<PAGE>
Rule 424(b)(5)
Registration No. 333-24935
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 22, 1998)
$446,001,625
(Approximate)
GE CAPITAL MORTGAGE SERVICES, INC.
(Seller and Servicer)
REMIC Multi-Class Pass-Through Certificates, Series 1998-2.
Principal and interest payable monthly, beginning February 25, 1998.
------------------
The REMIC Multi-Class Pass-Through Certificates, Series 1998-2 (the
'Certificates') will evidence beneficial ownership interests in a trust fund
(the 'Trust Fund'). The assets of the Trust Fund will consist primarily of
a pool (the '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 16.25 to 30
years and sold by GE Capital Mortgage Services, Inc. (the
'Company'). See 'Description of the Mortgage Pool 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
CERTIFICATE CERTIFICATE
PRINCIPAL INTEREST
BALANCE(1) RATE
------------ -----------
<S> <C> <C>
Class A1 $ 20,793,427 7.00%
Class A2 3,700,000 7.00
Class A3 25,344,335 7.00
Class A4 24,561,000 7.00
Class A5 34,060,499 7.00
Class A6 64,302,119 7.00
Class A7 9,800,000 7.00
Class A8 999,999 7.25
<CAPTION>
CLASS
CERTIFICATE CERTIFICATE
PRINCIPAL INTEREST
BALANCE(1) RATE
------------ -----------
<S> <C> <C>
Class A9 $ 5,000,000 6.95%
Class A10 3,300,000 7.00
Class A11 22,039,146 7.00
Class A12 217,450,000 7.00
Class R 100 7.00
Class M 7,889,000 7.00
Class B1 4,508,000 7.00
Class B2 2,254,000 7.00
</TABLE>
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(1) Approximate, subject to adjustment as described herein.
As described further herein, the Class M, Class B1 and Class B2
Certificates may not be acquired by ERISA Plans (as defined herein). The Class 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. Credit Suisse
First Boston Corporation ('CSFB') and Salomon Brothers Inc ('Salomon' and,
together with CSFB, the 'Underwriters') each expect to make a market in the
respective Certificates offered hereby by such Underwriter, but has no
obligation to do so. There can be no assurance that such a secondary market for
such Certificates will develop or, if it does develop, that it will continue.
See 'Summary of Terms--Liquidity Considerations' herein.
As described herein, the Senior Certificates offered hereby will be
purchased by CSFB and the Junior Certificates offered hereby will be purchased
by Salomon, in each case from the Company, and are being offered by the
respective Underwriters from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The Class A2,
Class A4, Class A7 and Class A10 Certificates will also be offered by AG Edwards
& Sons, Inc. (the 'Dealer') 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 99.478587% 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 by the respective Underwriters
when, as and if issued, delivered to and accepted by the respective Underwriters
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 Credit Suisse First Boston Corporation, New York, New
York, on or about January 29, 1998.
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CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY
The date of this Prospectus Supplement is January 26, 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. The
Certificates will consist of fourteen Classes of senior certificates (the 'Class
A1, Class A2, Class A3, Class A4, Class A5, Class A6, Class A7, Class A8, Class
A9, Class A10, Class A11, Class A12, Class PO and Class R Certificates,' and
collectively, the 'Senior Certificates') and six Classes of subordinated
certificates (the 'Class M, Class B1, Class B2, Class B3, Class B4 and Class B5
Certificates,' and collectively, the 'Junior Certificates'). The Junior
Certificates are subordinate in right of distribution to the Senior Certificates
to the extent described herein. The initial aggregate Certificate Principal
Balance of the Junior Certificates will equal approximately 4,25% of the initial
aggregate Certificate Principal Balance of all of the Certificates.
The Class M Certificates are subordinate to the Senior Certificates to the
extent described herein. The Class B1, Class B2, Class B3, Class B4 and Class B5
Certificates (collectively, the 'Class B Certificates') are subordinate to the
Senior Certificates and the Class M Certificates, and each Class of Class B
Certificates is subordinate to the Class or Classes of Class B Certificates
having a lower numerical designation (i.e., the Class B5 Certificates are
subordinate to the Class B4 Certificates, the Class B4 Certificates are
subordinate to the Class B3 Certificates, and so on) to the extent described
herein. The initial aggregate Certificate Principal Balance of the Class B3,
Class B4 and Class B5 Certificates will equal approximately 1.00% of the initial
aggregate Certificate Principal Balance of all of the Certificates and
approximately 23.53% of the initial aggregate Certificate Principal Balance of
all of the Junior Certificates.
The Class PO, Class B3, Class B4 and Class 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 February 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 Cross-Over Date and,
after the Cross-Over Date, the interest portion of any Realized Losses (each as
defined herein) allocable to Certificateholders.
Principal of the Certificates offered hereby will be distributable on each
Distribution Date commencing in February 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 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 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 such Certificates purchased at a premium, the
risk that a faster than anticipated rate of principal prepayments on the
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 Class M, Class B1 and Class B2 Certificates
will be sensitive, in varying degrees, to defaults on the Mortgage Loans (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 Mortgage Loans. See 'Yield and Weighted Average Life
Considerations' herein.
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 the Trust Fund as a 'real estate mortgage
investment conduit' (a 'REMIC') for federal income tax purposes. Each Class of
Certificates other than the Class R Certificates will be designated as regular
interests in the REMIC and will generally be treated as debt instruments for
federal income tax purposes. The Class R Certificates will be designated as the
residual interests in the REMIC. Prospective investors are cautioned that the
Class R 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 JANUARY 22, 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-2
<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.
<TABLE>
<S> <C>
SECURITIES OFFERED........ REMIC Multi-Class Pass-Through Certificates, Series
1998-2 (the 'Certificates'), 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 Certificates will be
approximately $450,800,718, subject to a permitted
variance such that the aggregate original
Certificate Principal Balance will not be less than
$427,842,000 or greater than $472,878,000.
The Certificates will consist of fourteen classes of
senior certificates (the 'Class A1, Class A2, Class
A3, Class A4, Class A5, Class A6, Class A7, Class
A8, Class A9, Class A10, Class A11, Class A12, Class
PO and Class R Certificates,' and collectively, the
'Senior Certificates') and six classes of
subordinated certificates (the 'Class M, Class B1,
Class B2, Class B3, Class B4 and Class B5
Certificates,' and collectively, the 'Junior
Certificates'). The Junior Certificates are
subordinate in right of distribution to the Senior
Certificates to the extent described herein. The
initial aggregate Certificate Principal Balance of
the Junior Certificates will equal approximately
4.25% of the initial aggregate Certificate Principal
Balance of all of the Certificates.
The Class M Certificates are subordinate to the
Senior Certificates to the extent described herein.
The Class B1, Class B2, Class B3, Class B4 and Class
B5 Certificates (collectively, the 'Class B
Certificates') are subordinate to the Senior
Certificates and the Class M Certificates, and each
Class of Class B Certificates is subordinate to the
Class or Classes of Class B Certificates having a
lower numerical designation (i.e., the Class B5
Certificates are subordinate to the Class B4
Certificates, the Class B4 Certificates are
subordinate to the Class B3 Certificates, and so on)
to the extent described herein. The initial
aggregate Certificate Principal Balance of the Class
B3, Class B4 and Class B5 Certificates will equal
approximately 1.00% of the initial aggregate
Certificate Principal Balance of all of the
Certificates and approximately 23.53% of the initial
aggregate Certificate Principal Balance of all of
the Junior Certificates.
The Class PO, Class B3, Class B4 and Class B5
Certificates are not offered hereby.
The Class PO Certificates will not bear interest. The
Company will initially retain and may subsequently
transfer the Class 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 Class A1,
Class A3, Class A5, Class A6, Class A8,
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Class A9, Class A11 and Class A12 Certificates),
$1,000 (in the case of the Class A2, Class A4, Class
A7 and Class A10 Certificates) or $100,000 (in the
case of the Class M, Class B1 and Class B2
Certificates), and, in each case, in integral
multiples of $1,000 in excess thereof. The Class R
Certificates (the 'Residual Certificates') will 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, a Massachusetts
banking corporation (the 'Trustee'). See 'The Pooling
and Servicing Agreement--Trustee' herein.
CUT-OFF DATE.............. January 1, 1998.
CLOSING DATE.............. On or about January 29, 1998.
MORTGAGE POOL............. The Certificates will represent the entire beneficial
ownership interest in a trust fund (the 'Trust
Fund'). The assets of the Trust Fund will consist
primarily of a pool (the '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 (as defined herein) will have
original terms to maturity of 16.25 to 30 years. The
Mortgage Loans 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
$450,800,718, subject to the variance described
herein. See 'Description of the Mortgage Pool and
the Mortgaged Properties' herein.
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 February 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. On each Distribution Date, (i) the Senior
Certificates will be entitled to receive all amounts
distributable to them for such Distribution Date
before any distributions are made to the Junior
Certificates on such date and (ii) the Junior
Certificates of each Class will be entitled to
receive all amounts distributable to them for such
Distribution Date before any distributions are made
on such date on any Class of Junior Certificates
subordinate thereto. The Available Funds (as defined
herein) for such Distribution Date will be allocated
first, to pay interest due the holders of the Senior
Certificates and then to reduce the Class
Certificate Principal Balances of the Senior
Certificates;
</TABLE>
S-4
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<TABLE>
<S> <C>
second, to pay the Class PO Deferred Amount (as
defined herein) for such Distribution Date to
holders of the Class PO Certificates, but only from
amounts that would otherwise be distributable on
such Distribution Date as principal on the Junior
Certificates; and third, to pay interest and
principal due the holders of the Junior Certificates
in order of priority among the Classes thereof. The
Available Funds will be allocated among the Classes
of Certificates offered hereby in the manner set
forth in 'Description of the
Certificates--Distributions on the
Certificates--Allocation of Available Funds' herein.
No distribution of interest or principal will be
made on any Class of Junior Certificates on any
Distribution Date until all distributions of
interest and principal have been made on such date
on each Class of Certificates having a higher
priority and the Class PO Deferred Amount for such
Distribution Date has, subject to the limitation
described above, been paid.
Interest. Interest will accrue on 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 Certificates offered
hereby from the Available Funds for such
Distribution Date 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 a Class 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 Net Interest
Shortfall, the interest portion of any Excess Losses
allocable to Certificateholders through the Cross-
Over Date and, after the Cross-Over Date, the
interest portion of any Realized Losses (as each
such term is defined herein) allocable to
Certificateholders.
The shortfall or losses described in the preceding
paragraph will be allocated among the 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 Certificates. Interest will be calculated on the
Certificates on the basis of a 360-day year
consisting of twelve 30-day months.
Excess Losses 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, as more fully described herein.
Principal. Principal will be distributable on the
Senior Certificates on each Distribution Date in an
aggregate amount equal to the sum of the Senior
Optimal Principal Amount and the Class PO Principal
</TABLE>
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<TABLE>
<S> <C>
Distribution Amount (each as defined herein) for
such Distribution Date, to the extent of the
Available Funds for such Distribution Date remaining
after distributions of interest are made on the
Senior Certificates (other than the Class PO
Certificates) on such date. Subject to such
limitations, the Senior Optimal Principal Amount and
the Class PO Principal Distribution Amount will be
allocated among the Senior Certificates in the
manner described herein. The Class A5 Certificates
will not receive any distributions in respect of
principal (including scheduled payments, prepayments
and other unscheduled recoveries of principal)
during the first five years after the Cut-off Date,
except as otherwise described herein on or following
the earlier of the Category A Group I Final
Distribution Date (as defined herein) or the
Cross-Over Date. The Class A11 Certificates will not
receive any distributions in respect of principal
prepayments or certain other unscheduled recoveries
of principal on the Mortgage Loans during the first
five years after the Cut-off Date, except as
otherwise described herein on or following the
earlier of the Category B Group I Final Distribution
Date (as defined herein) or the Cross-Over Date.
Principal will be distributable on each Class of
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 Available Funds remaining after
(i) distributions of interest and principal have
been made on each Senior Certificate entitled
thereto, (ii) the Class PO Deferred Amount for such
Distribution Date has, subject to the limitations
described herein, been distributed in respect of the
Class PO Certificates, (iii) distributions of
interest and principal have been made on each Class
of Junior Certificates, if any, ranking prior to
such Class of Junior Certificates and (iv)
distributions of interest have been made on such
Class of Junior Certificates. Distributions of
principal of a Class of Certificates will be made on
a pro rata basis among all outstanding Certificates
of such Class. See 'Description of the
Certificates--Distributions on the Certificates'
herein.
The principal portion of any Excess Losses will be
allocated pro rata among all the outstanding
Certificates, as described herein.
Class PO Deferred Amount. On each Distribution Date,
the PO Percentage (as defined herein) of the
principal portion of any Realized Loss (other than a
Debt Service Reduction) in respect of a Discount
Mortgage Loan (as defined herein) will be allocated
to the Class PO Certificates. See 'Description of
the Certificates--Allocation of Realized Losses on
the Certificates.' On each Distribution Date through
the date on which the Class Certificate Principal
Balances of the Junior Certificates have been
reduced to zero (the 'Cross-Over Date'), the Class
PO Certificates will be entitled to receive, to the
extent of Available Funds remaining after
distributions of interest and principal on the
Senior Certificates have been made on such
Distribution Date, any Class PO Deferred Amount for
such Distribution Date, provided, however, that
distributions in respect of the Class PO Deferred
Amount on any Distribution Date will not exceed the
Junior Optimal Principal Amount for such date.
Distributions in respect of the Class PO Deferred
Amount will not reduce the Class Certificate
Principal Balance of the Class PO Certificates. The
'Class PO Deferred Amount' means, as to
</TABLE>
S-6
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<TABLE>
<S> <C>
each Distribution Date through the Cross-Over Date,
the aggregate of all amounts allocable on such date
to the Class PO Certificates in respect of the
principal portion of Realized Losses (other than
Excess Losses) in respect of the Discount Mortgage
Loans and all amounts previously allocated in
respect of such losses to the Class PO Certificates
and not distributed thereto on prior Distribution
Dates.
ADDITIONAL RIGHTS OF THE
RESIDUAL
CERTIFICATEHOLDERS ..... In addition to distributions of principal and
interest, the holders of the Class R Certificates
will be entitled to receive (i) the amount, if any,
of Available Funds remaining in the REMIC on any
Distribution Date after distributions of interest
and principal, and in respect of any Class PO
Deferred Amount, are made on the Certificates on
such date and (ii) the proceeds, if any, of the
assets of the Trust Fund remaining after the Class
Certificate Principal Balances of all Classes of
Certificates 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.
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 the 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 to receive distributions with respect to
the Mortgage Loans will be subordinate to such
rights of the holders of the Senior Certificates and
of each prior-ranking Class of Junior Certificates.
The subordination of the Junior Certificates
relative to the Senior Certificates is intended to
enhance the likelihood of regular receipt by the
holders of the 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 Mortgage
Loans and certain losses resulting from the
bankruptcy of a related borrower (the 'Mortgagor').
The subordination of each Class of Junior
Certificates (other than the Class M Certificates)
relative to each Class of 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 Mortgage Pool, is less than
the protection afforded to the Senior Certificates
by virtue of the subordination of the Junior
Certificates.
As of the date of the initial issuance of the
Certificates, the aggregate Certificate Principal
Balance of the Junior Certificates will equal
approximately 4.25% of the aggregate Certificate
Principal Balance of all the Certificates. As of
such date, the aggregate Certificate Principal
Balance of the Class B3, Class B4 and Class B5
Certificates, all of which are subordinate in right
of distribution to the Certificates offered hereby,
will equal approximately 1.00% of the initial
aggregate Certificate Principal Balance of all of
the Certificates and approximately 23.53% of the
initial aggregate Certificate Principal Balance of
all of the Junior Certificates.
</TABLE>
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<TABLE>
<S> <C>
The protection afforded to the holders of Senior
Certificates 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 Junior Certificates, the
amounts due them on each Distribution Date out of
the Available Funds and, if necessary, by the right
of such holders to receive future distributions with
respect to the Mortgage Loans that would otherwise
have been payable to the holders of the 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
to the Junior Certificates, subject to the pro rata
allocation of any Excess Loss as described herein,
before such loss is allocated to the Senior
Certificates (other than the Class PO Certificates).
See 'Description of the Certificates--Subordination
--Priority of Senior Certificates' herein.
In addition, in order to extend the period during
which the Junior Certificates remain available as
credit enhancement for the Senior Certificates, the
entire amount of the applicable Non-PO Percentage of
any principal prepayments and certain other
unscheduled recoveries of principal with respect to
the Mortgage Loans will be allocated to the
outstanding Senior Certificates (other than the
Class PO Certificates and, to the extent described
herein, the Class A5 and Class A11 Certificates)
during the first five years after the Cut-off Date
(with such allocation being subject to reduction
thereafter as described herein). This allocation has
the effect of accelerating the amortization of such
Senior Certificates as a whole while, in the absence
of losses in respect of the Mortgage Loans,
increasing the percentage interest in the principal
balance of the Mortgage Loans evidenced by the
Junior Certificates. See 'Description of the
Certificates--Subordination' and '--Distributions on
the Certificates--Principal' herein.
On each Distribution Date, the holders of any
particular Class of Junior Certificates, other than
the Class B5 Certificates, will have a preferential
right to receive the amounts due them on such
Distribution Date out of Available Funds, prior to
any distribution being made on such date on any
Class of 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
Mortgage Loan will be allocated in reduction of the
Class Certificate Principal Balances of the 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 PO
Deferred Payment Writedown Amount (as defined
herein), to the extent distributions are made in
respect of the Class PO Deferred Amount. In order to
maintain the relative levels of subordination among
the Junior Certificates, prepayments and certain
other unscheduled recoveries of principal in respect
of the Mortgage Loans (which will not be
distributable to the Junior Certificates for at
least the first five years, except as otherwise
described herein on or following the Senior Final
Distribution Date) will not be distributable to the
holders of any Class of Class B Certificates on any
Distribution Date for which the related Class
Prepayment Distribution Trigger (as defined herein)
is not satisfied,
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except as described herein. See 'Description of the
Certificates--Distributions on the Certificates'
herein.
PAYMENT ENTITLEMENT AMONG
THE SENIOR
CERTIFICATES............ 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 a Mortgage
Loan allocable to the Class A1, Class A2, Class A3,
Class A4, Class A5, Class A12 and Class R
Certificates (together, the 'Category A Senior
Certificates') will be allocated to the Class A1,
Class A2, Class A3, Class A4, Class A12 and Class R
Certificates (together, the 'Category A 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 Category A Group I Final Distribution
Date. This allocation prior to the Category A Group
I Final Distribution Date has the effect of
accelerating the amortization of the Category A
Group I Senior Certificates while increasing the
percentage interest in the principal balance of the
Mortgage Loans evidenced by the Class A5
Certificates (the 'Category A Group II Senior
Certificates'). Notwithstanding the foregoing, all
distributions of principal on the outstanding
Category A Senior Certificates will be made pro rata
among such Certificates on each Distribution Date
after the Cross-Over Date. See 'Description of the
Certificates--Distributions on the
Certificates--Principal' herein.
The entire amount of the applicable Non-PO Percentage
of any prepayments and certain other unscheduled
recoveries of principal with respect to a Mortgage
Loan allocable to the Class A6, Class A7, Class A8,
Class A9, Class A10 and Class A11 Certificates
(together, the 'Category B Senior Certificates')
will be allocated to the Class A6, Class A7, Class
A8, Class A9 and Class A10 Certificates (together,
the '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 Category B
Group I Final Distribution Date. This allocation
prior to the Category B Group I Final Distribution
Date has the effect of accelerating the amortization
of the Category B Group I Senior Certificates while
increasing the percentage interest in the principal
balance of the Mortgage Loans evidenced by the Class
A11 Certificates (the 'Category B Group II Senior
Certificates'). Notwithstanding the foregoing,
all distributions of principal on the outstanding
Category B Senior Certificates will be made pro
rata among such Certificates on each Distribution
Date after the Cross-Over Date. See 'Description
of the Certificates--Distributions on the
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 yield to
maturity of the Certificates are related to the rate
of principal payments on or in respect of the
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
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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 prepayment
rate on such Mortgage Loans is likely to decrease,
although other economic, geographic and social
factors also may influence the prepayment rate. See
'Yield and Weighted Average Life
Considerations--Prepayments.'
The entire amount of the applicable Non-PO Percentage
of any principal prepayments and certain other
unscheduled recoveries of principal with respect to
a Mortgage Loan will be allocated solely to the
outstanding Senior Certificates (other than the
Class PO Certificates) during the first five years
after the Cut-off Date (with such allocation being
subject to reduction thereafter as described
herein). Among such Senior Certificates, such
amounts allocable to the Category A Senior
Certificates will be allocated solely to the
outstanding Category A Group I Senior Certificates
during the first five years after the Cut-off Date
(except as otherwise described herein on or
following the Category A Group I Final Distribution
Date) and such amounts allocable to the Category B
Senior Certificates will be allocated solely to the
outstanding 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 Category B Group I Final Distribution
Date). Notwithstanding the foregoing, all
distributions of principal will be made pro rata
among all of the outstanding Senior Certificates
(other than the Class PO Certificates) on each
Distribution Date after the Cross-Over Date. The
entire amount of the applicable PO Percentage of any
prepayment or unscheduled recovery of principal with
respect to a Mortgage Loan will be allocated solely
to the Class PO Certificates, so long as such Class
is outstanding. See 'Description of the
Certificates--Distributions on the
Certificates--Principal' herein.
Voluntary prepayments in full of principal on the
Mortgage Loans received, and any modifications and
repurchases by the Company in lieu of refinancings
that occur, 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
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
Compensating Interest Payment (as defined herein),
generally will produce a lower yield on the
Certificates than would otherwise be the case,
although such early
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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 through the Cross-Over Date
and the entire amount of the interest portion of all
Realized Losses allocable to Certificateholders
after the Cross-Over Date.
The yields to investors will be sensitive, in varying
degrees, to the rate and timing of Mortgage Loan
prepayments (including unscheduled recoveries of
principal). The extent to which the 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 prepayments on the
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 prepayments on the
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 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 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 Certificates offered hereby were structured on
the basis of, among other things, a prepayment
assumption of 250% 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 250% of
the Prepayment Assumption, based on the assumptions
described under 'Yield and Weighted Average Life
Considerations--Weighted Average Lives of the
Certificates--Tables of Class Certificate Principal
Balances' herein, are set forth in the tables that
appear under such heading. The Mortgage Loans are
not likely to prepay at a constant rate of 250% of
the Prepayment Assumption or at 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 Class M, Class B1 and Class B2
Certificates will be sensitive, in varying degrees,
to the liquidation of and any subsequent loss
experience on the Mortgage Loans and to the timing
of any such losses. Among the Junior Certificates
offered hereby, such yield sensitivity will
generally be greatest among the Class B2
Certificates relative to the Class M and Class B1
Certificates, greater among the Class B1
Certificates than the Class M Certificates and
greater among the Class M Certificates than the
Senior Certificates. See 'Yield and
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Weighted Average Life Considerations--The Class M,
Class B1 and Class 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)
will be allocated, to the extent described herein,
among the Certificates (other than the Class PO
Certificates) in inverse order of priority,
beginning with the Class B5 Certificates and ending
with the Senior Certificates (other than the Class
PO Certificates) and (ii) the applicable PO
Percentage of any such loss will be allocated, to
the extent described herein, among the Junior
Certificates in inverse order of priority, through
the operation of the Class PO Deferred Payment
Writedown Amount. Certain Realized Loss scenarios
could result in the failure of investors in the
Class M, Class B1 and Class B2 Certificates to fully
recover their 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 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 Mortgage Pool.
The weighted average lives of all Classes of the
Certificates will be affected in part by the
prepayment experience of the Mortgage Loans and the
resulting allocation of principal payments on the
Certificates.
OPTIONAL TERMINATION...... The Company may, at its option, repurchase from the
Trust Fund all of the Mortgage Loans underlying the
Certificates, and thereby effect the early
retirement of the Certificates, on any Distribution
Date after the aggregate Scheduled Principal Balance
of the Mortgage Loans 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 plus accrued and unpaid interest
thereon, the resulting shortfall will be allocated
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 Mortgage Loans which, in turn, will
depend on the characteristics of the 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 R Certificates
(the 'Regular Certificates') will be treated as
regular interests in the REMIC and generally will be
treated as debt instruments issued by the 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
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be used by a holder of a Regular Certificate to
amortize premium, will be 250% of the Prepayment
Assumption. No representation is made that the
Mortgage Loans will prepay at such rate or at any
other rate. The holders of the Residual Certificates
will be subject to special federal income tax rules
that may significantly reduce the after-tax yield of
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 Regular Certificates to receive cash
distributions in the event of losses or
delinquencies on the Mortgage Loans.
See 'Certain Federal Income Tax Consequences' herein
and 'Certain Federal Income Tax Consequences--REMIC
Certificates' in the Prospectus.
LEGAL INVESTMENT.......... The Senior Certificates offered hereby and the Class
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 B1 and Class B2 Certificates will not
constitute 'mortgage related securities' under
SMMEA. The appropriate characterization of the Class
B1 and Class B2 Certificates under various legal
investment restrictions, and thus the ability of
investors subject to these restrictions to purchase
Class B1 and Class 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 B1 and Class 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 Class M, Class B1 and Class B2
Certificates 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'), and that
the Class M, Class B1 and Class 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
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ratings do not address the possibility that
Certificateholders may suffer a lower than
anticipated yield. See 'Certificate Ratings' herein.
LIQUIDITY
CONSIDERATIONS.......... There is currently no secondary market for the
Certificates offered hereby. CSFB and Salomon each
expect to make a market in the respective
Certificates offered hereby by such Underwriter, 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 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 POOL AND THE MORTGAGED PROPERTIES
GENERAL
The Certificates will represent the entire beneficial ownership interest in
a trust fund (the 'Trust Fund'). The assets of the Trust Fund will consist
primarily of a pool (the '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').
Certain data with respect to the Mortgage Loans are set forth below. A
detailed description of the Mortgage Pool 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: 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 the original
Class Certificate Principal Balance of each Class of Certificates on the date of
issuance of the Certificates, the initial Senior Percentage, the Category A
Percentage, the Category B Percentage, the initial Class A5 Percentage, the
initial Class A11 Percentage and the initial Junior Percentage, and the
Bankruptcy Loss Amount, Fraud Loss Amount and Special Hazard Loss Amount 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 the Cut-off Date
is the then outstanding principal balance thereof, after deducting payments of
principal due on or before such date. 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 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' as of any
Distribution Date is equal to the aggregate Scheduled Principal Balances of all
of the Mortgage Loans 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.
It is expected that at least 92% (by Scheduled Principal Balance as of the
Cut-off Date) of the Mortgage Loans (and substantially all of the 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 6.12% (by
Scheduled Principal Balance as of the Cut-off Date) of the Mortgage Loans will
have been originated under the Company's 'No Income Verification Program' or
other no income verification programs acceptable to the Company, and that the
remainder of the 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.
It is expected that approximately 14 Mortgage Loans, having an aggregate
Scheduled Principal Balance as of the Cut-off Date of approximately $3,312,465
will be Pledged Asset Mortgage Loans. 'Pledged Asset Mortgage Loans' are
Mortgage Loans that will be master-serviced by the Company and directly serviced
by Merrill Lynch Credit Corporation ('MLCC') and that had a loan-to-value ratio
at origination of greater than 80% and which, in addition to being secured by
the related Mortgaged Property, are either (i) secured by a security interest in
a limited amount of additional collateral (normally securities) owned by the
Mortgagor or (ii) supported by a third-party guarantee (usually by a parent of
the Mortgagor), which guarantee in turn is secured by a security interest in
collateral (normally securities) or by a lien on residential real estate of the
guarantor and/or supported by the right to draw on a home equity line of credit
extended by MLCC to the guarantor. The amount of such additional collateral
referred to in clauses (i) and (ii) of the immediately preceding sentence (the
'Additional Collateral') generally does not exceed 30% of the original principal
balance of any such Pledged Asset Mortgage Loan, although the amount of the
Additional Collateral may exceed 30% of such original principal balance if the
original principal balance of the loan exceeds $1,000,000. In limited cases,
MLCC may have required Additional Collateral in excess of 30% of the original
principal balance of any such
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Pledged Asset Mortgage Loan as part of the underwriting decision. The
requirement to maintain Additional Collateral generally terminates when the
principal balance of such Pledged Asset Mortgage Loan is reduced to a
predetermined amount set forth in the related pledge agreement or guaranty
agreement, as applicable, or the loan-to-value ratio for such Pledged Asset
Mortgage Loan is reduced to MLCC's applicable loan-to-value ratio limit for such
Mortgage Loan by virtue of a reduction in the principal balance of the related
Mortgage Loan or an increase in the appraised value of the Mortgaged Property as
determined by MLCC. Pursuant to a separate agreement between the Company and
MLCC, MLCC will be responsible for administering any pledge agreements or
guaranty agreements, as applicable, relating to any Additional Collateral. MLCC
has advised the Company that its normal servicing procedures provide that it
will attempt to realize on the security interest in any Additional Collateral if
the related Mortgage Loan is liquidated upon default. The pledge agreement or
guaranty agreement, as applicable, and the security interest in such Additional
Collateral, if any, will be assigned by the Company to the Trustee, but will not
be part of the REMIC created by the Agreement. To the extent that the Mortgage
Loans include any Pledged Asset Mortgage Loans that are supported by a guarantee
that is secured by a lien on residential real estate, such lien will not be
transferred to the Trustee. The right to receive proceeds from the realization
of any Additional Collateral upon any liquidation thereof will be assigned by
the Company to the Trustee. No assurance can be given as to the amount of
proceeds, if any, that might be realized from the liquidation of such Additional
Collateral. Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and Guam, has previously issued a
limited purpose surety bond (the 'Limited Purpose Surety Bond') relating to the
Pledged Asset Mortgage Loans. The Limited Purpose Surety Bond, which is limited
in amount, is intended to guarantee receipt by the Trust Fund of certain
shortfalls in the net proceeds realized from the liquidation of any required
Additional Collateral (such amount not to exceed 30% of the original principal
balance of the related Pledged Asset Mortgage Loan) to the extent any such
shortfall results in a loss of principal on the related Pledged Asset Mortgage
Loan that becomes a Liquidated Mortgage Loan, as more particularly described in,
and as limited by, the terms and provisions of the Limited Purpose Surety Bond.
The Company will assign its rights as beneficiary under the Limited Purpose
Surety Bond to the Trustee. The Limited Purpose Surety Bond will not cover any
payments on the Certificates that are recoverable or sought to be recovered as a
voidable preference under applicable law.
See 'The Pooling and Servicing Agreement--Servicing Arrangement with
Respect to the Mortgage Loans' herein.
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.
Certain Mortgage Loans are Cooperative Loans. See 'The Trust Fund--The
Mortgage Loans' in the Prospectus.
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.
No more than 0.50% (by Scheduled Principal Balance as of the Cut-off Date)
will be Relocation Loans.
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.
THE MORTGAGE LOANS
The Mortgage Loans will have an aggregate Scheduled Principal Balance as of
the Cut-off Date of approximately $450,800,718. This amount is subject to a
permitted variance such that the aggregate Scheduled Principal Balance thereof
will not be less than $427,842,000 or greater than $472,878,000.
The Mortgage Rates borne by the Mortgage Loans are expected to range from
6.625% to 10.375% per annum, and the weighted average Mortgage Rate as of the
Cut-off Date of the Mortgage Loans is expected to be between 7.70% and 7.74% per
annum. The original principal balances of the Mortgage Loans are expected to
range from $49,500 to $1,000,000 and, as of the Cut-off Date, the average
Scheduled Principal Balance of the Mortgage Loans is not expected to exceed
$305,000 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
Mortgage Loan will be July 1987 and the month and year of the latest scheduled
maturity date of any Mortgage Loan will be February 2028. All of the Mortgage
Loans will have original terms to maturity of 16.25 to 30 years, and it is
expected that the weighted average scheduled remaining term to maturity of the
Mortgage Loans will be between 356 and 358 months as of the Cut-off Date.
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The Mortgage Loans are expected to have the following additional
characteristics (by Scheduled Principal Balance of all the Mortgage Loans) as of
the Cut-off Date:
No more than 10% of the Mortgage Loans will have a Scheduled Principal
Balance of more than $500,000 and up to and including $750,000. No more
than 3% of the Mortgage Loans will have a Scheduled Principal Balance of
more than $750,000 and up to and including $1,000,000. None of the Mortgage
Loans will have a Scheduled Principal Balance of more than $1,000,000.
No more than 18% of the Mortgage Loans will have a loan-to-value ratio
at origination in excess of 80%, no more than 7% of the Mortgage Loans will
have a loan-to-value ratio at origination in excess of 90%, and none of the
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 the Mortgage Loans is expected to be between 75% and 77%.
With respect to the Pledged Asset Mortgage Loans, the loan-to-value ratios
set forth in this paragraph will be calculated based on the Pledged Asset
Loan-to-Value Ratio (as defined herein) at origination of such Pledged
Asset Mortgage Loans.
None of the Pledged Asset Mortgage Loans will have a Pledged Asset
Loan-to-Value Ratio at origination in excess of 70%. As of the Cut-off
Date, the weighted average Pledged Asset Loan-to-Value Ratio at origination
of the Pledged Asset Mortgage Loans is expected to be between 68% and 70%.
With respect to any Pledged Asset Mortgage Loan, the 'Pledged Asset
Loan-to-Value Ratio' is calculated as (i) the original loan amount less the
portion of any required Additional Collateral which is covered by the
Limited Purpose Surety Bond, divided by (ii) the Original Value (as defined
in the accompanying Prospectus) of the related Mortgaged Property.
None of the Mortgage Loans will have a loan-to-value ratio (and none
of the Pledged Asset Mortgage Loans will have a Pledged Asset Loan-to-Value
Ratio) at origination calculated on the basis of an appraisal conducted
more than one year before the origination date thereof.
The proceeds of at least 55% of the Mortgage Loans will have been used
to acquire the related Mortgaged Property. The proceeds of the remainder of
the Mortgage Loans will have been used to refinance an existing loan. No
more than 10% of the Mortgage Loans will have been the subject of
'cash-out' refinancings.
No more than 1% of the Mortgage Loans will be temporary buy-down
Mortgage Loans. The portion of the interest rate paid by the related
Mortgagor will not increase by more than one percentage point for each
six-month period. No Mortgage Rate may exceed the 'bought-down' rate by
more than three percentage points, and no buy-down period will exceed three
years.
No more than 1% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
No more than 52% of the Mortgage Loans will be secured by Mortgaged
Properties located in California. The majority of the Mortgage Loans will
be secured by Mortgaged Properties located in California, Massachusetts,
New Jersey, Maryland, Virginia and Texas. No more than 4% of the Mortgage
Loans will be secured by Mortgaged Properties located in any one state
except the states specified in the preceding sentence.
At least 95% of the 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 89% of the Mortgage Loans will be secured by single-family,
detached residences.
No more than 6% of the Mortgage Loans will be secured by condominiums.
No more than 1% of the Mortgage Loans will be secured by shares of
stock in cooperative housing corporations and assignments of the
proprietary leases to cooperative apartment units therein.
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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. Reference is made to the
Prospectus for important additional information regarding the terms and
conditions of the Agreement and the Certificates. The Certificates will be
issued in the sixteen Classes offered hereby, together with the Class PO, Class
B3, Class B4 and Class B5 Certificates, none of which are offered hereby, and in
the aggregate original Certificate Principal Balance of approximately
$450,800,718 subject to a permitted variance such that the aggregate original
Certificate Principal Balance will not be less than $427,842,000 or greater than
$472,878,000. 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 R Certificates (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 Class A1, Class A3, Class A5, Class A6, Class A8, Class A9, Class A11 and
Class A12 Certificates), $1,000 (in the case of the Class A2, Class A4, Class A7
and Class A10 Certificates) or $100,000 (in the case of the Class M, Class B1
and Class B2 Certificates) and, in each case, in integral multiples of $1,000 in
excess thereof. 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 offered hereby other than the Residual
Certificates (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 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
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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 (as described
in the accompanying Prospectus) beneficial owners of the Book-Entry Certificates
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 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 M, Class B1 or Class B2 Certificates, no transfer of a
Class M, Class B1 or Class B2 Certificate 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
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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 the Mortgage Pool
that will be available for distribution to holders of the Certificates on each
Distribution Date is as described in the accompanying Prospectus under
'Servicing of the Mortgage Loans and Contracts--Loan Payment Record.'
DISTRIBUTIONS ON THE CERTIFICATES
Allocation of Available Funds. Interest and principal on the Certificates
will be distributed monthly on each Distribution Date commencing in February
1998 in an aggregate amount equal to the Available Funds for such Distribution
Date.
On each Distribution Date, the Available Funds will be distributed in the
following order of priority among the Certificates:
first, to the Classes of Senior Certificates (other than the Class 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 Senior Certificates (other than the Class PO
Certificates), any Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates, to the extent of remaining
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 Senior Certificates, in reduction of the Class
Certificate Principal Balances thereof, concurrently, to the extent of
remaining Available Funds, as follows:
(a) to the Class A1, Class A2, Class A3, Class A4, Class A5, Class A6,
Class A7, Class A8, Class A9, Class A10, Class A11, Class A12 and Class R
Certificates, the Senior Optimal Principal Amount for such Distribution
Date, concurrently, as follows:
(i) to the Class A1, Class A2, Class A3, Class A4, Class A5, Class
A12 and Class R Certificates (the 'Category A Senior Certificates'), the
Category A Senior Optimal Principal Amount (as defined herein) for such
Distribution Date, concurrently, as follows:
(A) to the Class A5 Certificates (the 'Category A Group II
Senior Certificates'), the Class A5 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 A1, Class A2, Class A3, Class A4, Class A12 and
Class R Certificates (the 'Category A Group I Senior Certificates'),
the Category A Senior Optimal Principal Amount for
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such Distribution Date, less the Class A5 Principal Distribution
Amount for such Distribution Date, concurrently, as follows:
(1) approximately 81.866558725865% of the amount set forth
in clause (a)(i)(B) sequentially, as follows:
(x) to the Class A12 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
(y) to the Class A4 Certificates, until the Class
Certificate Principal Balance thereof has been reduced zero;
and
(2) approximately 18.133441274135% of the amount set forth
in clause (a)(i)(B) sequentially, as follows:
(v) to the Class R Certificates, until the Class
Certificate Principal balance thereof has been reduced to
zero;
(w) concurrently, approximately 51.710921665519% of the
amount set forth in subclause (2) to the Class A1
Certificates and approximately 48.289078334481% of such
amount to the Class A3 Certificates, until the Class
Certificate Principal Balance of the Class A1 Certificates
has been reduced to zero;
(x) concurrently, approximately 36.247652388797% of the
remaining amount pursuant to subclause (2) to the Class A2
Certificates and approximately 63.752347611203% of such
amount to the Class A3 Certificates, until the Class
Certificate Principal Balance of the Class A2 Certificates
has been reduced to approximately $2,819,907;
(y) concurrently, approximately 39.171566283671% of the
remaining amount pursuant to subclause (2) to the Class A2
Certificates and approximately 60.828433716329% of such
amount to the Class A3 Certificates, until the Class
Certificate Principal Balances thereof have been reduced to
zero; and
(z) to the Class A4 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
(ii) to the Class A6, Class A7, Class A8, Class A9, Class A10 and
Class A11 Certificates (the 'Category B Senior Certificates'), the
Category B Senior Optimal Principal Amount (as defined herein) for such
Distribution Date, concurrently, as follows:
(A) to the Class A11 Certificates (the 'Category B Group II
Senior Certificates' and, together with the Category A Group II
Senior Certificates, the 'Group II Senior Certificates'), the Class
A11 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 A6, Class A7, Class A8, Class A9 and Class A10
Certificates (the 'Category B Group I Senior Certificates' and,
together with the Category A Group I Senior Certificates, the 'Group
I Senior Certificates') the Category B Senior Optimal Principal
Amount for such Distribution Date, less the Class A11 Principal
Distribution Amount for such Distribution Date, in the following
order of priority:
(1) concurrently, approximately 93.022956962025% of the
amount set forth in clause (a)(ii)(B) to the Class A6
Certificates, approximately 1.162839537295% of such amount to the
Class A8 Certificates and approximately 5.814203500679% of such
amount to the Class A9 Certificates, until the Class Certificate
Principal Balance of the Class A6 Certificates has been reduced
to zero;
(2) concurrently, approximately 89.276620694066% of such
amount to the Class A7 Certificates, approximately
1.787228394964% of such amount to the Class A8 Certificates and
approximately 8.936150910970% of such amount to the Class A9
Certificates, until the Class Certificate Principal Balances
thereof have been reduced to zero; and
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<PAGE>
(3) to the Class A10 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
and
(b) to the Class PO Certificates, the Class PO Principal Distribution
Amount for such Distribution Date, until the Class Certificate Principal
Balance thereof has been reduced to zero;
fourth, to the Class PO Certificates, to the extent of remaining
Available Funds, the Class 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 Junior Optimal Principal
Amount for such Distribution Date, (ii) such distributions shall not reduce
the Class Certificate Principal Balance of the Class PO Certificates and
(iii) no distribution will be made in respect of the Class PO Deferred
Amount after the Distribution Date on which the respective Class
Certificate Principal Balances of the Junior Certificates have been reduced
to zero (the 'Cross-Over Date');
fifth, to the Class M Certificates, to the extent of remaining
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 B1 Certificates, to the extent of remaining
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 B2 Certificates, to the extent of remaining
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 B3, Class B4 and Class B5 Certificates, to the
extent of remaining 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 Share for such Distribution Date.
The percentages set forth in priority third above and in the definitions of
'Category A Percentage' and 'Category B Percentage' below were calculated on the
basis of the Class Certificate Principal Balances of the related Certificates
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 Cross-Over Date, distributions of
principal on the outstanding Senior Certificates (other than the Class PO
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.
'Pro rata' distributions among Classes of Certificates will be made in
proportion to the then-current Class Certificate Principal Balances of such
Classes.
If, after distributions have been made pursuant to priorities first and
second above on any Distribution Date, the remaining Available Funds are less
than the sum of the Senior Optimal Principal Amount and the Class PO Principal
Distribution Amount for such Distribution Date, the amounts distributable under
priority third above shall be proportionately reduced, and such remaining
Available Funds will be distributed on the Senior Certificates in accordance
with the applicable clauses of priority third above on the basis of such reduced
amounts. Notwithstanding such allocation, Realized Losses will be allocated to
the Certificates as described under '--Allocation of Realized Losses on the
Certificates' herein.
Interest. Interest will accrue on the 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.
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<PAGE>
Interest will accrue on the Class B3, Class B4 and Class B5 Certificates at
the Certificate Interest Rate of 7.00% per annum during each Interest Accrual
Period.
The Class PO Certificates are principal-only Certificates and will not
accrue interest.
The 'Accrued Certificate Interest' for any Certificate (other than a Class
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 Cross-Over Date
and, after the Cross-Over Date, the interest portion of Realized Losses
allocable to Certificateholders including Excess Losses.
The 'Certificate Principal Balance' of any 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 Junior Certificate, such Certificate's
pro rata share, if any, of the Junior Certificate Writedown Amount and the Class
PO Deferred Payment Writedown Amount for previous Distribution Dates. As of any
Distribution Date, the 'Junior Certificate Writedown Amount' will equal the
amount by which (a) the sum of the Class Certificate Principal Balances of all
of the Certificates (after giving effect to the distribution of principal and
the application of Realized Losses in reduction of the Certificate Principal
Balances of the Certificates on such Distribution Date) exceeds (b) the Pool
Scheduled Principal Balance on the first day of the month of such Distribution
Date less any Deficient Valuations occurring on or prior to the Bankruptcy
Coverage Termination Date. For any Distribution Date, the 'Class PO Deferred
Payment Writedown Amount' will equal the amount, if any, distributed on such
date in respect of the Class PO Deferred Amount pursuant to priority fourth
under '--Allocation of Available Funds' above. The Junior Certificate Writedown
Amount and the Class PO Deferred Payment Writedown Amount will be allocated to
the Classes of 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 will equal the excess of the aggregate Interest
Shortfalls allocable to Certificateholders with respect to such Distribution
Date over the 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 will be allocated on each
Distribution Date between the outstanding Certificates (other than the 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; (iii) any modification and repurchase of such Mortgage Loan
by the Company in lieu of a refinancing (as described under 'The Pooling and
Servicing Agreement--Certain Modifications and Refinancings' in the accompanying
Prospectus) during the period described in clause (i) above; or (iv) a reduction
in the interest rate on such Mortgage Loan due 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 or a modification and repurchase 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
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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 Cross-Over Date and, after the
Cross-Over Date, the interest portion of any Realized Losses allocable to
Certificateholders (see '--Allocation of Realized Losses on the Certificates')
will, on each Distribution Date, be allocated among all the outstanding
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 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)
occurring prior to the Cross-Over Date will not be allocated among any
Certificates, but will reduce the amount of Available Funds on the related
Distribution Date. As a result of the subordination of the Junior Certificates
in right of distribution, such losses will be borne first by the Junior
Certificates (to the extent then outstanding) in inverse order of priority.
If Available Funds are insufficient on any Distribution Date to distribute
the aggregate Accrued Certificate Interest on the Senior Certificates (other
than the Class PO Certificates) to their Certificateholders, any shortfall in
available amounts will be allocated among such Classes of 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 Senior Certificates (other than the Class PO Certificates) on subsequent
Distribution Dates in accordance with priority second under '--Allocation of
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 Mortgage Loans will be allocated between (i) the Senior Certificates
(other than the Class PO Certificates) and the Junior Certificates, on the one
hand, and (ii) the Class 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 Mortgage Loan with a Net
Mortgage Rate ('NMR') less than 7.00% per annum (each such Mortgage Loan, a
'Discount Mortgage Loan') will be the fraction, expressed as a percentage, equal
to NMR divided by 7.00%. The 'Non-PO Percentage' with respect to any Mortgage
Loan with a Net Mortgage Rate equal to or greater than 7.00% (each such Mortgage
Loan, a 'Non-Discount Mortgage Loan') will be 100%. The 'PO Percentage' with
respect to any Discount Mortgage Loan will be the fraction, expressed as a
percentage, equal to (7.00% - NMR) divided by 7.00%. The 'PO Percentage' with
respect of any Non-Discount Mortgage Loan will be 0%.
The initial Class Certificate Principal Balance of the Class PO
Certificates, which are not offered hereby, will be approximately $291,075,
subject to the variance described herein.
Distributions in reduction of the Class Certificate Principal Balance of
each Senior Certificate will be made on each Distribution Date pursuant to
priority third under '--Allocation of Available Funds' above. In accordance with
priority third, the Available Funds remaining after the distribution of interest
will be allocated to the Senior Certificates in an aggregate amount not to
exceed the sum of the Senior Optimal Principal Amount and the Class PO Principal
Distribution Amount for such Distribution Date. Distributions in reduction of
the Class Certificate Principal Balances of the Class M, Class B1 and Class B2
Certificates will be made pursuant to priorities fifth, sixth and seventh,
respectively, under '--Allocation of Available Funds' above. In accordance with
each such priority, the Available Funds, if any, remaining after distributions
of principal and interest on the Senior Certificates and payments in respect of
the Class PO Deferred Amount on such Distribution Date will be allocated to the
Class M, Class B1 and Class 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 Class ranking
prior thereto has received distributions of interest and principal, and such
Class has received distributions of interest, on such Distribution Date. The
Class A5 Certificates will not receive any distributions of principal in respect
of the Category A Senior Optimal Principal Amount (including scheduled principal
payments, prepayments and other unscheduled recoveries of principal) during the
first five years after the Cut-off Date, except as otherwise described herein on
or following the earlier of the Category A Group I Final
S-24
<PAGE>
Distribution Date or the Cross-Over Date. The Class A11 Certificates will not
receive any distributions in respect of prepayments of principal or certain
other unscheduled recoveries of principal on the Mortgage Loans described in
clauses (ii), (iii) and (v) of the definition of Senior Optimal Principal Amount
during the first five years after the Cut-off Date, except as otherwise
described herein on or following the earlier of the Category B Group I Final
Distribution Date or the Cross-Over Date.
The 'Senior Optimal Principal Amount' with respect to each Distribution
Date will be an amount equal to the sum of (i) the Senior Percentage (as defined
herein) of the applicable Non-PO Percentage of all scheduled payments of
principal due on each 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 after the 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 Senior Prepayment Percentage (as
defined herein) of the applicable Non-PO Percentage of the Scheduled Principal
Balance of each Mortgage Loan which was the subject of a prepayment in full
received by the Company (or, in the case of a Mortgage Loan master-serviced by
the Company, of which the Company receives notice) or a modification and
repurchase by the Company in lieu of a refinancing, in each case during the
applicable Prepayment Period (as defined below), (iii) the Senior Prepayment
Percentage of the applicable Non-PO Percentage of all partial prepayments of
principal received during the applicable Prepayment Period, (iv) the lesser of
(a) the Senior Prepayment Percentage of the applicable Non-PO Percentage of the
sum of (w) the net liquidation proceeds allocable to principal on each Mortgage
Loan which became a Liquidated Mortgage Loan during the related Prepayment
Period (other than Mortgage Loans described in clause (x)) and (x) the principal
balance of each 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 Senior Percentage of the applicable
Non-PO Percentage of the sum of (w) the Scheduled Principal Balance of each
Mortgage Loan which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than Mortgage Loans described in clause (x)) and (x)
the Scheduled Principal Balance of each 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 Senior Percentage of the applicable Non-PO Percentage of the
principal portion of Excess Losses (other than Debt Service Reductions) during
the related Prepayment Period, and (v) the Senior Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Scheduled Principal Balance
of each Mortgage Loan which was repurchased by the Company in connection with
such Distribution Date (other than Mortgage Loans described in clause (ii)
above) and (b) the difference, if any, between the Scheduled Principal Balance
of a Mortgage Loan that has been replaced by the Company with a substitute
Mortgage Loan pursuant to the Agreement in connection with such Distribution
Date and the Scheduled Principal Balance of such substitute Mortgage Loan.
With respect to any Mortgage Loan that was the subject of a voluntary
prepayment in full or a modification and repurchase by the Company in lieu of a
refinancing 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 Mortgage Loan and any
Distribution Date, the 'Prepayment Period' is the month preceding the month of
such Distribution Date.
The 'Category A Senior Optimal Principal Amount' with respect to each
Distribution Date will be an amount equal to the Category A Percentage (as
defined herein) of the Senior Optimal Principal Amount.
The 'Category B Senior Optimal Principal Amount' with respect to each
Distribution Date will be an amount equal to the Category B Percentage (as
defined herein) of the Senior Optimal Principal Amount.
The 'Category A Percentage' for any Distribution Date will equal
approximately 75.56%, subject to the variance described herein. The 'Category B
Percentage' for any Distribution Date will equal approximately 24.44%, subject
to the variance described herein.
The 'Class A5 Principal Distribution Amount' for any Distribution Date will
equal the product of (a) the Category A Senior Optimal Principal Amount for such
date, (b) the Class A5 Percentage for such date and (c) the Class A5 Principal
Distribution Percentage for such date. Notwithstanding the foregoing, (i) on the
Category A
S-25
<PAGE>
Group I Final Distribution Date, the Class A5 Principal Distribution Amount will
be equal to any Category A Senior Optimal Principal Amount remaining after
distributions of principal have been made on the Category A Group I Senior
Certificates, and (ii) following the Category A Group I Final Distribution Date,
the Class A5 Principal Distribution Amount will equal the Category A Senior
Optimal Principal Amount.
The 'Class 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 A5 Certificates immediately preceding
such Distribution Date, by (y) the aggregate Class Certificate Principal Balance
of the Category A Senior Certificates immediately preceding such Distribution
Date. The initial Class A5 Percentage is expected to be approximately 10.45%.
The 'Class A5 Principal Distribution Percentage' for any Distribution Date
will equal 0% through the Distribution Date in January 2003; 30% thereafter
through the Distribution Date in January 2004; 40% thereafter through the
Distribution Date in January 2005; 60% thereafter through the Distribution Date
in January 2006; 80% thereafter through the Distribution Date in January 2007;
and 100% thereafter.
The 'Class A11 Principal Distribution Amount' for any Distribution Date
will equal the sum of (a) the Category B Percentage of the total of the amounts
described in clauses (i) and (iv) of the definition of Senior Optimal Principal
Amount for such date multiplied by the Class A11 Percentage for such date, and
(b) the Category B Percentage of the total of the amounts described in clauses
(ii), (iii) and (v) of the definition of Senior Optimal Principal Amount for
such date multiplied by the product of (x) the Class A11 Percentage for such
date and (y) the Class A11 Prepayment Distribution Percentage for such date.
Notwithstanding the foregoing, (i) on the Category B Group I Final Distribution
Date, the Class A11 Principal Distribution Amount will be equal to any Category
B Senior Optimal Principal Amount remaining after distributions of principal
have been made on the Category B Group I Senior Certificates, and (ii) following
the Category B Group I Final Distribution Date, the Class A11 Principal
Distribution Amount will equal the Category B Senior Optimal Principal Amount.
The 'Class A11 Prepayment Distribution Percentage' for any Distribution
Date will equal 0% through the Distribution Date in January 2003; 30% thereafter
through the Distribution Date in January 2004; 40% thereafter through the
Distribution Date in January 2005; 60% thereafter through the Distribution Date
in January 2006; 80% thereafter through the Distribution Date in January 2007;
and 100% thereafter.
The 'Class A11 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 A11 Certificates immediately
preceding such Distribution Date, by (y) the aggregate Class Certificate
Principal Balance of the Category B Senior Certificates immediately preceding
such Distribution Date. The initial Class A11 Percentage is expected to be
approximately 20.90%.
The '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 Senior
Certificates (less the Class Certificate Principal Balance of the Class PO
Certificates) immediately preceding such Distribution Date by the aggregate
Certificate Principal Balances of all the Certificates (less the Class
Certificate Principal Balance of the Class PO Certificates) immediately
preceding such Distribution Date. The initial Senior Percentage is expected to
be approximately 95.75%.
The 'Senior Prepayment Percentage' on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ----------------------------- -------------------------------------------------
<S> <C>
February 1998 - January 2003 100%
February 2003 - January 2004 Senior Percentage plus 70% of the Junior
Percentage
February 2004 - January 2005 Senior Percentage plus 60% of the Junior
Percentage
February 2005 - January 2006 Senior Percentage plus 40% of the Junior
Percentage
February 2006 - January 2007 Senior Percentage plus 20% of the Junior
Percentage
February 2007 and thereafter Senior Percentage
</TABLE>
Notwithstanding the foregoing, if the Senior Percentage on any Distribution
Date exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date will equal 100%.
S-26
<PAGE>
In addition, no reduction of the 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 '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 Mortgage Loans
delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund) does not exceed 50%
of the aggregate Class Certificate Principal Balance of the Junior
Certificates as of such date and (ii) cumulative Realized Losses do not
exceed (a) 30% of the aggregate Class Certificate Principal Balance of the
Junior Certificates as of the date of issuance of the Certificates (the
'Original Junior Principal Balance') if such Distribution Date occurs
between and including February 2003 and January 2004, (b) 35% of the
Original Junior Principal Balance if such Distribution Date occurs between
and including February 2004 and January 2005, (c) 40% of the Original
Junior Principal Balance if such Distribution Date occurs between and
including February 2005 and January 2006, (d) 45% of the Original Junior
Principal Balance if such Distribution Date occurs between and including
February 2006 and January 2007, and (e) 50% of the Original Junior
Principal Balance if such Distribution Date occurs during or after February
2007; or
(B) (i) the aggregate Scheduled Principal Balance of Mortgage Loans
delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund), 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 do not exceed (a) 10% of the
Original Junior Principal Balance if such Distribution Date occurs between
and including February 2003 and January 2004, (b) 15% of the Original
Junior Principal Balance if such Distribution Date occurs between and
including February 2004 and January 2005, (c) 20% of the Original Junior
Principal Balance if such Distribution Date occurs between and including
February 2005 and January 2006, (d) 25% of the Original Junior Principal
Balance if such Distribution Date occurs between and including February
2006 and January 2007, and (e) 30% of the Original Junior Principal Balance
if such Distribution Date occurs during or after February 2007.
The 'Class 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 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 after the 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 the Scheduled Principal Balance of each Mortgage
Loan which was the subject of a prepayment in full received by the Company (or,
in the case of a Mortgage Loan master-serviced by the Company, of which the
Company receives notice) or a modification and repurchase by the Company in lieu
of a refinancing, in each case 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 Mortgage Loan
which became a Liquidated Mortgage Loan during the related Prepayment Period
(other than Mortgage Loans described in clause (x)) and (x) the principal
balance of each 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 Mortgage Loan which was repurchased
by the Company in connection with such Distribution Date (other than Mortgage
Loans described in clause (ii) above) and (b) the difference, if any, between
the Scheduled Principal Balance of a Mortgage Loan that has been replaced by the
Company with a substitute Mortgage Loan pursuant to the Agreement in connection
with such Distribution Date and the Scheduled Principal Balance of such
substitute Mortgage Loan. For purposes of clauses (ii) and (v) above, the
Scheduled Principal Balance of a Mortgage Loan will be reduced by the amount of
any Deficient Valuation that occurred on or before the Bankruptcy Coverage
Termination Date.
S-27
<PAGE>
The 'Category A Group I Final Distribution Date' is the Distribution Date
on which the Class Certificate Principal Balance of each of the Category A Group
I Senior Certificates has been reduced to zero.
The 'Category B Group I Final Distribution Date' is the Distribution Date
on which the Class Certificate Principal Balance of each of the Category B Group
I Senior Certificates has been reduced to zero.
The 'Junior Percentage' on any Distribution Date will equal 100% minus the
Senior Percentage. The 'Junior Prepayment Percentage' will equal 100% minus the
Senior Prepayment Percentage, except that on any Distribution Date after the
respective Class Certificate Principal Balances of the Senior Certificates
(other than the Class PO Certificates) have each been reduced to zero (the
'Senior Final Distribution Date'), the Junior Prepayment Percentage will equal
100%. The initial Junior Percentage is expected to be approximately 4.25%.
The '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 Junior
Certificates immediately prior to such Distribution Date): (i) the Junior
Percentage of the applicable Non-PO Percentage of all scheduled payments of
principal due on each outstanding 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 after the 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 Junior Prepayment
Percentage of the applicable Non-PO Percentage of the Scheduled Principal
Balance of each Mortgage Loan which was the subject of a prepayment in full
received by the Company (or, in the case of a Mortgage Loan master-serviced by
the Company, of which the Company receives notice) or a modification and
repurchase by the Company in lieu of a refinancing, in each case during the
related Prepayment Period, (iii) the Junior Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal received
during the related Prepayment Period (plus, on the Senior Final Distribution
Date, 100% of any 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
(other than Mortgage Loans described in clause (b)) and (b) the applicable
Non-PO Percentage of the principal balance of each 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 Senior Certificateholders (other than the
holders of the Class PO Certificates) pursuant to clause (iv) of the definition
of Senior Optimal Principal Amount on such Distribution Date, and (v) the Junior
Prepayment Percentage of the applicable Non-PO Percentage of the sum of (a) the
Scheduled Principal Balance of each Mortgage Loan which was repurchased by the
Company in connection with such Distribution Date (other than Mortgage Loans
described in clause (ii) above) and (b) the difference, if any, between the
Scheduled Principal Balance of a Mortgage Loan that has been replaced by the
Company with a substitute Mortgage Loan pursuant to the Agreement in connection
with such Distribution Date and the Scheduled Principal Balance of such
substitute Mortgage Loan.
The 'Allocable Share' with respect to any Class of 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 Junior Optimal Principal Amount described above;
provided, that, except as described in the second succeeding sentence, no Class
B Certificate shall be entitled on any Distribution Date to receive
distributions pursuant to clauses (ii), (iii) and (v) of the definition of
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 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 Pool Scheduled Principal Balance 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 M
Certificates or of any Class of Class 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 Junior Optimal Principal Amount, to the
extent of such Class's remaining Allocable Share, shall be distributed to the
remaining Classes of Junior Certificates in
S-28
<PAGE>
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 B Certificates on any Distribution Date, this may have the effect
of accelerating the amortization of more senior ranking Classes of Junior
Certificates because the amount otherwise distributable to such Class pursuant
to clauses (ii), (iii) and (v) of the definition of Junior Optimal Principal
Amount will be distributable among the outstanding Class M Certificates and each
Class of the Class B Certificates as to which the related Class Prepayment
Distribution Trigger has been satisfied on a pro rata basis subject to the
priority of payments described herein. On any Distribution Date, any reduction
in funds available for distribution to the Classes of Junior Certificates
resulting from a distribution of the Class PO Deferred Amount to the Class PO
Certificates will be allocated to the Classes of 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 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.
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 Discount Mortgage Loan will be allocated to the
Class PO Certificates until the Class Certificate Principal Balance thereof is
reduced to zero. With respect to any Distribution Date through the Cross-Over
Date, the aggregate of all amounts so allocable to the Class PO Certificates on
such date in respect of Realized Losses other than Excess Losses in respect of
the Discount Mortgage Loans and all amounts previously allocated in respect of
such losses to the Class PO Certificates and not distributed on prior
Distribution Dates will be the 'Class PO Deferred Amount.' To the extent funds
are available therefor on any Distribution Date through the Cross-Over Date,
distributions in respect of the Class PO Deferred Amount will be made on the
Class PO Certificates in accordance with priority fourth under '--Distributions
on the Certificates--Allocation of Available Funds' above. Any distribution of
Available Funds in respect of the Class PO Deferred Amount will not reduce the
Class Certificate Principal Balance of the Class PO Certificates. No interest
will accrue on the Class PO Deferred Amount. On each
S-29
<PAGE>
Distribution Date through the Cross-Over Date, the Class Certificate Principal
Balance of the lowest ranking Class of Junior Certificates then outstanding will
be reduced by the amount of any distributions in respect of the Class PO
Deferred Amount on such Distribution Date, through the operation of the Class PO
Deferred Payment Writedown Amount. After the Cross-Over Date, no distributions
will be made in respect of, and losses allocated to the Class PO Certificates
will not be added to, the Class PO Deferred Amount. Any distribution of
Unanticipated Recoveries (as defined in the accompanying Prospectus) on the
Class PO Certificates will be adjusted to take into account the Class 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 Mortgage Loan
for any Distribution Date will not be allocated to any Senior Certificates until
the Cross-Over Date. Prior to the 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 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 B5 Certificates while
such Certificates are outstanding, second to the Class 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 Mortgage Loan for any
Distribution Date will be allocated pro rata among all outstanding Classes of
Certificates (other than the Class PO Certificates) based on their Class
Certificate Principal Balances. An 'Excess Loss' is any Bankruptcy Loss, Fraud
Loss and Special Hazard Loss (each a type of Realized Loss) occurring after the
Bankruptcy Coverage Termination Date, Fraud Coverage Termination Date and
Special Hazard Termination Date, respectively, as described more fully below.
Commencing on the Cross-Over Date, the applicable Non-PO Percentage of the
principal portion of any Realized Loss (other than a Debt Service Reduction)
will be allocated among the outstanding Classes of Senior Certificates (other
than the Class PO Certificates) pro rata based upon their Class Certificate
Principal Balances.
No reduction of the Class Certificate Principal Balance of any Class shall
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 Certificates as of such Distribution Date to an
amount less than the Pool Scheduled Principal Balance as of the first day of the
month of such Distribution Date, less any Deficient Valuations occurring on or
prior to the Bankruptcy Coverage Termination Date (such limitation being the
'Loss Allocation Limitation').
The principal portion of Debt Service Reductions will not be allocated in
reduction of the Certificate Principal Balance of any Certificate. However,
after the Bankruptcy Coverage Termination Date, the amounts distributable under
clause (i) of the definitions of Senior Optimal Principal Amount, Class PO
Principal Distribution Amount and Junior Optimal Principal Amount will be
reduced by the amount of any Debt Service Reductions. Regardless of when they
occur, Debt Service Reductions may reduce the amount of Available Funds
otherwise available for distribution on a Distribution Date. As a result of the
subordination of the Junior Certificates in right of distribution, any Debt
Service Reductions prior to the Bankruptcy Coverage Termination Date will be
borne by the Junior Certificates (to the extent then outstanding) in inverse
order of priority.
All allocations of Realized Losses to a Class of 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 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 PO Certificates on any Distribution Date through the Cross-Over Date will
also be taken into account in determining distributions in respect of the Class
PO Deferred Amount for such Distribution Date.
The interest portion of all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby to the extent described under
'--Distributions on the Certificates--Interest' above. For purposes of making
certain calculations under the Agreement, the interest portion of any Realized
Loss in respect of a Mortgage Loan will be allocated among the Base Servicing
Fee, the Supplemental Servicing Fee and interest at
S-30
<PAGE>
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 Mortgage Loan that would have been so allocated in the absence
of any such shortfall.
The applicable Non-PO Percentage of any Deficient Valuation will on each
Distribution Date be allocated solely to the outstanding Junior Certificates
until the Bankruptcy Coverage Termination Date. The 'Bankruptcy Coverage
Termination Date' is the Distribution Date upon which the Bankruptcy Loss Amount
has been reduced to zero or a negative number (or the Cross-Over Date, if
earlier). On each Distribution Date, the 'Bankruptcy Loss Amount' will equal
approximately $173,734 (approximately 0.04% of the aggregate Scheduled Principal
Balances of the Mortgage Loans as of the Cut-off Date), subject to reduction as
described in the Agreement, minus the aggregate amount of previous Bankruptcy
Losses. The 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) that such reduction or modification will not
adversely affect the then current ratings of the Senior Certificates by Fitch
and S&P. Such reduction may adversely affect the coverage provided by
subordination with respect to Bankruptcy Losses.
The applicable Non-PO Percentage of any Fraud Loss will on each
Distribution Date be allocated solely to the outstanding Junior Certificates
until the Fraud Coverage Termination Date. The '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 Cross-Over Date, if earlier). Upon the initial
issuance of the Certificates, the 'Fraud Loss Amount' will equal approximately
$4,508,007 (approximately 1% of the aggregate Scheduled Principal Balances of
the Mortgage Loans as of the Cut-off Date). As of any Distribution Date prior to
the first anniversary of the Cut-off Date, the Fraud Loss Amount will equal
approximately $4,508,007, minus the aggregate amount of Fraud Losses that would
have been allocated to the Junior Certificates in the absence of the Loss
Allocation Limitation since the Cut-off Date. As of any Distribution Date from
the first through the fifth anniversaries of the Cut-off Date, the Fraud Loss
Amount will equal (1) the lesser of (a) the Fraud Loss Amount as of the most
recent anniversary of the Cut-off Date and (b) 1% (from the first through and
excluding the third anniversaries of the Cut-off Date) or 0.5% (from and
including the third through and including the fifth anniversaries of the Cut-off
Date) of the aggregate outstanding principal balance of all of the 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 Junior Certificates in the absence
of the 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 Fraud Loss Amount shall be zero.
The applicable Non-PO Percentage of any Special Hazard Loss will on each
Distribution Date be allocated solely to the outstanding Junior Certificates
until the Special Hazard Termination Date. The 'Special Hazard Termination Date'
is the Distribution Date upon which the Special Hazard Loss Amount has been
reduced to zero or a negative number (or the Cross-Over Date, if earlier). Upon
the initial issuance of the Certificates, the 'Special Hazard Loss Amount' will
equal approximately $4,508,007 (approximately 1% of the aggregate Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date). As of any
Distribution Date, the Special Hazard Loss Amount will equal approximately
$4,508,007 minus the sum of (i) the aggregate amount of Special Hazard Losses
that would have been previously allocated to the Junior Certificates in the
absence of the Loss Allocation Limitation and (ii) the Adjustment Amount. For
each anniversary of the Cut-off Date, the 'Adjustment Amount' shall be equal to
the amount, if any, by which the Special Hazard Loss Amount (without giving
effect to the deduction of the 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 Mortgage Loans by
principal balance secured by Mortgaged Properties in any California zip code) of
the outstanding principal balance of all the Mortgage Loans on the Distribution
Date immediately preceding such anniversary and (y) twice the outstanding
principal balance of the Mortgage Loan which has the largest outstanding
principal balance on the Distribution Date immediately preceding such
anniversary.
S-31
<PAGE>
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATEHOLDERS
In addition to distributions of principal and interest, the holders of the
Class R Certificates will be entitled to receive (i) the amount, if any, of
Available Funds remaining in the REMIC on any Distribution Date after
distributions of interest and principal and in respect of the Class PO Deferred
Amount are made on the Certificates on such date and (ii) the proceeds, if any,
of the assets of the Trust Fund remaining in the REMIC after the Class
Certificate Principal Balances of all Classes of Certificates have each been
reduced to zero. It is not anticipated that any material assets will be
remaining 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 the Junior
Certificates will equal approximately 4.25% of the aggregate Certificate
Principal Balance of all the Classes of Certificates. The rights of the holders
of the Junior Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to such rights of the holders of the Senior
Certificates, to the extent described above. The subordination of the Junior
Certificates is intended (a) to enhance the likelihood of timely receipt by the
holders of the Senior Certificates (to the extent of the subordination of the
Junior Certificates) of the full amount of the scheduled monthly distributions
of principal and interest allocable to the Senior Certificates and (b) to afford
the holders of the Senior Certificates (to the extent of the subordination of
the Junior Certificates) protection against Realized Losses, to the extent
described above. If Realized Losses exceed the credit support provided to the
Senior Certificates through subordination, or if Excess Losses occur, all or a
portion of such losses will be borne by the Senior Certificates.
The protection afforded to the holders of Senior Certificates 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 Junior Certificates, in accordance with the paydown rules
specified above under '--Distributions on the Certificates--Allocation of
Available Funds,' the amounts due to the Senior Certificateholders on each
Distribution Date out of the Available Funds with respect to such date and, if
necessary, by the right of such holders to receive future distributions on the
Mortgage Loans that would otherwise have been payable to the holders of the
Junior Certificates, (ii) the allocation to the Junior Certificates of the
principal portion of the applicable Non-PO Percentage of any Realized Loss
(other than an Excess Loss or a Debt Service Reduction) to the extent set forth
herein and (iii) the allocation to the 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) to the extent set forth herein through the
operation of the Class PO Deferred Payment Writedown Amount. The allocation of
the principal portion of Realized Losses (as set forth herein) to the Junior
Certificates on any Distribution Date will decrease the protection provided to
the Senior Certificates then outstanding on future Distribution Dates by
reducing the aggregate Certificate Principal Balance of the Junior Certificates
then outstanding.
In addition, in order to extend the period during which the Junior
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of the applicable Non-PO Percentage of any principal
prepayment and certain other unscheduled recoveries of principal with respect to
a Mortgage Loan will be allocated to the Senior Certificates (other than the
Class PO Certificates) during the first five years after the Cut-off Date with
such allocation being subject to reduction thereafter as described herein. This
allocation has the effect of accelerating the amortization of such Senior
Certificates as a group while, in the absence of losses in respect of the
Mortgage Loans, increasing the percentage interest in the principal balance of
the Mortgage Loans evidenced by the Junior Certificates. These amounts will be
allocated among such Senior Certificates in the manner described herein.
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Junior Certificates will be entitled
on such date to the remaining portion, if any, of the Available Funds in an
aggregate amount equal to the Accrued Certificate Interest on the Junior
Certificates for such date, any remaining undistributed Accrued Certificate
Interest thereon from previous Distribution Dates and the sum of the Allocable
Shares of the Classes of Junior Certificates. Amounts so distributed to Junior
Certificateholders will not be available to cover any delinquencies or any
Realized Losses in respect of subsequent Distribution Dates.
S-32
<PAGE>
Priority Among Junior Certificates. As of the date of the initial issuance
of the Certificates, the aggregate Certificate Principal Balance of the Class
B3, Class B4 and Class B5 Certificates, all of which are subordinate in right of
distribution to the Junior Certificates offered hereby, will equal approximately
1.00% of the initial aggregate Certificate Principal Balance of all of the
Certificates and approximately 23.53% of the initial aggregate Certificate
Principal Balance of all of the Junior Certificates. On each Distribution Date,
the holders of any particular Class of Junior Certificates, other than the Class
B5 Certificates, will have a preferential right to receive the amounts due them
on such Distribution Date out of Available Funds, prior to any distribution
being made on such date on each Class of 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 Mortgage Loan
(other than a Debt Service Reduction or an Excess Loss) and any Class PO
Deferred Payment Writedown Amount will be allocated, to the extent set forth
herein, in reduction of the Class Certificate Principal Balances of the Junior
Certificates in inverse order of priority of such Certificates. The effect of
the allocation of such Realized Losses and of the Class PO Deferred Payment
Writedown Amount to a Class of 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 Certificates.
In order to maintain the relative levels of subordination among the Junior
Certificates, the applicable Non-PO Percentage of prepayments and certain other
unscheduled recoveries of principal in respect of the 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
Senior Final Distribution Date) will not be distributable to the holders of any
Class of Class B Certificates on any Distribution Date for which the related
Class Prepayment Distribution Trigger is not satisfied, except as described
above. See '--Distributions on the Certificates--Principal.' If the Class
Prepayment Distribution Trigger is not satisfied with respect to any Class of
Class B Certificates, the amortization of more senior ranking Classes of 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, the percentage
interest in the principal balance of the Mortgage Loans evidenced by such Class
B Certificates may increase.
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,
and under certain circumstances investors in such Certificates may not recover
their initial investment.
RESTRICTIONS ON TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates 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.
YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
YIELD
The effective yield on the Certificates will depend upon, among other
things, the price at which the Certificates are purchased and the rate and
timing of payments of principal (including both scheduled and unscheduled
payments) of the Mortgage Loans underlying the Certificates.
The yields to investors will be sensitive in varying degrees to the rate of
prepayments on the 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
at a premium, faster than anticipated rates of principal payments on the
Mortgage Loans could result in actual yields to investors 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 could
result in actual yields to investors that are lower than the anticipated yields.
S-33
<PAGE>
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 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 Mortgage
Loans are likely to coincide with periods of high rates. During such periods,
the amount of payments available to an investor for reinvestment at such high
rates may be relatively low.
The Mortgage Loans will not prepay at any constant rate, nor will all of
the 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
Mortgage Loan, the greater the effect on the yield to an investor in the
Certificates. As a result, the effect on the yield of principal prepayments on
the 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 Certificates is not likely to be offset by a later equivalent reduction
(or increase) in the rate of principal prepayments.
The 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 times the outstanding principal balance
of such Mortgage Loan on the first day of the month.
The effective yield to holders of Certificates 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 Certificates will be affected by any Net
Interest Shortfall and the interest portion of certain losses. See 'Description
of the Certificates' herein.
PREPAYMENTS
The rate of distribution of principal of the Certificates will be affected
primarily by the amount and timing of principal payments received on or in
respect of the 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 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), from a repurchase by the
Company of certain Mortgage Loans modified at the request of the Mortgagor, and
from an exercise by the Company of its option to repurchase a Defaulted Mortgage
Loan. 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. In addition, as a result of the fact that
Certificateholders will be entitled on any Distribution Date to receive from
Available Funds distributions of amounts based on clause (iv) of each of the
definitions of Senior Optimal Principal Amount, Class PO Principal Distribution
Amount or Junior Optimal Principal Amount, as the case may be, the occurrence of
defaults on the Mortgage Loans may produce the same effect on the 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
S-34
<PAGE>
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 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 significantly 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 the
interest rates on the Mortgage Loans.
Voluntary prepayments in full of principal on the Mortgage Loans received
by the Company (or, in the case of Mortgage Loans master-serviced by the
Company, of which the Company receives notice) and payments by the Company in
connection with the purchase of certain modified Mortgage Loans 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 Certificateholders in the month of receipt or
payment. Voluntary prepayments of principal in full received and payments made
in connection with the purchase of certain modified Mortgage Loans 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 Mortgage Loans are passed through to the
Certificateholders in the month following the month of receipt or payment. Any
prepayment of a Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure
proceedings or by virtue of the purchase of a 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 Certificateholders principal amounts which
would otherwise be passed through (or reduced) in amortized increments over the
remaining term of such Mortgage Loan.
The entire amount of the applicable Non-PO Percentage of any principal
prepayments and certain other unscheduled recoveries of principal with respect
to a Mortgage Loan will be allocated solely to the outstanding Senior
Certificates (other than the Class PO Certificates) during the first five years
after the Cut-off Date, with such allocation being subject to reduction
thereafter as described herein. Among such Senior Certificates, such amounts
allocable to the Category A Senior Certificates will be allocated solely to the
outstanding Category A Group I Senior Certificates during the first five years
after the Cut-off Date (except as otherwise described herein on or following the
Category A Group I Final Distribution Date) and such amounts allocable to the
Category B Senior Certifcates will be allocated solely to the outstanding
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 Category
B Group I Final Distribution Date), provided that such amounts will be allocated
pro rata among all the outstanding Senior Certificates (other than the Class PO
Certificates) on each Distribution Date after the Cross-Over Date. This
allocation between the Group I Senior Certificates and the Group II Senior
Certificates is designed to accelerate the allocation of principal prepayments
and certain other unscheduled recoveries of principal on the Mortgage Loans to
holders of the Group I Senior Certificates relative to that of the Group II
Senior Certificates through the Cross-Over Date. See 'Description of the
Certificates--Distributions on the Certificates--Principal' herein. In
addition, the Category A Group II Senior Certificates will not receive any
distributions of scheduled principal payments during the first five years after
the Cut-off Date, except as otherwise described herein on or following the
earlier of the Category A Group I Final Distribution Date and the Cross-over
Date.
When a full prepayment is made on a 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 is
passed through to the Certificateholders in the month following its receipt and
the amount of interest thus distributed to Certificateholders, to the extent not
supplemented by a Compensating Interest Payment (as defined herein), will be
less than the amount which would have been distributed in the absence of such
prepayment. The Company's purchase of certain modified Mortgage Loans from the
Trust Fund 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) may similarly reduce the amounts distributed. See 'The Pooling and
Servicing Agreement--Certain Modifications and Refinancings' in the Prospectus.
The payment of a claim
S-35
<PAGE>
under certain insurance policies or the purchase of a defaulted Mortgage Loan by
a private mortgage insurer may also cause a reduction in the amount of interest
passed through. Shortfalls described in this paragraph will be borne by
Certificateholders to the extent described herein. See 'Description of the
Certificates--Distributions on the Certificates--Interest' herein.
Any partial prepayment will be applied to the balance of the related
Mortgage Loan as of the first day of the month of receipt, will be passed
through to the Certificateholders in the following month and, to the extent not
supplemented by a Compensating Interest Payment, will reduce the aggregate
amount of interest distributable to the 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 Certificates also may be affected by
any repurchase by the Company of the Mortgage Loans as described under 'The
Pooling and Servicing Agreement--Termination' herein.
THE CLASS M, CLASS B1 AND CLASS B2 CERTIFICATES
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class M, Class B1 and Class B2 Certificates
will be affected by the rate of prepayments on the Mortgage Loans, as well
as the rate of mortgagor defaults resulting in Realized Losses, by the
severity of those losses and by the timing thereof. See 'Description of the
Certificates--Allocation of Realized Losses on the Certificates' herein for a
description of the manner in which such losses are borne by the holders of the
Certificates. If the purchaser of a Class M, Class B1 or Class B2 Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of Realized Losses 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 B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted Mortgage Loans than will the yields on such Classes with lower
numerical designations, and the yields to maturity on all of the Class B
Certificates will be more sensitive to such losses than will the yields on the
other Classes of Certificates. The yields to maturity on the Class M
Certificates will be more sensitive to such losses than will the yields on the
Senior Certificates and less sensitive than the yields on the Class B
Certificates. The Junior Certificates will be more sensitive to losses due to
liquidations of defaulted 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 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 Mortgage Loans may also have a relatively greater effect
(i) on the yields to investors in the Class B Certificates with higher numerical
designations than on the yields to investors in those Class B Certificates with
lower numerical designations, (ii) on the yields to investors in the Class B
Certificates than on the yields to investors in the other Classes of the
Certificates, and (iii) on the yields to investors in the Class M Certificates
than on the yields to investors in the Senior Certificates. As described above
under 'Description of the Certificates--Distributions on the
Certificates--Interest' and '--Principal,' '--Allocation of Realized Losses on
the Certificates' and '--Subordination,' amounts otherwise distributable to
holders of any Class of Class B Certificates will be made available to protect
the holders of the more senior ranking Classes of the Certificates against
interruptions in distributions due to certain mortgagor delinquencies. Amounts
otherwise distributable to holders of the Class M Certificates will be made
available to protect the holders of the 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 the Junior Certificates.
To the extent that the Class M, Class B1 or Class 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.
S-36
<PAGE>
FINAL PAYMENT CONSIDERATIONS
The rate of payment of principal of the Certificates will depend on the
rate of payment of principal of the Mortgage Loans (including prepayments,
defaults, delinquencies and liquidations) which, in turn, will depend on the
characteristics of the 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 is expected to be
February 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 Junior Certificates, delinquencies and defaults could
affect the actual maturity of the Certificates offered hereby.
WEIGHTED AVERAGE LIVES OF THE 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 Certificates will be affected, to varying
degrees, by the rate of principal payments on the 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 the 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 Class Certificate Principal Balances. The following tables set
forth the percentages of the initial Class Certificate Principal Balance of each
Class of 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 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 Mortgage Loans (the 'Modeling Assumptions') that (i) the distributions in
respect of the Certificates are made and received in cash on the 25th day of
each month commencing in February 1998, (ii) the Mortgage Loans prepay at the
specified constant percentages of the Prepayment Assumption, (iii) the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-off Date is
$450,800,718, (iv) no defaults or delinquencies in the payment by Mortgagors of
principal of and interest on the Mortgage Loans are experienced and the Company
does not repurchase any of the 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
Mortgage Loans are received on the first day of each month commencing in
February 1998, and are computed prior to giving effect to prepayments received
in the prior month, (vii) prepayments representing payment in full of individual
Mortgage Loans are received on the last day of each month (commencing January
1998) and include 30 days' interest thereon, and no Interest Shortfalls occur in
respect of the Mortgage Loans, (viii) the scheduled monthly payment for each
Mortgage Loan has been calculated based on its outstanding balance, interest
rate and remaining term to maturity such that the Mortgage Loan will amortize in
amounts
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<PAGE>
sufficient to repay the remaining balance of the Mortgage Loan by its remaining
term to maturity, (ix) the initial Class Certificate Principal Balance and
Certificate Interest Rate for each Class of Certificates offered hereby are as
indicated on the cover page hereof, (x) the date of the initial issuance of the
Certificates is January 29, 1998, (xi) the amount distributable to
Certificateholders is not reduced by the incurrence of any expenses by the Trust
Fund and (xii) the Mortgage Loans are divided into two groups (each, a 'Mortgage
Loan Group') and the Mortgage Loans in each Mortgage Loan Group have the
respective characteristics described below:
<TABLE>
<CAPTION>
AGGREGATE STATED
SCHEDULED REMAINING
PRINCIPAL NET TERM TO
MORTGAGE LOAN BALANCE AS OF MORTGAGE MORTGAGE AGE MATURITY
GROUP THE CUT-OFF DATE RATE RATE (MONTHS) (MONTHS)
- ----------------------------- ---------------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Discount..................... $ 13,257,233 7.0793110831% 6.8463082988% 3 356
Non-Discount................. 437,543,485 7.7441763478 7.4858165069 2 357
</TABLE>
It is not likely that the Mortgage Loans will prepay at a constant level of
the Prepayment Assumption. In addition, because certain of the 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 Certificates outstanding at any time and the actual weighted
average life of each Class of Certificates may differ from the corresponding
information in the table for each indicated percentage of the Prepayment
Assumption. Furthermore, even if all the 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 the
Mortgage Loans were to equal the weighted average mortgage interest rate and
weighted average stated remaining term to maturity of the assumed Mortgage
Loans, due to the actual distribution of remaining terms to maturity and
interest rates among the Mortgage Loans, the actual Class Certificate Principal
Balance of each Class of Certificates outstanding at any time and the actual
weighted average life of each Class of Certificates would differ (which
difference could be material) from the corresponding information in the tables
for each indicated percentage of the Prepayment Assumption.
S-38
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A1 CLASS A2
-------------------------------- -----------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500% 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
January 1999......... 99 95 92 90 86 100 100 100 100 100
January 2000......... 97 84 76 68 56 100 100 100 100 100
January 2001......... 96 71 56 42 23 100 100 100 100 100
January 2002......... 94 58 38 21 0 100 100 100 100 98
January 2003......... 92 47 24 5 0 100 100 100 100 31
January 2004......... 90 38 13 0 0 100 100 100 75 0
January 2005......... 88 29 3 0 0 100 100 100 41 0
January 2006......... 86 22 0 0 0 100 100 87 19 0
January 2007......... 84 16 0 0 0 100 100 66 5 0
January 2008......... 82 11 0 0 0 100 100 49 0 0
January 2009......... 79 6 0 0 0 100 100 35 0 0
January 2010......... 76 2 0 0 0 100 100 24 0 0
January 2011......... 73 0 0 0 0 100 92 14 0 0
January 2012......... 70 0 0 0 0 100 79 6 0 0
January 2013......... 67 0 0 0 0 100 65 0 0 0
January 2014......... 63 0 0 0 0 100 53 0 0 0
January 2015......... 59 0 0 0 0 100 42 0 0 0
January 2016......... 55 0 0 0 0 100 32 0 0 0
January 2017......... 50 0 0 0 0 100 23 0 0 0
January 2018......... 45 0 0 0 0 100 15 0 0 0
January 2019......... 39 0 0 0 0 100 8 0 0 0
January 2020......... 34 0 0 0 0 100 1 0 0 0
January 2021......... 27 0 0 0 0 100 0 0 0 0
January 2022......... 20 0 0 0 0 100 0 0 0 0
January 2023......... 13 0 0 0 0 100 0 0 0 0
January 2024......... 5 0 0 0 0 100 0 0 0 0
January 2025......... 0 0 0 0 0 84 0 0 0 0
January 2026......... 0 0 0 0 0 45 0 0 0 0
January 2027......... 0 0 0 0 0 2 0 0 0 0
January 2028......... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 17.4 5.3 3.5 2.8 2.2 27.9 16.6 10.3 6.9 4.8
<CAPTION>
CLASS A3
-------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100
January 1999......... 99 96 94 92 89
January 2000......... 98 88 82 75 66
January 2001......... 97 78 66 55 41
January 2002......... 95 68 53 40 23
January 2003......... 94 60 42 27 7
January 2004......... 93 52 33 17 0
January 2005......... 91 46 26 9 0
January 2006......... 89 40 20 4 0
January 2007......... 88 36 15 1 0
January 2008......... 86 32 11 0 0
January 2009......... 84 28 8 0 0
January 2010......... 82 25 5 0 0
January 2011......... 80 21 3 0 0
January 2012......... 77 18 1 0 0
January 2013......... 75 15 0 0 0
January 2014......... 72 12 0 0 0
January 2015......... 69 10 0 0 0
January 2016......... 65 7 0 0 0
January 2017......... 62 5 0 0 0
January 2018......... 58 3 0 0 0
January 2019......... 54 2 0 0 0
January 2020......... 49 * 0 0 0
January 2021......... 44 0 0 0 0
January 2022......... 39 0 0 0 0
January 2023......... 33 0 0 0 0
January 2024......... 27 0 0 0 0
January 2025......... 19 0 0 0 0
January 2026......... 10 0 0 0 0
January 2027......... * 0 0 0 0
January 2028......... 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 19.8 7.9 5.1 3.7 2.8
</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.
S-39
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A4 CLASS A5
-------------------------------- -----------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500% 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
January 1999......... 100 100 100 100 100 100 100 100 100 100
January 2000......... 100 100 100 100 100 100 100 100 100 100
January 2001......... 100 100 100 100 100 100 100 100 100 100
January 2002......... 100 100 100 100 100 100 100 100 100 100
January 2003......... 100 100 100 100 100 100 100 100 100 100
January 2004......... 100 100 100 100 56 100 97 95 92 88
January 2005......... 100 100 100 100 12 99 92 88 83 74
January 2006......... 100 100 100 100 0 98 86 78 70 53
January 2007......... 100 100 100 78 0 97 79 68 57 35
January 2008......... 100 100 100 62 0 95 70 56 44 24
January 2009......... 100 100 100 48 0 92 62 47 34 17
January 2010......... 100 100 100 37 0 90 55 39 26 11
January 2011......... 100 100 94 28 0 88 49 32 20 8
January 2012......... 100 100 79 22 0 85 43 26 15 5
January 2013......... 100 100 67 17 0 82 38 22 12 4
January 2014......... 100 100 55 13 0 79 33 18 9 2
January 2015......... 100 100 45 9 0 76 29 14 7 2
January 2016......... 100 100 36 7 0 72 25 12 5 1
January 2017......... 100 100 29 5 0 68 22 9 4 1
January 2018......... 100 95 23 4 0 64 18 7 3 *
January 2019......... 100 82 18 3 0 59 16 6 2 *
January 2020......... 100 71 14 2 0 54 13 5 2 *
January 2021......... 100 58 11 1 0 49 11 4 1 *
January 2022......... 100 47 8 1 0 43 9 3 1 *
January 2023......... 100 36 6 1 0 37 7 2 1 *
January 2024......... 100 27 4 * 0 30 5 1 * *
January 2025......... 100 19 3 * 0 23 3 1 * *
January 2026......... 100 11 2 * 0 15 2 * * *
January 2027......... 72 5 1 * 0 7 1 * * *
January 2028......... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 29.3 24.0 17.5 11.9 6.2 21.5 14.2 11.8 10.4 8.8
<CAPTION>
CLASS A6
------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100
January 1999......... 99 95 92 89 85
January 2000......... 98 84 76 67 55
January 2001......... 96 71 55 41 21
January 2002......... 95 58 37 19 0
January 2003......... 94 47 23 3 0
January 2004......... 92 38 12 0 0
January 2005......... 90 30 4 0 0
January 2006......... 88 23 0 0 0
January 2007......... 86 18 0 0 0
January 2008......... 84 14 0 0 0
January 2009......... 82 10 0 0 0
January 2010......... 79 7 0 0 0
January 2011......... 77 4 0 0 0
January 2012......... 74 1 0 0 0
January 2013......... 70 0 0 0 0
January 2014......... 67 0 0 0 0
January 2015......... 63 0 0 0 0
January 2016......... 59 0 0 0 0
January 2017......... 55 0 0 0 0
January 2018......... 50 0 0 0 0
January 2019......... 45 0 0 0 0
January 2020......... 40 0 0 0 0
January 2021......... 34 0 0 0 0
January 2022......... 27 0 0 0 0
January 2023......... 20 0 0 0 0
January 2024......... 13 0 0 0 0
January 2025......... 5 0 0 0 0
January 2026......... 0 0 0 0 0
January 2027......... 0 0 0 0 0
January 2028......... 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 18.4 5.5 3.5 2.7 2.1
</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.
S-40
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A7 CLASS A8/CLASS A9
-------------------------------- -----------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500% 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
January 1999......... 100 100 100 100 100 99 96 94 92 88
January 2000......... 100 100 100 100 100 98 87 80 74 64
January 2001......... 100 100 100 100 100 97 76 64 52 36
January 2002......... 100 100 100 100 81 96 66 50 35 16
January 2003......... 100 100 100 100 0 95 57 38 22 0
January 2004......... 100 100 100 54 0 94 50 29 11 0
January 2005......... 100 100 100 12 0 92 44 23 2 0
January 2006......... 100 100 88 0 0 91 38 17 0 0
January 2007......... 100 100 64 0 0 89 34 13 0 0
January 2008......... 100 100 48 0 0 87 31 9 0 0
January 2009......... 100 100 35 0 0 85 28 7 0 0
January 2010......... 100 100 24 0 0 83 25 5 0 0
January 2011......... 100 100 14 0 0 81 22 3 0 0
January 2012......... 100 100 7 0 0 79 20 1 0 0
January 2013......... 100 88 * 0 0 76 17 * 0 0
January 2014......... 100 74 0 0 0 73 14 0 0 0
January 2015......... 100 60 0 0 0 70 12 0 0 0
January 2016......... 100 48 0 0 0 67 9 0 0 0
January 2017......... 100 37 0 0 0 64 7 0 0 0
January 2018......... 100 27 0 0 0 60 5 0 0 0
January 2019......... 100 18 0 0 0 56 4 0 0 0
January 2020......... 100 10 0 0 0 51 2 0 0 0
January 2021......... 100 3 0 0 0 47 1 0 0 0
January 2022......... 100 0 0 0 0 42 0 0 0 0
January 2023......... 100 0 0 0 0 36 0 0 0 0
January 2024......... 100 0 0 0 0 30 0 0 0 0
January 2025......... 100 0 0 0 0 24 0 0 0 0
January 2026......... 76 0 0 0 0 15 0 0 0 0
January 2027......... 17 0 0 0 0 3 0 0 0 0
January 2028......... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 28.5 18.2 10.4 6.2 4.3 20.3 8.0 4.9 3.4 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.
S-41
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A10 CLASS A11
-------------------------------- -----------------------------------
DISTRIBUTION DATE 0% 150 250% 350% 500% 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
January 1999......... 100 100 100 100 100 99 99 99 99 99
January 2000......... 100 100 100 100 100 98 98 98 98 98
January 2001......... 100 100 100 100 100 97 97 97 97 97
January 2002......... 100 100 100 100 100 96 96 96 96 96
January 2003......... 100 100 100 100 25 95 95 95 95 95
January 2004......... 100 100 100 100 0 93 91 89 86 64
January 2005......... 100 100 100 100 0 92 86 82 77 41
January 2006......... 100 100 100 64 0 90 80 72 65 27
January 2007......... 100 100 100 32 0 89 72 62 52 18
January 2008......... 100 100 100 25 0 87 65 52 41 12
January 2009......... 100 100 100 19 0 85 57 43 31 8
January 2010......... 100 100 100 15 0 83 51 36 24 6
January 2011......... 100 100 100 11 0 81 45 30 19 4
January 2012......... 100 100 100 9 0 78 40 24 14 3
January 2013......... 100 100 100 7 0 76 35 20 11 2
January 2014......... 100 100 82 5 0 73 31 16 8 1
January 2015......... 100 100 67 4 0 70 27 13 6 1
January 2016......... 100 100 54 3 0 66 23 11 5 1
January 2017......... 100 100 43 2 0 63 20 9 4 *
January 2018......... 100 100 35 2 0 59 17 7 3 *
January 2019......... 100 100 27 1 0 55 14 5 2 *
January 2020......... 100 100 21 1 0 50 12 4 1 *
January 2021......... 100 100 16 1 0 45 10 3 1 *
January 2022......... 100 89 12 * 0 40 8 2 1 *
January 2023......... 100 69 9 * 0 34 6 2 * *
January 2024......... 100 52 6 * 0 28 5 1 * *
January 2025......... 100 36 4 * 0 21 3 1 * *
January 2026......... 100 21 2 * 0 14 2 * * *
January 2027......... 100 9 1 * 0 6 1 * * *
January 2028......... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 29.5 26.3 19.3 9.6 5.0 20.1 13.4 11.2 9.9 7.2
<CAPTION>
CLASS A12
----------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500%
- --------------------- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100
January 1999......... 99 96 93 91 88
January 2000......... 98 87 80 73 63
January 2001......... 96 76 63 51 36
January 2002......... 95 65 49 34 16
January 2003......... 94 56 36 20 3
January 2004......... 92 48 27 11 0
January 2005......... 90 41 19 5 0
January 2006......... 88 35 14 * 0
January 2007......... 87 30 9 0 0
January 2008......... 85 26 6 0 0
January 2009......... 83 22 3 0 0
January 2010......... 80 18 1 0 0
January 2011......... 78 15 0 0 0
January 2012......... 75 12 0 0 0
January 2013......... 72 9 0 0 0
January 2014......... 69 7 0 0 0
January 2015......... 66 5 0 0 0
January 2016......... 62 3 0 0 0
January 2017......... 58 1 0 0 0
January 2018......... 54 0 0 0 0
January 2019......... 49 0 0 0 0
January 2020......... 44 0 0 0 0
January 2021......... 39 0 0 0 0
January 2022......... 33 0 0 0 0
January 2023......... 27 0 0 0 0
January 2024......... 20 0 0 0 0
January 2025......... 13 0 0 0 0
January 2026......... 5 0 0 0 0
January 2027......... 0 0 0 0 0
January 2028......... 0 0 0 0 0
Weighted Average Life
(in years)(1)....... 19.1 7.0 4.5 3.4 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.
S-42
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS R CLASS M, CLASS B1 AND CLASS B2
------------------------------------ ------------------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 150% 250% 350% 500% 0% 150% 250% 350% 500%
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
January 1999......... 0 0 0 0 0 99 99 99 99 99
January 2000......... 0 0 0 0 0 98 98 98 98 98
January 2001......... 0 0 0 0 0 97 97 97 97 97
January 2002......... 0 0 0 0 0 96 96 96 96 96
January 2003......... 0 0 0 0 0 95 95 95 95 95
January 2004......... 0 0 0 0 0 93 91 89 87 84
January 2005......... 0 0 0 0 0 92 86 82 78 72
January 2006......... 0 0 0 0 0 90 80 73 67 57
January 2007......... 0 0 0 0 0 89 73 63 54 42
January 2008......... 0 0 0 0 0 87 65 53 42 29
January 2009......... 0 0 0 0 0 85 58 44 32 20
January 2010......... 0 0 0 0 0 83 51 36 25 14
January 2011......... 0 0 0 0 0 81 45 30 19 9
January 2012......... 0 0 0 0 0 78 40 25 15 6
January 2013......... 0 0 0 0 0 76 35 20 11 4
January 2014......... 0 0 0 0 0 73 31 17 9 3
January 2015......... 0 0 0 0 0 70 27 13 6 2
January 2016......... 0 0 0 0 0 66 23 11 5 1
January 2017......... 0 0 0 0 0 63 20 9 4 1
January 2018......... 0 0 0 0 0 59 17 7 3 1
January 2019......... 0 0 0 0 0 55 14 6 2 *
January 2020......... 0 0 0 0 0 50 12 4 1 *
January 2021......... 0 0 0 0 0 45 10 3 1 *
January 2022......... 0 0 0 0 0 40 8 2 1 *
January 2023......... 0 0 0 0 0 34 6 2 * *
January 2024......... 0 0 0 0 0 28 5 1 * *
January 2025......... 0 0 0 0 0 21 3 1 * *
January 2026......... 0 0 0 0 0 14 2 * * *
January 2027......... 0 0 0 0 0 6 1 * * *
January 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 13.4 11.3 10.0 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.
S-43
<PAGE>
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.
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,
1994 1995 1996
------------------------ ------------------------ ------------------------
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............. 606,627 $ 74,661,415 821,839 $ 91,977,411 785,928 $ 88,188,662
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
Period of delinquency(1)
30 to 59 days.......... 2,129 $ 270,912 3,813 $ 408,131 3,362 $ 353,209
60 to 89 days.......... 802 117,890 1,788 202,503 1,177 135,668
90 days or more(2)..... 3,796 581,806 6,437 919,526 6,867 892,643
--------- ------------- --------- ------------- --------- -------------
Total delinquent loans...... 6,727 $ 970,608 12,038 $ 1,530,160 11,406 $ 1,381,520
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
Percent of portfolio........ 1.11% 1.30% 1.46% 1.66% 1.45% 1.57%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF SEPTEMBER 30,
1996 1997
------------------------ ------------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS
--------- ------------- --------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total portfolio............. 795,787 $ 89,305,998 741,395 $ 84,554,200
--------- ------------- --------- -------------
--------- ------------- --------- -------------
Period of delinquency(1)
30 to 59 days.......... 3,647 $ 376,705 2,473 $ 260,046
60 to 89 days.......... 1,125 153,933 578 62,722
90 days or more(2)..... 6,811 871,945 5,991 749,726
--------- ------------- --------- -------------
Total delinquent loans...... 11,583 $ 1,402,583 9,042 $ 1,072,494
--------- ------------- --------- -------------
--------- ------------- --------- -------------
Percent of portfolio........ 1.46% 1.57% 1.22% 1.27%
</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.
S-44
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total portfolio......... $ 74,661,415 $ 91,977,411 $ 88,188,662
Foreclosures(1)......... 192,800 268,478 372,800
Foreclosure ratio....... 0.26% 0.29% 0.42%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Total portfolio......... $ 89,305,998 $ 84,554,200
Foreclosures(1)......... 364,861 273,407
Foreclosure ratio....... 0.41% 0.32%
</TABLE>
- ------------------
(1) Foreclosed loans 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 the Mortgage Pool. Consequently, there can be no
assurance that the delinquency and foreclosure experience on the Mortgage Loans
in the 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 the 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.
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.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Company will assign the
Mortgage Loans 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 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. 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
S-45
<PAGE>
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 cooperative 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 each Cooperative Loan to the Trustee. In the case of a 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.
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 Rating
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 and filing 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 the assignments to the Trustee or filing the
financing statements in favor of 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
The Agreement may permit the Company, at its option, to grant certain
rights in connection with the foreclosure of defaulted Mortgage Loans to the
holders of the Class B5 Certificates and, when such Certificates are no longer
outstanding, to the holders of the Class B4 Certificates. The initial Class
Certificate Principal Balances of the Class B4 and Class B5 Certificates are
expected to equal approximately 0.15% and 0.35%,
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respectively, of the initial Certificate Principal Balance of all of the
Certificates. See 'Servicing of the Mortgage Loans and Contracts--Collection and
Other Servicing Procedures' in the Prospectus.
It is expected that the Company will directly service at least 91% (by
aggregate Scheduled Principal Balance as of the Cut-off Date) of the Mortgage
Loans and will function as master servicer with respect to the remaining
Mortgage Loans pursuant to a Direct Master Servicing Arrangement. 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.
COLLECTION ACCOUNT
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 (the 'Collection Account') for the Certificates for the
collection of payments on the Mortgage Loans; 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 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 Account 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 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 Certificates. If
a Collection Account is established for the Certificates, all amounts credited
or debited to the Loan Payment Record in the manner described under the caption
'Servicing of the Mortgage Loans and Contracts--Loan Payment Record' will
instead be deposited or withdrawn from the 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, in next day funds, the Available Funds 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 the 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
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the Scheduled Principal Balance of such Mortgage Loan plus accrued interest at
the Mortgage Rate, net of the 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 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 unrelated Mortgage Loans. 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 (to the extent then outstanding) in inverse order of
priority before they are borne by holders of the 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 Certificate Account on the
business day prior to the Distribution Date on which the proceeds of such
purchase are to be distributed to the 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 from
approximately 0.20% to 0.29%, with an anticipated initial weighted average rate
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
7.00%. The Supplemental Servicing Fee Rate is expected to range from 0% to
approximately 3.25%, with an anticipated initial weighted average rate of
between 0.45% and 0.50%. 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 (as
described in clauses (i), (ii) and (iii) of the definition thereof) 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
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 for such
Distribution
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Date and (b) the aggregate amount received by the Company on account of its Base
Servicing Fees (net of any servicing compensation paid to any direct servicer)
in connection with such Distribution Date. 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 will generally decrease
to the extent the proportion of Outstanding Mortgage Loans 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 9% of the Mortgage
Loans (by aggregate Scheduled Principal Balance as of the Cut-off Date) will be
master-serviced by the Company. This percentage 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, 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 the Certificates offered hereby 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 the Certificates and thereby effect the early retirement of the
Certificates and cause the termination of the Trust Fund and the REMIC
constituted by the Trust Fund, on any Distribution Date after the aggregate
Scheduled Principal Balance of the Mortgage Loans 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 the Trust Fund to a tax on prohibited transactions or
result in the failure of the Trust Fund to qualify as a REMIC.
Any such repurchase by the Company of the assets included in the Trust Fund
will be at a price equal to the sum of (a) 100% of the unpaid principal balance
of each Mortgage Loan in the 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 unreimbursed advances), and (b) the appraised
value of any property acquired in respect of a related Mortgage Loan (less any
amounts representing previously unreimbursed advances in respect thereof and a
good faith estimate of liquidation expenses). The Available Funds on the final
Distribution Date will be allocated to each Class of Certificates in accordance
with the priorities described under 'Description of the Certificates--
Distributions on the Certificates--Allocation of Available Funds.' Accordingly,
if the Available Funds on the final Distribution Date are less than the
aggregate Certificate Principal Balance of all outstanding Certificates plus
accrued and unpaid interest thereon, then in the event that such Distribution
Date occurs (x) prior to the Cross-Over Date, the resulting shortfall will be
borne by the Certificates in inverse order of their related payment priorities,
and (y) on or after the Cross-Over Date, such shortfall will be borne pro rata
among such Certificates.
In no event will the 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.
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VOTING RIGHTS
Votes allocated to the Certificates under the Agreement will be allocated
among the Classes (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 the Trust Fund as a REMIC for federal
income tax purposes.
The Certificates, other than the Residual Certificates, will be designated
as 'regular interests' in the REMIC and the Residual Certificates will be
designated as the 'residual interest' in the REMIC.
Regular Certificates. The Regular Certificates generally will be treated
as debt instruments issued by the 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 250% 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
Senior Certificates to receive cash distributions in the event of losses or
delinquencies on 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 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 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 Expense;--Transfers of
Residual Certificates.'
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.
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The United States Department of Labor (the 'DOL') has issued to CSFB an
individual administrative exemption, Prohibited Transaction Exemption 89-90 (54
Fed. Reg. 42597, October 17, 1989), as amended (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 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) CSFB 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, Moody's
Investors Service, Inc., S&P 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 Trust
Fund, (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 CSFB represents not more than
reasonable compensation for underwriting such Certificates, the proceeds to the
Company pursuant to the assignment of the 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
offered hereby if the fiduciary (or its affiliate) is an obligor on any of the
Mortgage Loans.
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) CSFB, (iii) the Trustee, (iv) any entity that provides insurance
or other credit support to the Trust Fund or (v) any obligor with respect to
Mortgage Loans constituting more than five percent of the aggregate unamortized
principal balance of the assets in the 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 M, Class B1 and Class B2 Certificates. In
addition, a substantially identical administrative exemption has been issued by
the DOL to Salomon. However, the exemption granted to Salomon does not apply to
such purchase, holding or resale because such Certificates are subordinate to
certain other Classes of Certificates. ACCORDINGLY, ERISA PLANS MAY NOT PURCHASE
THE CLASS M, CLASS B1 OR CLASS 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.
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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 constitute the residual interest in the
REMIC constituted by the Trust Fund and all 'excess inclusions' allocated to the
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 M, Class B1 and Class B2 Certificates. See 'Description of the
Certificates--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.
LEGAL INVESTMENT MATTERS
The Senior Certificates offered hereby and the Class 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 B1 and Class B2 Certificates will not constitute 'mortgage
related securities' under SMMEA. The appropriate characterization of the Class
B1 and Class B2 Certificates under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase Class B1
or Class 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 B1 or Class B2 Certificates will constitute legal
investments for them.
The Company makes no representation as to the proper characterization of
the Class B1 or Class B2 Certificates for legal investment of financial
institution regulatory purposes, or as to the ability of particular investors to
purchase the Class B1 or Class B2 Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Class B1 or Class B2 Certificates) may adversely affect
the liquidity of the Class B1 and Class B2 Certificates.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the respective
Underwriting Agreements between the Company and CSFB and Salomon, the Senior
Certificates offered hereby are being purchased from the Company by CSFB and the
Junior Certificates offered hereby are being purchased from the Company by
Salomon upon issuance. Distribution of the Certificates offered hereby will be
made by the respective Underwriters from time to time in negotiated transactions
or otherwise at varying prices to be determined at the time of sale.
Distribution of the Class A2, Class A4, Class A7 and Class A10 Certificates will
also be made by AG Edwards & Sons, Inc. (the 'Dealer') 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 99.478587% of the aggregate initial Class
Certificate Principal Balance of the Certificates offered hereby, plus
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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 Underwriters may be
deemed to have received compensation from the Company in the form of
underwriting discounts.
The Company has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Salomon has entered into an agreement with the Company to purchase the
Class B3, Class B4 and Class B5 Certificates simultaneously with the purchase of
the Certificates offered hereby, subject to certain conditions.
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, and that
the Class M, Class B1 and Class 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.
S-53
<PAGE>
INDEX OF CERTAIN PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------ ----------
<S> <C>
Accrued Certificate Interest................................ S-5
Additional Collateral....................................... S-15
Adjustment Amount........................................... S-31
Agreement................................................... S-4
Allocable Share............................................. S-28
Available Funds............................................. S-20
Bankruptcy Coverage Termination Date........................ S-31
Bankruptcy Loss............................................. S-29
Bankruptcy Loss Amount...................................... S-31
Base Servicing Fee.......................................... S-48
Base Servicing Fee Rate..................................... S-48
beneficial owner............................................ S-18
BIF......................................................... S-47
Book-Entry Certificates..................................... S-18
Bulletin Board.............................................. S-14
Category A Group I Final Distribution Date.................. S-28
Category A Group I Senior Certificates...................... S-9
Category A Group II Senior Certificates..................... S-9
Category A Percentage....................................... S-25
Category A Senior Certificates.............................. S-9
Category A Senior Optimal Principal Amount.................. S-25
Category B Group I Final Distribution Date.................. S-28
Category B Group I Senior Certificates...................... S-9
Category B Group II Senior Certificates..................... S-9
Category B Percentage....................................... S-25
Category B Senior Certificates.............................. S-9
Category B Senior Optimal Principal Amount.................. S-25
Cede........................................................ S-18
Certificate Principal Balance............................... S-23
Certificates................................................ Cover Page
Class....................................................... S-2
Class A5 Percentage......................................... S-26
Class A5 Principal Distribution Amount...................... S-25
Class A5 Principal Distribution Percentage.................. S-26
Class A11 Percentage........................................ S-26
Class A11 Prepayment Distribution Percentage................ S-26
Class A11 Principal Distribution Amount..................... S-26
Class B Certificates........................................ S-2
Class Certificate Principal Balance......................... S-3
Class PO Deferred Amount.................................... S-6
Class PO Deferred Payment Writedown Amount.................. S-23
Class PO Principal Distribution Amount...................... S-27
Class Prepayment Distribution Trigger....................... S-28
Code........................................................ S-13
Collection Account.......................................... S-47
Company..................................................... Cover Page
Compensating Interest Payment............................... S-48
Cross-Over Date............................................. S-6
Dealer...................................................... Cover Page
Debt Service Reduction...................................... S-29
Defaulted Mortgage Loan..................................... S-48
</TABLE>
S-54
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------ ----------
<S> <C>
Deficient Valuation......................................... S-29
Definitive Certificate...................................... S-18
Depository.................................................. S-3
Detailed Description........................................ S-15
Discount Mortgage Loan...................................... S-24
Distribution Date........................................... S-4
DOL......................................................... S-51
ERISA....................................................... S-13
ERISA Plan.................................................. S-50
Excess Loss................................................. S-30
Exemption................................................... S-51
FDIC........................................................ S-47
Financial Intermediary...................................... S-18
Fitch....................................................... S-13
Fraud Coverage Termination Date............................. S-31
Fraud Loss.................................................. S-29
Fraud Loss Amount........................................... S-31
GE Capital.................................................. S-46
Group I Senior Certificates................................. S-21
Group II Senior Certificates................................ S-21
Interest Accrual Period..................................... S-5
Interest Shortfall.......................................... S-23
Junior Certificate Writedown Amount......................... S-23
Junior Certificates......................................... S-2
Junior Optimal Principal Amount............................. S-28
Junior Percentage........................................... S-28
Junior Prepayment Percentage................................ S-28
Limited Purpose Surety Bond................................. S-16
Liquidated Mortgage Loan.................................... S-29
Loss Allocation Limitation.................................. S-30
MLCC........................................................ S-15
Modeling Assumptions........................................ S-37
Mortgage.................................................... S-15
Mortgage Loan Group......................................... S-38
Mortgage Loans.............................................. Cover Page
Mortgage Pool............................................... Cover Page
Mortgage Rates.............................................. S-15
mortgage related securities................................. S-13
Mortgaged Properties........................................ S-4
Mortgagor................................................... S-7
Net Interest Shortfall...................................... S-23
Net Mortgage Rate........................................... S-23
NMR......................................................... S-24
Non-Book-Entry Certificates................................. S-19
Non-Discount Mortgage Loan.................................. S-24
Non-PO Percentage........................................... S-24
Nonrecoverable Advance...................................... S-48
Original Junior Principal Balance........................... S-27
Outstanding Mortgage Loan................................... S-15
Participant................................................. S-18
Pledged Asset Loan-to-Value Ratio........................... S-17
Pledged Asset Mortgage Loans................................ S-15
PO Percentage............................................... S-24
</TABLE>
S-55
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------ ----------
<S> <C>
Pool Scheduled Principal Balance............................ S-15
Prepayment Assumption....................................... S-37
Prepayment Interest......................................... S-35
Prepayment Period........................................... S-25
Primary Mortgage Insurance Policy........................... S-46
Realized Loss............................................... S-29
Record Date................................................. S-4
Regular Certificates........................................ S-12
regular interests........................................... S-50
REMIC....................................................... S-2
Residual Certificates....................................... Cover Page
residual interest........................................... S-50
Restricted Group............................................ S-51
SAIF........................................................ S-47
S&P......................................................... S-13
Scheduled Principal Balance................................. S-15
Senior Certificates......................................... S-2
Senior Final Distribution Date.............................. S-28
Senior Optimal Principal Amount............................. S-25
Senior Percentage........................................... S-26
Senior Prepayment Percentage................................ S-26
Senior Prepayment Percentage Stepdown Limitation............ S-27
Servicing Fee............................................... S-48
Servicing Portfolio......................................... S-44
SMMEA....................................................... S-13
Special Hazard Loss......................................... S-29
Special Hazard Loss Amount.................................. S-31
Special Hazard Termination Date............................. S-31
Supplemental Servicing Fee.................................. S-48
Supplemental Servicing Fee Rate............................. S-48
Tax-Exempt Investor......................................... S-52
Trigger Event............................................... S-46
Trust Fund.................................................. Cover Page
Trustee..................................................... S-4
Underwriter................................................. Cover Page
</TABLE>
S-56
<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 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 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 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 JANUARY 22, 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.
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
2
<PAGE>
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>
CAPTION PAGE
--------------------------------------------------------------- ----
<S> <C>
Prospectus Supplement.......................................... 2
Available Information.......................................... 2
Incorporation of Certain Documents by Reference................ 2
Reports to Certificateholders.................................. 3
Prospectus Summary............................................. 6
Description of the Certificates................................ 15
General...................................................... 15
Classes of Certificates...................................... 16
Distributions of Principal and Interest...................... 16
Example of Distributions..................................... 18
Optional Termination of the Trust Fund....................... 19
The Trust Fund................................................. 20
The Mortgage Loans........................................... 20
The Agency Securities........................................ 26
Contracts.................................................... 30
Credit Support................................................. 31
General...................................................... 31
Purchase of Liquidating Loans................................ 31
Limited Guarantee of the Guarantor........................... 32
Subordination................................................ 33
Cross-Support................................................ 34
Pool Insurance............................................... 34
Special Hazard Insurance..................................... 35
Bankruptcy Bond.............................................. 35
Repurchase Bond.............................................. 36
Guaranteed Investment Contracts.............................. 36
Reserve Accounts............................................. 36
Other Insurance, Guarantees and Similar Instruments or
Agreements................................................. 36
Yield, Maturity and Weighted Average Life Considerations....... 37
Servicing of the Mortgage Loans and Contracts.................. 39
Collection and Other Servicing Procedures.................... 39
Private Mortgage Insurance................................... 42
Hazard Insurance............................................. 43
Unanticipated Recoveries of Losses on the Mortgage Loans..... 44
Advances..................................................... 45
Loan Payment Record.......................................... 45
Servicing and Other Compensation and Payment of Expenses..... 47
Resignation, Succession and Indemnification of the Company... 48
The Pooling and Servicing Agreement............................ 49
Assignment of Assets......................................... 49
Repurchase or Substitution................................... 51
Certain Modifications and Refinancings....................... 52
Evidence as to Compliance.................................... 52
List of Certificateholders................................... 53
The Trustee.................................................. 53
Administration of the Certificate Account.................... 53
Reports to Certificateholders................................ 54
Events of Default............................................ 55
Rights Upon Event of Default................................. 55
Amendment.................................................... 56
Termination.................................................. 56
GE Capital Mortgage Services, Inc.............................. 57
General...................................................... 57
Delinquency and Foreclosure Experience....................... 57
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CAPTION PAGE
--------------------------------------------------------------- ----
<S> <C>
The Guarantor.................................................. 57
Certain Legal Aspects of the Mortgage Loans and Contracts...... 57
The Mortgage Loans........................................... 57
General.................................................... 57
Foreclosure................................................ 58
Junior Mortgages; Rights of Senior Mortgagees.............. 60
Right of Redemption........................................ 61
Anti-Deficiency Legislation and Other Limitations on
Lenders.................................................. 61
Enforceability of Certain Provisions....................... 62
Applicability of Usury Laws................................ 63
Soldiers' and Sailors' Civil Relief Act.................... 63
Environmental Considerations............................... 63
The Contracts................................................ 64
General.................................................... 64
Security Interests in the Manufactured Homes............... 64
Enforcement of Security Interests in Manufactured Homes.... 65
Consumer Protection Laws................................... 66
Transfers of Manufactured Homes; Enforceability of
'Due-on-Sale' Clauses.................................... 66
Applicability of Usury Laws................................ 66
Soldiers' and Sailors' Civil Relief Act.................... 67
Legal Investment Matters....................................... 67
ERISA Considerations........................................... 68
Certain Federal Income Tax Consequences........................ 70
General...................................................... 70
REMIC Elections.............................................. 70
REMIC Certificates........................................... 70
Non-REMIC Certificates....................................... 79
Backup Withholding........................................... 82
Plan of Distribution........................................... 82
Use of Proceeds................................................ 83
Legal Matters.................................................. 83
Financial Information.......................................... 83
</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.
<TABLE>
<S> <C>
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.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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.
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.
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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. 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
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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 of monthly payments and may include maximum
or minimum amounts of monthly payments.
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(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.
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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 the Principal Balance thereof plus
one month's interest thereon at the Remittance
Rate.
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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 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.
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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 the
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. 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 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.
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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.
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
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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 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
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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
will describe the allocation of such payments and the manner in which
distributions thereof will be made to Certificateholders.
<TABLE>
<S> <C>
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.
</TABLE>
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<TABLE>
<S> <C>
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.
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.
</TABLE>
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.
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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 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.
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<PAGE>
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 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.
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<PAGE>
(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 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.
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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).
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
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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.
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
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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 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.
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 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
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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 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').
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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.
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
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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 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.
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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 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
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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 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
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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.
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
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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 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
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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 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
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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. 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.
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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 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
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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.
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
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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 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 a
Certificateholder's yield of principal payments occurring at a rate higher (or
lower) than the rate anticipated by
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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.
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.
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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 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, generally, not more than one year after the date upon which the arrangement
with the mortgagor is entered into. 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
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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, 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
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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.
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
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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.
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
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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 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
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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 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.
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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 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.
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.
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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.
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
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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.
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.
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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.
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, 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.
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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 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.
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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. 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.
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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 MODIFICATIONS AND REFINANCINGS
Unless otherwise specified in the Prospectus Supplement, the Agreement will
permit the Company, as servicer, to modify any Mortgage Loan upon the request of
the related Mortgagor, provided that the Company purchases such Mortgage Loan
from the Trust Fund immediately following such modification. Any such
modification may not be made unless the modification includes a change in the
interest rate on the related Mortgage Loan to approximately a prevailing market
rate. Any such purchase will be for a price equal to 100% of the Principal
Balance of such Mortgage Loan, plus accrued and unpaid interest thereon to the
date of purchase at the applicable Remittance Rate, net of any unreimbursed
advances of principal and interest thereon made by the Company as servicer. The
Company will deposit the purchase price in the Certificate Account on the
related Deposit Date. Such purchases may occur when prevailing interest rates
are below the interest rates on the Mortgage Loans and Mortgagors request
modifications as an alternative to refinancings. If a REMIC election is made
with respect to all or a portion of the related Trust Fund, the Company will
indemnify the REMIC against liability for any prohibited transactions taxes and
any related interest, additions or penalties imposed on the REMIC as a result of
any such modification or purchase.
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.
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.
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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 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
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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;
(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
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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 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
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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.
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.
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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 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
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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
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,
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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.
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
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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, 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 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.
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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
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
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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 '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
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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 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'.
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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.
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
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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.
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
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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.
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
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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 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.
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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, 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 the Trust Fund related to each 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 the 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, the Trust Fund, or each portion thereof that
is treated as a separate REMIC, will be referred to as a 'REMIC Pool'. If the
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:
o assets described in Code Section 7701(a)(19)(C); and
o 'real estate assets' under Code Section 856(c)(5)(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 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
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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>
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 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
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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 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
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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.
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
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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 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
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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.
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
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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 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.
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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 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.
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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.
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:
o 'real estate assets' under Code Section 856(c)(5)(A); and
o 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 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.
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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
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.
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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 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;
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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.
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-3
Description of the Mortgage Pool and the
Mortgaged Properties.......................... S-15
Description of the Certificates................. S-18
Yield and Weighted Average Life
Considerations................................ S-33
GE Capital Mortgage Services, Inc............... S-44
Delinquency and Foreclosure Experience of the
Company....................................... S-44
The Pooling and Servicing Agreement............. S-45
Certain Federal Income Tax Consequences......... S-50
ERISA Considerations............................ S-50
Legal Investment Matters........................ S-52
Plan of Distribution............................ S-52
Certificate Ratings............................. S-53
Legal Matters................................... S-53
Index of Certain Prospectus Supplement
Definitions................................... S-54
PROSPECTUS
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Reports to Certificateholders................... 3
Prospectus Summary.............................. 6
Description of the Certificates................. 15
The Trust Fund.................................. 20
Credit Support.................................. 31
Yield, Maturity and Weighted Average Life
Considerations................................ 37
Servicing of the Mortgage Loans and Contracts... 39
The Pooling and Servicing Agreement............. 49
GE Capital Mortgage Services, Inc............... 57
The Guarantor................................... 57
Certain Legal Aspects of the Mortgage Loans and
Contracts..................................... 57
Legal Investment Matters........................ 67
ERISA Considerations............................ 68
Certain Federal Income Tax Consequences......... 70
Plan of Distribution............................ 82
Use of Proceeds................................. 83
Legal Matters................................... 83
Financial Information........................... 83
</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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GE CAPITAL MORTGAGE
SERVICES, INC.
(Seller and Servicer)
$446,001,625
(Approximate)
REMIC Multi-Class
Pass-Through Certificates,
Series 1998-2
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
January 26, 1998
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