RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
Company
RESIDENTIAL FUNDING CORPORATION
Master Servicer
Mortgage Pass-Through Certificates
Series 1996-S14
$0 Variable Rate* Class A-19 Certificates
---------------
* Based on the Notional Amount as described herein.
---------------
Supplement dated July 30, 1996
to
Prospectus Supplement dated May 23, 1996,
as supplemented by the Supplement
dated June 19, 1996 and the Supplement
dated June 20, 1996
and
Prospectus dated January 23, 1996
as supplemented by the Prospectus
dated June 21, 1996
--------------
The Mortgage Pass-Through Certificates Series 1996-S14 (the
"Certificates") include twenty classes of senior certificates (the "Senior
Certificates"), three classes of mezzanine certificates (the "Class M
Certificates") and three classes of subordinate certificates (the "Class B
Certificates") originally issued on May 30, 1996, as described in the Prospectus
Supplement, dated May 23, 1996 attached hereto (the "Prospectus Supplement") and
one class of certificates offered hereby (the "Class A-19 Certificates"). The
Class A-19 Certificates will be issued pursuant to an amendment (the
"Amendment") of the Pooling and Servicing Agreement, dated as of May 1, 1996,
among the Company, the Master Servicer and the Trustee (the "Pooling and
Servicing Agreement"), which provides that rights to the Excess Spread be
certificated and designated as the Class A-19 Certificates. Although payments of
interest on the Class A-19 Certificates are on a parity with payments of
interest on the Senior Certificates, references in the Prospectus Supplement, as
supplemented, and this Supplement to "Senior Certificates" do not include the
Class A-19 Certificates. Distributions on the Class A-19 Certificates will be
made on the 25th day of each month or, if such day is not a business day, then
on the next business day, commencing on the Distribution Date in August 1996
(each, a "Distribution Date"). As more fully described herein, interest
distributions on the Class A-19 Certificates will be based on the Notional
Amount thereof and the then-applicable Pass-Through Rate thereof, which will be
variable. The Class A-19 Certificates will not receive distributions with
respect to principal.
The Class A-19 Certificates will be purchased from the Company by Bear,
Stearns & Co. Inc. (the "Underwriter") and will be offered by the Underwriter
from time to time to the public in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The proceeds to the Company
from the sale of the Class A-19 Certificates, before deducting expenses payable
by the Company, will be equal to approximately $2,747,627.43. The Class A-19
Certificates are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject any order in whole or in part. It is expected that
delivery of the Class A-19 Certificates will be made at the offices of the
Underwriter, New York, New York on or about July 31, 1996, against payment
therefor in immediately available funds.
There is currently no secondary market for the Class A-19 Certificates.
There can be no assurance that a secondary market for the Class A-19
Certificates will develop or, if it does develop, that it will continue. The
Class A-19 Certificates will not be listed on any securities exchange.
THIS SUPPLEMENT MUST BE DELIVERED TOGETHER WITH THE PROSPECTUSES
AND PROSPECTUS SUPPLEMENT REFERRED TO ABOVE, AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
Bear, Stearns & Co. Inc.
NY1-152328.3
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UNTIL OCTOBER 28, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A-19
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS (INCLUDING THE PROSPECTUS SUPPLEMENT AND THIS
SUPPLEMENT). THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NY1-152328.3
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SUMMARY
The following summary is qualified in its entirety by
reference to the detailed information appearing elsewhere herein, in the
Prospectus Supplement and in the Prospectus. Capitalized terms used but not
defined in this Supplement have the meanings set forth in the Prospectus
Supplement and Prospectus to which this Supplement is attached.
Title and Class of Securities.................. Mortgage Pass-Through
Certificates, Series 1996-S14, Class A-19.
Denominations.................................. The Class A-19 Certificates
will be offered in registered form in minimum denominations of a 20% Percentage
Interest.
Distributions on the Class A-19 Certificates...................... Holders
of the Class A-19 Certificates will be entitled to receive interest
distributions in an amount equal to the Accrued Certificate Interest (as defined
below) on such class on each Distribution Date, to the extent of the Available
Distribution Amount (as defined in the Prospectus Supplement) for such
Distribution Date available therefor. Accrued Certificate Interest on the Class
A-19 Certificates is paid on a parity with the Accrued Certificate Interest
payable on the Senior Certificates.
............................................... With respect to any
Distribution Date, Accrued Certificate Interest in the case of the Class A-19
Certificates will be equal to one month's interest accrued during the related
Interest Accrual Period on the Notional Amount thereof immediately prior to such
Distribution Date at the then-applicable Pass-Through Rate on such class for
such Distribution Date, less any interest shortfalls not covered with respect to
such class by Subordination, including any Prepayment Interest Shortfall for
such Distribution Date not covered by the Master Servicer, that are allocated to
the Class A-19 Certificates as described herein.
............................................... The Pass-Through Rate on the
Class A-19 Certificates on each Distribution Date will equal the weighted
average, as of the Due Date in the month preceding the month in which such
Distribution Date occurs, of the Spread Rates on each of the Mortgage Loans. The
Spread Rate on each Mortgage Loan is equal to the Net Mortgage Rate thereon
minus 7.50% (but not less than 0.00%). The Net Mortgage Rate on each Mortgage
Loan is equal to the Mortgage Rate thereon minus the rate per annum at which the
related master servicing
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and subservicing fees accrue (the "Servicing Fee Rate"). The Spread Rates
on the Mortgage Loans as of the Reference Date range between 0.00% per annum and
1.42% per annum.
............................................... The Notional Amount of the
Class A-19 Certificates as of any date of determination is equal to the
aggregate Certificate Principal Balance of the Certificates of all classes
immediately prior to such date. See "Description of the Certificates--Interest
Distributions" herein. The Class A-19 Certificates will not receive any
principal distributions.
Special Yield Considerations.............................. The yield to
investors in the Class A-19 Certificates will be extremely sensitive to the rate
and timing of principal payments on the Mortgage Loans (including prepayments,
defaults and liquidations), which may fluctuate significantly over time. A rapid
rate of principal payments on the Mortgage Loans could result in the failure of
investors in the Class A-19 Certificates to recover their initial investments.
In addition to the foregoing, because holders of the Class A-19 Certificates
generally have rights to relatively larger portions of interest payments on the
Mortgage Loans with higher Mortgage Rates than on Mortgage Loans with lower
Mortgage Rates, the yield on the Class A- 19 Certificates will be materially
adversely affected to a greater extent than the yields on the Senior
Certificates if the Mortgage Loans with higher Mortgage Rates prepay faster than
the Mortgage Loans with lower Mortgage Rates. Because the Spread Rates on the
Discount Mortgage Loans equal 0.00%, the yield to investors on the Class A-19
Certificates will not be affected by prepayments on the Discount Mortgage Loans.
............................................... The yield to maturity on
the Class A-19 Certificates will also depend on the purchase price for such
Certificates. The yield to investors on the Class A-19 Certificates will be
adversely affected by any allocation thereto of Prepayment Interest Shortfalls
on the Mortgage Loans, which are expected to result from the distribution of
interest only to the date of prepayment (rather than a full month's interest) in
connection with prepayments in full, and the lack of any distribution of
interest on the amount of any partial prepayments. Limited protection from
Prepayment Interest Shortfalls will be provided by the Master Servicer as
described herein.
NY1-152328.3
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............................................... The Certificates were
structured assuming, among other things, a prepayment assumption of 200% SPA.
The prepayment, yield and other assumptions to be used for pricing purposes for
the class that is to be offered hereunder may vary as determined at the time of
sale.
............................................... See "Class A-19
Certificate Yield Considerations" herein, "Certain Yield and Prepayment
Considerations" in the Prospectus Supplement and "Yield Considerations" in the
Prospectus.
Certain Federal Income Tax Consequences................................ Two
separate REMIC elections were made with respect to the Trust Fund for federal
income tax purposes. For federal income tax purposes, the Class A-19
Certificates constitute "regular interests" in REMIC II and will be treated as
debt instruments of REMIC II.
...............................................The Class A-19 Certificates
will be treated for federal income tax reporting
purposes as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of market
discount and original issue discount for federal income tax purposes will be
200% SPA. No representation is made that the Mortgage Loans will prepay at that
rate or at any other rate.
............................................... For
further information regarding the federal income tax consequences of investing
in the Class A-19 Certificates, see "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
Ratings........................................ It is a condition to the
issuance of the Class A-19 Certificates that they be rated "AAAr" by Standard &
Poor's Rating Services ("Standard & Poor's") and "AAA" by Fitch Investors
Service, L.P. ("Fitch"). A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at any time by
the assigning rating organization. A security rating does not address the
frequency of prepayments of Mortgage Loans, or the corresponding effect on yield
to investors. The ratings of the Class A-19 Certificates do not address the
possibility that the holders of such Certificates may fail to fully recover
their initial investment. See "Certain Yield and Prepayment Considerations" and
"Ratings" herein and "Yield Considerations" in the Prospectus.
NY1-152328.3
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<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
See "Description of the Mortgage Pool" in the Prospectus Supplement for
a description of the Mortgage Pool as of the Cut-off Date.
As of July 1, 1996 (the "Reference Date"), $1,425,013 of the Mortgage
Loans, or 0.4% of the aggregate outstanding balance of the Mortgage Pool, were
more than 30 but less than 60 days delinquent. As of the Reference Date, none of
the Mortgage Loans were 60 or more days delinquent, none of the Mortgage Loans
were REO Mortgage Loans and no Realized Losses had been allocated to the
Certificates. As of the Reference Date the Mortgage Pool consisted of 1,425
Mortgage Loans with an aggregate principal balance, after deducting payments of
principal due on such date, of $365,392,184.55.
DESCRIPTION OF THE CLASS A-19 CERTIFICATES
General
Prior to the Amendment, the Pooling and Servicing Agreement provides
that the Master Servicer remit the Excess Spread, consisting of specified
portions of interest payments on the Mortgage Loans included in the Trust Fund,
to Residential Funding each month . The Pooling and Servicing Agreement provides
that it may be amended from time to time by the Company, the Master Servicer and
the Trustee, without the consent of any of the Certificateholders, to provide
for the Excess Spread to be certificated and designated as a Class A
Certificate.
The Class A-19 Certificates are to be issued pursuant to the Amendment,
which provides that rights to the Excess Spread be certificated and designated
as Class A-19. The Class A-19 Certificates will be issued in registered,
certificated form in minimum denominations of a 20% Percentage Interest.
See "Description of the Certificates" in the Prospectus Supplement for
a description of the Classes of Certificates issued on May 30, 1996.
Distributions on the Class A-19 Certificates
Holders of the Class A-19 Certificates will be entitled to receive
interest distributions in an amount equal to the Accrued Certificate Interest on
such class on each Distribution Date, to the extent of the Available
Distribution Amount (as described under "Description of the
Certificates--Available Distribution Amount" in the Prospectus Supplement) for
such Distribution Date.
With respect to any Distribution Date, Accrued Certificate Interest on
the Class A-19 Certificates will be equal to one month's interest accrued during
the related Interest Accrual Period on the Notional Amount thereof immediately
prior to such Distribution Date at the then-applicable Pass-Through Rate for
such Distribution Date, less interest shortfalls not covered by Subordination,
if any, allocated to the Class A-19 Certificates for such Distribution Date.
Interest Shortfalls not covered by Subordination include (i) any Prepayment
Interest Shortfalls to the extent not covered by the Master Servicer, (ii) the
interest portions of Realized Losses (including Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary
NY1-152328.3
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<PAGE>
Losses) not allocated solely through Subordination, (iii) the interest portion
of any Advances that were made with respect to delinquencies that were
ultimately determined to be Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses or Extraordinary Losses, and (iv) any other interest
shortfalls not covered by Subordination, including interest shortfalls relating
to the Relief Act (as defined in the Prospectus) or similar legislation or
regulations. Such shortfalls will be allocated to all classes of Certificates
including the Class A-19 Certificates, on a pro rata basis in accordance with
the respective amounts of Accrued Certificate Interest thereon that would result
absent such reduction. The Interest Accrual Period for the Class A-19
Certificates is the calendar month preceding the month in which the Distribution
Date occurs. Accrued Certificate Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months.
See the fourth paragraph under the heading "Description of the
Certificates--Interest Distributions" in the Prospectus Supplement for a
description of Prepayment Interest Shortfalls and the limited circumstances
under which Prepayment Interest Shortfalls resulting from prepayments in full
during the preceding calendar month may be offset by certain amounts otherwise
payable to the Master Servicer.
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates and Class A-19
Certificates for such Distribution Date, the shortfall will be allocated among
the holders of all classes of Senior Certificates and Class A-19 Certificates in
proportion to the respective amounts of Accrued Certificate Interest for such
Distribution Date on each such class. In addition, the amount of any interest
shortfalls that are covered by Subordination (specifically, interest shortfalls
not described in clauses (i) through (iv) in the second paragraph under the
heading "Description of the Certificates--Interest Distributions" in the
Prospectus Supplement) will be distributable to holders of the Certificates of
such classes entitled to such amounts on subsequent Distribution Dates, to the
extent of available funds after distributions as required herein. Such
shortfalls could occur, for example, if delinquencies or losses realized on the
Mortgage Loans were exceptionally high and were concentrated in a particular
month and Advances by the Master Servicer did not cover the shortfall. Any such
amounts so carried forward will not bear interest. Any interest shortfalls will
not be offset by a reduction of the servicing compensation of the Master
Servicer or otherwise.
The Pass-Through Rate on the Class A-19 Certificates on each
Distribution Date will equal the weighted average, as of the Due Date in the
month preceding the month in which such Distribution Date occurs, of the Spread
Rates on each of the Mortgage Loans in the Mortgage Pool. The Spread Rate on any
Mortgage Loan is equal to the Net Mortgage Rate thereon minus 7.50% (but not
less than 0.00%). The Net Mortgage Rate on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the Servicing Fee Rate. As of the Reference Date,
the Spread Rates on the Mortgage Loans range between 0.00% per annum and 1.42%
per annum, with a weighted average Spread Rate equal to 0.2111% per annum.
As described herein, the Accrued Certificate Interest allocable to the
Class A-19 Certificates is based on the Notional Amount thereof. The Notional
Amount of the Class A-19 Certificates as of any date of determination is equal
to the aggregate Certificate Principal Balance of the Certificates of all
classes as of such date. Reference to the Notional Amount of a Class A- 19
Certificate is solely for convenience in certain calculations and does not
represent the right to receive any distributions allocable to principal.
NY1-152328.3
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Allocation of Losses; Subordination
The Subordination provided to the Class A-19 Certificates and the
Senior Certificates by the Class B Certificates and Class M Certificates will be
accomplished by the allocation of Realized Losses which are not Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses first, to the Class B Certificates and Class M Certificates, until the
Certificate Principal Balances thereof have been reduced to zero; and
thereafter, among the Senior Certificates and the Class A-19 Certificates (in
the case of the interest portion of a Realized Loss) on a pro rata basis. The
interest portion of any Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses, Extraordinary Losses or other losses of a type not
covered by Subordination will be allocated on a pro rata basis among the Senior
Certificates, the Class A-19 Certificates, Class M Certificates and Class B
Certificates. An allocation of the interest portion of a Realized Loss on a "pro
rata basis" among two or more classes of Certificates means an allocation to
each such class of Certificates on the basis of the Accrued Certificate Interest
thereon in respect of such Distribution Date. Any allocation of the interest
portion of a Realized Loss to a Class A-19 Certificate will be made by reducing
the Accrued Certificate Interest thereon by the amount so allocated as of the
Distribution Date occurring in the month following the calendar month in which
such Realized Loss was incurred.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
are referred to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, including Accrued Certificate Interest on
the Class A-19 Certificates, on each Distribution Date holders of Senior
Certificates and Class A-19 Certificates and the Insurer have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the Class M Certificates and Class B Certificates, to the
extent necessary to satisfy the Senior Interest Distribution Amount, including
Accrued Certificate Interest on the Class A-19 Certificates. Upon the
effectiveness of the Amendment, the Senior Interest Distribution Amount will
include Accrued Certificate Interest on the Class A-19 Certificates, rather than
the Excess Spread.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses, Fraud Losses and Bankruptcy Losses
through Subordination is described in the ninth through twelfth paragraphs under
the heading "Description of the Certificates--Allocation of Losses;
Subordination" in the Prospectus Supplement.
Class A-19 Certificate Yield Considerations
The yield to maturity on the Class A-19 Certificates will be extremely
sensitive to both the timing of receipt of prepayments and the overall rate of
principal prepayments and defaults on the Mortgage Loans, which rate may
fluctuate significantly over time. For additional considerations relating to the
yield on the Class A-19 Certificates see "Certain Yield Considerations--General"
NY1-152328.3
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<PAGE>
in the Prospectus Supplement and "Yield Considerations" in the Prospectus.
Because the Spread Rate on the Discount Mortgage Loans equals 0.00%, the yield
to investors in the Class A-19 Certificates will not be affected by prepayments
on the Discount Mortgage Loans.
The following table indicates the sensitivity of the yield to maturity
on the Class A-19 Certificates to various constant rates of prepayment by
projecting the monthly aggregate payments of interest on the Class A-19
Certificates and computing the corresponding pre-tax yields to maturity on a
corporate bond equivalent basis, based on certain assumptions as described below
regarding the weighted average characteristics of the Mortgage Loans that are
included in the Trust Fund as described under "Description of the Mortgage Pool"
in the Prospectus Supplement and the performance thereof. The table assumes,
among other things, that: (i) the aggregate principal balance of the Discount
Mortgage Loans is $176,706,734 and each Discount Mortgage Loan has a Mortgage
Rate of 7.42084419% per annum, an original term to maturity of 357 months, a
remaining term to maturity of 344 months and a related Servicing Fee Rate of
0.32938366% per annum, and the aggregate principal balance of the Non-Discount
Mortgage Loans is $188,685,451 and each Non-Discount Mortgage Loan has a
Mortgage Rate of 8.23607686% per annum, an original term to maturity of 357
months, a remaining term to maturity of 342 months and a related Servicing Fee
Rate of 0.32726397% per annum; (ii) the scheduled monthly payment for each
Mortgage Loan has been based on its outstanding balance, interest rate and
remaining term to maturity, such that the Mortgage Loan will amortize in amounts
sufficient for repayment thereof over its remaining term to maturity; (iii) none
of the Unaffiliated Sellers, the Master Servicer or the Company will repurchase
any Mortgage Loan, as described under "Mortgage Loan Program--Representations by
Sellers" and "Description of the Certificates--Assignment of the Mortgage Loans"
in the Prospectus, and neither the Master Servicer nor the Company exercises any
option to purchase the Mortgage Loans and thereby cause a termination of the
Trust Fund; (iv) there are no delinquencies or Realized Losses on the Mortgage
Loans, and principal payments on the Mortgage Loans will be timely received
together with prepayments, if any, at the respective constant percentages of SPA
set forth in the table; (v) there is no Prepayment Interest Shortfall or any
other interest shortfall in any month; (vi) payments on the Certificates will be
received on the 25th day of each month, commencing August 1996; (vii) payments
on the Mortgage Loans earn no reinvestment return; (viii) there are no
additional ongoing Trust Fund expenses payable out of the Trust Fund; and (ix)
the Certificates will be purchased on July 31, 1996. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. For example, the Pass-Through Rate on the Class A-19
Certificates, which is assumed to be fixed throughout the life of the
Certificates, will change from one period to the next as the principal balances
of the Mortgage Loans with different Spread Rates are reduced. Discrepancies
between assumed and actual characteristics and performance underscore the
hypothetical nature of the tables, which are provided only to give a general
sense of the sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yields to Maturity of the
Class A-19 Certificates at the Following
Percentages of SPA
Assumed
Purchase
Price 0% 100% 200% 300% 450% 600%
- --------------- ----- ---- ---- ---- ---- ----
$2,804,720 27.7% 21.4% 15.0% 8.3% (2.2)% (13.3)%
NY1-152328.3
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The pre-tax yields to maturity set forth in the preceding table were
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class A-19 Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price listed in the related table. Accrued interest is
included in the purchase prices shown and is used in computing the corporate
bond equivalent yields shown. These yields do not take into account the
different interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class A-19 Certificates, and thus do
not reflect the return on any investment in the Class A-19 Certificates when any
reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yields to maturity on the Class
A-19 Certificates are likely to differ from those shown in the preceding table,
even if all of the Mortgage Loans prepay at the indicated constant percentages
of SPA over any given time period or over the entire life of the Certificates.
In addition, holders of the Class A-19 Certificates generally have rights to
relatively larger portions of interest payments on Mortgage Loans with higher
Mortgage Rates; thus, the yield on the Class A-19 Certificates will be
materially adversely affected to a greater extent than on the Senior
Certificates if the Mortgage Loans with the higher Mortgage Rates prepay faster
than the Mortgage Loans with the lower Mortgage Rates. Because Mortgage Loans
having higher Spread Rates generally have higher Mortgage Rates, such Mortgage
Loans are generally more likely to be prepaid under most circumstances than are
Mortgage Loans having lower Spread Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class A-19 Certificates will conform to
the yield described herein. Moreover, the various remaining terms to maturity of
the Mortgage Loans could produce slower or faster distributions than indicated
in the preceding tables at the various constant percentages of SPA specified,
even if the weighted average remaining term to maturity of the Mortgage Loans is
as assumed. Investors are urged to make their investment decisions based on
their determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Class A-19 Certificates should fully consider the
risk that a rapid rate of prepayments on the Mortgage Loans could result in the
failure of such investors to fully recover their investments.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
Voting Rights
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. 97% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Interest
Only Certificates, Class A-19 Certificates and Residual Certificates) in
proportion to their then outstanding Certificate Principal Balances, and 1%, 1%,
0.5% and 0.5% of all Voting Rights will be allocated among holders of the
Interest Only Certificates, Class A-19 Certificates, Class R-I Certificates and
Class R-II Certificates, respectively, in proportion to the Percentage Interests
(as defined in the Prospectus) evidenced by their respective Certificates.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Orrick, Herrington &
Sutcliffe, counsel to the Company, delivered its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, REMIC I and REMIC II qualified as a
REMIC under the Code.
For federal income tax purposes, the Class A-19 Certificates constitute
ownership of "regular interests" in REMIC II and will generally be treated as
debt instruments of REMIC II. See "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
The Class A-19 Certificates will be treated as having been issued with
original issue discount for federal income tax reporting purposes. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 200% SPA. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--General" and
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount" in the Prospectus.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, the amount of original issue discount allocable to such
period would be zero and such Certificateholder will be permitted to offset such
negative amount only against future original issue discount (if any)
attributable to such Certificates.
In certain circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing reports
to the Certificateholders and the IRS.
The Class A-19 Certificates will be treated as "qualifying real
property loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A-19 Certificates will
be treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such Class
A-19 Certificates are treated as "real estate assets" under Section 856(c)(5)(A)
of the Code. Moreover, the Class A-19 Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in Class A-19 Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Master Servicer or the Company to repurchase such Class A-19 Certificates
may adversely affect any REMIC that holds such Class A-19 Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. See "The Pooling and Servicing Agreement--Termination" herein and "Certain
Federal Income Tax
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Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated July 30, 1996 (the "Underwriting Agreement"), the Underwriter
has agreed to purchase and the Company has agreed to sell to the Underwriter the
Class A-19 Certificates. It is expected that delivery of the Class A-19
Certificates will be made at the offices of the Underwriter, New York, New York
on or about July 31, 1996, against payment therefor in immediately available
funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Class A-19 Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Class A-19 Certificates by the Underwriter may
be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Class A-19 Certificates, before deducting
expenses payable by the Company, will be approximately $2,747,627.43. The
Underwriter may effect such transactions by selling the Class A-19 Certificates
to or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for whom
they act as agent. In connection with the sale of the Class A-19 Certificates,
the Underwriter may be deemed to have received compensation from the Company in
the form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Class A-19
Certificates may be deemed to be underwriters and any profit on the resale of
the Class A-19 Certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933, or
contribute to payments required to be made in respect thereof.
There is currently no secondary market for the Class A-19 Certificates.
Neither the Company, the Underwriter nor any other person or entity intends to
create a secondary market in the Class A-19 Certificates. There can be no
assurance that a secondary market for the Class A-19 Certificates will develop
or, if it does develop, that it will continue. The primary source of information
available to investors concerning the Class A-19 Certificates will be the
monthly statements as discussed in the Prospectus under "Description of the
Certificates--Reports to Certificateholders." There can be no assurance that any
additional information regarding the Class A-19 Certificates will be available
through any other source. In addition, the Company is
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not aware of any source through which price information about the Class A-19
Certificates will be generally available on an ongoing basis. The limited nature
of such information regarding the Class A-19 Certificates may adversely affect
the liquidity of the Class A-19 Certificates, even if a secondary market for the
Class A-19 Certificates becomes available.
RATINGS
It is a condition of the issuance of the Class A-19 Certificates that
they be rated "AAAr" by Standard & Poor's and "AAA" by Fitch.
Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of payments required under
the Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Certain Yield and Prepayment Considerations" in the Prospectus Supplement. The
"r" of the "AAAr" rating of the Class A-19 Certificates by Standard & Poor's is
attached to highlight derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high variability in
expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The ratings assigned by Fitch to mortgage pass-through certificates
also address the likelihood of the receipt by Certificateholders of all
distributions to which such Certificateholders are entitled. The rating process
addresses the structural and legal aspects associated with the Certificates,
including the nature of the underlying mortgage loans. The ratings assigned to
mortgage pass-through certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Certificateholders might suffer a lower than anticipated yield
or that the holders of the Class A-19 Certificates may fail to recoup their
initial investments.
The Company has not requested a rating on the Class A-19 Certificates
by any rating agency other than Standard & Poor's and Fitch. However, there can
be no assurance as to whether any other rating agency will rate the Class A-19
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A-19
Certificates by Standard & Poor's and Fitch.
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. The ratings of the Class A- 19
Certificates do not address the possibility that the holders of such
Certificates may fail to fully recover their initial investments. In the event
that the ratings initially assigned to the Class A-19 Certificates are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to the Class A-19
Certificates.
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LEGAL INVESTMENT
The Class A-19 Certificates will constitute "mortgage related
securities" for purposes of SMMEA so long as they are rated in at least the
second highest rating category by one of the Rating Agencies, and, as such, are
legal investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provisions on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA.
The Company makes no representations as to the proper characterization
of any class of the Class A-19 Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
the Class A-19 Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Class
A-19 Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the Class A-19
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company (whether through its general or separate accounts) or other person
investing "plan assets" of any Plan, should carefully review with its legal
advisors whether the purchase or holding of Offered Certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the Class A-19 Certificates by or
on behalf of, or with "plan assets" of, a Plan may qualify for exemptive relief
under the Exemption (as defined under "ERISA Considerations-Prohibited
Transaction Exemption" in the Prospectus); however, the Exemption contains a
number of conditions including the requirement that any such Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Purchasers using insurance company general account funds to effect such purchase
should consider the availability of Prohibited Transaction Class Exemption 95-60
(60 Fed. Reg. 35925, July 12, 1995) issued by the U.S. Department of Labor. See
"ERISA Considerations" in the Prospectus.
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