<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 333-43755
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 24, 1998)
$669,370,221
(APPROXIMATE)
GE CAPITAL MORTGAGE SERVICES, INC.
(SELLER AND SERVICER)
REMIC MULTI-CLASS PASS-THROUGH CERTIFICATES, SERIES 1998-8
PRINCIPAL AND INTEREST PAYABLE MONTHLY, BEGINNING MAY 26, 1998.
The REMIC Multi-Class Pass-Through Certificates, Series 1998-8 (the
"Certificates") will consist of two groups of Certificates (the "Pool 1
Certificates" and the "Pool 2 Certificates"), each evidencing beneficial
ownership interests in a distinct trust fund (each, a "Trust Fund"). The
assets of each Trust Fund will consist primarily of a distinct pool ("Pool 1"
and "Pool 2," respectively, and each a "Mortgage Pool") of conventional,
fixed-rate, first-lien, fully-amortizing, one- to four-family residential
mortgage loans (the "Mortgage Loans") having original terms to maturity of 20
to 30 years, and sold by GE Capital Mortgage Services, Inc. (the "Company").
See "Description of the Mortgage Pools and the Mortgaged Properties" herein.
(Cover continued on next page)
----------------
NEITHER THESE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
CLASS CLASS
CERTIFICATE CERTIFICATE
PRINCIPAL CERTIFICATE PRINCIPAL CERTIFICATE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class 1-A1....... $200,000,000 6.75% Class 2-A6....... $ 4,321,969 7.00%
Class 1-A2....... 3,000,000 6.75 Class 2-A7....... 3,625,000 7.00
Class 1-A3....... 223,000,000 6.75 Class 2-A8....... 3,625,000 7.00
Class 1-A4....... 23,933,914 6.75 Class 2-A9....... 3,625,000 7.00
Class 1-A5....... 29,000,000 6.75 Class 2-A10...... 3,625,000 7.00
Class 1-M........ 10,516,000 6.75 Class 2-A11...... 3,625,000 7.00
Class 1-B1....... 4,006,000 6.75 Class 2-A12...... 11,339,531 6.20
Class 1-B2....... 2,253,000 6.75 Class 2-A13...... 10,000,000 6.20
Class 1-R........ 100 6.75 Class 2-A14...... 17,500,000 6.75
Class 2-A1....... 82,349,607 6.75 Class 2-M........ 3,420,000 6.75
Class 2-A2....... 15,125,000 7.00 Class 2-B1....... 1,403,000 6.75
Class 2-A3....... 2,500,000 7.00 Class 2-B2....... 702,000 6.75
Class 2-A4....... 2,750,000 7.00 Class 2-R........ 100 6.75
Class 2-A5....... 4,125,000 7.00
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Approximate, subject to adjustment as described herein.
As described further herein, the Class 1-M, Class 1-Bl, Class 1-B2, Class 2-
M, Class 2-B1 and Class 2-B2 Certificates may not be acquired by ERISA Plans
(as defined herein). The Class 1-R and Class 2-R Certificates (the "Residual
Certificates") may not be purchased by or transferred to (i) a Disqualified
Organization or Book-Entry Nominee (as defined in the accompanying
Prospectus), (ii) except under limited circumstances, a person who is not a
U.S. Person (as defined in the accompanying Prospectus), (iii) an ERISA Plan
or (iv) any person or entity who the transferor has reason to believe intends
to impede the assessment or collection of any federal, state or Local taxes
legally required to be paid with respect thereto. See "ERISA Considerations"
and "Description of the Certificates--Restrictions on Transfer of the Residual
Certificates" herein.
There is currently no secondary market for the Certificates offered hereby
and there can be no assurance that such a market will develop. Salomon
Brothers Inc (the "Underwriter") has indicated its intention to make a market
in the Certificates offered hereby, but is not obligated to do so. There can
be no assurance that a secondary market for such Certificates will develop, or
if it does develop, will continue. See "Summary of Terms--Liquidity
Considerations" herein.
As described herein, the Certificates offered hereby will be purchased by
the Underwriter from the Company, and are being offered by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Company from the sale of
the Certificates offered hereby will be approximately 98.319647% of the
aggregate initial Class Certificate Principal Balance of the Certificates
offered hereby plus accrued interest thereon from the Cut-off Date, before
deducting expenses payable by the Company. See "Plan of Distribution" herein.
The Certificates offered hereby are offered when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that delivery of the Certificates offered hereby
(other than the Residual Certificates) will be made through the book-entry
facilities of The Depository Trust Company, and that delivery of the Residual
Certificates in definitive, fully registered form, will be made at the offices
of Salomon Brothers Inc, New York, New York, on or about April 29, 1998.
----------------
SALOMON SMITH BARNEY
The Date of this Prospectus Supplement is April 24, 1998
<PAGE>
The Certificates offered hereby will be issued in the Classes (each, a
"Class") and with the characteristics set forth on the cover hereof.
Interest and principal will be distributable on the Pool 1 Certificates
solely out of collections received on the Mortgage Loans in the related Trust
Fund, and interest and principal will be distributable on the Pool 2
Certificates solely out of collections received on the Mortgage Loans in the
related Trust Fund. The Trust Funds are not cross-collateralized. All expenses
relating or attributable to a specific Trust Fund will be borne by the related
Trust Fund. The Certificates relating to a specific Trust Fund (each, a
"Certificate Group") may experience shortfalls or losses on a Distribution
Date even though distributions are made on such date to Certificates of the
other Certificate Group. See "Description of the Certificates--Subordination"
herein.
The Pool 1 Certificates will consist of seven Classes of senior certificates
(the "Class 1-Al, Class 1-A2, Class 1-A3, Class 1-A4, Class 1-A5, Class 1-PO
and Class 1-R Certificates," and collectively, the "Pool 1 Senior
Certificates") and six Classes of subordinated certificates (the "Class 1-M,
Class 1-B1, Class 1-B2, Class 1-B3, Class 1-B4 and Class 1-B5 Certificates,"
and collectively, the "Pool 1 Junior Certificates"). The Pool 1 Junior
Certificates are subordinate in right of distribution to the Pool 1 Senior
Certificates to the extent described herein. The initial aggregate Certificate
Principal Balance of the Pool 1 Junior Certificates will equal approximately
4.25% of the initial aggregate Certificate Principal Balance of all of the
Pool 1 Certificates.
The Pool 2 Certificates will consist of sixteen Classes of senior
certificates (the "Class 2-Al, Class 2-A2, Class 2-A3, Class 2-A4, Class 2-A5,
Class 2-A6, Class 2-A7, Class 2-A8, Class 2-A9, Class 2-A10, Class 2-A11,
Class 2-A12, Class 2-A13, Class 2-A14, Class 2-PO and Class 2-R Certificates,"
and, collectively, the "Pool 2 Senior Certificates") and six Classes of
subordinated certificates (the "Class 2-M, Class 2-B1, Class 2-B2, Class 2-B3,
Class 2-B4 and Class 2-B5 Certificates," and collectively, the "Pool 2 Junior
Certificates"). The Pool 2 Junior Certificates are subordinate in right of
distribution to the Pool 2 Senior Certificates to the extent described herein.
The initial aggregate Certificate Principal Balance of the Pool 2 Junior
Certificates will equal approximately 4.10% of the initial aggregate
Certificate Principal Balance of all of the Pool 2 Certificates.
The Class 1-M Certificates are subordinate to the Pool 1 Senior Certificates
to the extent described herein. The Class 1-Bl, Class 1-B2, Class 1-B3, Class
1-B4 and Class 1-B5 Certificates (collectively, the "Class 1-B Certificates")
are subordinate to the Pool 1 Senior Certificates and the Class 1-M
Certificates, and each Class of Class 1-B Certificates is subordinate to the
Class or Classes of Class 1-B Certificates having a lower numerical
designation (i.e., the Class 1-B5 Certificates are subordinate to the Class 1-
B4 Certificates, the Class 1-B4 Certificates are subordinate to the Class 1-B3
Certificates, and so on) to the extent described herein. The initial aggregate
Certificate Principal Balance of the Class 1-B3, Class 1-B4 and Class 1-B5
Certificates will equal approximately 0.90% of the initial aggregate
Certificate Principal Balance of all of the Pool 1 Certificates and
approximately 21.18% of the initial aggregate Certificate Principal Balance of
all of the Pool 1 Junior Certificates.
The Class 2-M Certificates are subordinate to the Pool 2 Senior Certificates
to the extent described herein. The Class 2-B1, Class 2-B2, Class 2-B3, Class
2-B4 and Class 2-B5 Certificates (collectively, the "Class 2-B Certificates")
are subordinate to the Pool 2 Senior Certificates and the Class 2-M
Certificates, and each Class of Class 2-B Certificates is subordinate to the
Class or Classes of Class 2-B Certificates having a lower numerical
designation (i.e., the Class 2-B5 Certificates are subordinate to the Class 2-
B4 Certificates, the Class 2-B4 Certificates are subordinate to the Class 2-B3
Certificates, and so on) to the extent described herein. The initial aggregate
Certificate Principal Balance of the Class 2-B3, Class 2-B4 and Class 2-B5
Certificates will equal approximately 0.95% of the initial aggregate
Certificate Principal Balance of all of the Pool 2 Certificates and
approximately 23.18% of the initial aggregate Certificate Principal Balance of
all of the Pool 2 Junior Certificates.
The Class 1-PO, Class 1-B3, Class 1-B4, Class 1-B5, Class 2-PO, Class 2-B3,
Class 2-B4 and Class 2-B5 Certificates are not offered hereby.
Interest will accrue on each Class of the Certificates offered hereby at the
respective fixed Certificate Interest Rates set forth on the cover hereof.
Interest will be distributable on the Certificates offered hereby on each
Distribution Date (as defined herein) commencing in May 1998. On each
Distribution Date, to the extent funds are available therefor, the amount of
interest distributable on each Certificate offered hereby will equal 30 days
of interest at the applicable Certificate Interest Rate on the Certificate
Principal Balance thereof immediately prior to such Distribution Date, less
such Certificate's share of any Net Interest Shortfall, the interest portion
of any Excess Losses allocable to Certificateholders through the related
Cross-Over Date and, after the Cross-Over Date, the interest portion of any
Realized Losses (each as defined herein) allocable to Certificateholders, in
each case in respect of the related Mortgage Pool.
Principal of the Certificates offered hereby will be distributable on each
Distribution Date commencing in May 1998 to the extent and in the manner
described herein.
The yields to maturity on the Certificates will be affected, in varying
degrees, by the rate and timing of principal payments (including prepayments)
on the related Mortgage Loans, which may be prepaid at any time without
penalty. Investors in the Certificates offered hereby should consider, in the
case of any Certificates purchased at a discount, the risk that a slower than
anticipated rate of principal prepayments on the related Mortgage Loans could
result in a significant extension of the weighted average lives of such
Certificates and actual yields to investors that are significantly lower than
the anticipated yields and, in the case of any Certificates purchased at a
premium, the risk that a faster than anticipated rate of principal prepayments
on the related Mortgage Loans could result in a significant reduction of the
weighted average lives of such Certificates and actual yields to investors
that are significantly lower than the anticipated yields.
The yields to maturity on the Junior Certificates will be sensitive, in
varying degrees, to defaults on the Mortgage Loans in the related Mortgage
Pool (and the timing thereof). Investors should fully consider the risks
associated with an investment in such Certificates, including the possibility
that such investors may not fully recoup their initial investment as a result
of Realized Losses on the related Mortgage Loans. See "Pool 1 Annex--Pool 1
Yield and Weighted Average Life Considerations" and "Pool 2 Annex--Pool 2
Yield and Weighted Average Life Considerations" herein.
S-2
<PAGE>
Beneficial interests in the Certificates offered hereby, other than the
Residual Certificates, will be held by investors only through the book-entry
facilities of the Depository (as defined herein). Distributions on such
Classes of Certificates, and transfers of beneficial interests therein, will
be made as described herein. No person will be entitled to receive a physical
certificate representing such Certificates except under the limited
circumstances described herein. See "Description of the Certificates--Book-
Entry Certificates" herein.
An election will be made to treat each Trust Fund as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. Each Class of
Certificates of each Certificate Group other than the related Residual
Certificates will be designated as regular interests in the related REMIC and
will generally be treated as debt instruments for federal income tax purposes.
The Residual Certificates of each Certificate Group will be designated as the
residual interests in the related REMIC. Prospective investors are cautioned
that the Residual Certificateholders' REMIC taxable income and the tax
liability thereon may exceed cash distributions to such holders during certain
periods, in which event such holders must have sufficient alternative sources
of funds to pay such tax liability. See "Summary of Terms--Certain Federal
Income Tax Consequences" and "Certain Federal Income Tax Consequences" herein
and "Certain Federal Income Tax Consequences" in the Prospectus.
THE CERTIFICATES OFFERED HEREBY CONSTITUTE A PART OF A SERIES OF PASS-
THROUGH CERTIFICATES BEING OFFERED BY THE COMPANY FROM TIME TO TIME PURSUANT
TO ITS PROSPECTUS DATED APRIL 24, 1998 OF WHICH THIS PROSPECTUS SUPPLEMENT IS
A PART. THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PURCHASERS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus to which it relates. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined have the meanings
assigned in the Prospectus.
SECURITIES OFFERED.......... REMIC Multi-Class Pass-Through Certificates,
Series 1998-8 (the "Certificates"), consisting
of two groups of Certificates (the "Pool 1
Certificates" and the "Pool 2 Certificates," and
each, a "Certificate Group"), in the Classes and
aggregate original Certificate Principal
Balances, subject to adjustment as described
herein (each, a "Class Certificate Principal
Balance"), set forth on the cover hereof. The
aggregate original Certificate Principal Balance
of the Pool 1 Certificates will be approximately
$500,745,644, subject to a permitted variance
such that the aggregate original Certificate
Principal Balance will not be less than
$475,000,000 or greater than $525,000,000. The
aggregate original Certificate Principal Balance
of the Pool 2 Certificates will be approximately
$175,390,683, subject to a permitted variance
such that the aggregate original Certificate
Principal Balance will not be less than
$166,250,000 or greater than $183,750,000.
Each Certificate Group will evidence the entire
beneficial ownership interest in a distinct
Trust Fund comprised primarily of the related
Mortgage Pool (as defined herein). Interest and
principal will be distributable on the
Certificates of a Certificate Group solely out
of collections received on the Mortgage Loans in
the related Trust Fund. The Trust Funds are not
cross-collateralized. All expenses relating or
attributable to a specific Trust Fund will be
borne by the related Trust Fund. The
Certificates of a Certificate Group may
experience shortfalls or losses on a
Distribution Date even though distributions are
made on such date to Certificates of the other
Certificate Group. See "Description of the
Mortgage Pools and the Mortgaged Properties--
General" herein.
Pool 1. The Pool 1 Certificates will consist of
seven classes of senior certificates (the "Class
1-Al, Class 1-A2, Class 1-A3, Class 1-A4, Class
1-A5, Class 1-PO and Class 1-R Certificates,"
and collectively, the "Pool 1 Senior
Certificates") and six classes of subordinated
certificates (the "Class 1-M, Class 1-B1, Class
1-B2, Class 1-B3, Class 1-B4 and Class 1-B5
Certificates," and collectively, the "Pool 1
Junior Certificates"). The Pool 1 Junior
Certificates are subordinate in right of
distribution to the Pool 1 Senior Certificates
to the extent described herein. The initial
aggregate Certificate Principal Balance of the
Pool 1 Junior Certificates will equal
approximately 4.25% of the initial aggregate
Certificate Principal Balance of all of the Pool
1 Certificates.
The Class 1-M Certificates are subordinate to the
Pool 1 Senior Certificates to the extent
described herein. The Class 1-B1,
S-4
<PAGE>
Class 1-B2, Class 1-B3, Class 1-B4 and Class 1-
B5 Certificates (collectively, the "Class 1-B
Certificates") are subordinate to the Pool 1
Senior Certificates and the Class 1-M
Certificates, and each Class of Class 1-B
Certificates is subordinate to the Class or
Classes of Class 1-B Certificates having a lower
numerical designation (i.e., the Class 1-B5
Certificates are subordinate to the Class 1-B4
Certificates, the Class 1-B4 Certificates are
subordinate to the Class 1-B3 Certificates, and
so on) to the extent described herein. The
initial aggregate Certificate Principal Balance
of the Class 1-B3, Class 1-B4 and Class 1-B5
Certificates will equal approximately 0.90% of
the initial aggregate Certificate Principal
Balance of all of the Pool 1 Certificates and
approximately 21.18% of the initial aggregate
Certificate Principal Balance of all of the Pool
1 Junior Certificates.
Pool 2. The Pool 2 Certificates will consist of
sixteen classes of senior certificates (the
"Class 2-A1, Class 2-A2, and so forth in
consecutive numerical sub-designation through
Class 2-A14, Class 2-PO and Class 2-R
Certificates," and, collectively, the "Pool 2
Senior Certificates" and, with the Pool 1 Senior
Certificates, the "Senior Certificates") and six
classes of subordinated certificates (the "Class
2-M, Class 2-B1, Class 2-B2, Class 2-B3, Class
2-B4 and Class 2-B5 Certificates," and,
collectively, the "Pool 2 Junior Certificates"
and, with the Pool 1 Junior Certificates, the
"Junior Certificates"). The Pool 2 Junior
Certificates are subordinate in right of
distribution to the Pool 2 Senior Certificates
to the extent described herein. The initial
aggregate Certificate Principal Balance of the
Pool 2 Junior Certificates will equal
approximately 4.10% of the initial aggregate
Certificate Principal Balance of all of the Pool
2 Certificates.
The Class 2-M Certificates are subordinate to the
Pool 2 Senior Certificates to the extent
described herein. The Class 2-B1, Class 2-B2,
Class 2-B3, Class 2-B4 and Class 2-B5
Certificates (collectively, the "Class 2-B
Certificates" and, with the Class 1-B
Certificates, the "Class B Certificates") are
subordinate to the Pool 2 Senior Certificates
and the Class 2-M Certificates, and each Class
of Class 2-B Certificates is subordinate to the
Class or Classes of Class 2-B Certificates
having a lower numerical designation (i.e., the
Class 2-B5 Certificates are subordinate to the
Class 2-B4 Certificates, the Class 2-B4
Certificates are subordinate to the Class 2-B3
Certificates, and so on) to the extent described
herein. The initial aggregate Certificate
Principal Balance of the Class 2-B3, Class 2-B4
and Class 2-B5 Certificates will equal
approximately 0.95% of the initial aggregate
Certificate Principal Balance of all of the Pool
2 Certificates and approximately 23.18% of the
initial aggregate Certificate Principal Balance
of all of the Pool 2 Junior Certificates.
S-5
<PAGE>
The Class 1-PO, Class 1-B3, Class 1-B4, Class 1-
B5, Class 2-PO, Class 2-B3, Class 2-B4 and Class
2-B5 Certificates are not offered hereby.
The Class 1-PO and Class 2-PO Certificates (each,
a "Class PO Certificate") will not bear
interest. The Company will initially retain and
may subsequently transfer the Class 1-PO and
Class 2-PO Certificates.
The Classes of Certificates offered hereby, other
than the Residual Certificates (as defined
below), will each be registered as a single
certificate held by a nominee of The Depository
Trust Company (the "Depository"), and beneficial
interests therein will be held by investors
through the book-entry facilities of the
Depository, as described herein, in minimum
denominations in Certificate Principal Balance
of $25,000 (in the case of the Senior
Certificates offered hereby other than the Class
2-A2, Class 2-A3, Class 2-A4, Class 2-A5, Class
2-A6, Class 2-A7, Class 2-A8, Class 2-A9, Class
2-A10, Class 2-A11 Certificates and the Residual
Certificates), $1,000 (in the case of the
Class 2-A2, Class 2-A3, Class 2-A4, Class 2-A5,
Class 2-A6, Class 2-A7, Class 2-A8, Class 2-A9,
Class 2-A10 and Class 2-A11 Certificates) or
$100,000 (in the case of the Junior Certificates
offered hereby), and, in each case, integral
multiples of $1,000 in excess thereof. The Class
1-R and Class 2-R Certificates (the "Residual
Certificates") will each be issued in
certificated form as a single Certificate
representing the entire Class Certificate
Principal Balance thereof.
SELLER AND SERVICER......... GE Capital Mortgage Services, Inc., a New Jersey
corporation (the "Company"). See "GE Capital
Mortgage Services, Inc." and "The Pooling and
Servicing Agreement--Servicing Arrangement with
Respect to the Mortgage Loans" herein.
TRUSTEE..................... State Street Bank and Trust Company (the
"Trustee"), a Massachusetts banking corporation.
See "The Pooling and Servicing Agreement--
Trustee" herein.
CUT-OFF DATE................ April 1, 1998.
CLOSING DATE................ On or about April 29, 1998.
MORTGAGE POOLS.............. Each Certificate Group will represent the entire
beneficial ownership interest in a distinct
trust fund (each, a "Trust Fund"). The assets of
each Trust Fund will consist primarily of a
distinct pool ("Pool 1" and "Pool 2",
respectively, and each a "Mortgage Pool") of
fixed-rate, fully-amortizing, conventional
Mortgage Loans secured by first liens on one to
four-family residential properties (the
"Mortgaged Properties"). The Mortgage Loans will
have original terms to maturity of 20 to 30
years. The Pool 1 Mortgage Loans (as defined
herein) will have an aggregate Scheduled
Principal Balance (as defined herein) as of the
Cut-off Date, after deducting payments of
principal due on or before such date, of
approximately $500,745,644, subject to the
variance described
S-6
<PAGE>
herein. The Pool 2 Mortgage Loans (as defined
herein) will have an aggregate Scheduled
Principal Balance as of the Cut-off Date, after
deducting payments of principal due on or before
such date, of approximately $175,390,683,
subject to the variance described herein. See
"Pool 1 Annex--The Pool 1 Mortgage Loans and the
Pool 1 Certificates" and "Pool 2 Annex--The Pool
2 Mortgage Loans and the Pool 2 Certificates."
It is expected that Mortgaged Properties relating
to the Pool 1 Mortgage Loans that represent no
more than 52% of the principal balance of all
the Pool 1 Mortgage Loans (by Scheduled
Principal Balance as of the Cut-off Date) will
be located in California. It is expected that
all of the Mortgaged Properties relating to the
Pool 2 Mortgage Loans will be located in
California. An occurrence of a natural disaster
or adverse circumstance in the real estate
market or economy of California is likely to
have a disproportionate impact on payments in
respect of the Mortgage Loans in Pool 1 and will
have such an impact on Pool 2.
DESCRIPTION OF THE
CERTIFICATES................ The Certificates will be issued pursuant to a
Pooling and Servicing Agreement, to be dated as
of the Cut-off Date (the "Agreement"), between
the Company and the Trustee. To the extent funds
are available therefor in the Certificate
Account, distributions on the Certificates will
be made on the 25th day of each month or, if
such 25th day is not a business day, on the
succeeding business day (each, a "Distribution
Date"), commencing in May 1998, to holders of
record on the close of business on the last
business day of the month preceding the month of
such Distribution Date (the "Record Date").
DISTRIBUTIONS ON THE
CERTIFICATES................ General. Distributions in respect of the Pool 1
Certificates will be made solely from payments
and other collections received in respect of the
Pool 1 Mortgage Loans, and distributions in
respect of the Pool 2 Certificates will be made
solely from payments and other collections
received in respect of the Pool 2 Mortgage
Loans. The Trust Funds, including the related
Mortgage Pools, are not cross-collateralized.
The Pool 1 Available Funds (as defined herein)
will be allocated among the Classes of Pool 1
Certificates offered hereby in the manner set
forth in "Pool 1 Annex--Distributions on the
Pool 1 Certificates--Allocation of Pool 1
Available Funds" herein, and the Pool 2
Available Funds (as defined herein) will be
allocated among the Classes of Pool 2
Certificates offered hereby in the manner set
forth in "Pool 2 Annex--Distributions on the
Pool 2 Certificates--Allocation of Pool 2
Available Funds" herein.
On each Distribution Date, (i) the Senior
Certificates relating to a Mortgage Pool will be
entitled to receive all amounts distributable to
them for such Distribution Date before any
distributions are made to the related Junior
Certificates on such date and (ii) each Class of
Junior Certificates relating to a Mortgage Pool
will be entitled to receive all amounts
distributable to them for such
S-7
<PAGE>
Distribution Date before any distributions are
made on such date on any Class of related Junior
Certificates subordinate thereto. The Available
Funds (as defined herein) relating to a Mortgage
Pool for each Distribution Date will be
allocated first, to pay interest due the holders
of the related Senior Certificates and then to
reduce the Class Certificate Principal Balances
of the related Senior Certificates; second, to
pay the Class 1-PO Deferred Amount (as defined
herein) (in the case of the Pool 1 Certificates)
or the Class 2-PO Deferred Amount (as defined
herein) (in the case of the Pool 2 Certificates)
for such Distribution Date to holders of the
Class 1-PO Certificates and Class 2-PO
Certificates, respectively, but only from
amounts that would otherwise be distributable on
such Distribution Date on the Junior
Certificates in respect of the related Mortgage
Pool; and third, to pay interest and principal
due the holders of the Junior Certificates in
respect of the related Mortgage Pool in order of
priority among the Classes thereof. No
distribution of interest or principal will be
made on any Class of Junior Certificates of a
Certificate Group on any Distribution Date until
all distributions of interest and principal have
been made on such date on each Class of
Certificates of such Certificate Group having a
higher priority and the Class 1-PO Deferred
Amount (in the case of the Pool 1 Certificates)
or the Class 2-PO Deferred Amount (in the case
of the Pool 2 Certificates) for such
Distribution Date has, subject to the limitation
described above, been paid.
Interest. Interest will accrue on each Class of
the Certificates offered hereby at the
respective fixed Certificate Interest Rates set
forth on the cover hereof during each one-month
period ending on the last day of the month
preceding the month in which each Distribution
Date occurs (each, an "Interest Accrual
Period").
On each Distribution Date, interest will be
distributable on each Class of Pool 1
Certificates offered hereby solely from the Pool
1 Available Funds (as defined herein) for such
Distribution Date and on each Class of Pool 2
Certificates offered hereby solely from the Pool
2 Available Funds (as defined herein) for such
Distribution Date, in each case in an aggregate
amount equal to the Accrued Certificate Interest
for such Class on such Distribution Date, plus
any Accrued Certificate Interest thereon
remaining undistributed from previous
Distribution Dates.
The "Accrued Certificate Interest" for any
Certificate (other than the Class 1-PO or Class
2-PO Certificates (together, the "Class PO
Certificates")) for any Distribution Date will
equal the interest accrued during the related
Interest Accrual Period at the applicable
Certificate Interest Rate on the Certificate
Principal Balance of such Certificate
immediately prior to such Distribution Date,
less such Certificate's share of any Net
Interest Shortfall, the interest portion of any
Excess Losses allocable to Certificateholders of
the related Certificate Group through the
related Cross-Over Date and, after the related
Cross-Over Date,
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<PAGE>
the interest portion of any Realized Losses (as
each such term is defined herein) allocable to
Certificateholders of the related Certificate
Group, in each case in respect of the related
Mortgage Pool.
The shortfall or losses described in the
preceding paragraph will be allocated among the
related Certificates (other than the Class PO
Certificates) in proportion to the amount of
Accrued Certificate Interest that would have
been allocated thereto in the absence of such
shortfall or losses, and will be allocated
without regard to the relative priority of the
related Certificates. Interest will be
calculated on the Certificates on the basis of a
360-day year consisting of twelve 30-day months.
Excess Losses with respect to a Mortgage Pool
consist of all Bankruptcy Losses, Fraud Losses
and Special Hazard Losses (each a type of
Realized Loss) occurring after the Bankruptcy
Coverage Termination Date, the Fraud Coverage
Termination Date and the Special Hazard
Termination Date, respectively, in each case in
respect of the related Mortgage Pool, as more
fully described herein.
Pool 1 Principal. Principal will be distributable
on the Pool 1 Senior Certificates on each
Distribution Date in an aggregate amount equal
to the sum of the Pool 1 Senior Optimal
Principal Amount and the Class 1-PO Principal
Distribution Amount (each as defined herein) for
such Distribution Date, to the extent of the
Pool 1 Available Funds for such Distribution
Date remaining after distributions of interest
are made on the Pool 1 Senior Certificates
(other than the Class 1-PO Certificates) on such
date. Subject to such limitation, the Pool 1
Senior Optimal Principal Amount and the Class 1-
PO Principal Distribution Amount for such
Distribution Date will be allocated among the
Pool 1 Senior Certificates in the manner
described herein.
Principal will be distributable on each Class of
Pool 1 Junior Certificates on each Distribution
Date in an aggregate amount equal to such
Class's Allocable Share (as defined herein) for
such Distribution Date to the extent of the Pool
1 Available Funds remaining after (i)
distributions of interest and principal have
been made on each Pool 1 Senior Certificate to
the extent entitled thereto, (ii) the Class 1-PO
Deferred Amount for such Distribution Date has,
subject to the limitations described herein,
been distributed in respect of the Class 1-PO
Certificates, (iii) distributions of interest
and principal have been made on each Class of
Pool 1 Junior Certificates, if any, ranking
prior to such Class of Pool 1 Junior
Certificates and (iv) distributions of interest
have been made on such Class of Pool 1 Junior
Certificates. Distributions of principal of a
Class of Pool 1 Certificates will be made on a
pro rata basis among all outstanding
Certificates of such Class. See "Pool 1 Annex--
Distributions on the Pool 1 Certificates"
herein.
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<PAGE>
Class 1-PO Deferred Amount. On each Distribution
Date, the applicable PO Percentage (as defined
herein) of the principal portion of any Realized
Loss (other than a Debt Service Reduction) in
respect of a Pool 1 Discount Mortgage Loan will
be allocated to the Class 1-PO Certificates. See
"Pool 1 Annex--Allocation of Realized Losses on
the Pool 1 Certificates." On each Distribution
Date through the Pool 1 Cross-Over Date (as
defined herein), the Class 1-PO Certificates
will be entitled to receive, to the extent of
Pool 1 Available Funds remaining after
distributions of interest and principal on the
Pool 1 Senior Certificates have been made on
such Distribution Date, any Class 1-PO Deferred
Amount for such Distribution Date, provided,
however, that distributions in respect of the
Class 1-PO Deferred Amount on any Distribution
Date will not exceed the Junior Optimal
Principal Amount for Pool 1 for such date.
Distributions in respect of the Class 1-PO
Deferred Amount will not reduce the Class
Certificate Principal Balance of the Class 1-PO
Certificates. The "Class 1-PO Deferred Amount"
means, as to each Distribution Date through the
Pool 1 Cross-Over Date, the aggregate of all
amounts allocable on such date to the Class 1-PO
Certificates in respect of the principal portion
of Realized Losses (other than Excess Losses) in
respect of the Pool 1 Discount Mortgage Loans
and all amounts previously allocated in respect
of such losses to the Class 1-PO Certificates
and not distributed thereto on prior
Distribution Dates.
Pool 2 Principal. Principal will be distributable
on the Pool 2 Senior Certificates on each
Distribution Date in an aggregate amount equal
to the sum of the Pool 2 Senior Optimal
Principal Amount and the Class 2-PO Principal
Distribution Amount (each as defined herein) for
such Distribution Date, to the extent of the
Pool 2 Available Funds for such Distribution
Date remaining after distributions of interest
are made on the Pool 2 Senior Certificates
(other than the Class 2-PO Certificates) on such
date. Subject to such limitation, the Pool 2
Senior Optimal Principal Amount and the Class 2-
PO Principal Distribution Amount for such
Distribution Date will be allocated among the
Pool 2 Senior Certificates in the manner
described herein.
Principal will be distributable on each Class of
Pool 2 Junior Certificates on each Distribution
Date in an aggregate amount equal to such
Class's Allocable Share for such Distribution
Date to the extent of the Pool 2 Available Funds
remaining after (i) distributions of interest
and principal have been made on each Pool 2
Senior Certificate to the extent entitled
thereto, (ii) the Class 2-PO Deferred Amount (as
defined herein) for such Distribution Date has,
subject to the limitations described herein,
been distributed in respect of the Class 2-PO
Certificates, (iii) distributions of interest
and principal have been made on each Class of
Pool 2 Junior Certificates, if any, ranking
prior to such Class of Pool 2 Junior
Certificates and (iv) distributions of interest
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<PAGE>
have been made on such Class of Pool 2 Junior
Certificates. Distributions of principal on a
Class of Pool 2 Certificates will be made on a
pro rata basis among all outstanding
Certificates of such Class. See "Pool 2 Annex--
Distributions on the Pool 2 Certificates"
herein.
Class 2-PO Deferred Amount. On each Distribution
Date, the applicable PO Percentage of the
principal portion of any Realized Loss (other
than a Debt Service Reduction) in respect of a
Pool 2 Discount Mortgage Loan (as defined
herein) will be allocated to the Class 2-PO
Certificates. See "Pool 2 Annex--Allocation of
Realized Losses on the Pool 2 Certificates." On
each Distribution Date through the Pool 2 Cross-
Over Date (as defined herein), the Class 2-PO
Certificates will be entitled to receive, to the
extent of Pool 2 Available Funds remaining after
distributions of interest and principal on the
Pool 2 Senior Certificates have been made on
such Distribution Date, any Class 2-PO Deferred
Amount for such Distribution Date, provided,
however, that distributions in respect of the
Class 2-PO Deferred Amount on any Distribution
Date will not exceed the Junior Optimal
Principal Amount for Pool 2 for such date.
Distributions in respect of the Class 2-PO
Deferred Amount will not reduce the Class
Certificate Principal Balance of the Class 2-PO
Certificates. The "Class 2-PO Deferred Amount"
means, as to each Distribution Date through the
Pool 2 Cross-Over Date, the aggregate of all
amounts allocable on such date to the Class 2-PO
Certificates in respect of the principal portion
of Realized Losses (other than Excess Losses) in
respect of the Pool 2 Discount Mortgage Loans
and all amounts previously allocated in respect
of such losses to the Class 2-PO Certificates
and not distributed thereto on prior
Distribution Dates.
The principal portion of any Excess Losses in
respect of a Mortgage Pool will be allocated pro
rata among all of the related outstanding
Certificates, as described herein.
ADDITIONAL RIGHTS OF THE
RESIDUAL
CERTIFICATEHOLDERS......... In addition to distributions of principal and
interest in respect of Pool 1 or Pool 2, as the
case may be, the holders of the Class 1-R and
Class 2-R Certificates, as the case may be, will
be entitled to receive (i) the amount, if any,
of Available Funds remaining in the related
REMIC on any Distribution Date after
distributions of interest and principal and in
respect of any Class 1-PO Deferred Amount and
any Class 2-PO Deferred Amount, respectively,
are made on the Certificates of the related
Certificate Group on such date and (ii) the
proceeds, if any, of the assets of the related
Trust Fund remaining in the applicable REMIC
after the Class Certificate Principal Balances
of all Classes of Certificates of the related
Certificate Group have been reduced to zero. It
is not anticipated that any material assets will
be remaining for such distributions at any such
time. See "Description of the Certificates--
Additional Rights of the Residual
Certificateholders" herein.
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<PAGE>
ADVANCES.................... The Company will be obligated to advance
delinquent installments of principal and
interest (net of the related Servicing Fees) on
the Mortgage Loans included in each Mortgage
Pool under certain circumstances. See "The
Pooling and Servicing Agreement--Advances"
herein.
SUBORDINATION............... The rights of the holders of each Class of Junior
Certificates relating to a Mortgage Pool to
receive distributions with respect to the
related Mortgage Loans will be subordinate to
such rights of the holders of the related Senior
Certificates and of each prior ranking Class of
related Junior Certificates. The subordination
of the Junior Certificates in respect of each
Mortgage Pool relative to the related Senior
Certificates is intended to enhance the
likelihood of regular receipt by the holders of
such Senior Certificates of the full amount of
the monthly distributions allocable to them, and
to afford such holders protection against losses
resulting from the liquidation of related
Mortgage Loans and certain losses resulting from
the bankruptcy of a related borrower (the
"Mortgagor"). The subordination of each Class of
Junior Certificates in respect of each Mortgage
Pool (other than the Class 1-M and Class 2-M
Certificates) relative to each Class of related
Junior Certificates having a higher ranking is
intended to confer a similar benefit on such
higher ranking Classes of Junior Certificates.
However, the degree of protection afforded any
Class of Junior Certificates by such
subordination, relative to delinquencies and
losses that might occur on the related Mortgage
Pool, is less than the protection afforded to
the related Senior Certificates by virtue of the
subordination of the related Junior Certificates
as a whole.
As of the date of the initial issuance of the
Certificates, the aggregate Certificate
Principal Balance of each of the Pool 1 Junior
Certificates and of the Pool 2 Junior
Certificates will equal approximately 4.25% and
4.10% of each of the aggregate Certificate
Principal Balance of all the Pool 1 Certificates
and of all the Pool 2 Certificates,
respectively. As of such date, the aggregate
Certificate Principal Balance of the Class 1-B3,
Class 1-B4 and Class 1-B5 Certificates, all of
which are subordinate in right of distribution
to the Pool 1 Certificates offered hereby, will
equal approximately 0.90% of the initial
aggregate Certificate Principal Balance of all
of the Pool 1 Certificates and approximately
21.18% of the initial aggregate Certificate
Principal Balance of all of the Pool 1 Junior
Certificates. In addition, as of such date, the
aggregate Certificate Principal Balance of the
Class 2-B3, Class 2-B4 and Class 2-B5
Certificates, all of which are subordinate in
right of distribution to the Pool 2 Certificates
offered hereby, will equal approximately 0.95%
of the initial aggregate Certificate Principal
Balance of all of the Pool 2 Certificates and
approximately 23.18% of the initial aggregate
Certificate Principal Balance of all of the Pool
2 Junior Certificates.
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<PAGE>
The protection afforded to the holders of Senior
Certificates in respect of each Mortgage Pool by
means of the subordination feature described
above will be accomplished (i) by the
preferential right of such holders to receive,
prior to any distribution being made on a
Distribution Date in respect of the related
Junior Certificates, the amounts due them on
each Distribution Date out of the related
Available Funds and, if necessary, by the right
of such holders to receive future distributions
(other than Unanticipated Recoveries (as defined
herein)) with respect to the Mortgage Loans in
the related Mortgage Pool that would otherwise
have been payable to the holders of the related
Junior Certificates and (ii) by the allocation
of the applicable Non-PO Percentage (as defined
herein) of the principal portion of any Realized
Loss (except as provided herein) with respect to
a Mortgage Loan in the related Mortgage Pool to
the related Junior Certificates, subject to the
pro rata allocation of any Excess Loss as
described herein, before such loss is allocated
to the related Senior Certificates (other than
the related Class PO Certificates).
In addition, in order to extend the period during
which the Junior Certificates in respect of each
Mortgage Pool remain available as credit
enhancement for the related Senior Certificates,
the entire amount of the applicable Non-PO
Percentage of any prepayments and certain other
unscheduled recoveries of principal with respect
to each Mortgage Pool will be allocated to the
related Senior Certificates as a whole (other
than the Class 1-PO Certificates and, to the
extent described herein, the Class 1-A5
Certificates, in the case of Pool 1, or the
Class 2-PO Certificates and, to the extent
described herein, the Class 2-A14 Certificates,
in the case of Pool 2) during the first five
years after the Cut-off Date (with such
allocation being subject to reduction thereafter
as described herein), except as otherwise
described herein. This allocation has the effect
of accelerating the amortization of the related
Senior Certificates as a whole while, in the
absence of losses in respect of the Mortgage
Loans in the related Mortgage Pool, increasing
the percentage interest in the principal balance
of the Mortgage Loans in the related Mortgage
Pool evidenced by the related Junior
Certificates. See "Description of the
Certificates--Subordination," "Pool 1 Annex--
Distributions on the Pool 1 Certificates--
Principal" and "Pool 2 Annex--Distributions on
the Pool 2 Certificates--Principal" herein.
On each Distribution Date, the holders of any
particular Class of Junior Certificates in
respect of each Mortgage Pool, other than the
Class 1-B5 and Class 2-B5 Certificates, will
have a preferential right to receive the amounts
due them on such Distribution Date out of
related Available Funds, prior to any
distribution being made on such date on any
Class of related Certificates ranking junior to
such Class. In addition, except as described
herein, the applicable Non-PO Percentage of the
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<PAGE>
principal portion of any Realized Loss with
respect to a Mortgage Loan in the related
Mortgage Pool will be allocated in reduction of
the Class Certificate Principal Balances of the
related Junior Certificates in inverse order of
priority of such Certificates, and the
applicable PO Percentage (as defined herein) of
any such loss will be similarly allocated,
through the operation of the Class 1-PO Deferred
Payment Writedown Amount or the Class 2-PO
Deferred Payment Writedown Amount, as the case
may be (each as defined herein), to the extent
distributions are made in respect of the Class
1-PO Deferred Amount or the Class 2-PO Deferred
Amount, respectively. In order to maintain the
relative levels of subordination among the
Junior Certificates in respect of each Mortgage
Pool, prepayments and certain other unscheduled
recoveries of principal in respect of the
related Mortgage Loans (which will not be
distributable to the related Junior Certificates
for at least the first five years, except as
otherwise described herein on or following the
Pool 1 Senior Final Distribution Date (as
defined herein) (in the case of the Pool 1
Certificates) or the Pool 2 Senior Final
Distribution Date (as defined herein) (in the
case of the Pool 2 Certificates) will not be
distributable to the holders of any related
Class of Class B Certificates on any
Distribution Date for which the related Class
Prepayment Distribution Trigger (as defined
herein) is not satisfied, except as described
herein. See "Pool 1 Annex--Distributions on the
Pool 1 Certificates" and "Pool 2 Annex--
Distributions on the Pool 2 Certificates"
herein.
PAYMENT ENTITLEMENT AMONG
THE SENIOR CERTIFICATES.... Pool 1. The entire amount of the applicable Non-
PO Percentage of any payments of principal
(including scheduled payments, prepayments and
other unscheduled recoveries of principal) with
respect to the Pool 1 Mortgage Loans allocable
to the Class 1-A2, Class 1-A3, Class 1-A4, Class
1-A5 and Class 1-R Certificates (together, the
"Pool 1 Category B Senior Certificates") will be
allocated to the Class 1-A2, Class 1-A3, Class
1-A4 and Class 1-R Certificates (together, the
"Pool 1 Category B Group I Senior Certificates")
during the first five years after the Cut-off
Date (with such allocation being subject to
reduction thereafter as described herein),
except as otherwise described herein on or
following the Pool 1 Category B Group I Final
Distribution Date (as defined herein). This
allocation prior to the Pool 1 Category B Group
I Final Distribution Date has the effect of
accelerating the amortization of the Pool 1
Category B Group I Senior Certificates while
increasing the percentage interest in the
principal balance of the Mortgage Loans
evidenced by the Class 1-A5 Certificates (the
"Pool 1 Category B Group II Senior
Certificates"). Notwithstanding the foregoing,
all distributions of principal on the
outstanding Pool 1 Category B Senior
Certificates will be made pro rata among such
Certificates on each Distribution Date after the
Pool 1 Cross-Over Date. See "Pool 1 Annex--
Distributions on the Pool 1 Certificates--
Principal" herein.
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<PAGE>
Pool 2. The entire amount of the applicable Non-
PO Percentage of any payments of principal
(including scheduled payments, prepayments and
other unscheduled recoveries of principal) with
respect to the Pool 2 Mortgage Loans allocable
to the Pool 2 Senior Certificates (other than
the Class 2-PO Certificates) will be allocated
to the Class 2-A1, Class 2-A2, Class 2-A3, Class
2-A4, Class 2-A5, Class 2-A6, Class 2-A7, Class
2-A8, Class 2-A9, Class 2-A10, Class 2-A11,
Class 2-A12, Class 2-A13 and Class 2-R
Certificates (together, the "Pool 2 Group I
Senior Certificates") during the first five
years after the Cut-off Date (with such
allocation being subject to reduction thereafter
as described herein), except as otherwise
described herein on or following the Pool 2
Group I Final Distribution Date (as defined
herein). This allocation prior to the Pool 2
Group I Final Distribution Date has the effect
of accelerating the amortization of the Pool 2
Group I Senior Certificates while increasing the
percentage interest in the principal balance of
the Pool 2 Mortgage Loans evidenced by the Class
2-A14 Certificates (the "Pool 2 Group II Senior
Certificates"). Notwithstanding the foregoing,
all distributions of principal on the
outstanding Pool 2 Senior Certificates (other
than the Class 2-PO Certificates) will be made
pro rata among such Certificates on each
Distribution Date after the Pool 2 Cross-Over
Date. See "Pool 2 Annex--Distributions on the
Pool 2 Certificates--Principal" herein.
PREPAYMENT AND YIELD
CONSIDERATIONS.............. The rate of principal distributions on the
Certificates, the aggregate amount of each
interest distribution on the Certificates and
the yields to maturity of the Certificates are
related to the rate of principal payments on or
in respect of the related Mortgage Loans.
Mortgage principal payments may be in the form
of scheduled principal payments, voluntary
prepayments by the mortgagors (such as, for
example, prepayments in full due to
refinancings, including refinancings made by the
Company in the ordinary course of conducting its
mortgage banking business, some of which
refinancings may be solicited by the Company, or
prepayments in connection with biweekly payment
programs, participation in which may be
solicited by the Company) and prepayments
resulting from default, foreclosure, casualty,
condemnation and similar events and certain
repurchases by the Company of the Mortgage Loans
under the circumstances described herein. See
"Yield, Maturity and Weighted Average Life
Considerations" in the Prospectus. Mortgagors
are permitted to prepay the Mortgage Loans, in
whole or in part, at any time without penalty.
Mortgage prepayment rates are likely to
fluctuate significantly. In general, when
prevailing mortgage interest rates decline
significantly below the interest rates on the
Mortgage Loans, the prepayment rate on such
Mortgage Loans is likely to increase, and when
prevailing mortgage interest rates rise
significantly above the interest rates on the
Mortgage Loans, the
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<PAGE>
prepayment rate on such Mortgage Loans is likely
to decrease, although other economic, geographic
and social factors also may influence the
prepayment rate. See "Pool 1 Annex--Yield and
Weighted Average Life Considerations--
Prepayments" and "Pool 2 Annex--Yield and
Weighted Average Life Considerations--
Prepayments."
The entire amount of the applicable Non-PO
Percentage of any prepayment and other
unscheduled recovery of principal with respect
to a Mortgage Loan will be allocated solely to
the outstanding Senior Certificates in respect
of the related Mortgage Pool (other than the
related Class PO Certificates) during the first
five years after the Cut-off Date (with such
allocation being subject to reduction thereafter
as described herein), except as otherwise
described herein on or following the Pool 1
Senior Final Distribution Date or the Pool 2
Senior Final Distribution Date, as applicable,
or the related Cross-Over Date. Among such
Senior Certificates, such amounts will be
allocated solely to certain of the outstanding
related Senior Certificates as described herein.
The entire amount of the applicable PO
Percentage of any prepayment or unscheduled
recovery of principal with respect to a Mortgage
Loan in Pool 1 or Pool 2 will be allocated
solely to the related Class PO Certificates, so
long as such Class is outstanding. See "Pool 1
Annex--Distributions on the Pool 1
Certificates--Principal" and "Pool 2 Annex--
Distributions on the Pool 2 Certificates--
Principal" herein.
Voluntary prepayments in full of principal on the
Mortgage Loans received from the sixteenth day
(or, in the case of the month of the Cut-off
Date, from the Cut-off Date) through the last
day of each month, and any voluntary partial
prepayments of principal on the Mortgage Loans
in each month, will reduce the amount of
interest available for distribution to related
Certificateholders in the following month from
the amount which would have been available in
the absence of such prepayments. Any shortfalls
in interest as a result of such early receipt of
principal, to the extent not offset by a related
Compensating Interest Payment (as defined
herein), generally will produce a lower yield on
the related Certificates than would otherwise be
the case, although such early receipt of
principal by holders of Classes of Certificates
purchased at a discount may offset the yield
reduction for such Classes. The interest
distributable on the Certificates offered hereby
will also be reduced by such Certificates' share
of the interest portion of any Excess Losses
allocable to Certificateholders in respect of
the related Mortgage Pool through the related
Cross-Over Date and the interest portion of all
Realized Losses allocable to Certificateholders
in respect of the related Mortgage Pool after
the related Cross-Over Date.
The yields to investors will be sensitive, in
varying degrees, to the rate and timing of
related Mortgage Loan prepayments (including
unscheduled recoveries of principal). The extent
to which the
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<PAGE>
yield to maturity of a Certificate is sensitive
to prepayments and other unscheduled receipts of
principal will depend upon the degree to which
it is purchased at a discount or premium. In the
case of Certificates purchased at a premium,
faster than anticipated rates of principal
payments on the related Mortgage Loans could
result in actual yields to such investors that
are lower than the anticipated yields and could
result in a reduction in the weighted average
lives of such Certificates. In the case of
Certificates purchased at a discount, slower
than anticipated rates of principal payments on
the related Mortgage Loans could result in
actual yields to investors that are lower than
the anticipated yields and could result in an
extension of the weighted average lives of such
Certificates.
Rapid rates of prepayments on the Mortgage Loans
are likely to coincide with periods of low
prevailing interest rates. During such periods,
the yields at which an investor in the related
Certificates may be able to reinvest amounts
received as payments on the investors'
Certificates may be lower than the yields on
such Certificates. Conversely, slow rates of
prepayments on the Mortgage Loans are likely to
coincide with periods of high prevailing
interest rates. During such periods, the amount
of payments available to an investor in the
related Certificates for reinvestment at such
high rates may be relatively low.
The Certificates offered hereby were structured
on the basis of, among other things, a
prepayment assumption of 275% of the Prepayment
Assumption (as defined herein) and corresponding
weighted average lives as described herein. The
weighted average lives of the Certificates
offered hereby at their respective Prepayment
Assumptions, based on the assumptions described
under "Pool 1 Annex--Pool 1 Yield and Weighted
Average Life Considerations--Weighted Average
Lives of the Certificates--Tables of Pool 1
Class Certificate Principal Balances" and
"Pool 2 Annex--Pool 2 Yield and Weighted Average
Life Considerations--Tables of Pool 2 Class
Certificate Principal Balances" herein, are set
forth in the tables that appear under such
headings. The Mortgage Loans are not likely to
prepay at the constant rate of 275% of the
Prepayment Assumption, or any other constant
rate, and the actual weighted average lives of
the Certificates are likely to differ from those
shown in such tables.
The yields on the Junior Certificates will be
sensitive, in varying degrees, to the
liquidation of and any subsequent loss
experience on the related Mortgage Loans and to
the timing of any such losses.
Among the Pool 1 Junior Certificates offered
hereby, yield sensitivity will generally be
greatest among the Class 1-B2 Certificates
relative to the Class 1-M and Class 1-B1
Certificates, greater among the Class 1-B2
Certificates than among the Class 1-B1
Certificates, greater among the Class 1-B1
Certificates
S-17
<PAGE>
than the Class 1-M Certificates and greater
among the Class 1-M Certificates than the Pool 1
Senior Certificates. See "Pool 1 Annex--Pool 1
Yield and Weighted Average Life Consider
ations--The Class 1-M, Class 1-B1 and Class 1-B2
Certificates" herein. In addition, (i) the
applicable Non-PO Percentage of the principal
portion of any Realized Loss (other than a Debt
Service Reduction and any Realized Loss that
constitutes an Excess Loss, as described below)
in respect of a Pool 1 Mortgage Loan will be
allocated, to the extent described herein, among
the Pool 1 Certificates (other than the Class 1-
PO Certificates) in inverse order of priority,
beginning with the Class 1-B5 Certificates and
ending with the Pool 1 Senior Certificates
(other than the Class 1-PO Certificates) and
(ii) the applicable PO Percentage of any such
loss in respect of a Pool 1 Mortgage Loan
through the Pool 1 Cross-Over Date will be
allocated, to the extent described herein, among
the Pool 1 Junior Certificates in inverse order
of priority, through the operation of the Class
1-PO Deferred Payment Writedown Amount.
Among the Pool 2 Junior Certificates offered
hereby, yield sensitivity will generally be
greatest among the Class 2-B2 Certificates
relative to the Class 2-M and Class 2-B1
Certificates, greater among the Class 2-B2
Certificates than among the Class 2-B1
Certificates, greater among the Class 2-B1
Certificates than the Class 2-M Certificates and
greater among the Class 2-M Certificates than
the Pool 2 Senior Certificates. See "Pool 2
Annex--Pool 2 Yield and Weighted Average Life
Consider ations--The Class 2-M, Class 2-B1 and
Class 2-B2 Certificates" herein. In addition,
(i) the applicable Non-PO Percentage of the
principal portion of any Realized Loss (other
than a Debt Service Reduction and any Realized
Loss that constitutes an Excess Loss, as
described below) in respect of a Pool 2 Mortgage
Loan will be allocated, to the extent described
herein, among the Pool 2 Certificates (other
than the Class 2-PO Certificates) in inverse
order of priority, beginning with the Class 2-B5
Certificates and ending with the Pool 2 Senior
Certificates (other than the Class 2-PO
Certificates) and (ii) the applicable PO
Percentage of any such loss in respect of a Pool
2 Mortgage Loan through the Pool 2 Cross-Over
Date will be allocated, to the extent described
herein, among the Pool 2 Junior Certificates in
inverse order of priority, through the operation
of the Class 2-PO Deferred Payment Writedown
Amount.
Certain Realized Loss scenarios could result in
the failure of investors in the Junior
Certificates offered hereby to fully recover
their initial investment.
The prepayment, yield, loss and other assumptions
to be used for pricing purposes for the
Certificates may vary as determined at the time
of sale. Each prospective investor is urged to
make an investment decision with respect to the
Certificates proposed to be
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<PAGE>
purchased by such investor based upon a
comparison of the desired yield to the
anticipated yield on such Certificates resulting
from the price to be paid by such investor for
such Certificates and such investor's own
determination as to the anticipated rate of
prepayments, defaults and losses on the related
Mortgage Pool.
OPTIONAL TERMINATION........ The Company may, at its option, repurchase from
each Trust Fund all of the Mortgage Loans
underlying the related Certificate Group, and
thereby effect the early retirement of such
Certificates, on any Distribution Date after the
aggregate Scheduled Principal Balance of the
Mortgage Loans in such Trust Fund is less than
10% of the aggregate Scheduled Principal Balance
thereof as of the Cut-off Date. If the proceeds
realized upon such early retirement are less
than the aggregate Class Certificate Principal
Balance of all outstanding Certificates of the
related Certificate Group, plus accrued and
unpaid interest thereon, the resulting shortfall
will be allocated among the Certificates of such
Certificate Group as described herein. See "The
Pooling and Servicing Agreement--Termination"
herein.
FINAL DISTRIBUTION DATES.... The rate of distribution of principal of the
Certificates will depend on the rate of payment
of principal of the related Mortgage Loans
which, in turn, will depend on the
characteristics of such Mortgage Loans, the
level of prevailing interest rates and other
economic, geographic and social factors. No
assurance can be given as to the actual payment
experience of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............... The Certificates other than the Class 1-R and
Class 2-R Certificates (the "Regular
Certificates") will be treated as regular
interests in the related REMIC and generally
will be treated as debt instruments issued by
the related REMIC for federal income tax
purposes. Certain Classes of the Regular
Certificates may be issued with original issue
discount. The prepayment assumption that will be
used in determining the rate of accrual of any
original issue discount on the Regular
Certificates for federal income tax purposes
(and whether such original issue discount is de
minimis), and that may be used by a holder of a
Regular Certificate to amortize premium, will be
275% of the Prepayment Assumption. No
representation is made that the Mortgage Loans
of either Mortgage Pool will prepay at such rate
or at any other rate. The holders of the
Residual Certificates of each Certificate Group
will be subject to special federal income tax
rules that may significantly reduce the after-
tax yield on such Certificates. Further,
significant restrictions apply to the transfer
of the Residual Certificates. See "Description
of the Certificates--Restrictions on Transfer of
the Residual Certificates" herein. The amount of
income reported by a holder of a Junior
Certificate may exceed cash distributions as a
result of the preferential right of other
Classes of related Regular Certificates to
receive cash distributions in the event of
losses or delinquencies on the related Mortgage
Loans. See "Certain Federal Income Tax
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Consequences" herein and "Certain Federal Income
Tax Consequences--REMIC Certificates" in the
Prospectus.
LEGAL INVESTMENT............ The Senior Certificates offered hereby and the
Class 1-M and Class 2-M Certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). However,
institutions whose investment activities are
subject to legal investment laws and regulations
or review by certain regulatory authorities may
be subject to restrictions on investment in such
Certificates. The Class 1-B1, Class 1-B2, Class
2-B1 and Class 2-B2 Certificates will not
constitute "mortgage related securities" under
SMMEA. The appropriate characterization of the
Class 1-B1, Class 1-B2, Class 2-B1 and Class 2-
B2 Certificates under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase the
Class 1-B1, Class 1-B2, Class 2-B1 and Class 2-
B2 Certificates, may be subject to significant
interpretive uncertainties. All investors whose
investment authority is subject to legal
restrictions should consult their own legal
advisors to determine whether, and to what
extent, the Class 1-B1, Class 1-B2, Class 2-B1
and Class 2-B2 Certificates will constitute
legal investments for them. See "Legal
Investment Matters" herein and in the
Prospectus.
ERISA CONSIDERATIONS........ Fiduciaries of employee benefit plans subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or plans subject to
Section 4975 of the Internal Revenue Code of
1986 (the "Code") should carefully review with
their legal advisors whether the purchase or
holding of the Certificates offered hereby could
give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code.
The Junior Certificates offered hereby and the
Residual Certificates may not be acquired by an
ERISA Plan (as defined herein) and transfer
thereof is subject to the restrictions described
herein. See "ERISA Considerations" herein.
CERTIFICATE RATINGS......... It is a condition of issuance of the Certificates
that the Senior Certificates offered hereby be
rated "AAA" by each of Fitch IBCA, Inc.
("Fitch") and Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"), that the Class 1-M,
Class 1-B1 and Class 1-B2 Certificates be rated
"AA," "A" and "BBB," respectively, by Fitch, and
that the Class 2-M, Class 2-B1 and Class 2-B2
Certificates be rated "AA," "A" and "BBB,"
respectively, by Fitch. The ratings of the
Certificates should be evaluated independently
from similar ratings on other types of
securities. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating agency. The
ratings do not address the possibility that
Certificateholders may suffer a lower than
anticipated yield. See "Certificate Ratings"
herein.
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LIQUIDITY CONSIDERATIONS.... There is currently no secondary market for the
Certificates offered hereby, and there can be no
assurance that such a market will develop. The
Underwriter has indicated its intention to
establish a market in the Certificates offered
hereby, but is not obligated to do so. There can
be no assurance that a secondary market for the
Certificates will develop, or if it does
develop, will continue for the life of the
related Certificates or provide investors with
liquidity of investment. In addition, there can
be no assurance that an investor in a
Certificate will be able to sell such
Certificate at a price that is equal to or
greater than the price at which such investor
purchased such Certificate.
Information available to investors that desire to
sell their Certificates in the secondary market
may be limited. In particular, price quotations
regarding specific Classes of the Certificates
are not currently available in any newspaper or
other source that is widely available to
investors.
The Company believes that a number of dealers
that engage in the mortgage-backed securities
markets currently offer price quotations for the
Company's mortgage pass-through certificates to
investors that desire to buy or sell such
certificates. However, there is no assurance
that such dealers will continue to provide such
a service or that any such dealer will offer a
price quotation for any particular series or
class of the Company's certificates. In
addition, there is no assurance that any such
dealer will offer a price quotation to any
particular investor, and non-institutional
investors in particular may not have access to
such quotations. The lack of availability of
price information concerning the Certificates
offered hereby may affect their liquidity.
The Company currently maintains an electronic
bulletin board (the "Bulletin Board") which
provides certain loan-level information about
loans included in various series of mortgage
pass-through securities which have been publicly
offered by the Company. The Company intends to
make information about the Mortgage Loans
available on the Bulletin Board as of the first
Distribution Date and thereafter while the
Bulletin Board is maintained. The loan-level
information appearing on the Bulletin Board is
accessible by computer modem. The Company makes
no representation or warranty that such
information will be suitable for any particular
purpose and the Company assumes no
responsibility for the accuracy or completeness
of any information that is generated therefrom.
The Company has no obligation to maintain the
Bulletin Board and may cease to do so at any
time. For further information concerning the
Bulletin Board, please call 800-544-3466,
extension 5515.
Use of Proceeds............. The net proceeds from the sale of the
Certificates offered hereby will be used by the
Company for general corporate purposes,
including the acquisition of residential
mortgage loans and servicing rights.
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DESCRIPTION OF THE MORTGAGE POOLS
AND THE MORTGAGED PROPERTIES
GENERAL
The Certificates will consist of two groups of Certificates (respectively,
the "Pool 1 Certificates" and the "Pool 2 Certificates" and each, a
"Certificate Group"), each representing the entire beneficial ownership
interest in a distinct trust fund (each, a "Trust Fund"). The assets of each
Trust Fund will consist primarily of its respective pool ("Pool 1" and "Pool
2," respectively, and each, a "Mortgage Pool") of conventional, fixed-rate,
fully-amortizing mortgage loans (the "Mortgage Loans"). The Mortgage Loans are
secured by mortgages, deeds of trust or other security instruments (each, a
"Mortgage") creating a first lien on one- to four-family residential
properties (the "Mortgaged Properties"). The Mortgage Loans included in Pool 1
are referred to as "Pool 1 Mortgage Loans" and the Mortgage Loans included in
Pool 2 are referred to as "Pool 2 Mortgage Loans." The Pool 1 Certificates
will evidence the right to receive all payments and other collections in
respect of the Pool 1 Mortgage Loans, and the Pool 2 Certificates will
evidence the right to receive all payments and other collections in respect of
the Pool 2 Mortgage Loans, in each case to the extent described herein. The
Certificates of a Certificate Group may experience shortfalls or losses on a
Distribution Date even though distributions are made on such date to
Certificates of the other Certificate Group.
Certain data with respect to the Pool 1 Mortgage Loans and the Pool 2
Mortgage Loans are set forth in the Pool 1 Annex and the Pool 2 Annex included
herein (each, an "Annex"), respectively. A detailed description of both
Mortgage Pools on a Current Report on Form 8-K (the "Detailed Description")
will be available to purchasers of the Certificates at or before, and will be
filed with the Securities and Exchange Commission within fifteen days after,
the initial delivery of the Certificates offered hereby. The Detailed
Description will specify the precise aggregate Scheduled Principal Balance (as
defined herein) of the Mortgage Loans as of the Cut-off Date and will also
include the following information regarding the Mortgage Loans, in each case
by Mortgage Pool: the years of origination, the mortgage interest rates borne
by the Mortgage Loans (the "Mortgage Rates"), the original loan-to-value
ratios, the types of properties securing the Mortgage Loans and the
geographical distribution of the Mortgage Loans by state. The Detailed
Description also will specify, by Mortgage Pool, the original Class
Certificate Principal Balance of each Class of Certificates, the initial Pool
1 Senior Percentage, the Pool 1 Category A Percentage, the Pool 1 Category B
Percentage, the initial Pool 1 Category B Group II Senior Percentage, the
initial Pool 2 Senior Percentage, the initial Pool 2 Group II Senior
Percentage, the initial Pool 1 Junior Percentage and the initial Pool 2 Junior
Percentage (each as defined herein) and the Bankruptcy Loss Amount, Fraud Loss
Amount and Special Hazard Loss Amount (each as defined herein) in respect of
each Mortgage Pool as of the Cut-off Date. The Agreement (as defined herein)
and its exhibits will be filed as an exhibit to the Detailed Description.
The "Scheduled Principal Balance" of a Mortgage Loan as of any Distribution
Date is the unpaid principal balance of such Mortgage Loan as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy or similar proceeding or any moratorium
or similar waiver or grace period) as of the first day of the month preceding
the month of such Distribution Date, after giving effect to any previously
applied partial principal prepayments, the payment of principal due on such
first day of the month and Deficient Valuations occurring after the related
Bankruptcy Coverage Termination Date (as such terms are defined herein),
irrespective of any delinquency in payment by the related borrower (the
"Mortgagor"). The "Pool Scheduled Principal Balance" of a Mortgage Pool as of
any Distribution Date is equal to the aggregate Scheduled Principal Balances
of all of the Mortgage Loans in such Mortgage Pool that were Outstanding
Mortgage Loans on the first day of the month preceding the month of such
Distribution Date (or such other date as is specified). An "Outstanding
Mortgage Loan" is any Mortgage Loan which has not been prepaid in full, has
not become a Liquidated Mortgage Loan and has not been repurchased.
Each Mortgage Loan other than a Cooperative Loan (as defined in the
accompanying Prospectus) is required to be covered by a standard hazard
insurance policy. Each Mortgage Loan which had a loan-to-value ratio at
origination in excess of 80% also will be covered by a private mortgage
insurance policy. See "Servicing of the Mortgage Loans and Contracts--Hazard
Insurance" and "--Private Mortgage Insurance" in the Prospectus.
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<PAGE>
All payments due on each Mortgage Loan on which at least one payment of
principal and interest was due prior to the Cut-off Date will have been paid
through the first day of the month preceding the Cut-off Date.
For a description of the underwriting standards generally applicable to the
Mortgage Loans, see "The Trust Fund--The Mortgage Loans--Loan Underwriting
Policies" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of the Cut-off Date (the "Agreement") between the
Company, as seller and servicer, and the Trustee, acting as trustee of
separate Trust Funds for the benefit of holders of Certificates of the related
Certificate Groups. Reference is made to the Prospectus for important
additional information regarding the terms and conditions of the Agreement and
the Certificates. The Pool 1 Certificates will be issued in the nine Classes
offered hereby, together with the Class 1-B3, Class 1-B4, Class 1-B5 and Class
1-PO Certificates, none of which are offered hereby, and in the aggregate
original Certificate Principal Balance of approximately $500,745,644, subject
to a permitted variance such that the aggregate original Certificate Principal
Balance will not be less than $475,000,000 or greater than $525,000,000. The
Pool 2 Certificates will be issued in the eighteen Classes offered hereby,
together with the Class 2-B3, Class 2-B4, Class 2-B5 and Class 2-PO
Certificates, none of which are offered hereby, and in the aggregate original
Certificate Principal Balance of approximately $175,390,683, subject to a
permitted variance such that the aggregate original Certificate Principal
Balance will not be less than $166,250,000 or greater than $183,750,000. Any
such variance will be allocated so as to approximate the material
characteristics of the Classes of Certificates described herein.
As described below, each Class of Certificates offered hereby, other than
the Class 1-R and Class 2-R Certificates (together, the "Residual
Certificates"), will be issued in book-entry form, and beneficial interests
therein will be held by investors through the book-entry facilities of the
Depository (as defined below), in minimum denominations in Certificate
Principal Balance of $25,000 (in the case of the Senior Certificates offered
hereby other than the Class 2-A2, Class 2-A3, Class 2-A4, Class 2-A5, Class 2-
A6, Class 2-A7, Class 2-A8, Class 2-A9, Class 2-A10, Class 2-A11 Certificates
and the Residual Certificates), $1,000 (in the case of the Class 2-A2, Class
2-A3, Class 2-A4, Class 2-A5, Class 2-A6, Class 2-A7, Class 2-A8, Class 2-A9,
Class 2-A10 and Class 2-A11 Certificates) or $100,000 (in the case of the
Junior Certificates offered hereby), and, in each case, integral multiples of
$1,000 in excess thereof. Each of the Residual Certificates will be issued in
certificated form as a single Certificate representing the entire Class
Certificate Principal Balance thereof. Notwithstanding the integral multiple
requirements described above, one Certificate of each Class other than the
Residual Certificates may evidence an additional amount equal to the remaining
Class Certificate Principal Balance thereof.
BOOK-ENTRY CERTIFICATES
Each Class of Certificates of each Certificate Group offered hereby other
than the related Residual Certificates (together, the "Book-Entry
Certificates") will be registered as a single certificate held by a nominee of
The Depository Trust Company (together with any successor depository selected
by the Company, the "Depository"). Beneficial interests in the Book-Entry
Certificates will be held by investors through the book-entry facilities of
the Depository, as described herein. The Company has been informed by the
Depository that its nominee will be Cede & Co. ("Cede"). Accordingly, Cede is
expected to be the holder of record of the Book-Entry Certificates. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
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maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of the Depository (or of a participating firm (each, a
"Participant") that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of the Depository, if the
beneficial owner's Financial Intermediary is not a Participant). Therefore,
the beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Book-Entry Certificate. Beneficial ownership of a
Book-Entry Certificate may only be transferred by compliance with the
procedures of such Financial Intermediaries and Participants.
The Depository, which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal procedures,
the Depository is expected to record the positions held by each Participant in
the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry
Certificates will be subject to the rules, regulations and procedures
governing the Depository and Participants as in effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to the Depository. The
Depository will be responsible for crediting the amount of such payments to
the accounts of the applicable Participants in accordance with the
Depository's normal procedures. Each Participant will be responsible for
disbursing such payments to the beneficial owners of the Book-Entry
Certificates that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the beneficial owners of the Book-Entry Certificates that
it represents.
As a result, under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments. Because
the Depository can only act on behalf of Financial Intermediaries, the ability
of a beneficial owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance
of the Book-Entry Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary market since certain potential investors
may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
The Depository has advised the Company and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by a Certificateholder under the Agreement only at the
direction of one or more Financial Intermediaries to whose Depository accounts
the Book-Entry Certificates are credited. The Depository may take conflicting
actions with respect to other Book-Entry Certificates to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the related
Book-Entry Certificates, or their nominees, rather than to the Depository,
only if (a) the Depository or the Company advises the Trustee in writing that
the Depository is no longer willing, qualified or able to discharge properly
its responsibilities as nominee and depository with respect to the
Certificates and the Company or the Trustee is unable to locate a qualified
successor; (b) the Company, at its sole option, elects to terminate the book-
entry system through the Depository; or (c) after the occurrence of an Event
of Default with respect to a Trust Fund (as described in the accompanying
Prospectus) beneficial owners of Book-Entry Certificates of the related
Certificate Group aggregating not less than 51% of the aggregate voting rights
allocated thereto advise the Trustee and the Depository through the Financial
Intermediaries in writing that the continuation of a book-entry system through
the Depository (or a successor thereto) is no longer in the best interests of
beneficial owners of the Certificates.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of the
global certificate or certificates
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representing the Certificates and instructions for re-registration, the
Trustee will issue the Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement. Following the issuance of Definitive
Certificates, distribution of principal and interest, if any, on the
Certificates will be made by the Trustee directly to holders of Definitive
Certificates in accordance with the procedures set forth in the Agreement.
The Agreement will provide that, if Definitive Certificates are issued in
respect of the Class 1-M, Class 1-B1, Class 1-B2, Class 2-M, Class 2-B1 or
Class 2-B2 Certificates, no transfer of such Class of Certificates may be made
unless the Trustee has received (i) a certificate to the effect that the
proposed transferee is not an ERISA Plan (as defined herein) or that the
transferee is an insurance company investing assets of its general account and
the exemption provided by Section III(a) of the Department of Labor Prohibited
Transaction Class Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995), applies
to such transferee's acquisition and holding of such Certificate or (ii) an
opinion of counsel relating to such transfer in form and substance
satisfactory to the Trustee and the Company. See "ERISA Considerations"
herein.
NON-BOOK-ENTRY CERTIFICATES
The Residual Certificates (the "Non-Book-Entry Certificates") will be issued
in fully-registered, certificated form. The Non-Book-Entry Certificates will
be transferable and exchangeable on a Certificate Register to be maintained at
the corporate trust office in the city in which the Trustee is located or such
other office or agency maintained for such purposes by the Trustee in New York
City. Under the Agreement, the Trustee will initially be appointed as the
Certificate Registrar. No service charge will be made for any registration of
transfer or exchange of the Non-Book-Entry Certificates, but payment of a sum
sufficient to cover any tax or other governmental charge may be required by
the Trustee. The Residual Certificates will be subject to certain restrictions
on transfer. See "--Restrictions on Transfer of the Residual Certificates"
herein.
Distributions of principal and interest, if any, on each Distribution Date
on the Non-Book-Entry Certificates will be made to the persons in whose names
such Certificates are registered at the close of business on the last business
day of the month immediately preceding the month of such Distribution Date.
Distributions will be made by check or money order mailed to the person
entitled thereto at the address appearing in the Certificate Register or, upon
written request by the Certificateholder to the Trustee, by wire transfer to a
United States depository institution designated by such Certificateholder and
acceptable to the Trustee or by such other means of payment as such
Certificateholder and the Trustee may agree; provided, however, that the final
distribution in retirement of the Non-Book-Entry Certificates will be made
only upon presentation and surrender of such Certificates at the office or
agency of the Trustee specified in the notice to the holders thereof of such
final distribution.
AVAILABLE FUNDS
The amount of funds ("Available Funds") in respect of Pool 1 (the "Pool 1
Available Funds") and Pool 2 (the "Pool 2 Available Funds") that will be
available for distribution to holders of the related Certificates on each
Distribution Date is as described in the accompanying Prospectus under
"Servicing of the Mortgage Loans and Contracts--Loan Payment Record."
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATEHOLDERS
In addition to principal and interest distributable to the holders of
Residual Certificates as described under "Pool 1 Annex--Distributions on the
Pool 1 Certificates" and "Pool 2 Annex--Distributions on the Pool 2
Certificates" herein, the holders of the Class 1-R and Class 2-R Certificates,
as the case may be, will be entitled to receive (i) the amount, if any, of
Pool 1 Available Funds and Pool 2 Available Funds, respectively, remaining in
the related REMIC on any Distribution Date after distributions of principal
and interest and in respect of any Class 1-PO Deferred Amount or any Class 2-
PO Deferred Amount, as applicable, are made on the Certificates
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of the related Certificate Group on such date and (ii) the proceeds, if any,
of the assets of the related Trust Fund remaining in the applicable REMIC
after the Class Certificate Principal Balances of all Classes of Certificates
of the related Certificate Group have each been reduced to zero. It is not
anticipated that any material assets will be remaining in either Trust Fund
for such distributions at any such time. See "Certain Federal Income Tax
Consequences--Residual Certificates" herein.
SUBORDINATION
Priority of Senior Certificates. As of the date of the initial issuance of
the Certificates, the aggregate Certificate Principal Balance of each of the
Pool 1 Junior Certificates and of the Pool 2 Junior Certificates will equal
approximately 4.25% and 4.10% of the aggregate Certificate Principal Balance
of all the Classes of Pool 1 Certificates and of all the Classes of Pool 2
Certificates, respectively. The rights of the holders of the Junior
Certificates relating to each Mortgage Pool to receive distributions with
respect to the related Mortgage Loans will be subordinate to such rights of
the holders of the related Senior Certificates, to the extent described
herein. The subordination of the Junior Certificates relating to each Mortgage
Pool is intended (a) to enhance the likelihood of timely receipt by the
holders of the related Senior Certificates (to the extent of the subordination
of such Junior Certificates) of the full amount of the scheduled monthly
distributions of principal and interest allocable to such Senior Certificates
and (b) to afford the holders of the related Senior Certificates (to the
extent of the subordination of such Junior Certificates) protection against
Realized Losses, to the extent described above. If Realized Losses in respect
of a Mortgage Pool exceed the credit support provided to the related Senior
Certificates through subordination, or if Excess Losses in respect of the
related Mortgage Pool occur, all or a portion of such losses will be borne by
such Senior Certificates.
The protection afforded to the holders of Senior Certificates of each
Mortgage Pool by means of the subordination feature will be accomplished by
(i) the preferential right of such holders to receive, prior to any
distribution being made on a Distribution Date in respect of the related
Junior Certificates, in accordance with the paydown rules specified under
"Pool 1 Annex--Distributions on the Pool 1 Certificates--Allocation of Pool 1
Available Funds," and "Pool 2 Annex--Distributions on the Pool 2
Certificates--Allocation of Pool 2 Available Funds," the amounts due to such
Senior Certificateholders on each Distribution Date out of the related
Available Funds with respect to such date and, if necessary, by the right of
such holders to receive future distributions on the Mortgage Loans in respect
of the related Mortgage Pool that would otherwise have been payable to the
holders of the related Junior Certificates, (ii) the allocation to the related
Junior Certificates of the principal portion of the applicable Non-PO
Percentage of any Realized Loss (in each case other than an Excess Loss or a
Debt Service Reduction) in respect of the related Mortgage Pool to the extent
set forth herein and (iii) the allocation to the related Junior Certificates
of the applicable PO Percentage of the principal portion of any Realized Loss
(other than an Excess Loss or a Debt Service Reduction) in respect of the
related Mortgage Pool to the extent set forth herein through the operation of
the Class 1-PO Deferred Payment Writedown Amount or Class 2-PO Deferred
Payment Writedown Amount, as the case may be. The allocation of the applicable
principal portion of Realized Losses in respect of a Mortgage Pool (as
described herein) to the related Junior Certificates on any Distribution Date
will decrease the protection provided to the related Senior Certificates then
outstanding on future Distribution Dates by reducing the aggregate Certificate
Principal Balance of the related Junior Certificates then outstanding.
In addition, in order to extend the period during which the Junior
Certificates of each Mortgage Pool remain available as credit enhancement for
the related Senior Certificates, the entire amount of the applicable Non-PO
Percentage of any prepayment or other unscheduled recovery of principal with
respect to a Mortgage Loan in respect of the related Mortgage Pool will be
allocated to the related Senior Certificates (other than the related Class PO
Certificates) during the first five years after the Cut-off Date (with such
allocation being subject to reduction thereafter as described herein) except
as otherwise described herein on or following the related Senior Final
Distribution Date. Among the Senior Certificates of each Mortgage Pool, such
amounts will be allocated solely to certain Classes of Senior Certificates
during the first five years after the Cut-off Date to the extent described
herein.
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After the payment of amounts distributable in respect of the Senior
Certificates of each Mortgage Pool on each Distribution Date, the related
Junior Certificates will be entitled on such date to the remaining portion, if
any, of the related Available Funds in an aggregate amount equal to the
Accrued Certificate Interest on such Junior Certificates for such date, any
remaining undistributed Accrued Certificate Interest thereon from previous
Distribution Dates and the sum of the Allocable Shares of such Classes of
Junior Certificates. Amounts so distributed to holders of such Junior
Certificates will not be available to cover any delinquencies or any Realized
Losses in respect of subsequent Distribution Dates.
Priority Among Junior Certificates. As of the date of the initial issuance
of the Certificates, the aggregate Certificate Principal Balance of the Class
1-B3, Class 1-B4 and Class 1-B5 Certificates, all of which are subordinate in
right of distribution to the Pool 1 Junior Certificates offered hereby, will
equal approximately 0.90% of the initial aggregate Certificate Principal
Balance of all of the Pool 1 Certificates and approximately 21.18% of the
initial aggregate Certificate Principal Balance of all of the Pool 1 Junior
Certificates. On each Distribution Date, the holders of any particular Class
of Pool 1 Junior Certificates, other than the Class 1-B5 Certificates, will
have a preferential right to receive the amounts due them on such Distribution
Date out of Pool 1 Available Funds, prior to any distribution being made on
such date on each Class of Pool 1 Certificates ranking junior to such Class.
In addition, except as described herein, the applicable Non-PO Percentage of
the principal portion of any Realized Loss with respect to a Pool 1 Mortgage
Loan (other than a Debt Service Reduction or Excess Loss) and any Class 1-PO
Deferred Payment Writedown Amount will be allocated, to the extent set forth
herein, in reduction of the Class Certificate Principal Balances of the Pool 1
Junior Certificates in inverse order of priority of such Certificates. The
effect of the allocation of such Realized Losses and of the Class 1-PO
Deferred Payment Writedown Amount to a Class of Pool 1 Junior Certificates
will be to reduce future distributions allocable to such Class and increase
the relative portion of distributions allocable to more senior Classes of Pool
1 Certificates.
As of the date of the initial issuance of the Certificates, the aggregate
Certificate Principal Balance of the Class 2-B3, Class 2-B4 and Class 2-B5
Certificates, all of which are subordinate in right of distribution to the
Pool 2 Junior Certificates offered hereby, will equal approximately 0.95% of
the initial aggregate Certificate Principal Balance of all of the Pool 2
Certificates and approximately 23.18% of the initial aggregate Certificate
Principal Balance of all of the Pool 2 Junior Certificates. On each
Distribution Date, the holders of any particular Class of Pool 2 Junior
Certificates, other than the Class 2-B5 Certificates, will have a preferential
right to receive the amounts due them on such Distribution Date out of Pool 2
Available Funds, prior to any distribution being made on such date on each
Class of Pool 2 Certificates ranking junior to such Class. In addition, except
as described herein, the applicable Non-PO Percentage of the principal portion
of any Realized Loss with respect to a Pool 2 Mortgage Loan (other than a Debt
Service Reduction or Excess Loss) and any Class 2-PO Deferred Payment
Writedown Amount will be allocated, to the extent set forth herein, in
reduction of the Class Certificate Principal Balances of the Pool 2 Junior
Certificates in inverse order of priority of such Certificates. The effect of
the allocation of such Realized Losses and of the Class 2-PO Deferred Payment
Writedown Amount to a Class of Pool 2 Junior Certificates will be to reduce
future distributions allocable to such Class and increase the relative portion
of distributions allocable to more senior Classes of Pool 2 Certificates.
In order to maintain the relative levels of subordination among the Junior
Certificates of each Mortgage Pool, the applicable Non-PO Percentage of
prepayments and certain other unscheduled recoveries of principal in respect
of the related Mortgage Loans (which will not be distributable to such
Certificates for at least the first five years after the Cut-Off Date, except
as otherwise described herein on or following the related Senior Final
Distribution Date) will not be distributable to the holders of any Class of
related Class B Certificates on any Distribution Date for which the related
Class Prepayment Distribution Trigger is not satisfied, except as described
above. See "Pool 1 Annex--Distributions on the Pool 1 Certificates--Principal"
and "Pool 2 Annex--Distributions on the Pool 2 Certificates--Principal." If
the Class Prepayment Distribution Trigger is not satisfied with respect to any
Class of Class B Certificates in respect of either Mortgage Pool, the
amortization of more senior ranking Classes of related Junior Certificates may
occur more rapidly than would otherwise have been the case and, in the absence
of losses in respect of the Mortgage Loans in the related Mortgage Pool, the
percentage interest in the principal balance of such Mortgage Loans evidenced
by such Class B Certificates may increase.
S-27
<PAGE>
As a result of the subordination of any Class of Certificates, such Class of
Certificates will be more sensitive than more senior ranking Classes of
Certificates to the rate of delinquencies and defaults on the Mortgage Loans
in the related Mortgage Pool, and under certain circumstances investors in
such Certificates may not recover their initial investment.
RESTRICTIONS ON TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates of each Certificate Group will be subject to the
restrictions on transfer described in the Prospectus under "Certain Federal
Income Tax Consequences--REMIC Certificates--Transfers of Residual
Certificates-- Disqualified Organizations," "--Foreign Investors" and "--
Noneconomic Residual Interests." In addition, the Agreement provides that the
Residual Certificates may not be acquired by an ERISA Plan. The Residual
Certificates will contain a legend describing the foregoing restrictions.
GE CAPITAL MORTGAGE SERVICES, INC.
The Company, a wholly-owned subsidiary of GE Capital Mortgage Corporation,
is a New Jersey corporation originally incorporated in 1949. The principal
executive office of the Company is located at Three Executive Campus, Cherry
Hill, New Jersey 08002, telephone (609) 661-6100. For a general description of
the Company and its activities, see "GE Capital Mortgage Services, Inc." in
the accompanying Prospectus.
S-28
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE COMPANY
The following delinquency tables set forth certain information concerning
the delinquency and foreclosure experience on one- to four-family conventional
residential mortgage loans serviced directly by the Company, excluding Home
Equity Loans (as defined in the Prospectus) and special loan portfolios which,
upon the Company's commencement of servicing responsibilities, consisted of
significant numbers of mortgage loans that were seriously delinquent or in
foreclosure (the "Servicing Portfolio"). The Servicing Portfolio does not
include mortgage loans that were serviced or sub-serviced by others.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, AS OF DECEMBER 31,
1995 1996 1997
-------------------- -------------------- --------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
------- ----------- ------- ----------- ------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total portfolio......... 821,839 $91,977,411 785,928 $88,188,662 726,869 $83,535,531
======= =========== ======= =========== ======= ===========
Period of delinquency(1)
30 to 59 days......... 3,813 $ 408,131 3,362 $ 353,209 2,687 $ 281,657
60 to 89 days......... 1,788 202,503 1,177 135,668 632 71,245
90 days or more(2).... 6,437 919,526 6,867 892,643 5,442 662,342
------- ----------- ------- ----------- ------- -----------
Total delinquent
loans................ 12,038 $ 1,530,160 11,406 $ 1,381,520 8,761 $ 1,015,244
======= =========== ======= =========== ======= ===========
Percent of portfolio.. 1.46% 1.66% 1.45% 1.57% 1.21% 1.22%
</TABLE>
- -------
(1) The indicated periods of delinquency are based on the number of days past
due on a contractual basis, based on a 30-day month. No mortgage loan is
considered delinquent for these purposes until the monthly anniversary of
its contractual due date (e.g., a mortgage loan with a payment due on
January 1 would first be considered delinquent on February 1). The
delinquencies reported above were determined as of the dates indicated.
(2)Includes pending foreclosures.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total portfolio....................... $91,977,411 $88,188,662 $83,535,531
Foreclosures(1)....................... 268,478 372,800 271,046
Foreclosure ratio..................... 0.29% 0.42% 0.32%
</TABLE>
- -------
(1) Foreclosures represent the principal balance of mortgage loans secured by
mortgaged properties, the title to which has been acquired by the Company,
by investors or by an insurer following foreclosure or delivery of a deed
in lieu of foreclosure and which had not been liquidated at the end of the
period indicated. The length of time necessary to complete the liquidation
of such mortgaged properties may be affected by prevailing economic
conditions and the marketability of the mortgaged properties.
The delinquency and foreclosure experience set forth above is historical and
is based on the servicing of mortgage loans that may not be representative of
the Mortgage Loans in either Mortgage Pool. Consequently, there can be no
assurance that the delinquency and foreclosure experience on the Mortgage
Loans in either Mortgage Pool will be consistent with the data set forth
above. The Servicing Portfolio, for example, includes mortgage loans having a
wide variety of payment characteristics (e.g., fixed-rate mortgage loans,
adjustable rate mortgage loans and graduated payment mortgage loans) and
mortgage loans secured by mortgaged properties in geographic locations that
may not be representative of the geographic locations of the Mortgage Loans in
either Mortgage Pool. The Servicing Portfolio also includes mortgage loans
originated in accordance with the Company's then applicable underwriting
policies as well as mortgage loans not originated in accordance with such
policies but as to which the Company had acquired the related servicing
rights.
The Servicing Portfolio includes many mortgage loans which have not been
outstanding long enough to have seasoned to a point where delinquencies would
be fully reflected. In the absence of substantial continuous additions of
servicing for recently originated mortgage loans to the Servicing Portfolio,
it is possible that the delinquency and foreclosure percentages experienced in
the future could be significantly higher than those indicated in the tables
above.
S-29
<PAGE>
THE POOLING AND SERVICING AGREEMENT
The Certificates will be issued pursuant to the Agreement. The following
summaries describe certain provisions of the Agreement. See "The Pooling and
Servicing Agreement" in the accompanying Prospectus for summaries of certain
other provisions of the Agreement. The summaries below do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Agreement. Where particular provisions or terms used in
the Agreement are referred to, such provisions or terms are as specified in
the Agreement.
SEPARATE TRUST FUNDS
The Agreement establishes two separate Trust Funds, and each Certificate
Group represents the entire undivided beneficial interest in its respective
Trust Fund. The Trust Funds will be treated as distinct for all purposes of
the Agreement. The Trust Funds are not cross-collateralized. All distributions
payable on the Certificates within a Certificate Group will be payable solely
out of collections received on the Mortgage Loans in the related Trust Fund,
and all expenses relating or attributable to a specific Trust Fund will be
borne by that Trust Fund. The Trustee will act as the trustee for each Trust
Fund.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Company will assign the
Mortgage Loans for each Trust Fund to the Trustee, together with all principal
and interest received by the Company on or with respect to the Mortgage Loans
on or after the Cut-off Date other than principal and interest due and payable
on or before the Cut-off Date. The Trustee will, concurrently with such
assignment, execute, countersign and deliver the Certificates of each
Certificate Group to the Company in exchange for the related Mortgage Loans.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
the Agreement, which schedule will specify the Mortgage Pool in which each
Mortgage Loan is included. Any substitute Mortgage Loan will be identified in
an amended schedule maintained by the Trustee. See "The Pooling and Servicing
Agreement--Repurchase or Substitution" in the Prospectus.
In addition, at the time of issuance of the Certificates, the Company will
deliver to the Trustee, as to each Mortgage Loan other than a Cooperative
Loan, the related Mortgage Note (or a lost-note affidavit), any related
assumption and modification agreement and an assignment of Mortgage to the
Trustee in recordable form (other than in respect of unavailable recording
information). Except in the case of a Cooperative Loan, the Company will also
deliver originals of the recorded Mortgages, any intervening assignments of
the Mortgages and title insurance policies with respect to the Mortgage Loans,
as promptly as practicable, and in any case within thirty days, after
receiving all such documents from the applicable recording offices and title
insurance companies. Pending such delivery, the Company will retain and
furnish to the Trustee upon request copies of the Mortgages and intervening
assignments of Mortgage delivered for recording and the evidence of title
insurance issued at origination of the Mortgage Loans. The Company will retain
and furnish to the Trustee upon request any applicable evidence of primary
mortgage insurance (any policy with respect to such insurance being referred
to herein as a "Primary Mortgage Insurance Policy") so long as such insurance
remains in force. With respect to any Mortgage Loans which are Cooperative
Loans, the Company, as seller, will cause to be delivered to the Trustee the
related original promissory note endorsed to the order of the Trustee (or a
lost-note affidavit), the original security agreement, the proprietary lease
or occupancy agreement, the recognition agreement, an executed financing
statement by the Mortgagor and the relevant stock certificate and related
blank stock powers. The Company will deliver to the Trustee a financing
statement in fileable form evidencing the assignment of the Company's security
interest in the collateral securing each Cooperative Loan to the Trustee. In
addition, for each Cooperative Loan, the Company will deliver any intervening
assignments of the financing statement executed by the Mortgagor as promptly
as practicable, and in any event within thirty days after receiving such
documents from the applicable filing offices. See "The Pooling and Servicing
Agreement--Assignment of Assets" in the Prospectus.
S-30
<PAGE>
The Company may refrain from recording the assignments of Mortgage to the
Trustee and filing the financing statements with respect to any Cooperative
Loan in favor of the Trustee unless the Company or the Trustee obtains actual
notice or knowledge of the occurrence of any one or more of the following: (i)
the Company is not a wholly-owned direct or indirect subsidiary of General
Electric Company or General Electric Capital Corporation ("GE Capital") does
not own (directly or indirectly) at least two-thirds of the voting shares of
the capital stock of the Company, (ii) the long-term senior unsecured rating
of GE Capital is downgraded by Fitch IBCA, Inc. ("Fitch") or Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), below
their two highest long-term rating categories or such rating is withdrawn,
(iii) GE Capital is no longer obligated pursuant to the terms of a support
agreement to maintain the Company's net worth or liquidity (as such terms are
defined in such support agreement) at the levels specified therein, or that
such support agreement, including any amendment thereto, has been breached,
terminated or otherwise held to be unenforceable or (iv) such support
agreement, including any amendment thereto, is amended or modified (each such
event described in (i), (ii), (iii) and (iv) is referred to herein as a
"Trigger Event"); provided, however, that such recording will not be required
if the Company delivers to the Trustee a letter from each rating agency which
originally rated the Certificates to the effect that the failure to take such
action would not cause such rating agency to withdraw or reduce its then
current ratings of such Certificates. For purposes of the foregoing, the
Company will be deemed to have knowledge of any such downgrading if, in the
exercise of reasonable diligence, the Company has or should have had knowledge
thereof. If a Trigger Event occurs, the Company will also promptly furnish to
the Trustee the documents retained by the Company as described in the
preceding paragraph.
Although the recordation of the assignments of Mortgage or the filing of
financing statements relating to the Cooperative Loans to the Trustee is not
necessary to make the assignment of the Mortgage Loans to the Trustee
effective, if the Company were to make a sale, assignment, satisfaction or
discharge of any Mortgage Loan prior to recording or filing the assignments to
the Trustee, the other parties to such sale, assignment, satisfaction or
discharge might have rights superior to those of the Trustee. If the Company
were to do so without authority under the Agreement, it would be liable to the
Certificateholders. Moreover, if insolvency proceedings relating to the
Company were commenced prior to such recording or filing, creditors or the
trustee-in-bankruptcy may be able to assert rights in the affected Mortgage
Loans superior to those of the Trustee.
SERVICING ARRANGEMENT WITH RESPECT TO THE MORTGAGE LOANS
It is expected that the Company will directly service at least 96% and 97%
(by aggregate Scheduled Principal Balance as of the Cut-off Date) of the
Mortgage Loans in Pool 1 and Pool 2, respectively, and will function as master
servicer with respect to the remaining Mortgage Loans in each Mortgage Pool
pursuant to a Direct Master Servicing Arrangement (as defined in the
accompanying Prospectus). Such master-serviced loans will be directly serviced
by entities which originated or acquired those loans and sold them to the
Company. The Agreement permits the Company to use other primary servicing
agents from time to time. See "Servicing of the Mortgage Loans and Contracts"
in the accompanying Prospectus.
The Agreement may permit the Company, at its option, to grant certain rights
in connection with the foreclosure of defaulted Pool 1 Mortgage Loans to the
holders of the Class 1-B5 Certificates and, when such Certificates are no
longer outstanding, to the holders of the Class 1-B4 Certificates. The initial
Class Certificate Principal Balances of the Class 1-B4 and Class 1-B5
Certificates are expected to equal approximately 0.20% and 0.30%,
respectively, of the initial Certificate Principal Balance of all of the Pool
1 Certificates. The Agreement may permit the Company, at its option, to grant
certain rights in connection with the foreclosure of defaulted Pool 2 Mortgage
Loans to the holders of the Class 2-B5 Certificates and, when such
Certificates are no longer outstanding, to the holders of the Class 2-B4
Certificates. The initial Class Certificate Principal Balances of the Class 2-
B4 and Class 2-B5 Certificates are expected to equal approximately 0.20% and
0.35%, respectively, of the initial Certificate Principal Balance of all of
the Pool 2 Certificates. See "Servicing of the Mortgage Loans and Contracts--
Collection and Other Servicing Procedures" in the Prospectus.
S-31
<PAGE>
COLLECTION ACCOUNTS
The Agreement provides that if the Company or the Trustee obtains actual
notice or knowledge of the occurrence of a Trigger Event or the downgrade by
S&P of GE Capital's short-term senior unsecured rating below A-1+, the Company
will, in lieu of the Loan Payment Record described under the caption
"Servicing of the Mortgage Loans and Contracts--Loan Payment Record" in the
accompanying Prospectus, establish and maintain or cause to be established and
maintained a separate account (each a "Collection Account") for the
Certificates relating to each Mortgage Pool for the collection of payments on
the Mortgage Loans in such Mortgage Pool; provided, however, that such action
will not be required if the Company delivers to the Trustee a letter from each
rating agency which originally rated the related Certificates to the effect
that the failure to take such action would not cause such rating agency to
withdraw or reduce its then current rating of such Certificates. If
established, the Collection Accounts would be (i) maintained with a depository
institution the debt obligations of which are, at the time of any deposit
therein, rated by each of Fitch and S&P in one of its two highest long-term
rating categories and by S&P in its highest short-term rating category, (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation
(the "FDIC") or the Savings Association Insurance Fund (as successor to the
Federal Savings and Loan Insurance Corporation) of the FDIC (the "SAIF"),
(iii) an account or accounts with a depository institution, which accounts are
insured by the BIF or SAIF (to the limits established by the FDIC), and which
uninsured deposits are invested in United States government securities or
other high quality investments, or are otherwise secured to the extent
required by Fitch and S&P such that, as evidenced by an opinion of counsel,
the holders of the related Certificates have a claim with respect to the funds
in the account or a perfected first security interest against any collateral
securing such funds that is superior to claims of any other depositors or
creditors of the depository institution with which the account is maintained,
(iv) a trust account maintained with the corporate trust department of a
federal or state chartered depository institution or of a trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
Trustee or (v) an account as will not cause either Fitch or S&P to downgrade
or withdraw its then current ratings assigned to the related Certificates. If
a Collection Account is established for the Certificates relating to a
Mortgage Pool, all amounts credited or debited to the related Loan Payment
Record in the manner described under the caption "Servicing of the Mortgage
Loans and Contracts--Loan Payment Record" will instead be deposited in or
withdrawn from the related Collection Account. See "Servicing of the Mortgage
Loans and Contracts--Loan Payment Record" in the accompanying Prospectus.
Prior to the occurrence of a Trigger Event, the Company will transfer to the
Certificate Account established with respect to each Trust Fund, in next-day
funds, the Pool 1 Available Funds or Pool 2 Available Funds, as the case may
be, for the related Distribution Date on the business day immediately
preceding such Distribution Date.
ADVANCES
In the event that any Mortgagor fails to make any payment of principal or
interest required under the terms of a Mortgage Loan, the Company will advance
the entire amount of such payment, net of the applicable Servicing Fee, less
the amount of any such payment that the Company reasonably believes will not
be recoverable out of liquidation proceeds or otherwise. The amount of any
scheduled payment required to be advanced by the Company will not be affected
by any agreement between the Company and a Mortgagor providing for the
postponement or modification of the due date or amount of such scheduled
payment. The Company will be entitled to reimbursement for any such advance
from related late payments on the Mortgage Loan as to which such advance was
made. Furthermore, in the event that any Mortgage Loan as to which such an
advance has been made is foreclosed while in a Trust Fund, the Company will be
entitled to reimbursement for such advance from related liquidation proceeds
or insurance proceeds prior to payment to Certificateholders of the related
Certificate Group of the Scheduled Principal Balance of such Mortgage Loan
plus accrued interest at the Mortgage Rate, net of the applicable Servicing
Fee.
If the Company makes a good faith judgment that all or any portion of any
advance of delinquent principal and interest made by it with respect to any
Mortgage Loan may not ultimately be recoverable from related
S-32
<PAGE>
liquidation or insurance proceeds or other collections on such Mortgage Loan
(a "Nonrecoverable Advance"), the Company will so notify the Trustee and the
Company will be entitled to reimbursement for such Nonrecoverable Advance from
recoveries on all other Mortgage Loans in the related Mortgage Pool. The
Company's judgment that it has made a Nonrecoverable Advance with respect to
any Mortgage Loan will be based upon its assessment of the value of the
related Mortgaged Property and such other facts and circumstances as it may
deem appropriate in evaluating the likelihood of receiving liquidation
proceeds, net of expenses, equal to or greater than the aggregate amount of
unreimbursed advances made with respect to such Mortgage Loan.
As a result of the subordination of the Junior Certificates, the effect of
reimbursements to the Company of previous advances from liquidation or
insurance proceeds and of Nonrecoverable Advances will generally be borne by
the holders of the Junior Certificates in respect of the related Mortgage Pool
(to the extent then outstanding) in inverse order of priority before they are
borne by holders of the related Senior Certificates.
The Trustee will make advances of delinquent principal and interest payments
in the event of a failure by the Company to perform its obligation to do so,
provided that the Trustee will not make such advance to the extent that it
reasonably believes the payment will not be recoverable to it out of related
liquidation or insurance proceeds or otherwise. The Trustee will be entitled
to reimbursement for advances in a manner similar to the Company's
entitlement.
PURCHASES OF DEFAULTED MORTGAGE LOANS
Under the Agreement, the Company will have the option (but not the
obligation) to purchase any Mortgage Loan as to which the Mortgagor has failed
to make unexcused payment in full of three or more scheduled payments of
principal and interest (a "Defaulted Mortgage Loan"). Any such purchase will
be for a price equal to 100% of the outstanding principal balance of such
Mortgage Loan, plus accrued and unpaid interest thereon at the Net Mortgage
Rate minus the Supplemental Servicing Fee Rate (as defined below), less any
amounts representing previously unreimbursed advances. The purchase price for
any Defaulted Mortgage Loan will be deposited in the applicable Certificate
Account on the business day prior to the Distribution Date on which the
proceeds of such purchase are to be distributed to the related
Certificateholders.
SERVICING COMPENSATION, COMPENSATING INTEREST AND PAYMENT OF EXPENSES
The Company's primary compensation for its servicing activities will come
from the payment to it, with respect to each interest payment on any Mortgage
Loan, of a servicing fee (the "Servicing Fee") equal to the sum of a base fee
(the "Base Servicing Fee") and a supplemental fee, if any (the "Supplemental
Servicing Fee"). As to each Mortgage Loan, the rate at which the Base
Servicing Fee is payable (the "Base Servicing Fee Rate") will be a fixed rate
per annum of the outstanding principal balance of such Mortgage Loan, expected
to range, in the case of both Mortgage Pools, from approximately 0.20% to
0.29% with an anticipated initial weighted average rate with respect to each
Mortgage Pool of between approximately 0.24% and 0.28%. As to each Mortgage
Loan, the rate at which the Supplemental Servicing Fee is payable (the
"Supplemental Servicing Fee Rate") will be a fixed rate per annum of the
outstanding principal balance of the Mortgage Loan equal to the excess, if
any, of the Net Mortgage Rate over 6.75%. The Supplemental Servicing Fee Rate
is expected to range, in the case of Pool 1, from approximately 0.00% to
2.00%, with an anticipated initial weighted average rate with respect to Pool
1 of between approximately 0.35% and 0.44%. The Supplemental Servicing Fee
Rate is expected to range, in the case of Pool 2, from approximately 0.00% to
2.00%, with an anticipated initial weighted average rate with respect to Pool
2 of between approximately 0.40% and 0.45%. The aggregate servicing
compensation to the Company could vary depending on the prepayment experience
of the Mortgage Loans. The servicing compensation of any direct servicer of
any Mortgage Loan will be paid out of the related Base Servicing Fee, and the
Company will retain the balance as part of its servicing compensation (subject
to its obligation to make Compensating Interest Payments, as described below).
To the extent any voluntary prepayment results in an Interest Shortfall in
respect of a Mortgage Loan in a Mortgage Pool (as described in clauses (i) and
(ii) of the definition thereof) allocable to the related
S-33
<PAGE>
Certificateholders with respect to any Distribution Date, the Company will be
obligated to remit an amount (such amount, a "Compensating Interest Payment")
sufficient to pass through to the related Certificateholders the full amount
of interest to which they would have been entitled in the absence of such
prepayments, but in no event greater than the lesser of (a) 1/12th of 0.125%
of the Pool Scheduled Principal Balance of the related Mortgage Pool for such
Distribution Date and (b) the aggregate amount received by the Company on
account of its Base Servicing Fees in respect of the related Mortgage Pool
(net of any servicing compensation paid to any direct servicer) in connection
with such Distribution Date. The Compensating Interest Payment with respect to
the Pool 1 Certificates or Pool 2 Certificates, as the case may be, will be
determined solely by reference to the related Mortgage Pool. Because the net
amount received by the Company on account of its Base Servicing Fee is
generally less in the case of Mortgage Loans master-serviced by the Company
than in the case of Mortgage Loans the Company services directly, the amounts
available for any Compensating Interest Payment with respect to any
Distribution Date and a Mortgage Pool will generally decrease to the extent
the proportion of Outstanding Mortgage Loans in such Mortgage Pool master-
serviced by the Company increases, and increase to the extent the proportion
of such Mortgage Loans decreases. It is expected that no more than 4%, in the
case of Pool 1, and 3%, in the case of Pool 2, of the Mortgage Loans (by
aggregate Scheduled Principal Balance) will be master-serviced by the Company.
These percentages could vary over time, however, if Mortgage Loans directly
serviced by the Company experience a disproportionately high or low level of
prepayments or defaults relative to Mortgage Loans master-serviced by the
Company. In addition, the proportion of master-serviced Mortgage Loans could
be affected as a result of (i) the exercise by the Company of its right under
the Agreement to contract with third parties to directly service Mortgage
Loans, with the Company becoming the master servicer of such Mortgage Loans,
or (ii) the substitution of any Mortgage Loans under the Agreement.
The Company will retain, as additional servicing compensation in respect of
a Trust Fund, amounts in respect of interest paid by borrowers in connection
with any principal prepayment in full received by the Company (or, with
respect to Mortgage Loans master-serviced by the Company, of which the Company
receives notice) from the first day through the fifteenth day of each month,
other than the month of the Cut-off Date.
The Company will pay expenses incurred in connection with its
responsibilities under the Agreement, subject to limited reimbursement as
described herein and in the accompanying Prospectus. See "Servicing of the
Mortgage Loans and Contracts--Servicing and Other Compensation and Payment of
Expenses" in the accompanying Prospectus for information regarding other
possible compensation to the Company.
TRUSTEE
The Trustee for each Trust Fund will be State Street Bank and Trust Company,
a Massachusetts banking corporation organized and existing under the laws of
the Commonwealth of Massachusetts. The Corporate Trust Office of the Trustee
is located at 225 Franklin Street, Boston, Massachusetts.
TERMINATION
The Company may, at its option, repurchase all of the Mortgage Loans
underlying a Certificate Group and thereby effect the early retirement of such
Certificate Group and cause the termination of the related Trust Fund and the
REMIC constituted by such Trust Fund, on any Distribution Date after the
aggregate Scheduled Principal Balance of the Mortgage Loans in such Trust Fund
is less than 10% of the aggregate Scheduled Principal Balance thereof as of
the Cut-off Date, provided that the Trustee has received an opinion of counsel
that the exercise of such option will not subject such Trust Fund to a tax on
prohibited transactions or result in the failure of such Trust Fund to qualify
as a REMIC.
Any such repurchase by the Company of the assets included in a Trust Fund
will be at a price equal to the sum of (a) 100% of the unpaid principal
balance of each Mortgage Loan in such Trust Fund (other than a Mortgage Loan
described in clause (b)) as of such date, plus accrued and unpaid interest
thereon at the related Net Mortgage Rate minus the Supplemental Servicing Fee
Rate (less any amounts representing previously
S-34
<PAGE>
unreimbursed advances), and (b) the appraised value of any property acquired
in respect of a Mortgage Loan included in such Trust Fund (less any amounts
representing previously unreimbursed advances in respect thereof and a good
faith estimate of liquidation expenses). The related Available Funds on the
final Distribution Date will be allocated to each Class of Certificates of the
related Certificate Group in accordance with the priorities described under
"Pool 1 Annex--Distributions on the Pool 1 Certificates--Allocation of Pool 1
Available Funds" and "Pool 2 Annex--Distributions on the Pool 2 Certificates--
Allocation of Pool 2 Available Funds" herein. Accordingly, if the Available
Funds in respect of a Mortgage Pool on the final Distribution Date are less
than the aggregate Certificate Principal Balance of all outstanding
Certificates of the related Certificate Group plus accrued and unpaid interest
thereon, then in the event that such Distribution Date occurs (x) prior to the
related Cross-Over Date, the resulting shortfall will be borne by the
Certificates of the related Certificate Group in inverse order of their
related payment priorities, and (y) on or after the related Cross-Over Date,
such shortfall will be borne pro rata among the Certificates of the related
Certificate Group.
In no event will either Trust Fund created by the Agreement continue beyond
the expiration of 21 years from the death of the last survivor of a certain
person named in such Agreement.
VOTING RIGHTS
All voting rights and remedies granted to Certificateholders under the
Agreement relate to each individual Certificate Group and Trust Fund.
Consequently, the holders of the requisite percentage of Certificates of a
Certificate Group may exercise such rights and remedies with respect to the
related Trust Fund. Votes allocated to the Certificates of a Certificate Group
under the Agreement will be allocated among the Classes of such Certificate
Group (and among the Certificates within each such Class) in proportion to
their Class Certificate Principal Balances or Certificate Principal Balances,
as the case may be.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat each Trust Fund as a REMIC for federal
income tax purposes.
The Certificates of each Certificate Group, other than the related Residual
Certificates, will be designated as "regular interests" in the related REMIC
and the Residual Certificates of each Certificate Group will be designated as
the "residual interest" in the related REMIC.
Regular Certificates. The Regular Certificates generally will be treated as
debt instruments issued by the related REMIC for federal income tax purposes.
Income on Regular Certificates must be reported under an accrual method of
accounting. Certain Classes of Regular Certificates may be issued with
original issue discount in an amount equal to the excess of their initial
respective Class Certificate Principal Balances (plus accrued interest from
the last day preceding the issue date corresponding to a Distribution Date
through the issue date) over their issue prices (including all accrued
interest). The prepayment assumption that is to be used in determining the
rate of accrual of original issue discount and whether the original issue
discount is considered de minimis, and that may be used by a holder of a
Regular Certificate to amortize premium, will be 275% of the Prepayment
Assumption. No representation is made as to the actual rate at which the
Mortgage Loans will prepay. See "Certain Federal Income Tax Consequences--
REMIC Certificates--Income from Regular Certificates" in the accompanying
Prospectus.
The requirement to report income on a Regular Certificate under an accrual
method may result in the inclusion of amounts in income that are not currently
distributed in cash. In the case of a Junior Certificate, accrued income may
exceed cash distributions as a result of the preferential right of Classes of
related Senior Certificates to receive cash distributions in the event of
losses or delinquencies on related Mortgage Loans. Prospective purchasers of
Junior Certificates should consult their tax advisors regarding the timing of
income from those Certificates and the timing and character of any deductions
that may be available with respect to
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principal or accrued interest that is not paid. See "Certain Federal Income
Tax Consequences--REMIC Certificates--Income from Regular Certificates" in the
accompanying Prospectus.
Residual Certificates. The holders of the Residual Certificates must include
the taxable income of the related REMIC in their federal taxable income. The
resulting tax liability of the holders may exceed cash distributions to such
holders during certain periods. All or a portion of the taxable income from a
Residual Certificate recognized by a holder may be treated as "excess
inclusion" income, which with limited exceptions is subject to U.S. federal
income tax in all events.
Under Treasury regulations, the Residual Certificates may be considered to
be "noneconomic residual interests" at the time they are issued, in which
event certain transfers thereof would be disregarded for federal income tax
purposes.
Prospective purchasers of a Residual Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in
the Prospectus and should consult their own tax advisors with respect to those
consequences. See "Certain Federal Income Tax Consequences--REMIC
Certificates--Income from Residual Certificates; --Taxation of Certain Foreign
Investors; --Servicing Compensation and Other REMIC Pool Expenses; --Transfers
of Residual Certificates" in the accompanying Prospectus.
ERISA CONSIDERATIONS
As described in the Prospectus under "ERISA Considerations," the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code
impose certain duties and restrictions on any person which is an employee
benefit plan within the meaning of Section 3(3) of ERISA or a plan subject to
Section 4975 of the Code or any person utilizing the assets of such employee
benefit plan or other plan (an "ERISA Plan") and certain persons who perform
services for ERISA Plans. For example, unless exempted, an investment by an
ERISA Plan in the Certificates offered hereby may constitute or give rise to a
prohibited transaction under ERISA or Section 4975 of the Code.
The United States Department of Labor (the "DOL") has issued to the
Underwriter an individual administrative exemption, Prohibited Transaction
Exemption 89-89 (54 Fed. Reg. 42589, October 17, 1989) (the "Exemption"), from
certain of the prohibited transaction provisions of ERISA with respect to the
initial purchase, the holding, and the subsequent resale by an ERISA Plan of
certificates in pass-through trusts that meet the conditions and requirements
of the Exemption. The Exemption might apply to the acquisition, holding and
resale of the Senior Certificates of either Certificate Group offered hereby
by an ERISA Plan, provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of such Senior Certificates are the
following: (i) the Underwriter is the sole underwriter or the manager or co-
manager of the underwriting syndicate, for such Certificates, (ii) such
Certificates are rated in one of the three highest generic rating categories
by Fitch, S&P, Moody's Investors Service, Inc. or Duff & Phelps Credit Rating
Co. at the time of the acquisition of such Certificates by the ERISA Plan,
(iii) such Certificates represent a beneficial ownership interest in, among
other things, obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multifamily residential or
commercial real property (including obligations secured by lease-hold
interests on commercial real property), or fractional undivided interests in
such obligations, (iv) such Certificates are not subordinated to other
certificates issued by the related Trust Fund in respect of the relevant
Mortgage Pool, (v) the ERISA Plan investing in such 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, (vi) the
acquisition of such Certificates is on terms that are at least as favorable to
the ERISA Plan as they would be in an arm's length transaction with an
unrelated third party, (vii) the Trustee is not an affiliate of any member of
the "Restricted Group" (as defined below) and (viii) the compensation to
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the Underwriter represents not more than reasonable compensation for
underwriting such Certificates, the proceeds to the Company pursuant to the
assignment of the related Mortgage Loans (or interests therein) to the Trustee
represent not more than the fair market value of such Mortgage Loans (or
interests) and the sum of all payments made to and retained by the Company
represents not more than reasonable compensation for the Company's services
under the Agreement and reimbursement of the Company's reasonable expenses in
connection therewith.
In addition, if certain additional conditions specified in the Exemption are
satisfied, the Exemption may provide an exemption from the prohibited
transaction provisions of ERISA relating to possible self-dealing transactions
by fiduciaries who have discretionary authority, or render investment advice,
with respect to ERISA Plan assets used to purchase the Senior Certificates of
either Certificate Group offered hereby if the fiduciary (or its affiliate) is
an obligor on any of the Mortgage Loans held in the relevant Mortgage Pool.
The Exemption would not be available with respect to ERISA Plans sponsored
by any of the following entities (or any affiliate of any such entity): (i)
the Company, (ii) the Underwriter, (iii) the Trustee, (iv) any entity that
provides insurance or other credit support to the Trust Fund in respect of the
relevant Mortgage Pool or (v) any obligor with respect to Mortgage Loans
included in the relevant Mortgage Pool constituting more than five percent of
the aggregate unamortized principal balance of the assets in such Mortgage
Pool (the "Restricted Group"). Before purchasing any Certificate offered
hereby, a fiduciary of an ERISA Plan should make its own determination as to
the availability of the exemptive relief provided in the Exemption or the
availability of any other prohibited transaction exemptions, and whether the
conditions of any such exemption will be applicable to such Certificate.
The Exemption does not apply to the initial purchase, the holding or the
subsequent resale of the Class 1-M, Class 1-B1, Class 1-B2, Class 2-M, Class
2-B1 and Class 2-B2 Certificates because such Certificates are subordinate to
certain other Classes of Certificates of the related Certificate Group.
Accordingly, ERISA Plans may not purchase the Class 1-M, Class 1-B1, Class 1-
B2, Class 2-M, Class 2-B1 and Class 2-B2 Certificates, except that any
insurance company may purchase such Certificates with assets of its general
account if the exemptive relief granted by the DOL for transactions involving
insurance company general accounts in Prohibited Transaction Exemption 95-60,
60 Fed. Reg. 35925 (July 12, 1995) is available with respect to such
investment. Any insurance company proposing to purchase such Certificates for
its general account should consider whether such relief would be available.
Any fiduciary of an ERISA Plan considering whether to purchase any
Certificate offered hereby should not only consider the applicability of
exemptive relief, but should also carefully review with its own legal advisors
the applicability of the fiduciary duty and prohibited transaction provisions
of ERISA and the Code to such investment. See "ERISA Considerations" in the
accompanying Prospectus.
A qualified pension plan or other entity that is exempt from federal income
taxation pursuant to Section 501 of the Code (a "Tax-Exempt Investor")
nonetheless will be subject to federal income taxation to the extent that its
income is "unrelated business taxable income" within the meaning of Section
512 of the Code. The Residual Certificates of each Certificate Group
constitute the residual interest in the REMIC constituted by the related Trust
Fund and all "excess inclusions" allocated to the related Residual
Certificates, if held by a Tax-Exempt Investor, will be considered "unrelated
business taxable income" and thus will be subject to federal income tax. See
"Certain Federal Income Tax Consequences--Residual Certificates" herein and
"Certain Federal Income Tax Consequences-- Federal Income Tax Consequences for
REMIC Certificates--Taxation of Residual Certificates" in the Prospectus.
The Agreement will contain certain restrictions on the transferability of
the Class 1-M, Class 1-B1, Class 1-B2, Class 2-M, Class 2-B1 and Class 2-B2
Certificates. See "Pool 1 Annex--Description of the Certificates--Book-Entry
Certificates" and "--Non-Book-Entry Certificates" and "Pool 2 Annex--
Description of the Certificates--Book-Entry Certificates" and "Non-Book-Entry
Certificates" herein. In addition, the Agreement provides that the Residual
Certificates may not be acquired by or transferred to an ERISA Plan. See
"Description of the Certificates--Restrictions on Transfer of the Residual
Certificates" herein.
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LEGAL INVESTMENT MATTERS
The Senior Certificates offered hereby and the Class 1-M and Class 2-M
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), and, as such, are
legal investments for certain entities to the extent provided in SMMEA.
However, institutions subject to the jurisdiction of the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Certificates, as
certain Classes may be deemed to be unsuitable investments under one or more
of these rules, policies and guidelines and certain restrictions may apply to
investments in other Classes. It should also be noted that certain states have
enacted legislation limiting to varying extents the ability of certain
entities (in particular insurance companies) to invest in mortgage related
securities. Investors should consult with their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors. See "Legal Investment Matters" in the
accompanying Prospectus.
The Class 1-B1, Class 1-B2, Class 2-B1 and Class 2-B2 Certificates will not
constitute "mortgage related securities" under SMMEA. The appropriate
characterization of the Class 1-B1, Class 1-B2, Class 2-B1 and Class 2-B2
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase such Certificates, may
be subject to significant interpretive uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether, and to what extent, such Certificates
will constitute legal investments for them.
The Company makes no representation as to the proper characterization of the
Class 1-B1, Class 1-B2, Class 2-B1 and Class 2-B2 Certificates for legal
investment of financial institution regulatory purposes, or as to the ability
of particular investors to purchase such Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of such Certificates) may adversely
affect the liquidity of such Certificates.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company and the Underwriter, the Certificates offered hereby are
being purchased from the Company by the Underwriter upon issuance.
Distribution of the Certificates offered hereby will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Certificates offered hereby will be approximately
98.319647% of the aggregate initial Class Certificate Principal Balance of the
Certificates offered hereby, plus accrued interest thereon from the Cut-off
Date to the Closing Date, but before deducting issuance expenses payable by
the Company. In connection with the purchase and sale of the Certificates
offered hereby, the Underwriter may be deemed to have received compensation
from the Company in the form of underwriting discounts.
The Company has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Underwriter has entered into an agreement with the Company to purchase
the Class 1-B3, Class 1-B4, Class 1-B5, Class 2-B3, Class 2-B4 and Class 2-B5
Certificates simultaneously with the purchase of the Certificates offered
hereby, subject to certain conditions.
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CERTIFICATE RATINGS
It is a condition of issuance of the Certificates that the Senior
Certificates offered hereby be rated "AAA" by each of Fitch and S&P, that the
Class 1-M, Class 1-B1 and Class 1-B2 Certificates be rated "AA," "A" and
"BBB," respectively, by Fitch and that the Class 2-M, Class 2-B1 and Class 2-
B2 Certificates be rated "AA," "A" and "BBB," respectively, by Fitch.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of all distributions to
which such Certificateholders are entitled. Fitch's ratings address the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on 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.
S&P's ratings on mortgage pass-through certificates address the likelihood
of receipt by Certificateholders of payments required under the operative
agreements. S&P's ratings take into consideration the credit quality of the
mortgage pool including any credit support providers, structural and legal
aspects associated with the certificates, and the extent to which the payment
stream of the mortgage pool is adequate to make payment required under the
certificates. S&P's ratings on the certificates do not, however, constitute a
statement regarding the frequency of prepayments on the mortgage loans. S&P's
rating does not address the possibility that investors may suffer a lower than
anticipated yield.
The ratings of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
The Company has not requested a rating of the Certificates offered hereby by
any rating agency other than Fitch and S&P and the Company has not provided
information relating to the Certificates offered hereby or the Mortgage Loans
to any rating agency other than Fitch and S&P. However, there can be no
assurance as to whether any other rating agency will rate the Certificates
offered hereby or, if another rating agency rates such Certificates, what
rating would be assigned to such Certificates by such rating agency. Any such
unsolicited rating assigned by another rating agency to the Certificates
offered hereby may be lower than the rating assigned to such Certificates by
either, or both, of Fitch and S&P.
LEGAL MATTERS
Certain legal matters in respect of the Certificates will be passed upon for
the Company by Cleary, Gottlieb, Steen & Hamilton, New York, New York, and for
the Underwriters by Brown & Wood LLP, Washington, D.C.
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POOL 1 ANNEX
THE POOL 1 MORTGAGE LOANS
AND THE POOL 1 CERTIFICATES
Interest and principal will be distributable on the Pool 1 Certificates
solely out of the Pool 1 Available Funds received in respect of the Pool 1
Mortgage Loans. This Pool 1 Annex sets forth certain data with respect to the
Pool 1 Mortgage Loans, describes the manner in which interest and principal
will be distributable on the Pool 1 Certificates and discusses certain yield
and weighted average life considerations relevant to an investment in the Pool
1 Certificates.
THE POOL 1 MORTGAGE LOANS
It is expected that at least 93% (by Scheduled Principal Balance as of the
Cut-off Date) of the Pool 1 Mortgage Loans (and substantially all of the Pool
1 Mortgage Loans with loan-to-value ratios in excess of 80%) will have been
originated under the Company's full or alternative documentation program or
other full or alternative documentation programs acceptable to the Company,
that no more than 5% of the Pool 1 Mortgage Loans will have been originated
under the Company's "No Income Verification Program" or other no income
verification programs acceptable to the Company, that no more than 1% of the
Pool 1 Mortgage Loans will have been originated under the Company's "Enhanced
Streamlined Refinance Program" or other streamlined refinance programs
acceptable to the Company, that no more than 0.5% of the Pool 1 Mortgage Loans
will have been originated under the Company's "No Ratio Program" or other no
ratio programs acceptable to the Company and that no more than 1% of the Pool
1 Mortgage Loans will have been originated under the Company's "No Income No
Asset Verification Program" or other no income, no asset verification programs
acceptable to the Company. See "The Trust Fund--The Mortgage Loans--Loan
Underwriting Policies" in the Prospectus.
The Pool 1 Mortgage Loans will have an aggregate Scheduled Principal Balance
as of the Cut-off Date, after deducting payments of principal due on or before
such date, of approximately $500,745,644. This amount is subject to a
permitted variance such that the aggregate Scheduled Principal Balance thereof
will not be less than $475,000,000 or greater than $525,000,000.
The Mortgage Rates borne by the Pool 1 Mortgage Loans are expected to range
from 6.00% to 9.00% per annum, and the weighted average Mortgage Rate as of
the Cut-off Date of such Mortgage Loans is expected to be between 7.41% and
7.45% per annum. The original principal balances of such Mortgage Loans are
expected to range from $34,000 to $1,000,000 and, as of the Cut-off Date, the
average Scheduled Principal Balance of such Mortgage Loans is not expected to
exceed $306,000 after application of payments due on or before the Cut-off
Date. It is expected that the month and year of the earliest origination date
of any Pool 1 Mortgage Loan will be September 1990, and the month and year of
the latest scheduled maturity date of any Pool 1 Mortgage Loan will be May
2028. All of the Pool 1 Mortgage Loans will have original terms to maturity of
20 to 30 years, and it is expected that the weighted average scheduled
remaining term to maturity of such Mortgage Loans will be between 356 and 358
months as of the Cut-off Date.
The Pool 1 Mortgage Loans are expected to have the following additional
characteristics (by Scheduled Principal Balance of all the Pool 1 Mortgage
Loans) as of the Cut-off Date:
It is expected that Mortgaged Properties relating to the Pool 1 Mortgage
Loans that represent no more than 52% of the Principal Balance of all the
Pool 1 Mortgage Loans (by Scheduled Principal Balance as of the Cut-off
Date) will be located in California. An occurrence of a natural disaster or
adverse circumstance in the real estate market or economy of California is
likely to have a disproportionate impact on payments in respect of the Pool
1 Mortgage Loans. No more than 5% of such Mortgaged Loans will be secured
by Mortgaged Properties located in any one state except California,
Massachusetts and New Jersey.
No more than 12% of the Pool 1 Mortgage Loans will have a Scheduled
Principal Balance of more than $500,000 and up to and including $750,000.
No more than 2% of the Pool 1 Mortgage Loans will have a Scheduled
Principal Balance of more than $750,000 and up to and including $1,000,000.
None of the Pool 1 Mortgage Loans will have a Scheduled Principal Balance
of more than $1,000,000.
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No more than 13% of such Mortgage Loans will have a loan-to-value ratio
at origination in excess of 80%, no more than 5% of such Mortgage Loans
will have a loan-to-value ratio at origination in excess of 90%, and none
of such Mortgage Loans will have a loan-to-value ratio at origination in
excess of 95%. As of the Cut-off Date, the weighted average loan-to-value
ratio at origination of such Mortgage Loans is expected to be between 73%
and 75%.
No more than 1% of such Mortgage Loans will have a loan-to-value ratio at
origination calculated based on an appraisal conducted more than one year
before the origination date thereof.
The proceeds of at least 32% of such Mortgage Loans will have been used
to acquire the related Mortgaged Property. The proceeds of the remainder of
such Mortgage Loans will have been used to refinance an existing loan. No
more than 13% of such Mortgage Loans will have been the subject of "cash-
out" refinancings. No more than 1% of such Mortgage Loans will have been
relocation loans.
No more than 1% of such Mortgage Loans will be temporary buy-down
Mortgage Loans.
No more than 2% of such Mortgage Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
At least 96% of such Mortgage Loans will be secured by Mortgaged
Properties determined by the Company to be the primary residence of the
Mortgagor. The basis for such determination will be the making of a
representation by the Mortgagor at origination that the underlying property
will be used as the Mortgagor's primary residence.
At least 86% of such Mortgage Loans will be secured by single-family,
detached residences. No more than 6% of such Mortgage Loans will be secured
by condominiums.
No more than 1% of the Pool 1 Mortgage Loans will be Cooperative Loans
secured by shares of stock in cooperative housing corporations and
assignments of the proprietary leases to cooperative apartment units
therein (see "The Trust Fund--The Mortgage Loans" in the Prospectus).
Federal emergency aid has been made available to property owners in
several areas of California and several other states as a result of recent
flooding, ice storms and, in California, landslides. Approximately 52.36%
(by Scheduled Principal Balance as of the Cut-off Date) of the Pool 1
Mortgage Loans (93.67% of which are located in California) are secured by
related Mortgaged Properties located in the 53 counties (24 of which
counties are located in California) known to be affected by such
conditions, and it is unknown whether additional areas may be affected by
such conditions. The Company has not undertaken the physical inspection of
any such Mortgaged Property and, as a result, there can be no assurance
that material damage to any Mortgaged Property in such affected areas has
not occurred.
Under the Agreement, the Company will represent and warrant that each
Pool 1 Mortgaged Property is free of material damage and in good repair as
of the date of issuance of the Certificates. In the event of an uncured
breach of such representation and warranty that materially and adversely
affects the interest of Certificateholders, the Company will be required to
repurchase the affected Pool 1 Mortgage Loan or substitute another mortgage
loan therefor. If any damage caused by the flooding, ice storms or
landslides occurs after the Closing Date, the Company will have no such
obligation. In addition, the standard hazard policies covering the
Mortgaged Properties generally do not cover damage caused by flooding and
landslides, and flood or landslide insurance may not have been obtained
with respect to such Mortgaged Properties. To the extent that any insurance
proceeds received with respect to any damaged Pool 1 Mortgaged Properties
are not applied to the restoration thereof, such proceeds will be used to
prepay the related Pool 1 Mortgage Loans in whole or in part. Any
repurchases or prepayments of the Pool 1 Mortgage Loans may reduce the
weighted average lives of the Pool 1 Certificates offered hereby and will
reduce the yields on any Classes of Pool 1 Certificates purchased at a
premium.
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DISTRIBUTIONS ON THE POOL 1 CERTIFICATES
Allocation of Pool 1 Available Funds. Interest and principal on the Pool 1
Certificates will be distributed monthly on each Distribution Date commencing
in May 1998 in an aggregate amount equal to the Pool 1 Available Funds for
such Distribution Date.
On each Distribution Date, the Pool 1 Available Funds will be distributed in
the following order of priority among the Certificates:
first, to the Classes of Pool 1 Senior Certificates (other than the Class 1-
PO Certificates), the Accrued Certificate Interest on each such Class for such
Distribution Date, any shortfall in available amounts being allocated among
such Classes in proportion to the amount of Accrued Certificate Interest
otherwise distributable thereon;
second, to the Classes of Pool 1 Senior Certificates (other than the Class
1-PO Certificates), any Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates, to the extent of remaining
Pool 1 Available Funds, any shortfall in available amounts being allocated
among such Classes in proportion to the amount of such Accrued Certificate
Interest remaining undistributed for each such Class for such Distribution
Date;
third, to the Classes of Pool 1 Senior Certificates, in reduction of the
Class Certificate Principal Balances thereof, to the extent of remaining Pool
1 Available Funds, concurrently, as follows:
(a) to the Class 1-A1, Class 1-A2, Class 1-A3, Class 1-A4, Class 1-A5 and
Class 1-R Certificates, the Pool 1 Senior Optimal Principal Amount for such
Distribution Date, concurrently, as follows:
(i) to the Class 1-A1 Certificates (the "Pool 1 Category A Senior
Certificates"), the Pool 1 Category A Senior Optimal Principal Amount
(as defined herein) for such Distribution Date, until the Class
Certificate Principal Balance thereof has been reduced to zero; and
(ii) to the Class 1-A2, Class 1-A3, Class 1-A4, Class 1-A5 and Class
1-R Certificates ( the "Pool 1 Category B Senior Certificates"), the
Pool 1 Category B Senior Optimal Principal Amount (as defined herein)
for such Distribution Date, concurrently, as follows:
(A) to the Class 1-A5 Certificates ( the "Pool 1 Category B Group
II Senior Certificates"), the Pool 1 Category B Group II Principal
Distribution Amount (as defined herein) for such Distribution Date,
until the Class Certificate Principal Balance thereof has been
reduced to zero; and
(B) to the Class 1-A2, Class 1-A3, Class 1-A4 and Class 1-R
Certificates (the "Pool 1 Category B Group I Senior Certificates"),
the Pool 1 Category B Senior Optimal Principal Amount for such
Distribution Date, less the Pool 1 Category B Group II Principal
Distribution Amount, in the following order of priority:
(1) to the Class 1-R Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(2) concurrently, approximately 1.6000000000% of the amount
set forth in clause (a)(ii)(B) remaining after the distribution
pursuant to clause (1) above to the Class 1-A2 Certificates and
approximately 98.4000000000% of such remaining amount to the
Class 1-A3 Certificates, until the Class Certificate Principal
Balance of the Class 1-A2 Certificates has been reduced to zero;
(3) to the Class 1-A3 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
and
(4) to the Class 1-A4 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
and
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(b) to the Class 1-PO Certificates, the Class 1-PO Principal Distribution
Amount for such Distribution Date, until the Class Certificate Principal
Balance thereof has been reduced to zero;
fourth, to the Class 1-PO Certificates, to the extent of remaining Pool 1
Available Funds, the Class 1-PO Deferred Amount for such Distribution Date,
until the Class Certificate Principal Balance thereof has been reduced to
zero; provided that, (i) on any Distribution Date, distributions pursuant to
this priority fourth shall not exceed the Pool 1 Junior Optimal Principal
Amount for such Distribution Date, (ii) such distributions shall not reduce
the Class Certificate Principal Balance of the Class 1-PO Certificates and
(iii) no distribution will be made in respect of the Class 1-PO Deferred
Amount after the Distribution Date on which the respective Class Certificate
Principal Balances of the Pool 1 Junior Certificates have been reduced to zero
(the "Pool 1 Cross- Over Date");
fifth, to the Class 1-M Certificates, to the extent of remaining Pool 1
Available Funds, in the following order: (a) the Accrued Certificate Interest
thereon for such Distribution Date, (b) any Accrued Certificate Interest
thereon remaining undistributed from previous Distribution Dates and (c) such
Class's Allocable Share (as defined under "--Principal" below) for such
Distribution Date;
sixth, to the Class 1-B1 Certificates, to the extent of remaining Pool 1
Available Funds, in the following order: (a) the Accrued Certificate Interest
thereon for such Distribution Date, (b) any Accrued Certificate Interest
thereon remaining undistributed from previous Distribution Dates and (c) such
Class's Allocable Share for such Distribution Date;
seventh, to the Class 1-B2 Certificates, to the extent of remaining Pool 1
Available Funds, in the following order: (a) the Accrued Certificate Interest
thereon for such Distribution Date, (b) any Accrued Certificate Interest
thereon remaining undistributed from previous Distribution Dates and (c) such
Class's Allocable Share for such Distribution Date; and
eighth, to the Class 1-B3, Class 1-B4 and Class 1-B5 Certificates, to the
extent of remaining Pool 1 Available Funds: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates and
(c) such Classes' Allocable Shares for such Distribution Date.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then-current Class Certificate Principal Balances.
The percentages set forth in priority third above and in the definitions of
"Pool 1 Category A Percentage" and "Pool 1 Category B Percentage" below were
calculated on the basis of the Class Certificate Principal Balances of the
related Certificates of the relevant Certificate Group set forth on the cover
hereof. If such Class Certificate Principal Balances are increased or
decreased in accordance with the variance permitted hereby, the applicable
percentages will be increased or decreased substantially correspondingly.
On each Distribution Date after the Pool 1 Cross-Over Date, distributions of
principal on the outstanding Pool 1 Senior Certificates will be made pro rata
among all such Certificates, regardless of the allocation, or sequential
nature, of principal payments described in priority third above.
If, after distributions have been made pursuant to priorities first and
second above on any Distribution Date, the remaining Pool 1 Available Funds
are less than the sum of the Pool 1 Senior Optimal Principal Amount and the
Class 1-PO Principal Distribution Amount for such Distribution Date, the
amounts distributable under priority third above shall be proportionately
reduced, and such remaining Pool 1 Available Funds will be distributed on the
Pool 1 Senior Certificates in accordance with the applicable clauses of
priority third above on the basis of such reduced amounts. Notwithstanding
such allocation, Realized Losses in respect of Pool 1 will be allocated to the
Pool 1 Certificates as described under "--Allocation of Realized Losses on the
Pool 1 Certificates" herein.
A1-4
<PAGE>
Interest. Interest will accrue on the Pool 1 Certificates offered hereby at
the fixed Certificate Interest Rates set forth on the cover hereof during each
one-month period ending on the last day of the month preceding the month in
which a Distribution Date occurs (each, an "Interest Accrual Period").
Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Interest will accrue on the Class 1-B3, Class 1-B4 and Class 1-B5
Certificates at the Certificate Interest Rate of 6.75% per annum during each
Interest Accrual Period.
The Class 1-PO Certificates are principal-only Certificates and will not
accrue interest.
The "Accrued Certificate Interest" for any Pool 1 Certificate (other than a
Class 1-PO Certificate) for any Distribution Date will equal the interest
accrued during the related Interest Accrual Period at the applicable
Certificate Interest Rate on the Certificate Principal Balance of such
Certificate immediately prior to such Distribution Date, less such
Certificate's share of any allocable Net Interest Shortfall (as defined
below), the interest portion of any Excess Losses (as defined herein)
allocable to Certificateholders through the Pool 1 Cross-Over Date and, after
the Pool 1 Cross-Over Date, the interest portion of Realized Losses allocable
to Certificateholders including Excess Losses, in each case in respect of the
related Pool 1 Mortgage Loans.
The "Certificate Principal Balance" of any Pool 1 Certificate as of any
Distribution Date will equal such Certificate's Certificate Principal Balance
on the Closing Date as reduced by (i) all amounts distributed on previous
Distribution Dates on such Certificate on account of principal, (ii) the
principal portion of all Realized Losses previously allocated to such
Certificate and (iii) in the case of a Pool 1 Junior Certificate, such
Certificate's pro rata share, if any, of the Pool 1 Junior Certificate
Writedown Amount (as defined below) and the Class 1-PO Deferred Payment
Writedown Amount (as defined below) for previous Distribution Dates. As of any
Distribution Date, the "Pool 1 Junior Certificate Writedown Amount" will equal
the amount by which (a) the sum of the Class Certificate Principal Balances of
all the Pool 1 Certificates (after giving effect to the distribution of
principal and the application of Realized Losses in respect of the related
Mortgage Loans in reduction of the Certificate Principal Balances of such
Certificates on such Distribution Date) exceeds (b) the aggregate Scheduled
Principal Balance of the Pool 1 Mortgage Loans on the first day of the month
of such Distribution Date less any applicable Deficient Valuations occurring
on or prior to the Bankruptcy Coverage Termination Date in respect of Pool 1.
For any Distribution Date, the "Class 1-PO Deferred Payment Writedown Amount"
will equal the amount, if any, distributed on such date in respect of the
Class 1-PO Deferred Amount pursuant to priority fourth under "--Allocation of
Pool 1 Available Funds" above. The Pool 1 Junior Certificate Writedown Amount
and the Class 1-PO Deferred Payment Writedown Amount will be allocated to the
Classes of Pool 1 Junior Certificates in inverse order of priority, until the
Class Certificate Principal Balance of each such Class has been reduced to
zero.
With respect to any Distribution Date, the "Net Interest Shortfall"
allocable to Certificateholders in respect of a Mortgage Pool will equal the
excess of the aggregate Interest Shortfalls allocable to Certificateholders in
respect of the related Mortgage Loans with respect to such Distribution Date
over the applicable Compensating Interest Payment (as defined under "The
Pooling and Servicing Agreement--Servicing Compensation, Compensating Interest
and Payment of Expenses" herein), if any, for such Distribution Date. For
purposes of making the foregoing determinations, any Interest Shortfalls in
respect of the Mortgage Loans in a Mortgage Pool will be allocated on each
Distribution Date between the outstanding related Certificates (other than the
related Class PO Certificates) and the Company in respect of its Supplemental
Servicing Fees (as defined herein) in proportion to the aggregate amount of
Accrued Certificate Interest and Supplemental Servicing Fees, respectively,
that would have been allocated thereto in the absence of such Interest
Shortfalls.
With respect to any Distribution Date, an "Interest Shortfall" in respect of
a Mortgage Loan will result from (i) any voluntary prepayment of principal in
full on such Mortgage Loan received from the sixteenth day (or, in the case of
the first Distribution Date, from the Cut-off Date) through the last day of
the month preceding such Distribution Date; (ii) any partial prepayment of
principal on such Mortgage Loan by the Mortgagor during the month preceding
such Distribution Date; or (iii) a reduction in the interest rate on such
Mortgage Loan due
A1-5
<PAGE>
to the application of the Soldiers' and Sailors' Civil Relief Act of 1940
whereby, in general, members of the Armed Forces who entered into mortgages
prior to the commencement of military service may have the interest rates on
those mortgage loans reduced for the duration of their active military
service. See "Certain Legal Aspects of the Mortgage Loans and Contracts--The
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act" in the Prospectus. As
to any Distribution Date and any Mortgage Loan with respect to which a
prepayment in full has occurred as described above, the resulting "Interest
Shortfall" generally will equal the difference between (a) one month's
interest at the Mortgage Rate net of the applicable Base Servicing Fee (as
defined herein) (the "Net Mortgage Rate") on the Scheduled Principal Balance
of such Mortgage Loan, and (b) the amount of interest at the Net Mortgage Rate
actually received with respect to such Mortgage Loan. In the case of a partial
prepayment, the resulting "Interest Shortfall" will equal one month's interest
at the applicable Net Mortgage Rate on the amount of such prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
allocable to Certificateholders through the Pool 1 Cross-Over Date and, after
the Pool 1 Cross-Over Date, the interest portion of any Realized Losses
allocable to Certificateholders (see "--Allocation of Realized Losses on the
Pool 1 Certificates"), in each case in respect of the Pool 1 Mortgage Loans,
will, on each Distribution Date, be allocated among all the outstanding Pool 1
Certificates (other than the Class 1-PO Certificates) in proportion to the
amount of Accrued Certificate Interest that would have been allocated thereto
in the absence of such shortfall and losses. See "The Pooling and Servicing
Agreement--Servicing Compensation, Compensating Interest and Payment of
Expenses" herein.
The interest portion of any Realized Losses (other than Excess Losses) in
respect of the Pool 1 Mortgage Loans occurring prior to the Pool 1 Cross-Over
Date will not be allocated among any Pool 1 Certificates, but will reduce the
amount of Pool 1 Available Funds on the related Distribution Date. As a result
of the subordination of the Pool 1 Junior Certificates in right of
distribution relative to the Pool 1 Senior Certificates, such losses will be
borne first by the Pool 1 Junior Certificates (to the extent then outstanding)
in inverse order of priority.
If the Pool 1 Available Funds are insufficient on any Distribution Date to
distribute the aggregate Accrued Certificate Interest on the Pool 1 Senior
Certificates (other than the Class 1-PO Certificates) to their
Certificateholders, any shortfall in available amounts will be allocated among
such Classes of Pool 1 Senior Certificates in proportion to the amounts of
Accrued Certificate Interest otherwise distributable thereon. The amount of
any such undistributed Accrued Certificate Interest will be added to the
amount to be distributed in respect of interest on the Pool 1 Senior
Certificates (other than the Class 1-PO Certificates) on subsequent
Distribution Dates in accordance with priority second under "--Allocation of
Pool 1 Available Funds" above. No interest will accrue on any Accrued
Certificate Interest remaining undistributed from previous Distribution Dates.
Principal. All payments and other amounts received in respect of principal
of the Pool 1 Mortgage Loans will be allocated between (i) the Pool 1
Certificates (other than the Class 1-PO Certificates), on the one hand, and
(ii) the Class 1-PO Certificates, on the other, in each case based on the
applicable Non-PO Percentage and the applicable PO Percentage (each as defined
herein), respectively, of such amounts.
The "Non-PO Percentage" with respect to any Pool 1 Mortgage Loan with a Net
Mortgage Rate ("NMR") less than 6.75% per annum (each such Mortgage Loan, a
"Pool 1 Discount Mortgage Loan") will be the fraction, expressed as a
percentage, equal to NMR divided by 6.75%. The "Non-PO Percentage" with
respect to any Pool 1 Mortgage Loan with a Net Mortgage Rate equal to or
greater than 6.75% (each such Mortgage Loan, a "Pool 1 Non-Discount Mortgage
Loan") will be 100%. The "PO Percentage" with respect to any Pool 1 Discount
Mortgage Loan will be the fraction, expressed as a percentage, equal to
(6.75%--NMR) divided by 6.75%. The "PO Percentage" with respect of any Pool 1
Non-Discount Mortgage Loan will be 0%.
The initial Class Certificate Principal Balance of the Class 1-PO
Certificates, which are not offered hereby, will be approximately $528,986,
subject to the variance described herein.
A1-6
<PAGE>
Distributions in reduction of the Certificate Principal Balance of each Pool
1 Senior Certificate will be made on each Distribution Date pursuant to
priority third under "--Allocation of Pool 1 Available Funds" above. In
accordance with priority third, the Pool 1 Available Funds remaining after the
distribution of interest on the Pool 1 Senior Certificates (other than the
Class 1-PO Certificates) will be allocated to the Pool 1 Senior Certificates
in an aggregate amount not to exceed the sum of the Pool 1 Senior Optimal
Principal Amount and the Class 1-PO Principal Distribution Amount for such
Distribution Date. Distributions in reduction of the Class Certificate
Principal Balances of the Class 1-M, Class 1-B1 and Class 1-B2 Certificates
will be made pursuant to priorities fifth, sixth, and seventh, respectively,
under "--Allocation of Pool 1 Available Funds" above. In accordance with each
such priority, the Pool 1 Available Funds, if any, remaining after
distributions of principal and interest on the Pool 1 Senior Certificates and
payments in respect of the Class 1-PO Deferred Amount on such Distribution
Date will be allocated to the Class 1-M, Class 1-B1 and Class 1-B2
Certificates in an amount equal to each such Class's Allocable Share for such
Distribution Date, provided that no distribution of principal will be made on
any such Class until any related Class ranking prior thereto has received
distributions of interest and principal, and such Class has received
distributions of interest, on such Distribution Date. The Pool 1 Category B
Group II Senior Certificates will not receive any distributions in respect of
scheduled payments, prepayments or other unscheduled recoveries of principal
on the Pool 1 Mortgage Loans during the first five years after the Cut-off
Date, except as otherwise described herein on or following the earlier of the
Pool 1 Category B Group I Final Distribution Date or the Pool 1 Cross-Over
Date.
The "Pool 1 Senior Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of (i) the Pool 1 Senior
Percentage (as defined herein) of the applicable Non-PO Percentage of all
scheduled payments of principal due on each Pool 1 Mortgage Loan on the first
day of the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment for
previous principal prepayments and the principal portion of Debt Service
Reductions in respect of Pool 1 after the Pool 1 Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule by
reason of any other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period), (ii) the Pool 1 Senior Prepayment Percentage
(as defined herein) of the applicable Non-PO Percentage of the Scheduled
Principal Balance of each Pool 1 Mortgage Loan which was the subject of a
prepayment in full received by the Company (or, in the case of a Pool 1
Mortgage Loan master-serviced by the Company, of which the Company receives
notice) during the applicable Prepayment Period (as defined below), (iii) the
Pool 1 Senior Prepayment Percentage of the applicable Non-PO Percentage of all
partial prepayments of principal received in respect of Pool 1 during the
applicable Prepayment Period, (iv) the lesser of (a) the Pool 1 Senior
Prepayment Percentage of the applicable Non-PO Percentage of the sum of (w)
the net liquidation proceeds allocable to principal on each Pool 1 Mortgage
Loan which became a Liquidated Mortgage Loan during the related Prepayment
Period (other than Pool 1 Mortgage Loans described in clause (x)) and (x) the
principal balance of each Pool 1 Mortgage Loan that was purchased by a private
mortgage insurer during the related Prepayment Period as an alternative to
paying a claim under the related insurance policy, and (b) the Pool 1 Senior
Percentage of the applicable Non-PO Percentage of the sum of (w) the Scheduled
Principal Balance of each Pool 1 Mortgage Loan which became a Liquidated
Mortgage Loan during the related Prepayment Period (other than Pool 1 Mortgage
Loans described in clause (x)) and (x) the Scheduled Principal Balance of each
Pool 1 Mortgage Loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim under the
related insurance policy less (y) in the case of clause (b), the Pool 1 Senior
Percentage of the applicable Non-PO Percentage of the principal portion of
Excess Losses (other than Debt Service Reductions) in respect of Pool 1 during
the related Prepayment Period, and (v) the Pool 1 Senior Prepayment Percentage
of the applicable Non-PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Pool 1 Mortgage Loan which was repurchased by the Company in
connection with such Distribution Date and (b) the difference, if any, between
the Scheduled Principal Balance of a Pool 1 Mortgage Loan that has been
replaced by the Company with a substitute Pool 1 Mortgage Loan pursuant to the
Agreement in connection with such Distribution Date and the Scheduled
Principal Balance of such substitute Pool 1 Mortgage Loan.
With respect to any Pool 1 Mortgage Loan that was the subject of a voluntary
prepayment in full and any Distribution Date, the "Prepayment Period" is the
period from the sixteenth day of the month preceding the
A1-7
<PAGE>
month of such Distribution Date (or, in the case of the first Distribution
Date, from the Cut-off Date) through the fifteenth day of the month of such
Distribution Date. With respect to any other unscheduled prepayment of
principal of any Pool 1 Mortgage Loan and any Distribution Date, the
"Prepayment Period" is the month preceding the month of such Distribution
Date.
The "Pool 1 Category A Senior Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the Pool 1 Category A Percentage
(as defined herein) of the Pool 1 Senior Optimal Principal Amount.
The "Pool 1 Category B Senior Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the Pool 1 Category B Percentage
(as defined herein) of the Pool 1 Senior Optimal Principal Amount.
The "Pool 1 Category A Percentage" for any Distribution Date will equal
approximately 41.759%, subject to the variance described herein. The "Pool 1
Category B Percentage" for any Distribution Date will equal approximately
58.241%, subject to the variance described herein.
The "Pool 1 Category B Group II Principal Distribution Amount" for any
Distribution Date will equal the product of (a) the Pool 1 Category B Senior
Optimal Principal Amount for such date multiplied by (b) the Class 1-A5
Percentage for such date multiplied by (c) the Class 1-A5 Distribution
Percentage. Notwithstanding the foregoing, (i) on the Pool 1 Category B Group
I Final Distribution Date, the Pool 1 Category B Group II Principal
Distribution Amount will be increased by any Pool 1 Category B Senior Optimal
Principal Amount remaining after distributions of principal have been made on
the Pool 1 Category B Group I Senior Certificates, and (ii) following the Pool
1 Category B Group I Final Distribution Date, the Pool 1 Category B Group II
Principal Distribution Amount will equal the Pool 1 Category B Senior Optimal
Principal Amount.
The "Class 1-A5 Distribution Percentage" for any Distribution Date will
equal 0% through the Distribution Date in April 2003; 30% thereafter through
the Distribution Date in April 2004; 40% thereafter through the Distribution
Date in April 2005; 60% thereafter through the Distribution Date in April
2006; 80% thereafter through the Distribution Date in April 2007; and 100%
thereafter.
The "Class 1-A5 Percentage" for any Distribution Date will equal the
percentage (carried to six places rounded up) obtained by dividing (x) the
Class Certificate Principal Balance of the Class 1-A5 Certificates immediately
preceding such Distribution Date by (y) the aggregate Class Certificate
Principal Balance of the Pool 1 Category B Senior Certificates immediately
preceding such Distribution Date. The initial Class 1-A5 Percentage is
expected to be approximately 10.40%.
The "Pool 1 Senior Percentage" on any Distribution Date will equal the
lesser of (i) 100% and (ii) the percentage (carried to six places rounded up)
obtained by dividing the aggregate Certificate Principal Balances of all the
Pool 1 Senior Certificates (less the Class Certificate Principal Balance of
the Class 1-PO Certificates) immediately preceding such Distribution Date by
the aggregate Certificate Principal Balances of all the Pool 1 Certificates
(less the Class Certificate Principal Balance of the Class 1-PO Certificates)
immediately preceding such Distribution Date. The initial Pool 1 Senior
Percentage is expected to be approximately 95.75%.
A1-8
<PAGE>
The "Pool 1 Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) POOL 1 SENIOR PREPAYMENT PERCENTAGE
------------------------ -----------------------------------
<C> <S>
May 1998--April 2003.... 100%
May 2003--April 2004.... Pool 1 Senior Percentage plus 70% of the Pool 1 Junior Percentage
May 2004--April 2005.... Pool 1 Senior Percentage plus 60% of the Pool 1 Junior Percentage
May 2005--April 2006.... Pool 1 Senior Percentage plus 40% of the Pool 1 Junior Percentage
May 2006--April 2007.... Pool 1 Senior Percentage plus 20% of the Pool 1 Junior Percentage
May 2007 and thereafter. Pool 1 Senior Percentage
</TABLE>
Notwithstanding the foregoing, if the Pool 1 Senior Percentage on any
Distribution Date exceeds the initial Pool 1 Senior Percentage, the Pool 1
Senior Prepayment Percentage for such Distribution Date will equal 100%.
In addition, no reduction of the Pool 1 Senior Prepayment Percentage below
the level in effect for the most recent prior period specified in the table
above shall be effective on any Distribution Date (such limitation being the
"Pool 1 Senior Prepayment Percentage Stepdown Limitation") unless, as of the
last day of the month preceding such Distribution Date, either:
(A)(i) the aggregate Scheduled Principal Balance of Pool 1 Mortgage Loans
delinquent 60 days or more (including for this purpose any Pool 1 Mortgage
Loans in foreclosure and Pool 1 Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Fund for Pool 1)
does not exceed 50% of the aggregate Class Certificate Principal Balance of
the Pool 1 Junior Certificates as of such date and (ii) cumulative Realized
Losses in respect of Pool 1 do not exceed (a) 30% of the aggregate Class
Certificate Principal Balance of the Pool 1 Junior Certificates as of the
date of issuance of the Certificates (the "Original Pool 1 Junior Principal
Balance") if such Distribution Date occurs between and including May 2003
and April 2004, (b) 35% of the Original Pool 1 Junior Principal Balance if
such Distribution Date occurs between and including May 2004 and April
2005, (c) 40% of the Original Pool 1 Junior Principal Balance if such
Distribution Date occurs between and including May 2005 and April 2006,
(d) 45% of the Original Pool 1 Junior Principal Balance if such
Distribution Date occurs between and including May 2006 and April 2007, and
(e) 50% of the Original Pool 1 Junior Principal Balance if such
Distribution Date occurs during or after May 2007; or
(B)(i) the aggregate Scheduled Principal Balance of Pool 1 Mortgage Loans
delinquent 60 days or more (including for this purpose any Pool 1 Mortgage
Loans in foreclosure and Pool 1 Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Fund for Pool 1),
averaged over the last three months, as a percentage of the aggregate
Scheduled Principal Balance of all Mortgage Loans averaged over the last
three months, does not exceed 4%, and (ii) cumulative Realized Losses in
respect of Pool 1 do not exceed (a) 10% of the Original Pool 1 Junior
Principal Balance if such Distribution Date occurs between and including
May 2003 and April 2004, (b) 15% of the Original Pool 1 Junior Principal
Balance if such Distribution Date occurs between and including May 2004 and
April 2005, (c) 20% of the Original Junior Principal Balance if such
Distribution Date occurs between and including May 2005 and April 2006, (d)
25% of the Original Pool 1 Junior Principal Balance if such Distribution
Date occurs between and including May 2006 and April 2007, and (e) 30% of
the Original Pool 1 Junior Principal Balance if such Distribution Date
occurs during or after May 2007.
The "Class 1-PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of (i) the applicable PO
Percentage of all scheduled payments of principal due on each Pool 1 Mortgage
Loan on the first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal portion of
Debt Service Reductions in respect of Pool 1 after the Pool 1 Bankruptcy
Coverage Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period), (ii) the applicable PO
Percentage of
A1-9
<PAGE>
the Scheduled Principal Balance of each Pool 1 Mortgage Loan which was the
subject of a prepayment in full received by the Company (or, in the case of a
Pool 1 Mortgage Loan master-serviced by the Company, of which the Company
receives notice) during the related Prepayment Period, (iii) the applicable PO
Percentage of all partial prepayments of principal received during the related
Prepayment Period, (iv) the applicable PO Percentage of the sum of (w) the net
liquidation proceeds allocable to principal on each Pool 1 Mortgage Loan which
became a Liquidated Mortgage Loan during the related Prepayment Period (other
than Pool 1 Mortgage Loans described in clause (x)) and (x) the principal
balance of each Pool 1 Mortgage Loan that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to paying a
claim under the related insurance policy, and (v) the applicable PO Percentage
of the sum of (a) the Scheduled Principal Balance of each Pool 1 Mortgage Loan
which was repurchased by the Company in connection with such Distribution Date
and (b) the difference, if any, between the Scheduled Principal Balance of a
Pool 1 Mortgage Loan that has been replaced by the Company with a substitute
Pool 1 Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date and the Scheduled Principal Balance of such substitute Pool
1 Mortgage Loan. For purposes of clauses (ii) and (v) above, the Scheduled
Principal Balance of a Pool 1 Mortgage Loan will be reduced by the amount of
any Deficient Valuation that occurred on or before the Pool 1 Bankruptcy
Coverage Termination Date.
The "Pool 1 Category B Group I Final Distribution Date" is the Distribution
Date on which the Class Certificate Principal Balance of each of the Pool 1
Category B Group I Senior Certificates have been reduced to zero.
The "Pool 1 Junior Percentage" on any Distribution Date will equal 100%
minus the Pool 1 Senior Percentage. The "Pool 1 Junior Prepayment Percentage"
will equal 100% minus the Pool 1 Senior Prepayment Percentage, except that on
any Distribution Date after the respective Class Certificate Principal
Balances of the Pool 1 Senior Certificates (other than the Class 1-PO
Certificates) have each been reduced to zero (the "Pool 1 Senior Final
Distribution Date"), the Pool 1 Junior Prepayment Percentage will equal 100%.
The initial Pool 1 Junior Percentage is expected to be approximately 4.25%.
The "Pool 1 Junior Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following (but in
no event greater than the aggregate Class Certificate Principal Balances of
the Pool 1 Junior Certificates immediately prior to such Distribution Date):
(i) the Pool 1 Junior Percentage of the applicable Non-PO Percentage of all
scheduled payments of principal due on each outstanding Pool 1 Mortgage Loan
on the first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal portion of
Debt Service Reductions in respect of Pool 1 after the Pool 1 Bankruptcy
Coverage Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period), (ii) the Pool 1 Junior
Prepayment Percentage of the applicable Non-PO Percentage of the Scheduled
Principal Balance of each Pool 1 Mortgage Loan which was the subject of a
prepayment in full received by the Company (or, in the case of a Pool 1
Mortgage Loan master-serviced by the Company, of which the Company receives
notice) during the related Prepayment Period, (iii) the Pool 1 Junior
Prepayment Percentage of the applicable Non-PO Percentage of all partial
prepayments of principal received in respect of Pool 1 during the related
Prepayment Period (plus, on the Pool 1 Senior Final Distribution Date, 100% of
any Pool 1 Senior Optimal Principal Amount remaining undistributed on such
date), (iv) the excess, if any, of the sum of (a) the applicable Non-PO
Percentage of the net liquidation proceeds allocable to principal received
during the related Prepayment Period in respect of each Liquidated Mortgage
Loan in Pool 1 (other than Pool 1 Mortgage Loans described in clause (b)) and
(b) the applicable Non-PO Percentage of the principal balance of each Pool 1
Mortgage Loan that was purchased by a private mortgage insurer during the
related Prepayment Period as an alternative to paying a claim under the
related insurance policy over (c) the sum of the amounts distributable to the
Pool 1 Senior Certificateholders (other than the holders of the Class 1-PO
Certificates) pursuant to clause (iv) of the definition of Pool 1 Senior
Optimal Principal Amount on such Distribution Date, and (v) the Pool 1 Junior
Prepayment Percentage of the applicable Non-PO Percentage of the sum of (a)
the Scheduled Principal Balance of each Pool 1 Mortgage Loan which was
repurchased by the Company in connection with such Distribution Date and (b)
the difference, if any,
A1-10
<PAGE>
between the Scheduled Principal Balance of a Pool 1 Mortgage Loan that has
been replaced by the Company with a substitute Pool 1 Mortgage Loan pursuant
to the Agreement in connection with such Distribution Date and the Scheduled
Principal Balance of such substitute Pool 1 Mortgage Loan.
The "Allocable Share" with respect to any Class of Pool 1 Junior
Certificates on any Distribution Date will generally equal such Class's pro
rata share (based on the Class Certificate Principal Balance of each Class
entitled thereto) of each of the components of the Pool 1 Junior Optimal
Principal Amount described above; provided, that, except as described in the
second succeeding sentence, no Class 1-B Certificate shall be entitled on any
Distribution Date to receive distributions pursuant to clauses (ii), (iii) and
(v) of the definition of Pool 1 Junior Optimal Principal Amount unless the
Class Prepayment Distribution Trigger for the related Class is satisfied for
such Distribution Date. The "Class Prepayment Distribution Trigger" for a
Class of Class 1-B Certificates for any Distribution Date is satisfied if the
fraction (expressed as a percentage), the numerator of which is the aggregate
Class Certificate Principal Balance of such Class and each Class subordinate
thereto, if any, and the denominator of which is the aggregate Scheduled
Principal Balance of the Pool 1 Mortgage Loans with respect to such
Distribution Date, equals or exceeds such percentage calculated as of the
Closing Date. If, on any Distribution Date, the Class Certificate Principal
Balance of the Class 1-M Certificates or of any Class of Class 1-B
Certificates for which the related Class Prepayment Distribution Trigger was
satisfied on such Distribution Date is reduced to zero, any amounts
distributable to such Class pursuant to clauses (ii), (iii) and (v) of the
definition of Pool 1 Junior Optimal Principal Amount, to the extent of such
Class's remaining Allocable Share, shall be distributed to the remaining
Classes of Pool 1 Junior Certificates in reduction of their respective Class
Certificate Principal Balances in order of priority. If the Class Prepayment
Distribution Trigger is not satisfied for any Class of Class 1-B Certificates
on any Distribution Date, this may have the effect of accelerating the
amortization of more senior ranking Classes of Pool 1 Junior Certificates. On
any Distribution Date, any reduction in funds available for distribution to
the Classes of Pool 1 Junior Certificates resulting from a distribution of the
Class 1-PO Deferred Amount to the Class 1-PO Certificates will be allocated to
the Classes of Pool 1 Junior Certificates, in reduction of the Allocable
Shares thereof, in inverse order of priority.
Example of Distributions. For an example of hypothetical distributions on
the Certificates for a particular Distribution Date, see "Description of the
Certificates--Example of Distributions" in the accompanying Prospectus.
ALLOCATION OF REALIZED LOSSES ON THE POOL 1 CERTIFICATES
A "Realized Loss" with respect to a Mortgage Loan is (i) a Bankruptcy Loss
(as defined below) or (ii) as to any Liquidated Mortgage Loan, the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the Net
Mortgage Rate through the last day of the month of liquidation less the net
proceeds from the liquidation of, and any insurance proceeds from, such
Mortgage Loan and the related Mortgaged Property. A "Liquidated Mortgage Loan"
is any defaulted Mortgage Loan as to which the Company has determined that all
amounts which it expects to recover from or on account of such Mortgage Loan
have been recovered.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy court
may establish the value of the Mortgaged Property at an amount less than the
then outstanding principal balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to
the extent of the difference between the outstanding principal balance of such
Mortgage Loan and such reduced secured debt (such difference, a "Deficient
Valuation"). In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding, including the reduction
of the amount of the monthly payment on the related Mortgage Loan (a "Debt
Service Reduction").
A "Bankruptcy Loss" with respect to any Mortgage Loan is a Deficient
Valuation or Debt Service Reduction.
A "Fraud Loss" is any Realized Loss attributable to fraud in the origination
of the related Mortgage Loan.
A1-11
<PAGE>
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or
substances on a Mortgaged Property) other than any such damage or loss covered
by a hazard policy or a flood insurance policy required to be maintained in
respect of such Mortgaged Property under the Agreement or any loss due to
normal wear and tear or certain other causes.
On each Distribution Date, the applicable PO Percentage of the principal
portion of any Realized Loss (including any Excess Loss, but not including any
Debt Service Reduction) on a Pool 1 Discount Mortgage Loan will be allocated
to the Class 1-PO Certificates until the Class Certificate Principal Balance
thereof is reduced to zero. With respect to any Distribution Date through the
Pool 1 Cross-Over Date, the aggregate of all amounts so allocable to the Class
1-PO Certificates on such date in respect of Realized Losses other than Excess
Losses in respect of the Discount Pool 1 Mortgage Loans and all amounts
previously allocated in respect of such losses to the Class 1-PO Certificates
and not distributed on prior Distribution Dates will be the "Class 1-PO
Deferred Amount." To the extent funds are available therefor on any
Distribution Date through the Pool 1 Cross-Over Date, distributions in respect
of the Class 1-PO Deferred Amount will be made on the Class 1-PO Certificates
in accordance with priority fourth under "--Distributions on the Pool 1
Certificates--Allocation of Pool 1 Available Funds" above. Any distribution of
Pool 1 Available Funds in respect of the Class 1-PO Deferred Amount will not
reduce the Class Certificate Principal Balance of the Class 1-PO Certificates.
No interest will accrue on the Class 1-PO Deferred Amount. On each
Distribution Date through the Pool 1 Cross-Over Date, the Class Certificate
Principal Balance of the lowest ranking Class of Pool 1 Junior Certificates
then outstanding will be reduced by the amount of any distributions in respect
of the Class 1-PO Deferred Amount on such Distribution Date, through the
operation of the Class 1-PO Deferred Payment Writedown Amount. After the
Pool 1 Cross-Over Date, no distributions will be made in respect of, and
losses allocated to the Class 1-PO Certificates will not be added to, the
Class 1-PO Deferred Amount. Any distribution of Unanticipated Recoveries (as
defined in the accompanying Prospectus) in respect of Pool 1 on the Class 1-PO
Certificates will be adjusted to take into account the Class 1-PO Deferred
Amount previously paid to such Class as specified in the Agreement. See
"Servicing of the Mortgage Loans and Contracts--Unanticipated Recoveries of
Losses on the Mortgage Loans" in the accompanying Prospectus.
The applicable Non-PO Percentage of the principal portion of any Realized
Loss (other than an Excess Loss or a Debt Service Reduction) on a Pool 1
Mortgage Loan for any Distribution Date will not be allocated to any Pool 1
Senior Certificates until the Pool 1 Cross-Over Date. Prior to the Pool 1
Cross-Over Date (and on such date under certain circumstances), the applicable
Non-PO Percentage of the principal portion of any such Realized Loss will be
allocated among the outstanding Classes of Pool 1 Junior Certificates, in
inverse order of priority, until the Class Certificate Principal Balance of
each such Class has been reduced to zero (i.e., such Realized Losses will be
allocated first to the Class 1-B5 Certificates while such Certificates are
outstanding, second to the Class 1-B4 Certificates, and so on). The applicable
Non-PO Percentage of the principal portion of any Excess Loss (other than a
Debt Service Reduction) on a Pool 1 Mortgage Loan for any Distribution Date
will be allocated pro rata among all outstanding Classes of Pool 1
Certificates (other than the Class 1-PO Certificates) based on their Class
Certificate Principal Balances. An "Excess Loss" with respect to a Mortgage
Pool is any Bankruptcy Loss, Fraud Loss and Special Hazard Loss (each a type
of Realized Loss), in each case in respect of such Mortgage Pool, occurring
after the related Bankruptcy Coverage Termination Date, Fraud Coverage
Termination Date and Special Hazard Termination Date, respectively, as
described more fully below. Commencing on the Pool 1 Cross-Over Date, the
applicable Non-PO Percentage of the principal portion of any Realized Loss
(other than a Debt Service Reduction) in respect of the Pool 1 Mortgage Loans
will be allocated among the outstanding Classes of Pool 1 Senior Certificates
(other than the Class 1-PO Certificates) pro rata based upon their Class
Certificate Principal Balances.
No reduction of the Class Certificate Principal Balance of any Class of Pool
1 Certificates will be made on any Distribution Date on account of any
Realized Loss to the extent that such reduction would have the effect of
reducing the aggregate Certificate Principal Balance of all of the Pool 1
Certificates as of such Distribution Date to an amount less than the Pool
Scheduled Principal Balance of Pool 1 as of the first day of the month of such
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Distribution Date, less any Deficient Valuations in respect of the Pool 1
Mortgage Loans occurring on or prior to the Pool 1 Bankruptcy Coverage
Termination Date (such limitation being the "Pool 1 Loss Allocation
Limitation").
The principal portion of Debt Service Reductions in respect of the Pool 1
Mortgage Loans will not be allocated in reduction of the Certificate Principal
Balance of any Pool 1 Certificate. However, after the Pool 1 Bankruptcy
Coverage Termination Date, the amounts distributable under clause (i) of each
of the definitions of Pool 1 Senior Optimal Principal Amount, Class 1-PO
Principal Distribution Amount and Pool 1 Junior Optimal Principal Amount will
be reduced by the amount of any Debt Service Reductions in respect of the Pool
1 Mortgage Loans. Regardless of when they occur, such Debt Service Reductions
may reduce the amount of Pool 1 Available Funds otherwise available for
distribution on a Distribution Date. As a result of the subordination of the
Pool 1 Junior Certificates in right of distribution relative to the Pool 1
Senior Certificates, any Debt Service Reductions in respect of the Pool 1
Mortgage Loans prior to the Pool 1 Bankruptcy Coverage Termination Date will
be borne by the Pool 1 Junior Certificates (to the extent then outstanding) in
inverse order of priority.
All allocations of Realized Losses in respect of the Pool 1 Mortgage Loans
to a Class of Pool 1 Certificates will be accomplished on a Distribution Date
by reducing the applicable Class Certificate Principal Balance or Component
Principal Balance, as the case may be, by the appropriate pro rata share of
any such losses occurring during the month preceding the month of such
Distribution Date and, accordingly, will be taken into account in determining
the distributions of principal and interest on the Pool 1 Certificates
commencing on the following Distribution Date, except that the aggregate
amount of the principal portion of any Realized Losses (other than Excess
Losses and Debt Service Reductions) to be allocated to the Class 1-PO
Certificates on any Distribution Date through the Pool 1 Cross-Over Date will
also be taken into account in determining distributions in respect of the
Class 1-PO Deferred Amount for such Distribution Date.
The interest portion of all Realized Losses in respect of the Pool 1
Mortgage Loans will be allocated among the outstanding Classes of Pool 1
Certificates offered hereby to the extent described under "--Distributions on
the Pool 1 Certificates--Interest" above. For purposes of making certain
calculations under the Agreement, the interest portion of any Realized Loss in
respect of a Pool 1 Mortgage Loan will be allocated among the Base Servicing
Fee, the Supplemental Servicing Fee and interest at the excess of the Mortgage
Rate over the sum of the Base Servicing Fee and the Supplemental Servicing Fee
in proportion to the amount of accrued interest in respect of such Pool 1
Mortgage Loan that would have been so allocated in the absence of any such
shortfall.
The applicable Non-PO Percentage of any Deficient Valuation in respect of a
Pool 1 Mortgage Loan will on each Distribution Date be allocated solely to the
outstanding Pool 1 Junior Certificates until the Pool 1 Bankruptcy Coverage
Termination Date. The "Pool 1 Bankruptcy Coverage Termination Date" is the
Distribution Date upon which the Pool 1 Bankruptcy Loss Amount has been
reduced to zero or a negative number (or the Pool 1 Cross-Over Date, if
earlier). On each Distribution Date, the "Pool 1 Bankruptcy Loss Amount" will
equal approximately $171,498 (approximately 0.03% of the aggregate Scheduled
Principal Balances of the Pool 1 Mortgage Loans as of the Cut-off Date),
subject to reduction as described in the Agreement, minus the aggregate amount
of previous Bankruptcy Losses in respect of the Pool 1 Mortgage Loans. The
Pool 1 Bankruptcy Loss Amount and the manner of reduction thereof described in
the Agreement may be reduced or modified upon written confirmation from Fitch
and S&P to the effect that such reduction or modification will not adversely
affect the then current ratings of the Pool 1 Senior Certificates by Fitch and
S&P. Such reduction may adversely affect the coverage provided by
subordination with respect to Bankruptcy Losses in respect of the Pool 1
Mortgage Loans.
The applicable Non-PO Percentage of any Fraud Loss in respect of a Pool 1
Mortgage Loan will on each Distribution Date be allocated solely to the
outstanding Pool 1 Junior Certificates until the Pool 1 Fraud Coverage
Termination Date. The "Pool 1 Fraud Coverage Termination Date" is the
Distribution Date upon which the Fraud Loss Amount has been reduced to zero or
a negative number (or the Pool 1 Cross-Over Date, if earlier). Upon the
initial issuance of the Certificates, the "Pool 1 Fraud Loss Amount" will
equal approximately
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$5,007,456 (approximately 1.00% of the aggregate Scheduled Principal Balances
of the Pool 1 Mortgage Loans as of the Cut-off Date). As of any Distribution
Date prior to the first anniversary of the Cut-off Date, the Pool 1 Fraud Loss
Amount will equal approximately $5,007,456, minus the aggregate amount of
Fraud Losses that would have been allocated to the Pool 1 Junior Certificates
in the absence of the Pool 1 Loss Allocation Limitation since the Cut-off
Date. As of any Distribution Date from the first to the fifth anniversaries of
the Cut-off Date, the Pool 1 Fraud Loss Amount will equal (1) the lesser of
(a) the Pool 1 Fraud Loss Amount as of the most recent anniversary of the Cut-
off Date and (b) 1% (from the first to but excluding the third anniversaries
of the Cut-off Date) or 0.5% (from and including the third to but excluding
the fifth anniversaries of the Cut-off Date) of the aggregate outstanding
principal balance of all of the Pool 1 Mortgage Loans as of the most recent
anniversary of the Cut-off Date minus (2) the Fraud Losses that would have
been allocated to the Pool 1 Junior Certificates in the absence of the Pool 1
Loss Allocation Limitation since the most recent anniversary of the Cut-off
Date. As of any Distribution Date on or after the fifth anniversary of the
Cut-off Date, the Pool 1 Fraud Loss Amount shall be zero.
The applicable Non-PO Percentage of any Special Hazard Loss in respect of a
Pool 1 Mortgage Loan will on each Distribution Date be allocated solely to the
outstanding Pool 1 Junior Certificates until the Pool 1 Special Hazard
Termination Date. The "Pool 1 Special Hazard Termination Date" is the
Distribution Date upon which the Pool 1 Special Hazard Loss Amount has been
reduced to zero or a negative number (or the Pool 1 Cross-Over Date, if
earlier). Upon the initial issuance of the Certificates, the "Pool 1 Special
Hazard Loss Amount" will equal approximately $5,007,456 (approximately 1.00%
of the aggregate Scheduled Principal Balances of the Pool 1 Mortgage Loans as
of the Cut-off Date). As of any Distribution Date, the Pool 1 Special Hazard
Loss Amount will equal approximately $5,007,456 minus the sum of (i) the
aggregate amount of Special Hazard Losses that would have been previously
allocated to the Pool 1 Junior Certificates in the absence of the Pool 1 Loss
Allocation Limitation and (ii) the Pool 1 Adjustment Amount. For each
anniversary of the Cut-off Date, the "Pool 1 Adjustment Amount" shall be equal
to the amount, if any, by which the Pool 1 Special Hazard Loss Amount (without
giving effect to the deduction of the Pool 1 Adjustment Amount for such
anniversary) exceeds the lesser of (A) an amount calculated by the Company and
approved by each of Fitch and S&P, which amount shall not be less than
$500,000, and (B) the greater of (x) 1% (or if greater than 1%, the highest
percentage of Pool 1 Mortgage Loans by principal balance secured by Mortgaged
Properties in any California zip code) of the outstanding principal balance of
all the Pool 1 Mortgage Loans on the Distribution Date immediately preceding
such anniversary and (y) twice the outstanding principal balance of the Pool 1
Mortgage Loan which has the largest outstanding principal balance on the
Distribution Date immediately preceding such anniversary.
POOL 1 YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
YIELD
The effective yields on the Pool 1 Certificates will depend upon, among
other things, the price at which such Certificates are purchased and the rate
and timing of payments of principal (including both scheduled and unscheduled
payments) of the Pool 1 Mortgage Loans.
The yields to investors will be sensitive in varying degrees to the rate of
prepayments on the Pool 1 Mortgage Loans. The extent to which the yield to
maturity of a Certificate is sensitive to prepayments will depend upon the
degree to which it is purchased at a discount or premium. In the case of Pool
1 Certificates purchased at a premium, faster than anticipated rates of
principal payments on the Pool 1 Mortgage Loans could result in actual yields
to investors in such Certificates that are lower than the anticipated yields.
In the case of Pool 1 Certificates purchased at a discount slower than
anticipated rates of principal payments on the Pool 1 Mortgage Loans could
result in actual yields to investors in such Certificates that are lower than
the anticipated yields.
Rapid rates of prepayments on the Pool 1 Mortgage Loans are likely to
coincide with periods of low prevailing interest rates. During such periods,
the yields at which an investor in the Pool 1 Certificates may be
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able to reinvest amounts received as payments on the investor's Certificates
may be lower than the yield on such Certificates. Conversely, slow rates of
prepayments on the Pool 1 Mortgage Loans are likely to coincide with periods
of high prevailing interest rates. During such periods, the amount of payments
available to an investor for reinvestment at such high rates may be relatively
low.
The Pool 1 Mortgage Loans will not prepay at any constant rate, nor will all
of the Pool 1 Mortgage Loans prepay at the same rate at any one time. The
timing of changes in the rate of prepayments may affect the actual yield to an
investor, even if the average rate of principal prepayments is consistent with
the investor's expectation. In general, the earlier a prepayment of principal
on a Pool 1 Mortgage Loan, the greater the effect on the yield to an investor
in the Pool 1 Certificates. As a result, the effect on the yield of principal
prepayments on the Pool 1 Mortgage Loans occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Pool 1 Certificates is not likely to be offset
by a later equivalent reduction (or increase) in the rate of principal
prepayments.
The entire amount of the applicable Non-PO Percentage of any principal
payments (including scheduled payments and prepayments and other unscheduled
recoveries of principal) with respect to a Pool 1 Mortgage Loan allocable to
the Pool 1 Category B Senior Certificates will be allocated solely to the
outstanding Pool 1 Category B Group I Senior Certificates during the first
five years after the Cut-off Date (except as otherwise described herein on or
following the Pool 1 Category B Group I Final Distribution Date), with such
allocation being subject to reduction thereafter as described herein, provided
that such amounts will be allocated pro rata among all Pool 1 Senior
Certificates (other than the Class 1-PO Certificates) on each Distribution
Date after the Pool 1 Cross-Over Date. This allocation between the Pool 1
Category B Group I Senior Certificates and the Pool 1 Category B Group II
Senior Certificates is designed to accelerate the allocation of principal
payments, prepayments and certain other unscheduled recoveries on the Pool 1
Mortgage Loans to holders of the Pool 1 Category B Group I Senior Certificates
relative to that of the Pool 1 Category B Group II Senior Certificates through
the Pool 1 Cross-Over Date.
The Pool 1 Mortgage Loans will bear interest at fixed Mortgage Rates,
payable in arrears. Each monthly interest payment on a Mortgage Loan is
calculated as 1/12th of the applicable Mortgage Rate multiplied by the
outstanding principal balance of such Mortgage Loan on the first day of the
month.
The effective yield to holders of Pool 1 Certificates offered hereby will be
lower than the yield otherwise produced by the applicable Certificate Interest
Rate and the applicable purchase prices thereof because, while interest will
accrue from the first day of each month, the distribution of such interest
will not be made until the 25th day (or if such day is not a business day, the
immediately following business day) of the month following the month of
accrual. In addition, the effective yield on the Pool 1 Certificates will be
affected by any Net Interest Shortfall and the interest portion of certain
losses, in respect of Pool 1. See "Pool 1 Annex--Distributions on the Pool 1
Certificates" and "--Allocation of Realized Losses on the Pool 1 Certificates"
herein.
PREPAYMENTS
The rate of distribution of principal of the Pool 1 Certificates will be
affected primarily by the amount and timing of principal payments received on
or in respect of the Pool 1 Mortgage Loans. Such principal payments will
include scheduled payments as well as voluntary prepayments by borrowers (such
as, for example, prepayments in full due to refinancings, including
refinancings made by the Company in the ordinary course of conducting its
mortgage banking business, some of which refinancings may be solicited by the
Company, or prepayments in connection with biweekly payment programs,
participation in which may be solicited by the Company) and prepayments
resulting from foreclosure, condemnation and other dispositions of the
Mortgaged Properties, from repurchase by the Company of any Pool 1 Mortgage
Loan as to which there has been a material breach of warranty or defect in
documentation (or deposit of certain amounts in respect of delivery of a
substitute Mortgage Loan therefor), and from an exercise by the Company of its
option to repurchase a Defaulted Mortgage Loan. See the last two paragraphs of
"The Pool 1 Mortgage Loans," above and "Yield Maturity and Weighted Average
Life Considerations" in the Prospectus. Mortgagors are permitted to prepay the
Mortgage Loans, in
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whole or in part, at any time without penalty. In addition, as a result of the
fact that Pool 1 Certificateholders will be entitled on any Distribution Date
to receive from the Pool 1 Available Funds distributions of amounts pursuant
to clause (iv) of each of the definitions of the Pool 1 Senior Optimal
Principal Amount, Class 1-PO Principal Distribution Amount or Pool 1 Junior
Optimal Principal Amount, the occurrence of defaults on the Pool 1 Mortgage
Loans may produce the same effect on the Pool 1 Certificates receiving such
distributions as an early receipt of principal.
A number of social, economic, tax, geographic, demographic, legal and other
factors may influence prepayments of the Mortgage Loans. These factors may
include the age of such Mortgage Loans, the geographic distribution of the
Mortgaged Properties, the payment terms of such Mortgage Loans, the
characteristics of the borrowers, homeowner mobility, economic conditions
generally and in the geographic area in which the Mortgaged Properties are
located, enforceability of due-on-sale clauses, prevailing interest rates in
relation to the interest rates on such Mortgage Loans, the availability of
mortgage funds, the use of second or "home equity" mortgage loans by
mortgagors, the use of the properties as second or vacation homes, the extent
of the mortgagors' net equity in the Mortgaged Properties, tax-related
considerations and, where investment properties are securing such Mortgage
Loans, the availability of other investments. The rate of principal payment
may also be subject to seasonal variations.
The rate of principal prepayments on pools of conventional mortgage loans
has fluctuated significantly in recent years. Generally, if prevailing
interest rates were to fall significantly below the interest rates on the Pool
1 Mortgage Loans, such Mortgage Loans would be expected to prepay at higher
rates than if prevailing rates were to remain at or above the interest rates
on such Mortgage Loans. Conversely, if interest rates were to rise
significantly above the interest rates on the Pool 1 Mortgage Loans, such
Mortgage Loans would be expected to prepay at lower rates than if prevailing
rates were to remain at or below the interest rates on such Mortgage Loans.
Voluntary prepayments in full of principal on the Pool 1 Mortgage Loans
received by the Company (or, in the case of Mortgage Loans master-serviced by
the Company, of which the Company receives notice) from the first day through
the fifteenth day of each month (other than the month of the Cut-off Date) are
passed through to the Pool 1 Certificateholders in the month of receipt or
payment. Voluntary prepayments of principal in full received from the
sixteenth day (or, in the case of the month of the Cut-off Date, from the Cut-
off Date) through the last day of each month, and all voluntary partial
prepayments of principal on the Pool 1 Mortgage Loans are passed through to
the Pool 1 Certificateholders in the month following the month of receipt or
payment. Any prepayment or liquidation of a Pool 1 Mortgage Loan (by
foreclosure proceedings or by virtue of the purchase of a Pool 1 Mortgage Loan
in advance of its stated maturity as required or permitted by the Agreement)
will generally have the effect of passing through to the Pool 1
Certificateholders principal amounts which would otherwise be passed through
in amortized increments over the remaining term of such Mortgage Loan.
The entire amount of the applicable Non-PO Percentage of any prepayment and
unscheduled recovery of principal with respect to a Pool 1 Mortgage Loan will
be allocated solely to the outstanding Pool 1 Senior Certificates (other than
the Class 1-PO Certificates and Pool 1 Category B Group II Senior Certificates
as described herein) during the first five years after the Cut-off Date (with
such allocation being subject to reduction thereafter as described herein),
except as otherwise described herein on or following the Pool 1 Category B
Group I Final Distribution Date. Among such Pool 1 Senior Certificates, such
amounts will be allocated in the manner described herein. See "Pool 1 Annex--
Distributions on the Pool 1 Certificates--Principal" herein.
When a full prepayment is made on a Pool 1 Mortgage Loan, the Mortgagor is
charged interest ("Prepayment Interest") on the days in the month actually
elapsed up to the date of such prepayment, at a daily interest rate
(determined by dividing the Mortgage Rate by 360) which is applied to the
principal amount of the loan so prepaid. When such a prepayment is made during
the period from the sixteenth day through the last day of any month (and from
the Cut-off Date through the fifteenth day of the month of the Cut-off Date),
such Prepayment Interest (net of Servicing Fees) is passed through to the Pool
1 Certificateholders in the month following its receipt and the amount of
interest thus distributed to Certificateholders, to the extent not offset by a
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related Compensating Interest Payment (as defined herein), will be less than
the amount which would have been distributed in the absence of such
prepayment. The payment of a claim under certain insurance policies or the
purchase of a defaulted Pool 1 Mortgage Loan by a private mortgage insurer may
also cause a reduction in the amount of interest passed through. Shortfalls in
respect of Pool 1 described in this paragraph will be borne by the Pool 1
Certificateholders to the extent described herein. See --"Pool 1 Annex--
Distributions on the Pool 1 Certificates--Interest" herein.
Any partial prepayment will be applied to the balance of the Pool 1 Mortgage
Loan as of the first day of the month of receipt, will be passed through to
the Pool 1 Certificateholders in the following month and, to the extent not
offset by a related Compensating Interest Payment, will reduce the aggregate
amount of interest distributable to such Certificateholders in such month in
an amount equal to 30 days of interest at the related Net Mortgage Rate on the
amount of such prepayment.
The yield on certain Classes of the Pool 1 Certificates also may be affected
by any repurchase by the Company of the Pool 1 Mortgage Loans as described
under "The Pooling and Servicing Agreement--Termination" herein.
THE CLASS 1-M, CLASS 1-B1 AND CLASS 1-B2 CERTIFICATES
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class 1-M, Class 1-B1 and Class 1-B2 Certificates
will be affected by the rate of prepayments on the Pool 1 Mortgage Loans, as
well as the rate of mortgagor defaults resulting in Realized Losses in respect
of such Mortgage Loans, by the severity of those losses and by the timing
thereof. See "Allocation of Realized Losses on the Pool 1 Certificates" herein
for a description of the manner in which such losses are borne by the holders
of the Pool 1 Certificates. If the purchaser of a Class 1-M, Class 1-B1 or
Class 1-B2 Certificate calculates its anticipated yield based on an assumed
rate of default and amount of Realized Losses in respect of the related
Mortgage Loans that is lower than the default rate and the amount of losses
actually incurred, its actual yield to maturity may be lower than that so
calculated and could be negative. The timing of defaults and losses will also
affect an investor's actual yield to maturity, even if the average rate of
defaults and severity of losses are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity.
The yields to maturity on the Classes of Class 1-B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted Pool 1 Mortgage Loans than will the yields on such Classes with
lower numerical designations, and the yields to maturity on all of the Class
1-B Certificates will be more sensitive to such losses than will the yields on
the other Classes of related Certificates. The yields to maturity on the Class
1-M Certificates will be more sensitive to such losses than will the yields on
the Pool 1 Senior Certificates and less sensitive than the yields on the Class
1-B Certificates. The Pool 1 Junior Certificates will be more sensitive to
losses due to liquidations of defaulted Pool 1 Mortgage Loans because the
entire amount of such losses will be allocable to such Certificates in inverse
order of priority, either directly or through the allocation of the Class 1-PO
Deferred Payment Writedown Amount except as provided herein. To the extent not
covered by the Company's advances of delinquent monthly payments of principal
and interest, delinquencies on the Pool 1 Mortgage Loans may also have a
relatively greater effect (i) on the yields to investors in the related Class
1-B Certificates with higher numerical designations than on the yields to
investors in those related Class 1-B Certificates with lower numerical
designations, (ii) on the yields to investors in the related Class 1-B
Certificates than on the yields to investors in the other Classes of related
Certificates, and (iii) on the yields to investors in the Class 1-M
Certificate than on the yields to investors in the related Senior
Certificates. As described above under "Pool 1 Annex--Distributions on the
Pool 1 Certificates--Interest" and "--Principal," "--Allocation of Realized
Losses on the Pool 1 Certificates," and "--Subordination," amounts otherwise
distributable to holders of any Class of Pool 1 Class B Certificates will be
made available to protect the holders of the more senior ranking Classes of
Pool 1 Certificates against interruptions in distributions due to certain
mortgagor delinquencies. Amounts otherwise distributable to holders of the
Class 1-M Certificate will be made
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available to protect the holders of the Pool 1 Senior Certificates against
interruptions in distributions due to certain mortgagor delinquencies. Such
delinquencies, even if subsequently cured, may affect the timing of the
receipt of distributions by the holders of such Junior Certificates.
To the extent that the Class 1-M, Class 1-B1 or Class 1-B2 Certificates are
being purchased at discounts from their initial Class Certificate Principal
Balances, if the purchaser of such a Certificate calculates its yield to
maturity based on an assumed rate of payment of principal faster than that
actually received on such Certificate, its actual yield to maturity may be
lower than that so calculated.
FINAL PAYMENT CONSIDERATIONS
The rate of payment of principal of the Pool 1 Certificates will depend on
the rate of payment of principal of the related Mortgage Loans (including
prepayments, defaults, delinquencies and liquidations) which, in turn, will
depend on the characteristics of such Mortgage Loans, the level of prevailing
interest rates and other economic, geographic, social and other factors, and
no assurance can be given as to the actual payment experience. As of the Cut-
off Date, the month and year of the latest scheduled maturity of a Mortgage
Loan in Pool 1 is expected to be May 2028. In addition, to the extent
delinquencies and defaults are not covered by advances made by the Company or
offset by the effect of the subordination of the related Junior Certificates,
delinquencies and defaults could affect the actual maturity of the
Certificates offered hereby.
WEIGHTED AVERAGE LIVES OF THE POOL 1 CERTIFICATES
The weighted average life of a Certificate is determined by (a) multiplying
the reduction, if any, in the Certificate Principal Balance thereof on each
Distribution Date by the number of years from the date of issuance to such
Distribution Date, (b) summing the results and (c) dividing the sum by the
aggregate reductions in the Certificate Principal Balance of such Certificate.
The weighted average lives of the Pool 1 Certificates will be affected, to
varying degrees, by the rate of principal payments on the Pool 1 Mortgage
Loans, the timing of changes in such rate of payments and the priority
sequence of distributions of principal of such Certificates. The interaction
of the foregoing factors may have different effects on the various Classes of
the Certificates and the effects on any Class may vary at different times
during the life of such Class. Further, to the extent the prices of Classes of
Certificates represent discounts or premiums to their respective original
Class Certificate Principal Balances, variability in the weighted average
lives of such Classes of Certificates could result in variability in the
related yields to maturity.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage
loans. The Prepayment Assumption does not purport to be either a historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans in either Mortgage Pool. A prepayment
assumption of 100% of the Prepayment Assumption assumes prepayment rates of
0.2% per annum of the then outstanding principal balance of such mortgage
loans in the first month of the life of the mortgage loans and increasing by
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
mortgage loans, 100% of the Prepayment Assumption assumes a constant
prepayment rate of 6.0% per annum.
Tables of Pool 1 Class Certificate Principal Balances. The following tables
set forth the percentages of the initial Class Certificate Principal Balance
of each Class of Pool 1 Certificates offered hereby that would be outstanding
after each of the dates shown at the specified constant percentages of the
Prepayment Assumption and the corresponding weighted average life of each such
Class of Pool 1 Certificates. For purposes of calculations under the columns
at the indicated percentages of the Prepayment Assumption set forth in the
tables, it is assumed with respect to the Pool 1 Mortgage Loans (the "Pool 1
Modeling Assumptions") that (i) the
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distributions in respect of the Pool 1 Certificates are made and received in
cash on the 25th day of each month commencing in May 1998, (ii) the Pool 1
Mortgage Loans prepay at the specified constant percentages of the Prepayment
Assumption, (iii) the aggregate outstanding principal balance of the Pool 1
Mortgage Loans as of the Cut-off Date is $500,745,644, (iv) no defaults or
delinquencies in the payment by Mortgagors of principal of and interest on the
Pool 1 Mortgage Loans are experienced and the Company does not repurchase any
of the Pool 1 Mortgage Loans as permitted or required by the Agreement, (v)
the Company does not exercise its option to repurchase all the Mortgage Loans
in the Trust Fund as described under the caption "The Pooling and Servicing
Agreement--Termination" herein, (vi) scheduled monthly payments on the Pool 1
Mortgage Loans are received on the first day of each month commencing in May
1998, and are computed prior to giving effect to prepayments received in the
prior month, (vii) prepayments representing payment in full of individual Pool
1 Mortgage Loans are received on the last day of each month (commencing in
April 1998) and include 30 days' interest thereon and no Interest Shortfalls
occur in respect of the Pool 1 Mortgage Loans, (viii) the scheduled monthly
payment for each Pool 1 Mortgage Loan has been calculated based on its
outstanding balance, interest rate and remaining term to maturity such that
such Mortgage Loan will amortize in amounts sufficient to repay the remaining
balance of such Mortgage Loan by its remaining term to maturity, (ix) the
initial Class Certificate Principal Balance and Certificate Interest Rate for
each Class of Pool 1 Certificates offered hereby are as indicated on the cover
page hereof, (x) the date of the initial issuance of the Pool 1 Certificates
is April 29, 1998, (xi) the amounts distributable to Pool 1 Certificateholders
are not reduced by the incurrence of any expenses by the Trust Fund and (xii)
the Pool 1 Mortgage Loans are divided into two groups (each, a "Pool 1
Mortgage Loan Group") and the Pool 1 Mortgage Loans in each Pool 1 Mortgage
Loan Group have the respective characteristics described below:
<TABLE>
<CAPTION>
AGGREGATE
SCHEDULED STATED
PRINCIPAL REMAINING
BALANCE AS NET TERM TO
OF THE MORTGAGE MORTGAGE AGE MATURITY
CUT-OFF DATE RATE RATE (MONTHS) (MONTHS)
------------ ------------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Discount........... $ 24,199,249 6.8152215480% 6.6024475920% 1 351
Non-Discount....... 476,546,395 7.4660297736 7.2087988080 2 357
</TABLE>
It is not likely that the Pool 1 Mortgage Loans will prepay at a constant
level of the Prepayment Assumption. In addition, because certain of the Pool 1
Mortgage Loans will have remaining terms to maturity and will bear interest at
rates that are different from those assumed, the actual Class Certificate
Principal Balance of each Class of Pool 1 Certificates outstanding at any time
and the actual weighted average life of each Class of Pool 1 Certificates may
differ from the corresponding information in the table for each indicated
percentage of the Prepayment Assumption. Furthermore, even if all the Pool 1
Mortgage Loans prepay at the indicated percentages of the Prepayment
Assumption and the weighted average mortgage interest rate and weighted
average stated remaining term to maturity of such Mortgage Loans were to equal
the weighted average mortgage interest rate and weighted average stated
remaining term to maturity of the assumed Pool 1 Mortgage Loans, due to the
actual distribution of remaining terms to maturity and interest rates among
the Pool 1 Mortgage Loans, the actual Class Certificate Principal Balance of
each Class of Pool 1 Certificates outstanding at any time and the actual
weighted average life of each Class of Pool 1 Certificates would differ (which
difference could be material) from the corresponding information in the tables
for each indicated percentage of the Prepayment Assumption.
A1-19
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 1 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 1-A1 CLASS 1-A2 CLASS 1-A3
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 1999............ 99 97 94 92 90 99 96 91 88 85 99 97 93 90 88
April 2000............ 98 92 82 75 70 97 88 74 63 55 98 90 78 70 63
April 2001............ 97 85 67 56 48 95 78 52 34 22 96 82 60 46 35
April 2002............ 96 79 55 41 32 94 69 33 12 0 95 74 44 27 16
April 2003............ 94 73 45 30 21 92 60 17 0 0 93 67 32 13 2
April 2004............ 93 68 36 22 13 90 52 6 0 0 91 60 22 4 0
April 2005............ 92 62 29 16 9 88 45 0 0 0 90 54 15 0 0
April 2006............ 90 57 24 11 6 85 38 0 0 0 88 49 9 0 0
April 2007............ 88 53 19 8 4 83 32 0 0 0 86 44 5 0 0
April 2008............ 86 49 16 6 3 81 27 0 0 0 84 40 2 0 0
April 2009............ 84 45 13 5 2 78 22 0 0 0 82 36 0 0 0
April 2010............ 82 41 11 3 1 75 18 0 0 0 79 32 0 0 0
April 2011............ 80 37 9 3 1 72 13 0 0 0 77 28 0 0 0
April 2012............ 77 34 7 2 1 69 9 0 0 0 74 25 0 0 0
April 2013............ 75 31 6 1 * 65 5 0 0 0 71 21 0 0 0
April 2014............ 72 28 4 1 * 61 1 0 0 0 68 18 0 0 0
April 2015............ 69 25 4 1 * 57 0 0 0 0 65 15 0 0 0
April 2016............ 65 22 3 1 * 53 0 0 0 0 61 13 0 0 0
April 2017............ 62 20 2 * * 48 0 0 0 0 57 10 0 0 0
April 2018............ 58 18 2 * * 43 0 0 0 0 53 8 0 0 0
April 2019............ 54 15 1 * * 37 0 0 0 0 48 5 0 0 0
April 2020............ 49 13 1 * * 31 0 0 0 0 43 3 0 0 0
April 2021............ 44 11 1 * * 25 0 0 0 0 38 1 0 0 0
April 2022............ 39 9 1 * * 18 0 0 0 0 32 0 0 0 0
April 2023............ 33 7 * * * 11 0 0 0 0 26 0 0 0 0
April 2024............ 27 6 * * * 2 0 0 0 0 19 0 0 0 0
April 2025............ 21 4 * * * 0 0 0 0 0 12 0 0 0 0
April 2026............ 14 3 * * * 0 0 0 0 0 4 0 0 0 0
April 2027............ 6 1 * * * 0 0 0 0 0 0 0 0 0 0
April 2028............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 20.0 11.4 5.9 4.3 3.5 17.0 7.1 3.3 2.5 2.2 18.8 9.3 4.1 3.0 2.6
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A1-20
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 1 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 1-A4 CLASS 1-A5
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100 100 100 100 100
April 1999............ 100 100 100 100 100 100 100 100 100 100
April 2000............ 100 100 100 100 100 100 100 100 100 100
April 2001............ 100 100 100 100 100 100 100 100 100 100
April 2002............ 100 100 100 100 100 100 100 100 100 100
April 2003............ 100 100 100 100 100 100 100 100 100 100
April 2004............ 100 100 100 100 49 100 98 94 91 88
April 2005............ 100 100 100 85 11 99 95 86 80 74
April 2006............ 100 100 100 52 0 98 90 76 66 54
April 2007............ 100 100 100 35 0 96 84 65 52 36
April 2008............ 100 100 100 26 0 94 78 53 39 24
April 2009............ 100 100 99 19 0 92 71 43 29 17
April 2010............ 100 100 80 14 0 90 65 35 21 11
April 2011............ 100 100 65 10 0 87 60 29 16 8
April 2012............ 100 100 53 8 0 85 54 23 12 5
April 2013............ 100 100 42 6 0 82 49 19 8 4
April 2014............ 100 100 34 4 0 78 45 15 6 2
April 2015............ 100 100 27 3 0 75 40 12 4 2
April 2016............ 100 100 22 2 0 71 36 9 3 1
April 2017............ 100 100 17 2 0 67 32 7 2 1
April 2018............ 100 100 13 1 0 63 28 6 2 *
April 2019............ 100 100 10 1 0 58 24 5 1 *
April 2020............ 100 100 8 1 0 54 21 3 1 *
April 2021............ 100 100 6 * 0 48 18 3 1 *
April 2022............ 100 90 4 * 0 42 15 2 * *
April 2023............ 100 72 3 * 0 36 12 1 * *
April 2024............ 100 55 2 * 0 30 9 1 * *
April 2025............ 100 39 1 * 0 22 6 1 * *
April 2026............ 100 24 1 * 0 15 4 * * *
April 2027............ 61 10 * * 0 6 2 * * *
April 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 29.2 26.4 15.4 9.3 6.1 21.4 15.9 11.4 9.9 8.8
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A1-21
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 1 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 1-M, CLASS 1-B1
CLASS 1-R AND CLASS 1-B2
----------------------- ------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
----------------------- ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- --- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100 100 100 100 100
April 1999............ 0 0 0 0 0 99 99 99 99 99
April 2000............ 0 0 0 0 0 98 98 98 98 98
April 2001............ 0 0 0 0 0 97 97 97 97 97
April 2002............ 0 0 0 0 0 96 96 96 96 96
April 2003............ 0 0 0 0 0 94 94 94 94 94
April 2004............ 0 0 0 0 0 93 91 88 86 84
April 2005............ 0 0 0 0 0 92 88 81 76 71
April 2006............ 0 0 0 0 0 90 83 71 63 57
April 2007............ 0 0 0 0 0 88 77 60 50 42
April 2008............ 0 0 0 0 0 86 71 49 37 29
April 2009............ 0 0 0 0 0 84 65 40 27 20
April 2010............ 0 0 0 0 0 82 60 33 20 13
April 2011............ 0 0 0 0 0 80 55 27 15 9
April 2012............ 0 0 0 0 0 77 50 22 11 6
April 2013............ 0 0 0 0 0 75 45 17 8 4
April 2014............ 0 0 0 0 0 72 41 14 6 3
April 2015............ 0 0 0 0 0 69 37 11 4 2
April 2016............ 0 0 0 0 0 65 33 9 3 1
April 2017............ 0 0 0 0 0 62 29 7 2 1
April 2018............ 0 0 0 0 0 58 26 5 2 1
April 2019............ 0 0 0 0 0 54 22 4 1 *
April 2020............ 0 0 0 0 0 49 19 3 1 *
April 2021............ 0 0 0 0 0 44 16 2 1 *
April 2022............ 0 0 0 0 0 39 13 2 * *
April 2023............ 0 0 0 0 0 33 11 1 * *
April 2024............ 0 0 0 0 0 27 8 1 * *
April 2025............ 0 0 0 0 0 21 6 1 * *
April 2026............ 0 0 0 0 0 14 4 * * *
April 2027............ 0 0 0 0 0 6 2 * * *
April 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 0.1 0.1 0.1 0.1 0.1 20.0 14.9 10.9 9.5 8.8
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A1-22
<PAGE>
POOL 2 ANNEX
THE POOL 2 MORTGAGE LOANS
AND THE POOL 2 CERTIFICATES
Interest and principal will be distributable on the Pool 2 Certificates
solely out of the Pool 2 Available Funds received in respect of the Pool 2
Mortgage Loans. This Pool 2 Annex sets forth certain data with respect to the
Pool 2 Mortgage Loans, describes the manner in which interest and principal
will be distributable on the Pool 2 Certificates and discusses certain yield
and weighted average life considerations relevant to an investment in the Pool
2 Certificates.
THE POOL 2 MORTGAGE LOANS
It is expected that at least 92% (by Scheduled Principal Balance as of the
Cut-off Date) of the Pool 2 Mortgage Loans (and substantially all of the Pool
2 Mortgage Loans with loan-to-value ratios in excess of 80%) will have been
originated under the Company's full or alternative documentation program or
other full or alternative documentation programs acceptable to the Company,
that no more than 6% (by Scheduled Principal Balance as of the Cut-off Date)
of the Pool 2 Mortgage Loans will have been originated under the Company's "No
Income Verification Program" or other no income verification programs
acceptable to the Company, that no more than 1.25% of the Pool 2 Mortgage
Loans will have been originated under the Company's "No Ratio Program" or
other no ratio programs acceptable to the Company, and that none of the Pool 2
Mortgage Loans will have been originated under the Company's "No Income No
Asset Verification Program" or other no income, no asset verification programs
acceptable to the Company. See "The Trust Fund--The Mortgage Loans--Loan
Underwriting Policies" in the Prospectus.
The Pool 2 Mortgage Loans will have an aggregate Scheduled Principal Balance
as of the Cut-off Date, after deducting payments of principal due on or before
such date, of approximately $175,390,683. This amount is subject to a
permitted variance such that the aggregate Scheduled Principal Balance thereof
will not be less than $166,250,000 or greater than $183,750,000.
The Mortgage Rates borne by the Pool 2 Mortgage Loans are expected to range
from 6.75% to 9.00% per annum, and the weighted average Mortgage Rate as of
the Cut-off Date of such Mortgage Loans is expected to be between 7.43% and
7.47% per annum. The original principal balances of the Pool 2 Mortgage Loans
are expected to range from $62,300 to $900,000 and, as of the Cut-off Date,
the average Scheduled Principal Balance of such Mortgage Loans is not expected
to exceed $321,000 after application of payments due on or before the Cut-off
Date. It is expected that the month and year of the earliest origination date
of any Pool 2 Mortgage Loan will be October 1993, and the month and year of
the latest scheduled maturity date of any such Mortgage Loan will be April
2028. All of the Pool 2 Mortgage Loans will have original terms to maturity of
20 to 30 years, and it is expected that the weighted average scheduled
remaining term to maturity of such Mortgage Loans will be between 357 and 359
months as of the Cut-off Date.
The Pool 2 Mortgage Loans are expected to have the following additional
characteristics (by Scheduled Principal Balance of all the Pool 2 Mortgage
Loans) as of the Cut-off Date:
It is expected that all of the Mortgaged Properties relating to the Pool
2 Mortgage Loans will be located in California. An occurrence of a natural
disaster or adverse circumstance in the real estate market or economy of
California is likely to have an adverse impact on payments in respect of
the Mortgage Loans.
No more than 11% of the Pool 2 Mortgage Loans will have a Scheduled
Principal Balance of more than $500,000 and up to and including $750,000.
No more than 2% of the Pool 2 Mortgage Loans will have a Scheduled
Principal Balance of more than $750,000 and up to and including $1,000,000.
None of the Pool 2 Mortgage Loans will have a Scheduled Principal Balance
of more than $1,000,000.
A2-1
<PAGE>
No more than 12% of such Mortgage Loans will have a loan-to-value ratio
at origination in excess of 80% no more than 5% of such Mortgage Loans will
have a loan-to-value ratio at origination in excess of 90%, and none of
such Mortgage Loans will have a loan-to-value ratio at origination in
excess of 95%. As of the Cut-off Date, the weighted average loan-to-value
ratio at origination of such Mortgage Loans is expected to be between 74%
and 76%.
None of such Mortgage Loans will have a loan-to-value ratio at
origination calculated based on an appraisal conducted more than one year
before the origination date thereof.
The proceeds of at least 31% of such Mortgage Loans will have been used
to acquire the related Mortgaged Property. The proceeds of the remainder of
such Mortgage Loans will have been used to refinance an existing loan. No
more than 13% of such Mortgage Loans will have been the subject of "cash-
out" refinancings. No more than 1% of such Mortgage Loans will have been
relocation loans.
No more than 1% of such Mortgage Loans will be temporary buy-down
Mortgage Loans.
No more than 3% of such Mortgage Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
At least 96% of such Mortgage Loans will be secured by Mortgaged
Properties determined by the Company to be the primary residence of the
Mortgagor. The basis for such determination will be the making of a
representation by the Mortgagor at origination that the underlying property
will be used as the Mortgagor's primary residence.
At least 86% of such Mortgage Loans will be secured by single-family,
detached residences. No more than 6% of such Mortgage Loans will be secured
by condominiums.
Federal emergency aid has been made available to property owners in
several areas of California as a result of recent flooding and landslides.
Approximately 97.81% (by Scheduled Principal Balance as of the Cut-off
Date) of the Pool 2 Mortgage Loans are secured by related Mortgaged
Properties located in the 28 counties in California known to be affected by
such conditions, and it is unknown whether additional areas may be affected
by such conditions. The Company has not undertaken the physical inspection
of any such Mortgaged Property and, as a result, there can be no assurance
that material damage to any Mortgaged Property in such affected areas has
not occurred.
Under the Agreement, the Company will represent and warrant that each
Pool 2 Mortgaged Property is free of material damage and in good repair as
of the date of issuance of the Certificates. In the event of an uncured
breach of such representation and warranty that materially and adversely
affects the interests of Certificateholders, the Company will be required
to repurchase the affected Pool 2 Mortgage Loan or substitute another
mortgage loan therefor. If any damage caused by the flooding, ice storms or
landslides occurs after the Closing Date, the Company will have no such
obligation. In addition, the standard hazard policies covering the
Mortgaged Properties generally do not cover damage caused by flooding and
landslides, and flood or landslide insurance may not have been obtained
with respect to such Mortgaged Properties. To the extent that any insurance
proceeds received with respect to any damaged Pool 2 Mortgaged Properties
are not applied to the restoration thereof, such proceeds will be used to
prepay the related Pool 2 Mortgage Loans in whole or in part. Any
repurchases or prepayments of the Pool 2 Mortgage Loans may reduce the
weighted average lives of the Certificates offered hereby and will reduce
the yields on any Classes of Pool 2 Certificates purchased at a premium.
DISTRIBUTIONS ON THE POOL 2 CERTIFICATES
Allocation of Pool 2 Available Funds. Interest and principal on the Pool 2
Certificates will be distributed monthly on each Distribution Date commencing
in May 1998 in an aggregate amount equal to the Pool 2 Available Funds for
such Distribution Date.
A2-2
<PAGE>
On each Distribution Date, the Pool 2 Available Funds will be distributed in
the following order of priority among the Certificates:
first, to the Classes of Pool 2 Senior Certificates (other than the Class
2-PO Certificates), the Accrued Certificate Interest on each such Class for
such Distribution Date, any shortfall in available amounts being allocated
among such Classes in proportion to the amount of Accrued Certificate
Interest otherwise distributable thereon;
second, to the Classes of Pool 2 Senior Certificates (other than the
Class 2-PO Certificates), any Accrued Certificate Interest thereon
remaining undistributed from previous Distribution Dates, to the extent of
remaining Pool 2 Available Funds, any shortfall in available amounts being
allocated among such Classes in proportion to the amount of such Accrued
Certificate Interest remaining undistributed for each such Class for such
Distribution Date;
third, to the Classes of Pool 2 Senior Certificates, in reduction of the
Class Certificate Principal Balances thereof, to the extent of remaining
Pool 2 Available Funds, concurrently, as follows:
(a) to the Class 2-A14 Certificates (the "Pool 2 Group II Senior
Certificates"), the Pool 2 Group II Senior Principal Distribution
Amount (as defined herein) for such Distribution Date, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(b) to the Class 2-A1, Class 2-A2, Class 2-A3, Class 2-A4, Class 2-
A5, Class 2-A6, Class 2-A7, Class 2-A8, Class 2-A9, Class 2-A10, Class
2-A11, Class 2-A12, Class 2-A13 and Class 2-R Certificates (together,
the "Pool 2 Group I Senior Certificates"), the Pool 2 Senior Optimal
Principal Amount for such Distribution Date less the Pool 2 Group II
Senior Principal Distribution Amount for such Distribution Date, in the
following order of priority:
(i) to the Class 2-R Certificates, until the Class Certificates
Principal Balance thereof has been reduced to zero;
(ii) to the Class 2-A1 Certificates, until the Class Certificates
Principal Balance thereof has been reduced to zero;
(iii) to the Class 2-A2, Class 2-A3, Class 2-A4, Class 2-A5, Class
2-A6, Class 2-A7, Class 2-A8, Class 2-A9, Class 2-A10, Class 2-A11,
Class 2-A12 and Class 2-A13 Certificates, concurrently:
(A) to the Class 2-A12 and Class 2-A13 Certificates,
approximately 31.250% of the amount set forth in clause (b)
remaining after distributions under subparagraphs (i) and (ii) of
this clause (b), in the following order of priority:
(1) to the Class 2-A12 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(2) to the Class 2-A13 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(B) to the Class 2-A2, Class 2-A3, Class 2-A4, Class 2-A5, Class
2-A6, Class 2-A7, Class 2-A8, Class 2-A9, Class 2-A10 and Class 2-
A11 Certificates, the amount set forth in clause (b) remaining
after distributions under clause (b) (iii) (A), in the following
order of priority:
(1) to the Class 2-A2 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(2) concurrently, approximately 12.1212121210% of the
remaining amount to the Class 2-A3 Certificates and
approximately 87.8787878790% of such remaining amount to the
Class 2-A7 Certificates, until the Class Certificate Principal
Balance of the Class 2-A7 Certificates has been reduced to zero;
A2-3
<PAGE>
(3) concurrently, approximately 12.1212121210% of the
remaining amount to the Class 2-A3 Certificates and
approximately 87.8787878790% of such remaining amount to the
Class 2-A8 Certificates, until the Class Certificate Principal
Balance of the Class 2-A8 Certificates has been reduced to zero;
(4) concurrently, approximately 12.1212121210% of the
remaining amount to the Class 2-A3 Certificates and
approximately 87.8787878790% of such remaining amount to the
Class 2-A9 Certificates, until the Class Certificate Principal
Balance of the Class 2-A9 Certificates has been reduced to zero;
(5) concurrently, approximately 12.1212121210% of the
remaining amount to the Class 2-A3 Certificates and
approximately 87.8787878790% of such remaining amount to the
Class 2-A10 Certificates, until the Class Certificate Principal
Balance of the Class 2-A10 Certificates has been reduced to
zero;
(6) concurrently, approximately 12.1212121210% of the
remaining amount to the Class 2-A3 Certificates and
approximately 87.8787878790% of such remaining amount to the
Class 2-A11 Certificates, until the Class Certificate Principal
Balances thereof have each been reduced to zero;
(7) to the Class 2-A4 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(8) to the Class 2-A5 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(9) to the Class 2-A6 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
and
(c) to the Class 2-PO Certificates, the Class 2-PO Principal
Distribution Amount for such Distribution Date, until the Class
Certificate Principal Balance thereof has been reduced to zero;
fourth, to the Class 2-PO Certificates, to the extent of remaining Pool 2
Available Funds, the Class 2-PO Deferred Amount for such Distribution Date,
until the Class Certificate Principal Balance thereof has been reduced to
zero; provided that, (i) on any Distribution Date, distributions pursuant
to this priority fourth shall not exceed the Pool 2 Junior Optimal
Principal Amount for such Distribution Date, (ii) such distributions shall
not reduce the Class Certificate Principal Balance of the Class 2-PO
Certificates and (iii) no distribution will be made in respect of the Class
2-PO Deferred Amount after the Distribution Date on which the respective
Class Certificate Principal Balances of the Pool 2 Junior Certificates have
been reduced to zero (the "Pool 2 Cross-Over Date");
fifth, to the Class 2-M Certificates, to the extent of remaining Pool 2
Available Funds, in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share for such Distribution Date;
sixth, to the Class 2-B1 Certificates, to the extent of remaining Pool 2
Available Funds, in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share for such Distribution Date;
seventh, to the Class 2-B2 Certificates, to the extent of remaining Pool
2 Available Funds, in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share for such Distribution Date; and
eighth, to the Class 2-B3, Class 2-B4 and Class 2-B5 Certificates, to the
extent of remaining Pool 2 Available Funds: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued
A2-4
<PAGE>
Certificate Interest thereon remaining undistributed from previous
Distribution Dates and (c) such Classes' Allocable Shares for such
Distribution Date.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then-current Class Certificate Principal Balances of such
Classes.
The percentages set forth in priority third above were calculated on the
basis of the Class Certificate Principal Balances of the related Certificates
of the relevant Certificate Group set forth on the cover hereof. If such Class
Certificate Principal Balances are increased or decreased in accordance with
the variance permitted hereby, the applicable percentages will be increased or
decreased substantially correspondingly.
On each Distribution Date after the Pool 2 Cross-Over Date, distributions of
principal on the outstanding Pool 2 Senior Certificates will be made pro rata
among all such Certificates, regardless of the allocation, or sequential
nature, of the principal payments described in priority third above.
If, after distributions have been made pursuant to priorities first and
second above on any Distribution Date, the remaining Pool 2 Available Funds
are less than the sum of the amounts required to be distributed in accordance
with priority third above, the Pool 2 Senior Optimal Principal Amount and the
Class 2-PO Principal Distribution Amount for such Distribution Date shall be
proportionately reduced, and such remaining Pool 2 Available Funds will be
distributed on the Pool 2 Senior Certificates in accordance with the
applicable clauses of priority third above on the basis of such reduced
amounts. Notwithstanding such allocation, Realized Losses in respect of Pool 2
will be allocated to the Pool 2 Certificates as described under "--Allocation
of Realized Losses on the Pool 2 Certificates" herein.
Interest. Interest will accrue on the Pool 2 Certificates offered hereby at
the fixed Certificate Interest Rates set forth on the cover hereof during each
Interest Accrual Period. Interest will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Interest will accrue on the Class 2-B3, Class 2-B4 and Class 2-B5
Certificates at the Certificate Interest Rate of 6.75% per annum during each
Interest Accrual Period.
The Class 2-PO Certificates are principal-only Certificates and will not
accrue interest.
The "Accrued Certificate Interest" for any Pool 2 Certificate (other than a
Class 2-PO Certificate) for any Distribution Date will equal the interest
accrued during the related Interest Accrual Period at the applicable
Certificate Interest Rate on the Certificate Principal Balance of such
Certificate immediately prior to such Distribution Date, less such
Certificate's share of any allocable Net Interest Shortfall (as defined
below), the interest portion of any Excess Losses (as defined herein)
allocable to Certificateholders through the Pool 2 Cross-Over Date and, after
the Pool 2 Cross-Over Date, the interest portion of Realized Losses allocable
to Certificateholders including Excess Losses, in each case in respect of the
Pool 2 Mortgage Loans.
The "Certificate Principal Balance" of any Pool 2 Certificate as of any
Distribution Date will equal such Certificate's Certificate Principal Balance
on the Closing Date as reduced by (i) all amounts distributed on previous
Distribution Dates on such Certificate on account of principal, (ii) the
principal portion of all Realized Losses previously allocated to such
Certificate and (iii) in the case of a Pool 2 Junior Certificate, such
Certificate's pro rata share, if any, of the Pool 2 Junior Certificate
Writedown Amount (as defined below) and the Class 2-PO Deferred Payment
Writedown Amount (as defined below) for previous Distribution Dates. As of any
Distribution Date, the "Pool 2 Junior Certificate Writedown Amount" will equal
the amount by which (a) the sum of the Class Certificate Principal Balances of
all of the Pool 2 Certificates (after giving effect to the
A2-5
<PAGE>
distribution of principal and the application of Realized Losses in respect of
the Pool 2 Mortgage Loans in reduction of the Certificate Principal Balances
of such Certificates on such Distribution Date) exceeds (b) the aggregate
Scheduled Principal Balance of the Pool 2 Mortgage Loans on the first day of
the month of such Distribution Date less any applicable Deficient Valuations
occurring on or prior to the Bankruptcy Coverage Termination Date in respect
of Pool 2. For any Distribution Date, the "Class 2-PO Deferred Payment
Writedown Amount" will equal the amount, if any, distributed on such date in
respect of the Class 2-PO Deferred Amount pursuant to priority fourth under
"--Allocation of Pool 2 Available Funds" above. The Pool 2 Junior Certificate
Writedown Amount and the Class 2-PO Deferred Payment Writedown Amount will
each be allocated to the Classes of Pool 2 Junior Certificates in inverse
order of priority, until the Class Certificate Principal Balance of each such
Class has been reduced to zero.
For the definitions of "Interest Accrual Period," "Net Interest Shortfall"
and "Interest Shortfall," see "Pool 1 Annex--Distributions on the Pool 1
Certificates--Interest" herein.
Any Net Interest Shortfall, the interest portion of any Excess Losses
allocable to Certificateholders through the Pool 2 Cross-Over Date and, after
the Pool 2 Cross-Over Date, the interest portion of any Realized Losses
allocable to Certificateholders (see "--Allocation of Realized Losses on the
Pool 2 Certificates" herein), in each case in respect of the Pool 2 Mortgage
Loans, will, on each Distribution Date, be allocated among all the outstanding
Pool 2 Certificates (other than the Class 2-PO Certificates), in proportion to
the amount of Accrued Certificate Interest that would have been allocated
thereto in the absence of such shortfall and losses. See "The Pooling and
Servicing Agreement--Servicing Compensation, Compensating Interest and Payment
of Expenses" herein.
The interest portion of any Realized Losses (other than Excess Losses) in
respect of the Pool 2 Mortgage Loans occurring prior to the Pool 2 Cross-Over
Date will not be allocated among any Pool 2 Certificates, but will reduce the
amount of Pool 2 Available Funds on the related Distribution Date. As a result
of the subordination of the Pool 2 Junior Certificates in right of
distribution relative to the Pool 2 Senior Certificates, such losses will be
borne first by the Pool 2 Junior Certificates (to the extent then outstanding)
in inverse order of priority.
If the Pool 2 Available Funds are insufficient on any Distribution Date to
distribute the aggregate Accrued Certificate Interest on the Pool 2 Senior
Certificates (other than the Class 2-PO Certificates) to their
Certificateholders, any shortfall in available amounts will be allocated among
such Classes of Pool 2 Senior Certificates in proportion to the amounts of
Accrued Certificate Interest otherwise distributable thereon. The amount of
any such undistributed Accrued Certificate Interest will be added to the
amount to be distributed in respect of interest on the Pool 2 Senior
Certificates (other than the Class 2-PO Certificates) on subsequent
Distribution Dates in accordance with priority second under "--Allocation of
Pool 2 Available Funds" above. No interest will accrue on any Accrued
Certificate Interest remaining undistributed from previous Distribution Dates.
Principal. All payments and other amounts received in respect of principal
of the Pool 2 Mortgage Loans will be allocated between (i) the Pool 2
Certificates (other than the Class 2-PO Certificates), on the one hand, and
(ii) the Class 2-PO Certificates, on the other, in each case based on the
applicable Non-PO Percentage and the applicable PO Percentage, respectively,
of such amounts.
The "Non-PO Percentage" with respect to any Pool 2 Mortgage Loan with a Net
Mortgage Rate ("NMR") less than 6.75% per annum (each such Mortgage Loan, a
"Pool 2 Discount Mortgage Loan") will be the fraction, expressed as a
percentage, equal to NMR divided by 6.75%. The "Non-PO Percentage" with
respect to any Pool 2 Mortgage Loan with a Net Mortgage Rate equal to or
greater than 6.75% (each such Mortgage Loan, a "Pool 2 Non-Discount Mortgage
Loan") will be 100%. The "PO Percentage" with respect to any Pool 2 Discount
Mortgage Loan will be the fraction, expressed as a percentage, equal to (6.75%
- - NMR) divided by 6.75%. The "PO Percentage" with respect to any Pool 2 Non-
Discount Mortgage Loan will be 0%.
A2-6
<PAGE>
The initial Class Certificate Principal Balance of the Class 2-PO
Certificates, which are not offered hereby, will be approximately $62,609,
subject to the variance described herein.
Distributions in reduction of the Class Certificate Principal Balance of
each Pool 2 Senior Certificate will be made on each Distribution Date pursuant
to priority third under "--Allocation of Pool 2 Available Funds" above. In
accordance with priority third, the Pool 2 Available Funds remaining after the
distribution of interest on the Pool 2 Senior Certificates (other than the
Class 2-PO Certificates) will be allocated to such Certificates in an
aggregate amount not to exceed the sum of the Pool 2 Senior Optimal Principal
Amount and the Class 2-PO Principal Distribution Amount for such Distribution
Date. Distributions in reduction of the Class Certificate Principal Balances
of the Class 2-M, Class 2-B1 and Class 2-B2 Certificates will be made pursuant
to priorities fifth, sixth and seventh, respectively, under "--Allocation of
Pool 2 Available Funds" above. In accordance with each such priority, the Pool
2 Available Funds, if any, remaining after distributions of principal and
interest on the Pool 2 Senior Certificates and payments in respect of the
Class 2-PO Deferred Amount on such Distribution Date will be allocated to the
Class 2-M, Class 2-B1 and Class 2-B2 Certificates in an amount equal to each
such Class's Allocable Share for such Distribution Date, provided that no
distribution of principal will be made on any such Class until any related
Class ranking prior thereto has received distributions of interest and
principal, and such Class has received distributions of interest, on such
Distribution Date. The Pool 2 Group II Senior Certificates will not receive
any distributions in respect of scheduled payments, prepayments or other
unscheduled recoveries of principal on the Pool 2 Mortgage Loans during the
first five years after the Cut-off Date, except as otherwise described herein
on or following the earlier of the Pool 2 Group I Final Distribution Date or
the Pool 2 Cross-Over Date.
The "Pool 2 Senior Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of (i) the Pool 2 Senior
Percentage (as defined herein) of the applicable Non-PO Percentage of all
scheduled payments of principal due on each Pool 2 Mortgage Loan on the first
day of the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment for
previous principal prepayments and the principal portion of Debt Service
Reductions in respect of Pool 2 after the Pool 2 Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule by
reason of any other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period), (ii) the Pool 2 Senior Prepayment Percentage
(as defined herein) of the applicable Non-PO Percentage of the Scheduled
Principal Balance of each Pool 2 Mortgage Loan which was the subject of a
prepayment in full received by the Company (or, in the case of a Pool 2
Mortgage Loan master-serviced by the Company, of which the Company receives
notice) during the applicable Prepayment Period (as defined below), (iii) the
Pool 2 Senior Prepayment Percentage of the applicable Non-PO Percentage of all
partial prepayments of principal received in respect of Pool 2 during the
applicable Prepayment Period, (iv) the lesser of (a) the Pool 2 Senior
Prepayment Percentage of the applicable Non-PO Percentage of the sum of (w)
the net liquidation proceeds allocable to principal on each Pool 2 Mortgage
Loan which became a Liquidated Mortgage Loan during the related Prepayment
Period (other than Pool 2 Mortgage Loans described in clause (x)) and (x) the
principal balance of each Pool 2 Mortgage Loan that was purchased by a private
mortgage insurer during the related Prepayment Period as an alternative to
paying a claim under the related insurance policy, and (b) the Pool 2 Senior
Percentage of the applicable Non-PO Percentage of the sum of (w) the Scheduled
Principal Balance of each Pool 2 Mortgage Loan which became a Liquidated
Mortgage Loan during the related Prepayment Period (other than Pool 2 Mortgage
Loans described in clause (x)) and (x) the Scheduled Principal Balance of each
Pool 2 Mortgage Loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim under the
related insurance policy less (y) in the case of clause (b), the Pool 2 Senior
Percentage of the applicable Non-PO Percentage of the principal portion of
Excess Losses (other than Debt Service Reductions) in respect of Pool 2 during
the related Prepayment Period, and (v) the Pool 2 Senior Prepayment Percentage
of the applicable Non-PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Pool 2 Mortgage Loan which was repurchased by the Company in
connection with such Distribution Date and (b) the difference, if any, between
the Scheduled Principal Balance of a Pool 2 Mortgage Loan that has been
replaced by the Company with a substitute Pool 2 Mortgage Loan pursuant to the
Agreement in connection with such Distribution Date and the Scheduled
Principal Balance of such substitute Pool 2 Mortgage Loan.
A2-7
<PAGE>
With respect to any Pool 2 Mortgage Loan that was the subject of a voluntary
prepayment in full and any Distribution Date, the "Prepayment Period" is the
period from the sixteenth day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, from the
Cut-off Date) through the fifteenth day of the month of such Distribution
Date. With respect to any other unscheduled prepayment of principal of any
Pool 2 Mortgage Loan and any Distribution Date, the Prepayment Period is the
month preceding the month of such Distribution Date.
The "Pool 2 Senior Percentage" on any Distribution Date will equal the
lesser of (i) 100% and (ii) the percentage (carried to six places rounded up)
obtained by dividing the aggregate Certificate Principal Balances of all the
Pool 2 Senior Certificates (less the Class Certificate Principal Balance of
the Class 2-PO Certificates) immediately preceding such Distribution Date by
the aggregate Certificate Principal Balances of all the Pool 2 Certificates
(less the Class Certificate Principal Balance of the Class 2-PO Certificates)
immediately preceding such Distribution Date. The initial Pool 2 Senior
Percentage is expected to be approximately 95.90%.
The "Pool 2 Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) POOL 2 SENIOR PREPAYMENT PERCENTAGE
- ------------------------ -----------------------------------
<S> <C>
May 1998--April 2003.... 100%
May 2003--April 2004.... Pool 2 Senior Percentage plus 70% of the Pool 2 Junior Percentage
May 2004--April 2005.... Pool 2 Senior Percentage plus 60% of the Pool 2 Junior Percentage
May 2005--April 2006.... Pool 2 Senior Percentage plus 40% of the Pool 2 Junior Percentage
May 2006--April 2007.... Pool 2 Senior Percentage plus 20% of the Pool 2 Junior Percentage
May 2007 and thereafter. Pool 2 Senior Percentage
</TABLE>
Notwithstanding the foregoing, if the Pool 2 Senior Percentage on any
Distribution Date exceeds the initial Pool 2 Senior Percentage, the Pool 2
Senior Prepayment Percentage for such Distribution Date will equal 100%.
In addition, no reduction of the Pool 2 Senior Prepayment Percentage below
the level in effect for the most recent prior period specified in the table
above shall be effective on any Distribution Date (such limitation being the
"Pool 2 Senior Prepayment Percentage Stepdown Limitation") unless, as of the
last day of the month preceding such Distribution Date, either:
(A)(i) the aggregate Scheduled Principal Balance of Pool 2 Mortgage Loans
delinquent 60 days or more (including for this purpose any Pool 2 Mortgage
Loans in foreclosure and Pool 2 Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Fund for Pool 2)
does not exceed 50% of the aggregate Class Certificate Principal Balance of
the Pool 2 Junior Certificates as of such date and (ii) cumulative Realized
Losses in respect of Pool 2 do not exceed (a) 30% of the aggregate Class
Certificate Principal Balance of the Pool 2 Junior Certificates as of the
date of issuance of the Certificates (the "Original Pool 2 Junior Principal
Balance" and with the Original Pool 1 Junior Principal Balance, each a
"Junior Principal Balance") if such Distribution Date occurs between and
including May 2003 and April 2004, (b) 35% of the Original Pool 2 Junior
Principal Balance if such Distribution Date occurs between and including
May 2004 and April 2005, (c) 40% of the Original Pool 2 Junior Principal
Balance if such Distribution Date occurs between and including May 2005 and
April 2006, (d) 45% of the Original Pool 2 Junior Principal Balance if such
Distribution Date occurs between and including May 2006 and April 2007, and
(e) 50% of the Original Pool 2 Junior Principal Balance if such
Distribution Date occurs during or after May 2007; or
(B)(i) the aggregate Scheduled Principal Balance of Pool 2 Mortgage Loans
delinquent 60 days or more (including for this purpose any Pool 2 Mortgage
Loans in foreclosure and Pool 2 Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Fund for Pool 2),
averaged over the last three months, as a percentage of the aggregate
Scheduled Principal Balance of all Pool 2 Mortgage Loans averaged over the
last three months, does not exceed 4%, and (ii) cumulative Realized Losses
in respect of Pool 2 do not exceed (a) 10% of the Original Pool 2 Junior
Principal Balance
A2-8
<PAGE>
if such Distribution Date occurs between and including May 2003 and April
2004, (b) 15% of the Original Pool 2 Junior Principal Balance if such
Distribution Date occurs between and including May 2004 and April 2005,
(c) 20% of the Original Pool 2 Junior Principal Balance if such
Distribution Date occurs between and including May 2005 and April 2006, (d)
25% of the Original Pool 2 Junior Principal Balance if such Distribution
Date occurs between and including May 2006 and April 2007, and (e) 30% of
the Original Pool 2 Junior Principal Balance if such Distribution Date
occurs during or after May 2007.
The "Class 2-PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of (i) the applicable PO
Percentage of all scheduled payments of principal due on each Pool 2 Mortgage
Loan on the first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal portion of
Debt Service Reductions in respect of Pool 2 after the Bankruptcy Coverage
Termination Date in respect of Pool 2, but before any adjustment to such
amortization schedule by reason of any other bankruptcy or similar proceeding
or any moratorium or similar waiver or grace period), (ii) the applicable PO
Percentage of the Scheduled Principal Balance of each Pool 2 Mortgage Loan
which was the subject of a prepayment in full received by the Company (or, in
the case of a Pool 2 Mortgage Loan master-serviced by the Company, of which
the Company receives notice) during the related Prepayment Period, (iii) the
applicable PO Percentage of all partial prepayments of principal received
during the related Prepayment Period, (iv) the applicable PO Percentage of the
sum of (w) the net liquidation proceeds allocable to principal on each Pool 2
Mortgage Loan which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than Pool 2 Mortgage Loans described in clause (x))
and (x) the principal balance of each Pool 2 Mortgage Loan that was purchased
by a private mortgage insurer during the related Prepayment Period as an
alternative to paying a claim under the related insurance policy, and (v) the
applicable PO Percentage of the sum of (a) the Scheduled Principal Balance of
each Pool 2 Mortgage Loan which was repurchased by the Company in connection
with such Distribution Date and (b) the difference, if any, between the
Scheduled Principal Balance of a Pool 2 Mortgage Loan that has been replaced
by the Company with a substitute Pool 2 Mortgage Loan pursuant to the
Agreement in connection with such Distribution Date and the Scheduled
Principal Balance of such substitute Pool 2 Mortgage Loan. For purposes of
clauses (ii) and (v) above, the Scheduled Principal Balance of a Pool 2
Mortgage Loan will be reduced by the amount of any Deficient Valuation that
occurred on or before the Pool 2 Bankruptcy Coverage Termination Date.
The "Pool 2 Group I Final Distribution Date" is the Distribution Date on
which the Class Certificate Principal Balance of each of the Pool 2 Group I
Senior Certificates has been reduced to zero.
The "Pool 2 Group II Senior Principal Distribution Amount" for any
Distribution Date will equal the product of (a) the Pool 2 Senior Optimal
Principal Amount for such date multiplied by (b) the Pool 2 Group II Senior
Percentage for such date multiplied by (c) the Pool 2 Group II Senior
Distribution Percentage for such date. Notwithstanding the foregoing, (i) on
the Pool 2 Group I Final Distribution Date, the Pool 2 Group II Senior
Principal Distribution Amount will be increased by any Pool 2 Senior Optimal
Principal Amount remaining after distributions of principal have been made on
the Pool 2 Group I Senior Certificates, and (ii) following the Pool 2 Group I
Final Distribution Date, the Pool 2 Group II Senior Principal Distribution
Amount will equal the Pool 2 Senior Optimal Principal Amount.
The "Pool 2 Group II Senior Distribution Percentage" for any Distribution
Date will equal 0% through the Distribution Date in April 2003; 30% thereafter
through the Distribution Date in April 2004; 40% thereafter through the
Distribution Date in April 2005; 60% thereafter through the Distribution Date
in April 2006; 80% thereafter through the Distribution Date in April 2007; and
100% thereafter.
The "Pool 2 Group II Senior Percentage" for any Distribution Date will equal
the percentage (carried to six places rounded up) obtained by dividing (x) the
Class Certificate Principal Balance of the Pool 2 Group II Senior Certificates
immediately preceding such Distribution Date by (y) the aggregate Class
Certificate Principal Balance of all the Pool 2 Senior Certificates (other
than the Class 2-PO Certificates) immediately preceding such Distribution
Date. The initial Pool 2 Group II Senior Percentage is expected to be
approximately 10.41%.
A2-9
<PAGE>
The "Pool 2 Junior Percentage" on any Distribution Date will equal 100%
minus the Pool 2 Senior Percentage. The "Pool 2 Junior Prepayment Percentage"
will equal 100% minus the Pool 2 Senior Prepayment Percentage, except that on
any Distribution Date after the respective Class Certificate Principal
Balances of the Pool 2 Senior Certificates (other than the Class 2-PO
Certificates) have each been reduced to zero (the "Pool 2 Senior Final
Distribution Date"), the Pool 2 Junior Prepayment Percentage will equal 100%.
The initial Pool 2 Junior Percentage is expected to be approximately 4.10%.
The "Pool 2 Junior Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following (but in
no event greater than the aggregate Class Certificate Principal Balances of
the Pool 2 Junior Certificates immediately prior to such Distribution Date):
(i) the Pool 2 Junior Percentage of the applicable Non-PO Percentage of all
scheduled payments of principal due on each outstanding Pool 2 Mortgage Loan
on the first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal portion of
Debt Service Reductions in respect of Pool 2 after the Pool 2 Bankruptcy
Coverage Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period), (ii) the Pool 2 Junior
Prepayment Percentage of the applicable Non-PO Percentage of the Scheduled
Principal Balance of each Pool 2 Mortgage Loan which was the subject of a
prepayment in full received by the Company (or, in the case of a Pool 2
Mortgage Loan master-serviced by the Company, of which the Company receives
notice) during the related Prepayment Period, (iii) the Pool 2 Junior
Prepayment Percentage of the applicable Non-PO Percentage of all partial
prepayments of principal received in respect of Pool 2 during the related
Prepayment Period (plus, on the Pool 2 Senior Final Distribution Date, 100% of
any Pool 2 Senior Optimal Principal Amount remaining undistributed on each
date), (iv) the excess, if any, of the sum of (a) the applicable Non-PO
Percentage of the net liquidation proceeds allocable to principal received
during the related Prepayment Period in respect of each Liquidated Mortgage
Loan in Pool 2 (other than Pool 2 Mortgage Loans described in clause (b)) and
(b) the applicable Non-PO Percentage of the principal balance of each Pool 2
Mortgage Loan that was purchased by a private mortgage insurer during the
related Prepayment Period as an alternative to paying a claim under the
related insurance policy over (c) the sum of the amounts distributable to the
Pool 2 Senior Certificateholders (other than the holders of the Class 2-PO
Certificates) pursuant to clause (iv) of the definition of Pool 2 Senior
Optimal Principal Amount on such Distribution Date, and (v) the Pool 2 Junior
Prepayment Percentage of the applicable Non-PO Percentage of the sum of (a)
the Scheduled Principal Balance of each Pool 2 Mortgage Loan which was
repurchased by the Company in connection with such Distribution Date and (b)
the difference, if any, between the Scheduled Principal Balance of a Pool 2
Mortgage Loan that has been replaced by the Company with a substitute Pool 2
Mortgage Loan pursuant to the Agreement in connection with such Distribution
Date and the Scheduled Principal Balance of such substitute Pool 2 Mortgage
Loan.
The "Allocable Share" with respect to any Class of Pool 2 Junior
Certificates on any Distribution Date will generally equal such Class's pro
rata share (based on the Class Certificate Principal Balance of each Class
entitled thereto) of each of the components of the Pool 2 Junior Optimal
Principal Amount described above; provided, that, except as described in the
second succeeding sentence, no Class 2-B Certificate shall be entitled on any
Distribution Date to receive distributions pursuant to clauses (ii), (iii) and
(v) of the definition of Pool 2 Junior Optimal Principal Amount unless the
Class Prepayment Distribution Trigger for the related Class is satisfied for
such Distribution Date. The "Class Prepayment Distribution Trigger" for a
Class of Class 2-B Certificates for any Distribution Date is satisfied if the
fraction (expressed as a percentage), the numerator of which is the aggregate
Class Certificate Principal Balance of such Class and each Class subordinate
thereto, if any, and the denominator of which is the aggregate Scheduled
Principal Balance of the Pool 2 Mortgage Loans with respect to such
Distribution Date, equals or exceeds such percentage calculated as of the
Closing Date. If, on any Distribution Date, the Class Certificate Principal
Balance of the Class 2-M Certificates or of any Class of Class 2-B
Certificates for which the related Class Prepayment Distribution Trigger was
satisfied on such Distribution Date is reduced to zero, any amounts
distributable to such Class pursuant to clauses (ii), (iii) and (v) of the
definition of Pool 2 Junior Optimal Principal Amount, to the extent of such
Class's remaining Allocable Share, shall be distributed to the remaining
Classes of Pool 2 Junior Certificates in reduction of their respective Class
Certificate Principal Balances in order of priority. If the Class Prepayment
Distribution Trigger is not
A2-10
<PAGE>
satisfied for any Class of Class 2-B Certificates on any Distribution Date,
this may have the effect of accelerating the amortization of more senior
ranking Classes of Pool 2 Junior Certificates. On any Distribution Date, any
reduction in funds available for distribution to the Classes of Pool 2 Junior
Certificates resulting from a distribution of the Class 2-PO Deferred Amount
to the Class 2-PO Certificates will be allocated to the Classes of Pool 2
Junior Certificates, in reduction of the Allocable Shares thereof, in inverse
order of priority.
Example of Distributions. For an example of hypothetical distributions on
the Certificates for a particular Distribution Date, see "Description of the
Certificates--Example of Distributions" in the accompanying Prospectus.
ALLOCATION OF REALIZED LOSSES ON THE POOL 2 CERTIFICATES
For the definitions of "Realized Loss," "Liquidated Mortgage Loan,"
"Deficient Valuation," "Debt Service Reduction," "Bankruptcy Loss," "Fraud
Loss," "Excess Loss" and "Special Hazard Loss," see "Pool 1 Annex--Allocation
of Realized Losses on the Pool 1 Certificates."
On each Distribution Date, the applicable PO Percentage of the principal
portion of any Realized Loss (including any Excess Loss, but not including any
Debt Service Reduction) on a Pool 2 Discount Mortgage Loan will be allocated
to the Class 2-PO Certificates until the Class Certificate Principal Balance
thereof is reduced to zero. With respect to any Distribution Date through the
Pool 2 Cross-Over Date, the aggregate of all amounts so allocable to the Class
2-PO Certificates on such date in respect of Realized Losses other than Excess
Losses in respect of the Pool 2 Discount Mortgage Loans and all amounts
previously allocated in respect of such losses to the Class 2-PO Certificates
and not distributed on prior Distribution Dates will be the "Class 2-PO
Deferred Amount." To the extent funds are available therefor on any
Distribution Date through the Pool 2 Cross-Over Date, distributions in respect
of the Class 2-PO Deferred Amount will be made on the Class 2-PO Certificates
in accordance with priority fourth under "--Distributions on the Pool 2
Certificates--Allocation of Pool 2 Available Funds" above. Any distribution of
Pool 2 Available Funds in respect of the Class 2-PO Deferred Amount will not
reduce the Class Certificate Principal Balance of the Class 2-PO Certificates.
No interest will accrue on the Class 2-PO Deferred Amount. On each
Distribution Date through the Pool 2 Cross-Over Date, the Class Certificate
Principal Balance of the lowest ranking Class of Pool 2 Junior Certificates
then outstanding will be reduced by the amount of any distributions in respect
of the Class 2-PO Deferred Amount on such Distribution Date, through the
operation of the Class 2-PO Deferred Payment Writedown Amount. After the
Pool 2 Cross-Over Date, no distributions will be made in respect of, and
losses allocated to the Class 2-PO Certificates will not be added to, the
Class 2-PO Deferred Amount. Any distribution of Unanticipated Recoveries (as
defined in the accompanying Prospectus) in respect of Pool 2 on the Class 2-PO
Certificates will be adjusted to take into account the Class 2-PO Deferred
Amount previously paid to such Class as specified in the Agreement. See
"Servicing of the Mortgage Loans and Contracts--Unanticipated Recoveries of
Losses on the Mortgage Loans" in the accompanying Prospectus.
The applicable Non-PO Percentage of the principal portion of any Realized
Loss (other than an Excess Loss or a Debt Service Reduction) on a Pool 2
Mortgage Loan for any Distribution Date will not be allocated to any Pool 2
Senior Certificates until the Pool 2 Cross-Over Date. Prior to the Pool 2
Cross-Over Date (and on such date under certain circumstances), the applicable
Non-PO Percentage of the principal portion of any such Realized Loss will be
allocated among the outstanding Classes of Pool 2 Junior Certificates, in
inverse order of priority, until the Class Certificate Principal Balance of
each such Class has been reduced to zero (i.e., such Realized Losses will be
allocated first to the Class 2-B5 Certificates while such Certificates are
outstanding, second to the Class 2-B4 Certificates, and so on). The applicable
Non-PO Percentage of the principal portion of any Excess Loss (other than a
Debt Service Reduction) on a Pool 2 Mortgage Loan for any Distribution Date
will be allocated pro rata among all outstanding Classes of Pool 2
Certificates (other than the Class 2-PO Certificates) based on their Class
Certificate Principal Balances. Commencing on the Pool 2 Cross-Over Date, the
applicable Non-PO Percentage of the principal portion of any Realized Loss
(other than a Debt Service Reduction) in respect of the Pool 2 Mortgage Loans
will be allocated among the outstanding Classes of Pool 2 Senior Certificates
(other than the Class 2-PO Certificates) pro rata based upon their Class
Certificate Principal Balances.
A2-11
<PAGE>
No reduction of the Class Certificate Principal Balance of any Class of Pool
2 Certificates will be made on any Distribution Date on account of any
Realized Loss to the extent that such reduction would have the effect of
reducing the aggregate Certificate Principal Balance of all of the Pool 2
Certificates as of such Distribution Date to an amount less than the Pool
Scheduled Principal Balance of Pool 2 as of the first day of the month of such
Distribution Date, less any Deficient Valuations in respect of Pool 2 Mortgage
Loans occurring on or prior to the Pool 2 Bankruptcy Coverage Termination Date
(such limitation being the "Pool 2 Loss Allocation Limitation" and, with the
Pool 1 Loss Allocation Limitation, each a "Loss Allocation Limitation").
The principal portion of Debt Service Reductions in respect of the Pool 2
Mortgage Loans will not be allocated in reduction of the Certificate Principal
Balance of any Pool 2 Certificate. However, after the Pool 2 Bankruptcy
Coverage Termination Date, the amounts distributable under clause (i) of each
of the definitions of Pool 2 Senior Optimal Principal Amount, Class 2-PO
Principal Distribution Amount and Pool 2 Junior Optimal Principal Amount will
be reduced by the amount of any Debt Service Reductions in respect of the Pool
2 Mortgage Loans. Regardless of when they occur, such Debt Service Reductions
may reduce the amount of Pool 2 Available Funds otherwise available for
distribution on a Distribution Date. As a result of the subordination of the
Pool 2 Junior Certificates in right of distribution relative to the Pool 2
Senior Certificates, any Debt Service Reductions in respect of the Pool 2
Mortgage Loans prior to the Pool 2 Bankruptcy Coverage Termination Date will
be borne by the Pool 2 Junior Certificates (to the extent then outstanding) in
inverse order of priority.
All allocations of Realized Losses in respect of the Pool 2 Mortgage Loans
to a Class of Pool 2 Certificates will be accomplished on a Distribution Date
by reducing the applicable Class Certificate Principal Balance by the
appropriate pro rata share of any such losses occurring during the month
preceding the month of such Distribution Date and, accordingly, will be taken
into account in determining the distributions of principal and interest on the
Pool 2 Certificates commencing on the following Distribution Date, except that
the aggregate amount of the principal portion of any Realized Losses (other
than Excess Losses and Debt Service Reductions) to be allocated to the Class
2-PO Certificates on any Distribution Date through the Pool 2 Cross-Over Date
will also be taken into account in determining distributions in respect of the
Class 2-PO Deferred Amount for such Distribution Date.
The interest portion of all Realized Losses in respect of the Pool 2
Mortgage Loans will be allocated among the outstanding Classes of Pool 2
Certificates offered hereby to the extent described under "--Distributions on
the Pool 2 Certificates--Interest" above. For purposes of making certain
calculations under the Agreement, the interest portion of any Realized Loss in
respect of a Pool 2 Mortgage Loan will be allocated among the Base Servicing
Fee, the Supplemental Servicing Fee and interest at the excess of the Mortgage
Rate over the sum of the Base Servicing Fee and the Supplemental Servicing Fee
in proportion to the amount of accrued interest in respect of such Pool 2
Mortgage Loan that would have been so allocated in the absence of any such
shortfall.
The applicable Non-PO Percentage of any Deficient Valuation in respect of a
Pool 2 Mortgage Loan will on each Distribution Date be allocated solely to the
outstanding Pool 2 Junior Certificates until the Pool 2 Bankruptcy Coverage
Termination Date. The "Pool 2 Bankruptcy Coverage Termination Date" (with the
Pool 1 Bankruptcy Coverage Termination Date, each a "Bankruptcy Coverage
Termination Date") is the Distribution Date upon which the Pool 2 Bankruptcy
Loss Amount has been reduced to zero or a negative number (or the Pool 2
Cross-Over Date, if earlier). On each Distribution Date, the "Pool 2
Bankruptcy Loss Amount" (with the Pool 1 Bankruptcy Loss Amount, each a
"Bankruptcy Loss Amount") will equal approximately $100,000 (approximately
0.06% of the aggregate Scheduled Principal Balances of the Pool 2 Mortgage
Loans as of the Cut-off Date), subject to reduction as described in the
Agreement, minus the aggregate amount of previous Bankruptcy Losses in respect
of the Pool 2 Mortgage Loans. The Pool 2 Bankruptcy Loss Amount and the manner
of reduction thereof described in the Agreement may be reduced or modified
upon written confirmation from Fitch and S&P (each as defined herein) to the
effect that such reduction or modification will not adversely affect the then
current ratings of the Pool 2 Senior Certificates by Fitch and S&P. Such
reduction may adversely affect the coverage provided by subordination with
respect to Bankruptcy Losses in respect of the Pool 2 Mortgage Loans.
A2-12
<PAGE>
The applicable Non-PO Percentage of any Fraud Loss in respect of a Pool 2
Mortgage Loan will on each Distribution Date be allocated solely to the
outstanding Pool 2 Junior Certificates until the Pool 2 Fraud Coverage
Termination Date. The "Pool 2 Fraud Coverage Termination Date" is the
Distribution Date upon which the Fraud Loss Amount has been reduced to zero or
a negative number (or the Pool 2 Cross-Over Date, if earlier). Upon the
initial issuance of the Certificates, the "Pool 2 Fraud Loss Amount" will
equal approximately $1,753,907 (approximately 1.00% of the aggregate Scheduled
Principal Balances of the Pool 2 Mortgage Loans as of the Cut-off Date). As of
any Distribution Date prior to the first anniversary of the Cut-off Date, the
Pool 2 Fraud Loss Amount will equal approximately $1,753,907, minus the
aggregate amount of Fraud Losses that would have been allocated to the Pool 2
Junior Certificates in the absence of the Pool 2 Loss Allocation Limitation
since the Cut-off Date. As of any Distribution Date from the first to the
fifth anniversaries of the Cut-off Date, the Pool 2 Fraud Loss Amount will
equal (1) the lesser of (a) the Pool 2 Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 1% (from the first to but excluding
the third anniversaries of the Cut-off Date) or 0.5% (from and including the
third to but excluding the fifth anniversaries of the Cut-off Date) of the
aggregate outstanding principal balance of all of the Pool 2 Mortgage Loans as
of the most recent anniversary of the Cut-off Date minus (2) the Fraud Losses
that would have been allocated to the Pool 2 Junior Certificates in the
absence of the Pool 2 Loss Allocation Limitation since the most recent
anniversary of the Cut-off Date. As of any Distribution Date on or after the
fifth anniversary of the Cut-off Date, the Pool 2 Fraud Loss Amount shall be
zero.
The applicable Non-PO Percentage of any Special Hazard Loss in respect of a
Pool 2 Mortgage Loan will on each Distribution Date be allocated solely to the
outstanding Pool 2 Junior Certificates until the Pool 2 Special Hazard
Termination Date. The "Pool 2 Special Hazard Termination Date" (with the Pool
1 Special Hazard Termination Date, each a "Special Hazard Termination Date")
is the Distribution Date upon which the Pool 2 Special Hazard Loss Amount has
been reduced to zero or a negative number (or the Pool 2 Cross-Over Date, if
earlier). Upon the initial issuance of the Certificates, the "Pool 2 Special
Hazard Loss Amount" (with the Pool 1 Special Hazard Loss Amount, each a
"Special Hazard Loss Amount") will equal approximately $3,306,678
(approximately 1.89% of the aggregate Scheduled Principal Balances of the Pool
2 Mortgage Loans as of the Cut-off Date). As of any Distribution Date, the
Pool 2 Special Hazard Loss Amount will equal approximately $3,306,678 minus
the sum of (i) the aggregate amount of Special Hazard Losses that would have
been previously allocated to the Pool 2 Junior Certificates in the absence of
the Pool 2 Loss Allocation Limitation and (ii) the Pool 2 Adjustment Amount.
For each anniversary of the Cut-off Date, the "Pool 2 Adjustment Amount" (with
the Pool 1 Adjustment Amount, each an "Adjustment Amount") shall be equal to
the amount, if any, by which the Pool 2 Special Hazard Loss Amount (without
giving effect to the deduction of the Pool 2 Adjustment Amount for such
anniversary) exceeds the lesser of (A) an amount calculated by the Company and
approved by each of Fitch and S&P, which amount shall not be less than
$500,000, and (B) the greater of (x) 1% (or if greater than 1%, the highest
percentage of Pool 2 Mortgage Loans by principal balance secured by Mortgaged
Properties in any California zip code) of the outstanding principal balance of
all the Pool 2 Mortgage Loans on the Distribution Date immediately preceding
such anniversary and (y) twice the outstanding principal balance of the Pool 2
Mortgage Loan which has the largest outstanding principal balance on the
Distribution Date immediately preceding such anniversary.
POOL 2 YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
YIELD
The effective yields on the Pool 2 Certificates will depend upon, among
other things, the price at which such Certificates are purchased and the rate
and timing of payments of principal (including both scheduled and unscheduled
payments) of the Pool 2 Mortgage Loans.
The yields to investors will be sensitive in varying degrees to the rate of
prepayments on the Pool 2 Mortgage Loans. The extent to which the yield to
maturity of a Certificate is sensitive to prepayments will depend upon the
degree to which it is purchased at a discount or premium. In the case of
Certificates purchased
A2-13
<PAGE>
at a premium, faster than anticipated rates of principal payments on the
Mortgage Loans in Pool 2 could result in actual yields to investors in such
Certificates that are lower than the anticipated yields. In the case of
Certificates purchased at a discount, slower than anticipated rates of
principal payments on the Mortgage Loans in Pool 2 could result in actual
yields to investors in such Certificates that are lower than the anticipated
yields.
Rapid rates of prepayments on the Pool 2 Mortgage Loans are likely to
coincide with periods of low prevailing interest rates. During such periods,
the yields at which an investor in the Pool 2 Certificates may be able to
reinvest amounts received as payments on the investor's Certificates may be
lower than the yield on such Certificates. Conversely, slow rates of
prepayments on the Pool 2 Mortgage Loans are likely to coincide with periods
of high prevailing interest rates. During such periods, the amount of payments
available to an investor for reinvestment at such high rates may be relatively
low.
The Pool 2 Mortgage Loans will not prepay at any constant rate, nor will all
of the Pool 2 Mortgage Loans prepay at the same rate at any one time. The
timing of changes in the rate of prepayments may affect the actual yield to an
investor, even if the average rate of principal prepayments is consistent with
the investor's expectation. In general, the earlier a prepayment of principal
on a Pool 2 Mortgage Loan, the greater the effect on the yield to an investor
in the Pool 2 Certificates. As a result, the effect on the yield of principal
prepayments on the Pool 2 Mortgage Loans occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Pool 2 Certificates is not likely to be offset
by a later equivalent reduction (or increase) in the rate of principal
prepayments.
The entire amount of the applicable Non-PO Percentage of any principal
payments (including scheduled payments and prepayments and other unscheduled
recoveries of principal) with respect to a Pool 2 Mortgage Loan allocable to
the Pool 2 Senior Certificates will be allocated solely to the outstanding
Pool 2 Group I Senior Certificates during the first five years after the Cut-
off Date (except as otherwise described herein on or following the Pool 2
Group I Final Distribution Date), with such allocation being subject to
reduction thereafter as described herein, provided that such amounts will be
allocated pro rata among all Pool 2 Senior Certificates (other than the Class
2-PO Certificates) on each Distribution Date after the Pool 2 Cross-Over Date.
This allocation between the Pool 2 Group I Senior Certificates and the Pool 2
Group II Senior Certificates is designed to accelerate the allocation of
principal payments, prepayments and certain other unscheduled recoveries on
the Pool 2 Mortgage Loans to holders of the Pool 2 Group I Senior Certificates
relative to that of the Pool 2 Group II Senior Certificates through the Pool 2
Cross-Over Date.
The Pool 2 Mortgage Loans will bear interest at fixed Mortgage Rates,
payable in arrears. Each monthly interest payment on a Mortgage Loan is
calculated as 1/12th of the applicable Mortgage Rate multiplied by the
outstanding principal balance of such Mortgage Loan on the first day of the
month.
The effective yield to holders of Pool 2 Certificates offered hereby will be
lower than the yield otherwise produced by the applicable Certificate Interest
Rate and the applicable purchase prices thereof because, while interest will
accrue from the first day of each month, the distribution of such interest
will not be made until the 25th day (or if such day is not a business day, the
immediately following business day) of the month following the month of
accrual. In addition, the effective yield on the Pool 2 Certificates will be
affected by any Net Interest Shortfall and the interest portion of certain
losses in respect of Pool 2. See "Pool 2 Annex--Distributions on the Pool 2
Certificates" and "--Allocation of Realized Losses on the Pool 2 Certificates"
herein.
PREPAYMENTS
The rate of distribution of principal of the Pool 2 Certificates will be
affected primarily by the amount and timing of principal payments received on
or in respect of the Pool 2 Mortgage Loans. Such principal payments will
include scheduled payments as well as voluntary prepayments by borrowers (such
as, for example, prepayments in full due to refinancings, including
refinancings made by the Company in the ordinary course of conducting its
mortgage banking business, some of which refinancings may be solicited by the
Company, or prepayments in connection with biweekly payment programs,
participation in which may be solicited by the
A2-14
<PAGE>
Company) and prepayments resulting from foreclosure, condemnation and other
dispositions of the Pool 2 Mortgaged Properties, from repurchase by the
Company of any Mortgage Loan as to which there has been a material breach of
warranty or defect in documentation (or deposit of certain amounts in respect
of delivery of a substitute Mortgage Loan therefor), and from an exercise by
the Company of its option to repurchase a Defaulted Mortgage Loan. See the
last two paragraphs of "The Pool 2 Mortgage Loans," above and "Yield Maturity
and Weighted Average Life Considerations" in the Prospectus. Mortgagors are
permitted to prepay the Pool 2 Mortgage Loans, in whole or in part, at any
time without penalty. In addition, as a result of the fact that Pool 2
Certificateholders will be entitled on any Distribution Date to receive from
the Pool 2 Available Funds distributions of amounts pursuant to clause (iv) of
each of the definitions of the Pool 2 Senior Optimal Principal Amount, Class
2-PO Principal Distribution Amount or Pool 2 Junior Optimal Principal Amount,
the occurrence of defaults on the Pool 2 Mortgage Loans may produce the same
effect on the Pool 2 Certificates receiving such distributions as an early
receipt of principal.
A number of social, economic, tax, geographic, demographic, legal and other
factors may influence prepayments of the Mortgage Loans. These factors may
include the age of such Mortgage Loans, the geographic distribution of the
Mortgaged Properties, the payment terms of such Mortgage Loans, the
characteristics of the borrowers, homeowner mobility, economic conditions
generally and in the geographic area in which the Mortgaged Properties are
located, enforceability of due-on-sale clauses, prevailing interest rates in
relation to the interest rates on such Mortgage Loans, the availability of
mortgage funds, the use of second or "home equity" mortgage loans by
mortgagors, the use of the properties as second or vacation homes, the extent
of the mortgagors' net equity in the Mortgaged Properties, tax-related
considerations and, where investment properties are securing such Mortgage
Loans, the availability of other investments. The rate of principal payment
may also be subject to seasonal variations.
The rate of principal prepayments on pools of conventional mortgage loans
has fluctuated significantly in recent years. Generally, if prevailing
interest rates were to fall significantly below the interest rates on the Pool
2 Mortgage Loans, such Mortgage Loans would be expected to prepay at higher
rates than if prevailing rates were to remain at or above the interest rates
on such Mortgage Loans. Conversely, if interest rates were to rise
significantly above the interest rates on the Pool 2 Mortgage Loans, such
Mortgage Loans would be expected to prepay at lower rates than if prevailing
rates were to remain at or below the interest rates on such Mortgage Loans.
Voluntary prepayments in full of principal on the Pool 2 Mortgage Loans
received by the Company (or, in the case of Mortgage Loans master-serviced by
the Company, of which the Company receives notice) from the first day through
the fifteenth day of each month (other than the month of the Cut-off Date) are
passed through to the Pool 2 Certificateholders in the month of receipt or
payment. Voluntary prepayments of principal in full received from the
sixteenth day (or, in the case of the month of the Cut-off Date, from the Cut-
off Date) through the last day of each month, and all voluntary partial
prepayments of principal on the Pool 2 Mortgage Loans are passed through to
the Pool 2 Certificateholders in the month following the month of receipt or
payment. Any prepayment or liquidation of a Pool 2 Mortgage Loan (by
foreclosure proceedings or by virtue of the purchase of a Pool 2 Mortgage Loan
in advance of its stated maturity as required or permitted by the Agreement)
will generally have the effect of passing through to the Pool 2
Certificateholders principal amounts which would otherwise be passed through
in amortized increments over the remaining term of such Mortgage Loan.
The entire amount of the applicable Non-PO Percentage of any prepayment and
unscheduled recovery of principal with respect to a Pool 2 Mortgage Loan will
be allocated solely to the outstanding Pool 2 Senior Certificates (other than
the Class 2-PO Certificates and Pool 2 Group II Senior Certificates) during
the first five years after the Cut-off Date (with such allocation being
subject to reduction thereafter as described herein), except as otherwise
described herein on or following the Pool 2 Senior Final Distribution Date.
Among such Pool 2 Senior Certificates, such amounts will be allocated in the
manner described herein. See "Pool 2 Annex-- Distributions on the Pool 2
Certificates--Principal" herein.
A2-15
<PAGE>
When a full prepayment is made on a Mortgage Loan in a Mortgage Pool, the
Mortgagor is charged interest ("Prepayment Interest") on the days in the month
actually elapsed up to the date of such prepayment, at a daily interest rate
(determined by dividing the Mortgage Rate by 360) which is applied to the
principal amount of the loan so prepaid. When such a prepayment is made during
the period from the sixteenth day through the last day of any month (and from
the Cut-off Date through the fifteenth day of the month of the Cut-off Date),
such Prepayment Interest (net of Servicing Fees) is passed through to the Pool
2 Certificateholders in the month following its receipt and the amount of
interest thus distributed to Certificateholders, to the extent not offset by a
related Compensating Interest Payment (as defined herein), will be less than
the amount which would have been distributed in the absence of such
prepayment. The payment of a claim under certain insurance policies or the
purchase of a defaulted Pool 2 Mortgage Loan by a private mortgage insurer may
also cause a reduction in the amount of interest passed through. Shortfalls in
respect of Pool 2 described in this paragraph will be borne by the Pool 2
Certificateholders to the extent described herein. See "Pool 1 Annex--
Distributions on the Pool 1 Certificates--Interest" and "Pool 2 Annex--
Distributions on the Pool 2 Certificates--Interest" herein.
Any partial prepayment will be applied to the balance of the related Pool 2
Mortgage Loans as of the first day of the month of receipt, will be passed
through to the Pool 2 Certificateholders in the following month and, to the
extent not offset by a related Compensating Interest Payment, will reduce the
aggregate amount of interest distributable to such Certificateholders in such
month in an amount equal to 30 days of interest at the related Net Mortgage
Rate on the amount of such prepayment.
The yield on certain Classes of the Pool 2 Certificates also may be affected
by any repurchase by the Company of the Pool 2 Mortgage Loans as described
under "The Pooling and Servicing Agreement--Termination" herein.
THE CLASS 2-M, CLASS 2-B1 AND CLASS 2-B2 CERTIFICATES
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class 2-M, Class 2-B1 and Class 2-B2 Certificates
will be affected by the rate of prepayments on the Pool 2 Mortgage Loans, as
well as the rate of mortgagor defaults resulting in Realized Losses in respect
of such Mortgage Loans, by the severity of those losses and by the timing
thereof. See "Pool 2 Annex--Allocation of Realized Losses on the Pool 2
Certificates" herein for a description of the manner in which such losses are
borne by the holders of the Pool 2 Certificates. If the purchaser of a Class
2-M, Class 2-B1 or Class 2-B2 Certificate calculates its anticipated yield
based on an assumed rate of default and amount of Realized Losses in respect
of the related Mortgage Loans that is lower than the default rate and the
amount of losses actually incurred, its actual yield to maturity may be lower
than that so calculated and could be negative. The timing of defaults and
losses will also affect an investor's actual yield to maturity, even if the
average rate of defaults and severity of losses are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater
the effect on an investor's yield to maturity.
The yields to maturity on the Classes of Class 2-B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted Pool 2 Mortgage Loans than will the yields on such Classes with
lower numerical designations, and the yields to maturity on all of the Class
2-B Certificates will be more sensitive to such losses than will the yields on
the other Classes of related Certificates. The yields to maturity on the Class
2-M Certificates will be more sensitive to such losses than will the yields on
the Pool 2 Senior Certificates and less sensitive than the yields on the Class
2-B Certificates. The Pool 2 Junior Certificates will be more sensitive to
losses due to liquidations of defaulted Pool 2 Mortgage Loans because the
entire amount of such losses will be allocable to such Certificates in inverse
order of priority, either directly or through the allocation of the Class 2-PO
Deferred Payment Writedown Amount, except as provided herein. To the extent
not covered by the Company's advances of delinquent monthly payments of
principal and interest, delinquencies on the Pool 2 Mortgage Loans may also
have a relatively greater effect (i) on the yields to investors in the related
Class 2-B Certificates with higher numerical designations than on the yields
to investors in those related Class 2-B Certificates with lower numerical
designations, (ii) on the yields to investors in the related Class 2-B
Certificates than on the yields to investors in the other Classes of related
Certificates, and (iii) on the yields to
A2-16
<PAGE>
investors in the Class 2-M Certificates than on the yields to investors in the
related Senior Certificates. As described above under "Pool 2 Annex--
Distributions on the Pool 2 Certificates--Interest" and "--Principal," "--
Allocation of Realized Losses on the Pool 2 Certificates" and "--
Subordination," amounts otherwise distributable to holders of any Class of
Pool 2 Class B Certificates will be made available to protect the holders of
the more senior ranking Classes of Pool 2 Certificates against interruptions
in distributions due to certain mortgagor delinquencies. Amounts otherwise
distributable to holders of the Class 2-M Certificates will be made available
to protect the holders of the Pool 2 Senior Certificates against interruptions
in distributions due to certain mortgagor delinquencies. Such delinquencies,
even if subsequently cured, may affect the timing of the receipt of
distributions by the holders of such Junior Certificates.
To the extent that the Class 2-M, Class 2-B1 or Class 2-B2 Certificates are
being purchased at discounts from their initial Class Certificate Principal
Balances, if the purchaser of such a Certificate calculates its yield to
maturity based on an assumed rate of payment of principal faster than that
actually received on such Certificate, its actual yield to maturity may be
lower than that so calculated.
FINAL PAYMENT CONSIDERATIONS
The rate of payment of principal of the Pool 2 Certificates will depend on
the rate of payment of principal of the related Mortgage Loans (including
prepayments, defaults, delinquencies and liquidations) which, in turn, will
depend on the characteristics of such Mortgage Loans, the level of prevailing
interest rates and other economic, geographic, social and other factors, and
no assurance can be given as to the actual payment experience. As of the Cut-
off Date, the month and year of the latest scheduled maturity of a Mortgage
Loan in Pool 2 is expected to be April 2028. In addition, to the extent
delinquencies and defaults are not covered by advances made by the Company or
offset by the effect of the subordination of the related Junior Certificates,
delinquencies and defaults could affect the actual maturity of the
Certificates offered hereby.
WEIGHTED AVERAGE LIVES OF THE POOL 2 CERTIFICATES
The weighted average life of a Certificate is determined by (a) multiplying
the reduction, if any, in the Certificate Principal Balance thereof on each
Distribution Date by the number of years from the date of issuance to such
Distribution Date, (b) summing the results and (c) dividing the sum by the
aggregate reductions in the Certificate Principal Balance of such Certificate.
The weighted average lives of the Pool 2 Certificates will be affected, to
varying degrees, by the rate of principal payments on the Pool 2 Mortgage
Loans, the timing of changes in such rate of payments and the priority
sequence of distributions of principal of such Certificates. The interaction
of the foregoing factors may have different effects on the various Classes of
the Certificates and the effects on any Class may vary at different times
during the life of such Class. Further, to the extent the prices of Classes of
Certificates represent discounts or premiums to their respective original
Class Certificate Principal Balances, variability in the weighted average
lives of such Classes of Certificates could result in variability in the
related yields to maturity.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage
loans. The Prepayment Assumption does not purport to be either a historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans,
including the Mortgage Loans in either Mortgage Pool. A prepayment assumption
of 100% of the Prepayment Assumption assumes prepayment rates of 0.2% per
annum of the then outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and increasing by 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 mortgage loans, 100%
of the Prepayment Assumption assumes a constant prepayment rate of 6.0% per
annum.
A2-17
<PAGE>
Tables of Pool 2 Class Certificate Principal Balances. The following tables
set forth the percentages of the initial Class Certificate Principal Balance
of each Class of Pool 2 Certificates offered hereby that would be outstanding
after each of the dates shown at the specified constant percentages of the
Prepayment Assumption and the corresponding weighted average life of each such
Class of Pool 2 Certificates. In addition, for purposes of calculations under
the columns at the indicated percentages of the Prepayment Assumption set
forth in the tables, it is assumed with respect to the Pool 2 Mortgage Loans
(the "Pool 2 Modeling Assumptions") that (i) the distributions in respect of
the Pool 2 Certificates are made and received in cash on the 25th day of each
month commencing in May 1998, (ii) the Pool 2 Mortgage Loans prepay at the
specified constant percentages of the Prepayment Assumption, (iii) the
aggregate outstanding principal balance of the Pool 2 Mortgage Loans as of the
Cut-off Date is $175,390,683, (iv) no defaults or delinquencies in the payment
by Mortgagors of principal of and interest on the Pool 2 Mortgage Loans are
experienced and the Company does not repurchase any of the Pool 2 Mortgage
Loans as permitted or required by the Agreement, (v) the Company does not
exercise its option to repurchase all the Mortgage Loans in the Trust Fund as
described under the caption "The Pooling and Servicing Agreement--Termination"
herein, (vi) scheduled monthly payments on the Pool 2 Mortgage Loans are
received on the first day of each month commencing in May 1998, and are
computed prior to giving effect to prepayments received in the prior month,
(vii) prepayments representing payment in full of individual Pool 2 Mortgage
Loans are received on the last day of each month (commencing in April 1998)
and include 30 days' interest thereon, and no Interest Shortfalls occur in
respect of the Pool 2 Mortgage Loans, (viii) the scheduled monthly payment for
each Pool 2 Mortgage Loan has been calculated based on its outstanding
balance, interest rate and remaining term to maturity such that such Mortgage
Loan will amortize in amounts sufficient to repay the remaining balance of
such Mortgage Loan by its remaining term to maturity, (ix) the initial Class
Certificate Principal Balance and Certificate Interest Rate for each Class of
Pool 2 Certificates offered hereby are as indicated on the cover page hereof,
(x) the date of the initial issuance of the Pool 2 Certificates is April 29,
1998, (xi) the amounts distributable to Pool 2 Certificateholders are not
reduced by the incurrence of any expenses by the Trust Fund and (xii) the Pool
2 Mortgage Loans are divided into two groups (each, a "Pool 2 Mortgage Loan
Group") and the Pool 2 Mortgage Loans in each Pool 2 Mortgage Loan Group have
the respective characteristics described below:
<TABLE>
<CAPTION>
AGGREGATE
SCHEDULED STATED
PRINCIPAL REMAINING
POOL 2 BALANCE AS OF NET TERM TO
MORTGAGE LOAN THE CUT-OFF MORTGAGE MORTGAGE AGE MATURITY
GROUP DATE RATE RATE (MONTHS) (MONTHS)
------------- ------------- ------------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Discount.......... $ 4,402,577 6.8683988727% 6.6540078480% 1 359
Non-Discount...... 170,988,106 7.4631119637 7.2059489489 2 358
</TABLE>
It is not likely that the Pool 2 Mortgage Loans will prepay at a constant
level of the Prepayment Assumption. In addition, because certain of the Pool 2
Mortgage Loans will have remaining terms to maturity and will bear interest at
rates that are different from those assumed, the actual Class Certificate
Principal Balance of each Class of Pool 2 Certificates outstanding at any time
and the actual weighted average life of each Class of Pool 2 Certificates may
differ from the corresponding information in the table for each indicated
percentage of the Prepayment Assumption. Furthermore, even if all the Pool 2
Mortgage Loans prepay at the indicated percentages of the Prepayment
Assumption and the weighted average mortgage interest rate and weighted
average stated remaining term to maturity of such Mortgage Loans were to equal
the weighted average mortgage interest rate and weighted average stated
remaining term to maturity of the assumed Pool 2 Mortgage Loans, due to the
actual distribution of remaining terms to maturity and interest rates among
the Pool 2 Mortgage Loans, the actual Class Certificate Principal Balance of
each Class of Pool 2 Certificates outstanding at any time and the actual
weighted average life of each Class of Pool 2 Certificates would differ (which
difference could be material) from the corresponding information in the tables
for each indicated percentage of the Prepayment Assumption.
A2-18
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 2 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 2-A1 CLASS 2-A2 CLASS 2-A3
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 1999............ 98 94 88 84 80 100 100 100 100 100 100 100 100 100 100
April 2000............ 96 84 64 50 39 100 100 100 100 100 100 100 100 100 100
April 2001............ 94 70 34 10 0 100 100 100 100 74 100 100 100 100 100
April 2002............ 91 57 8 0 0 100 100 100 24 0 100 100 100 100 65
April 2003............ 89 45 0 0 0 100 100 51 0 0 100 100 100 55 3
April 2004............ 86 34 0 0 0 100 100 0 0 0 100 100 94 14 0
April 2005............ 83 24 0 0 0 100 100 0 0 0 100 100 60 0 0
April 2006............ 80 16 0 0 0 100 100 0 0 0 100 100 35 0 0
April 2007............ 77 7 0 0 0 100 100 0 0 0 100 100 17 0 0
April 2008............ 74 * 0 0 0 100 100 0 0 0 100 100 4 0 0
April 2009............ 70 0 0 0 0 100 76 0 0 0 100 100 0 0 0
April 2010............ 66 0 0 0 0 100 52 0 0 0 100 100 0 0 0
April 2011............ 62 0 0 0 0 100 29 0 0 0 100 100 0 0 0
April 2012............ 58 0 0 0 0 100 8 0 0 0 100 100 0 0 0
April 2013............ 53 0 0 0 0 100 0 0 0 0 100 91 0 0 0
April 2014............ 48 0 0 0 0 100 0 0 0 0 100 77 0 0 0
April 2015............ 42 0 0 0 0 100 0 0 0 0 100 64 0 0 0
April 2016............ 36 0 0 0 0 100 0 0 0 0 100 51 0 0 0
April 2017............ 29 0 0 0 0 100 0 0 0 0 100 40 0 0 0
April 2018............ 22 0 0 0 0 100 0 0 0 0 100 28 0 0 0
April 2019............ 15 0 0 0 0 100 0 0 0 0 100 18 0 0 0
April 2020............ 7 0 0 0 0 100 0 0 0 0 100 8 0 0 0
April 2021............ 0 0 0 0 0 92 0 0 0 0 100 0 0 0 0
April 2022............ 0 0 0 0 0 57 0 0 0 0 100 0 0 0 0
April 2023............ 0 0 0 0 0 19 0 0 0 0 100 0 0 0 0
April 2024............ 0 0 0 0 0 0 0 0 0 0 84 0 0 0 0
April 2025............ 0 0 0 0 0 0 0 0 0 0 52 0 0 0 0
April 2026............ 0 0 0 0 0 0 0 0 0 0 17 0 0 0 0
April 2027............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 2028............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 14.3 4.9 2.5 2.0 1.7 24.2 12.2 5.1 3.8 3.2 27.1 18.3 7.6 5.2 4.3
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A2-19
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 2 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 2-A4 CLASS 2-A5 CLASS 2-A6
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 1999............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2000............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2001............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2002............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2003............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2004............ 100 100 100 100 0 100 100 100 100 16 100 100 100 100 100
April 2005............ 100 100 100 4 0 100 100 100 100 0 100 100 100 100 26
April 2006............ 100 100 100 0 0 100 100 100 23 0 100 100 100 100 0
April 2007............ 100 100 100 0 0 100 100 100 0 0 100 100 100 81 0
April 2008............ 100 100 100 0 0 100 100 100 0 0 100 100 100 60 0
April 2009............ 100 100 51 0 0 100 100 100 0 0 100 100 100 45 0
April 2010............ 100 100 0 0 0 100 100 90 0 0 100 100 100 33 0
April 2011............ 100 100 0 0 0 100 100 53 0 0 100 100 100 25 0
April 2012............ 100 100 0 0 0 100 100 23 0 0 100 100 100 18 0
April 2013............ 100 100 0 0 0 100 100 0 0 0 100 100 98 13 0
April 2014............ 100 100 0 0 0 100 100 0 0 0 100 100 79 10 0
April 2015............ 100 100 0 0 0 100 100 0 0 0 100 100 63 7 0
April 2016............ 100 100 0 0 0 100 100 0 0 0 100 100 50 5 0
April 2017............ 100 100 0 0 0 100 100 0 0 0 100 100 40 4 0
April 2018............ 100 100 0 0 0 100 100 0 0 0 100 100 31 3 0
April 2019............ 100 100 0 0 0 100 100 0 0 0 100 100 24 2 0
April 2020............ 100 100 0 0 0 100 100 0 0 0 100 100 18 1 0
April 2021............ 100 89 0 0 0 100 100 0 0 0 100 100 14 1 0
April 2022............ 100 22 0 0 0 100 100 0 0 0 100 100 10 1 0
April 2023............ 100 0 0 0 0 100 72 0 0 0 100 100 7 * 0
April 2024............ 100 0 0 0 0 100 32 0 0 0 100 100 5 * 0
April 2025............ 100 0 0 0 0 100 0 0 0 0 100 94 3 * 0
April 2026............ 100 0 0 0 0 100 0 0 0 0 100 59 2 * 0
April 2027............ 0 0 0 0 0 63 0 0 0 0 100 26 1 * 0
April 2028............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 28.7 23.6 11.1 6.8 5.3 29.1 25.6 13.2 7.7 5.8 29.6 28.3 19.0 11.6 6.8
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A2-20
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 2 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 2-A7 CLASS 2-A8 CLASS 2-A9
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 1999............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2000............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2001............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2002............ 100 100 100 100 0 100 100 100 100 26 100 100 100 100 100
April 2003............ 100 100 100 0 0 100 100 100 0 0 100 100 100 73 0
April 2004............ 100 100 71 0 0 100 100 100 0 0 100 100 100 0 0
April 2005............ 100 100 0 0 0 100 100 2 0 0 100 100 100 0 0
April 2006............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2007............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2008............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2009............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2010............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2011............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2012............ 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2013............ 100 55 0 0 0 100 100 0 0 0 100 100 0 0 0
April 2014............ 100 0 0 0 0 100 85 0 0 0 100 100 0 0 0
April 2015............ 100 0 0 0 0 100 19 0 0 0 100 100 0 0 0
April 2016............ 100 0 0 0 0 100 0 0 0 0 100 57 0 0 0
April 2017............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2018............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2019............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2020............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2021............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2022............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2023............ 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2024............ 20 0 0 0 0 100 0 0 0 0 100 0 0 0 0
April 2025............ 0 0 0 0 0 0 0 0 0 0 58 0 0 0 0
April 2026............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 2027............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 2028............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 25.8 15.1 6.1 4.4 3.7 26.5 16.6 6.7 4.8 4.0 27.1 18.1 7.4 5.1 4.2
</TABLE>
- --------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A2-21
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 2 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 2-A10 CLASS 2-A11 CLASS 2-A12
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 1999............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2000............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 2001............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 84
April 2002............ 100 100 100 100 100 100 100 100 100 100 100 100 100 54 11
April 2003............ 100 100 100 100 0 100 100 100 100 17 100 100 70 2 0
April 2004............ 100 100 100 0 0 100 100 100 71 0 100 100 35 0 0
April 2005............ 100 100 100 0 0 100 100 100 0 0 100 100 7 0 0
April 2006............ 100 100 77 0 0 100 100 100 0 0 100 100 0 0 0
April 2007............ 100 100 0 0 0 100 100 86 0 0 100 100 0 0 0
April 2008............ 100 100 0 0 0 100 100 21 0 0 100 100 0 0 0
April 2009............ 100 100 0 0 0 100 100 0 0 0 100 85 0 0 0
April 2010............ 100 100 0 0 0 100 100 0 0 0 100 71 0 0 0
April 2011............ 100 100 0 0 0 100 100 0 0 0 100 57 0 0 0
April 2012............ 100 100 0 0 0 100 100 0 0 0 100 44 0 0 0
April 2013............ 100 100 0 0 0 100 100 0 0 0 100 32 0 0 0
April 2014............ 100 100 0 0 0 100 100 0 0 0 100 20 0 0 0
April 2015............ 100 100 0 0 0 100 100 0 0 0 100 9 0 0 0
April 2016............ 100 100 0 0 0 100 100 0 0 0 100 0 0 0 0
April 2017............ 100 98 0 0 0 100 100 0 0 0 100 0 0 0 0
April 2018............ 100 42 0 0 0 100 100 0 0 0 100 0 0 0 0
April 2019............ 100 0 0 0 0 100 90 0 0 0 100 0 0 0 0
April 2020............ 100 0 0 0 0 100 40 0 0 0 100 0 0 0 0
April 2021............ 100 0 0 0 0 100 0 0 0 0 95 0 0 0 0
April 2022............ 100 0 0 0 0 100 0 0 0 0 74 0 0 0 0
April 2023............ 100 0 0 0 0 100 0 0 0 0 51 0 0 0 0
April 2024............ 100 0 0 0 0 100 0 0 0 0 26 0 0 0 0
April 2025............ 100 0 0 0 0 100 0 0 0 0 0 0 0 0 0
April 2026............ 0 0 0 0 0 84 0 0 0 0 0 0 0 0 0
April 2027............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 2028............ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 27.7 19.9 8.3 5.6 4.6 28.2 21.8 9.6 6.2 4.9 25.0 13.7 5.7 4.1 3.5
</TABLE>
- --------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A2-22
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 2 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 2-A13 CLASS 2-A14
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------ ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100 100 100 100 100 100 100 100 100 100
April 1999.................... 100 100 100 100 100 100 100 100 100 100
April 2000.................... 100 100 100 100 100 100 100 100 100 100
April 2001.................... 100 100 100 100 100 100 100 100 100 100
April 2002.................... 100 100 100 100 100 100 100 100 100 100
April 2003.................... 100 100 100 100 54 100 100 100 100 100
April 2004.................... 100 100 100 64 23 100 98 94 91 88
April 2005.................... 100 100 100 39 5 99 95 87 80 74
April 2006.................... 100 100 84 24 0 98 90 76 66 54
April 2007.................... 100 100 67 16 0 96 84 65 52 36
April 2008.................... 100 100 55 12 0 94 78 53 39 25
April 2009.................... 100 100 45 9 0 92 71 43 29 17
April 2010.................... 100 100 36 7 0 90 65 35 21 12
April 2011.................... 100 100 30 5 0 87 60 29 16 8
April 2012.................... 100 100 24 4 0 85 54 23 12 5
April 2013.................... 100 100 19 3 0 82 49 19 8 4
April 2014.................... 100 100 15 2 0 79 45 15 6 2
April 2015.................... 100 100 12 1 0 75 40 12 5 2
April 2016.................... 100 99 10 1 0 72 36 10 3 1
April 2017.................... 100 88 8 1 0 68 32 8 2 1
April 2018.................... 100 78 6 1 0 63 28 6 2 *
April 2019.................... 100 68 5 * 0 59 25 5 1 *
April 2020.................... 100 58 4 * 0 54 21 3 1 *
April 2021.................... 100 49 3 * 0 49 18 3 1 *
April 2022.................... 100 41 2 * 0 43 15 2 * *
April 2023.................... 100 33 1 * 0 37 12 1 * *
April 2024.................... 100 26 1 * 0 30 9 1 * *
April 2025.................... 99 18 1 * 0 23 7 1 * *
April 2026.................... 67 12 * * 0 16 4 * * *
April 2027.................... 31 5 * * 0 7 2 * * *
April 2028.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)................ 28.5 23.3 11.8 7.4 5.4 21.5 15.9 11.4 9.9 8.8
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A2-23
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE POOL 2 CERTIFICATES
<TABLE>
<CAPTION>
CLASS 2-M, CLASS 2-B1
CLASS 2-R AND CLASS 2-B2
----------------------- ------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
----------------------- ------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- --- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100 100 100 100 100
April 1999............ 0 0 0 0 0 99 99 99 99 99
April 2000............ 0 0 0 0 0 98 98 98 98 98
April 2001............ 0 0 0 0 0 97 97 97 97 97
April 2002............ 0 0 0 0 0 96 96 96 96 96
April 2003............ 0 0 0 0 0 94 94 94 94 94
April 2004............ 0 0 0 0 0 93 91 88 86 84
April 2005............ 0 0 0 0 0 92 88 81 76 72
April 2006............ 0 0 0 0 0 90 83 71 63 57
April 2007............ 0 0 0 0 0 88 78 61 50 42
April 2008............ 0 0 0 0 0 87 71 50 37 29
April 2009............ 0 0 0 0 0 85 66 40 28 20
April 2010............ 0 0 0 0 0 82 60 33 20 13
April 2011............ 0 0 0 0 0 80 55 27 15 9
April 2012............ 0 0 0 0 0 78 50 22 11 6
April 2013............ 0 0 0 0 0 75 45 17 8 4
April 2014............ 0 0 0 0 0 72 41 14 6 3
April 2015............ 0 0 0 0 0 69 37 11 4 2
April 2016............ 0 0 0 0 0 66 33 9 3 1
April 2017............ 0 0 0 0 0 62 29 7 2 1
April 2018............ 0 0 0 0 0 58 26 5 2 1
April 2019............ 0 0 0 0 0 54 23 4 1 *
April 2020............ 0 0 0 0 0 50 19 3 1 *
April 2021............ 0 0 0 0 0 45 17 2 1 *
April 2022............ 0 0 0 0 0 39 14 2 * *
April 2023............ 0 0 0 0 0 34 11 1 * *
April 2024............ 0 0 0 0 0 28 9 1 * *
April 2025............ 0 0 0 0 0 21 6 1 * *
April 2026............ 0 0 0 0 0 14 4 * * *
April 2027............ 0 0 0 0 0 7 2 * * *
April 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 0.1 0.1 0.1 0.1 0.1 20.1 14.9 10.9 9.5 8.8
</TABLE>
- --------
* Indicates an amount above zero and less than 0.5% of the original Class
Certificate Principal Balance is outstanding.
(1) The weighted average life of a Certificate is determined by (a)
multiplying the reduction, if any, in the Certificate Principal Balance
thereof on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate reductions in the Certificate Principal
Balance of such Certificate.
A2-24
<PAGE>
INDEX OF CERTAIN PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Accrued Certificate Interest....................................... S-8
Adjustment Amount.................................................. A2-13
Agreement.......................................................... S-7
Allocable Share.................................................... A1-11, A2-10
Annex.............................................................. S-22
Available Funds.................................................... S-25
Bankruptcy Coverage Termination Date............................... A2-12
Bankruptcy Loss.................................................... A1-11
Bankruptcy Loss Amount............................................. A2-12
Base Servicing Fee................................................. S-33
Base Servicing Fee Rate............................................ S-33
beneficial owner................................................... S-23
BIF................................................................ S-32
Book-Entry Certificates............................................ S-23
Bulletin Board..................................................... S-21
Cede............................................................... S-23
Certificate Principal Balance...................................... A1-5
Certificate Group.................................................. S-2
Certificates....................................................... Cover Page
Class.............................................................. S-2
Class 1-A5 Percentage.............................................. A1-8
Class 1-A5 Distribution Percentage................................. A1-8
Class 1-B Certificates............................................. S-2
Class 1-PO Deferred Amount......................................... S-10
Class 1-PO Deferred Payment Writedown Amount....................... A1-5
Class 1-PO Principal Distribution Amount........................... A1-9
Class 2-B Certificates............................................. S-2
Class 2-PO Deferred Amount......................................... S-11
Class 2-PO Deferred Payment Writedown Amount....................... A2-6
Class 2-PO Principal Distribution Amount........................... A2-9
Class Certificate Principal Balance................................ S-4
Class PO Certificate............................................... S-6
Class Prepayment Distribution Trigger.............................. A1-11, A2-10
Code............................................................... S-20
Collection Account................................................. S-32
Company............................................................ Cover Page
Compensating Interest Payment...................................... S-34
Debt Service Reduction............................................. A1-11
Defaulted Mortgage Loan............................................ S-33
Deficient Valuation................................................ A1-11
Definitive Certificate............................................. S-23
Depository......................................................... S-6
Detailed Description............................................... S-22
Distribution Date.................................................. S-7
DOL................................................................ S-36
ERISA.............................................................. S-20
ERISA Plan......................................................... S-36
Excess Loss........................................................ A1-12
Exemption.......................................................... S-36
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
------------ ----------
<S> <C>
FDIC................................................................. S-32
Financial Intermediary............................................... S-23
Fitch................................................................ S-20
Fraud Loss........................................................... A1-11
GE Capital........................................................... S-31
Interest Accrual Period.............................................. S-8
Interest Shortfall................................................... A1-5
Junior Certificates.................................................. S-5
Junior Principal Balance............................................. A2-8
Liquidated Mortgage Loan............................................. A1-11
Loss Allocation Limitation........................................... A2-12
Mortgage............................................................. S-22
Mortgage Loans....................................................... Cover Page
Mortgage Pool........................................................ Cover Page
Mortgage Rates....................................................... S-22
mortgage related securities.......................................... S-20
Mortgaged Properties................................................. S-22
Mortgagor............................................................ S-12
Net Interest Shortfall............................................... A1-5
Net Mortgage Rate.................................................... A1-6
NMR.................................................................. A1- 6
Non-Book-Entry Certificates.......................................... S- 25
Non-PO Percentage.................................................... A1-6
Nonrecoverable Advance............................................... S-33
Original Pool 1 Junior Principal Balance............................. A1-9
Original Pool 2 Junior Principal Balance............................. A2-8
Outstanding Mortgage Loan............................................ S-22
Participant.......................................................... S-24
PO Percentage........................................................ A1-6, A2-6
Pool 1............................................................... Cover Page
Pool 1 Available Funds............................................... S-25
Pool 1 Bankruptcy Coverage Termination Date.......................... A1-13
Pool 1 Bankruptcy Loss Amount........................................ A1-13
Pool 1 Category A Percentage......................................... A1-4
Pool 1 Category B Percentage......................................... A1-4
Pool 1 Category A Senior Certificates................................ A1-3
Pool 1 Category B Senior Certificates................................ S-14
Pool 1 Category B Group I Final Distribution Date.................... A1-10
Pool 1 Category B Group II Principal Distribution Amount............. A1-8
Pool 1 Category B Group I Senior Certificates........................ S-14
Pool 1 Category B Group II Senior Certificates....................... S-14
Pool 1 Category A Senior Optimal Principal Amount.................... A1-8
Pool 1 Category B Senior Optimal Principal Amount.................... A1-8
Pool 1 Certificates.................................................. Cover Page
Pool 1 Cross-Over Date............................................... A1-4
Pool 1 Discount Mortgage Loan........................................ A1-6
Pool 1 Fraud Coverage Termination Date............................... A1-13
Pool 1 Fraud Loss Amount............................................. A1-13
Pool 1 Junior Certificate Writedown Amount........................... A1-5
Pool 1 Junior Certificates........................................... S-2
Pool 1 Junior Optimal Principal Amount............................... A1-10
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
------------ ----------
<S> <C>
Pool 1 Junior Percentage............................................. A1-10
Pool 1 Junior Prepayment Percentage.................................. A1-10
Pool 1 Loss Allocation Limitation.................................... A1-13
Pool 1 Modeling Assumptions.......................................... A1-18
Pool 1 Mortgage Loan Group........................................... A1-19
Pool 1 Mortgage Loans................................................ S-22
Pool 1 Non-Discount Mortgage Loan.................................... A1-6
Pool 1 Senior Certificates........................................... S-2
Pool 1 Senior Final Distribution Date................................ A1-10
Pool 1 Senior Optimal Principal Amount............................... A1-7
Pool 1 Senior Percentage............................................. A1-8
Pool 1 Senior Prepayment Percentage.................................. A1-9
Pool 1 Senior Prepayment Percentage Stepdown Limitation.............. A1-9
Pool 1 Special Hazard Loss Amount.................................... A1-14
Pool 1 Special Hazard Termination Date............................... A1-14
Pool 2............................................................... Cover Page
Pool 2 Adjustment Amount............................................. A2-13
Pool 2 Available Funds............................................... S-25
Pool 2 Bankruptcy Coverage Termination Date.......................... A2-12
Pool 2 Bankruptcy Loss Amount........................................ A2-12
Pool 2 Certificates.................................................. Cover Page
Pool 2 Cross-Over Date............................................... A2-4
Pool 2 Discount Mortgage Loan........................................ A2-6
Pool 2 Fraud Coverage Termination Date............................... A2-13
Pool 2 Fraud Loss Amount............................................. A2-13
Pool 2 Group I Final Distribution Date............................... A2-9
Pool 2 Group I Senior Certificates................................... S-15
Pool 2 Group II Senior Certificates.................................. S-15
Pool 2 Group II Senior Percentage.................................... A2-9
Pool 2 Group II Senior Distribution Percentage....................... A2-9
Pool 2 Group II Senior Principal Distribution Amount................. A2-9
Pool 2 Junior Certificate Writedown Amount........................... A2-5
Pool 2 Junior Certificates........................................... S-2
Pool 2 Junior Optimal Principal Amount............................... A2-10
Pool 2 Junior Percentage............................................. A2-10
Pool 2 Junior Prepayment Percentage.................................. A2-10
Pool 2 Loss Allocation Limitation.................................... A2-12
Pool 2 Modeling Assumptions.......................................... A2-18
Pool 2 Mortgage Loans................................................ S-22
Pool 2 Mortgage Loan Group........................................... A2-18
Pool 2 Non-Discount Mortgage Loan.................................... A2-6
Pool 2 Senior Certificates........................................... S-2
Pool 2 Senior Final Distribution Date................................ A2-10
Pool 2 Senior Optimal Principal Amount............................... A2-7
Pool 2 Senior Percentage............................................. A2-8
Pool 2 Senior Prepayment Percentage.................................. A2-8
Pool 2 Senior Prepayment Percentage Stepdown Limitation.............. A2-8
Pool 2 Special Hazard Loss Amount.................................... A2-13
Pool 2 Special Hazard Termination Date............................... A2-13
Pool Scheduled Principal Balance..................................... S-22
Prepayment Assumption................................................ A1-18
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
------------ ------------
<S> <C>
Prepayment Interest................................................ A1-16, A2-16
Prepayment Period.................................................. A1-7, A2-8
Primary Mortgage Insurance Policy.................................. S-30
Realized Loss...................................................... A1-11
Record Date........................................................ S-7
Regular Certificates............................................... S-19
regular interests.................................................. S-35
REMIC.............................................................. S-3
Residual Certificates.............................................. Cover Page
residual interest.................................................. S-35
Restricted Group................................................... S-37
S&P................................................................ S-20
SAIF............................................................... S-32
Scheduled Principal Balance........................................ S-22
Senior Certificates................................................ S-5
Servicing Fee...................................................... S-33
Servicing Portfolio................................................ S-29
SMMEA.............................................................. S-20
Special Hazard Loss................................................ A1-12
Special Hazard Loss Amount......................................... A2-13
Special Hazard Termination Date.................................... A2-13
Supplemental Servicing Fee......................................... S-33
Supplemental Servicing Fee Rate.................................... S-33
Tax-Exempt Investor................................................ S-37
Trigger Event...................................................... S-31
Trust Fund......................................................... Cover Page
Trustee............................................................ S-6
Underwriter........................................................ Cover Page
</TABLE>
B-4
<PAGE>
PROSPECTUS
PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
Seller and Servicer:
GE Capital Mortgage Services, Inc.
Each Certificate offered hereby will evidence a beneficial ownership
interest in one of a number of trust funds (each, a "Trust Fund") created by
GE Capital Mortgage Services, Inc. (the "Company") from time to time. As
specified in the related Prospectus Supplement, the assets of a Trust Fund may
consist of (i) a pool of mortgage loans secured by first liens, or a
combination of first and second liens, on one- to four-family residential
properties or participation interests in such loans (the "Mortgage Loans")
originated or acquired by the Company, (ii) mortgage pass-through securities
(the "Agency Securities") issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") or (iii)
conditional sales contracts and installment sales or loan agreements or
participation interests therein secured by manufactured housing (the
"Contracts"). If specified in the related Prospectus Supplement, a Trust Fund
may also include one or more of the following: reinvestment income, reserve
accounts and insurance, guarantees or similar instruments or agreements.
The Certificates may be sold from time to time in one or more series on
terms determined at the time of sale and specified in the Prospectus
Supplement relating to such series. Each series of Certificates will be issued
in a single class or in two or more classes. The Certificates of each class
will evidence the beneficial ownership of (i) any distributions in respect of
the assets of the related Trust Fund that are allocable to principal of the
Certificates in the amount of the aggregate original principal balance, if
any, of such class of Certificates as specified in the related Prospectus
Supplement and (ii) any distributions in respect of the assets of the related
Trust Fund that are allocable to interest on the principal balance or notional
principal balance of such Certificates at the interest rate, if any,
applicable to such class of Certificates as specified in the related
Prospectus Supplement. One or more classes of each series (i) may be entitled
to receive distributions allocable to principal, principal prepayments,
interest or any combination thereof prior to one or more other classes of
Certificates of such series or after the occurrence of certain events and (ii)
may be subordinated in the right to receive such distributions on such
Certificates to one or more senior classes of Certificates, in each case as
specified in the related Prospectus Supplement. Interest on each class of
Certificates entitled to distributions allocable to interest will accrue at a
fixed rate or at a rate that is subject to change from time to time as
specified in the related Prospectus Supplement on an actual or notional
principal amount, may represent a specified portion of interest received on
some or all of the assets of the related Trust Fund or may otherwise be
determined as specified in the related Prospectus Supplement. The Company may
retain or hold for sale from time to time one or more classes of a series of
Certificates.
Distributions on the Certificates of a series will be made only from the
proceeds from the assets of the related Trust Fund. The Certificates of any
series will not be insured or guaranteed by any governmental entity or by any
other person. Unless otherwise specified in the related Prospectus Supplement,
the Company's only obligations with respect to a series of Certificates will
consist of its contractual servicing obligations, including any obligation it
may have to advance delinquent payments on the Mortgage Loans or Contracts
included in the related Trust Fund, and its obligations pursuant to certain
representations and warranties made by it. Unless otherwise specified in the
Prospectus Supplement relating to a series, none of General Electric Company,
General Electric Capital Corporation, GE Capital Mortgage Corporation, General
Electric Mortgage Insurance Corporation or any other affiliate of the Company
will have any obligations with respect to the Certificates or the related
Trust Fund.
The yield on each class of Certificates of a series will be affected by the
rate of payment of principal (including prepayments) on the assets in the
related Trust Fund and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement. Each series of Certificates
may be subject to early termination only under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election will be made to treat
the related Trust Fund as a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes, or two REMIC elections may be made
with respect to the related Trust Fund. See "Certain Federal Income Tax
Consequences".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
under "Plan of Distribution" herein and in the related Prospectus Supplement.
There will have been no public market for any series of Certificates prior
to the offering thereof. There can be no assurance that a secondary market
will develop for the Certificates of any series or, if it does develop, that
such market will continue.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
THE DATE OF THIS PROSPECTUS IS APRIL 24, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Certificates being offered
hereby will, among other things, set forth with respect to such series of
Certificates (i) information as to the assets comprising the Trust Fund,
including the characteristics of the Mortgage Loans, Agency Securities or
Contracts included therein and, if applicable, the insurance, guarantees or
other instruments or agreements included in the Trust Fund and the amount and
source of any reserve accounts; (ii) the aggregate original principal balance
of each class of Certificates entitled to distributions allocable to principal
and, if a fixed rate of interest, the interest rate for each class of such
Certificates entitled to distributions allocable to interest; (iii)
information as to any class of Certificates that has a rate of interest that
is subject to change from time to time and the basis on which such interest
rate will be determined; (iv) information as to any class of Certificates on
which interest will accrue and be added to the principal or, if applicable,
the notional principal balance thereof; (v) information as to the method used
to calculate the amount of interest to be paid on any class entitled to
distributions of interest only; (vi) information as to the nature and extent
of subordination with respect to any class of Certificates that is subordinate
in right of payment to any other class; (vii) the circumstances, if any, under
which the Trust Fund is subject to early termination; (viii) if applicable,
the final distribution date and the first mandatory principal distribution
date of each class of such Certificates; (ix) the method used to calculate the
aggregate amounts of principal and interest required to be distributed on each
distribution date in respect of each class of such Certificates and, with
respect to any series consisting of more than one class, the basis on which
such amounts will be allocated among the classes of such series; (x) the
distribution date for each class of the Certificates, the date on which
payments received in respect of the assets included in the Trust Fund during
the related period will be deposited in the certificate account and, if
applicable, the assumed reinvestment rate applicable to payments received in
respect of such assets and the date on which such payments are assumed to be
received for such series of Certificates; (xi) the name of the trustee of the
Trust Fund; (xii) information with respect to the administrator, if any, of
the Trust Fund; (xiii) whether an election will be made to treat all or a
portion of the Trust Fund as a REMIC or whether two REMIC elections will be
made with respect to the Trust Fund and, if such election is made, the
designation of the regular interests and residual interests therein; and (xiv)
information with respect to the plan of distribution of such Certificates.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") with respect to the
series of Certificates offered hereby and by the related Prospectus
Supplement, and in accordance therewith files reports and other information
with the Securities and Exchange Commission (the "Commission"). Such reports
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Certificates. This
Prospectus, which forms a part of the Registration Statement, omits certain
information contained in such Registration Statement pursuant to the rules and
regulations of the Commission. The Registration Statement can be inspected and
copied at prescribed rates at the public reference facilities maintained by
the Commission as described in the preceding paragraph.
The Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the
Company.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act with respect to a series of Certificates prior to
the termination of the offering of such series of Certificates shall be deemed
to be incorporated by reference in this Prospectus as supplemented by the
related Prospectus Supplement. If so specified in any such document, such
document shall also be deemed to be incorporated by reference in the
Registration Statement of which this Prospectus forms a part.
Any statement contained herein or in a Prospectus Supplement for a series of
Certificates or in a document incorporated or deemed to be incorporated by
reference herein or therein shall be deemed to be modified or superseded for
purposes of this Prospectus and such Prospectus Supplement and, if applicable,
the Registration Statement to the extent that a statement contained herein or
therein or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein or therein modifies or supersedes such
statement, except to the extent that such subsequently filed document
expressly states otherwise. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus or the related Prospectus Supplement or, if applicable, the
Registration Statement.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Corporate Secretary, GE Capital Mortgage Services,
Inc., Three Executive Campus, Cherry Hill, N.J. 08002. Telephone requests for
such copies should be directed to the Corporate Secretary at (609) 661-6512.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the series of Certificates covered by such
Prospectus Supplement, whether or not participating in the distribution
thereof, may be required to deliver such Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and Prospectus when acting as underwriters of the series
of Certificates covered by such Prospectus Supplement and with respect to
their unsold allotments or subscriptions.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon as having been
authorized. This Prospectus and any Prospectus Supplement with respect hereto
do not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Certificates offered hereby and thereby nor an offer
to sell or a solicitation of an offer to buy the Certificates to any person in
any state or other jurisdiction in which such offer or solicitation would be
unlawful. Neither the delivery of this Prospectus or any Prospectus Supplement
with respect hereto nor any sale made hereunder and thereunder shall, under
any circumstances, create any implication that the information herein or
therein is correct as of any time subsequent to the date of such information.
REPORTS TO CERTIFICATEHOLDERS
The Company will provide to Certificateholders, annually and with respect to
each Distribution Date, reports concerning the Trust Fund related to such
Certificates. See "The Pooling and Servicing Agreement--Reports to
Certificateholders"
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement...................................................... 2
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 3
Reports to Certificateholders.............................................. 3
Prospectus Summary......................................................... 6
Description of the Certificates............................................ 15
General.................................................................. 15
Classes of Certificates.................................................. 16
Distributions of Principal and Interest.................................. 17
Example of Distributions................................................. 18
Optional Termination of the Trust Fund................................... 20
The Trust Fund............................................................. 20
The Mortgage Loans......................................................... 21
The Agency Securities.................................................... 27
Contracts................................................................ 31
Credit Support............................................................. 32
General.................................................................. 32
Purchase of Liquidating Loans............................................ 33
Limited Guarantee of the Guarantor....................................... 34
Subordination............................................................ 34
Cross-Support............................................................ 35
Pool Insurance........................................................... 35
Special Hazard Insurance................................................. 36
Bankruptcy Bond.......................................................... 37
Repurchase Bond.......................................................... 38
Guaranteed Investment Contracts.......................................... 38
Reserve Accounts......................................................... 38
Other Insurance, Guarantees and Similar Instruments or Agreements........ 38
Yield, Maturity and Weighted Average Life Considerations................... 39
Servicing of the Mortgage Loans and Contracts.............................. 41
Collection and Other Servicing Procedures................................ 41
Private Mortgage Insurance............................................... 45
Hazard Insurance......................................................... 45
Unanticipated Recoveries of Losses on the Mortgage Loans................. 47
Advances................................................................. 47
Loan Payment Record...................................................... 48
Servicing and Other Compensation and Payment of Expenses................. 50
Resignation, Succession and Indemnification of the Company............... 51
The Pooling and Servicing Agreement........................................ 52
Assignment of Assets..................................................... 52
Repurchase or Substitution............................................... 54
Certain Refinancings..................................................... 55
Evidence as to Compliance................................................ 56
List of Certificateholders............................................... 56
The Trustee.............................................................. 56
Administration of the Certificate Account................................ 57
Reports to Certificateholders............................................ 57
Events of Default........................................................ 58
Rights Upon Event of Default............................................. 58
</TABLE>
4
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Amendment............................................................... 59
Termination............................................................. 60
GE Capital Mortgage Services, Inc. ....................................... 60
General................................................................. 60
Delinquency and Foreclosure Experience.................................. 60
The Guarantor............................................................. 61
Certain Legal Aspects of the Mortgage Loans and Contracts................. 61
The Mortgage Loans........................................................ 61
General................................................................. 61
Foreclosure............................................................. 62
Junior Mortgages; Rights of Senior Mortgagees........................... 64
Right of Redemption..................................................... 65
Anti-Deficiency Legislation and Other Limitations on Lenders............ 65
Enforceability of Certain Provisions.................................... 66
Applicability of Usury Laws............................................. 67
Soldiers' and Sailors' Civil Relief Act................................. 67
Environmental Considerations............................................ 68
The Contracts............................................................. 68
General................................................................. 68
Security Interests in the Manufactured Homes............................ 69
Enforcement of Security Interests in Manufactured Homes................. 70
Consumer Protection Laws................................................ 71
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses................................................................ 71
Applicability of Usury Laws............................................. 71
Soldiers' and Sailors' Civil Relief Act................................. 71
Legal Investment Matters.................................................. 72
ERISA Considerations...................................................... 73
Certain Federal Income Tax Consequences................................... 75
General................................................................. 75
REMIC Elections......................................................... 75
REMIC Certificates...................................................... 75
Non-REMIC Certificates.................................................. 85
Backup Withholding...................................................... 88
Plan of Distribution...................................................... 89
Use of Proceeds........................................................... 90
Legal Matters............................................................. 90
Financial Information..................................................... 90
</TABLE>
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates.
Unless otherwise specified, capitalized terms used and not defined in this
Summary of Prospectus have the meanings given to them in this Prospectus and in
the related Prospectus Supplement.
Title of Securities......... Pass-Through Certificates, issuable in series, as
described in the Prospectus Supplement.
The Company................. GE Capital Mortgage Services, Inc. (the
"Company"), a wholly-owned subsidiary of GE
Capital Mortgage Corporation. The Company will
be the seller of the Mortgage Loans, Agency
Securities or Contracts included in a Trust
Fund. Unless otherwise specified in the
Prospectus Supplement, the Company will service,
and may act as master servicer with respect to,
the Mortgage Loans or Contracts included in the
related Trust Fund.
Description of Securities... Each Certificate will represent a beneficial
ownership interest in a Trust Fund created by
the Company from time to time pursuant to a
pooling and servicing agreement (each, an
"Agreement") between the Company and the
commercial bank or trust company acting as
trustee specified in the Prospectus Supplement.
The assets of a Trust Fund may consist of (i) a
pool of mortgage loans secured by first liens or
a combination of first and second liens on one-
to four-family residential properties, or
participation interests in such loans (the
"Mortgage Loans"), originated or acquired by the
Company, (ii) mortgage pass-through securities
(the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") or (iii)
conditional sales contracts and installment
sales or loan agreements or participation
interests therein secured by manufactured
housing (the "Contracts"). If the pool of
Mortgage Loans included in any Trust Fund
consists of a combination of first- and second-
lien mortgage loans, the second-lien mortgage
loans will be Home Equity Loans (as defined
herein). The portion of any mortgage pool
consisting of first-lien Mortgage Loans may be
comprised of first-lien Home Equity Loans and/or
other first-lien mortgage loans. If specified in
the related Prospectus Supplement, a Trust Fund
may also include one or more of the following:
reinvestment income, reserve accounts and
insurance, guarantees or similar instruments or
agreements intended to decrease the likelihood
that Certificateholders will experience delays
in distributions of scheduled payments on, or
losses in respect of, the assets in such Trust
Fund. The Certificates of any series will be
entitled to payment only from the proceeds from
the assets of the related Trust Fund.
6
<PAGE>
The Certificates of any series may be issued in a
single class or in two or more classes, as
specified in the Prospectus Supplement. One or
more classes of Certificates of each series (i)
may be entitled to receive distributions
allocable only to principal, only to interest or
to any combination thereof; (ii) may be entitled
to receive distributions only of prepayments of
principal throughout the lives of the
Certificates or during specified periods; (iii)
may be subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal, interest or
any combination thereof to one or more other
classes of Certificates of such series
throughout the lives of the Certificates or
during specified periods; (iv) may be entitled
to receive such distributions only after the
occurrence of events specified in the Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the assets in the Trust
Fund; (vi) as to Certificates entitled to
distributions allocable to interest, may be
entitled to receive interest at a fixed rate or
a rate that is subject to change from time to
time; and (vii) as to Certificates entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified in
the Prospectus Supplement and may accrue
interest until such events occur, in each case
as specified in the Prospectus Supplement. The
timing and amounts of such distributions may
vary among classes, over time, or otherwise as
specified in the related Prospectus Supplement.
More than one Trust Fund may underlie the
Certificates of a series, in which case
specified Certificates of such series will
evidence the entire beneficial interest in each
such Trust Fund.
The Company may retain or hold for sale from time
to time one or more classes of a series of
Certificates.
Unless otherwise specified in the related
Prospectus Supplement, the Certificates will be
offered in fully registered form only in the
denominations specified in the Prospectus
Supplement. The Certificates will not be
guaranteed or insured by any governmental agency
or instrumentality or any other issuer and,
except as described in the Prospectus
Supplement, the Mortgage Loans or Contracts
included in the related Trust Fund will not be
guaranteed or insured by any governmental agency
or instrumentality or any other person.
Distributions on the
Certificates................ Distributions on the Certificates entitled
thereto will be made monthly, quarterly,
semiannually or at such other intervals and on
the dates specified in the Prospectus Supplement
solely out of the payments received in respect
of the assets of the related Trust Fund. The
amount allocable to payments of principal and
interest on any distribution date will be
determined as specified in the Prospectus
Supplement. Unless otherwise specified in the
Prospectus Supplement, all distributions will be
made pro rata to Certificateholders of the class
entitled thereto based on such class's
outstanding principal balance.
7
<PAGE>
The aggregate original principal balance of the
Certificates will equal the aggregate
distributions allocable to principal that such
Certificates will be entitled to receive. If
specified in the Prospectus Supplement, the
Certificates will have an aggregate original
principal balance equal to the aggregate unpaid
principal balance of the Mortgage Loans, Agency
Securities or Contracts as of the first day of
the month of creation of the Trust Fund and will
bear interest in the aggregate at a rate equal
to the weighted average interest rate borne by
the underlying Mortgage Loans, Agency Securities
or Contracts, net of servicing fees payable to
the Company and any primary or sub-servicers of
the Mortgage Loans or Contracts and any other
amounts (including fees payable to the Company
as master servicer, if applicable) specified in
the Prospectus Supplement (as to each Mortgage
Loan, the "Remittance Rate"). If specified in
the Prospectus Supplement, the aggregate
original principal balance of the Certificates
and interest rates on the classes of
Certificates will be determined based on the
cash flow on the Mortgage Loans, Agency
Securities or Contracts, as the case may be.
The rate at which interest will be passed through
to holders of Certificates entitled thereto may
be a fixed rate or a rate that is subject to
change from time to time from the time and for
the periods, in each case as specified in the
Prospectus Supplement. Any such rate may be
calculated on a loan-by-loan, weighted average
or other basis, in each case as described in the
Prospectus Supplement.
Trust Fund Assets........... The Trust Fund will include the Mortgage Loans,
Agency Securities or Contracts, payments in
respect of such assets and certain accounts,
obligations or agreements, in each case as
specified in the Prospectus Supplement.
A. The Mortgage Loans....... Unless otherwise specified in the Prospectus
Supplement, each pool of Mortgage Loans will
consist of conventional Mortgage Loans
originated or acquired by the Company and
secured by first liens or Home Equity Loans
secured by first liens or a combination of first
and second liens on one- to four-family
residential properties located in one or more
states of the United States or the District of
Columbia. If the pool of Mortgage Loans included
in any Trust Fund consists of a combination of
first- and second-lien mortgage Loans, the
second-lien mortgage loans will be Home Equity
Loans (as defined herein). Any first lien
Mortgage Loan in any mortgage pool will be
either a first-lien Home Equity Loan and/or
other first-lien mortgage loan. If so specified
in the Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans secured
by security interests in shares issued by
private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives' buildings.
8
<PAGE>
If so specified in the Prospectus Supplement,
the Mortgage Loans may include loans secured by
mortgages on residential long-term leases of
real property. Unless otherwise specified in the
Prospectus Supplement, the principal balance of
each Mortgage Loan at origination will not
exceed $1,000,000. Unless otherwise specified in
the Prospectus Supplement, the Mortgage Loans
(other than Home Equity Loans) in the Trust Fund
will all have original maturities of 10 to 30
years. If specified in the Prospectus
Supplement, all or a portion of the Mortgage
Loans in the Trust Fund may be closed-end, home
equity loans secured by first or second liens on
Mortgaged Properties ("Home Equity Loans").
The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in
the related Prospectus Supplement and may
include any of the following features or
combinations thereof or other features described
in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a
rate adjustable from time to time in relation to
an index, a rate that is fixed for a period of
time or under certain circumstances and is
followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate
that is convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be deferred
and added to the principal of a loan for such
periods and under such circumstances as may be
specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of
interest at a rate lower than the specified
mortgage rate for a period of time or for the
life of the loan with the amount of any
difference contributed from funds supplied by
the seller of the mortgaged property or another
source.
(b) Principal may be payable on a level-debt-
service basis which fully amortizes the loan
over its term, may be calculated on the basis of
an assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is
different from the interest rate on the Mortgage
Loan or may not be amortized during all or a
portion of the original term. Payment of all or
a substantial portion of the principal may be
due on maturity. Principal may include interest
that has been deferred and added to the
principal balance of the Mortgage Loan. In the
case of Home Equity Loans which are "simple
interest" loans, payments are applied first to
interest accrued to the date payment is
received, then to principal.
(c) Monthly payments of principal and interest
may be fixed for the life of the loan, may
increase over a specified period of time or may
change from period to period. Mortgage Loans may
include limits on periodic increases or
decreases in the amount
9
<PAGE>
of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life
of the loan or may decline over time, and may be
prohibited for the life of the loan or for
certain periods ("lockout periods"). Certain
loans may permit prepayments after expiration of
the applicable lockout period and may require
the payment of a prepayment fee in connection
with any such subsequent prepayment. Other loans
may permit prepayments without payment of any
prepayment fee and others may require the
payment of a fee if the prepayment occurs during
specified time periods. The loans may include
"due-on-sale" clauses which permit the mortgagee
to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of
the related mortgaged property. Other loans may
be assumable by persons meeting the then
applicable underwriting standards of the
Company.
B. The Agency Securities.... The Agency Securities evidenced by a series of
Certificates will consist of (i) mortgage
participation certificates issued and guaranteed
as to timely payment of interest and, unless
otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the
Federal Home Loan Mortgage Corporation ("FHLMC
Certificates"), (ii) guaranteed mortgage pass-
through certificates issued and guaranteed as to
timely payment of principal and interest by the
Federal National Mortgage Association ("FNMA
Certificates"), (iii) "fully modified pass-
through" mortgage-backed certificates guaranteed
as to timely payment of principal and interest
by the Government National Mortgage Association
("GNMA Certificates"), (iv) stripped mortgage-
backed securities representing an undivided
interest in all or a part of either the
principal distributions (but not the interest
distributions) or the interest distributions
(but not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such
distributions) on certain FHLMC, FNMA or GNMA
Certificates and, unless otherwise specified in
the Prospectus Supplement, guaranteed to the
same extent as the underlying securities, or
(v) a combination of such Agency Securities. All
GNMA Certificates will be backed by the full
faith and credit of the United States. No FHLMC
or FNMA Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States.
The Agency Securities may consist of pass-through
securities issued under FHLMC's Cash or
Guarantor Program, the GNMA I Program, the GNMA
II Program or another program specified in the
Prospectus Supplement. Agency Securities may be
backed by adjustable, fixed or variable rate
mortgage loans or graduated payment mortgage
loans.
10
<PAGE>
C. Contracts................ Contracts will consist of conditional sales
contracts and installment sales or loan
agreements or participation interests therein
secured by new or used Manufactured Homes (as
defined herein). Contracts may be conventional,
insured by the Federal Housing Authority ("FHA")
or partially guaranteed by the Veterans
Administration ("VA"), as specified in the
related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will
bear interest at a fixed percentage rate
("APR"). Unless otherwise specified in the
related Prospectus Supplement, Contracts will
have had individual principal balances at
origination of not less than $10,000 and not
more than $1,000,000 and original terms to
stated maturity of 5 to 30 years.
Certificate Account......... With respect to each Trust Fund, the Company, as
servicer or master servicer, will be obligated
to establish an account with the trustee into
which it will deposit on the dates specified in
the related Prospectus Supplement payments
received in respect of the assets in such Trust
Fund. If specified in the Prospectus Supplement,
such payments will be invested for the benefit
of Certificateholders for the periods and in the
investments specified in the Prospectus
Supplement.
Advances.................... Unless otherwise specified in the Prospectus
Supplement, the Company, as servicer or master
servicer of the Mortgage Loans or Contracts,
will be obligated to advance delinquent
installments of principal and interest (the
latter adjusted to the applicable Remittance
Rate) on the Mortgage Loans or Contracts in a
Trust Fund. Any such obligation to make advances
may be limited to amounts due holders of senior
Certificates of the related series, to amounts
deemed to be recoverable from late payments or
liquidation proceeds, for specified periods or
any combination thereof, in each case as
specified in the related Prospectus Supplement.
Any such advance will be recoverable by the
Company as specified in the related Prospectus
Supplement.
Credit Support.............. If specified in the Prospectus Supplement, a
series of Certificates, or certain classes
within such series, may have the benefit of one
or more of the following types of credit
support. The protection against losses afforded
by any such credit support will be limited.
A. Purchase of Liquidating
Loans....................... If so specified in the Prospectus Supplement, the
Company will have a limited obligation to cover
losses due to defaults with respect to the
Mortgage Loans by purchasing any Mortgage Loan
(a "Liquidating Loan") as to which either (i)
liquidation proceedings have been commenced and
any equitable or statutory right to reinstate
such Mortgage Loan has expired or (ii) the
Company has agreed to accept a deed in lieu of
foreclosure. Unless otherwise specified in the
Prospectus Supplement, the purchase price for
any Liquidating Loan will be
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the Principal Balance thereof plus one month's
interest thereon at the Remittance Rate.
The Company's maximum liability to purchase
Liquidating Loans will be limited as specified
in the Prospectus Supplement and, unless
otherwise specified in the Prospectus
Supplement, will be reduced by all unreimbursed
payments previously made by the Company with
respect to Delinquent Mortgage Loans (as defined
below) and Liquidating Loans. In the event that
at any time the Company's maximum liability to
purchase Liquidating Loans is exhausted with
respect to a Trust Fund, all further losses on
the Mortgage Loans will be borne by the holders
of one or more classes of the Certificates of
the related series, unless the amount of the
Company's liability is subsequently restored as
a result of recoveries in respect of Liquidating
Loans or Delinquent Mortgage Loans previously
purchased by the Company.
Unless otherwise specified in the Prospectus
Supplement, in connection with its obligation to
purchase Liquidating Loans, the Company will
have the option to purchase any Mortgage Loan as
to which the mortgagor has failed to make
unexcused payment in full of three or more
scheduled payments of principal and interest (a
"Delinquent Mortgage Loan"). If the Company
exercises this option with respect to any
Delinquent Mortgage Loan, unless otherwise
specified in the Prospectus Supplement, the
Company will purchase such Delinquent Mortgage
Loan for a price equal to 100% of its Principal
Balance plus interest thereon at the applicable
Remittance Rate from the date on which interest
was last paid to the first day of the month in
which such purchase price is to be distributed,
net of any unreimbursed advances of principal
and interest thereon made by the Company as
servicer.
B. Limited Guarantee........ If specified in the Prospectus Supplement,
certain obligations of the Company under the
related Agreement, including obligations of the
Company to cover certain deficiencies in
principal or interest payments on the Mortgage
Loans resulting from the bankruptcy of the
related borrower, may be covered by a financial
guarantee policy, limited guarantee or other
similar instrument (the "Limited Guarantee"),
limited in scope and amount, issued by an entity
named in the Prospectus Supplement, which may be
an affiliate of the Company (the "Guarantor").
If so specified, the Guarantor may be obligated
to take one or more of the following actions in
the event the Company fails to do so: make
deposits to the Certificate Account (a "Deposit
Guarantee"), make advances (an "Advance
Guarantee"), or purchase Liquidating Loans (a
"Liquidating Loan Guarantee"). Any such Limited
Guarantee will be limited in amount and a
portion of the coverage of any such Limited
Guarantee may be separately allocated to certain
events. For example, a portion of the aggregate
amount of a Liquidating Loan Guarantee may be
separately allocated to Liquidating Loans due to
special hazards
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<PAGE>
not covered by standard hazard insurance
policies, Liquidating Loans due to the
bankruptcy of a mortgagor, and other Liquidating
Loans. The scope, amount and, if applicable, the
allocation of any Limited Guarantee will be
described in the related Prospectus Supplement.
C. Subordination............ A series of Certificates may include one or more
classes that are subordinate in the right to
receive distributions on such Certificates to
one or more senior classes of Certificates of
the same series, but only to the extent
described in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, the same class of Certificates may
constitute senior Certificates with respect to
certain types of payments or certain losses and
subordinated Certificates with respect to other
types of payments or losses. If so specified in
the related Prospectus Supplement, subordination
may apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered by
standard hazard insurance policies or losses
resulting from the bankruptcy of the borrower.
If specified in the Prospectus Supplement, a
reserve fund may be established and maintained
by the deposit therein of distributions
allocable to the holders of subordinate
Certificates until a specified level is reached.
The related Prospectus Supplement will set forth
information concerning the amount of
subordination of a class or classes of
subordinate Certificates in a series, the
circumstances in which such subordination will
be applicable, the manner, if any, in which the
amount of subordination will decrease over time,
the manner of funding the related reserve fund,
if any, and the conditions under which amounts
in any such reserve fund will be used to make
distributions to holders of senior Certificates
or released from the related Trust Fund.
D. Cross-Support............ If specified in the Prospectus Supplement, the
beneficial ownership of separate groups of
assets included in a Trust Fund may be evidenced
by separate classes of the related series of
Certificates. In such case, and if so specified,
credit support may be provided by a cross-
support feature which requires that
distributions be made with respect to
Certificates evidencing beneficial ownership of
one or more asset groups prior to distributions
to subordinate Certificates evidencing a
beneficial ownership interest in other asset
groups within the same Trust Fund.
If specified in the Prospectus Supplement, the
coverage provided by one or more forms of credit
support may apply concurrently to two or more
separate Trust Funds. If applicable, the
Prospectus Supplement will identify the Trust
Funds to which such credit support relates and
the manner of determining the amount of the
coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
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E. Pool and Special Hazard
Insurance................... In order to decrease the likelihood that
Certificateholders will experience losses in
respect of the Mortgage Loans or Contracts, if
specified in the Prospectus Supplement, the
Company will obtain one or more insurance
policies to cover (i) losses by reason of
defaults by borrowers (a "Mortgage Pool
Insurance Policy") and (ii) losses by reason of
hazards not covered under the standard form of
hazard insurance, in each case up to the
amounts, for the periods and subject to the
conditions specified in the Prospectus
Supplement. See "Credit Support--Pool
Insurance".
F. Reserve Accounts, Other
Insurance, Guarantees and
Similar Instruments and
Agreements................. In order to decrease the likelihood that
Certificateholders will experience delays in the
receipt of scheduled payments on, and losses in
respect of, the assets in a Trust Fund, if
specified in the related Prospectus Supplement,
such Trust Fund may also include reserve
accounts, other insurance, guarantees and
similar instruments and agreements entered into
with the entities, in the amounts, for the
purposes and subject to the conditions specified
in the Prospectus Supplement.
Certain Federal Income Tax
Consequences............... The federal income tax consequences to
Certificateholders will depend on, among other
factors, whether an election is made to treat
each Trust Fund or specified portions thereof as
a "real estate mortgage investment conduit"
("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code").
See "Certain Federal Income Tax Consequences".
ERISA Considerations........ A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or a plan subject
to Section 4975 of the Code should carefully
review with its own legal advisors whether the
purchase or holding of Certificates could give
rise to a transaction prohibited or otherwise
impermissible under ERISA or Section 4975 of the
Code. See "ERISA Considerations".
Legal Investment Matters.... Unless otherwise specified in the Prospectus
Supplement, Certificates of each series offered
by this Prospectus and the related Prospectus
Supplement 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, subject, in any case, to any other
regulations which may govern investments by such
institutional investors. If so specified in the
Prospectus Supplement, all or certain classes of
the Certificates of the related series may not
constitute "mortgage related securities" under
SMMEA. See "Legal Investment Matters".
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DESCRIPTION OF THE CERTIFICATES
Each series of Certificates will be issued pursuant to a separate pooling
and servicing agreement (each, an "Agreement") entered into between the
Company, as seller, and a commercial bank or trust company named in the
Prospectus Supplement, as trustee (the "Trustee") for the benefit of holders
of Certificates of that series. More than one Trust Fund may underlie the
Certificates of a series, in which case specified Certificates of such series
will evidence the entire beneficial interest in one of such Trust Funds. 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.
The Agreement will be substantially in one of the forms filed as an exhibit to
the Registration Statement of which this Prospectus is a part, or in such
similar form as will reflect the terms of a series of Certificates described
in the Prospectus Supplement. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
series of Certificates will describe any provision of the Agreement relating
to such series that materially differs from the description thereof contained
in this Prospectus. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Agreement for each series of Certificates and the applicable
Prospectus Supplement. The Company will provide Certificateholders, without
charge, on written request a copy of the Agreement for any series. Requests
should be addressed to GE Capital Mortgage Services, Inc., Three Executive
Campus, Cherry Hill, New Jersey 08002, Attention: General Counsel. The
Agreement relating to a series of Certificates will be filed with the
Securities and Exchange Commission within 15 days after the date of issuance
of such series of Certificates (the "Delivery Date").
The Certificates of a series will be entitled to payment only from the
proceeds from the assets included in the Trust Fund related to such series and
will not be entitled to payments in respect of the assets included in any
other trust fund established by the Company. The Certificates will not
represent obligations of General Electric Company, General Electric Capital
Corporation, GE Capital Mortgage Corporation, General Electric Mortgage
Insurance Corporation, the Company or any affiliate of the Company and will
not be guaranteed by any governmental agency or any other person. Unless
otherwise specified in the Prospectus Supplement, the Company's only
obligations with respect to the Certificates will consist of its contractual
servicing and/or master servicing obligations, including any obligation to
make advances under certain limited circumstances specified herein of
delinquent installments of principal and interest (adjusted to the applicable
Remittance Rate), its obligations pursuant to certain representations and
warranties made by it and its obligations to cover certain deficiencies in
principal and interest payments on the Mortgage Loans resulting from the
bankruptcy of the related borrower. See "The Trust Fund" herein.
The Mortgage Loans will not be, and the Contracts may not be, insured or
guaranteed by any governmental entity or, except as specified in the
Prospectus Supplement, by any other person. To the extent that delinquent
payments on or losses in respect of defaulted Mortgage Loans or Contracts are
not advanced by the Company or any other entity or paid from any applicable
credit support arrangement, such delinquencies may result in delays in the
distribution of payments to the holders of one or more classes of
Certificates, and such losses will be borne by the holders of one or more
classes of Certificates.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates of
each series will be issued in fully-registered form only. The minimum original
Certificate Principal Balance or Notional Principal Balance that may be
represented by a Certificate (the "denomination") will be specified in the
Prospectus Supplement. The original Certificate Principal Balance of each
Certificate will equal the aggregate distributions allocable to principal to
which such Certificate is entitled. Unless otherwise specified in the
Prospectus Supplement, distributions allocable to interest on each Certificate
that is not entitled to distributions allocable to principal will be
calculated based on the Notional Principal Balance of such Certificate. The
Notional Principal Balance of a Certificate will not evidence an interest in
or entitlement to distributions allocable to principal but will be used solely
for convenience in expressing the calculation of interest and for certain
other purposes.
The Certificates will be transferable and exchangeable on a Certificate
Register to be maintained at the corporate trust office of the Trustee or such
other office or agency maintained for such purposes by the Trustee
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<PAGE>
in New York City. Unless otherwise specified in the Prospectus Supplement,
under each Agreement, the Trustee will initially be appointed as the
Certificate Registrar. Unless otherwise specified in the Prospectus
Supplement, no service charge will be made for any registration of transfer or
exchange of Certificates, but payment of a sum sufficient to cover any tax or
other governmental charge may be required.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in a single class or in two or
more classes. The Certificates of each class will evidence the beneficial
ownership of (i) any distributions in respect of the assets of the Trust Fund
that are allocable to principal, in the aggregate amount of the original
Certificate Principal Balance, if any, of such class of Certificates as
specified in the Prospectus Supplement and (ii) any distributions in respect
of the assets of the Trust Fund that are allocable to interest on the
Certificate Principal Balance or Notional Principal Balance of such
Certificates from time to time at the Certificate Interest Rate, if any,
applicable to such class of Certificates as specified in the Prospectus
Supplement. If specified in the Prospectus Supplement, one or more classes of
a series of Certificates may evidence beneficial ownership interests in
separate groups of assets included in the related Trust Fund.
If specified in the Prospectus Supplement, the Certificates will have an
aggregate original Certificate Principal Balance equal to the aggregate unpaid
principal balance of the Mortgage Loans, Agency Securities or Contracts as of
the close of business on the first day of the month of creation of the Trust
Fund (the "Cut-off Date") after deducting payments of principal due on or
before, and prepayments of principal received before, the Cut-off Date and
will bear interest in the aggregate equal to the weighted average of the
Remittance Rates. The Remittance Rate will equal the rate of interest payable
on each Mortgage Loan or Contract minus the Company's servicing fee as
described herein, the servicing fee of any third party servicer of the
Mortgage Loans or Contracts and such other amounts (including fees payable to
the Company as master servicer, if applicable) as are specified in the
Prospectus Supplement. If specified in the Prospectus Supplement, the original
Certificate Principal Balance of the Certificates and the interest rate on the
classes of Certificates will be determined based on the cash flow on the
Mortgage Loans, Agency Securities or Contracts, as the case may be. The
Certificates may have an original Certificate Principal Balance as determined
in the manner specified in the Prospectus Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with a schedule, (b) in reference
to an index, or (c) otherwise (each, a "Certificate Interest Rate"), in each
case as specified in the Prospectus Supplement. One or more classes of
Certificates may provide for interest that accrues, but is not currently
payable ("Accrual Certificates"). With respect to any class of Accrual
Certificates, if specified in the Prospectus Supplement, any interest that has
accrued but is not paid on a given Distribution Date (as defined below under
"Distributions of Principal and Interest") will be added to the aggregate
Certificate Principal Balance of such class of Certificates on that
Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions (i) allocable to interest, (ii) allocable to principal (and
allocable as between scheduled payments of principal and Principal
Prepayments, as defined below) or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal
Prepayments) and interest. A series of Certificates may consist of one or more
classes as to which distributions will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust Fund, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. The timing and amounts of such distributions may vary among
classes, over time or otherwise, in each case as specified in the Prospectus
Supplement.
The taking of action with respect to certain matters under the Agreement,
including certain amendments thereto, will require the consent of the holders
of the Certificates. The voting rights allocated to each class of Certificates
will be specified in the Prospectus Supplement. Votes may be allocated in
different proportions among classes of Certificates depending on whether the
Certificates of a class have a Notional Principal Balance or a Certificate
Principal Balance.
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DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest at the applicable
Certificate Interest Rate (if any) on the Certificates will be made by the
Trustee to the extent of funds available on the dates specified in the
Prospectus Supplement (each, a "Distribution Date") and may be made monthly,
quarterly, semiannually or at such other intervals as are specified in the
Prospectus Supplement. Distributions will be made to the persons in whose
names the Certificates are registered at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). Distributions
will be made by check or money order mailed to the person entitled thereto at
the address appearing in the Certificate Register or, if specified in the
Prospectus Supplement, in the case of Certificates that are of a certain
minimum denomination as specified in the Prospectus Supplement, upon written
request by the Certificateholder, by wire transfer or by such other means as
are agreed upon with the person entitled thereto; provided, however, that the
final distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee specified in the notice to Certificateholders of such final
distribution.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds in a separate
account established and maintained under the Agreement for the benefit of
holders of the Certificates of the related series (the "Certificate Account"),
including any funds transferred from any Reserve Account. As between
Certificates of different classes and as between distributions of principal
(and, if applicable, between distributions of Principal Prepayments and
scheduled payments of principal) and interest, distributions made on any
Distribution Date will be applied as specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, distributions to any
class of Certificates will be made pro rata to all Certificateholders of that
class. If so specified in the Prospectus Supplement, the amounts received by
the Trustee as described below under "The Trust Fund" will be invested in the
eligible investments specified herein and in the Prospectus Supplement and all
income or other gain from such investments will be deposited in the
Certificate Account and will be available to make payments on the Certificates
on the next succeeding Distribution Date in the manner specified in the
Prospectus Supplement.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Certificate Principal
Balance (or, in the case of Certificates entitled only to distributions
allocable to interest, the aggregate Notional Principal Balance) of each class
of Certificates entitled to interest from the date, at the Certificate
Interest Rate and for the periods (each, an "Interest Accrual Period")
specified in the Prospectus Supplement. To the extent funds are available
therefor, interest accrued during each Interest Accrual Period on each class
of Certificates entitled to interest (other than a class of Accrual
Certificates) will be distributable on the Distribution Dates specified in the
Prospectus Supplement until the aggregate Certificate Principal Balance of the
Certificates of such class has been distributed in full or, in the case of
Certificates entitled only to distributions allocable to interest, until the
aggregate Notional Principal Balance of such Certificates is reduced to zero
or for the period of time designated in the Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, distributions of interest on
each class of Accrual Certificates will commence only after the occurrence of
the events specified in the Prospectus Supplement. Unless otherwise specified
in the Prospectus Supplement, prior to such time, the beneficial ownership
interest of such class of Accrual Certificates in the Trust Fund, as reflected
in the aggregate Certificate Principal Balance of such class of Accrual
Certificates, will increase on each Distribution Date by the amount of
interest that accrued on such class of Accrual Certificates during the
preceding Interest Accrual Period but that was not required to be distributed
to such class on such Distribution Date. Any such class of Accrual
Certificates will thereafter accrue interest on its outstanding Certificate
Principal Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate Certificate Principal Balance of any class of
Certificates entitled to distributions of principal will be the aggregate
original Certificate Principal Balance of such class of Certificates specified
in the Prospectus Supplement, reduced by all distributions reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued
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but not then distributable on such Accrual Certificates. The Prospectus
Supplement will specify the method by which the amount of principal to be
distributed on the Certificates on each Distribution Date will be calculated
and the manner in which such amount will be allocated among the classes of
Certificates entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more classes of senior
Certificates will be entitled to receive all or a disproportionate percentage
of the payments or other recoveries of principal on a Mortgage Loan which are
received in advance of their scheduled due dates and not accompanied by
amounts of interest representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. Any
such allocation of Principal Prepayments to such class or classes of
Certificateholders will have the effect of accelerating the amortization of
such senior Certificates while increasing the interests evidenced by the
subordinated Certificates in the Trust Fund. Increasing the interests of the
subordinated Certificates relative to that of the senior Certificates is
intended to preserve the availability of the subordination provided by the
subordinated Certificates. See "Credit Support--Subordination".
Unscheduled Distributions. If specified in the Prospectus Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner
described below and in the Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Mortgage Loans, Agency
Securities or Contracts, low rates then available for reinvestment of such
payments or both, the Trustee determines, based on the assumptions specified
in the Agreement, that the amount anticipated to be on deposit in the
Certificate Account on the next Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any Reserve Account,
may be insufficient to make required distributions on the Certificates on such
Distribution Date. Unless otherwise specified in the Prospectus Supplement,
the amount of any such unscheduled distribution that is allocable to principal
will not exceed the amount that would otherwise have been required to be
distributed as principal on the Certificates on the next Distribution Date.
Unless otherwise specified in the Prospectus Supplement, all unscheduled
distributions will include interest at the applicable Certificate Interest
Rate (if any) on the amount of the unscheduled distribution allocable to
principal for the period and to the date specified in the Prospectus
Supplement.
Unless otherwise specified in the Prospectus Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the
same priority and manner as distributions of principal on the Certificates
would have been made on the next Distribution Date, and with respect to
Certificates of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the Trustee prior to the date of such distribution.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of hypothetical distributions on a
series of the Certificates for the Distribution Date occurring in March 1998,
assuming such Certificates are issued during January 1998. All references to
the Trust Fund, Certificateholders, Mortgage Loans, Loan Payment Record and
Certificate Account refer to those related to such series of Certificates. The
following discussion of the allocation of Mortgage Loan payments as between
principal and interest would not necessarily apply to simple-interest Home
Equity Loans or Mortgage Loans that do not provide for payments of principal
and interest in arrears on a monthly basis, and if a series of Certificates is
backed by a material amount of such Mortgage Loans, the Prospectus Supplement
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will describe the allocation of such payments and the manner in which
distributions thereof will be made to Certificateholders.
January 1.................... Cut-off Date. The aggregate unpaid principal
balance of the Mortgage Loans after deducting
principal payments due and payable on or
before January 1 and Principal Prepayments
received before January 1 will be included in
the Trust Fund. These deducted principal
payments and Principal Prepayments will be
retained by the Company and will not be
included in the Trust Fund or passed through
to Certificateholders.
February 1-28................ Voluntary principal prepayments in full (and
interest thereon to the date of prepayment)
received from February 16 through February 28
will be passed through to the related
Certificateholders on March 25, 1998.
(Voluntary principal prepayments in full
received by the Company (or, in the case of
Mortgage Loans master-serviced by the Company,
of which the Company receives notice) from
February 1 through February 15 will be passed
through to the Certificateholders (net of any
interest thereon) in the month of their
receipt.) Other unscheduled prepayments
received at any time during the month will be
passed through to the related
Certificateholders on March 25.
February 28.................. Record Date. Distributions on March 25 will be
made to Certificateholders of record at the
close of business on the last business day of
the month immediately preceding the month of
distribution.
March 1-17................... Through March 15, the Company receives (or, in
the case of Mortgage Loans master-serviced by
the Company, receives notice of) any voluntary
principal prepayments in full and interest
thereon to the date of prepayment. Such
principal prepayments (net of any interest)
will be credited to the Loan Payment Record
and deposited into the Certificate Account for
distribution to the related Certificateholders
on March 25. Through March 17, the Company
receives interest on February 1 principal
balances plus principal due March 1. Payments
due on March 1 from Mortgagors will be
credited to the Loan Payment Record as
received. Such payments will include the
scheduled principal payments received, plus
one month's interest on the February 1
principal balances, less interest to the
extent described above on the prepaid amount
of any Mortgage Loan prepaid during February.
Payments received from Mortgagors after March
15 will be subject to a late charge in
accordance with the terms of the related
mortgage instruments (with such late charges
being retained by the Company).
March 18..................... Determination Date. On the fifth business day
preceding the Distribution Date, the Company
determines the aggregate amount of
distributions to be made on the Certificates
on the following Distribution Date.
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March 23..................... The Company furnishes notice of the
distribution amount to the Trustee on the
second business day preceding the Distribution
Date.
March 24..................... Deposit Date. On the business day preceding the
Distribution Date, the Company transfers
amounts to be distributed to
Certificateholders in the Certificate Account.
March 25..................... Distribution Date. On March 25, the Trustee
will distribute to Certificateholders the
aggregate amounts set forth in the notice it
received from the Company on March 23. If a
payment due March 1 is received from a
Mortgagor on or after the Determination Date
and the Company, as servicer, has advanced
funds in the amount of such payment to the
Certificateholders, such late payment will be
paid to the Company. If no such advance has
been made, such late payment will be passed
through to such Certificateholders at the time
of the next distribution.
OPTIONAL TERMINATION OF THE TRUST FUND
If so specified in the Prospectus Supplement, either the Company or the
holders of one or more classes of Certificates specified in the Prospectus
Supplement may, at its or their option, effect early termination of the Trust
Fund, on any Distribution Date after the time specified in the Prospectus
Supplement, by purchasing all of the Certificates or the assets in the Trust
Fund at a price and in accordance with the procedures specified in the
Prospectus Supplement. The proceeds of such sale will be applied on such
Distribution Date to the distribution in full of the Certificate Principal
Balance of each outstanding Certificate entitled to distributions allocable to
principal and to accrued interest at the applicable Certificate Interest Rate
to the date specified in the Prospectus Supplement on each Certificate
entitled to distributions allocable to interest, or to such other amount as is
specified in the Prospectus Supplement. Notice of such optional termination
will be given by the Trustee prior to such Distribution Date.
THE TRUST FUND
The Trust Fund for a series of Certificates may consist of (i) the Mortgage
Loans, Agency Securities or Contracts, as the case may be, subject to the
Agreement from time to time (subject, if specified in the Prospectus
Supplement, to certain exclusions); (ii) all payments (subject, if specified
in the Prospectus Supplement, to certain exclusions) in respect of such assets
adjusted in the case of interest payments on Mortgage Loans or Contracts, to
the applicable Remittance Rates; (iii) if specified in the Prospectus
Supplement, reinvestment income on such payments; (iv) all property acquired
by foreclosure or deed in lieu of foreclosure with respect to any Mortgage
Loan or by repossession with respect to any Contract; (v) all rights of the
Company under any private mortgage insurance policies and any other insurance
policies required to be maintained in respect of the Mortgage Loans or
Contracts; and (vi) if so specified in the Prospectus Supplement, one or more
of the following: (1) any Reserve Accounts; (2) any Liquidating Loan, Advance
or Deposit Guarantees (as defined herein); and (3) any pool insurance, special
hazard insurance or other insurance, guarantee or similar instruments or
agreements.
The Certificates will be entitled to payment only from the assets of the
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Company. The primary assets of any
trust fund will consist of Mortgage Loans, Agency Securities or Contracts but
not a combination thereof.
Mortgage Loans, Agency Securities and Contracts will be originated or
acquired by the Company. The following is a brief description of the Mortgage
Loans, Agency Securities and Contracts expected to be included
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in the Trust Funds. If specific information respecting the Mortgage Loans,
Agency Securities and Contracts is not known at the time the related series of
Certificates initially are offered, more general information of the nature
described below will be provided in the Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Certificates (the "Detailed Description"). A copy of the
Agreement with respect to each series of Certificates will be attached to the
Form 8-K and will be available for inspection at the corporate trust office of
the Trustee specified in the related Prospectus Supplement. A schedule of the
Agency Securities, Mortgage Loans or Contracts, as appropriate, relating to
such series, will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
THE MORTGAGE LOANS
Description of the Mortgage Loans. The Mortgage Loans will be evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages or deeds of trust
(the "Mortgages") creating first liens, or, in the case of Home Equity Loans
(as defined below), first or second liens, on residential properties (the
"Mortgaged Properties") or first liens on long-term leases of such properties.
Such Mortgage Loans will be within the broad classification of one- to four-
family mortgage loans, defined generally as loans secured by mortgages on
residences containing one to four dwelling units, loans secured by mortgages
on condominium units and loans secured by mortgages on leasehold estates. The
Mortgage Loans may include cooperative apartment loans ("Cooperative Loans")
secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings. The Mortgage Loans
will be "conventional" mortgage loans; i.e., they will not be insured or
guaranteed by any governmental agency. The Mortgaged Properties securing the
Mortgage Loans will be located in one or more states in the United States, the
District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands and other
territories of the United States and may include investment properties and
vacation and second homes. Each Mortgage Loan will be selected by the Company
for inclusion in the Trust Fund from among those originated or acquired by the
Company in the ordinary course of the Company's mortgage lending activities,
including newly originated loans.
Unless otherwise specified in the Prospectus Supplement, the Mortgage Loans
(other than Home Equity Loans) will have initial principal balances of not
less than the minimum amount permitted under the laws of the state where the
related mortgaged property is located and not more than $1,000,000 and will
have original maturities of 10 to 30 years. Unless otherwise specified in the
Prospectus Supplement, principal and interest on the Mortgage Loans (other
than Home Equity Loans that employ the simple interest method) will be payable
on the first day of each month, and interest will be calculated based on a
360-day year of twelve 30-day months. When a full payment of principal is made
on a Mortgage Loan during a month, the mortgagor is charged interest only on
the days of the month actually elapsed up to the date of such prepayment, at a
daily interest rate that is applied to the principal amount of the loan so
prepaid. When a partial prepayment of principal is made on a Mortgage Loan
(other than a Home Equity Loan) during a month, the mortgagor generally will
not be charged interest on the amount of the partial prepayment during the
month in which such prepayment is made.
If specified in the Prospectus Supplement, all or a portion of the Mortgage
Loans included in a Trust Fund may be closed-end home equity loans secured by
first or second liens on Mortgaged Properties ("Home Equity Loans"). The Home
Equity Loan portion of any Trust Fund may consist of loans secured by first
liens or by first and second liens. Unless otherwise specified in the
Prospectus Supplement, Home Equity Loans will have initial principal balances
within the ranges permitted under the laws of the state where the related
mortgaged property is located and will have original maturities of 5 to 30
years. Interest on Home Equity Loans will be calculated on the basis of either
a 360-day year or 365-day year, depending on applicable state law. As
specified in the Prospectus Supplement, interest on Home Equity Loans will
accrue on a simple interest basis or on a fully-amortizing basis. Under the
simple interest method, regularly scheduled payments (which are based on the
amortization of the loan over a series of equal monthly payments) and other
payments are applied first to interest
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accrued to the date payment is received, then to principal. See "Yield,
Maturity and Weighted Average Life Considerations".
The Company also originates and acquires "balloon loans." If specified in
the Prospectus Supplement, the Home Equity Loans may include balloon loans.
Such loans may be originated with a stated maturity of 15 years but may on
occasion be originated with a shorter stated maturity. Notwithstanding the 15-
year maturity, level monthly payments on such a balloon loan would typically
be calculated on an amortization schedule based on a 30-year maturity. As a
result, upon the maturity of a balloon loan, the borrower will be required to
make a "balloon" payment, which will be significantly larger than such
borrower's previous monthly payments. The ability of such borrower to repay
the balloon loan at maturity frequently will depend on such borrower's ability
to refinance the loan.
The Mortgage Loans may be purchase-money loans used by the borrowers to
acquire the related Mortgaged Properties or may be loans used by the borrowers
to refinance existing mortgage loans. A refinancing may be a "cash-out" loan,
the Principal Balance of which exceeds the sum of the amount needed to repay
the loan being refinanced plus closing costs and "points" associated with the
new mortgage loan, or may be a "non-cash-out" or "rate-and-term" refinancing
in which the borrower refinances the loan solely to change the interest rate
or term of the mortgage loan.
The payment terms of the Mortgage Loans to be included in a Trust Fund will
be described in the related Prospectus Supplement and may include any of the
following features or combinations thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the loan with the
amount of any difference contributed from funds supplied by the seller of
the mortgaged property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the interest rate
on the Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan. In the case of
Home Equity Loans, payments are applied first to interest accrued to the
date payment is received, then to principal.
(c) Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may change
from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related
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mortgaged property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Company.
It is anticipated that the Mortgage Loans will consist primarily of Mortgage
Loans secured by Mortgaged Properties determined by the Company to be the
primary residences of the mortgagors. The basis for such determination will be
the making of a representation by the mortgagor that he intends to use the
underlying property as his primary residence.
The Prospectus Supplement will contain information regarding the interest
rates (the "Mortgage Rates"), the average Principal Balance and the aggregate
Principal Balance of the Mortgage Loans as of the related Cut-off Date, the
years of origination and original principal balances and the original loan-to-
value ratios of the Mortgage Loans. The "Principal Balance" of any Mortgage
Loan (other than a Home Equity Loan) will be the unpaid principal balance of
such Mortgage Loan as of the Cut-off Date, after deducting any principal
payments due on or before the Cut-off Date, reduced by all principal payments,
including principal payments advanced pursuant to the Agreement, previously
distributed to Certificateholders with respect to such Mortgage Loan and
reported to them as allocable to principal. The "Principal Balance" of any
Home Equity Loan as of the Cut-off Date will be the unpaid principal balance
thereof as of such date. The Prospectus Supplement will also contain
information regarding the geographic distribution and nature of the Mortgaged
Properties securing the Mortgage Loans.
Unless otherwise specified in the Prospectus Supplement, the loan-to-value
ratio of any Mortgage Loan will be determined by dividing the amount of such
loan (without taking into account any secondary financing) by the "Original
Value" of the related Mortgaged Property. The principal amount of the "loan,"
for purposes of computation of the loan-to-value ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagor, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgaged
Property is (a) in the case of a purchase money Mortgage Loan, the lesser of
(i) the value of the Mortgaged Property, based on an appraisal thereof
acceptable to the Company, and (ii) the selling price, and (b) in the case of
any non-purchase money Mortgage Loan, the value of the Mortgaged Property,
based on either (i) the appraised value determined in an appraisal obtained at
the time of refinancing or origination of such loan or (ii) if no such
appraisal has been obtained, the value of the related Mortgaged Property which
value generally will be supported by either (1) a representation by the
related correspondent as to such value, (2) a broker's price opinion,
automated appraisal, drive-by appraisal or other certification of value, (3)
an appraisal obtained within twelve months prior to such refinancing or
origination or (4) the sales price, if the Mortgaged Property was purchased
within the previous twelve months.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such
that the outstanding principal balances of the Mortgage Loans become equal to
or greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than
those now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real estate values)
may affect the timely and ultimate payment by mortgagors 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 the case of seasoned Mortgage Loans acquired by the Company, the values
used in calculating loan-to-value ratios may no longer be accurate valuations
of the Mortgaged Properties. Under the Company's underwriting standards, a
correspondent or other third-party seller is generally permitted to provide
secondary financing (or subordinate existing secondary financing) to a
mortgagor contemporaneously with the origination of a Mortgage Loan, provided
that the combined loan-to-value ratio does not exceed the Company's
underwriting guidelines for the specific loan program. Secondary financing is
readily available and may be obtained by a Mortgagor from a variety of
lenders, including the related correspondent or other third-party seller, at
any time (including at origination of the Mortgage Loan).
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Loan Production Sources. The Company acquires the mortgage loans that may
underlie a series of Certificates by purchasing mortgage loans originated or
otherwise acquired by its approved correspondents or other approved third
parties, by closing mortgage loans originated through loan brokers eligible to
refer applications to the Company, by refinancing mortgage loans in its own
servicing portfolio and by originating loans with borrowers who currently have
mortgage loans serviced by the Company. The Company may purchase loans from
correspondents or other third parties either for contemporaneous delivery or
for delivery in one or more pools on a "forward-delivery" basis at some future
date.
The Company's mortgage loan correspondents are certain lending institutions
that satisfy the Company's financial and operational criteria, demonstrate
experience in originating mortgage loans and follow the Company's loan
underwriting standards or other loan underwriting standards approved by the
Company. Except as described below, the Company reviews each mortgage loan for
compliance with its underwriting standards before accepting delivery from its
correspondents. Under the Company's "delegated underwriting" program, however,
the Company delegates all underwriting functions to certain approved
correspondents. In such cases, the Company will not perform any underwriting
functions prior to its acquisition of the loans, instead relying on the
representations and warranties of its correspondents and on post-purchase
reviews of the material loan documents and samplings of the loans for
compliance with applicable underwriting standards. Mortgage loans originated
by a correspondent may be closed in the name of such correspondent and
acquired by the Company or, to a lesser extent, closed in the name of the
Company. Mortgage loans originated by the Company through loan brokers are
generally underwritten by the Company, processed by the broker on behalf of
the Company as well as by the Company, and closed in the Company's name.
The Company purchases portfolios of loans from other third-party sellers in
negotiated transactions. Before making such purchases, the Company generally
determines that such sellers satisfy the Company's financial and operational
criteria, have demonstrated experience in originating or acquiring single-
family mortgage loans and have followed loan underwriting standards acceptable
to the Company.
Loans acquired from the Company's correspondents will generally have been
recently originated. Loans acquired in bulk whole loan sales from
correspondents and from other third parties in negotiated transactions are
more likely to include loans that have been outstanding for a period of time.
The Prospectus Supplement will provide information with respect to the
origination dates and the remaining terms to maturity of the Mortgage Loans
included in the related Trust Fund.
Loan Underwriting Policies. The Mortgage Loans underlying a series of
Certificates will generally have been originated in accordance with the
underwriting standards described below. In the case of mortgage loans sold to
the Company by certain approved correspondents who have exhibited strong
financial performance and have delinquency and foreclosure rates with respect
to their conventional loan portfolios acceptable to the Company, the Company
may vary some of the generally acceptable underwriting standards and program
criteria described herein, such as required documentation levels, loan-to-
value ratios and the mortgagors' debt and income ratios. If a material portion
of the Mortgage Loans included in any Trust Fund has been originated or
acquired by the Company under materially different standards from those
described herein, the related Prospectus Supplement will describe such
standards.
The underwriting standards applied by the Company in acquiring or
originating mortgage loans are intended to evaluate the prospective
mortgagor's credit standing and ability to repay the loan and the value and
adequacy of the underlying mortgaged property as collateral for the loan. In
applying these standards, the Company must be satisfied that the value of the
property being financed supports, and will continue to support, the
outstanding loan balance. The Company may require that mortgage loans that are
not eligible for purchase by FHLMC or FNMA be underwritten by a nationally-
recognized third-party underwriter approved by the Company. In such cases (as
well as in cases of loans originated under the Company's delegated
underwriting program, as described above in "--Loan Production Sources" and in
the case of loans sold by certain third-party sellers), the determination of a
mortgage loan's compliance with the underwriting standards described herein
will be made by the related underwriter.
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In acquiring or originating residential mortgage loans, the Company follows
procedures established to comply with applicable federal and state laws and
regulations. In applying for a loan, a prospective mortgagor is generally
required to supply detailed information for a loan application designed to
provide pertinent credit information about the prospective mortgagor, the
property to be purchased or that will serve as the security for the loan, and
the type of loan desired. The application generally includes a description of
the prospective mortgagor's assets and liabilities and income and expenses.
The Company also usually requires a credit report that summarizes the
prospective mortgagor's credit with merchants and lenders and, in the case of
second-lien Home Equity Loans, a written or telephonic verification of the
first mortgage balance and payment history. The Company may, as part of its
overall evaluation of the prospective mortgagor's creditworthiness, use a
credit scoring model and/or mortgage scoring model to evaluate in a
statistical manner the expected performance of a mortgage loan based on the
pertinent credit information concerning the prospective mortgagor supplied
through national credit bureaus, certain other information provided by the
prospective mortgagor and an assessment of specific mortgage loan
characteristics, including loan-to-value ratio, type of loan product and
geographic location. The Company expects to place greater reliance on a
prospective mortgagor's credit and/or mortgage scores for the purpose of
determining the type of underwriting process to be used, the level of
underwriter expertise that is required to review the loan file and the
appropriate levels of documentation and appropriate underwriting criteria
(e.g., debt and income ratios, loan-to-value ratios) to be applied.
The extensiveness of the documentation that the Company requires in
connection with the verification of a prospective mortgagor's employment
status, income, assets and adequacy of funds to close varies from full
documentation to limited documentation. The Company may raise or lower its
documentation requirements depending upon such factors as the net worth and
financial performance of the correspondent or other third party selling the
mortgage loans and the performance of such correspondent's mortgage loan
portfolio. In addition, the Company will take into account the performance of
those mortgage loans previously sold to it by such correspondent or third
party seller, as well as factors particular to a mortgage loan such as the
credit history of the individual borrower, the loan-to-value ratio of the loan
and the prospective mortgagor's credit and/or mortgage scores.
Under a typical full or alternative documentation loan approval process,
verification of the prospective mortgagor's employment status and current
salary is obtained from records prepared by the employer or by other means
satisfactory to the Company. Each prospective mortgagor who is self-employed
is generally required to submit a copy of his or her federal income tax
returns. In the case of purchase money mortgage loans, the Company also
generally requires verification that the mortgagor has adequate funds to close
the mortgage loan. A prospective mortgagor may be eligible for a loan approval
process permitting limited documentation if the amount of the Mortgage Loan,
together with, in the case of a second-lien Home Equity Loan, the unpaid
principal balance of the senior mortgage loan, would not exceed a certain
percentage of the Original Value of the related Mortgaged Property and certain
other requirements are satisfied. The limited documentation process differs
from the full or alternative documentation process primarily in that it does
not require a verification of the borrower's employment, income and/or assets
or, in certain circumstances, verification of funds to close, and generally
places greater reliance on a prospective mortgagor's credit and/or mortgage
scores. Certain of the Company's Programs that utilize the limited
documentation loan approval process are described below. A loan application
and credit report and, when applicable, a mortgage or rental reference are
usually obtained. A current appraisal is also generally obtained, except as
described below.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's Relocation Loan program. Under the
Relocation Loan program, the related borrower must be a relocating employee,
the Relocation Loan must be secured by the related borrower's primary
residence and the employer generally must have paid all or a substantial
portion of the relocating employee's closing costs. A relocating employee may
be either an employee transferring from one location to another, a new hire or
a participant in a group relocation. Loan documentation for a Relocation Loan
will generally be similar to that required for other mortgage loans originated
or acquired by the Company, except with respect to the treatment of the income
of the spouse of the relocating employee. If the spouse confirms an intention
to seek employment
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at the new location, under certain circumstances, a portion of such spouse's
income at the old location may be counted for qualifying for a Relocation
Loan. Generally, for all Relocation Loans, the spouse's income at the old
location must also be verified.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Income Verification program,
pursuant to which the Company will not verify any self-employment or other
non-salaried income of the borrower. Unless otherwise specified in the
Prospectus Supplement, in order to qualify for the No Income Verification
program, the related borrower generally must have (i) no delinquent mortgage
or rental payments during the preceding 24 months, (ii) a minimum of two
months' principal, interest, tax and insurance payments in reserves after the
closing of the related loan and (iii) acceptable credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Ratio program, pursuant to which
the Company will verify the assets of the borrower but will not require the
borrower to either complete the income section on the loan application or
satisfy any qualifying housing to income or debt to income ratios. Unless
otherwise specified in the Prospectus Supplement, in order to qualify for the
No Ratio program, the related borrower generally must have (i) no delinquent
mortgage or rental payments during the preceding 24 months, (ii) a minimum of
six months' principal, interest, tax and insurance payments in reserves after
the closing of the related loan and (iii) strong credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Income No Asset Verification
program, pursuant to which the Company will not verify any income or assets of
the borrower. This program is only available to certain approved
correspondents who have exhibited strong financial performance and have
delinquency and foreclosure rates with respect to their conventional loan
portfolios acceptable to the Company. Unless otherwise specified in the
Prospectus Supplement, in order to qualify for the No Income No Asset
Verification program, the related borrower generally must have (i) no
delinquent mortgage or rental payments during the preceding 24 months, (ii) a
minimum of six months' principal, interest, tax and insurance payments in
reserves after the closing of the related loan and (iii) strong credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's Enhanced Streamlined Refinance
program. Under this program, if the Company is currently the servicer of a
borrower's first-lien mortgage loan, the Company may originate a rate-and-term
(rather than "cash-out") refinance loan which pays off the existing mortgage
loan so long as the existing mortgage loan is current, and the borrower has no
more than one 30-day delinquent mortgage payment on the existing mortgage loan
during the preceding 12 months. Under this program the Company will not verify
any income or assets of the borrower, and no new appraisal will be required.
The Company will, however, represent and warrant in the Agreement that the
value of the related mortgaged property is no less than the value established
at the time the existing mortgage loan was originated.
Upon receipt of appropriate verification, where required, the credit report,
and, in certain cases, the prospective mortgagor's credit score or mortgage
score, the Company (or the delegated underwriter) makes a determination as to
whether the prospective mortgagor has sufficient monthly income to meet the
monthly payment obligations on the proposed mortgage loan (including real
estate taxes and insurance on the subject property), plus other financial
obligations not expected to be fully repaid within the next ten months and
normal monthly living expenses. In the case of a mortgage loan with more than
one borrower where all the borrowers intend to occupy the mortgaged property,
the combined gross income of all such borrowers is considered for the above
computation. However, the Company may depart from a strict application of its
guidelines in favor of other credit considerations, and may permit such a
departure in the case of loans acquired from certain of its approved
correspondents and other third-party sellers. In its evaluation of seasoned
mortgage loans which have 24 or more months of payment experience, the Company
generally places greater emphasis on payment history and may take into account
market and other economic trends while placing less emphasis on underwriting
factors generally applied to newly originated mortgage loans.
In assessing the adequacy of properties as collateral for mortgage loans, an
independent appraisal is generally used with respect to each property
considered for financing. Such appraisal generally entails physical
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inspection of the property as well as a verification that the property is in
good condition. The appraiser estimates the value of the property based on
market values of comparable homes and the cost of replacing the property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of appraisal
of such Mortgaged Properties. The appraisal of any Mortgaged Property reflects
the individual appraiser's judgment as to value, based on the market value of
comparable homes sold within the recent past in comparable nearby locations
and on the estimated replacement cost. Because of the unique locations and
special features of certain Mortgaged Properties, identifying comparable
properties in nearby locations may be difficult. The appraised values of such
Mortgaged Properties will be based to a greater extent on adjustments made by
the appraisers to the appraised values of reasonably similar properties. If
residential real estate values generally or in particular geographic areas
decline such that the outstanding principal balances of the Mortgage Loans and
any secondary financing on the Mortgaged Properties become equal to or greater
than the values of the related Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than
those now generally experienced in the mortgage lending industry and those now
experienced on the Company's servicing portfolios. To the extent that such
losses are not covered by any of the credit enhancement features described
herein, they will be borne by the holders of the related Certificates.
The Company may not require a current appraisal in connection with certain
purchase money mortgage loans, certain refinancings and certain home equity
loan programs. The percentage of Mortgage Loans representing such purchase
money mortgage loans, refinancings and home equity loans (by Principal Balance
of all of the Mortgage Loans included in the related Trust Fund as of the Cut-
off Date) where an appraisal dated within the past year has not been obtained
will be specified in the related Prospectus Supplement, if material. In
addition, the percentage of Mortgage Loans in respect of which no appraisal
has been obtained will be specified in the related Prospectus Supplement, if
material. Generally, appraisals in connection with a Home Equity Loan will be
dated within six months prior to the origination of the mortgage loan. In the
event that there has been a decline in value of the mortgaged properties with
respect to mortgage loans originated without current appraisals, the use of
other methods in establishing the "Original Value" of a Mortgaged Property and
in calculating the loan-to-value ratios of such mortgage loans may result in
substantially lower loan-to-value ratios than would be the case if new
appraisals were obtained at the time of refinancing. This may be particularly
true in geographic areas where there has been a substantial decline in
property values since the date of origination of the refinanced mortgage
loans. In addition, the use of methods other than a current appraisal to
establish the Original Value of a Mortgaged Property (e.g., a broker's price
opinion, an automated appraisal or a drive-by appraisal) may not provide as
thorough a review or as accurate an assessment of the value of the related
Mortgaged Property. In certain circumstances, the Company may require a
current appraisal where, as a result of deterioration in conditions in the
local real estate market since the date of origination of the refinanced
mortgage loan, there is a greater probability that the original appraisal may
not accurately reflect the current market value of the mortgaged property.
Generally, mortgage loans that the Company originates or acquires do not
have loan-to-value ratios in excess of 95% of the Original Value. In certain
cases, secondary financing (or subordination of existing secondary financing)
is permitted, provided that the combined loan-to-value ratio does not exceed
the Company's underwriting guidelines for the specific loan program. Unless
otherwise specified in the Prospectus Supplement, mortgage loans (other than
Home Equity Loans) that the Company acquires or originates which have an
original principal amount exceeding 80% of Original Value will have private
mortgage insurance. The Company generally requires such coverage to continue
until the loan-to-value ratio is 80% or less. See "Servicing of the Mortgage
Loans and Contracts--Private Mortgage Insurance" below. The Company does not
require private mortgage insurance with respect to Home Equity Loans.
If Home Equity Loans constitute a material portion of the Mortgage Loans
included in a Trust Fund with respect to a series of Certificates, the related
Prospectus Supplement will describe in further detail the underwriting
standards applicable to the Home Equity Loans.
THE AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the United States Department of
Housing and Urban Development. Section 306(g) of
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Title III of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and
interest on certificates which represent an interest in a pool of mortgage
loans insured by FHA under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate relating to a series (which may be
issued under either the GNMA I program or the GNMA II program) will be a
"fully modified pass-through" mortgage-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or
VA Loans. The mortgage loans underlying the GNMA Certificates will consist of
FHA Loans and/or VA Loans. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guarantee agreement (a "Guaranty Agreement")
between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the
payments received by the GNMA Issuer on the FHA Loans or VA Loans underlying
each such GNMA Certificate are less than the amounts due on each such GNMA
Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities
of substantially less than 30 years). Each such GNMA Certificate will be based
on and backed by a pool of FHA Loans or VA Loans secured by one- to four-
family residential property and will provide for the payment by or on behalf
of the GNMA Issuer to the registered holder of such GNMA Certificate of
scheduled monthly payments of principal and interest equal to the registered
holder's proportionate interest in the aggregate amount of the monthly
principal and interest payment on each FHA Loan or VA Loan underlying such
GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of
principal on the FHA Loans or VA Loans underlying such GNMA Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly
to the registered holder of such GNMA Certificate. In the event no payment is
made by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to
make such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates relating to a series, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
Regular monthly installment payments on each GNMA Certificate relating to a
series will be comprised of interest due as specified on such GNMA Certificate
plus the scheduled principal payments on the FHA Loans or VA Loans underlying
such GNMA Certificate due on the first day of the month in which the scheduled
monthly installment on such GNMA Certificate is due. Such regular monthly
installments on each such GNMA Certificate are required to be paid to the
Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th
day of each month in the case of a GNMA II Certificate. Any principal
prepayments on any FHA Loans or VA Loans underlying a GNMA Certificate
relating to a series or any other early recovery of principal on such loan
will be passed through to the Trustee as the registered holder of such GNMA
Certificate.
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GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid
will be added to the principal of such graduated payment mortgage loans and,
together with interest thereon, will be paid in subsequent years. The
obligations of GNMA and of a GNMA Issuer will be the same irrespective of
whether the GNMA Certificates relating to a series of Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a series of Certificates may be held
in book-entry form.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly-held government-
sponsored enterprise created pursuant to Title III of the Emergency Home
Finance Act of 1970, as amended (the "FHLMC Act"). FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit
for the financing of urgently needed housing. It seeks to provide an enhanced
degree of liquidity for residential mortgage investments primarily by
assisting in the development of secondary markets for conventional mortgages.
The principal activity of FHLMC currently consists of the purchase of first
lien conventional mortgage loans or participation interests in such mortgage
loans and the sale of the mortgage loans or participations so purchased in the
form of mortgage securities, primarily FHLMC Certificates. FHLMC is confined
to purchasing, so far as practicable, mortgage loans that it deems to be of
such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates are
sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates relating to a series will
consist of residential mortgage loans secured by one- to four-family
dwellings. Each such mortgage loan must meet the applicable standards set
forth in the FHLMC Act. A FHLMC Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another FHLMC Certificate group. Under the
Guarantor Program any such FHLMC Certificate group may include only whole
loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such
holder's pro rata share thereof, but does not, except if and to the extent
specified in the Prospectus Supplement for a series, guarantee the timely
payment of scheduled principal. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC
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reserves the right to exercise its judgment with respect to the mortgage loans
in the same manner as for mortgage loans which it has purchased but not sold.
The length of time necessary for FHLMC to determine that a mortgage loan
should be accelerated varies with the particular circumstances of each
mortgagor, and FHLMC has not adopted standards which require that the demand
be made within any specified period.
FHLMC Certificates are not guaranteed by the United States and do not
constitute debts or obligations of the United States or any instrumentality of
the United States other than FHLMC. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FHLMC Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on
the underlying mortgage loans, interest at the FHLMC pass-through rate and any
other sums such as prepayment fees, within 60 days of the date on which such
payments are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans underlying
a FHLMC Certificate may exceed the pass-through rate on the FHLMC Certificate
by 50 to 100 basis points. Under FHLMC's Guarantor Program, interest rates on
the mortgage loans underlying a FHLMC Certificate may range from the pass-
through rate (plus a minimum servicing fee) to 250 basis points higher than
such rate.
FHLMC Certificates duly presented for registration of ownership on or before
the last business day of a month are registered effective as of the first day
of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day
of the month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, and makes payments of principal and interest each month
to the registered holders thereof in accordance with such holders'
instructions.
Federal National Mortgage Association. FNMA is a federally-chartered and
privately-owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps
to redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either
provided by FNMA from its own portfolio or purchased pursuant to the criteria
of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment
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mortgage loans underlying a FNMA Certificate are expected to be between either
8 to 15 years or 20 to 30 years. The original maturities of substantially all
of the fixed rate level payment FHA Loans or VA Loans are expected to be 30
years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under
a regular servicing option (pursuant to which the mortgagee or other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on
the mortgage loans underlying a FNMA Certificate will be between 50 basis
points and 250 basis points greater than in its annual pass-through rate and
under a special servicing option (pursuant to which FNMA assumes the entire
risk for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will generally be between 55 basis points and
255 basis points greater than the annual FNMA Certificate pass-through rate.
If specified in the Prospectus Supplement, FNMA Certificates may be backed by
adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it will
distribute amounts representing such holder's proportionate share of scheduled
principal and interest payments at the applicable pass-through rate provided
for by such FNMA Certificate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full principal amount
of any foreclosed or other finally liquidated mortgage loan, whether or not
such principal amount is actually recovered. The obligations of FNMA under its
guarantees are obligations solely of FNMA and are not backed by, nor entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up
to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance FNMA's operations or to assist FNMA in
any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of FNMA Certificates would be affected by
delinquent payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal
and interest on each FNMA Certificate will be made by FNMA on the 25th day of
each month to the persons in whose name the FNMA Certificate is entered in the
books of the Federal Reserve Banks (or registered on the FNMA Certificate
register in the case of fully registered FNMA Certificates) as of the close of
business on the last day of the preceding month. With respect to FNMA
Certificates issued in book-entry form, distributions thereon will be made by
wire, and with respect to fully registered FNMA Certificates, distributions
thereon will be made by check.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one or
more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain FHLMC,
FNMA or GNMA Certificates. The underlying securities will be held under a
trust agreement by FHLMC, FNMA or GNMA each as trustee, or by another trustee
named in the related Prospectus Supplement. FHLMC, FNMA or GNMA will guarantee
each stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
CONTRACTS
Each pool of Contracts with respect to a series of Certificates (the
"Contract Pool") will consist of manufactured housing conditional sales
contracts and installment loan agreements or participation interests therein
(collectively, the "Contracts") originated by the Company or acquired from one
or more manufactured
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housing dealers in the ordinary course of business. The Contracts may be
conventional manufactured housing contracts or contracts insured by the FHA or
partially guaranteed by the VA. Each Contract is secured by a Manufactured
Home (as defined below). Unless otherwise specified in the Prospectus
Supplement, the Contracts will be fully amortizing and will bear interest at a
fixed annual percentage rate ("APR").
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty
body feet or more in length, or, when erected on site, is three hundred twenty
or more square feet, and which is built on a permanent chassis and designed to
be used as a dwelling with or without a permanent foundation when connected to
the required utilities, and includes the plumbing, heating, air-conditioning,
and electrical systems contained therein; except that such term shall include
any structure which meets all the requirements of this paragraph except the
size requirements and with respect to which the manufacturer voluntarily files
a certification required by the Secretary of Housing and Urban Development and
complies with the standards established under this chapter." Moreover, if an
election is made to treat the Trust Fund as a REMIC as described in "Certain
Federal Income Tax Consequences--REMIC Certificates", Manufactured Homes will
have a minimum of 400 square feet of living space and a minimum width in
excess of 102 inches.
Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the loan-to-value ratio of a Contract relating to a
new Manufactured Home, the "Collateral Value" is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, the
Collateral Value of a used Manufactured Home is the least of the sales price,
the appraised value, and the National Automobile Dealer's Association book
value plus prepaid taxes and hazard insurance premiums. The appraised value of
a Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of
the Contracts; the APRs on the Contracts; the Contract loan-to-value ratios;
the minimum and maximum outstanding principal balances as of the Cut-off Date
and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the Contract Pool; and the original
maturities of the Contracts and the last maturity date of any Contract.
CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of a
series of Certificates or with respect to the assets in the related Trust
Fund. Credit support may be in the form of the limited obligation of the
Company to purchase Liquidating Loans, a limited financial guarantee policy,
limited guarantee or other similar instrument (a "Limited Guarantee") issued
by an entity named in the Prospectus Supplement (the "Guarantor"), which may
be an affiliate of the Company, the subordination of one or more classes of
the Certificates of such series, the establishment of one or more reserve
accounts, the use of a cross-support feature, use of a pool insurance policy,
bankruptcy bond, special hazard insurance policy, repurchase bond, guaranteed
investment contract or another method of credit support described in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit support will not
provide protection against all risks of loss and will not guarantee repayment
of the entire principal balance of the Certificates and interest thereon. If
losses occur which exceed the amount covered by credit support or which are
not covered by the credit support, Certificateholders will bear their
allocable share of deficiencies.
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If the Prospectus Supplement for a series provides that an institution other
than the Company will act as sole servicer or master servicer of the related
Mortgage Loans, or that the Company will act as master servicer of such
Mortgage Loans under a Supervisory Master Servicing Arrangement (as defined
under "Servicing of the Mortgage Loans and Contracts") whereby other servicers
will be directly obligated to perform certain servicing duties, if so
specified in such Prospectus Supplement, such other master servicers or
servicers may provide certain of the credit support arrangements described
below in lieu of the Company. In such event, all references to the Company as
servicer under the description of such credit support set forth below should
be read to refer to such other master servicer or servicers, as the case may
be.
PURCHASE OF LIQUIDATING LOANS
The Company, as servicer, may be obligated, if and to the extent described
in the Prospectus Supplement, to purchase any Mortgage Loan (a "Liquidating
Loan") as to which either (i) liquidation proceedings have been commenced and
any equitable or statutory right to reinstate such Mortgage Loan has expired
or (ii) the Company, as servicer, has agreed to accept a deed in lieu of
foreclosure, in each case for a price equal to 100% of the Principal Balance
of such Mortgage Loan plus, unless otherwise specified in the Prospectus
Supplement, one month's interest thereon at the applicable Remittance Rate.
Any such obligation of the Company, as servicer, may be limited as specified
in the Prospectus Supplement. In particular, the aggregate losses from the
purchase of Liquidating Loans that the Company is obligated to bear (measured
as the difference between the aggregate payments made by the Company into the
Certificate Account in respect of Liquidating Loans and the aggregate net
proceeds received by the Company from the disposition of such Loans) may be
limited to an amount specified in the Prospectus Supplement. After this amount
is exhausted, no further Liquidating Loans will be purchased by the Company,
unless such amount has been restored as described below.
If so specified in the Prospectus Supplement, the Company, as servicer, will
have the option (but not the obligation) to purchase any Mortgage Loan as to
which the mortgagor has failed to make unexcused payment in full of three or
more scheduled payments of principal and interest (a "Delinquent Mortgage
Loan"). Unless otherwise specified in the Prospectus Supplement, any such
purchase will be for a price equal to 100% of the Principal Balance of such
Mortgage Loan plus interest thereon at the applicable Remittance Rate from the
date on which interest was last paid to the first day of the month in which
such purchase price is to be distributed, net of any unreimbursed advances of
principal and interest thereon made by the Company as servicer. The purchase
price for any Delinquent Mortgage Loan will be deposited in the Certificate
Account on the next Deposit Date (as defined under "Servicing of the Mortgage
Loans and Contracts--Loan Payment Record").
The purchase by the Company, as servicer, of a Delinquent Mortgage Loan may
result in the diminution of the amount of the Company's obligations, as
servicer, to purchase Liquidating Loans, to the extent that net recoveries
upon the liquidation of such Delinquent Mortgage Loan are, or are estimated by
the Company on the date of such purchase to be, less than the sum of the
purchase price for such Delinquent Mortgage Loan and any previous unreimbursed
advances of delinquent installments of principal and interest (adjusted to the
related Remittance Rate) made by the Company with respect thereto. To the
extent that actual recoveries, net of related expenses, upon the final
liquidation of such Delinquent Mortgage Loan differ from the estimated amount
thereof, the amount of the Company's remaining obligation to purchase
Liquidating Loans will be adjusted up or down accordingly. If a Delinquent
Mortgage Loan becomes current after its purchase by the Company, any related
decrease in the amount of the Company's obligation to purchase Liquidating
Loans will be reversed in its entirety. Liquidation proceeds in connection
with the liquidation of any Mortgaged Property may not be deemed for this
purpose to include the entire principal balance of any mortgage loan made by
the Company to facilitate such sale at a rate less than then prevailing market
rates. In estimating the net amount of proceeds recoverable upon the
liquidation of any Delinquent Mortgage Loan, the Company may treat as related
liquidation expenses certain costs associated with the protection of the
Mortgaged Property, property sales expenses and foreclosure or other similar
costs.
Following the purchase by the Company of any Liquidating Loan or Delinquent
Mortgage Loan as described above, and the payment by the Company of the
purchase price therefor, the Company will be entitled
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to receive an assignment by the Trustee of such Mortgage Loan, and the Company
will thereafter own such Mortgage Loan free of any further obligation to the
Trustee or the Certificateholders with respect thereto.
LIMITED GUARANTEE OF THE GUARANTOR
If specified in the Prospectus Supplement, certain obligations of the
Company, as servicer, under the related Agreement may be covered by a Limited
Guarantee, limited in scope and amount, issued by the Guarantor. If so
specified, the Guarantor may be obligated to take one or more of the following
actions in the event the Company fails to do so: make deposits to the
Certificate Account (a "Deposit Guarantee"); make advances (an "Advance
Guarantee"); or purchase Liquidating Loans (a "Liquidating Loan Guarantee").
Any such Limited Guarantee will be limited in amount and a portion of the
coverage of any such Limited Guarantee may be separately allocated to certain
events. For example, a portion of the aggregate amount of a Liquidating Loan
Guarantee may be separately allocated to Liquidating Loans due to special
hazards not covered by standard hazard insurance policies, Liquidating Loans
due to the bankruptcy of a mortgagor, and other Liquidating Loans. The scope,
amount and, if applicable, the allocation of any Limited Guarantee will be
described in the related Prospectus Supplement.
If and to the extent that the Guarantor is required to make payments under
any such Limited Guarantee, unless otherwise specified in the Prospectus
Supplement, the Guarantor, upon notice from the Trustee, will be obligated to
deposit the amount of such payments in same-day funds in the Certificate
Account on the day after the Deposit Date, all as set forth more specifically
in such Limited Guarantee. If the Guarantor is required to make any payment
under a Limited Guarantee, the Guarantor will be subrogated, to the extent of
such payment, to the rights of holders of the Certificates and shall have all
rights of the Company under the related Agreement as described herein. Any
Limited Guarantee issued by the Guarantor will be limited in amount or
duration as specified in the Prospectus Supplement and may not guarantee the
full extent of the Company's obligations with respect to which such Limited
Guarantee was issued. As described in the Prospectus Supplement, if
applicable, the amount of any Limited Guarantee will be reduced by amounts
distributed by the Guarantor, and not recovered by it, under all Limited
Guarantees issued by the Guarantor with respect to the same series of
Certificates and by any reduction in the Company's obligations with respect to
which such Limited Guarantee was issued.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination
thereof that otherwise would have been payable to one or more classes of
Certificates of a series (the "subordinated Certificates") will instead be
payable to holders of one or more other classes of such series (the "senior
Certificates") under the circumstances and to the extent specified in the
Prospectus Supplement. If specified in the Prospectus Supplement, delays in
receipt of scheduled payments on the Mortgage Loans or Contracts and losses on
defaulted Mortgage Loans or Contracts will be borne first by the various
classes of subordinated Certificates and thereafter by the various classes of
senior Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Loans or
Contracts over the lives of the Certificates or at any time, the aggregate
losses in respect of defaulted Mortgage Loans or Contracts which must be borne
by the subordinated Certificates by virtue of subordination and the amount of
the distributions otherwise distributable to the subordinated
Certificateholders that will be distributable to senior Certificateholders on
any Distribution Date may be limited as specified in the Prospectus
Supplement. If aggregate distributions in respect of delinquent payments on
the Mortgage Loans or Contracts or aggregate losses in respect of such
Mortgage Loans or Contracts were to exceed the total amounts payable and
available for distribution to holders of subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, holders of senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable
to holders of subordinated Certificates on any Distribution Date may instead
be deposited into one or more reserve accounts (the "Reserve Account")
established by the Trustee. If so specified
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in the Prospectus Supplement, such deposits may be made on each Distribution
Date, on each Distribution Date for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of senior Certificates or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit
in the Reserve Account may be released to the Company or the holders of any
class of Certificates at the times and under the circumstances specified in
the Prospectus Supplement.
If specified in the Prospectus Supplement, one or more classes of
Certificates may bear the risk of certain losses on defaulted Mortgage Loans
not covered by other forms of credit support prior to other classes of
Certificates. Such subordination might be effected by reducing the Certificate
Principal Balance of the subordinated Certificates on account of such losses,
thereby decreasing the proportionate share of distributions allocable to such
Certificates, or by another means specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of senior
Certificates and subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
If so specified in the Prospectus Supplement, the same class of Certificates
may constitute senior Certificates with respect to certain types of payments
or certain losses and subordinated Certificates with respect to other types of
payments or losses.
As between classes of senior Certificates and as between classes of
subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. As between classes of subordinated Certificates, payments to
holders of senior Certificates on account of delinquencies or losses and
payments to any Reserve Account will be allocated as specified in the
Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, the Agreement may
permit the Company, at its option, to grant to the holders of certain classes
of subordinated Certificates certain rights in connection with the foreclosure
of defaulted Mortgage Loans in the related Trust Fund. See "Servicing of the
Mortgage Loans and Contracts--Collection and Other Servicing Procedures."
CROSS-SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related series of Certificates. In such case, credit
support may be provided by a cross-support feature which may require that
distributions be made with respect to Certificates evidencing beneficial
ownership of one or more asset groups prior to distributions to subordinated
Certificates evidencing a beneficial ownership interest in other asset groups
within the same Trust Fund. The Prospectus Supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such
coverage to the identified Trust Funds.
POOL INSURANCE
In order to decrease the likelihood that Certificateholders will experience
losses in respect of the Mortgage Loans, if specified in the Prospectus
Supplement, the Company will obtain one or more pool insurance policies.
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Any such policies may be in lieu of or in addition to any obligations of the
Company in respect of the Mortgage Loans. Such pool insurance policy will,
subject to the limitations described in the Prospectus Supplement, cover loss
by reason of default in payments on the Mortgage Loans up to the amounts
specified in the Prospectus Supplement or the Detailed Description and for the
periods specified in the Prospectus Supplement. The Company, as servicer, will
agree to use its best reasonable efforts to maintain in effect any such pool
insurance policy and to present claims thereunder to the pool insurer on
behalf of itself, the Trustee and the Certificateholders. The pool insurance
policy, however, is not a blanket policy against loss, since claims thereunder
may only be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent described below. The pool
insurance policy, if any, will not cover losses due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of
the reason therefor.
Unless otherwise specified in the Prospectus Supplement, the original amount
of coverage under any pool insurance policy will be reduced over the life of
the related series of Certificates by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will
include certain expenses incurred by the Company as well as accrued interest
on delinquent Mortgage Loans to the date of payment of the claim. See "Certain
Legal Aspects of the Mortgage Loans--Foreclosure". Accordingly, if aggregate
net claims paid under any pool insurance policy reach the original policy
limit, coverage under that pool insurance policy will be exhausted and any
further losses will be borne by one or more classes of Certificateholders
unless assumed by the Company or the Guarantor under any obligations they may
have in respect of Liquidating Loans or by some other entity, if and to the
extent specified in the Prospectus Supplement.
Since any mortgage pool insurance policy may require that the property
subject to a defaulted Mortgage Loan be restored to its original condition
prior to claiming against the pool insurer, such policy may not provide
coverage against hazard losses. As described under "Servicing of the Mortgage
Loans--Hazard Insurance", the hazard policies concerning the Mortgage Loans
typically exclude from coverage physical damage resulting from a number of
causes and even when the damage is covered, may afford recoveries which are
significantly less than the full replacement cost of such losses. Even if
special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special
Hazard Insurance" below. As a result, certain hazard risks will not be insured
against and will therefore be borne by Certificateholders, unless otherwise
assumed by the Company or the Guarantor under any obligations they may have in
respect of Liquidating Loans or by some other entity, as specified in the
Prospectus Supplement.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE
In order to decrease the likelihood that Certificateholders will experience
losses in respect of the Mortgage Loans, if specified in the Prospectus
Supplement, the Company will obtain one or more special hazard insurance
policies with respect to the Mortgage Loans. Any such policies may be in lieu
of or in addition to any obligations of the Company to advance delinquent
payments in respect of the Mortgage Loans. Such a special hazard insurance
policy will, subject to limitations described below and in the Prospectus
Supplement, protect holders of Certificates from (i) loss by reason of damage
to Mortgaged Properties caused by certain hazards (including earthquakes and,
to a limited extent, tidal waves and related water damage) not covered by the
standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if
any, covering the Mortgaged Properties, and (ii) loss from partial damage
caused by reason of the application of the co-insurance clause contained in
hazard insurance policies. Any special hazard insurance policy may not cover
losses occasioned by war, civil insurrection, certain governmental actions,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located
in a federally designated flood area), chemical contamination and certain
other risks. Aggregate claims under each special hazard insurance policy may
be limited to a specified percentage of the
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aggregate principal balance as of the Cut-off Date of the Mortgage Loans. Any
special hazard insurance policy may also provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the Mortgaged Property
has been kept in force and other protection and preservation expenses have
been paid by the Company.
Subject to the foregoing limitations, any special hazard insurance policy
may provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or
flood insurance policy, if any, maintained by the mortgagor or the Company,
the special hazard insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
special hazard insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Company with respect to such property. If the unpaid
principal balance plus accrued interest and certain expenses is paid by the
insurer, the amount of further coverage under the related special hazard
insurance policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair or replacement of
the property will also reduce coverage by such amount. Restoration of the
property with the proceeds described under clause (i) above will satisfy the
condition under any pool insurance policy that the property be restored before
a claim under such pool insurance policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under clause (ii) above will render unnecessary presentation of a claim in
respect of such Mortgage Loan under the related pool insurance policy.
Therefore, so long as a pool insurance policy remains in effect, the payment
by the insurer under a special hazard insurance policy of the cost of repair
or replacement or the unpaid principal balance of the Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related special hazard insurance policy and pool
insurance policy.
The terms of any special hazard policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the Mortgaged Property securing the related Mortgage
Loan at an amount less than the then outstanding principal balance of such
Mortgage Loan secured by such Mortgaged Property and could reduce the secured
debt to such value. In such case, the holder of such Mortgage Loan would
become an unsecured creditor to the extent of the difference between the
outstanding principal balance of such Mortgage Loan and such reduced secured
debt. In addition, certain other modifications of the terms of a Mortgage Loan
can result from a bankruptcy proceeding, including the reduction in monthly
payments required to be made by the borrower. See "Certain Legal Aspects of
the Mortgage Loans and Contracts--Enforceability of Certain Provisions". If so
provided in the related Prospectus Supplement, the Company will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a
Mortgage Loan or a reduction by such court of the principal amount of a
Mortgage Loan and will cover certain unpaid interest on the amount of such a
principal reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans,
unless otherwise specified in the related Prospectus Supplement, and will not
be restored.
In lieu of a bankruptcy bond, the Company may obtain a Limited Guarantee to
cover such bankruptcy-related losses.
The terms of any bankruptcy bond (or Limited Guarantee in lieu thereof)
relating to a pool of Contracts will be described in the related Prospectus
Supplement.
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REPURCHASE BOND
If so specified in the related Prospectus Supplement, the Company, as
servicer, will be obligated to repurchase any Mortgage Loan or Contract (up to
an aggregate dollar amount specified in the related Prospectus Supplement) for
which insurance coverage is denied due to dishonesty, misrepresentation or
fraud in connection with the origination or sale of such Mortgage Loan or
Contract. Such obligation may be secured by a surety bond or other instrument
or mechanism guaranteeing payment of the amount to be paid by the Company.
GUARANTEED INVESTMENT CONTRACTS
If so specified in the Prospectus Supplement, on or prior to the Delivery
Date, the Trustee will enter into a guaranteed investment contract (a "GIC")
pursuant to which all amounts deposited in the Certificate Account, and if so
specified the Reserve Accounts, will be invested by the Trustee and under
which the issuer of the GIC will pay to the Trustee interest at an agreed rate
per annum with respect to the amounts so invested.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit, other instruments or
obligations or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Company on the Delivery Date in
one or more accounts (each, a "Reserve Account") established by the Trustee.
Such cash and the principal and interest payments on such other instruments
will be used to enhance the likelihood of timely payment of principal of, and
interest on, or, if so specified in the Prospectus Supplement, to provide
additional protection against losses in respect of, the assets in the related
Trust Fund, to pay the expenses of the Trust Fund or for such other purposes
specified in the Prospectus Supplement. Whether or not the Company has any
obligation to make such a deposit, certain amounts to which the subordinated
Certificateholders, if any, will otherwise be entitled may instead be
deposited into the Reserve Account from time to time and in the amounts as
specified in the Prospectus Supplement. Any cash in the Reserve Account and
the proceeds of any other instrument upon maturity will be invested in
Eligible Investments, which, unless otherwise specified in the Prospectus
Supplement, will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the Prospectus
Supplement, any instrument deposited therein will name the Trustee, in its
capacity as trustee for the holders of the Certificates, as beneficiary and
will be issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments
deposited in the Reserve Accounts will be set forth in the Prospectus
Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement, the related Trust Fund may also
include insurance, guarantees, letters of credit or similar arrangements for
the purpose of (i) maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, (ii)
paying administrative expenses or (iii) establishing a minimum reinvestment
rate on the payments made in respect of such assets or principal payment rate
on such assets. Such arrangements may include agreements under which
Certificateholders are entitled to receive amounts deposited in various
accounts held by the Trustee upon the terms specified in the Prospectus
Supplement. Such arrangements may be in lieu of any obligation of the Company
to advance
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delinquent installments in respect of the Mortgage Loans or Contracts. See
"Servicing of Mortgage Loans and Contracts--Advances".
YIELD, MATURITY AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will
be affected primarily by the rate and timing of principal payments received on
or in respect of the Mortgage Loans, Agency Securities or Contracts included
in the related Trust Fund. Such principal payments will include scheduled
payments as well as Principal Prepayments (including refinancings, some of
which refinancings may be solicited by the Company) and prepayments resulting
from foreclosure, condemnation and other dispositions of the Mortgaged
Properties or Manufactured Homes (including amounts paid by insurers under
applicable insurance policies), from repurchase by the Company of any Mortgage
Loan or Contract as to which there has been a material breach of warranty or
defect in documentation (or deposit of certain amounts in respect of delivery
of a substitute Mortgage Loan), repurchase by the Company of Mortgage Loans
modified by it in lieu of refinancing thereof, repurchase by the Company, the
Guarantor or any other entity of any Liquidating Loan or Delinquent Mortgage
Loan, if applicable, and from the repurchase by the Company of all of the
Certificates or all of the Mortgage Loans, Agency Securities or Contracts in
certain circumstances. See "Description of the Certificates--Optional
Termination of Trust Fund". The yield to maturity and weighted average lives
of the Certificates may also be affected by the amount and timing of
delinquencies and losses on the Mortgage Loans or Contracts.
After origination of the related Mortgage Loans, certain of the borrowers
may be solicited by the Company to participate in its biweekly payment
programs, under which payments equal to one-half of one full monthly payment
are made in respect of the related Mortgage Loan on a biweekly basis. In
contrast to a Mortgage Loan in respect of which payments are received once
every month, a Mortgage Loan involved in a biweekly payment program will
produce thirteen full monthly payments per calendar year, resulting in
additional prepayments of principal over the life of the Mortgage Loan. All
payments of principal received during a month in respect of a Mortgage Loan in
a biweekly payment program will be applied to the principal balance of such
Mortgage Loan on the first business day of the succeeding month and will not
result in interest shortfalls.
A number of social, economic, tax, geographic, demographic, legal and other
factors may influence prepayments, delinquencies and losses. For a Trust Fund
comprised of Mortgage Loans, these factors may include the age of the Mortgage
Loans, the geographic distribution of the Mortgaged Properties, the payment
terms of the Mortgages, the characteristics of the mortgagors, homeowner
mobility, economic conditions generally and in the geographic area in which
the Mortgaged Properties are located, enforceability of due-on-sale clauses,
servicing decisions, prevailing mortgage market interest rates in relation to
the interest rates on the Mortgage Loans, the availability of mortgage funds,
the use of second or "home equity" mortgage loans by mortgagors, the
availability of refinancing opportunities, the use of the properties as second
or vacation homes, the extent of the mortgagors' net equity in the Mortgaged
Properties and, where investment properties are securing the Mortgage Loans,
tax-related considerations and the availability of other investments. The rate
of principal payment may also be subject to seasonal variations. The
prepayment experience on Home Equity Loans may differ from those of other
Mortgage Loans and may differ between first-priority and second-priority Home
Equity Loans. Similar types of factors may affect the rate of prepayments,
delinquencies and losses on Contracts.
The rate of principal prepayments on pools of conventional housing loans has
fluctuated significantly in recent years. Generally, if prevailing interest
rates were to fall significantly below the interest rates on the Mortgage
Loans, the Mortgage Loans would be expected to prepay at higher rates than if
prevailing rates were to remain at or above the interest rates on the Mortgage
Loans. Conversely, if interest rates were to rise above the interest rates on
the Mortgage Loans, the Mortgage Loans would be expected to prepay at lower
rates than if prevailing rates were to remain at or below interest rates on
the Mortgage Loans. The timing of changes in the rate of prepayments may
significantly affect a Certificateholder's actual yield to maturity, even if
the average rate of principal payments is consistent with a
Certificateholder's expectation. In general, the earlier a prepayment of
principal the greater the effect on a Certificateholder's yield to maturity.
As a result, the effect on
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a Certificateholder's yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the related series of Certificates will
not be offset by a subsequent like reduction (or increase) in the rate of
principal payments.
When a Mortgage Loan or Contract prepays in full, the borrower will
generally be required to pay interest on the amount of prepayment only to the
prepayment date. When a partial prepayment of principal is made on a Mortgage
Loan (other than a simple interest Home Equity Loan), the borrower generally
will not be required to pay interest on the amount of the partial prepayment
during the month in which such prepayment is made. In addition, unless
otherwise specified in the related Prospectus Supplement, a full or partial
prepayment will not be required to be passed through to Certificateholders
until the month following receipt.
Unless otherwise specified in the Prospectus Supplement, interest with
respect to Home Equity Loans accrues on a simple interest basis. Under the
simple interest method, regularly scheduled payments (which are based on the
amortization of the loan over a series of equal monthly payments) and other
payments are applied first to interest accrued to the date payment is received
and then to reduce the unpaid principal balance of the related loan. Each
regularly scheduled monthly interest payment is calculated by multiplying the
outstanding principal balance of the loan by the stated interest rate. Such
product is then multiplied by a fraction, the numerator of which is the number
of days elapsed since the preceding payment of interest was made and the
denominator of which is either 365 or 360, depending on applicable state law.
As a result of the payment terms of simple interest Home Equity Loans, the
making of a scheduled payment on, or the prepayment of, such a Home Equity
Loan prior to its scheduled due date may result in the collection of less than
one month's interest on such Home Equity Loan for the period since the
preceding payment was made. Conversely, if the scheduled payment on such a
Home Equity Loan is made after its scheduled payment date or the Home Equity
Loan is prepaid after the scheduled due date, the collection of interest on
such Home Equity Loan for such period may be greater than one month's interest
on such Home Equity Loan. In addition, the extent to which simple interest
Home Equity Loans experience early payment or late payment of scheduled
payments will correspondingly change the amount of principal received during a
monthly period and, accordingly, the amount of principal to be distributed on
the related Distribution Date and the amount of unpaid principal due at the
stated maturity of such Home Equity Loans. To the extent shortfalls
attributable to prepayments or the early receipt of a scheduled payment on
Home Equity Loans are not compensated for by any forms of credit enhancement
described in the Prospectus Supplement, the Certificateholders will experience
delays or losses in amounts due them.
If a Mortgagor pays more than one scheduled installment on a simple interest
Home Equity Loan at a time, the entire amount of the additional installment
will be treated as a principal prepayment and passed through to
Certificateholders in the month following the month of receipt. In such case,
although the Mortgagor will not be required to make the next regularly
scheduled installment, interest will continue to accrue on the principal
balance of the Home Equity Loan, as reduced by the application of the early
installment. As a result, when the Mortgagor pays the next required
installment, the installment so paid may be insufficient to cover the interest
that has accrued since the last payment by the Mortgagor. Notwithstanding such
insufficiency, the Mortgagor's Home Equity Loan would be considered to be
current. If specified in the Prospectus Supplement, the Company will be
required to advance the amount of such insufficiency. This insufficiency will
continue until the installment payments received are once again sufficient to
cover all accrued interest and to reduce the principal balance of the Home
Equity Loan. Depending on the principal balance and interest rate of the
related Home Equity Loan and on the number of installments that were paid
early, there may be extended periods of time during which Home Equity Loans
that are current are not amortizing.
Factors other than those identified herein and in the Prospectus Supplement
could significantly affect principal prepayments at any time and over the
lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no
assurance as to the rate of payment of principal of the Mortgage Loans, Agency
Securities or Contracts at any time or over the lives of the Certificates.
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The Prospectus Supplement relating to a series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted
average lives and maturities of such Certificates. If a series of Certificates
is backed by a pool of Mortgage Loans that includes Home Equity Loans
providing for balloon payments at maturity, the Prospectus Supplement will
contain information regarding the potential effect of such Mortgage Loans on
the weighted average lives of such Certificates.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage Loans will
be serviced either (i) by the Company as primary servicer, (ii) by the Company
as master servicer, (iii) by another institution as primary servicer or (iv)
by another institution as master servicer. If an institution other than the
Company acts as primary servicer or as master servicer for a series, the
Company may have no servicing obligations with respect to such series. If the
Company or another institution acts as master servicer with respect to a
series, the related Agreement may provide either (i) that the master servicer
may delegate all or a portion of the servicing duties described below to other
servicers but shall remain directly liable for all such servicing duties (a
"Direct Master Servicing Arrangement"), or (ii) that certain of the servicing
duties described below may be performed directly by other servicers, pursuant
to servicing agreements entered into between such servicers and the Company,
as seller, and assigned to the Trustee, in which event the master servicer
will be obligated to supervise such servicers' performance but will not itself
be obligated to perform such duties (a "Supervisory Master Servicing
Arrangement"). Unless otherwise specified in the Prospectus Supplement, if the
Company is acting as master servicer under a Direct Master Servicing
Arrangement, the servicing agreement entered into between the Company and the
direct servicer will be deemed to be between the Company and the direct
servicer alone, and the Trustee and the Certificateholders will have no
claims, obligations, duties or liabilities with respect thereto. Each master
servicer will have the ability to terminate any such other servicer upon terms
that will be agreed to at or before the time the related series of
Certificates is issued. Unless otherwise specified in the Prospectus
Supplement, in the event that the master servicer is no longer acting as such
for the series, the Trustee or a successor master servicer shall succeed to
the master servicer's rights under the servicing agreement with the primary
servicer.
The Prospectus Supplement for each series will specify whether the Company
or another institution will act as primary servicer or master servicer for
such series, and if there is a master servicer, whether the master servicing
arrangement is a Direct Master Servicing Arrangement or a Supervisory Master
Servicing Arrangement. If the Company acts as master servicer for a series
under a Direct Master Servicing Arrangement, all references herein to the
Company as servicer should be read to refer to the Company as master servicer,
as appropriate. If the Company acts as master servicer for a series under a
Supervisory Master Servicing Arrangement, such references should be read to
refer to the direct servicers of such series, acting under the supervision of
the Company as master servicer. If an institution other than the Company acts
as primary servicer for a series, or acts as master servicer for such series
under a Direct Master Servicing Arrangement, all references herein to the
Company as servicer should be read to refer to such institution as primary or
master servicer, as appropriate. If an institution other than the Company acts
as master servicer with respect to a series under a Supervisory Master
Servicing Arrangement, such references should be read to refer to the direct
servicers of such series, acting under the supervision of such institution as
master servicer.
With respect to each series of Certificates, except to the extent the
Agreement specifically prescribes other servicing standards, the related
Mortgage Loans will be serviced under servicing standards substantially
equivalent to those required for approval by FNMA or FHLMC.
COLLECTION AND OTHER SERVICING PROCEDURES
Mortgage Loans. The Company, as servicer, will be responsible for making
reasonable efforts to collect all payments called for under the Mortgage Loans
and shall, consistent with each Agreement, follow such
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collection procedures as it follows with respect to mortgage loans in its
servicing portfolio which are comparable to the Mortgage Loans. Consistent
with the above, the Company, as servicer, may, in its discretion, (i) waive
any late payment charge and (ii) if a default on the related Mortgage Loan has
occurred or is reasonably foreseeable, arrange with the mortgagor, at any time
prior to foreclosure, a schedule for the payment of principal and interest due
and unpaid for a period of up to two years after the date upon which the
arrangement with the mortgagor is entered into (generally, the arrangement
period will not be more than eighteen months). In the event of any such
arrangement the Company will be responsible for distributing funds with
respect to such Mortgage Loan during the scheduled period in accordance with
the original amortization schedule thereof and without regard to the temporary
modification thereof.
The Company, as servicer, will be obligated to follow such normal practices
and procedures as it deems necessary or advisable to realize upon a defaulted
Mortgage Loan. In this regard, the Company, as servicer, may (directly or
through a local assignee) sell the property at a foreclosure or trustee's
sale, negotiate with the mortgagor for a deed in lieu of foreclosure or, in
the event a deficiency judgment is available against the mortgagor or other
person (see "Certain Legal Aspects of the Mortgage Loans and Contracts--Anti-
Deficiency Legislation and Other Limitations on Lenders" for a description of
the limited availability of deficiency judgments), foreclose against such
property and proceed for the deficiency against the appropriate person. The
amount of the ultimate net recovery (including the proceeds of any pool
insurance or other guarantee), after reimbursement to the Company, as
servicer, of its expenses incurred in connection with the liquidation of any
such defaulted Mortgage Loan (including those described in the next paragraph
in the case of second-lien Home Equity Loans) and prior unreimbursed advances
of principal and interest, delinquent taxes, assessments, insurance premiums
and comparable items and property protection expenses with respect thereto,
will be credited to the Loan Payment Record when realized, and will be
distributed to Certificateholders on the next Distribution Date following the
month of receipt. If specified in the Prospectus Supplement, if such net
recovery exceeds the Principal Balance of such Mortgage Loan plus one month's
interest thereon at the Remittance Rate, the excess will be paid to the
Company as additional servicing compensation. The Company will not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of any Mortgaged Property unless it shall determine (i) that such
restoration or foreclosure will increase the proceeds of liquidation of the
Mortgaged Loan to Certificateholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it either through
liquidation proceeds or insurance proceeds in respect of the related Mortgage
Loan.
The Company, as servicer, will not be obligated to foreclose on any
Mortgaged Property which it believes may be contaminated with or affected by
hazardous or toxic wastes, materials or substances. See "Certain Legal Aspects
of the Mortgage Loans--Environmental Considerations". The Company will not be
liable to the Certificateholders of a series if it fails to foreclose on a
Mortgaged Property securing a Mortgage Loan in the related Trust Fund which it
believes may be so contaminated or affected, even if such Mortgaged Property
is, in fact, not so contaminated or affected. If the Company does not
foreclose on such a Mortgaged Property, the Certificateholders of the related
series may experience a loss on the related Mortgage Loan. In addition, the
Company will not be liable to the Certificateholders if, based on its belief
that no such contamination or effect exists, the Company forecloses on a
Mortgaged Property and takes title to such Mortgaged Property on behalf of the
related Trustee, and thereafter such Mortgaged Property is determined to be so
contaminated or affected.
Unless otherwise specified in the Prospectus Supplement relating to a series
of Certificates, if the Company determines that all amounts which it expects
to recover from or on account of such a Mortgage Loan have been recovered, the
Company's obligation, if any, to advance delinquent installments of principal
and interest on such Mortgage Loan will cease and the Principal Balance of
such Mortgage Loan will be allocated in reduction of the Certificate Principal
Balance of the Certificates of the related series in the manner in which
losses are allocated as specified in such Prospectus Supplement.
The Company may not foreclose on any Mortgaged Property securing a Home
Equity Loan unless it forecloses subject to any senior mortgage on such
Mortgaged Property and any outstanding property taxes. In the event of such
foreclosure, the Company generally will pay, subject to the final sentence of
this paragraph,
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the entire amount due on such senior mortgage loan to the senior mortgagee at
or prior to the foreclosure sale. If any senior mortgage is in default after
the Company has initiated its foreclosure action, the Company may advance
funds to keep the senior mortgage current until such time as the Company
satisfies such senior mortgage. In the event foreclosure proceedings have been
instituted on any senior mortgage prior to the initiation of the Company's
foreclosure action, the Company may satisfy the senior mortgage at the time of
the foreclosure sale or take other action to protect its interest in the
related Mortgaged Property. The Company will take or refrain from taking any
such action based upon the standards and considerations described in the
preceding paragraph.
Unless otherwise specified in the Prospectus Supplement, if a series of
Certificates includes one or more classes of subordinated Certificates, the
Agreement may permit the Company, at its option, to grant to the holders of
certain classes of subordinated Certificates (the "Loss Certificates") certain
rights in connection with the foreclosure of defaulted Mortgage Loans in the
related Trust Fund. Such rights may be granted on the date of initial issuance
of such series of Certificates or thereafter and may or may not inure to the
benefit of successive holders of the Loss Certificates. These rights would
include, among other things, the right to receive notice from the Company that
foreclosure of a defaulted Mortgage Loan is imminent and the right to instruct
the Company to delay the commencement of foreclosure proceedings for up to six
months after the Mortgage Loan has become delinquent. The Company may also
grant the holders of the Loss Certificates the option to purchase a defaulted
Mortgage Loan at the conclusion of such six-month period, at a purchase price
equal to its unpaid principal balance plus accrued interest. The proceeds of
such purchase would be deposited in the related Collection Account as
liquidation proceeds. It will be a condition to the exercise of these latter
rights that a reserve fund for the benefit of holders of the other classes of
Certificates of such series and the Company as servicer be established. An
amount equal to 125% of the greater of the Scheduled Principal Balance (as
defined in the related Prospectus Supplement) of the defaulted Mortgage Loan
and the then current appraised value of the underlying Mortgaged Property,
together with interest at the applicable Mortgage Rate for the period that
foreclosure is delayed, must be deposited into such reserve fund. The
principal purpose of the reserve fund would be to protect holders of the other
classes of Certificates of such series from any diminution in value of the
underlying Mortgaged Property attributable to the delay in foreclosure.
Amounts on deposit in the reserve fund may be invested in certain specific
investments acceptable to each of the rating agencies that are rating such
Certificates.
The exercise by holders of the Loss Certificates of the right to delay
foreclosure will not alter the obligation of the Company to make any advances
of delinquent Mortgage Loan payments specified in the Prospectus Supplement.
Any such advances made by the Company after the date foreclosure is delayed
will be recoverable by the Company from amounts on deposit in the reserve
fund. The Company will continue to be entitled to reimbursement for
Nonrecoverable Advances out of the assets of the related Trust Fund.
The exercise by the holders of the Loss Certificates of any right to delay
commencement of foreclosure proceedings as described above could affect the
amount recovered upon the liquidation of the related Mortgaged Property and
could also affect the extent of any losses recognized thereon if the amounts
available in the reserve fund are not sufficient to make up the difference
between the net liquidation proceeds and the unpaid principal balance of the
related defaulted Mortgage Loan. There can be no assurance that this situation
would not arise under circumstances in which it could be in the interest of
other classes of Certificates to proceed promptly to pursue remedies against
the mortgagor and Mortgaged Property in order to expedite recovery on a
defaulted Mortgage Loan. Any right to delay commencement of foreclosure
proceedings granted to the holders of the Loss Certificates would terminate in
certain specified circumstances, including when such Class's Certificate
Principal Balance had been reduced to zero.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the
related proprietary lease or occupancy agreement. See "Certain Legal Aspects
of the Mortgage Loans and Contracts" herein. This approval is usually based on
the purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval could limit the number of potential
purchasers for those shares and otherwise limit the Trust Fund's ability to
sell and realize the value of those shares.
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In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2)) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in which such items are allowable as a
deduction to the corporation, such Section requires, among other things, that
at least 80% of the gross income of the corporation be derived from its
tenant-stockholders (as defined in Code Section 216(b)(2)). By virtue of this
requirement, the status of a corporation for purposes of Code Section
216(b)(1) must be determined on a year-to-year basis. Consequently, there can
be no assurance that Cooperatives relating to the Cooperative Loans will
qualify under such Section for any particular year. In the event that such a
Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance
of the tax benefits accorded tenant-stockholders of a corporation that
qualifies under Code Section 216(b)(1), the likelihood that such a failure
would be permitted to continue over a period of years appears remote.
If a Mortgaged Property has been or is about to be conveyed by the
mortgagor, the Company, as servicer, will be obligated to accelerate the
maturity of the Mortgage Loan, unless it reasonably believes it is unable to
enforce that Mortgage Loan's "due-on-sale" clause under applicable law or such
enforcement would adversely affect or jeopardize coverage under any related
primary mortgage insurance policy or pool insurance policy. If it reasonably
believes it may be restricted by law, for any reason, from enforcing such a
"due-on-sale" clause, the Company may enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note. Any fee collected by the Company for entering into an
assumption agreement will be retained by the Company as additional servicing
compensation. For a description of circumstances in which the Company may be
unable to enforce "due-on-sale" clauses, see "Certain Legal Aspects of the
Mortgage Loans and Contracts-- Enforceability of Certain Provisions". In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be decreased.
The Company, as servicer, will maintain with one or more depository
institutions one or more accounts into which it will deposit all payments of
taxes, insurance premiums, assessments or comparable items received for the
account of the mortgagors. Withdrawals from such account or accounts may be
made only to effect payment of taxes, insurance premiums, assessments or
comparable items, to reimburse the Company, or applicable servicer, out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and
to pay interest to mortgagors on balances in such account or accounts to the
extent required by law.
So long as it acts as servicer of the Mortgage Loans, the Company, and any
successor to the Company appointed following an Event of Default, will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Contracts. Pursuant to the Agreement, the Company, as servicer, will service
and administer the Contracts assigned to the Trustee as more fully set forth
below. The Company, either directly or through servicers subject to general
supervision by the Company, will perform diligently all services and duties
specified in each Agreement, in the same manner as prudent lending
institutions servicing manufactured housing installment sales contracts of the
same type as the Contracts in those jurisdictions where the related
Manufactured Homes are located. The Company, as servicer, will monitor the
performance of each other servicer, if any, and, unless the related Prospectus
Supplement states that a Supervisory Master Servicing Arrangement will be in
effect, will remain liable for the servicing of the Contracts in accordance
with the terms of the Agreement. The duties to be performed by the Company
will include collection and remittance of principal and interest payments,
collection of insurance claims and, if necessary, repossession.
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The Agreement will provide that, when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Company, as servicer, to
the extent it has knowledge of such prospective conveyance and prior to the
time of the consummation of such conveyance, may exercise its rights to
accelerate the maturity of such Contract under the applicable "due-on-sale"
clause, if any, unless the Company reasonably believes it is unable to enforce
such "due-on-sale" clause under applicable law. In such case, the Company is
authorized to take or enter into an assumption agreement from or with the
person to whom such Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Contract.
Under the Agreement, the Company, as servicer, will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Company will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Company, however,
will not be required to expend its own funds in connection with any
repossession or towards the restoration of any property unless it determines
(i) that such restoration or repossession will increase the proceeds of
liquidation of the related Contract to the Certificateholders after
reimbursement to itself for such expenses and (ii) that such expenses will be
recoverable to it either through liquidation proceeds or through insurance
proceeds.
PRIVATE MORTGAGE INSURANCE
Generally, Mortgage Loans that the Company originates or acquires do not
have loan-to-value ratios in excess of 95% of their Original Value (as defined
above). Unless otherwise specified in the Prospectus Supplement, Mortgage
Loans (other than Home Equity Loans) that the Company originates or acquires
that have an original principal amount exceeding 80% of Original Value usually
will have private mortgage insurance. The Company generally requires such
coverage to continue until the outstanding principal amount equals or is less
than 80% of the greater of the Original Value and, if permitted under any pool
insurance policy obtained with respect to a series, the then current value of
the property as evidenced by an appraisal thereof satisfactory to the Company.
Private mortgage insurance policies may be provided by General Electric
Mortgage Insurance Corporation, an affiliate of the Company. Any mortgage
insurance relating to a pool of Contracts will be described in the related
Prospectus Supplement. The Company does not require private mortgage insurance
policies on Home Equity Loans. A private mortgage insurance policy may provide
that, as an alternative to paying a claim thereunder, the mortgage insurer
will have the right to purchase the Mortgage Loan following the receipt of a
notice of default, at a purchase price equal to the sum of the principal
balance of the Mortgage Loan, accrued interest thereon and the amount of
certain advances made by the Company as servicer with respect to the Mortgage
Loan. The mortgage insurer may have such purchase right after the borrower has
failed to make three scheduled monthly payments (or one payment if it is the
first payment due on the Mortgage Loan) or after any foreclosure or other
proceeding affecting the Mortgage Loan or the Mortgaged Property has been
commenced. The proceeds of any such purchase will be distributed to
Certificateholders on the applicable Distribution Date. A mortgage insurer may
be more likely to exercise such purchase option when prevailing interest rates
are low relative to the interest rate borne by the defaulted Mortgage Loan, in
order to reduce the aggregate amount of accrued interest that the insurer
would be obligated to pay upon payment of a claim.
HAZARD INSURANCE
Mortgage Loans. The Company, as servicer, will cause to be maintained for
each Mortgaged Property a hazard insurance policy. The coverage of such policy
is required to be in an amount not less than the maximum insurable value of
the improvements securing the related Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. All amounts collected by the Company for the benefit of the related
Trust Fund under any hazard policy (except for amounts to be applied to the
restoration or repair of property subject to the related Mortgage or property
acquired by foreclosure or amounts released to the related mortgagor in
accordance with the Company's normal servicing procedures) will
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be credited to the related Loan Payment Record and deposited in the applicable
Certificate Account at the times and in the manner described under "Loan
Payment Record" below.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and mud
flow), nuclear reactions, pollution, wet or dry rot, vermin, rodents, insects
or domestic animals, theft and, in certain cases, vandalism. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive. If the property securing a Mortgage Loan is
located in a federally designated flood area, the Agreement will require that
flood insurance be maintained in such amounts as would be required by the
Federal National Mortgage Association in connection with its mortgage loan
purchase program. The Company may also purchase special hazard insurance
against certain of the uninsured risks described above. See "Credit Support--
Special Hazard Insurance".
Most of the properties securing the Mortgage Loans will be covered by
homeowners' insurance policies, which, in addition to the standard form of
fire and extended coverage, provide coverage for certain other risks. These
homeowners' policies typically contain a "coinsurance" clause which in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on
the property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, then the insurer's
liability in the event of partial loss will not exceed the lesser of (i) the
actual cash value (generally defined as replacement cost at the time and place
of loss, less physical depreciation) of the improvements damaged or destroyed,
or (ii) such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance the Company is required to cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Company, as servicer, will cause to be maintained on any Mortgaged
Property acquired upon foreclosure, or by deed in lieu of foreclosure, on
behalf of the Trustee hazard insurance with extended coverage in an amount
which is at least equal to the lesser of (i) the maximum insurable value from
time to time of the improvements which are a part of such property or (ii) the
unpaid principal balance of the related Mortgage Loan, plus, in the case of a
second priority Home Equity Loan, the unpaid principal balance of any senior
mortgage loan, at the time of such foreclosure or deed in lieu of foreclosure,
plus accrued interest and the good-faith estimate of the Company of related
liquidation expenses to be incurred in connection therewith.
The Company, as servicer, may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Mortgage Loan, one or
more blanket insurance policies covering hazard losses on the Mortgage Loans.
The Company will pay the premium for such policy on the basis described
therein and will pay any deductible amount with respect to claims under such
policy relating to the Mortgage Loans.
The Company will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of
hazard insurance for the property owned by the Cooperative and the tenant-
stockholders of that Cooperative do not maintain individual hazard insurance
policies. To the extent, however, that a Cooperative and the related borrower
on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such
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borrower's cooperative dwelling or such Cooperative's building could
significantly reduce the value of the collateral securing such Cooperative
Loan to the extent not covered by other credit support.
Contracts. The terms of the Agreement will require the Company to cause to
be maintained with respect to each Contract one or more hazard insurance
policies which provide, at a minimum, the same coverage as a standard form
fire and extended coverage insurance policy that is customary for manufactured
housing, issued by a company authorized to issue such policies in the state in
which the Manufactured Home is located, and in an amount which is not less
than the maximum insurable value of such Manufactured Home or the principal
balance due from the borrower on the related Contract, whichever is less. When
a Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Company
also shall cause such flood insurance to be maintained, which coverage shall
be at least equal to the minimum amount specified in the preceding sentence or
such lesser amount as may be available under the federal flood insurance
program.
The Company, as servicer, may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home,
and shall maintain, to the extent that the related Contract does not require
the borrower to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the borrowers' interests in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies. The Company will pay
the premium for such policy on the basis described therein and will pay any
deductible amount with respect to claims under such policy relating to the
Contracts.
The Company, to the extent practicable, will cause the borrowers to pay all
taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Company will pay any such delinquent tax or charge. Any
such payment made by the Company will be reimbursable to the Company as
described under "--Loan Payment Record" below.
If the Company repossesses a Manufactured Home on behalf of the Trustee, the
Company will either (i) maintain at its expense hazard insurance with respect
to such Manufactured Home, or (ii) indemnify the Trustee against any damage to
such Manufactured Home prior to resale or other disposition.
UNANTICIPATED RECOVERIES OF LOSSES ON THE MORTGAGE LOANS
Unless otherwise specified in the Prospectus Supplement, in the event that
in any calendar month the Company recovers an amount (an "Unanticipated
Recovery") as a result of events such as an unanticipated insurance
settlement, tax refund or mortgagor bankruptcy distribution, in respect of
principal of a Mortgage Loan which had previously been allocated as a loss to
any class of Certificates, on the Distribution Date in the next succeeding
calendar month the Trustee shall distribute to the holders of each outstanding
class to which such loss had previously been allocated its share of such
Unanticipated Recovery in an amount not to exceed the amount of such loss
previously allocated to such class, provided that following the Distribution
Date on which the Certificate Principal Balance of a class of Certificates has
been reduced to zero, the holders of such class shall not be entitled to any
share of an Unanticipated Recovery. Any distributions of Unanticipated
Recoveries will not reduce the Certificate Principal Balances of the class of
Certificates receiving such recoveries.
ADVANCES
Unless otherwise specified in the Prospectus Supplement, in the event that
any borrower fails to make any payment of principal or interest required under
the terms of a Mortgage Loan or Contract, the Company, as servicer, will be
obligated to advance the entire amount of such payment adjusted in the case of
any delinquent interest payment to the applicable Remittance Rate. Unless
otherwise specified in the Prospectus Supplement and except as described above
under "Credit Support--Purchases of Liquidating Loans", this obligation to
advance will be limited to amounts which the Company reasonably believes will
be recoverable by it out of
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liquidation proceeds or otherwise in respect of such Mortgage Loan or
Contract. The Company, or the applicable servicer, will be entitled to
reimbursement for any such advance from related late payments on the Mortgage
Loan or Contract as to which such advance was made. Furthermore, unless
otherwise specified in the Prospectus Supplement, the Company, or the
applicable servicer, will be entitled to reimbursement for any such advance
(i) from liquidation proceeds or insurance proceeds received if such
Manufactured Home is repossessed or such Mortgage Loan is foreclosed (and is
not purchased by the Company, as servicer, pursuant to any obligation it may
have to purchase Liquidating Loans) prior to any payment to Certificateholders
in respect of the repossession or foreclosure and (ii) from receipts or
recoveries on all other Mortgage Loans or Contracts or from any other assets
of the Trust Fund, for all or any portion of such advance which the Company
determines, in good faith, may not be ultimately recoverable from such
liquidation or insurance proceeds (a "Nonrecoverable Advance"). Any
Nonrecoverable Advance will be reimbursable out of the assets of the Trust
Fund. The amount of any scheduled payment required to be advanced by the
Company will not be affected by any agreement between the Company and a
borrower providing for the postponement or modification of the due date or
amount of such scheduled payment. If specified in the Prospectus Supplement,
the Trustee for the related series will make advances of delinquent payments
of principal and interest in the event of a failure by the Company, as
servicer, to perform such obligation.
Unless otherwise specified in the Prospectus Supplement, until any Company
obligation to purchase Liquidating Loans is exhausted, the Company will
advance delinquent installments of principal and interest (adjusted to the
applicable Remittance Rate) on the Mortgage Loans as described above in an
aggregate amount up to the amount of its remaining purchase obligation,
irrespective of whether the Company believes any such advance will be
recoverable. The Company's obligation to advance delinquent installments of
principal and interest (adjusted to the applicable Remittance Rate) on the
Mortgage Loans which it deems recoverable will be unaffected by the exhaustion
of any obligation of the Company to purchase Liquidating Loans. In the event
that the Company has an obligation to purchase Liquidating Loans, any
outstanding unreimbursed advances may be charged against the amount of such
obligation, subject to reinstatement on account of net recoveries on such
Mortgage Loan.
Any such obligation to make advances may be limited to amounts due holders
of senior Certificates of the related series or may be limited to specified
periods or otherwise as specified in the Prospectus Supplement.
The Company, or the applicable servicer, will make such advances in order to
maintain a regular flow of scheduled interest and principal payments to
holders of the relevant classes of Certificates. Such advances do not
represent an obligation of the Company or the applicable servicer to guarantee
or insure against losses.
LOAN PAYMENT RECORD
The Agreement will require that the Company, as servicer, establish and
maintain a Loan Payment Record to which will be credited the following
payments received by the Company with respect to the Mortgage Loans or
Contracts included in the related Trust Fund:
(i) All payments on account of principal, including Principal Prepayments
(other than principal payments due and payable on or before, and Principal
Prepayments received before, the Cut-off Date), received from borrowers
(excluding any amounts specified in the Prospectus Supplement);
(ii) All payments (other than those due and payable on or before the Cut-
off Date) on account of interest received from borrowers (adjusted to the
applicable Remittance Rate) and excluding any other amounts specified in
the Prospectus Supplement;
(iii) All amounts received by the Company, or the applicable servicer, in
connection with the liquidation of any Mortgaged Property or Manufactured
Home, and the purchase price including applicable interest thereon, of any
Mortgage Loan or Contract purchased by the Company pursuant to the
applicable Agreement or any amount paid in connection with the substitution
of a Mortgage Loan;
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(iv) All proceeds received by the Company, or the applicable servicer,
under any private mortgage insurance or any title, hazard, special hazard,
pool or other insurance policy covering any Mortgage Loan or Contract,
other than proceeds to be applied to the restoration or repair of the
property subject to the related Mortgage or Contract or released to the
borrower in accordance with the normal servicing procedures of the Company;
(v) All proceeds received in respect of any Mortgaged Property acquired
on behalf of the Trustee; and
(vi) Unanticipated Recoveries.
The Company will not be required to credit to the Loan Payment Record payments
on any Mortgage Loan or Contract that has been previously released from the
Trust Fund, amounts representing fees or late charge penalties payable by
borrowers or amounts received by the Company for the account of borrowers for
application towards the payment of taxes, insurance premiums, assessments and
similar items.
Unless otherwise specified in the Prospectus Supplement, the Company, as
servicer, may, from time to time, make debits to the Loan Payment Record for
the following purposes:
(i) To reimburse the Company, or the applicable servicer, for expenses
incurred by it in connection with the liquidation of any Mortgage Loan
(including amounts advanced on any senior mortgage loans) or Manufactured
Home and prior unreimbursed advances of delinquent installments of
principal and interest, delinquent taxes, assessments, insurance premiums
and comparable items and property protection expenses with respect thereto,
in an amount not to exceed the amount of the proceeds from any such
liquidation (including insurance proceeds) credited to the Loan Payment
Record, and, if specified in the Prospectus Supplement, to the extent such
proceeds, net of such expenses, exceed the Principal Balance of such
Mortgage Loan or Contract plus one month's interest thereon at the
applicable Remittance Rate, to pay to the Company such excess as additional
servicing compensation;
(ii) To reimburse the Company, or the applicable servicer, for expenses
reimbursable under any insurance policy covering a Mortgage Loan and
amounts expended by the Company in good faith in connection with the
restoration of a Mortgaged Property damaged by an uninsured cause, in an
amount not to exceed the proceeds from any insurance covering such Mortgage
Loan and any liquidation thereof credited to the Loan Payment Record;
(iii) To reimburse the Company for certain expenses relating to the
Agreement as to which the Company is entitled to indemnification or
reimbursement pursuant to the Agreement;
(iv) To pay to the Company amounts received in respect of any Mortgage
Loan or Contract purchased by the Company as required by the Agreement to
the extent that the distribution of any such amounts on the Distribution
Date upon which the proceeds of such purchase are distributed would make
the total amount distributed in respect thereof greater than the Principal
Balance thereof plus, unless otherwise specified in the Prospectus
Supplement, one month's interest thereon at the applicable Remittance Rate,
net of any unreimbursed advances of delinquent installments of principal
and interest made by the Company;
(v) To reimburse the Company (or, if applicable, the Guarantor or any
other entity) for any previous advance of delinquent installments of
principal and interest (adjusted to the applicable Remittance Rate) in
respect of any Mortgage Loan or Contract to the extent of recoveries,
including late payments and liquidation proceeds, on such Mortgage Loan or
Contract;
(vi) To reimburse the Company from any borrower payment of interest or
other recovery with respect to a particular Mortgage Loan, to the extent
not previously retained by the Company, for unpaid servicing fees with
respect to such Mortgage Loan, subject to certain limitations;
(vii) To reimburse the Company (or, if applicable, the Trustee, the
Guarantor or any other entity) for any Nonrecoverable Advance;
(viii) To transfer funds to the Certificate Account; and
(ix) To deduct any amount credited to the Loan Payment Record in error.
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In addition, if specified in the Prospectus Supplement relating to a Trust
Fund which includes second-priority Home Equity Loans, the Company will be
entitled to be reimbursed, out of payments received on a second-priority Home
Equity Loan, for funds advanced to keep the related senior mortgages current.
On the date or dates specified in the Prospectus Supplement (each, a
"Deposit Date") prior to each Distribution Date, unless otherwise specified in
the Prospectus Supplement, the Company will transfer to the Certificate
Account the payments in respect of the Mortgage Loans or Contracts described
above, net of any debits made thereto as described above, which were received
by it after the Cut-off Date and before the fifth business day next preceding
such Distribution Date (the "Determination Date"), together with any required
advances of delinquent principal and interest payments to be made by it,
except (i) Principal Prepayments received during the month of such deposit
(other than as described in the next sentence) and all related payments of
interest representing interest for the month of deposit or any portion thereof
and (ii) payments which represent early receipt of scheduled payments of
principal and interest due on a date or dates subsequent to the first day of
the month of deposit. In addition, unless otherwise specified in the
Prospectus Supplement, the Company will transfer to the Certificate Account
(i) the amount of any voluntary prepayment in full (net of any interest
thereon) received by the Company (or, in the case of a Mortgage Loan master-
serviced by the Company, of which the Company receives notice) during the
period from the first day through the fifteenth day of the month of such
Distribution Date and any payment made by the Company in connection with the
repurchase of a Mortgage Loan that has been modified in lieu of refinancing
during such period and (ii) the amount of any Compensating Interest Payment
for such Distribution Date, as described in the Prospectus Supplement. The net
amounts described in the two preceding sentences are the "Available Funds" for
a series of Certificates with respect to any Distribution Date, provided that
such Available Funds shall not include Unanticipated Recoveries. Unless
otherwise specified in the Prospectus Supplement, all transfers by the Company
to the Certificate Account will be made by transfer of next-day funds.
Although such next-day funds may have been credited to the Certificate
Account, until such funds become available to the Trustee under applicable law
and procedures relating to such transfers, such funds will not be available to
Certificateholders. Unless otherwise specified in the Prospectus Supplement,
prior to transferring such funds, the Company may commingle payments received
in respect of the Mortgage Loans or Contracts and may invest such payments for
its own account. Income realized on the investment of such payments pending
deposit into the Certificate Account will be retained by the Company as
additional servicing compensation.
As a result of the Company's access to payments received in respect of the
Mortgage Loans prior to the time such payments become available to the Trustee
in the Certificate Account, creditors or a trustee-in-bankruptcy for the
Company may be able to assert rights in such payments superior to those of the
Trustee.
If specified in the Prospectus Supplement, the Company may establish, or
provide for the establishment of, an account (the "Collection Account") in
lieu of the Loan Payment Record described above. If so specified, all amounts
to be credited or debited to the Loan Payment Record will instead be deposited
in or withdrawn from the Collection Account.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the Prospectus Supplement, the Company's
primary compensation for its servicing activities will come from the payment
to it, with respect to each interest payment on a Mortgage Loan or Contract,
of all or a portion of the difference between the Mortgage Rate for such
Mortgage Loan or Contract and the related Remittance Rate. In addition to the
primary compensation, the Company will retain all assumption fees, late
payment charges and other miscellaneous charges, including prepayment
penalties, all to the extent collected from borrowers and, unless otherwise
specified in the Prospectus Supplement, the investment income described in the
second preceding paragraph. In the event the Company or another institution is
acting as master servicer under an Agreement, the master servicer will receive
compensation with respect to the performance of its activities as master
servicer.
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Unless otherwise specified in the Prospectus Supplement, the Company will be
responsible for paying all expenses incurred in connection with the servicing
of the Mortgage Loans or Contracts (subject to limited reimbursement as
described in "Loan Payment Record" above), including, without limitation,
payment of any premium for any Advance Guarantee, Liquidating Loan Guarantee,
Deposit Guarantee, pool insurance policy, special hazard policy, bankruptcy
bond, repurchase bond or other guarantee or surety, payment of the fees and
the disbursements of the Trustee, the Administrator (if any) and the
independent accountants, payment of the compensation of any direct servicers
of the Mortgage Loans, payment of all fees and expenses in connection with the
realization upon defaulted Mortgage Loans or Contracts and payment of expenses
incurred in connection with distributions and reports to Certificateholders.
Unless otherwise specified in the Prospectus Supplement, the Company may
assign any of its primary servicing compensation in excess of that amount
customarily retained as servicing compensation for similar assets.
RESIGNATION, SUCCESSION AND INDEMNIFICATION OF THE COMPANY
The Agreement will provide that, except as described in the second and third
succeeding paragraphs, the Company may not resign from its obligations and
duties as servicer or master servicer thereunder, except upon determination
that the Company's performance of such duties is no longer permissible under
applicable law or as provided in the last paragraph under this heading. No
such resignation will become effective until the Trustee or a successor has
assumed the Company's servicing obligations and duties under such Agreement.
The Guarantor's obligations under any Advance Guarantee, Liquidating Loan
Guarantee or Deposit Guarantee will, upon issuance thereof, be irrevocable,
subject to certain limited rights of assignment as described in the Prospectus
Supplement if applicable.
The Agreement will provide that neither the Company nor, if applicable, the
Guarantor, nor any of their respective directors, officers, employees or
agents, shall be under any liability to the Trust Fund or the
Certificateholders of the related series for taking any action or for
refraining from taking any action pursuant to such Agreement, or for errors in
judgment; provided, however, that neither the Company nor, if applicable, the
Guarantor, nor any such person, will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. The Agreement will also
provide that the Company and, if applicable, the Guarantor and their
respective directors, officers, employees and agents are 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, other than any loss, liability
or expense related to any specific Mortgage Loan or Contract (except as
otherwise reimbursable under the Agreement) or incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Company
nor, if applicable, the Guarantor is under any obligation to appear in,
prosecute or defend any legal action which is not incidental to the Company's
servicing responsibilities under such Agreement or the Guarantor's payment
obligations under any Limited Guarantee, respectively, and which in its
respective opinion may involve it in any expense or liability. Each of the
Company and, if applicable, the Guarantor may, however, in its respective
discretion undertake any such action which it may deem necessary or desirable
in respect of such Agreement and the rights and duties of the parties thereto
and the interests of the Certificateholders thereunder. In such event, the
legal expenses and costs of such action and any liability resulting therefrom
will be expenses, costs and liabilities of the Trust Fund, and the Company
and, if applicable, the Guarantor, will be entitled to be reimbursed therefor
from amounts credited to the Loan Payment Record.
Any corporation into which the Company may be merged or consolidated or any
corporation resulting from any merger, conversion or consolidation to which
the Company is a party, or any corporation succeeding to the business of the
Company, or any corporation more than 50% of the voting stock of which is
owned, directly or indirectly, by General Electric Company, or any limited
partnership, the sole general partner of which is either the Company or a
corporation more than 50% of the voting stock of which is owned, directly or
indirectly, by General Electric Company, which assumes the obligations of the
Company, will be the successor of the Company under each Agreement.
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The Company also has the right to assign its rights, and delegate its duties
and obligations, as servicer under the Agreement for each series of
Certificates; provided that (i) the purchaser or transferee accepting such
assignment or delegation is qualified to service mortgage loans for FNMA or
FHLMC, is reasonably satisfactory to the Trustee for such series of
Certificates and executes and delivers to the Trustee an agreement, in form
and substance reasonably satisfactory to the Trustee, which contains an
assumption by such purchaser or transferee of the due and punctual performance
and observance of each covenant and condition to be performed or observed by
the servicer under the Agreement from and after the date of such agreement and
(ii) each applicable Rating Agency's rating of any Certificates of such series
in effect immediately prior to such assignment or delegation would not be
qualified, downgraded or withdrawn as a result thereof. In the case of any
such assignment or delegation, the Company will be released from its
obligations as servicer under the Agreement except for liabilities and
obligations incurred prior to such assignment or delegation.
THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreements. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the Pooling and Servicing Agreements. Where particular provisions or terms
used in the Pooling and Servicing Agreements are referred to, such provisions
or terms are as specified in the Pooling and Servicing Agreements. Each of the
Pooling and Servicing Agreements may establish one or more Trust Funds.
ASSIGNMENT OF ASSETS
Assignment of the Mortgage Loans. At the time of issuance of a series of
Certificates, the Company, as seller, will assign the related Mortgage Loans
to the Trustee, together with all principal and interest, subject to
exclusions specified in the Prospectus Supplement, received by the Company on
or with respect to such Mortgage Loans on or after the Cut-off Date other than
principal and interest due and payable on or before, and Principal Prepayments
received before, the Cut-off Date. The Trustee will, concurrently with such
assignment, execute, countersign and deliver the Certificates to the Company
in exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the Agreement. Such schedule will include
information as to the Principal Balance of each Mortgage Loan as of the Cut-
off Date, as well as information respecting the Mortgage Rate, the scheduled
monthly payment of principal and interest as of the Cut-off Date and the
maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Company, as seller, will deliver
to the Trustee, unless otherwise specified in the Prospectus Supplement or as
described below, the Mortgage Note and Mortgage, any assumption and
modification agreement and an assignment of the Mortgage to the Trustee in
recordable form (other than in respect of unavailable recording information).
In addition, unless otherwise specified in the Prospectus Supplement, the
Company will also deliver to the Trustee originals of the recorded Mortgages,
any intervening assignments of the Mortgages and title insurance policies with
respect to the Mortgage Loans, as promptly as practicable, and in any case
within thirty days, after receiving all such documents from the applicable
recording offices and title insurance companies. Pending such delivery, the
Company will retain and furnish to the Trustee upon request copies of the
Mortgages and intervening assignments of Mortgage delivered for recording and
the evidence of title insurance issued at origination of the Mortgage Loans.
The Company will retain and furnish to the Trustee upon request any applicable
evidence of primary mortgage insurance so long as such insurance remains in
force.
The Company may deliver to the Trustee, in lieu of the original Mortgage
Note, a new promissory note signed by the borrower confirming its obligation
under the original Mortgage Note (a "Confirmatory Mortgage Note").
Furthermore, a Trust Fund may include Mortgage Loans where the original
Mortgage Note or a Confirmatory Mortgage Note is not delivered to the Trustee
if the Company instead delivers to the Trustee an affidavit certifying that
the Company was the sole owner of the indebtedness evidenced by such note and
the original thereof has been lost or destroyed and the Company indemnifies
the Trust Fund against any loss,
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liability, damage, claim or expense resulting from the Company's failure to
have delivered the original Mortgage Note or Confirmatory Mortgage Note. Such
indemnification will be terminated if the Company subsequently delivers to the
Trustee the original Mortgage Note or a Confirmatory Mortgage Note. Unless
otherwise specified in the applicable Prospectus Supplement, no more than 1%
of the Mortgage Loans in any Mortgage Pool, measured by Principal Balance as
of the related Cut-Off Date, may consist of Mortgage Loans as to which the
Company has failed to deliver the original Mortgage Note or Confirmatory
Mortgage Note.
Unless otherwise specified in the Prospectus Supplement, the Company may
refrain from recording the assignments of the Mortgage Loans prior to the
occurrence of certain events set forth in the related Agreement. Although such
recordation is not necessary to make the assignment of the Mortgage Loans to
the Trustee effective, if the Company were to make a sale, assignment,
satisfaction or discharge of any Mortgage Loan prior to recording or filing
the assignments to the Trustee, the other parties to such sale, assignment,
satisfaction or discharge might have rights superior to those of the Trustee.
If the Company were to do so without authority under the Agreement, it would
be liable to the related Certificateholders. Moreover, if insolvency
proceedings relating to the Company were commenced prior to such recording or
filing, creditors of the Company may be able to assert rights in the affected
Mortgage Loans superior to those of the Trustee.
With respect to any Mortgage Loans which are Cooperative Loans, the Company,
as seller, will cause to be delivered to the Trustee the related original
cooperative note endorsed to the order of the Trustee (or the lost-note
affidavit and indemnification described in the second preceding paragraph),
the original security agreement, the proprietary lease or occupancy agreement,
the recognition agreement, an executed financing agreement and the relevant
stock certificate and related blank stock powers. The Company will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, in the
Agreement the Company, as seller, generally will represent and warrant to the
Trustee, among other things, that (i) the information set forth in the
schedule of Mortgage Loans attached thereto is correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) a lender's title insurance policy or binder, or other assurance of title
insurance customary in the relevant jurisdiction therefor, for each Mortgage
Loan subject to the Agreement was issued on the date of origination thereof
and each such policy or binder assurance is valid and remains in full force
and effect; (iii) at the date of initial issuance of the Certificates, the
Company has good title to the Mortgage Loans and the Mortgage Loans are free
of offsets, defenses or counterclaims; (iv) at the date of initial issuance of
the Certificates, each Mortgage is a valid first or, in the case of a second
priority Home Equity Loan, second lien on the property securing the Mortgage
Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording
of such Mortgage, such exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area wherein the property
subject to the Mortgage is located or specifically reflected in the appraisal
obtained by the Company, (c) in the case of a second-priority Home Equity
Loan, the lien of the related first mortgage, and (d) other matters to which
like properties are commonly subject which do not materially interfere with
the benefits of the security intended to be provided by such Mortgage) and
such property is free of material damage and is in good repair; (v) at the
date of initial issuance of the Certificates, no Mortgage Loan is 30 or more
days delinquent and there are no delinquent tax or assessment liens against
the property covered by the related Mortgage; (vi) at the date of initial
issuance of the Certificates, the portion of each Mortgage Loan, if any, which
in the circumstances set forth above under "Servicing of the Mortgage Loans--
Private Mortgage Insurance" should be insured with a private mortgage insurer
is so insured; and (vii) each Mortgage Loan at the time it was made complied
in all material respects with applicable state and federal laws, including,
without limitation, usury, equal credit opportunity and disclosure laws.
In the event that the Company has acquired the Mortgage Loans for a series,
if so specified in the related Prospectus Supplement, the Company may, in lieu
of making the representations described in the preceding paragraph, cause the
entity from which the Company acquired such Mortgage Loans to make such
representations (other than those regarding the Company's title to the
Mortgage Loans, which will in all events
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be made by the Company), in the sales agreement pursuant to which such
Mortgage Loans are acquired, or if such entity is acting as a servicer, in its
servicing agreement. In such event such representations, and the Company's
rights against such entity in the event of a breach thereof, will be assigned
to the Trustee for the benefit of the holders of the Certificates of such
series.
Assignment of Agency Securities. The Company, as seller, will cause the
Agency Securities to be registered in the name of the Trustee or its nominee,
and the Trustee concurrently will execute, countersign and deliver the
Certificates. Each Agency Security will be identified in a schedule appearing
as an exhibit to the Agreement, which will specify as to each Agency Security
the original principal amount and outstanding principal balance as of the Cut-
off Date, the annual pass-through rate (if any) and the maturity date. The
Company will represent and warrant to the Trustee, among other things, that
the information contained in the Agency Securities schedule is true and
correct and that immediately prior to the transfer of the Agency Securities to
the Trustee, the Company had good title to, and was the sole owner of, each
Agency Security.
Assignment of Contracts. The Company, as seller, will cause the Contracts to
be assigned to the Trustee, together with principal and interest due on or
with respect to the Contracts after the Cut-off Date specified in the related
Prospectus Supplement. Each Contract will be identified in a loan schedule
appearing as an exhibit to the related Agreement. Such loan schedule will
specify, with respect to each Contract, among other things: the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-off Date; the interest rate; the current scheduled payment
of principal and interest; and the maturity date.
In addition, with respect to each Contract, the Company will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest
in the Manufactured Home securing each Contract. To give notice of the right,
title and interest of the Certificateholders to the Contracts, the Company
will cause a UCC-1 financing statement to be filed identifying the Trustee as
the secured party and identifying all Contracts as collateral. Unless
otherwise specified in the related Prospectus Supplement, the Contracts will
not be stamped or otherwise marked to reflect their assignment from the
Company to the Trustee. Therefore, if a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of the Certificateholders in the Contracts could be defeated. See
"Certain Legal Aspects of the Mortgage Loans and Contracts".
The Company, as seller, will provide limited representations and warranties
to the Trustee concerning the Contracts. Such representations and warranties
will include: (i) that the information contained in the loan schedule provides
an accurate listing of the Contracts and that the information respecting such
Contracts set forth in such loan schedule is true and correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) that, immediately prior to the conveyance of the Contracts, the Company
had good title to, and was sole owner of, each such Contract; and (iii) that
there has been no other sale by it of such Contract and that the Contract is
not subject to any lien, charge, security interest or other encumbrance.
REPURCHASE OR SUBSTITUTION
The Trustee will review the documents delivered to it with respect to the
assets of the related Trust Fund. Unless otherwise specified in the Prospectus
Supplement, if any document is not delivered or is found to be defective in
any material respect and the Company cannot deliver such document or cure such
defect within 60 days after notice thereof (which the Trustee will undertake
to give within 45 days of the delivery of such documents), the Company will,
not later than the first Distribution Date which is more than ten days after
such 60-day period, (a) remove the affected Mortgage Loan or Contract from the
Trust Fund and substitute one or more other mortgage loans or contracts
therefor or (b) repurchase the Mortgage Loan or Contract from the Trustee for
a price equal to 100% of its Principal Balance plus interest thereon at the
applicable Remittance Rate from the date on which interest was last paid to
the first day of the month in which such purchase price is to be distributed,
net of any unreimbursed advances of principal and interest thereon made by the
Company as servicer.
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Such purchase price will be deposited in the Certificate Account on the
business day preceding such Distribution Date. Unless otherwise provided in
the Agreement, this repurchase and substitution obligation will constitute the
sole remedy available to Certificateholders or the Trustee on behalf of
Certificateholders against the Company for a material defect in a document
relating to a Mortgage Loan or Contract.
Unless otherwise specified in the Prospectus Supplement, the Company will
agree to either (a) cure in all material respects any breach of any
representation or warranty set forth in the related Agreement that materially
and adversely affects the interests of the Certificateholders in a Mortgage
Loan (a "Defective Mortgage Loan") or Contract within 60 days of its discovery
by the Company or its receipt of notice thereof from the Trustee,
(b) repurchase such Defective Mortgage Loan or Contract not later than the
first Distribution Date which is more than ten days after such 60-day period
for a price equal to 100% of its Principal Balance plus interest thereon at
the applicable Remittance Rate from the date on which interest was last paid
to the first day of the month in which such purchase price is to be
distributed, net of any unreimbursed advances of principal and interest
thereon made by the Company as servicer, or (c) remove the affected Mortgage
Loan or Contract from the Trust Fund and substitute one or more other mortgage
loans or contracts therefor. Such purchase price will be deposited in the
Certificate Account on the business day preceding such Distribution Date.
Unless otherwise provided in the Agreement, this repurchase or substitution
obligation will constitute the sole remedy available to Certificateholders or
the Trustee on behalf of Certificateholders for any such breach.
If so specified in the Prospectus Supplement for a series where the Company
has acquired the related Mortgage Loans, in lieu of agreeing to repurchase or
substitute Mortgage Loans as described above, the Company may obtain such an
agreement from the entity which sold such mortgage loans, which agreement will
be assigned to the Trustee for the benefit of the holders of the Certificates
of such series. In such event, unless otherwise specified in the related
Prospectus Supplement, the Company will have no obligation to repurchase or
substitute mortgage loans if such entity defaults in its obligation to do so.
If a mortgage loan or contract is substituted for another Mortgage Loan or
Contract as described above, the new mortgage loan or contract will, unless
otherwise specified in the Prospectus Supplement, (i) have a Principal Balance
(together with any other new mortgage loan or contract so substituted), as of
the first Distribution Date following the month of substitution, after
deduction of all payments due in the month of substitution, not in excess of
the Principal Balance of the removed Mortgage Loan or Contract as of such
Distribution Date (the amount of any shortfall, plus one month's interest
thereon at the applicable Remittance Rate, to be deposited in the Certificate
Account on the business day prior to the applicable Distribution Date), (ii)
have a Mortgage Rate not less than, and not more than one percentage point
greater than, that of the removed Mortgage Loan or Contract, (iii) have a
Remittance Rate equal to that of the removed Mortgage Loan or Contract, (iv)
have a remaining term to stated maturity not later than, and not more than one
year less than, the remaining term to stated maturity of the removed Mortgage
Loan or Contract, (v) have a current loan to Original Value not greater than
that of the removed Mortgage Loan or Contract, and (vi) in the reasonable
determination of the Company, be of the same type, quality and character as
the removed Mortgage Loan or Contract (as if the defect or breach giving rise
to the substitution had not occurred) and be, as of the substitution date, in
compliance with the representations and warranties contained in the Agreement.
If a REMIC election is to be made with respect to all or a portion of a
Trust Fund, any such substitution will occur within two years after the
initial issuance of the related Certificates. If no REMIC election is made,
any substitution will be made within 90 days after the initial issuance of the
related Certificates.
CERTAIN REFINANCINGS
The Agreement will provide that if the Company in its individual capacity
agrees to refinance any Mortgage Loan upon the request of the related
Mortgagor, such Mortgage Loan will be assigned to the Company by the Trustee
upon certification that the Principal Balance of such Mortgage Loan and
accrued and unpaid interest thereon at the Remittance Rate has been credited
to the related Loan Payment Record.
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EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public accountants
will furnish to the Trustee on or before March 31 of each year, beginning with
March 31 in the year which begins not less than three months after the date of
the initial issue of Certificates, a report as to compliance by the Company
with the minimum servicing standards set forth in the Uniform Single
Attestation Program for Mortgage Bankers ("USAP") with respect to the mortgage
loans (or, if the Agreement relates to Home Equity Loans, with respect to the
home equity loans) in the Company's servicing portfolio. In connection with
the preparation of such report, the Company will provide to such firm of
independent public accountants a statement signed by an officer of the Company
to the effect that the Company has complied in all material respects with the
minimum servicing standards set forth in the USAP with respect to the mortgage
loans (or, if the Agreement relates to Home Equity Loans, with respect to the
home equity loans) in the Company's servicing portfolio or, if there has been
material noncompliance with such servicing standards, describing such
noncompliance.
The Agreement will also provide for delivery to the Trustee on or before
March 31 of each year, beginning with March 31 in the year which begins not
less than three months after the date of the initial issue of the
Certificates, a statement signed by an officer of the Company, as servicer, to
the effect that the Company, as servicer, has fulfilled its material
obligations under the Agreement throughout the preceding year or, if there has
been a default in the fulfillment of any such obligations, describing each
such default.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Trustee, or, if the Guarantor has issued any
Limited Guarantee with respect to such Certificates, the Guarantor, the
Certificate Registrar will provide to the Trustee, or, if applicable, the
Guarantor, within fifteen days after receipt of such request, a list of the
names and addresses of all Certificateholders of record of a particular series
as of the most recent Record Date for payment of distributions to
Certificateholders of that series. Upon written request of three or more
Certificateholders of record of a series of Certificates for purposes of
communicating with other Certificateholders with respect to their rights under
the Agreement for such series, the Trustee will afford, within five business
days after the receipt of such request, such Certificateholders access during
business hours to the most recent list of Certificateholders of that series
held by the Trustee. If such list is as of a date more than 90 days prior to
the date of receipt of a request from such Certificateholders, the Trustee
shall promptly request from the Certificate Registrar a current list and will
afford such requesting Certificateholders access to such list promptly upon
receipt.
The Agreement will not provide for the holding of any annual or other
meetings of Certificateholders.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Company. In addition, the Company and the
Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
Fund relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who
shall exercise and perform such rights, powers, duties and obligations solely
at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates (other than the signature and
countersignature of the Trustee on the Certificates) or of any Mortgage Loan,
Agency Security, Contract or related document, and will not be accountable for
the use or application by the Company of any funds paid to the Company in
respect of the Certificates or the related assets, or amounts credited to the
Loan Payment Record or deposited into the Certificate Account. If no Event of
Default has occurred, the Trustee will be required to perform only those
duties specifically required of it under the
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Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
Agreement.
The Trustee may resign at any time, and the Company may remove the Trustee
if the Trustee ceases to be eligible to continue as such under the Agreement,
if the Trustee becomes insolvent or in such other instances, if any, as are
set forth in the Agreement. Following any resignation or removal of the
Trustee, the Company will be obligated to appoint a successor Trustee, any
such successor to be approved by the Guarantor if so specified in the
Prospectus Supplement in the event that the Guarantor has issued any Limited
Guarantee with respect to the Certificates. Any resignation or removal of the
Trustee and appointment of a successor Trustee does not become effective until
acceptance of the appointment by the successor Trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which are, at
the time of any deposit therein, rated at least "AA" (or the equivalent) by
each nationally recognized statistical rating organization that rated the
Certificates, (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the "BIF") of the Federal Deposit
Insurance Corporation (the "FDIC") or the Savings Association Insurance Fund
(as successor to the Federal Savings and Loan Insurance Corporation) ("SAIF")
of the FDIC, (iii) an account or accounts with a depository institution, which
accounts are insured by the BIF or SAIF (to the limits established by the
FDIC), and which uninsured deposits are invested in United States government
securities or other high quality investments, or are otherwise secured to the
extent required by each rating agency that rates the Certificates such that,
as evidenced by an opinion of counsel, the holders of the Certificates have a
claim with respect to the funds in the account or a perfected first security
interest against any collateral securing such funds that is superior to claims
of any other depositors or creditors of the depository institution with which
the account is maintained, (iv) a trust account maintained with the corporate
trust department of a federal or state chartered depository institution or
trust company with trust powers and acting in its fiduciary capacity for the
benefit of the Trustee or (v) an account as will not cause any of the rating
agencies that rates the Certificates to downgrade or withdraw its then-current
rating assigned to the Certificates.
Not later than the second business day prior to each Distribution Date, the
Company, as servicer, will furnish a separate statement to the Trustee for the
Certificates setting forth, among other things, the amount to be distributed
with respect to the Certificates on the next succeeding Distribution Date to
Certificateholders, with amounts allocable to principal and to interest stated
separately and, if applicable, information relating to the amount available
for the purchase of Liquidating Loans.
REPORTS TO CERTIFICATEHOLDERS
At least two Business Days before each Distribution Date, unless otherwise
specified in the Prospectus Supplement, the Company, as servicer, will furnish
to the Trustee for mailing to Certificateholders on such Distribution Date, a
statement generally setting forth, to the extent applicable to any series,
among other things:
(i) The aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class and the amount of
Principal Prepayments (and Mortgage Loans repurchased by the Company)
included therein;
(ii) The amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) The amount of servicing compensation received by the Company in
respect of the Mortgage Loans during the month preceding the month of the
Distribution Date, and such other customary information as the Company
deems necessary or desirable to enable Certificateholders to prepare their
tax returns;
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(iv) The aggregate Certificate Principal Balance (or Notional Principal
Balance) of each class of Certificates after giving effect to distributions
and allocations, if any, of losses on the Mortgage Loans on such
Distribution Date;
(v) The aggregate Certificate Principal Balance of any class of Accrual
Certificates after giving effect to any increase in such Certificate
Principal Balance that results from the accrual of interest that is not yet
distributable thereon;
(vi) If applicable, the amount of the Company's remaining obligations
with respect to the purchase of Liquidating Loans, after giving effect to
any charges or adjustments thereto in respect of the Distribution Date,
expressed as a percentage of the amount reported pursuant to clause (iv)
and, if applicable, (v) above;
(vii) The aggregate Principal Balance and number of the Mortgage Loans
included in the related Trust Fund after giving effect to distributions of
principal made on such Distribution Date; and
(viii) The aggregate Principal Balance of Mortgage Loans which were
delinquent as to a total of one, two or three or more installments of
principal and interest or were in foreclosure as of the end of the
preceding calendar month.
The Company will also furnish annually customary information deemed
necessary for Certificateholders to prepare their tax returns.
The Company, as servicer, will provide Certificateholders which are
federally insured savings and loan associations with certain reports and with
access to information and documentation regarding the Mortgage Loans included
in the Trust Fund sufficient to permit such associations to comply with
applicable regulations of the Office of Thrift Supervision.
EVENTS OF DEFAULT
Events of Default under the Agreement will consist of: (i) any failure by
the Company, as servicer, to distribute to Certificateholders any required
payment, which failure continues unremedied for three business days after the
giving of written notice of such failure to the Company by the Trustee, or to
the Company and the Trustee by the holders of Certificates evidencing
interests aggregating not less than 25% of each affected class; (ii) any
failure by the Company, as servicer, duly to observe or perform in any
material respect any other of its covenants or agreements in such Agreement
materially affecting the rights of Certificateholders which continues
unremedied for 60 days after the giving of written notice of such failure to
the Company by the Trustee, or to the Company and the Trustee by the holders
of Certificates evidencing interests aggregating not less than 25% of each
affected class; (iii) any failure by the Company, as servicer, to effect
timely payment of the premium for a pool insurance policy or a special hazard
insurance policy or Limited Guarantee, if any, which continues unremedied for
10 Business Days after the giving of written notice of such failure by the
Trustee, or to the Company and the Trustee by the holders of Certificates
evidencing interests aggregating not less than 25% of each affected class; and
(iv) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by the Company
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by the
Company, as servicer (or, if applicable, by the Guarantor pursuant to any
Limited Guarantee), the Trustee, or holders of Certificates evidencing
interests aggregating not less than 51% of each affected class, may terminate
all of the rights and obligations of the Company as servicer under the
Agreement, whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Company as servicer under the Agreement and will
be entitled to similar compensation arrangements, provided that if the Trustee
had no obligation under the Agreement to make advances of delinquent principal
and interest on the Mortgage Loans upon the failure of the Company, as
servicer, to do so, or if the Trustee had such obligation but is prohibited by
law or regulation from making such
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advances, the Trustee will not be required to assume such obligation of the
Company. The Company, as servicer, shall be entitled to payment of certain
amounts payable to it under the Agreement, notwithstanding the termination of
its activities as servicer. No such termination will affect in any manner the
Guarantor's obligations under any Limited Guarantee, except that the
obligation of the Company, as servicer, to make advances of delinquent
payments of principal and interest (adjusted to the applicable Remittance
Rate) and, if applicable, to purchase any Liquidating Loan will become the
direct obligations of the Guarantor under the Advance Guarantee and the
Liquidating Loan Guarantee, respectively, if applicable, until a new servicer
is appointed. In the event that the Trustee is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution with a net worth of at
least $10,000,000 and, if the Guarantor has issued any Limited Guarantee with
respect to the Certificates, approved by the Guarantor, to act as successor to
the Company, as servicer, under such Agreement. In addition, if the Guarantor
has issued any Limited Guarantee with respect to the related series of
Certificates, the Guarantor will have the right to replace any successor
servicer to the Company with an institution meeting the requirements described
in the preceding sentence. The Trustee and such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation to the Company under such Agreement.
No holder of Certificates will have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates of each affected class evidencing, in the aggregate,
25% or more of the interests in such class have made written request to the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity and the Trustee for 60 days
after receipt of such notice, request and offer of indemnity has neglected or
refused to institute any such proceedings. However, the Trustee is under no
obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the Certificateholders, unless
such Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
The Agreement may be amended by the Company, as seller, the Company, as
servicer, and the Trustee, and if the Guarantor has issued any Limited
Guarantee with respect to the Certificates, with the consent of the Guarantor,
but without Certificateholder consent, to cure any ambiguity, to correct or
supplement any provision therein which may be inconsistent with any other
provision therein, to take any action necessary to maintain REMIC status of
any Trust Fund as to which a REMIC election has been made, to avoid or
minimize the risk of the imposition of any tax on the Trust Fund pursuant to
the Code or to make any other provisions with respect to matters or questions
arising under the Agreement which are not materially inconsistent with the
provisions of the Agreement; provided that such action will not, as evidenced
by an opinion of counsel satisfactory to the Trustee, adversely affect in any
material respect the interests of any Certificateholders of that series.
Unless otherwise specified in the Prospectus Supplement, the Agreement may
also be amended by the Company, as seller, the Company, as servicer, and the
Trustee with the consent of holders of Certificates evidencing interests
aggregating either not less than 66% of all interests in the related Trust
Fund or not less than 66% of all interests of each Class affected by such
amendment, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Agreement or of modifying
in any manner the rights of Certificateholders of that series; provided,
however, that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, payments received on Mortgage Loans which are required to
be distributed in respect of any Certificate without the consent of the holder
of such Certificate, (ii) adversely affect in any material respect the
interests of the holders of any class of Certificates in any manner other than
as described in (i), without the consent of the holders of Certificates of
such class evidencing at least 66% of the interests of such class or (iii)
reduce the aforesaid percentage of Certificates, the holders of which are
required to consent to any such amendment, without the consent of the holders
of all Certificates of such affected class then outstanding.
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TERMINATION
The obligations of the Company, as seller, the Company, as servicer, and the
Trustee created by the Agreement will terminate upon the last action required
to be taken by the Trustee on the final Distribution Date pursuant to the
Agreement after the earlier of (i) the maturity or other liquidation of the
last Mortgage Loan, Agency Security or Contract subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan or Contract or (ii) the repurchase by the Company from the Trust Fund of
all the outstanding Certificates or all remaining assets in the Trust Fund.
The Agreement will establish the repurchase price for the assets in the Trust
Fund and the allocation of such purchase price among the classes of
Certificates. The exercise of such right will effect early retirement of the
Certificates of that series, but the Company's right so to repurchase will be
subject to the conditions set forth in the related Prospectus Supplement. If a
REMIC election is to be made with respect to all or a portion of a Trust Fund,
there may be additional conditions to the termination of such Trust Fund which
will be described in the related Prospectus Supplement. In no event, however,
will the trust created by the Agreement continue beyond the expiration of 21
years from the death of the survivor of certain persons named in the
Agreement. The Trustee will give written notice of termination of the
Agreement to each Certificateholder, and the final distribution will be made
only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in such notice of termination.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Loans, Agency Securities or Contracts and the
other assets of the Trust Fund in the event that payments in respect thereto
are insufficient to make payments required in the Agreement. The assets of the
Trust Fund will be sold only under the circumstances and in the manner
specified in the Prospectus Supplement.
GE CAPITAL MORTGAGE SERVICES, INC.
GENERAL
The Company, a New Jersey corporation, is a wholly-owned subsidiary of GE
Capital Mortgage Corporation ("GECMC"). GECMC is a wholly-owned subsidiary of
General Electric Capital Corporation, which, in turn, is a wholly-owned
indirect subsidiary of General Electric Company.
The Company was acquired by GECMC, effective October 1, 1990, and thereafter
changed its name to GE Capital Mortgage Services, Inc. On August 31, 1993, the
Company acquired from Shearson Holdings, Inc. all of the outstanding capital
stock of Shearson Lehman Hutton Mortgage Corporation, a California-based
mortgage company. Following such acquisition, the corporate name of Shearson
Lehman Hutton Mortgage Corporation was changed to GE Capital Mortgage Services
of California, Inc. On December 31, 1993, GE Capital Mortgage Services of
California, Inc. and General Electric Mortgage Securities Corporation, an
affiliate of the Company which has functioned primarily as an issuer and
master servicer of privately-placed mortgage-backed securities, were merged
with and into the Company.
The Company is engaged in the business of refinancing, acquiring and
servicing residential mortgage loans secured by one- to four-family homes. It
obtains servicing through the acquisition and origination of mortgage loans,
and the purchase of servicing rights. The Company is also engaged in the home
equity business through its Home Equity Services unit. The Home Equity
Services unit acquires and services closed-end first and second mortgage
loans. From time to time, the Company may also engage in sales of such
mortgage loans and servicing rights. See "The Trust Fund--The Mortgage Loans--
Loan Production Sources" and "--Loan Underwriting Policies."
DELINQUENCY AND FORECLOSURE EXPERIENCE
The Company's delinquency and foreclosure experience on the portfolio of
one- to four-family residential mortgage loans that it services as of a recent
date will be summarized in the Prospectus Supplement. Such summary will
include or consist of data with respect to the Company's Home Equity Loan
portfolio if the related
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Trust Fund includes a material amount of Home Equity Loans. There can be no
assurance that the Company's experience with respect to the Mortgage Loans
included in any Trust Fund will be similar to that historically experienced by
the Company.
THE GUARANTOR
If specified in the Prospectus Supplement, an entity identified therein as
the Guarantor will, to the limited extent specified, issue a Limited Guarantee
to guarantee certain of the Company's limited obligations under the related
Agreement. If the Guarantor provides any such Limited Guarantee with respect
to a series of Certificates, the Prospectus Supplement will contain additional
information about the Guarantor.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans or Contracts
is situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans or Contracts.
THE MORTGAGE LOANS
GENERAL
Mortgages. The Mortgages will be either deeds of trust or mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage. It
is not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of filing
with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee or the
trustee of an inter vivos revocable trust (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a
land trust, there are three parties because title to the property is held by a
land trustee under a land trust agreement of which the borrower/homeowner is
the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. In the case of an
inter vivos revocable trust, there are three parties because title to the
property is held by the trustee under the trust instrument of which the home
occupant is the primary beneficiary; at origination of a mortgage loan, the
primary beneficiary and the trustee execute a mortgage note and the trustee
executes a mortgage or deed of trust, with the primary beneficiary agreeing to
be bound by its terms. Although a deed of trust is similar to a mortgage, a
deed of trust formally has three parties, the borrower-homeowner called the
trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust and generally with a power of sale, to the trustee to secure payment
of the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The
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interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the 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 lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make
such final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a Trust Fund including Cooperative
Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-
stockholder's pro rata share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender 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.
FORECLOSURE
Mortgages. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lien holders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment
of foreclosure and appoints a referee or other court officer to conduct the
sale of the property.
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A sale conducted in accordance with the terms of the power of sale contained
in a mortgage or deed of trust is generally presumed to be conducted regularly
and fairly, and a conveyance of the real property by the referee confers
absolute legal title to the real property to the purchaser, free of all junior
mortgages and free of all other liens and claims subordinate to the mortgage
or deed of trust under which the sale is made (with the exception of certain
governmental liens and any redemption rights that may be granted to borrowers
pursuant to applicable state law). The purchaser's title is, however, subject
to all senior liens, encumbrances and mortgages. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the referee
or trustee will convey title to the property to the purchaser, subject to the
underlying first mortgage or deed of trust and any other prior liens and
claims. A foreclosure under a junior mortgage or deed of trust generally will
have no effect on any senior mortgage or deed of trust, except that it may
trigger the right of a senior mortgagee or beneficiary to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance"
clause contained in the senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of
the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee
or referee for an amount equal to the principal amount of the mortgage or deed
of trust, accrued and unpaid interest and expenses of foreclosure. Thereafter,
the lender will assume the burdens of ownership, including obtaining casualty
insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
Some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust, or under a mortgage
having a power of sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
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
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor,
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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. However, the requirement that the lender obtain prior approval
or consent of the cooperative before transferring the cooperative shares or
assigning the proprietary lease may result in delays in completion of
foreclosure on cooperative shares and delays in receipt of foreclosure
proceeds by the related Trust Fund. See "--The Mortgage Loans--General--
Cooperatives" herein.
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 (the "UCC") and the security agreement relating to those shares. Article
9 of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor
and the method, manner, time, place and terms of the foreclosure. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See "Anti-
Deficiency Legislation and Other Limitations on Lenders" below.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
Some of the Home Equity Loans included in a Trust Fund may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of
trust held by the Company, other lenders or institutional investors. The
rights of the Trustee (and therefore the Certificateholders) as mortgagee
under a junior mortgage or beneficiary under a junior deed of trust are
subordinate to those of the mortgagee under the senior mortgage or beneficiary
under the senior deed of trust, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loan to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the junior mortgagee or junior beneficiary asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage or deed of trust. As
discussed more fully below, a junior mortgagee or junior beneficiary may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, no notice of
default is required to be given to a junior mortgagee or junior beneficiary,
and junior mortgagees or junior beneficiaries are seldom given notice of
defaults on senior mortgages. In order for a foreclosure action in some states
to be effective against a junior mortgagee or junior beneficiary, the junior
mortgagee or junior beneficiary must be named in any foreclosure action, thus
giving notice to junior lienors. See "Servicing of the Mortgage Loans and
Contracts--Collection and Other Servicing Procedures".
The standard form of the mortgage or deed of trust used by most
institutional lenders (including the Company) confers on the mortgagee or
beneficiary the right under some circumstances both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to
any indebtedness secured by the mortgage or deed of trust in such order as the
mortgagee or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by
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condemnation, the mortgagee or beneficiary under any underlying senior
mortgages may have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with
the condemnation and to apply the same to the indebtedness secured by the
senior mortgages or deeds of trust. Proceeds in excess of the amount of senior
mortgage indebtedness, in most cases, will be applied to the indebtedness of a
junior mortgage or trust deed.
A common form of mortgage or deed of trust used by institutional lenders
typically contains a "future advance" clause which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of
any advance made under the clause depends, in some states, on whether the
advance was an "obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially loaned under the
mortgage or deed of trust, notwithstanding that there may be intervening
junior mortgages or deeds of trust and other liens at the time of the advance.
Where the mortgagee or beneficiary is not obligated to advance the additional
amounts (and, in some jurisdictions, has actual knowledge of the intervening
junior mortgages or deeds of trust and other liens), the advance will be
subordinate to such intervening junior mortgages or deeds of trust and other
liens. Priority of advances under the clause rests, in many other states, on
state statutes giving priority to all advances made under the loan agreement
to a "credit limit" amount stated in the recorded mortgage.
Other provisions sometimes included in the form of the mortgage or deed of
trust used by institutional lenders (and included in some of the forms used by
the Company) obligate the mortgagor or trustor to pay, before delinquency, all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property which appear prior to the mortgage or deed of trust,
to provide and maintain fire insurance on the property, to maintain and repair
the property and not to commit or permit any waste thereof, and to appear in
and defend any action or proceeding purporting to affect the property or the
rights of the mortgagee or beneficiary under the mortgage or deed of trust.
Upon a failure of the mortgagor or trustor to perform any of these
obligations, the mortgagee or beneficiary is given the right under certain
mortgages or deeds of trust to perform the obligation itself, at its election,
with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust. See
"Servicing of the Mortgage Loans and Contracts--Collection and Other Servicing
Procedures".
RIGHT 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, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. 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 rights of
redemption would defeat the title of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee 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 in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount
due to the
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lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
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
beneficiary or a mortgagee 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 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 and/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 suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of
the loan.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage. 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, their related regulations and related
statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of
the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all of the Mortgage
Loans will contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law prohibiting the enforcement of due-on-
sale clauses and permits lenders to enforce these clauses in accordance with
their terms, subject to certain limited exceptions. The Garn-St Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
Due-on-sale clauses contained in mortgage loans originated by federal
savings and loan associations or federal savings banks are fully enforceable
pursuant to regulations of the Office of Thrift Supervision (the
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"OTS"), as successor to the Federal Home Loan Bank Board, which preempt state
law restrictions on the enforcement of due-on-sale clauses.
The Garn-St Germain Act also sets forth several specific instances in which
a mortgage lender covered by the Garn-St Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a
junior encumbrance. Regulations promulgated under the Garn-St Germain Act by
the Federal Home Loan Bank Board as succeeded by the OTS also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to
a due-on-sale clause. If interest rates were to rise above the interest rates
on the Mortgage Loans, then any inability of the Company to enforce due-on-
sale clauses may result in the Trust Fund including a greater number of loans
bearing below-market interest rates than would otherwise be the case, since a
transferee of the property underlying a Mortgage Loan would have a greater
incentive in such circumstances to assume the transferor's Mortgage Loan. Any
inability of the Company to enforce due-on-sale clauses may affect the average
life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity. See "Yield, Maturity and Weighted Average Life
Considerations".
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender
undertake affirmative and expensive actions to determine the causes for 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 judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The OTS, as
successor to the Federal Home Loan Bank Board, 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 which
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.
Under the Agreement for each series of Certificates, the Company will
represent and warrant to the Trustee that the Mortgage Loans have been
originated in compliance in all material respects with applicable state laws,
including usury laws.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Company to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations which would impair the
ability of the Company to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a
Mortgage Loan
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goes into default there may be delays and losses occasioned by the inability
to realize upon the Mortgaged Property in a timely fashion.
Under the applicable Agreement, the Company will not be required to make
deposits to the Certificate Account for a series of Certificates in respect of
any Mortgage Loan as to which the Relief Act has limited the amount of
interest the related borrower is required to pay each month, and
Certificateholders will bear such loss.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, and under state law in certain states, a secured
party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale or operates a mortgaged property may become
liable in certain circumstances for the costs of remedial action ("Cleanup
Costs") if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. It is
possible that such Cleanup Costs could reduce the amounts otherwise
distributable to the Certificateholders if the related Trust Fund were deemed
to be liable for such Cleanup Costs and if such Cleanup Costs were incurred.
Moreover, under federal law and the law of certain states, a lien may be
imposed for any Cleanup Costs incurred by federal or state authorities on the
property that is the subject of such Cleanup Costs. All subsequent liens on
such property are subordinated to such lien and, in several states, even prior
recorded liens, including those of existing mortgages, are subordinated to
such liens (a "Superlien"). In the latter states, the security interest of the
Trustee in a Mortgaged Property that is subject to such a Superlien could be
adversely affected.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to
any mortgaged property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed in lieu of foreclosure. The Company does
not make any representation or warranty or assume any liability with respect
to the absence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property or any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances. See "Servicing of the Mortgage Loans
and Contracts--Collection and Other Servicing Procedures".
THE CONTRACTS
GENERAL
As a result of the Company's assignment of the Contracts to the Trustee, the
Certificateholders will succeed collectively to all of the rights (including
the right to receive payment on the Contracts) and will assume certain
obligations of the Company. Each Contract evidences both (a) the obligation of
the obligor to repay the loan evidenced thereby, and (b) the grant of a
security interest in the Manufactured Home to secure repayment of such loan.
Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the Agreement, the Company will transfer physical
possession of the Contracts to the Trustee or its custodian. In addition, the
Company will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Contracts
will not be stamped or marked otherwise to reflect their assignment from the
Company to the Trustee. Therefore, if a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in the Contracts could be defeated.
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SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. The Company may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in
which any manufactured home securing a manufactured housing conditional sales
contract is registered. In the event the Company fails, due to clerical
errors, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Certificateholders may not have a
first priority security interest in the Manufactured Home securing a contract.
As manufactured homes have become larger and often have been attached to their
sites without any apparent intention to move them, courts in many states have
held that manufactured homes, under certain circumstances, may become subject
to real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law. In order to perfect a security interest in a manufactured home under real
estate laws, the holder of the security interest must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage under the
real estate laws of the state where the home is located. These filings must be
made in the real estate records office of the county where the home is
located. Substantially all of the Contracts contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Certificates
and as described in the related Prospectus Supplement, the Company may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and
if any of the foregoing events were to occur, the only recourse of the
Certificateholders would be against the Company pursuant to its repurchase
obligation for breach of warranties.
The Company will assign its security interest in the Manufactured Homes to
the Trustee on behalf of the Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, neither the Company nor the Trustee will
amend the certificates of title to identify the Trust Fund as the new secured
party. Accordingly, the Company will continue to be named as the secured party
on the certificates of title relating to the Manufactured Homes. In most
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and
the new secured party succeeds to the Company's rights as the secured party.
However, in some states there exists a risk that, in the absence of an
amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Company.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Company on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Company and the Certificateholders
is not perfected, such security interest would be subordinate to, among
others, subsequent purchasers for value of Manufactured Homes and holders of
perfected security interests. There also exists a risk in not identifying the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Certificateholders
could be released.
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In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered under
the laws of most states the perfected security interest in the Manufactured
Home would continue for four months after such relocation and thereafter only
if and after the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not re-
register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien,
the Trustee would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Company takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from
the obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under the Agreement the Company is
obligated to take such steps, at the Company's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority even over a perfected security interest. The Company will
represent in the Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However,
such liens could arise at any time during the term of a Contract. No notice
will be given to the Trustee or Certificateholders in the event such a lien
arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Company on behalf of the Trustee, to the extent required by the related
Agreement, may take action to enforce the Trustee's security interest with
respect to Contracts in default by repossession and resale of the Manufactured
Homes securing such Contracts in default. So long as the Manufactured Home has
not become subject to the real estate law, a creditor can repossess a
Manufactured Home securing a Contract by voluntary surrender, by "self-help"
repossession that is "peaceful" (i.e., without breach of the peace) or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a Contract must give the debtor
a number of days' notice, which varies from 10 to 30 days depending on the
state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness
in effecting such a sale. The law in most states also requires that the debtor
be given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale
of a Manufactured Home, the Trustee would be entitled to be paid out of the
sale proceeds before such proceeds could be applied to the payment of the
claims of unsecured creditors or the holders of subsequently perfected
security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
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CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trust Fund against such obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination of
and lending pursuant to the Contracts, including the Truth-in-Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of
these laws, the failure to comply with their provisions may affect the
enforceability of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Company and permit the
acceleration of the maturity of the Contracts by the Company upon any such
sale or transfer that is not consented to. Unless otherwise specified in the
related Prospectus Supplement, the Company expects that it will permit most
transfers of Manufactured Homes and not accelerate the maturity of the related
Contracts. In certain cases, the transfer may be made by a delinquent obligor
in order to avoid a repossession proceeding with respect to a Manufactured
Home.
In the case of a transfer of a Manufactured Home after which the Company
desires to accelerate the maturity of the related Contract, the Company's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Company may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels will be included in a Trust
Fund. The Company will represent that all of the Contracts comply with
applicable usury law.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters military
service after the origination of such borrower's Contract (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Contract and is later called to active duty)
may not be charged interest above
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an annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. It is possible
that such interest rate limitation could have an effect, for an indeterminate
period of time, on the ability of the Company to collect full amounts of
interest on certain of the Contracts. In addition, the Relief Act imposes
limitations which would impair the ability of the Company to enforce the lien
with respect to an affected Contract during the borrower's period of active
duty status. Thus, in the event that such a Contract goes into default, there
may be delays and losses occasioned by the inability to enforce the lien with
respect to the Manufactured Home in a timely fashion.
Under the applicable Agreement, the Company will not be required to make
deposits to the Certificate Account for a series of Certificates in respect of
any Contract as to which the Relief Act has limited the amount of interest the
related borrower is required to pay each month, and Certificateholders will
bear such loss.
LEGAL INVESTMENT MATTERS
Unless otherwise specified in the Prospectus Supplement, all of the classes
of a series of Certificates offered thereby will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), so long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations, and, as such, are legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business
entities (including, but not limited to, state-chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as
well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off 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, the investors affected by such
legislation will be authorized to invest in the 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 with mortgage
related securities without limitation as to the percentage of their assets
represented thereby; federal credit unions may invest in mortgage related
securities; and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority
may prescribe. In this connection, federal credit unions should review
National Credit Union Administration (the "NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines
to assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, effective December 2, 1991,
which prohibit federal credit unions from investing in certain mortgage
related securities, possibly including certain series or classes of
Certificates, except under limited circumstances.
If specified in the Prospectus Supplement, one or more classes of a series
of Certificates will not constitute "mortgage related securities" for purposes
of SMMEA. In such event, persons whose investments are subject to state or
federal regulation may not be legally authorized to invest in such classes of
Certificates.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992 (the "Policy Statement") of the Federal Financial
Institutions Examination Council. The Policy Statement, which has been adopted
by the Board of Governors of the Federal Reserve System, the FDIC, the
Comptroller of the Currency and the Office of Thrift Supervision, effective
February 10, 1992, and by the NCUA (with certain modifications) effective June
26, 1992,
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prohibits depository institutions from investing in certain "high-risk
mortgage securities" (including securities such as certain series and classes
of the Certificates), except under limited circumstances, and sets forth
certain investment practices deemed to be unsuitable for regulated
institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing Certificates,
as certain series or classes thereof may be deemed unsuitable investments, or
may otherwise be restricted, under such rules, policies or guidelines, in
certain instances irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investments in securities which are
not "interest-bearing" or "income-paying," and, with regard to any
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Investors should consult their own legal advisors in determining whether and
to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Internal Revenue Code of 1986, as amended (the "Code") impose
requirements on employee benefit plans (and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans and collective investment funds and separate accounts in which
such plans, accounts or arrangements are invested) subject to ERISA or Section
4975 of the Code (collectively, "Plans") and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of a Plan subject to ERISA be held in trust and that the trustee, or other
duly authorized fiduciary, have exclusive authority and discretion to manage
and control the assets of such Plan. ERISA also imposes certain duties on
persons who are fiduciaries with respect to a Plan. Under ERISA, any person
who exercises any authority or control respecting the management or
disposition of the assets of a Plan generally is considered to be a fiduciary
of such Plan. In addition to the imposition by ERISA of general fiduciary
standards of investment prudence and diversification, ERISA and Section 4975
of the Code prohibit a broad range of transactions involving Plan assets and
persons ("Parties in Interest") having certain specified relationships to a
Plan and impose additional prohibitions where Parties in Interest are
fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued a regulation
concerning the definition of what constitutes the assets of a Plan (DOL Reg.
Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA and
Section 4975 of the Code to be assets of the investing Plan in certain
circumstances. In such a case, the fiduciary making such an investment for the
Plan could be deemed to have delegated his or her asset management
responsibility, the underlying assets and properties could be subject to
ERISA's reporting and disclosure requirements, and transactions involving the
underlying assets and properties could be subject to the fiduciary
responsibility requirements of ERISA and the prohibited transaction provisions
of Section 4975 of the Code. Certain exceptions to the regulation may apply in
the case of a Plan's investment in the Certificates, but the Company cannot
predict in advance whether any such exceptions will apply due to the factual
nature of the conditions to be met. Accordingly, because the Mortgage Loans,
Agency Securities or Contracts may be deemed Plan assets of each Plan that
purchases Certificates, an investment in the Certificates by a Plan might give
rise to a prohibited transaction under ERISA Sections 406 or 407 and be
subject to an excise tax under Code Section 4975 unless a statutory or
administrative exemption applies.
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DOL Prohibited Transaction Class Exemption 83-1 ("PTE 83-1") exempts from
the prohibited transaction rules of ERISA and Section 4975 of the Code certain
transactions relating to the operation of residential mortgage pool investment
trusts and the purchase, sale and holding of "mortgage pool pass-through
certificates" in the initial issuance of such certificates. PTE 83-1 permits,
subject to certain conditions, transactions which might otherwise be
prohibited between Plans and Parties in Interest with respect to those Plans
involving the origination, servicing, operation and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or
deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by Plans.
PTE 83-1 sets forth three general conditions which must be satisfied for any
transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the
aggregate principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan; (ii) the
existence of a pool trustee who is not an affiliate of the pool sponsor; and
(iii) a limitation on the amount of the payments retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool.
Although the Trustee for any series of Certificates will be unaffiliated
with the Company, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above.
In addition, the nature of a Trust Fund's assets or the characteristics of one
or more classes of the related series of Certificates may not be included
within the scope of PTE 83-1 or any other class exemption under ERISA. The
Prospectus Supplement will provide additional information with respect to the
application of ERISA and Section 4975 of the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained individual ERISA prohibited transaction exemptions which are in some
respects broader than PTE 83-1. Such exemptions only apply to mortgage-backed
securities which, in addition to satisfying other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If such an exemption
might be applicable to a series of Certificates, the related Prospectus
Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make
its own determination as to whether the general and the specific conditions of
PTE 83-1 have been satisfied, or as to the availability of any other
prohibited transaction exemptions. Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Unless otherwise specified in the Prospectus Supplement, the Agreement will
provide that the Residual Certificates of any series of Certificates with
respect to which a REMIC election has been made may not be acquired by a Plan.
Any Plan proposing to invest in Certificates should consult with its counsel
to confirm that such investment will not result in a prohibited transaction
and will satisfy the other requirements of ERISA and the Code.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following generally describes the anticipated material federal income
tax consequences of purchasing, owning and disposing of Certificates. It does
not address special rules which may apply to particular types of investors.
The authorities on which this discussion is based are subject to change or
differing interpretations, and any such change or interpretation could apply
retroactively. Investors should consult their own tax advisors regarding the
Certificates.
For purposes of this discussion, unless otherwise specified, the term
"Mortgage Loans" will be used to refer to Mortgage Loans, Agency Securities
and Contracts, and the term "Owner" will refer to the beneficial owner of a
Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986 (the "Code"), an election may be
made to treat each Trust Fund related to a Series of Certificates (or
segregated pools of assets within the Trust Fund) as a "real estate mortgage
investment conduit" ("REMIC") within the meaning of Section 860D(a) of the
Code. If one or more REMIC elections are made, the Certificates of any Class
will be either "regular interests" in a REMIC within the meaning of Section
860G(a)(1) of the Code ("Regular Certificates") or "residual interests" in a
REMIC within the meaning of Section 860G(a)(2) of the Code ("Residual
Certificates"). The Prospectus Supplement for each Series of Certificates will
indicate whether an election will be made to treat each Trust Fund as one or
more REMICs, and if so, which Certificates will be Regular Certificates and
which will be Residual Certificates.
If a REMIC election is made, each Trust Fund, or each portion thereof that
is treated as a separate REMIC, will be referred to as a "REMIC Pool". If a
Trust Fund is comprised of two REMIC Pools, one will be an "Upper-Tier REMIC"
and one a "Lower-Tier REMIC". The assets of the Lower-Tier REMIC will consist
of the Mortgage Loans and related Trust Fund assets. The assets of the Upper-
Tier REMIC will consist of all of the regular interests issued by the Lower-
Tier REMIC.
The discussion below under the heading "REMIC Certificates" considers Series
for which a REMIC election will be made. Series for which no such election
will be made are addressed under "Non-REMIC Certificates".
REMIC CERTIFICATES
The discussion in this section applies only to a Series of Certificates for
which a REMIC election is made.
TAX OPINION
Qualification as a REMIC requires ongoing compliance with certain
conditions. Upon the issuance of each Series of Certificates for which a REMIC
election is made, Cleary, Gottlieb, Steen & Hamilton, counsel to the Company,
will deliver its opinion generally to the effect that, with respect to each
such Series of Certificates, under then existing law and assuming compliance
by the Company, the Servicer and the Trustee for such Series with all of the
provisions of the related Agreement (and such other agreements and
representations as may be referred to in such opinion), each REMIC Pool will
be a REMIC, and the Certificates of such Series will be treated as either
Regular Certificates or Residual Certificates.
STATUS OF CERTIFICATES
The Certificates will be:
. assets described in Code Section 7701(a)(19)(C); and
. "real estate assets" under Code Section 856(c)(4)(A),
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to the extent the assets of the related REMIC Pool are so treated. Interest on
the Regular Certificates will be "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that the income of the REMIC Pool
is so treated. If at all times 95% or more of the assets or income of the
REMIC Pool qualifies under the foregoing Code sections, the Certificates (and
income thereon) will so qualify in their entirety. The Regular Certificates
will also qualify as "permitted assets" under Section 860L(c) of the Code.
In the event the assets of the related REMIC Pool include buy-down Mortgage
Loans, it is unclear whether the related buy-down funds would qualify under
the foregoing Code sections. Also, Contracts may be considered to qualify
under the foregoing sections only if the Manufactured Homes securing such
Contracts are considered to be "permanently fixed" or "permanently installed".
Contracts may limit the ability of a borrower to permanently attach a
Manufactured Home to its site.
The rules described in the two preceding paragraphs will be applied to a
Trust Fund consisting of two REMIC Pools as if the Trust Fund were a single
REMIC holding the assets of the Lower-Tier REMIC.
INCOME FROM REGULAR CERTIFICATES
General. Except as otherwise provided in this tax discussion, Regular
Certificates will be taxed as newly originated debt instruments for federal
income tax purposes. Interest, original issue discount and market discount
accrued on a Regular Certificate will be ordinary income to the Owner. All
Owners must account for interest income under the accrual method of
accounting, which may result in the inclusion of amounts in income that are
not currently distributed in cash.
On January 27, 1994, the Internal Revenue Service adopted regulations
applying the original issue discount rules of the Code (the "OID
Regulations"). Except as otherwise noted, the discussion below is based on the
OID Regulations.
Original Issue Discount. Certain Regular Certificates may have "original
issue discount." An Owner must include original issue discount in income as it
accrues, without regard to the timing of payments.
The total amount of original issue discount on a Regular Certificate is the
excess of its "stated redemption price at maturity" over its "issue price."
The issue price for any Regular Certificate is the price (including any
accrued interest) at which a substantial portion of the Class of Certificates
including such Regular Certificate are first sold to the public. In general,
the stated redemption price at maturity is the sum of all payments made on the
Regular Certificate, other than payments of interest that (i) are actually
payable at least annually over the entire life of the Certificates and (ii)
are based on a single fixed rate or variable rate (or certain combinations of
fixed and variable rates). The stated redemption price at maturity of a
Regular Certificate always includes its original principal amount, but
generally does not include distributions of stated interest, except in the
case of Accrual Certificates, and, as discussed below, Interest Only
Certificates. An "Interest Only Certificate" is a Certificate entitled to
receive distributions of some or all of the interest on the Mortgage Loans or
other assets in a REMIC Pool and that has either a notional or nominal
principal amount. Special rules for Regular Certificates that provide for
interest based on a variable rate are discussed below in "Income from Regular
Certificates--Variable Rate Regular Certificates."
With respect to an Interest Only Certificate, the stated redemption price at
maturity is likely to be the sum of all payments thereon, determined in
accordance with the Prepayment Assumption (as defined below). In that event,
Interest Only Certificates would always have original issue discount.
Alternatively, in the case of an Interest Only Certificate with some principal
amount, the stated redemption price at maturity might be determined under the
general rules described in the preceding paragraph. If, applying those rules,
the stated redemption price at maturity were considered to equal the principal
amount of such Certificate, then the rules described below under "Premium"
would apply. The Prepayment Assumption is the assumed rate of prepayment
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of the Mortgage Loans used in pricing the Regular Certificates. The Prepayment
Assumption will be set forth in the related Supplement.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered zero if it is less than 0.25% of the Certificate's stated
redemption price at maturity multiplied by the Certificate's weighted average
maturity. The weighted average maturity of a Regular Certificate is computed
based on the number of full years (i.e., rounding down partial years) each
distribution of principal (or other amount included in the stated redemption
price at maturity) is scheduled to be outstanding. The schedule of such
distributions likely should be determined in accordance with the Prepayment
Assumption.
The Owner of a Regular Certificate generally must include in income the
original issue discount that accrues for each day on which the Owner holds
such Certificate, including the date of purchase, but excluding the date of
disposition. The original issue discount accruing in any period equals:
PV End + Dist - PV Beg
Where:
<TABLE>
<S> <C> <C>
PV End = present value of all remaining distributions to be made as of the end of the period;
Dist = distributions made during the period includible in the stated redemption price at maturity; and
PV Beg = present value of all remaining distributions as of the beginning of the period.
</TABLE>
The present value of the remaining distributions is calculated based on (i)
the original yield to maturity of the Regular Certificate, (ii) events
(including actual prepayments) that have occurred prior to the end of the
period and (iii) the Prepayment Assumption. For these purposes, the original
yield to maturity of a Regular Certificate will be calculated based on its
issue price, assuming that the Certificate will be prepaid in all periods in
accordance with the Prepayment Assumption, and with compounding at the end of
each accrual period used in the formula.
Assuming the Regular Certificates have monthly Distribution Dates, discount
would be computed under the formula generally for the one-month periods (or
shorter initial period) ending on each Distribution Date. The original issue
discount accruing during any accrual period is divided by the number of days
in the period to determine the daily portion of original issue discount for
each day.
The daily portions of original issue discount generally will increase if
prepayments on the underlying Mortgage Loans exceed the Prepayment Assumption
and decrease if prepayments are slower than the Prepayment Assumption (changes
in the rate of prepayments having the opposite effect in the case of an
Interest Only Certificate). If the relative principal payment priorities of
the Classes of Regular Certificates of a Series change, any increase or
decrease in the present value of the remaining payments to be made on any such
Class will affect the computation of original issue discount for the period in
which the change in payment priority occurs.
If original issue discount computed as described above is negative for any
period, the Owner generally will not be allowed a current deduction for the
negative amount but instead will be entitled to offset such amount only
against future positive original issue discount from such Certificate.
However, while not free from doubt, such an Owner may be entitled to deduct
"negative original issue discount" to the extent the Owner's adjusted basis
(as defined in "Sale or Exchange of Certificates" below) in the Certificate
remaining after such deduction is not less than the principal amount of the
Certificate.
Acquisition Premium. If an Owner of a Regular Certificate acquires such
Certificate at a price greater than its "adjusted issue price," but less than
its remaining stated redemption price at maturity, the daily portion for any
day (as computed above) is reduced by an amount equal to the product of (i)
such daily portion and (ii) a fraction, the numerator of which is the amount
by which the price exceeds the adjusted issue price and the
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denominator of which is the sum of the daily portions for such Regular
Certificate for all days on and after the date of purchase. The adjusted issue
price of a Regular Certificate on any given day is its issue price, increased
by all original issue discount that has accrued on such Certificate and
reduced by the amount of all previous distributions on such Certificate of
amounts included in its stated redemption price at maturity.
Market Discount. A Regular Certificate may have market discount (as defined
in the Code). Market discount equals the excess of the adjusted issue price of
a Certificate over the Owner's adjusted basis in the Certificate. The Owner of
a Certificate with market discount must report ordinary interest income, as
the Owner receives distributions on the Certificate of principal or other
amounts included in its stated redemption price at maturity, equal to the
lesser of (a) the excess of the amount of those distributions over the amount,
if any, of accrued original issue discount on the Certificate or (b) the
portion of the market discount that has accrued and not previously been
included in income. Also, such Owner must treat gain from the disposition of
the Certificate as ordinary income to the extent of any accrued, but
unrecognized, market discount. Alternatively, an Owner may elect in any
taxable year to include market discount in income currently as it accrues on
all market discount instruments acquired by the Owner in that year or
thereafter. An Owner may revoke such an election only with the consent of the
Internal Revenue Service.
In general terms, market discount on a Regular Certificate may be treated,
at the Owner's election, as accruing either (a) on the basis of a constant
yield (similar to the method described above for accruing original issue
discount) or (b) alternatively, either (i) in the case of a Regular
Certificate issued without original issue discount, in the ratio of stated
interest distributable in the relevant period to the total stated interest
remaining to be distributed from the beginning of such period (computed taking
into account the Prepayment Assumption) or (ii) in the case of a Regular
Certificate issued with original issue discount, in the ratio of the amount of
original issue discount accruing in the relevant period to the total remaining
original issue discount at the beginning of such period. An election to accrue
market discount on a Regular Certificate on a constant yield basis is
irrevocable with respect to that Certificate.
An Owner may be required to defer a portion of the deduction for interest
expense on any indebtedness that the Owner incurs or maintains in order to
purchase or carry a Regular Certificate that has market discount. The deferred
amount would not exceed the market discount that has accrued but not been
taken into income. Any such deferred interest expense is, in general, allowed
as a deduction not later than the year in which the related market discount
income is recognized.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is de minimis under a rule similar to that
described above in the fourth paragraph under "Original Issue Discount."
Owners should consult their own tax advisors regarding the application of the
market discount rules as well as the advisability of making any election with
respect to market discount.
Discount on a Regular Certificate that is neither original issue discount
nor market discount, as defined above, must be allocated ratably among the
principal payments on the Certificate and included in income (as gain from the
sale or exchange of the Certificate) as the related principal payments are
made (whether as scheduled payments or prepayments).
Premium. A Regular Certificate, other than an Accrual Certificate or, as
discussed above under "Original Issue Discount", an Interest Only Certificate,
purchased at a cost (net of accrued interest) greater than its principal
amount generally is considered to be purchased at a premium. The Owner may
elect under Code Section 171 to amortize such premium under the constant yield
method, using the Prepayment Assumption. To the extent the amortized premium
is allocable to interest income from the Regular Certificate, it is treated as
an offset to such interest rather than as a separate deduction. An election
made by an Owner would generally apply to all its debt instruments and may not
be revoked without the consent of the Internal Revenue Service.
Special Election to Apply OID Rules. In lieu of the rules described above
with respect to de minimis discount, acquisition premium, market discount and
premium, an Owner of a Regular Certificate may elect to
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accrue such discount, or adjust for such premium, by applying the principles
of the OID rules described above. An election made by a taxpayer with respect
to one obligation can affect other obligations it holds. Owners should consult
with their tax advisors regarding the merits of making this election.
Retail Regular Certificates. For purposes of the original issue and market
discount rules, a repayment in full of a Retail Certificate that is subject to
payment in units or other increments, rather than on a pro rata basis with
other Retail Certificates, will be treated in the same manner as any other
prepayment.
Variable Rate Regular Certificates. The Regular Certificates may provide for
interest that varies based on an interest rate index. The OID Regulations
provide special rules for calculating income from certain "variable rate debt
instruments" or "VRDIs." A debt instrument must meet certain technical
requirements to qualify as a VRDI, which are outlined in the next paragraph.
Under the regulations, income on a VRDI is calculated by (1) creating a
hypothetical debt instrument that pays fixed interest at rates equivalent to
the variable interest, (2) applying the original issue discount rules of the
Code to that fixed rate instrument, and (3) adjusting the income accruing in
any accrual period by the difference between the assumed fixed interest amount
and the actual amount for the period. In general, where a variable rate on a
debt instrument is based on an interest rate index (such as LIBOR), a fixed
rate equivalent to a variable rate is determined based on the value of the
index as of the issue date of the debt instrument. In cases where rates are
reset at different intervals over the life of a VRDI, adjustments are made to
ensure that the equivalent fixed rate for each accrual period is based on the
same reset interval.
A debt instrument must meet a number of requirements in order to qualify as
a VRDI. A VRDI cannot be issued at a premium above its principal amount that
exceeds a specified percentage of its principal amount (15%, or if less 1.5%
times its weighted average life). As a result, Interest Only Certificates will
never be VRDIs. Also, a debt instrument that pays interest based on a multiple
of an interest rate index is not a VRDI if the multiple is less than or equal
to 0.65 or greater than 1.35, unless, in general, interest is paid based on a
single formula that lasts over the life of the instrument. A debt instrument
is not a VRDI if it is subject to caps and floors, unless they remain the same
over the life of the instrument or are not expected to change significantly
the yield on the instrument. Variable rate Regular Certificates other than
Interest Only Certificates may or may not qualify as VRDIs depending on their
terms.
In a case where a variable rate Regular Certificate does not qualify as a
VRDI, it will be treated under the OID Regulations as a contingent payment
debt instrument. The Internal Revenue Service has issued final regulations
addressing contingent payment debt instruments, but such regulations are not
applicable by their terms to REMIC regular interests. Until further guidance
is forthcoming, one method of calculating income on such a Regular Certificate
that appears to be reasonable would be to apply the principles governing VRDIs
outlined above.
Subordinated Certificates. Certain Series of Certificates may contain one or
more Classes of subordinated Certificates. In the event there are defaults or
delinquencies on the related Mortgage Loans, amounts that otherwise would be
distributed on a Class of subordinated Certificates may instead be distributed
on other more senior Classes of Certificates. Since Owners of Regular
Certificates are required to report income under an accrual method, Owners of
subordinated Certificates will be required to report income without giving
effect to delays and reductions in distributions on such Certificates
attributable to defaults or delinquencies on the Mortgage Loans, except to the
extent that it can be established that amounts are uncollectible. As a result,
the amount of income reported by an Owner of a subordinated Certificate in any
period could significantly exceed the amount of cash distributed to such Owner
in that period. The Owner will eventually be allowed a loss (or be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated Certificate is reduced as a result of
defaults and delinquencies on the Mortgage Loans. Such a loss could in some
circumstances be a capital loss. Also, the timing and amount of such losses or
reductions in income are uncertain. Owners of subordinated Certificates should
consult their tax advisors on these points.
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INCOME FROM RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, Owners of Residual Certificates in a
REMIC Pool ("Residual Owners") must report ordinary income or loss equal to
their pro rata shares (based on the portion of all Residual Certificates they
own) of the taxable income or net loss of the REMIC. Such income must be
reported regardless of the timing or amounts of distributions on the Residual
Certificates.
The taxable income of a REMIC Pool is generally determined under the accrual
method of accounting in the same manner as the taxable income of an individual
taxpayer. Taxable income is generally gross income, including interest and
original issue discount income, if any, on the assets of the REMIC Pool and
income from the amortization of any premium on Regular Certificates, minus
deductions. Market discount (as defined in the Code) with respect to Mortgage
Loans held by a REMIC Pool is recognized in the same fashion as if it were
original issue discount. Deductions include interest and original issue
discount expense on the Regular Certificates, reasonable servicing fees
attributable to the REMIC Pool, other administrative expenses and amortization
of any premium on assets of the REMIC Pool. As previously discussed, the
timing of recognition of "negative original issue discount," if any, on a
Regular Certificate is uncertain; as a result, the timing of recognition of
the corresponding income to the REMIC Pool is also uncertain.
If the Trust Fund consists of an Upper-Tier REMIC and a Lower-Tier REMIC,
the OID Regulations provide that the regular interests issued by the Lower-
Tier REMIC to the Upper-Tier REMIC will be treated as a single debt instrument
for purposes of the original issue discount provisions. A determination that
these regular interests are not treated as a single debt instrument would have
a material adverse effect on the Owners of Residual Certificates issued by the
Lower-Tier REMIC.
A Residual Owner may not amortize the cost of its Residual Certificate.
Taxable income of the REMIC Pool, however, will not include cash received by
the REMIC Pool that represents a recovery of the REMIC Pool's initial basis in
its assets, and such basis will include the issue price of the Residual
Certificates (assuming the issue price is positive). Such recovery of basis by
the REMIC Pool will have the effect of amortization of the issue price of the
Residual Certificate over its life. The period of time over which such issue
price is effectively amortized, however, may be longer than the economic life
of the Residual Certificate. The issue price of a Residual Certificate is the
price at which a substantial portion of the Class of Certificates including
the Residual Certificate are first sold to the public (or if the Residual
Certificate is not publicly offered, the price paid by the first buyer).
A subsequent Residual Owner must report the same amounts of taxable income
or net loss attributable to the REMIC Pool as an original Owner. No
adjustments are made to reflect the purchase price.
Losses. A Residual Owner that is allocated a net loss of the REMIC Pool may
not deduct such loss currently to the extent it exceeds the Owner's adjusted
basis (as defined in "Sale or Exchange of Certificates" below) in its Residual
Certificate. A Residual Owner that is a U.S. person (as defined below in
"Taxation of Certain Foreign Investors"), however, may carry over any
disallowed loss to offset any taxable income generated by the same REMIC Pool.
Excess Inclusions. A portion of the taxable income allocated to a Residual
Certificate is subject to special tax rules. That portion, referred to as an
"excess inclusion," is calculated for each calendar quarter and equals the
excess of such taxable income for the quarter over the daily accruals for the
quarter. The daily accruals equal the product of (i) 120% of the federal long-
term rate under Code Section 1274(d) for the month which includes the Closing
Date (determined on the basis of quarterly compounding and properly adjusted
for the length of the quarter) and (ii) the adjusted issue price of the
Certificate at the beginning of such quarter. The adjusted issue price of a
Residual Certificate at the beginning of a quarter is the issue price of the
Certificate, plus the amount of daily accruals on the Certificate for all
prior quarters, decreased (but not below zero) by any prior distributions on
the Certificate. If the aggregate value of the Residual Certificates is not
considered to be "significant," then to the extent provided in Treasury
regulations, a Residual Owner's entire share of REMIC taxable income will
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be treated as an excess inclusion. The regulations that have been adopted
under Code Sections 860A through 860G (the "REMIC Regulations") do not contain
such a rule.
Excess inclusions generally may not be offset by unrelated losses or loss
carryforwards or carrybacks of a Residual Owner. In addition, for all taxable
years beginning after August 20, 1996, and unless a Residual Owner elects
otherwise for all other taxable years, the alternate minimum taxable income of
a Residual Owner for a taxable year may not be less than the Residual Owner's
excess inclusions for the taxable year and excess inclusions are disregarded
when calculating a Residual Owner's alternate minimum tax net operating loss
deduction.
Excess inclusions are treated as unrelated business taxable income for an
organization subject to the tax on unrelated business income. In addition,
under Treasury regulations yet to be issued, if a real estate investment
trust, regulated investment company or certain other pass-through entities are
Residual Owners, a portion of the distributions made by such entities may be
treated as excess inclusions.
Distributions. Distributions on a Residual Certificate (whether at their
scheduled times or as a result of prepayments) generally will not result in
any taxable income or loss to the Residual Owner. If the amount of any
distribution exceeds a Residual Owner's adjusted basis in its Residual
Certificate, however, the Residual Owner will recognize gain (treated as gain
from the sale or exchange of its Residual Certificate) to the extent of such
excess. See "Sale or Exchange of Certificates" below.
Prohibited Transactions; Special Taxes. Net income recognized by a REMIC
Pool from "prohibited transactions" is subject to a 100% tax and is
disregarded in calculating the REMIC Pool's taxable income. In addition, a
REMIC Pool is subject to federal income tax at the highest corporate rate on
"net income from foreclosure property" (which has a technical definition). A
100% tax also applies to certain contributions to a REMIC Pool made after it
is formed. It is not anticipated that any REMIC Pool will (i) engage in
prohibited transactions in which it recognizes a significant amount of net
income, (ii) receive contributions of property that are subject to tax, or
(iii) derive a significant amount of net income from foreclosure property that
is subject to tax.
Negative Value Residual Certificates. The federal income tax treatment of
any consideration paid to a transferee on a transfer of a Residual Certificate
is unclear. Such a transferee should consult its tax advisor. The preamble to
the REMIC Regulations indicates that the Internal Revenue Service may issue
future guidance on the tax treatment of such payments.
Mark to Market Rules. A REMIC residual interest that is acquired on or after
January 4, 1995 is not a "security" for the purposes of Code Section 475, and
thus is not subject to the mark to market rules.
The method of taxation of Residual Certificates described in this section
can produce a significantly less favorable after-tax return for a Residual
Certificate than would be the case if the Certificate were taxable as a debt
instrument. Also, a Residual Owner's return may be adversely affected by the
excess inclusions rules described above. In certain periods, taxable income
and the resulting tax liability for a Residual Owner may exceed any
distributions it receives. In addition, a substantial tax may be imposed on
certain transferors of a Residual Certificate and certain Residual Owners that
are "pass-thru" entities. See "Transfers of Residual Certificates" below.
Investors should consult their tax advisors before purchasing a Residual
Certificate.
SALE OR EXCHANGE OF CERTIFICATES
An Owner generally will recognize gain or loss upon sale or exchange of a
Regular or Residual Certificate equal to the difference between the amount
realized and the Owner's adjusted basis in the Certificate. The adjusted basis
in a Certificate generally will equal the cost of the Certificate, increased
by income previously recognized, and reduced (but not below zero) by previous
distributions, and by any amortized premium in the case of a Regular
Certificate, or net losses allowed as a deduction in the case of a Residual
Certificate.
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Except as described below, any gain or loss on the sale or exchange of a
Certificate held as a capital asset will be capital gain or loss and will be
long-term or short-term depending on whether the Certificate has been held for
more than one year. Such gain or loss will be ordinary income or loss (i) for
a bank or thrift institution, and (ii) in the case of a Regular Certificate,
(a) to the extent of any accrued, but unrecognized, market discount, or (b) to
the extent income recognized by the Owner is less than the income that would
have been recognized if the yield on such Certificate were 110% of the
applicable federal rate under Code Section 1274(d).
A Residual Owner should be allowed a loss upon termination of the REMIC Pool
equal to the amount of the Owner's remaining adjusted basis in its Residual
Certificates. Whether the termination will be treated as a sale or exchange
(resulting in a capital loss) is unclear.
Except as provided in Treasury regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of a Residual Certificate where the
seller of the interest, during the period beginning six months before the sale
or disposition of the interest and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in
the application of Code Section 1091) any REMIC residual interest, or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that
is economically comparable to a residual interest.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates. A Regular Certificate held by an Owner that is a non-
U.S. person (as defined below), and that has no connection with the United
States other than owning the Certificate, will not be subject to
U.S. withholding or income tax with respect to the Certificate provided such
Owner (i) is not a "10-percent shareholder" within the meaning of Code Section
871(h)(3)(B) or a controlled foreign corporation described in Code Section
881(c)(3)(C), and (ii) provides an appropriate statement, signed under
penalties of perjury, identifying the Owner and stating, among other things,
that the Owner is a non-U.S. person. If these conditions are not met, a 30%
withholding tax will apply to interest (including original issue discount)
unless an income tax treaty reduces or eliminates such tax or unless the
interest is effectively connected with the conduct of a trade or business
within the United States by such Owner. In the latter case, such Owner will be
subject to United States federal income tax with respect to all income from
the Certificate at regular rates then applicable to U.S. taxpayers (and in the
case of a corporation, possibly also the branch profits tax).
The term "non-U.S. person" means any person other than a U.S. person. A U.S.
person is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
Residual Certificates. A Residual Owner that is a non-U.S. person, and that
has no connection with the United States other than owning a Residual
Certificate, will not be subject to U.S. withholding or income tax with
respect to the Certificate (other than with respect to excess inclusions)
provided that (i) the conditions described in the second preceding paragraph
with respect to Regular Certificates are met and (ii) in the case of a
Residual Certificate in a REMIC Pool holding Mortgage Loans, the Mortgage
Loans were originated after July 18, 1984. Excess inclusions are subject to a
30% withholding tax in all events (notwithstanding any contrary tax treaty
provisions) when distributed to the Residual Owner (or when the Residual
Certificate is disposed of). The Code grants the Treasury Department authority
to issue regulations requiring excess inclusions to be taken into account
earlier if necessary to prevent avoidance of tax. The REMIC Regulations do not
contain such a rule. The preamble thereto states that the Internal Revenue
Service is considering issuing regulations concerning withholding on
distributions to foreign holders of residual interests to satisfy accrued tax
liability due to excess inclusions.
With respect to a Residual Certificate that has been held at any time by a
non-U.S. person, the Trustee (or its agent) will be entitled to withhold (and
to pay to the Internal Revenue Service) any portion of any payment on such
Residual Certificate that the Trustee reasonably determines is required to be
withheld. If the Trustee (or
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its agent) reasonably determines that a more accurate determination of the
amount required to be withheld from a distribution can be made within a
reasonable period after the scheduled date for such distribution, it may hold
such distribution in trust for the Residual Owner until such determination can
be made.
Special tax rules and restrictions that apply to transfers of Residual
Certificates to and from non-U.S. persons are discussed in the next section.
TRANSFERS OF RESIDUAL CERTIFICATES
Special tax rules and restrictions apply to transfers of Residual
Certificates to disqualified organizations or foreign investors, and to
transfers of noneconomic Residual Certificates.
Disqualified Organizations. In order to comply with the REMIC rules of the
Code, the Agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless (i) the proposed purchaser provides to the Trustee an
"affidavit" (within the meaning of the REMIC Regulations) to the effect that,
among other items, such transferee is not a "disqualified organization" (as
defined below), is not purchasing a Residual Certificate as an agent for a
disqualified organization (i.e., as a broker, nominee, or other middleman) and
is not an entity (a "Book-Entry Nominee") that holds REMIC residual securities
as nominee to facilitate the clearance and settlement of such securities
through electronic book-entry changes in accounts of participating
organizations and (ii) the transferor states in writing to the Trustee that it
has no actual knowledge that such affidavit is false.
If despite these restrictions a Residual Certificate is transferred to a
disqualified organization, the transfer may result in a tax equal to the
product of (i) the present value of the total anticipated future excess
inclusions with respect to such Certificate and (ii) the highest corporate
marginal federal income tax rate. Such a tax generally is imposed on the
transferor, except that if the transfer is through an agent for a disqualified
organization, the agent is liable for the tax. A transferor is not liable for
such tax if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that the affidavit is
false.
A disqualified organization may hold an interest in a REMIC Certificate
through a "pass-thru entity" (as defined below). In that event, the pass-thru
entity is subject to tax (at the highest corporate marginal federal income tax
rate) on excess inclusions allocable to the disqualified organization.
However, such tax will not apply to the extent the pass-thru entity receives
affidavits from record holders of interests in the entity stating that they
are not disqualified organizations and the entity does not have actual
knowledge that the affidavits are false.
For these purposes, (i) "disqualified organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, certain organizations that are exempt from taxation under the Code
(including tax on excess inclusions) and certain corporations operating on a
cooperative basis, and (ii) "pass-thru entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust
or estate and certain corporations operating on a cooperative basis. Except as
may be provided in Treasury regulations, any person holding an interest in a
pass-thru entity as a nominee for another will, with respect to that interest,
be treated as a pass-thru entity. Certain additional rules also apply to
"electing large partnerships." If an electing large partnership holds a
Residual Certificate, all interests in the electing large partnership are
treated as held by disqualified organizations for the purposes of the tax on
pass-through entities described above. The exception to this tax described
above for pass-through entities that collect affidavits from their record
holders is not available to electing large partnerships.
Foreign Investors. Under the REMIC Regulations, a transfer of a Residual
Certificate to a non-U.S. person that will not hold the Certificate in
connection with a U.S. trade or business will be disregarded for all federal
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tax purposes if the Certificate has "tax avoidance potential." A Residual
Certificate has tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that:
(i) for each excess inclusion, the REMIC will distribute to the
transferee residual interest holder an amount that will equal at least 30
percent of the excess inclusion, and
(ii) each such amount will be distributed at or after the time at which
the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual.
A transferor has such reasonable expectation if the above test would be met
assuming that the REMIC's Mortgage Loans will prepay at each rate between 50
percent and 200 percent of the Prepayment Assumption.
The REMIC Regulations also provide that a transfer of a Residual Certificate
from a non-U.S. person to a U.S. person (or to a non-U.S. person that will
hold the Certificate in connection with a U.S. trade or business) is
disregarded if the transfer has "the effect of allowing the transferor to
avoid tax on accrued excess inclusions."
In light of these provisions, the Agreement provides that a Residual
Certificate may not be purchased by or transferred to any person that is not a
U.S. person, unless (i) such person holds the Certificate in connection with
the conduct of a trade or business within the United States and furnishes the
transferor and the Trustee with an effective Internal Revenue Service Form
4224, or (ii) the transferee delivers to both the transferor and the Trustee
an opinion of nationally recognized tax counsel to the effect that such
transfer is in accordance with the requirements of the Code and the
regulations promulgated thereunder and that such transfer will not be
disregarded for federal income tax purposes.
Noneconomic Residual Certificates. Under the REMIC Regulations, a transfer
of a "noneconomic" Residual Certificate will be disregarded for all federal
income tax purposes if a significant purpose of the transfer is to impede the
assessment or collection of tax. Such a purpose exists if the transferor, at
the time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. A transferor is presumed to lack such knowledge if:
(i) the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found that
the transferee had historically paid its debts as they came due and found
no significant evidence to indicate that the transferee will not continue
to pay its debts as they become due, and
(ii) the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the interest and that
it intends to pay taxes associated with holding the residual interest as
they become due.
A Residual Certificate (including a Certificate with significant value at
issuance) is noneconomic unless, at the time of the transfer, (i) the present
value of the expected future distributions on the Certificate at least equals
the product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions on the Certificate, at or after the time at which taxes
accrue, in an amount sufficient to pay the taxes.
The Agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless the transferor represents to the Trustee that it has conducted
the investigation of the transferee, and made the findings, described in the
preceding paragraph, and the proposed transferee provides to the Trustee the
transferee representations described in the preceding paragraph, and agrees
that it will not transfer the Certificate to any person unless that person
agrees to comply with the same restrictions on future transfers.
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SERVICING COMPENSATION AND OTHER REMIC POOL EXPENSES
Under Code Section 67, an individual, estate or trust is allowed certain
itemized deductions only to the extent that such deductions, in the aggregate,
exceed 2% of the Owner's adjusted gross income, and such a person is not
allowed such deductions to any extent in computing its alternative minimum tax
liability. Under Treasury regulations, if such a person is an Owner of a REMIC
Certificate, the REMIC Pool is required to allocate to such a person its share
of the servicing fees and administrative expenses paid by a REMIC together
with an equal amount of income. Those fees and expenses are deductible as an
offset to the additional income, but subject to the 2% floor.
In the case of a REMIC Pool that has multiple classes of Regular
Certificates with staggered maturities, fees and expenses of the REMIC Pool
would be allocated entirely to the Owners of Residual Certificates. However,
if the REMIC Pool were a "single-class REMIC" as defined in applicable
Treasury regulations, such deductions would be allocated proportionately among
the Regular and Residual Certificates.
REPORTING AND ADMINISTRATIVE MATTERS
Annual reports will be made to the Internal Revenue Service, and to Holders
of record of Regular Certificates, and Owners of Regular Certificates holding
through a broker, nominee or other middleman, that are not excepted from the
reporting requirements, of accrued interest, original issue discount,
information necessary to compute accruals of market discount, information
regarding the percentage of the REMIC Pool's assets meeting the qualified
assets tests described above under "Status of Certificates" and, where
relevant, allocated amounts of servicing fees and other Code Section 67
expenses. Holders not receiving such reports may obtain such information from
the related REMIC by contacting the person designated in IRS Publication 938.
Quarterly reports will be made to Residual Holders showing their allocable
shares of income or loss from the REMIC Pool, excess inclusions, and Code
Section 67 expenses.
The Trustee will sign and file federal income tax returns for each REMIC
Pool. To the extent allowable, the Company will act as the tax matters person
for each REMIC Pool. Each Owner of a Residual Certificate, by the acceptance
of its Residual Certificate, agrees that the Company will act as the Owner's
agent in the performance of any duties required of the Owner in the event that
the Owner is the tax matters person.
An Owner of a Residual Certificate is required to treat items on its federal
income tax return consistently with the treatment of the items on the REMIC
Pool's return, unless the Owner owns 100% of the Residual Certificate for the
entire calendar year or the Owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Internal Revenue Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC
level. Any person that holds a Residual Certificate as a nominee for another
person may be required to furnish the REMIC Pool, in a manner to be provided
in Treasury regulations, the name and address of such other person and other
information.
NON-REMIC CERTIFICATES
The discussion in this Section applies only to a Series of Certificates for
which no REMIC election is made.
TRUST FUND AS GRANTOR TRUST
Upon issuance of each series of Certificates, Cleary, Gottlieb, Steen &
Hamilton, counsel to the Company, will deliver its opinion to the effect that,
under then current law, assuming compliance by the Company, the Servicer and
the Trustee with all the provisions of the Agreement (and such other
agreements and representations as may be referred to in the opinion), the
Trust Fund will be classified for federal income tax purposes as a grantor
trust and not as an association taxable as a corporation.
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Under the grantor trust rules of the Code, each Owner of a Certificate will
be treated for federal income tax purposes as the owner of an undivided
interest in the Mortgage Loans (and any related assets) included in the Trust
Fund. The Owner will include in its gross income, gross income from the
portion of the Mortgage Loans allocable to the Certificate, and may deduct its
share of the expenses paid by the Trust Fund that are allocable to the
Certificate, at the same time and to the same extent as if it had directly
purchased and held such interest in the Mortgage Loans and had directly
received payments thereon and paid such expenses. If an Owner is an
individual, trust or estate, the Owner will be allowed deductions for its
share of Trust Fund expenses (including reasonable servicing fees) only to the
extent that the sum of those expenses and the Owner's other miscellaneous
itemized deductions exceeds 2% of adjusted gross income, and will not be
allowed to deduct such expenses for purposes of the alternative minimum tax.
Distributions on a Certificate will not be taxable to the Owner, and the
timing or amount of distributions will not affect the timing or amount of
income or deductions relating to a Certificate.
STATUS OF THE CERTIFICATES
The Certificates, other than Interest Only Certificates, will be:
. "real estate assets" under Code Section 856(c)(4)(A); and
. assets described in Section 7701(a)(19)(C) of the Code,
to the extent the assets of the Trust Fund are so treated. Interest income
from such Certificates will be "interest on obligations secured by mortgages
on real property" under Code Section 856(c)(3)(B) to the extent the income of
the Trust Fund qualifies under that section. An "Interest Only Certificate" is
a Certificate which is entitled to receive distributions of some or all of the
interest on the Mortgage Loans or other assets in a REMIC Pool and that has
either a notional or nominal principal amount. Although not certain,
Certificates that are Interest Only Certificates should qualify under the
foregoing Code sections to the same extent as other Certificates.
POSSIBLE APPLICATION OF STRIPPED BOND RULES
The federal income tax treatment of Certificates will depend on whether they
are subject to the "stripped bond" rules of Code Section 1286. In general,
Certificates will be subject to those rules in the hands of an Owner if (i)
the Company (or anyone else) retains rights to receive more than 100 basis
points of interest on any Mortgage Loans assigned to the Trust Fund
(disregarding rights to reasonable servicing compensation, but including
rights to fees in excess of reasonable compensation), or (ii) Certificates are
issued in two or more Classes representing rights to non-pro rata shares of
interest and principal payments on the Mortgage Loans.
Notwithstanding the foregoing, a Certificate will not be subject to the
stripped bond rules in the hands of an Owner unless, viewing the Certificate
as a debt instrument issued by the Trust Fund, it would have original issue
discount. In general, a Certificate will not have original issue discount if
it pays interest at a fixed rate, or a single variable rate, monthly over its
entire life, is issued within one month of the first Distribution Date, and is
issued with no more than a de minimis amount of discount below its principal
amount. Discount is de minimis if the Certificate has an issue price
(generally the initial offering price at which a substantial amount of
Certificates are sold) that is not less than its principal amount by more than
.25% times the weighted average life of the Certificate (calculated by
rounding down the number of years to each principal payment to the next lowest
number). For a more detailed discussion of the definition of original issue
discount, see "REMIC Certificates-- Income from Regular Certificates--Original
Issue Discount" above.
TAXATION OF CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY
If the stripped bond rules do not apply to a Certificate, then the Owner
will be required to include in income its share of the interest payments on
the Mortgage Loans held by the Trust Fund in accordance with its tax
accounting method. The Owner must also account for discount or premium on the
Mortgage Loans if it is considered to have purchased its interest in the
Mortgage Loans at a discount or premium. An Owner will be
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considered to have purchased an interest in each Mortgage Loan at a price
determined by allocating its purchase price for the Certificate among the
Mortgage Loans in proportion to their fair market values at the time of
purchase. It is likely that discount would be considered to accrue and premium
would be amortized, as described below, based on an assumption that there will
be no future prepayments of the Mortgage Loans, and not based on a reasonable
prepayment assumption.
Discount. The treatment of any discount relating to a Mortgage Loan will
depend on whether the discount is original issue discount or market discount.
Discount at which a Mortgage Loan is purchased will be original issue discount
only if the Mortgage Loan itself has original issue discount; the issuance of
Certificates is not considered a new issuance of a debt instrument that can
give rise to original issue discount. A Mortgage Loan generally will be
considered to have original issue discount if the greater of the amount of
points charged to the borrower, or the amount of any interest foregone during
any initial teaser period, exceeds .167% of the principal amount of the
Mortgage Loan times the number of full years to maturity (i.e., 5% of the
principal amount for a 30 year loan), or if interest is not paid at a fixed
rate or a single variable rate (disregarding any initial teaser rate) over the
life of the Mortgage Loan. It is not anticipated that the amount of original
issue discount, if any, accruing on the Mortgage Loans in each month will be
significant relative to the interest paid currently on the Mortgage Loans, but
there can be no assurance that this will be the case.
In the case of a Mortgage Loan that is considered to have been purchased
with market discount that exceeds a de minimis amount (generally, .167% of the
principal amount times the number of whole years to maturity remaining at the
time of purchase), the Owner will be required to include in income in each
month the amount of such discount that has accrued through such month and not
previously been included in income, but limited to the amount of principal on
the Mortgage Loan that is received by the Trust Fund in that month. Because
the Mortgage Loans will provide for monthly principal payments, such discount
may be required to be included in income at a rate that is not significantly
slower than the rate at which such discount accrues. Any market discount that
has not previously been included in income will be recognized as ordinary
income if and when the Mortgage Loan is prepaid in full. For a more detailed
discussion of the market discount rules of the Code, see "REMIC Certificates--
Income from Regular Certificates--Market Discount" above.
In the case of market discount that does not exceed a de minimis amount, the
Owner generally will be required to allocate ratably the portion of such
discount that is allocable to a Mortgage Loan among the principal payments on
the Mortgage Loan and to include the discount in ordinary income as the
related principal payments are made (whether as scheduled payments or
prepayments).
Premium. In the event that a Mortgage Loan is purchased at a premium, the
Owner may elect under Section 171 of the Code to amortize such premium under a
constant yield method based on the yield of the Mortgage Loan to such Owner,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should
be allocated among the principal payments on the Mortgage Loan and allowed as
an ordinary deduction as principal payments are made (whether as scheduled
payments or prepayments).
TAXATION OF CERTIFICATES IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply to a Certificate, income on the Certificate
will be treated as original issue discount and will be included in income as
it accrues under a constant yield method. More specifically, for purposes of
applying the original issue discount rules of the Code, the Owner will likely
be taxed as if it had purchased a newly issued, single debt instrument
providing for payments equal to the payments on the interests in the Mortgage
Loans allocable to the Certificate, and having original issue discount equal
to the excess of the sum of such payments over the Owner's purchase price for
the Certificate (which would be treated as the issue price). The amount of
original issue discount income accruing in any taxable year will be computed
generally as described above under "REMIC Certificates--Income from Regular
Certificates--Original Issue Discount". It is possible, however, that the
calculation must be made using as the Prepayment Assumption an assumption of
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zero prepayments. If the calculation is made assuming no future prepayments,
then the Owner should be allowed to deduct currently any negative amount of
original issue discount produced by the accrual formula.
Different approaches could be applied in calculating income under the
stripped bond rules. For example, a Certificate could be viewed as a
collection of separate debt instruments (one for each payment allocable to the
Certificate) rather than a single debt instrument. Also, in the case of an
Interest-Only Certificate, it could be argued that certain proposed
regulations governing contingent payment debt obligations apply. Owners should
consult their own tax advisors regarding the calculation of income under the
stripped bond rules.
SALES OF CERTIFICATES
A Certificateholder that sells a Certificate will recognize gain or loss
equal to the difference between the amount realized in the sale and its
adjusted tax basis in the Certificate. In general, such adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the Certificate and
decreased (but not below zero) by the amount of any distributions received
thereon, the amount of any losses previously allowable to such Owner with
respect to such Certificate and any premium amortization thereon. Any such
gain or loss would be capital gain or loss if the Certificate was held as a
capital asset, subject to the potential treatment of gain as ordinary income
to the extent of any accrued but unrecognized market discount under the market
discount rules of the Code, if applicable.
FOREIGN INVESTORS
Except as described in the following paragraph, an Owner that is not a U.S.
person (as defined under "REMIC Certificates--Taxation of Foreign Investors"
above) and that is not subject to federal income tax as a result of any direct
or indirect connection to the United States in addition to its ownership of a
Certificate will not be subject to United States income or withholding tax in
respect of a Certificate (assuming the underlying Mortgage Loans were
originated after July 18, 1984), if the Owner provides an appropriate
statement, signed under penalties of perjury, identifying the Owner and
stating, among other things, that the Owner is not a U.S. person. If these
conditions are not met, a 30% withholding tax will apply to interest
(including original issue discount) unless an income tax treaty reduces or
eliminates such tax or unless the interest is effectively connected with the
conduct of a trade or business within the United States by such Owner. Income
effectively connected with a U.S. trade or business will be subject to United
States federal income tax at regular rates then applicable to U.S. taxpayers
(and in the case of a corporation, possibly also the branch profits tax).
In the event the Trust Fund acquires ownership of real property located in
the United States in connection with a default on a Mortgage Loan, then any
rental income from such property allocable to an Owner that is not a U.S.
person generally will be subject to a 30% withholding tax. In addition, any
gain from the disposition of such real property allocable to an Owner that is
not a U.S. person may be treated as income that is effectively connected with
a U.S. trade or business under special rules governing United States real
property interests. The Trust Fund may be required to withhold tax on gain
realized upon a disposition of such real property by the Trust Fund at a 35%
rate.
REPORTING
Tax information will be reported annually to the Internal Revenue Service
and to Holders of Certificates that are not excluded from the reporting
requirements.
BACKUP WITHHOLDING
Distributions made on a Certificate and proceeds from the sale of a
Certificate to or through certain brokers may be subject to a "backup"
withholding tax of 31% unless, in general, the Owner of the Certificate
complies with certain procedures or is a corporation or other person exempt
from such withholding. Any amounts so
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withheld from distributions on the Certificates would be refunded by the
Internal Revenue Service or allowed as a credit against the Owner's federal
income tax.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series or in one or more classes of
a series through one or more of the various methods described below. The
Prospectus Supplement will describe the method of offering being utilized for
the related series or classes of Certificates and will state the public
offering or purchase price of each class of Certificates being offered thereby
or the method by which such price will be determined and the net proceeds to
the Company from the sale of each such class.
The Certificates of each series or class will be offered through the
following methods from time to time, and offerings may be made concurrently
through more than one of these methods and an offering of a particular series
or of one or more classes of Certificates may be made through a combination of
two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
2. By placements by the Company with institutional investors through
dealers or agents; and
3. By direct placements by the Company with institutional investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series or class of Certificates will be set forth on the cover of
the Prospectus Supplement relating to such series or class and the members of
the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Certificates, underwriters may receive
compensation from the Company or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Securities
Act"). The Prospectus Supplement will describe any such compensation paid by
the Company.
It is anticipated that the underwriting agreement pertaining to the sale of
any series or class of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Company will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act or will
contribute to payments required to be made in respect thereof.
Purchasers of Certificates, including dealers, institutional investors and
sophisticated non-institutional investors, may, depending on the facts and
circumstances of such purchases, be deemed to be underwriters within the
meaning of the Securities Act, in connection with reoffers and sales by them
of Certificates. Holders of Certificates should consult with their legal
advisors in this regard prior to any such reoffer or sale.
With respect to any series of Certificates offered other than through
underwriters, the Prospectus Supplement will contain information regarding the
nature of such offering and any agreements to be entered into between the
Company and purchasers of such Certificates.
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USE OF PROCEEDS
The net proceeds of sales of Certificates will be added to the Company's
general funds. Unless otherwise specified in the Prospectus Supplement, the
Company intends to use such proceeds for general corporate purposes, including
the acquisition of servicing rights, Mortgage Loans, Agency Securities and
Contracts.
LEGAL MATTERS
The legality of the Certificates offered hereby will be passed upon for the
Company by Cleary, Gottlieb, Steen & Hamilton, New York, New York. Certain
federal income tax matters will be passed upon for the Company by Cleary,
Gottlieb, Steen & Hamilton.
FINANCIAL INFORMATION
A Trust Fund will be formed with respect to each series of Certificates. No
Trust Fund will have any assets or obligations prior to the issuance of the
related series of Certificates. No Trust Fund will engage in any activities
other than those described herein or in the Prospectus Supplement.
Accordingly, no financial statement with respect to any Trust Fund is included
in this Prospectus or will be included in the Prospectus Supplement.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS
PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS NOR ANY SALE MADE THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms........................................................... S-4
Description of the Mortgage Pools and the Mortgaged Properties............. S-22
Description of the Certificates............................................ S-23
GE Capital Mortgage Services, Inc.......................................... S-28
Delinquency and Foreclosure Experience of the Company...................... S-29
The Pooling and Servicing Agreement........................................ S-30
Certain Federal Income Tax Consequences.................................... S-35
ERISA Considerations....................................................... S-36
Legal Investment Matters................................................... S-38
Plan of Distribution....................................................... S-38
Certificate Ratings........................................................ S-39
Legal Matters.............................................................. S-39
Pool 1 Annex............................................................... A1-1
Pool 2 Annex............................................................... A2-1
Index of Certain Prospectus Supplement Definitions......................... B-1
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 3
Reports of Certificateholders.............................................. 3
Prospectus Summary......................................................... 6
Description of the Certificates............................................ 15
The Trust Fund............................................................. 20
Credit Support............................................................. 32
Yield, Maturity and Weighted Average Life Considerations................... 39
Servicing of the Mortgage Loans and Contracts.............................. 41
The Pooling and Servicing Agreement........................................ 52
GE Capital Mortgage Services, Inc.......................................... 60
The Guarantor.............................................................. 61
Certain Legal Aspects of the Mortgage Loans and Contracts.................. 61
Legal Investment Matters................................................... 72
ERISA considerations....................................................... 73
Certain Federal Income Tax Consequences.................................... 75
Plan of Distribution....................................................... 89
Use of Proceeds............................................................ 90
Legal Matters.............................................................. 90
Financial Information...................................................... 90
</TABLE>
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Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus to which it relates. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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$669,370,221
(APPROXIMATE)
GE CAPITAL MORTGAGE
SERVICES, INC.
(SELLER AND SERVICER)
REMIC MULTI-CLASS
PASS-THROUGH CERTIFICATES,
SERIES 1998-8
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PROSPECTUS SUPPLEMENT
APRIL 24, 1998
--------
SALOMON SMITH BARNEY
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