrower 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, the 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 loan
or mortgage-backed security 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.
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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 the 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 the 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
o the broker determines that the seller is a corporation or other
exempt recipient, or
o the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Person, certifies that
the seller is a Non-U.S. Person, and other conditions are met.
Such a sale must also be reported by the broker to the Internal Revenue
Service, unless either
o the broker determines that the seller is an exempt recipient or
o the seller certifies its non-U.S. Person status and other conditions
are met.
Certification of the registered owner's non-U.S. Person status normally
would be made on Internal Revenue Service Form W-8 under penalties of perjury,
although in some 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 the recipient's federal income tax liability.
On October 6, 1997, the Treasury Department issued new regulations which
make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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 Internal Revenue 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 Internal Revenue Code provides that
a trust fund will not be treated as a REMIC for the year and thereafter. In that
event, the entity may be taxable as a separate corporation, and the REMIC
Certificates may not be accorded the status or given the tax treatment described
below in this section. While the Internal Revenue 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 relief, moreover, may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC's income for the
period in which the requirements for such status are not satisfied. With respect
to each trust fund that elects REMIC status, Brown & Wood LLP or Cadwalader,
Wickersham & Taft or Latham & Watkins will deliver its opinion generally to the
effect that, under then existing law and assuming compliance with all provisions
of the related Agreement, the trust fund will qualify as a REMIC, and the
related certificates will be considered to be REMIC Regular Certificates or a
sole class of REMIC Residual Certificates in the REMIC. The related prospectus
supplement for each series
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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:
o certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in
Internal Revenue Code Section 7701(a)(19)(C);
o certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of Internal Revenue Code
Section 856(c)(4)(A); and
o 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 Internal Revenue Code Section
856(c)(3)(B).
If less than 95% of the REMIC's assets are assets qualifying under any of
the foregoing Internal Revenue 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 loans and mortgage-backed securities may not
be treated entirely as assets described in the foregoing sections. See, in this
regard, the discussion of buydown loans contained in "--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 Internal
Revenue Code Section 856(c)(4)(A), and REMIC Certificates held by a regulated
investment company will not constitute "Government Securities" within the
meaning of Internal Revenue Code Section 851(b)(4)(A)(ii). REMIC Certificates
held by certain financial institutions will constitute "evidences of
indebtedness" within the meaning of Internal Revenue Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes includes 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 Internal Revenue Code
Section 25(e)(10) will qualify as real property without regard to state law
classifications. Under Internal Revenue 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 for federal income tax purposes. Upon the issuance of any such
series of certificates, Brown & Wood LLP or Cadwalader, Wickersham & Taft or
Latham & Watkins, counsel to Morgan Stanley Dean Witter Capital I Inc., 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 REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Other than the residual interest in a Subsidiary REMIC, only REMIC
Certificates issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC or REMICs and the Master REMIC will be treated as one REMIC
solely for purposes of determining whether the REMIC Certificates will be:
o "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Internal Revenue Code;
o "loans secured by an interest in real property" under
Section 7701(a)(19)(C) of the Internal Revenue Code; and
o whether the income on such certificates is interest described in
Section 856(c)(3)(B) of the Internal Revenue Code.
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A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with original issue discount. Generally, the original issue discount, 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 original issue discount will be required to include
such original issue discount 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
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 original issue discount are set forth in Internal Revenue
Code Sections 1271 through 1273 and 1275. These rules require that the amount
and rate of accrual of original issue discount 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 the discount where the actual prepayment rate differs
from the Prepayment Assumption. Under the Internal Revenue Code, the Prepayment
Assumption must be determined in the manner prescribed by regulations, which
regulations have not yet been issued. 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
original issue discount. 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 original issue discount 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 closing date, the issue price
for that class will be treated as the fair market value of that 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 the distributions constitute "qualified
stated interest." Qualified stated interest generally means interest payable at
a single fixed rate or qualified variable rate, provided that the 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 the REMIC Regular Certificates includes all distributions of
interest as well as principal thereon.
Where the interval between the issue date and the first distribution date
on a REMIC Regular Certificate is longer than the interval between subsequent
distribution dates, the greater of any original issue discount, disregarding the
rate in the first period, and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
certificate exceeds its issue price for purposes of the de minimis rule
described below in this section. The OID Regulations suggest that all interest
on a
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long first period REMIC Regular Certificate that is issued with non-de minimis
original issue discount, as determined under the foregoing rule, will be treated
as original issue discount. 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 certificate's 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, original issue discount on a REMIC Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the REMIC Regular
Certificate multiplied by the weighted average 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 the 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 original issue discount pro rata as principal payments are received, and
the 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 original issue discount as well as market discount under a constant
interest method.
The prospectus supplement with respect to a trust fund may provide for
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 original issue discount. The calculation of income in this manner could
result in negative original issue discount, which delays future accruals of
original issue discount rather than being immediately deductible, when
prepayments on the mortgage loans and mortgage-backed securities exceed those
estimated under the Prepayment Assumption. The Internal Revenue Service 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 Internal Revenue Code Section 1272(a)(6), they represent
the only guidance regarding the current views of the Internal Revenue Service
with respect to contingent payment instruments. In the alternative, the Internal
Revenue Service 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 a 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 "--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 Internal Revenue Code
Section 171 is made to amortize such premium.
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Generally, a REMIC Regular Certificateholder must include in gross income
the "daily portions," as determined below, of the original issue discount 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 original issue
discount 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:
o adding (1) 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 (2) any payments included in the stated redemption price at
maturity received during such accrual period, and
o 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 original issue discount 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
original issue discount accrued during an accrual period will then be divided by
the number of days in the period to determine the daily portion of original
issue discount for each day in the accrual period. The calculation of original
issue discount under the method described above will cause the accrual of
original issue discount 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
original issue discount may be determined according to an appropriate allocation
under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with original
issue discount 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 original issue discount
on that REMIC Regular Certificate. In computing the daily portions of original
issue discount 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:
o the sum of the issue price plus the aggregate amount of original
issue discount 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
o 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
original issue discount by treating the purchase as a purchase at original
issue.
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Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a qualifying variable rate. Under the original
issue discount rules, interest based on a variable rate will constitute
qualified stated interest and not contingent interest if, generally:
o the interest is unconditionally payable at least annually;
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
o 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 the REMIC Regular Certificate.
The amount of original issue discount 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 at the rate applicable on the date they are issued.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, Morgan Stanley Dean Witter Capital I Inc.
intends to treat interest on a REMIC Regular Certificate that is a weighted
average of the net interest rates on mortgage loans as qualified stated
interest. In such case, the weighted average rate used to compute the initial
pass-through rate on the REMIC Regular Certificates will be deemed to be the
index in effect through the life of the REMIC Regular Certificates. It is
possible, however, that the Internal Revenue Service 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. No guidance is currently available as to how original issue discount
would be determined for debt instruments subject to Internal Revenue Code
Section 1272(a)(6) that provide for contingent interest. The treatment of REMIC
Regular Certificates as contingent payments debt instruments may affect the
timing of income accruals on the REMIC Regular Certificates.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including de minimis market discount or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
to be made with respect to a REMIC Regular Certificate with market discount, the
certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such certificateholder acquires during the year of the
election or thereafter. Similarly, a certificateholder that makes this election
for a certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such certificateholder owns or acquires. See
"--Premium" in this prospectus. 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 Internal Revenue Code
Sections 1276 through 1278. Under these provisions and the OID Regulations,
"market discount" equals the excess, if any, of (1) the REMIC Regular
Certificate's stated principal amount or, in the case of a REMIC Regular
Certificate with original issue discount, the adjusted issue price, determined
for this purpose as if the purchaser had purchased such REMIC Regular
Certificate from an original holder, over (2) 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 Internal
Revenue 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, the
election will apply to all market discount bonds acquired by the
certificateholder on or after the first day of the first taxable year to which
the election applies.
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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 the REMIC Regular Certificate's stated redemption price at
maturity multiplied by the 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 the 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 Internal Revenue Code Sections 1276 through 1278.
The Internal Revenue 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 the 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 Internal Revenue 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 original issue discount, the
amount of market discount that accrues during a period is equal to the product
of
1) the total remaining market discount and
2) a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the total remaining
original issue discount at the beginning of the period.
For REMIC Regular Certificates issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of
1) the total remaining market discount and
2) a fraction, the numerator of which is the amount of stated interest paid
during the accrual period and the denominator of which is the total amount of
stated interest remaining to be paid at the beginning of the period.
For purposes of calculating market discount under any of the above methods
in the case of instruments (such as the REMIC Regular Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption applicable
to calculating the accrual of original issue discount 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
the 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 the 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
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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 original issue discount, will also apply in
amortizing bond premium under Internal Revenue Code Section 171. The Internal
Revenue 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 the interest payment. The Amortizable Bond Premium Regulations do
not apply to prepayable securities described in Section 1272(a)(6) of the
Internal Revenue 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
adjustable rate 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 original issue discount, 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 subordinate certificates, and in the event there
are defaults or delinquencies on the mortgage loans and mortgage-backed
securities, amounts that would otherwise be distributed on the subordinate
certificates may instead be distributed on the senior certificates. Subordinate
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 subordinate certificates attributable to
defaults and delinquencies on the mortgage loans and mortgage-backed securities,
except to the extent that it can be established that those amounts are
uncollectible. As a result, the amount of income reported by a subordinate
certificateholder in any period could significantly exceed the amount of cash
distributed to such holder in that period. The holder will eventually be allowed
a loss, or will be allowed to report a lesser amount of income, to the extent
that the aggregate amount of distributions on the subordinate certificate is
reduced as a result of defaults and delinquencies on the mortgage loans and
mortgage-backed securities. Timing and characterization of such losses is
discussed in "--Taxation of Owners of 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 original issue discount 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 Internal Revenue Code
Section 1221.
Such capital gain or loss will generally be long-term capital gain or loss
if the REMIC Regular Certificate was held for more than one year. Long-term
capital gains of individuals are subject to reduced
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maximum tax rates while capital gains recognized by individuals on capital
assets held less than twelve months are generally subject to ordinary income tax
rates. The use of capital losses is limited.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that the gain does not exceed the excess, if any, of
o the amount that would have been includible in the 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 Internal
Revenue Code Section 1274(d) determined as of the date of purchase
of such REMIC Regular Certificate, over
o 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
Internal Revenue 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
Internal Revenue 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
Internal Revenue 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 this 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. 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 the interval. Purchasers of Payment Lag
Certificates for which the period between the closing date and the first
distribution date does not exceed the 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 pre-issuance
accrued interest and the REMIC Regular Certificate provides for a payment of
stated interest on the first payment date and the first payment date is within
one year of the issue date that equals or exceeds the amount of the pre-issuance
accrued interest, then the REMIC Regular Certificate's issue price may be
computed by subtracting from the issue price the amount of pre-issuance accrued
interest, rather than as an amount payable on the REMIC Regular Certificate.
However, it is unclear under this method how the OID Regulations treat 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 the 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.
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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 loans and mortgage-backed securities. 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
loans and mortgage-backed securities 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. These taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
certificates.
Non-U.S. Persons. Generally, payments of interest on the REMIC Regular
Certificates, including any payment with respect to accrued original issue
discount, 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:
o the 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;
o the REMIC Regular Certificateholder is not a controlled foreign
corporation, within the meaning of Internal Revenue Code Section
957, related to the issuer; and
o the REMIC Regular Certificateholder complies with identification
requirements, including delivery of a statement, signed by the REMIC
Regular Certificateholder under penalties of perjury, certifying
that the REMIC Regular Certificateholder is a foreign person and
providing the name and address of the REMIC Regular
Certificateholder.
If a REMIC Regular Certificateholder is not exempt from withholding,
distributions of interest to the holder, including distributions in respect of
accrued original issue discount, 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 the
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
REMIC Residual Certificateholders and persons related to REMIC Residual
Certificateholders should not acquire any REMIC Regular Certificates without
consulting their tax advisors as to the possible adverse tax consequences of
doing so. In addition, the Internal Revenue
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Service may assert that non-U.S Persons that own directly or indirectly, a
greater than 10% interest in any borrower, and foreign corporations that are
"controlled foreign corporations" as to the United States of which such a
borrower is a "United States shareholder" within the meaning of
Section 951(b) of the Internal Revenue Code, are subject to United States
withholding tax on interest distributed to them to the extent of interest
concurrently paid by the related borrower.
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 that year, the 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 the information available to beneficial
owners or financial intermediaries that hold the REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments with respect to
any payments to registered owners who are not "exempt recipients." In addition,
upon the sale of a REMIC Regular Certificate to, or through, a broker, the
broker must withhold 31% of the entire purchase price, unless either:
o the broker determines that the seller is a corporation or other
exempt recipient, or
o the seller provides, in the required manner, identifying information
and, in the case of a non-U.S. Person, certifies that such seller is
a Non-U.S. Person, and other conditions are met.
A sale of a REMIC Regular Certificate to, or through, a broker must also be
reported by the broker to the Internal Revenue Service, unless either:
o the broker determines that the seller is an exempt recipient or
o the seller certifies its non-U.S. Person status and other conditions
are met.
Certification of the registered owner's non-U.S. Person status normally
would be made on Internal Revenue Service Form W-8 under penalties of perjury,
although in certain cases it may be possible to submit other documentary
evidence. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax
liability.
On October 6, 1997, the Treasury Department issued the New Regulations,
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which the 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 the 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
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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 loans
and mortgage-backed securities 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
the 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 the REMIC Residual Certificateholder owns
the 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 the
REMIC Residual Certificate at a price greater than or less than the adjusted
basis the 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 the 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:
o the income from the mortgage loans and mortgage-backed securities
and the REMIC's other assets, and
o the deductions allowed to the REMIC for interest and original issue
discount 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:
o the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply,
o all bad loans will be deductible as business bad debts, and
o 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 loans
and mortgage-backed securities may differ from the time of the actual loss on
the assets. 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
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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. The
aggregate basis will be allocated among the mortgage loans and mortgage-backed
securities and other assets of the REMIC in proportion to their respective fair
market value. A mortgage loan or mortgage-backed security 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 original issue discount, will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to the income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. The REMIC may elect under Internal Revenue Code Section 171 to
amortize any premium on the mortgage loans and mortgage-backed securities.
Premium on any mortgage loan or mortgage-backed security to which the election
applies would be amortized under a constant yield method. It is not clear
whether the yield of a mortgage loan or mortgage-backed security 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 original issue
discount on the REMIC Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same manner
as described above with respect to REMIC Regular Certificates except that the
0.25% per annum de minimis rule and adjustments for subsequent holders described
therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See "--Sale or Exchange of REMIC Residual
Certificates" below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of the REMIC Residual Certificate to the holder and the
adjusted basis the 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. The 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 the net loss exceeds the
holder's adjusted basis in the REMIC Residual Certificate. Any net loss that is
not currently deductible by reason of this limitation may only be used by the
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 Internal Revenue
Code.
Mark-to-Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the Internal Revenue Service finalized
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
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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:
o 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
o 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 Internal
Revenue 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, Internal Revenue Code Section
68 provides that the applicable amount will be reduced by the lesser of:
o 3% of the excess of the individual's adjusted gross income over the
applicable amount or
o 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 Internal Revenue
Code Section 67 or Internal Revenue 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 Internal Revenue Service such holder's
allocable share, if any, of the REMIC's non-interest expenses. The term
"PASS-THROUGH INTEREST HOLDER" generally refers to individuals, entities taxed
as individuals and certain pass-through entities, but does not include real
estate investment trusts. REMIC Residual Certificateholders that are
pass-through interest holders should consult their own tax advisors about the
impact of these rules on an investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
referred to in the Internal Revenue 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:
o may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual
Certificateholder;
o will be treated as "unrelated business taxable income" within the
meaning of Internal Revenue 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, as
discussed under "--Tax-Exempt Investors" below; and
o 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, as discussed under "--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 (1) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (2) the sum
of the "daily accruals" for all days during the calendar quarter on which the
REMIC Residual Certificateholder holds a 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
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of the "adjusted issue price" 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 the 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
Internal Revenue Service.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Internal Revenue 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 the
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 the shareholder. Regulated investment companies, common trust funds
and certain cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 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 the 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 the REMIC Residual Certificate. To the extent a distribution exceeds
the adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate except that the
recognition of loss may be limited under the "wash sale" rules described in the
second following paragraph. A holder's adjusted basis in a REMIC Residual
Certificate generally equals the cost of the REMIC Residual Certificate to the
REMIC Residual Certificateholder, increased by the taxable income of the REMIC
that was included in the income of the REMIC Residual Certificateholder with
respect to the REMIC Residual Certificate, and decreased--but not below zero--by
the net losses that have been allowed as deductions to the REMIC Residual
Certificateholder with respect to the REMIC Residual Certificate and by the
distributions received thereon by the REMIC Residual Certificateholder. In
general, the 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 Internal
Revenue 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.
The capital gain or loss will generally be long-term capital gain or loss
if the REMIC Regular Certificate was held for more than one year. Long-term
capital gains of individuals are subject to reduced
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maximum tax rates while capital gains recognized by individuals on capital
assets held twelve months or less are generally subject to ordinary income tax
rates. The use of capital losses is limited.
Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool", as defined in Internal
Revenue 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 Internal Revenue 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 Internal Revenue Code imposes a tax on REMICs equal to 100% of the net
income derived from "prohibited transactions". In general, subject to certain
specified exceptions, a prohibited transaction means:
o the disposition of a mortgage loan or mortgage-backed security;
o the receipt of income from a source other than a mortgage loan or
mortgage-backed security or certain other permitted investments;
o the receipt of compensation for services; or
o gain from the disposition of an asset purchased with the payments on
the mortgage loans and mortgage-backed securities 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 the trust fund as a REMIC made after the day on which the
trust fund issues all of its interests could result in the imposition of 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
the 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:
o 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
o Morgan Stanley Dean Witter Capital I Inc.'s obligation to repurchase
a mortgage loan, such tax will be borne by Morgan Stanley Dean
Witter Capital I Inc.
In the event that the servicer, trustee or depositor, as the case may be,
fails to pay or is not required to pay any Prohibited Transactions Tax,
Contributions Tax, tax on net income from foreclosure property or state or local
income or franchise tax, the tax will be payable out of the trust fund for the
series and will result in a reduction in amounts available to be distributed to
the certificateholders of the series.
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LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Internal Revenue Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets other than cash within a 90-day
period beginning on such date, the REMIC will not be subject to any Prohibited
Transaction Tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash, other than the amounts retained to meet
claims, to holders of Regular and REMIC Residual Certificates within the 90-day
period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Internal
Revenue Code, the REMIC generally will be treated as a partnership and the REMIC
Residual Certificateholders will be treated as the partners. 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 Internal Revenue Service 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 Internal Revenue 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.
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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 Internal Revenue 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 original issue discount. The Internal Revenue Code,
however, grants the Treasury Department authority to issue regulations requiring
that those amounts be taken into account earlier than otherwise provided where
necessary to prevent avoidance of tax, for example, where the REMIC Residual
Certificates do not have significant value. See "--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions" above. If the amounts paid to REMIC
Residual Certificateholders that are not U.S. Persons are effectively connected
with their conduct of a trade or business within the United States, the 30% or
lower treaty rate withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
the entity are not held by "disqualified organizations". 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 (B) 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),
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(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" 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:
o a regulated investment company, real estate investment trust or
common trust fund,
o a partnership, trust or estate and
o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any
person holding an interest in a pass-through entity as a nominee for another
will, with respect to such interest, be treated as a pass-through entity.
Electing large partnerships--generally, non-service partnerships with 100 or
more members electing to be subject to simplified Internal Revenue Service
reporting provisions under Internal Revenue 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 consent
to a proposed transfer only if it receives the following:
o 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
o 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, 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,
o 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
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue on
the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes.
A significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes
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due on its share of the taxable income of the REMIC. A transferor is presumed
not to have such knowledge if:
o the transferor conducted a reasonable investigation of the
transferee and
o 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 the transferee's income
in respect of the REMIC Residual Certificate is effectively connected with the
conduct of a United Sates trade or business. A REMIC Residual Certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably 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 the person
provides the trustee with a duly completed Internal Revenue Service Form 4224 or
applicable successor form adopted by the Internal Revenue Service for such
purposes and the trustee consents to the 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.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "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 Internal Revenue Code, impose certain restrictions on
Plans and on persons who are parties in interest or disqualified persons with
respect to the Plans. Certain employee benefit plans, such as governmental plans
and church plans (if no election has been made under Section 410(d) of the
Internal Revenue Code), are not subject to the restrictions of ERISA, and assets
of these plans may be invested in the certificates without regard to the ERISA
considerations described below, subject to other applicable federal and state
law. However, any governmental or church plan that is not subject to ERISA but
is qualified under Section 401(a) of the Internal Revenue Code and exempt from
taxation under Section 501(a) of the Internal Revenue Code is subject to the
prohibited transaction rules set forth in Section 503 of the Internal Revenue
Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Internal Revenue Code imposes 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 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 an exception
applies.
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 this event, the asset seller, the master servicer, the trustee,
any insurer of the mortgage loans and mortgage-backed securities 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 Internal Revenue Code), with respect to
transactions involving the plan assets unless such transactions are subject to a
statutory, regulatory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts the
assets of 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 25% or more of the value of any
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class of equity interest, excluding from the calculation the value of equity
interest held by persons who have discretionary authority or control with access
to the assets of the entity or held by affiliates of such persons. "BENEFIT PLAN
INVESTORS" include both Plans and employee benefit plans not subject to ERISA
(e.g., governmental and foreign plans). To fit within the safe harbor, 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
The United States Department of Labor has granted to Morgan Stanley & Co.
Incorporated Prohibited Transaction Exemption 90-24, Exemption Application No.
D-8019, 55 Fed. Reg. 20548 (1990) which exempts from the application of the
prohibited transaction rules transactions relating to:
o 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
o the servicing, operation and management of those asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied.
The Exemption sets forth the following general conditions which must be
satisfied before a transaction involving the acquisition, sale and holding of
the certificates or a transaction in connection with the servicing, operation
and management of the trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the certificates by a Plan is on terms
(including the price for such certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) The certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of the following rating agencies: Duff & Phelps
Inc., Fitch IBCA, Inc., Moody's Investors Service, Inc. and Standard &
Poor's Ratings Services.
(4) The trustee is not an affiliate of the underwriter, the asset
seller, the master servicer, any insurer of the mortgage loans and
mortgage-backed securities, 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 each servicer represents not more than reasonable compensation for such
servicer's services under the pooling and servicing agreement and
reimbursement of such 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.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of a
type that have been included in other investment pools;
(ii) certificates evidencing interests in such other investment pools
must have been rated in one of the three highest rating categories of a
rating agency for at least one year prior to the Plan's acquisition of the
securities; and
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(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the securities.
On July 21, 1997, Labor published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage loans
or other secured receivables supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent (25%) of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month pre-funding period
following the closing date, instead of requiring that all such receivables be
either identified or transferred on or before the closing date. The relief is
available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"PRE-FUNDING LIMIT") must not exceed twenty-five percent (25%).
(2) All receivables transferred after the closing date (the
"ADDITIONAL OBLIGATIONS") must meet the same terms and conditions for
eligibility as the original receivables used to create the trust, which
terms and conditions have been approved by a rating agency.
(3) The transfer of such additional obligations to the trust during
the pre-funding period must not result in the certificates to be covered by
the Exemption receiving a lower credit rating from a rating agency upon
termination of the pre-funding period than the rating that was obtained at
the time of the initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the receivables in the trust at
the end of the pre-funding period must not be more than 100 basis points
lower than the average interest rate for the receivables transferred to the
trust on the closing date.
(5) In order to insure that the characteristics of the additional
obligations are substantially similar to the original receivables which
were transferred to the trust fund:
(i) the characteristics of the additional obligations must be
monitored by an insurer or other credit support provider that is
independent of Morgan Stanley Dean Witter Capital I Inc.; or
(ii) an independent accountant retained by Morgan Stanley Dean
Witter Capital I Inc. must provide Morgan Stanley Dean Witter Capital I
Inc. with a letter (with copies provided to each rating agency rating
the certificates, the related underwriter and the related trustee)
stating whether or not the characteristics of the additional obligations
conform to the characteristics described in the related prospectus or
prospectus supplement or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the receivables transferred to the
trust as of the closing date.
(6) The pre-funding period must end no later than three months or 90
days after the closing date or earlier if the pre-funding account falls
below the minimum level specified in the pooling and servicing agreement or
an Event of Default occurs.
(7) Amounts transferred to any pre-funding account or capitalized
interest account, or both, used in connection with the pre-funding may be
invested only in certain permitted investments.
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account or capitalized interest account, or
both, used in connection with a pre-funding account;
(ii) the duration of the pre-funding period;
(iii) the percentage or dollar amount, or both, of the pre-funding
limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at the
end of the pre-funding period will be remitted to certificateholders as
repayments of principal.
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(9) The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account or capitalized interest
account, or both, and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when any person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets causes a Plan to acquire certificates in a trust
holding receivables on which that person or an affiliate is an obligor, provided
that, among other requirements:
o the person or its affiliate is an obligor with respect to five
percent or less of the fair market value of the obligations or receivables
contained in the trust;
o no member of the Restricted Group (as defined below) is the "plan
sponsor" (as defined in Section 3(16)(B) of ERISA) of the Plan;
o in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested and at least fifty percent of the
aggregate interest in the trust fund is acquired by persons independent of
the Restricted Group;
o a Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at
the time of the acquisition; and
o immediately after the acquisition, no more than twenty-five percent
of the assets of any Plan with respect to which the person has
discretionary authority or renders investment advice are invested in
certificates representing an interest in one or more trusts containing
assets sold or serviced by the same entity.
The Exemption does not apply to Plans sponsored by the seller, Morgan Stanley
Dean Witter Capital I Inc., Morgan Stanley & Co. Incorporated and the other
underwriters set forth in the related prospectus supplement, the trustee, the
master servicer, any pool insurer, any obligor with respect to obligations
included in the trust fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust fund, or any affiliate
of any of such parties (the "Restricted Group").
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 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 Internal Revenue Code to such investment. Among other things, before
purchasing any certificates, a fiduciary of a Plan should make its own
determination as to the availability of the exemptive relief provided in the
Exemption, and also consider the availability of any other prohibited
transaction exemptions. In 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. PTCE 83-1 does not apply to pools containing loans secured by
shares issued by a cooperative association. 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.
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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 described in the related prospectus supplement, each class that is
rated in one of the two highest rating categories by at least one rating agency
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended and, as such, will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities including, but not limited
to, depository institutions, insurance companies, trustees and pension funds
created pursuant to or existing under the laws of the United States or of any
state, including the District of Columbia and Puerto Rico, whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cutoff 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. Accordingly, investors affected by the legislation will be authorized to
invest in SMMEA certificates only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase such securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
ss.24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, the Office of
the Comptroller of the Currency amended 12 C.F.R. Part I to authorize national
banks to purchase and sell for their own account, without limitation as to a
percentage of the bank's capital and surplus (but subject to compliance with
certain general standards in 12 C.F.R. ss.1.5 concerning "safety and soundness"
and retention of credit information), certain "Type IV securities" defined in 12
C.F.R. ss.1.2(1) to include certain "residential mortgage-related securities" As
so defined, "residential mortgage-related security" means, in relevant part,
"mortgage related security" within the meaning of SMMEA. The National Credit
Union Administration has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in "mortgage related securities" under
certain limited circumstances, other than stripped mortgage related securities,
residual interests in mortgage related securities, and commercial mortgage
related securities, unless the credit union has obtained written approval from
the National Credit Union Administration to participate in the "investment pilot
program" described in 12 C.F.R. ss.703.140. The Office of Thrift Supervision has
issued Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate
Risk, Investment securities and Derivative Activities," which thrift
institutions subject to the jurisdiction of the Office of Thrift Supervision
should consider before investing in any of the offered certificates.
All depository institutions considering an investment in the offered
certificates shall review the "Supervisory Policy Statement on Investment
Securities and End User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency and the Office of
Thrift Supervision effective May 26, 1998, and by the National Credit Union
Administration, effective October 1, 1998. The "Supervisory Policy Statement on
Investment Securities and End User Derivatives Activities" sets forth general
guidelines which depository institutions must follow in managing risks,
including market, credit, liquidity, operational (transaction), and legal risks
applicable to all securities, including mortgage pass-through securities and
mortgage-derivative products, used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any offered
certificates, as certain series or classes may be deemed to be unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines, in certain instances irrespective of SMMEA.
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If specified in the related prospectus supplement, other classes of offered
certificates offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
offered certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such offered
certificates, may be subject to significant interpretive uncertainties.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any offered certificates issued
in book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of SMMEA certificates identified in the prospectus
supplement for a series as "mortgage related securities" under SMMEA, no
representations are made as to the proper characterization of the offered
certificates for legal investment purposes, financial institution regulatory
purposes, or other purposes, or as to the ability of particular investors to
purchase any offered certificates under applicable legal investment
restrictions. The uncertainties described in this section 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. 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
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 Morgan Stanley Dean
Witter Capital I Inc. In connection with the sale of offered certificates,
underwriters may receive compensation from Morgan Stanley Dean Witter Capital I
Inc. or from purchasers of offered certificates in the form of discounts,
concessions or commissions. The prospectus supplement will describe any such
compensation paid by Morgan Stanley Dean Witter Capital I Inc.
Alternatively, the prospectus supplement may specify that offered
certificates will be distributed by Morgan Stanley & Co. Incorporated 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 & Co.
Incorporated acts as agent in the sale of offered certificates, Morgan Stanley &
Co. Incorporated will receive a selling commission with respect to the offered
certificates, depending on market conditions, expressed as a percentage of the
aggregate certificate balance or notional amount of the 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 & Co. Incorporated elects to purchase offered certificates as principal,
Morgan Stanley & Co. Incorporated 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 Morgan Stanley Dean Witter Capital I Inc.
and purchasers of offered certificates of such series.
Morgan Stanley Dean Witter Capital I Inc. will indemnify Morgan Stanley &
Co. Incorporated and any underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will
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contribute to payments Morgan Stanley & Co. Incorporated and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Morgan Stanley & Co. Incorporated and
Morgan Stanley Dean Witter Capital I Inc. may engage in various securities and
financing transactions, including repurchase agreements to provide interim
financing of Morgan Stanley Dean Witter Capital I Inc.'s mortgage loans pending
the sale of such mortgage loans or interests in the mortgage loans, including
the certificates.
Offered certificates will be sold primarily to institutional investors.
Purchasers of offered certificates, including dealers, may, depending on the
facts and circumstances of the 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.
If specified in the prospectus supplement relating to certificates of a
particular series offered hereby, Morgan Stanley Dean Witter Capital I Inc., any
affiliate thereof or any other person or persons specified in the prospectus
supplement may purchase some or all of the certificates of any series from
Morgan Stanley & Co. Incorporated and any other underwriters thereof. This
purchaser may thereafter from time to time offer and sell, pursuant to this
prospectus and the related prospectus supplement, some or all of the
certificates so purchased, directly, through one or more underwriters to be
designated at the time of the offering of the certificates, through dealers
acting as agent or principal or in such other manner as may be specified in the
related prospectus supplement. The offering may be restricted in the manner
specified in the prospectus supplement. The transactions may be effected at
market prices prevailing at the time of sale, at negotiated prices or at fixed
prices. Any underwriters and dealers participating in the purchaser's offering
of the certificates may receive compensation in the form of underwriting
discounts or commissions from such purchaser and such dealers may receive
commissions from the investors purchasing the certificates for whom they may act
as agent (which discounts or commissions will not exceed those customary in
those types of transactions involved). Any dealer that participates in the
distribution of the certificates may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any commissions and discounts received by
such dealer and any profit on the resale or such certificates by such dealer
might be deemed to be underwriting discounts and commissions under the
Securities Act.
All or part of any class of certificates may be reacquired by Morgan
Stanley Dean Witter Capital I Inc. or acquired by an affiliate of Morgan Stanley
Dean Witter Capital I Inc. in a secondary market transaction or from an
affiliate, including Morgan Stanley & Co. Incorporated. Such certificates may
then be included in a trust fund, the beneficial ownership of which will be
evidenced by one or more classes of mortgage-backed certificates, including
subsequent series of certificates offered pursuant to this prospectus and a
prospectus supplement.
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 Morgan Stanley Dean
Witter Capital I Inc., and may be sold by Morgan Stanley Dean Witter Capital I
Inc. 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 Morgan Stanley
Dean Witter Capital I Inc. by Cadwalader, Wickersham & Taft, Brown & Wood LLP or
Latham & Watkins.
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.
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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 borrowers 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.
INCORPORATION OF INFORMATION BY REFERENCE
The SEC allows Morgan Stanley Dean Witter Capital I Inc. to "incorporate by
reference" information it files with the SEC, which means that Morgan Stanley
Dean Witter Capital I Inc. can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus. Information that Morgan Stanley Dean
Witter Capital I Inc. files later with the SEC will automatically update the
information in this prospectus. In all cases, you should rely on the later
information rather than on any different information included in this prospectus
or the accompanying prospectus supplement. Morgan Stanley Dean Witter Capital I
Inc. incorporates by reference any future annual, monthly and special SEC
reports filed by or on behalf of the trust until the termination of the offering
of the certificates.
As a recipient of this prospectus, you may request a copy of any document
Morgan Stanley Dean Witter Capital I Inc. incorporates by reference, except
exhibits to the documents, unless the exhibits are specifically incorporated by
reference, at no cost, by writing or calling Morgan Stanley Dean Witter Capital
I Inc. at Morgan Stanley & Co. Incorporated, 1585 Broadway, 37th Floor, New
York, New York 10036, Attention: Mortgage Securities, telephone number (212)
761-4700.
Morgan Stanley Dean Witter Capital I Inc. filed a registration statement
relating to the certificates with the Securities and Exchange Commission. This
prospectus is part of the registration statement, but the registration statement
includes additional information.
Copies of the registration statement may be obtained from the Public
Reference Section of the Securities and Exchange Commission, Washington, D.C.
20549 upon payment of the prescribed charges, or may be examined free of charge
at the Securities and Exchange Commission's offices, 450 Fifth Street N.W.,
Washington, D.C. 20549 or at the regional offices of the Securities and Exchange
Commission located at Suite 1300, 7 World Trade Center, New York, New York 10048
and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511. The Securities and Exchange Commission also maintains a site on the
World Wide Web at "http://www.sec.gov" at which you can view and download copies
of reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering Analysis and Retrieval
system. Morgan Stanley Dean Witter Capital I Inc. has filed the registration
statement, including all exhibits, through the EDGAR system and the materials
should be available by logging onto the Securities and Exchange Commission's Web
site. The Securities and Exchange Commission maintains computer terminals
providing access to the EDGAR system at each of the offices referred to above.
Copies of any documents incorporated to this prospectus by reference will be
provided to each person to whom a Prospectus is delivered upon written or oral
request directed to Morgan Stanley & Co. Incorporated, 1585 Broadway, 37th
Floor, New York, New York 10036, Attention: Mortgage Securities, telephone
number (212) 761-4700.
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GLOSSARY OF TERMS
The certificates will be issued pursuant to the Agreement. The following
Glossary of Terms is not complete. You should also refer to the prospectus
supplement and the Agreement for additional or more complete definitions. If you
send a written request to the trustee at its corporate office, the trustee will
provide to you without charge a copy of the Agreement (without exhibits and
schedules).
Unless the context requires otherwise, the definitions contained in this
Glossary of Terms apply only to this series of certificates.
"Agreement" means the pooling and servicing agreement or the trust
agreement, as applicable.
"Amortizable Bond Premium Regulations" means final regulations issued by
the Internal Revenue Service which deal with the amortizable bond premium.
"Available Distribution Amount" means for each distribution date, the sum
of the following amounts:
o the total amount of all cash on deposit in the related certificate
account as of the corresponding determination date, exclusive of:
o all scheduled payments of principal and interest collected but due on a
date subsequent to the related Due Period;
o 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
o all amounts in the certificate account that are due or reimbursable to
Morgan Stanley Dean Witter Capital I Inc., the trustee, an asset seller,
a subservicer, 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;
o 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;
o all advances made by a servicer or any other entity as specified in the
related prospectus supplement with respect to the distribution date;
o if and to the extent the related prospectus supplement so provides,
amounts paid by a 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
o 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 the distribution date.
"Contributions Tax" means a tax on the trust fund equal to 100% of the
value of the contributed property.
"Deferred Interest" means interest deferred by reason of negative
amortization.
"Determination Date" means the close of business on the date specified in
the related prospectus supplement.
"Due Period" means the period which 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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
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"Events of Default" means, with respect to the master servicer under the
pooling and servicing agreement, any one of the following events:
o 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.
o any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the
pooling and servicing agreement which continues unremedied for thirty
days after written notice of such failure has been given to the master
servicer by the trustee or Morgan Stanley Dean Witter Capital I Inc., or
to the master servicer, Morgan Stanley Dean Witter Capital I Inc., and
the trustee by the holders of certificates evidencing not less than 25%
of the voting rights;
o any breach of a representation or warranty made by the master servicer
under the pooling and servicing 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 Morgan Stanley Dean Witter
Capital I Inc., or to the master servicer, Morgan Stanley Dean Witter
Capital I Inc. and the trustee by the holders of certificates evidencing
not less than 25% of the voting rights; and
o certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or on
behalf of the master servicer indicating its insolvency or inability to
pay its obligations.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Mark-to-Market Regulations" means the finalized Internal Revenue Service
regulations which provide that a REMIC Residual Certificate acquired after
January 3, 1995 cannot be marked to market.
"Mortgage Rate" means the interest rate for a mortgage loan which provides
for no accrual of interest or for accrual of interest thereon at an interest
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.
"New Regulations" means the regulations issued by the Treasury Department
on October 6, 1997.
"OID Regulations" means the special rules of the Internal Revenue Code
relating to original issue discount (currently Internal Revenue Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27, 1994.
"Payment Lag Certificates" means certain of the REMIC Regular Certificates.
"Permitted Investments" means United States government securities and other
investment grade obligations specified in the Pooling and servicing agreement.
"Plans" means employee benefit plans subject to ERISA and certain other
similar plans and arrangements, including but not limited to individual
retirement accounts and annuities.
"Prepayment Assumption" means 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.
"Prohibited Transaction Tax" means the tax the Internal Revenue Code
imposes on REMICs equal to 100% of the net income derived from "prohibited
transactions."
"Purchase Price" means, with respect to any mortgage loan and to the extent
set forth in the related prospectus supplement, the amount that is equal to the
sum of the unpaid principal balance, plus unpaid accrued interest 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.
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"Record Date" means the last business day of the month immediately
preceding the month in which the distribution date for a class of certificates
occurs.
"Related Proceeds" means related recoveries on the mortgage loans,
including amounts received under any form of credit support, for which advances
were made.
"REMIC Certificates" means a certificate issued by a trust fund relating to
a series of certificate where an election is made to treat the trust fund as a
REMIC.
"REMIC Provisions" means provisions of the federal income tax law relating
to real estate mortgage investment conduits, which appear at Section 860A
through 860G of Subchapter M of Chapter 1 of the Internal Revenue Code of 1986,
as amended from time to time, and related provisions, and regulations (including
any proposed regulations) and rulings promulgated thereunder, as the foregoing
may be in effect from time to time.
"REMIC Regular Certificates" means REMIC Certificates issued by the trust
fund that qualify as REMIC Certificates and are considered to be regular
interests.
"REMIC Regular Certificateholders" means holders of REMIC and Regular
Certificates.
"REMIC Regulations" means the REMIC Regulations promulgated by the Treasury
Department.
"REMIC Residual Certificate" means the sole class of residual interests in
the REMIC.
"REMIC Residual Certificateholders" means holders of the REMIC Regular
Certificates.
"REO Tax" means a tax on "net income from foreclosure property," within the
meaning of Section 857(b)(4)(B) of the Internal Revenue Code.
"Restricted Group" means the underwriter, the asset seller, the master
servicer, any insurer of the mortgage loans and mortgage-backed securities, 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.
"RICO" means the Racketeer Influenced and Corrupt Organizations statute.
"Servicing Standard" means:
o the standard for servicing the servicer must follow as defined by the
terms of the related pooling and servicing agreement and any related
hazard, business interruption, rental interruption or general liability
insurance policy or instrument of credit support included in the related
trust fund as described in this prospectus under "Description of Credit
Support" and in the prospectus supplement;
o applicable law; and
o the general servicing standard specified in the related prospectus
supplement or, if no such standard is so specified, its normal servicing
practices.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"Stripped ARM Obligations" means original issue discount on grantor trust
certificates attributable to adjustable rate loans.
"Stripped Bond Certificates" means a class of grantor trust certificates
that represents the right to principal and interest, or principal only, on all
or a portion of the mortgage loans and mortgage-backed securities, if a trust
fund is created with two classes of grantor trust certificates.
"Stripped Coupon Certificates" means a class of grantor trust certificates
that represents the right to some or all of the interest on a portion of the
mortgage loans and mortgage-backed securities, if a trust fund is created with
two classes of grantor trust certificates.
"Stripped Interest Certificates" means certificates which are entitled to
interest distributions with disproportionately low, nominal or no principal
distributions.
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"Stripped Principal Certificates" means certificates which are entitled to
principal distributions with disproportionately low, or no interest
distributions.
"Super-Premium Certificates" means certain REMIC Regular Certificates to be
issued at prices significantly exceeding their principal amounts or based on
notional principal balances.
"Title V" means Title V of the depository Institutions Deregulation and
Monetary Control Act of 1980.
"U.S. Person" means a citizen or resident of the United States, a
corporation or a partnership organized in or under the laws of the United States
or any political subdivision thereof (other than a partnership that is not
treated as a U.S. Person under any applicable Treasury regulations), an estate
the income of which from sources outside the United States is included 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.
"Value" means:
o with respect to any mortgaged property other than a mortgaged property
securing a refinance loan, generally the lesser of
o the appraised value determined in an appraisal obtained by the
originator at origination of that loan, and
o the sales price for that property; and
o with respect to any refinance loan, unless otherwise specified in
the related prospectus supplement, the appraised value determined in
an appraisal obtained at the time of origination of the refinance
loan.
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