<PAGE>
Filed pursuant to Rule 424(b)(5)
PROSPECTUS SUPPLEMENT Registration File No. 333-51151
(TO PROSPECTUS DATED OCTOBER 22, 1998)
$346,465,058
(APPROXIMATE)
GE CAPITAL MORTGAGE SERVICES, INC.
SELLER AND SERVICER
REMIC MULTI-CLASS PASS-THROUGH CERTIFICATES, SERIES 1998-20.
Principal and interest payable monthly, beginning November 25, 1998.
------------------------
All of the certificates comprising the series of certificates described in
this Prospectus Supplement (the "Certificates") represent ownership interests in
a trust fund. The trust fund consists primarily of a pool of conventional,
fixed-rate, first-lien, fully-amortizing, one- to four- family residential
mortgage loans with maturities of 20 to 30 years. GE Capital Mortgage Services,
Inc. (the "Company") is selling the mortgage loans to the trust fund.
------------------------
NEITHER THE CERTIFICATES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT NOR THE
UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
CLASS CERTIFICATE CERTIFICATE
PRINCIPAL BALANCE(1) INTEREST RATE
-------------------- -------------
<S> <C> <C>
SENIOR CERTIFICATES:
Class A1...................................... $287,697,958 6.50%
Class A2...................................... 5,000,000 6.50
Class A3...................................... 5,000,000 6.50
Class A4...................................... 4,025,000 6.50
Class A5...................................... 35,091,000 6.50
Class R....................................... 100 6.50
JUNIOR CERTIFICATES:
Class M....................................... 5,264,000 6.50
Class B1...................................... 2,632,000 6.50
Class B2...................................... 1,755,000 6.50
</TABLE>
- ------------------
(1) Approximate, subject to the adjustment described in this Prospectus
Supplement.
Certain types of investors are not permitted to purchase or hold the Junior
Certificates or the Class R Certificates. For more information on these
restrictions, you should refer to "ERISA Considerations" and "Description of the
Certificates--Restrictions on Transfer of the Residual Certificates" in this
Prospectus Supplement.
The Certificates offered by this Prospectus Supplement will be purchased by
Salomon Smith Barney Inc., and are being offered by Salomon Smith Barney Inc.
from time to time to the public in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Company will receive
proceeds from the sale of such Certificates of approximately 99.897052% of their
total initial principal balance, plus accrued interest from October 1, 1998 to
but excluding the initial issuance date, before deducting expenses payable by
the Company. You should refer to "Plan of Distribution" herein.
On or about October 29, 1998, delivery of the Certificates offered by this
Prospectus Supplement, except for the Class R Certificates, will be made through
the book-entry facilities of The Depository Trust Company, and delivery of the
Class R Certificates will be made at the offices of Salomon Smith Barney Inc. in
New York, New York.
------------------------
SALOMON SMITH BARNEY
------------------------
The date of this Prospectus Supplement is October 27, 1998.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the Certificates offered by this
Prospectus Supplement in two separate documents: (1) the accompanying
Prospectus, which provides general information, some of which may not apply to
your Certificates, and (2) this Prospectus Supplement, which describes the
specific terms of your Certificates.
IF THE INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
S-2
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. You should carefully read the entire Prospectus and
Prospectus Supplement to fully understand the terms of the Certificates offered
by this Prospectus Supplement. All of the information contained in this summary
is qualified by the more detailed explanation appearing in other parts of this
Prospectus Supplement and the accompanying Prospectus. While this summary
contains an overview of certain allocation concepts and other information to aid
your understanding, you should read carefully the full description of these
allocation concepts and other information in this Prospectus Supplement and the
accompanying Prospectus before making any investment decision.
You can find a listing of capitalized terms used in this Prospectus
Supplement, and the pages on which they are defined, under the caption "Index of
Certain Prospectus Supplement Definitions" beginning on page S-48 of this
Prospectus Supplement. Any capitalized terms that are not defined in the
Prospectus Supplement are defined in the accompanying Prospectus.
SECURITIES OFFERED
The underwriter is offering the Certificates offered by this Prospectus
Supplement in the classes and total original principal balances that are
specified on the cover, subject to the possible adjustment described below. The
total original principal balance of the Certificates will be approximately
$350,914,546. Depending on the final composition of the underlying pool of
mortgage loans, the principal balance of each class may increase or decrease
from the amount listed on the cover. The total original principal balance of the
Certificates will not be less than $332,500,000 or greater than $367,500,000.
The Class A1, Class A2, Class A3, Class A4, Class A5, Class R and Class PO
Certificates comprise the senior certificates (the "Senior Certificates"). The
Class M and Class B1 through Class B5 Certificates comprise the junior
certificates (the "Junior Certificates").
The Class PO, Class B3, Class B4 and Class B5 Certificates are not offered
by this Prospectus Supplement. The Company will initially retain and may
subsequently transfer the Class PO Certificates.
Unless you are purchasing a Class R Certificate, you will not have the
right to receive physical certificates evidencing your ownership except under
certain limited circumstances. Instead, the trust fund will issue the
Certificates offered by this Prospectus Supplement in the form of global
certificates, which will be held by The Depository Trust Company or its nominee.
Financial institutions that are direct or indirect participants in The
Depository Trust Company will record beneficial ownership of a Certificate by
individual investors in
S-3
<PAGE>
the following minimum denominations and, in each case, in integral multiples of
$1,000 in excess of these denominations:
CERTIFICATE MINIMUM DENOMINATION
- -------------------------------- --------------------
Class A1........................ $ 25,000
Class A2........................ 1,000
Class A3........................ 1,000
Class A4........................ 1,000
Class A5........................ 25,000
Class M......................... 100,000
Class B1........................ 100,000
Class B2........................ 100,000
The Class R Certificates will be issued in certificated form as a single
certificate representing the entire principal balance of that class.
TRUST FUND
The Certificates will represent the entire beneficial ownership interest in
the trust fund. Holders of the Certificates will be paid out of the cash flow
produced by the trust fund's assets. The assets of the trust fund will consist
primarily of a pool of fixed-rate, fully-amortizing, conventional mortgage loans
that are secured by first liens on one- to four-family residential properties.
The mortgage loans expected to be included in the trust fund have the following
characteristics as of October 1, 1998:
Total original principal balance (1).............. $350,914,546
Original terms to maturity........................ 20 to 30 years
Weighted average maturity......................... between 346 and 348 months
Weighted average annual interest rate............. between 7.54% and 7.58%
- ------------------
(1) Approximate, after deducting payments of principal due on or before October
1, 1998 and subject to the possible adjustment described in this Prospectus
Supplement.
In addition, the Company expects that up to approximately 41%, in terms of
total principal balance as of October 1, 1998, of the mortgage loans included in
the trust fund will be located in California.
SERVICER
The Company will act as servicer of the mortgage loans. For approximately
two-thirds of the mortgage loans contained in the trust fund, measured by
principal balance as of October 1, 1998, North American Mortgage Company, as
seller of such mortgage loans, will remain as the primary servicer while the
Company will supervise the servicing duties and remain directly liable to the
trust fund for the performance of such servicing duties. As servicer, the
Company will be responsible for making reasonable efforts to collect payments
due on the mortgage loans and performing other administrative functions. The
Company will be obligated, as servicer, to advance delinquent principal and
interest payments on the mortgage loans included in the mortgage pool under
certain circumstances. In addition, the Company will reduce its servicing
compensation, within certain limits, to reimburse holders
S-4
<PAGE>
of Certificates for shortfalls of interest payments resulting from voluntary
prepayments on the mortgage loans. For more information on the Company, you
should refer to "GE Capital Mortgage Services, Inc." in this Prospectus
Supplement. For more information on the servicing of the mortgage loans, you
should refer to "The Pooling and Servicing Agreement--Servicing Arrangement with
Respect to the Mortgage Loans" and "--Servicing Compensation, Compensating
Interest and Payment of Expenses" in this Prospectus Supplement.
DISTRIBUTIONS ON THE CERTIFICATES
The Certificates will be issued under a pooling and servicing agreement,
which will be dated as of October 1, 1998, between the Company and State Street
Bank and Trust Company, as trustee. The pooling and servicing agreement will
provide that distributions will be made on the Certificates on the 25th day of
each month, beginning in November 1998. If such 25th day is not a business day,
then distributions will be made on the next business day after the 25th of the
month. These distributions will be made to holders of record of the Certificates
on the close of business on the last business day of the calendar month
preceding any distribution date. The first distribution date will be
November 25, 1998.
On each distribution date, (i) the Senior Certificates will be entitled to
receive all amounts of interest and principal distributable to them before any
distributions are made to the Junior Certificates, and (ii) each class of Junior
Certificates will be entitled to receive all amounts of interest and principal
distributable to it before any distributions are made on any subordinate class
of Junior Certificates. Generally, the available funds for each distribution
date will first be allocated to pay interest due the holders of the Senior
Certificates and then to pay the principal due the holders of the Senior
Certificates in the order of priority established among the senior classes. The
remaining available funds will then be allocated so that holders of the Class PO
Certificates are protected from certain losses realized on mortgage loans that
have annual interest rates, net of the Company's fixed servicing fee, that are
less than 6.50%, but only if it is possible to cover those losses from amounts
otherwise distributable as principal on the Junior Certificates. Lastly, the
remaining available funds will be allocated to pay interest and then principal
due the holders of the Junior Certificates in the order of priority established
among the junior classes. You should refer to "Description of the
Certificates--Distributions on the Certificates--Allocation of Available Funds"
in this Prospectus Supplement for the exact allocation of the available funds
among the Certificates.
INTEREST PAYMENTS
o Interest will accrue on each class of Certificates offered by this
Prospectus Supplement at the respective fixed interest rates specified on
the cover of this Prospectus Supplement during each applicable interest
accrual period.
o On each distribution date, interest will be distributable from the
available funds on each class of Certificates in a total amount based on
the current accrued interest for such class, plus any accrued interest
remaining undistributed from previous distribution dates.
S-5
<PAGE>
o The amount of interest actually distributed to you on any distribution
date may be less than the interest accrued on your Certificate if one or
more mortgage loans prepay, go into default and produce a loss, or have
their interest rates reduced by federal law because the borrower is on
active military duty. You should refer to "Description of the
Certificates--Distributions on the Certificates--Interest" and
"Description of the Certificates--Allocation of Realized Losses on the
Certificates" in this Prospectus Supplement for a description of how any
such event may produce a shortfall or loss and how shortfalls or losses
of interest are allocated among the Certificates.
o Interest will be calculated on the Certificates on the basis of a 360-day
year consisting of twelve 30-day months.
PRINCIPAL PAYMENTS
o Principal will be paid on each class of Senior Certificates after
interest has been paid on all classes of Senior Certificates. Principal
will be paid on each class of Junior Certificates after (i) interest and
principal have been paid on all classes of Senior Certificates and each
higher ranking class of Junior Certificates and (ii) interest has been
paid on such class of Junior Certificates.
o The amount of principal distributable on the Certificates is a function
of (i) formulas that allocate portions of the principal payments
received, or expected to be received, on the mortgage loans among the
different classes and (ii) the funds actually received from the trust
fund's assets that are available to make distributions on each
Certificate according to its allocation. Funds actually received may
consist of expected, scheduled mortgage loan payments and unexpected,
unscheduled payments due to prepayments, defaults by mortgagors or
certain other events. You should refer to "Prepayment and Yield
Considerations" in this summary for more details about types of
unexpected payments.
o The key allocation concept for the Senior Certificates, other than the
Class PO Certificates, is the Senior Optimal Principal Amount which is
defined on page S-20. The key allocation concept for the Class PO
Certificates is the Class PO Principal Distribution Amount which is
defined on page S-22. The key allocation concept for the Junior
Certificates is the Junior Optimal Principal Amount which is defined on
page S-23. The amount determined by each of these definitions is
allocated among the different classes of Certificates based upon the
priority of payments described in detail under "Description of the
Certificates--Distribution on the Certificates--Allocation of Available
Funds" in this Prospectus Supplement.
o One of the main effects of the allocation formulas is to allocate to the
Senior Certificates other than the Class PO Certificates, as a group,
more than their proportionate share of most of the unexpected mortgage
loan payments for at least the first nine years after initial issuance of
the Certificates. This results in an acceleration of the repayment of the
Senior Certificates, as a group, relative to the Junior Certificates.
Unexpected payments distributable to holders of Junior Certificates will
generally be paid in a manner designed to maintain the relative levels of
subordination among the various classes of Junior Certificates. You
should refer to "Description of the Certificates--Distribution on the
Certificates--Allocation of Available Funds--Class Prepayment
Distribution Trigger" in this Prospectus Supplement.
S-6
<PAGE>
o As discussed in more detail below, losses on the underlying mortgage
loans are first allocated to the Junior Certificates. Losses due to
certain types of defaults, including those resulting from bankruptcies of
mortgagors, fraud in the origination process, or uninsured physical
damage to the mortgaged properties, are allocated exclusively to the
Junior Certificates in varying degrees until these losses reach specified
levels. You should refer to "Description of the Certificates--Allocation
of Realized Losses on the Certificates" in this Prospectus Supplement.
o This series of Certificates includes a class of Senior Certificates, the
Class A5 Certificates, that does not benefit from accelerated repayment
in the same manner as the other Senior Certificates. The Class A5
Certificates will not receive any distribution of payments of principal
on the mortgage loans for the first five years after initial issuance of
the Certificates, unless (i) the other classes of Senior Certificates
have been paid off or (ii) the total principal balance of the Junior
Certificates has been reduced to zero as a result of principal
distributions and the allocation of losses to such Certificates.
o Despite the priority of payments, all distributions of principal on the
outstanding Senior Certificates, other than the Class PO Certificates,
will be made on a pro rata basis among such Certificates on each
distribution date after the date on which the total principal balance of
the Junior Certificates has been reduced to zero as a result of principal
distributions and the allocation of losses to such Certificates. You
should refer to "Description of the Certificates--Distributions on the
Certificates--Principal" in this Prospectus Supplement.
o The rate of distribution of principal on the Certificates will depend on
the rate of payment of principal on 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. The Company cannot predict or assure you as to the actual rate
of payment of principal on the mortgage loans.
SUBORDINATION AND LOSS ALLOCATION
The rights of the holders of each class of Junior Certificates to receive
distributions from the trust fund will be subordinate to the rights of the
holders of the Senior Certificates to receive distributions. Furthermore, the
right of certain classes of Junior Certificates, other than the Class M
Certificates, to receive distributions from the trust fund will be subordinate
to the rights of each higher ranking class of Junior Certificates to receive
distributions. The subordination of the Junior Certificates relative to the
Senior Certificates is intended to both (i) enhance the likelihood that holders
of the Senior Certificates will receive the full amount of the monthly
distributions allocable to them and (ii) to protect the holders of Senior
Certificates against losses. The subordination of each class of Junior
Certificates, other than the Class M Certificates, relative to each higher
ranking class of Junior Certificates is intended to give similar benefits to
such higher ranking classes of Junior Certificates. However, the degree of
protection afforded any class of Junior Certificates by this subordination is
less than the degree of protection afforded to the Senior Certificates.
You should consider the level of subordination present among the
Certificates when making your investment decision. As of the date of the initial
issuance of the Certificates, the total principal balance of the Junior
Certificates will equal approximately 4.00% of the
S-7
<PAGE>
total principal balance of all the Certificates. As of that date, the total
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 by
this Prospectus Supplement, will equal approximately 1.25% of the initial total
principal balance of all of the Certificates and approximately 31.25% of the
initial total principal balance of all of the Junior Certificates.
The protection given to the holders of Senior Certificates through the
subordination feature described above will be accomplished in two ways: first,
by the preferential right of the holders of Senior Certificates to receive the
amounts due them on each distribution date, prior to any distribution being made
on the Junior Certificates on that date and, second, by the allocation of
certain mortgage loan losses to the Junior Certificates before such losses are
allocated to the Senior Certificates (except the Class PO Certificates).
Allocation of mortgage loan losses to the Junior Certificates may, in turn,
increase the proportionate claim of the Senior Certificates on future mortgage
loan payments. You should refer to "Description of the
Certificates--Subordination--Priority of Senior Certificates" in this Prospectus
Supplement.
No form of credit enhancement other than the subordination described above
will be available for the benefit of holders of the Certificates.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal distributions on the Certificates, the total amount
of each interest distribution on the Certificates and the yield to maturity of
the Certificates are related to the rate of principal collections on the
mortgage loans. Principal collections on the mortgage loans may be in the form
of expected, scheduled principal payments and unexpected, unscheduled principal
payments. Unexpected payments consist of:
o voluntary prepayments by the mortgagors such as prepayments in full due
to refinancings. These may include refinancings made, and possibly
solicited, by the Company in the ordinary course of conducting its
mortgage banking business;
o prepayments resulting from default, foreclosure, casualty, condemnation
and similar events, and repurchases by the Company of the mortgage loans
under certain circumstances described in this Prospectus Supplement; and
o prepayments made during participation by mortgagors, which may be
solicited by the Company, in biweekly payment programs.
Expected payments and unexpected payments of principal are allocated between the
Senior Certificates and Junior Certificates, and between the Class A5
Certificates and the other Senior Certificates, according to special rules. You
should refer to "Distributions on the Certificates--Principal Payments" in this
summary and "Description of the Certificates--Distributions on the Certificates"
and "--Allocation of Realized Losses on the Certificates" below.
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 in the trust fund,
the prepayment rate on the mortgage loans is likely to increase. Conversely,
when prevailing mortgage interest rates rise significantly above the interest
rates on the underlying mortgage loans, the prepayment rate on the mortgage
loans
S-8
<PAGE>
is likely to decrease. Other economic, geographic and social factors also may
influence the prepayment rate. Because rapid rates of prepayments on the
mortgage loans are likely to occur when prevailing interest rates are lower than
those on the mortgage loans, the yields at which you may be able to reinvest
amounts received as payments on your Certificates may be lower than the yield on
your Certificates. Conversely, because slow rates of prepayments on the mortgage
loans are likely to occur when prevailing interest rates are higher than those
on the mortgage loans, the amount of payments available to you for reinvestment
at such high rates may be relatively low.
In addition, the yields to maturity on the Certificates themselves will be
sensitive, in varying degrees, to the rate and timing of mortgage loan
prepayments. The extent to which the yield to maturity of a Certificate is
sensitive to prepayments will depend upon whether it is purchased for an amount
greater than or less than the Certificate's then outstanding principal balance.
In the case of Certificates purchased for an amount greater than their then
outstanding principal balance, (i) faster than anticipated rates of principal
prepayments on the mortgage loans could result in actual yields to you that are
lower than the anticipated yields and (ii) could result in a reduction in the
amount of time such Certificates are outstanding. In the case of Certificates
purchased for an amount less than their then outstanding principal balance,
(i) slower than anticipated rates of principal prepayments on the mortgage loans
could result in actual yields to you that are lower than the anticipated yields
and (ii) could result in an extension of the amount of time such Certificates
are outstanding.
Voluntary prepayments of principal on the mortgage loans may reduce the
amount of interest available for distribution to holders of Certificates. Any
resulting shortfalls in interest, unless offset by a reduction in servicing
compensation of the Company, generally will produce a lower yield on the
Certificates than would otherwise be the case. The interest distributable on the
Certificates offered by this Prospectus Supplement will also be reduced under
certain loss scenarios and this will also produce a lower yield. You should
refer to "Description of the Certificates--Allocation of Realized Losses on the
Certificates" in this Prospectus Supplement.
The Certificates offered by this Prospectus Supplement were structured on
the basis of several things, including (i) an assumed rate of prepayments on the
mortgage loans of 295% of the prepayment model, as described under "Yield and
Weighted Average Life Considerations--Weighted Average Lives of the
Certificates" and (ii) corresponding weighted average lives as described in this
Prospectus Supplement. The weighted average lives of the Certificates offered by
this Prospectus Supplement, based on the assumptions described under "Yield and
Weighted Average Life Considerations--Weighted Average Lives of the
Certificates--Tables of Class Certificate Principal Balances", are set forth in
the tables that appear under such heading on pages S-34 through S-36. The
mortgage loans are not likely to prepay at a constant rate of 295% of the
prepayment model 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 weighted average lives of all classes of the Certificates will be affected
in part by the rate of principal payments on the mortgage loans and the
resulting allocation of principal payments on the Certificates.
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
these Certificates, 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
S-9
<PAGE>
and greater among the Class M Certificates than the Senior Certificates. Because
of the special allocation of losses to the Junior Certificates, investors in the
Class M, Class B1 and Class B2 Certificates may not fully recover their
investment. You should refer to "Yield and Weighted Average Life
Considerations--The Class M, Class B1 and Class B2 Certificates" in this
Prospectus Supplement.
You are urged to make an investment decision with respect to the
Certificates you propose to purchase based upon your own determination as to the
anticipated rate of prepayments, defaults and losses on the underlying mortgage
loans and anticipated yield on the Certificates.
You should refer to "Yield, Maturity and Weighted Average Life
Considerations" in the Prospectus.
OPTIONAL TERMINATION OF THE TRUST FUND
The Company may, at its option, repurchase from the trust fund all of the
mortgage loans underlying the Certificates on any distribution date after the
total unpaid principal balance of the mortgage loans is less than 10% of the
total unpaid principal balance of the mortgage loans as of October 1, 1998. This
repurchase would result in the early retirement of the Certificates. If the
proceeds realized upon such early retirement are less than the total principal
balance of all outstanding Certificates plus accrued and unpaid interest, the
resulting shortfall will be allocated among the Certificates as described in
this Prospectus Supplement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Certificates, other than the Class R Certificates, will be treated as
debt instruments issued by a real estate mortgage investment conduit ("REMIC")
for federal income tax purposes. The Class R Certificates will be treated as the
residual interest in the REMIC.
The particular federal income tax consequences of your investment will
depend upon the class of Certificates you buy. These consequences may include
the following:
o You will be required to report income on your Certificates (other than
the Class R Certificates) in accordance with the accrual method of
accounting.
o Certain classes of the Certificates may be issued with original issue
discount.
o The holders of the Class R 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 Class R Certificates. You should refer to
"Description of the Certificates--Restrictions on Transfer of the
Residual Certificates" for further information on those restrictions.
o The amount of income reported by a holder of a Junior Certificate may
exceed the cash distributions actually received by that holder due to the
preferential right of other classes of Certificates to receive cash
distributions in the event of losses on the mortgage loans.
S-10
<PAGE>
You should refer to "Certain Federal Income Tax Consequences" in this Prospectus
Supplement and "Certain Federal Income Tax Consequences--REMIC Certificates" in
the accompanying Prospectus.
LEGAL INVESTMENT
The Senior Certificates and the Class M Certificates offered by this
Prospectus Supplement will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. Certain institutions,
however, may be subject to restrictions on investment in such Certificates. The
Class B1 and Class B2 Certificates will not constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of 1984. All
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether, and to what extent, they
can invest in Class B1 and Class B2 Certificates.
ERISA CONSIDERATIONS
If you are a fiduciary of an employee benefit plan that is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or a plan
subject to Section 4975 of the Internal Revenue Code of 1986 (the "Code") you
should carefully review with your legal advisors whether the purchase or holding
of the Certificates offered by this Prospectus Supplement could give rise to a
transaction prohibited or not otherwise permissible under ERISA or the Code. The
Class M, Class B1, Class B2 and Class R Certificates may not be acquired by an
employee benefit plan that is subject to ERISA or a plan subject to
Section 4975 of the Code. The transfer of those classes of Certificates is
subject to certain restrictions described in "ERISA Considerations" in this
Prospectus Supplement.
CERTIFICATE RATINGS
The Company must obtain the following ratings for the Certificates from
Fitch IBCA, Inc. and/or Standard and Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., at the time the Certificates are initially issued:
STANDARD AND
CERTIFICATE FITCH'S RATING POOR'S RATING
- ------------------------------------------ --------------- --------------
[S] [C] [C]
Class A1.................................. AAA AAA
Class A2.................................. AAA AAA
Class A3.................................. AAA AAA
Class A4.................................. AAA AAA
Class A5.................................. AAA AAA
Class R................................... AAA AAA
Class M................................... Not Rated AA
Class B1.................................. Not Rated A
Class B2.................................. Not Rated BBB
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
The ratings of the Certificates should be evaluated independently of any other
rating. The ratings do not
S-11
<PAGE>
address the possibility that a holder of a Certificate may suffer a lower than
anticipated yield. You should refer to "Certificate Ratings" in this Prospectus
Supplement.
LIQUIDITY CONSIDERATIONS
At this time, a secondary market does not exist for the Certificates, and
the Company does not know whether such a market will develop or, if it does
develop, whether it will permit an investor to readily sell its Certificates.
Salomon Smith Barney Inc. intends to make a market for the purchase and sale of
the Certificates after their issuance, but is not obligated to do so. In
addition, the Company cannot assure you that you will be able to sell your
Certificate at a price that is equal to or greater than the price at which you
purchased your Certificate.
Information available to you should you desire to sell your 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, we cannot assure you 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, we cannot assure you 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 may affect liquidity.
The Company currently maintains an electronic bulletin board, accessible by
computer modem, which provides certain information about loans included in
various series of mortgage pass-through securities which have been publicly
offered by the Company. 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 by others using such information. The Company has no
obligation to maintain the bulletin board and may stop maintaining it at any
time. For further information concerning the bulletin board, you should call
800-544-3466, extension 5515.
S-12
<PAGE>
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 October 1, 1998 (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 aggregate original class certificate principal balance (each, a
"Class Certificate Principal Balance") of each class of Certificates (each, a
"Class") on the date of issuance of the Certificates, the initial Senior
Percentage, the initial Group II Senior Percentage and the initial Junior
Percentage (each as defined herein), and the Bankruptcy Loss Amount, Fraud Loss
Amount and Special Hazard Loss Amount (each as defined herein), 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 (as defined herein) 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 95% (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 3.50% (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, that no more
than 0.25% (by Scheduled Principal Balance as of the Cut-off Date) of the
Mortgage Loans will have been originated under the Company's "Enhanced
Streamlined Refinance Program" or other streamlined refinance programs
acceptable to the Company, that none of the Mortgage Loans will have been
originated under the Company's "No Ratio Program" or other no ratio programs
acceptable to the Company and that no more than 0.50% (by Scheduled Principal
Balance as of the Cut-off Date) 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. It is expected
that no more than 0.50% (by Scheduled Principal Balance as of the Cut-off Date)
of the Mortgage Loans will have been acquired under the Company's "Relocation
Loan" program or other relocation programs acceptable to the Company. See "The
Trust Fund--The Mortgage Loans--Loan Underwriting Policies" in the Prospectus.
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.
S-13
<PAGE>
All payments due on each Mortgage Loan on which at least one payment of
principal and interest was due prior to the Cut-off Date will have been paid
through the first day of the month preceding the Cut-off Date.
For a description of the underwriting standards generally applicable to the
Mortgage Loans, see "The Trust Fund--The Mortgage Loans--Loan Underwriting
Policies" in the Prospectus.
THE MORTGAGE LOANS
The Mortgage Loans will have an aggregate Scheduled Principal Balance as of
the Cut-off Date of approximately $350,914,546. This amount is subject to a
permitted variance such that the aggregate Scheduled Principal Balance thereof
will not be less than $332,500,000 or greater than $367,500,000.
The Mortgage Rates borne by the Mortgage Loans are expected to range from
6.50% to 10.125% per annum, and the weighted average Mortgage Rate as of the
Cut-off Date of the Mortgage Loans is expected to be between 7.54% and 7.58% per
annum. The original principal balances of the Mortgage Loans are expected to
range from $77,200 to $1,100,000 and, as of the Cut-off Date, the average
Scheduled Principal Balance of the Mortgage Loans is not expected to exceed
$314,000 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 March 1991 and the month and year of the latest scheduled
maturity date of any Mortgage Loan will be October 2028. All of the Mortgage
Loans will have original terms to maturity of 20 to 30 years, and it is expected
that the weighted average scheduled remaining term to maturity of the Mortgage
Loans will be between 346 and 348 months as of the Cut-off Date.
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 9% 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. No more than 1% of
the Mortgage Loans will have a Scheduled Principal Balance of more than
$1,000,000.
No more than 13% of the Mortgage Loans will have a loan-to-value ratio
at origination in excess of 80%, no more than 5% 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 73% and 75%.
None of the Mortgage Loans will have a 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 48% 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 7% of the Mortgage Loans will have been the subject of "cash-out"
refinancings.
None of the Mortgage Loans will be temporary buy-down Mortgage Loans.
No more than 2% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
No more than 41% 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, Virginia,
Massachusetts and Maryland. No more than 6% 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 96% 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 2% of the Mortgage Loans will be Cooperative Loans
secured by shares of stock in cooperative housing corporations and
assignments of the proprietary leases to cooperative apartment units
therein (see "The Trust Fund--The Mortgage Loans" in the Prospectus).
S-14
<PAGE>
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 State Street Bank and Trust Company, as
trustee (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 nine 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 $350,914,546, subject to a
permitted variance such that the aggregate original Certificate Principal
Balance will not be less than $332,500,000 or greater than $367,500,000. 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 and Class A5 Certificates), $1,000 (in the case of the
Class A2, Class A3 and Class A4 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 Certificates that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial
S-15
<PAGE>
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 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.
S-16
<PAGE>
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 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 November 1998, in an aggregate amount equal to the
Available Funds for such Distribution Date. Distributions will be made 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").
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 Classes of Senior Certificates, in reduction of the
Class Certificate Principal Balances thereof, to the extent of remaining
Available Funds, concurrently as follows:
(a) to the Class A1, Class A2, Class A3, Class A4, Class A5 and
Class R Certificates, the Senior Optimal Principal Amount for such
Distribution Date, in the following order of priority:
(i) to the Class A5 Certificates (the "Group II Senior
Certificates"), the Group II Senior Principal Distribution Amount (as
defined herein) for such Distribution Date, until the Class
Certificate Principal Balance thereof has been reduced to zero; and
(ii) to the Class A1, Class A2, Class A3, Class A4 and Class R
Certificates (the "Group I Senior Certificates"), the Senior Optimal
Principal Amount for such Distribution Date, less the Group II Senior
Principal Distribution Amount for such Distribution Date, in the
following order of priority:
(A) to the Class R Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(B) to the Class A1 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
(C) to the Class A2 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
S-17
<PAGE>
(D) to the Class A3 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to zero;
and
(E) to the Class A4 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.
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.
Interest will accrue on the Class B3, Class B4 and Class B5 Certificates at
the Certificate Interest Rate of 6.50% per annum during each Interest Accrual
Period.
The Class PO Certificates are principal-only Certificates and will not
accrue interest.
S-18
<PAGE>
The "Accrued Certificate Interest" for any Certificate (other than the
Class PO Certificates) for any Distribution Date will equal the interest accrued
during the related Interest Accrual Period at the applicable Certificate
Interest Rate on the Certificate Principal Balance of such Certificate
immediately prior to such Distribution Date, less such Certificate's share of
any 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 (as defined
below) and the Class PO Deferred Payment Writedown Amount (as defined below) 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; or (iii) 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 has occurred as described above, the resulting "Interest Shortfall"
generally will equal the difference between (a) one month's interest at the
Mortgage Rate net of the applicable Base Servicing Fee (as defined herein) (the
"Net Mortgage Rate") on the Scheduled Principal Balance of such Mortgage Loan,
and (b) the amount of interest at the Net Mortgage Rate actually received with
respect to such Mortgage Loan. In the case of a partial prepayment, the
resulting "Interest Shortfall" will equal one month's interest at the applicable
Net Mortgage Rate on the amount of such prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
allocable to Certificateholders through the 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
S-19
<PAGE>
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 6.50% per annum (each such Mortgage Loan, a
"Discount Mortgage Loan") will be the fraction, expressed as a percentage, equal
to NMR divided by 6.50%. The "Non-PO Percentage" with respect to any Mortgage
Loan with a Net Mortgage Rate equal to or greater than 6.50% (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 (6.50% - NMR) divided by 6.50%. The "PO Percentage" with
respect to 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 $62,942,
subject to the variance described herein.
Distributions in reduction of the Class Certificate Principal Balance of
each Class of Senior Certificates entitled to principal distributions 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 such 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 Group II
Senior Certificates will not receive any distributions in respect of scheduled
payments, prepayments or other unscheduled recoveries of principal on the
Mortgage Loans during the first five years after the date of initial issuance of
the Certificates, except as otherwise described herein on or following the
earlier of the Group I Final Distribution Date and 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
S-20
<PAGE>
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) 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 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 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 "Group II Senior Principal Distribution Amount" for any Distribution
Date will equal the product of (a) the Senior Optimal Principal Amount for such
date multiplied by (b) the Group II Senior Percentage for such date multiplied
by (c) the Group II Senior Distribution Percentage for such date.
Notwithstanding the foregoing, (i) on the Group I Final Distribution Date, the
Group II Senior Principal Distribution Amount will be increased by any Senior
Optimal Principal Amount remaining after distributions of principal have been
made on the Group I Senior Certificates, and (ii) following the Group I Final
Distribution Date, the Group II Senior Principal Distribution Amount will equal
the Senior Optimal Principal Amount.
The "Group II Senior Percentage" for any Distribution Date will equal the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Group II Senior Certificates immediately preceding such Distribution Date
by (y) the aggregate Certificate Principal Balance of all the Senior
Certificates (less the Class Certificate Principal Balance of the Class PO
Certificates) immediately preceding such Distribution Date. The initial
Group II Senior Percentage is expected to be approximately 10.42%.
The "Group II Senior Distribution Percentage" for any Distribution Date
will equal 0% through the Distribution Date in October 2003; 30% thereafter
through the Distribution Date in October 2004; 40% thereafter through the
Distribution Date in October 2005; 60% thereafter through the Distribution Date
in October 2006; 80% thereafter through the Distribution Date in October 2007;
and 100% thereafter.
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 96.00%.
S-21
<PAGE>
The "Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ----------------------------- -------------------------------------------------
November 1998 - October 2003 100%
November 2003 - October 2004 Senior Percentage plus 70% of the Junior
Percentage
November 2004 - October 2005 Senior Percentage plus 60% of the Junior
Percentage
November 2005 - October 2006 Senior Percentage plus 40% of the Junior
Percentage
November 2006 - October 2007 Senior Percentage plus 20% of the Junior
Percentage
November 2007 and thereafter Senior Percentage
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%.
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 November 2003 and October 2004, (b) 35% of the
Original Junior Principal Balance if such Distribution Date occurs between
and including November 2004 and October 2005, (c) 40% of the Original
Junior Principal Balance if such Distribution Date occurs between and
including November 2005 and October 2006, (d) 45% of the Original Junior
Principal Balance if such Distribution Date occurs between and including
November 2006 and October 2007, and (e) 50% of the Original Junior
Principal Balance if such Distribution Date occurs during or after November
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 November 2003 and October 2004, (b) 15% of the Original
Junior Principal Balance if such Distribution Date occurs between and
including November 2004 and October 2005, (c) 20% of the Original Junior
Principal Balance if such Distribution Date occurs between and including
November 2005 and October 2006, (d) 25% of the Original Junior Principal
Balance if such Distribution Date occurs between and including November
2006 and October 2007, and (e) 30% of the Original Junior Principal Balance
if such Distribution Date occurs during or after November 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) 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
S-22
<PAGE>
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 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.
The "Group I Final Distribution Date" is the Distribution Date on which the
Class Certificate Principal Balance of each of the 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 4.00%.
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) 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 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 B1, Class B2, Class B3, Class B4 or Class B5 Certificate (together, the
"Class B Certificates") 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
S-23
<PAGE>
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 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
S-24
<PAGE>
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
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 entitled to principal distributions (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 entitled to principal distributions (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 the principal portion 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.
S-25
<PAGE>
The interest portion of all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby entitled to interest
distributions 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 the excess of the Mortgage Rate over the sum of
the Base Servicing Fee and the Supplemental Servicing Fee (each as defined
herein) 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 $118,464 (approximately 0.03% 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
$3,509,145 (approximately 1.00% 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 $3,509,145 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 to 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 to but excluding the
third anniversaries of the Cut-off Date) or 0.5% (from and including the third
to but excluding the fifth anniversaries of the Cut-off Date) of the aggregate
outstanding principal balance of all of the 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 $3,509,145 (approximately 1.00% 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
$3,509,145 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-26
<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 4.00% 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 prepayment or other
unscheduled recovery of principal with respect to a Mortgage Loan will be
allocated to the Senior Certificates entitled to principal distributions (other
than the Class PO Certificates) during the first five years after the date of
initial issuance of the Certificates, 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. Among such Senior Certificates, such amounts will be
allocated to the outstanding Group I Senior Certificates during the first five
years after the date of initial issuance of the Certificates (except as
otherwise described herein on or following the Group I Final Distribution Date)
with such allocation being subject to reduction thereafter as described herein,
except that such amounts will be allocated pro rata among all of the outstanding
Senior Certificates (other than the Class PO Certificates) on each Distribution
Date after the Cross-Over Date.
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
S-27
<PAGE>
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.
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
1.25% of the initial aggregate Certificate Principal Balance of all of the
Certificates and approximately 31.25% 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
S-28
<PAGE>
anticipated rates of principal payments on the Mortgage Loans could result in
actual yields to investors that are lower than the anticipated yields.
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 entitled to interest
distributions 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) 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 generally 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-29
<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) 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 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
in amortized increments over the remaining term of such Mortgage Loan.
The entire amount of the applicable Non-PO Percentage of any prepayments
and 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 date of initial
issuance of the Certificates, with such allocation being subject to reduction
thereafter as described herein. Among such Senior Certificates, such amounts
will be allocated solely to the outstanding Group I Senior Certificates during
the first five years after the date of initial issuance of the Certificates
(except as otherwise described herein on or following the Group I Final
Distribution Date), with such allocation being subject to reduction thereafter
as described herein, provided that such amounts will be allocated pro rata among
all 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 the Group II Senior Certificates through the earlier of
the Group I Final Distribution Date and the Cross-Over Date. In addition, the
Group II Senior Certificates will not receive any distributions of scheduled
principal payments during the first five years after the date of initial
issuance of the Certificates, except as otherwise described herein on or
following the earlier of the Group I Final Distribution Date and the Cross-Over
Date. Notwithstanding the foregoing, all distributions of principal on the
outstanding Senior Certificates (other than the Class PO 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.
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 payment of a claim 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
S-30
<PAGE>
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.
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
October 2028. In addition, to the extent delinquencies and defaults are not
covered by advances made by the Company or offset by
S-31
<PAGE>
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 November 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
$350,914,546, (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
November 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 October
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 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 October 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
S-32
<PAGE>
Group") and the Mortgage Loans in each Mortgage Loan Group have the respective
characteristics described below:
<TABLE>
<CAPTION>
AGGREGATE STATED
SCHEDULED REMAINING
PRINCIPAL TERM TO
BALANCE AS OF MORTGAGE NET MORTGAGE AGE MATURITY
MORTGAGE LOAN GROUP THE CUT-OFF DATE RATE RATE (MONTHS) (MONTHS)
- --------------------------------- ---------------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Discount......................... $ 5,748,637 6.7086021621% 6.4288317423% 1 359
Non-Discount Seasoned............ 48,059,956 8.9853353760 8.7318353762 79 281
Non-Discount..................... 297,105,953 7.3466275324 7.0684757290 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
may have remaining terms to maturity and may 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-33
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A1 CLASS A2 CLASS A3
---------------------------- ---------------------------- ----------------------------
DISTRIBUTION DATE 0% 100% 295% 400% 500% 0% 100% 295% 400% 500% 0% 100% 295% 400% 500%
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
October 1999......... 99 96 91 88 85 100 100 100 100 100 100 100 100 100 100
October 2000......... 98 90 75 68 61 100 100 100 100 100 100 100 100 100 100
October 2001......... 96 82 57 46 36 100 100 100 100 100 100 100 100 100 100
October 2002......... 95 74 43 29 18 100 100 100 100 100 100 100 100 100 100
October 2003......... 93 67 31 16 6 100 100 100 100 100 100 100 100 100 100
October 2004......... 91 61 22 8 0 100 100 100 100 59 100 100 100 100 100
October 2005......... 90 56 15 3 0 100 100 100 100 0 100 100 100 100 0
October 2006......... 88 50 10 0 0 100 100 100 91 0 100 100 100 100 0
October 2007......... 86 46 7 0 0 100 100 100 0 0 100 100 100 97 0
October 2008......... 84 42 5 0 0 100 100 100 0 0 100 100 100 51 0
October 2009......... 81 38 3 0 0 100 100 100 0 0 100 100 100 17 0
October 2010......... 79 34 1 0 0 100 100 100 0 0 100 100 100 0 0
October 2011......... 76 31 0 0 0 100 100 98 0 0 100 100 100 0 0
October 2012......... 73 27 0 0 0 100 100 41 0 0 100 100 100 0 0
October 2013......... 70 24 0 0 0 100 100 0 0 0 100 100 95 0 0
October 2014......... 67 21 0 0 0 100 100 0 0 0 100 100 58 0 0
October 2015......... 63 18 0 0 0 100 100 0 0 0 100 100 28 0 0
October 2016......... 60 16 0 0 0 100 100 0 0 0 100 100 4 0 0
October 2017......... 55 13 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2018......... 51 11 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2019......... 46 9 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2020......... 41 7 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2021......... 35 5 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2022......... 30 3 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2023......... 25 1 0 0 0 100 100 0 0 0 100 100 0 0 0
October 2024......... 19 0 0 0 0 100 94 0 0 0 100 100 0 0 0
October 2025......... 14 0 0 0 0 100 16 0 0 0 100 100 0 0 0
October 2026......... 7 0 0 0 0 100 0 0 0 0 100 41 0 0 0
October 2027......... 1 0 0 0 0 100 0 0 0 0 100 0 0 0 0
October 2028......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)...... 18.6 9.7 4.1 3.1 2.6 29.2 26.6 13.9 8.4 6.1 29.5 27.9 16.4 10.1 6.5
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
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-34
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A4 CLASS A5
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 100% 295% 400% 500% 0% 100% 295% 400% 500%
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
October 1999......... 100 100 100 100 100 100 100 100 100 100
October 2000......... 100 100 100 100 100 100 100 100 100 100
October 2001......... 100 100 100 100 100 100 100 100 100 100
October 2002......... 100 100 100 100 100 100 100 100 100 100
October 2003......... 100 100 100 100 100 100 100 100 100 100
October 2004......... 100 100 100 100 100 100 98 94 91 88
October 2005......... 100 100 100 100 40 99 95 85 80 74
October 2006......... 100 100 100 100 0 98 90 75 66 51
October 2007......... 100 100 100 100 0 96 84 63 52 34
October 2008......... 100 100 100 100 0 94 77 50 38 23
October 2009......... 100 100 100 100 0 91 71 40 28 16
October 2010......... 100 100 100 90 0 89 65 32 21 11
October 2011......... 100 100 100 66 0 86 59 26 15 7
October 2012......... 100 100 100 48 0 83 53 20 11 5
October 2013......... 100 100 100 35 0 80 48 16 8 3
October 2014......... 100 100 100 26 0 76 43 13 6 2
October 2015......... 100 100 100 19 0 72 39 10 4 1
October 2016......... 100 100 100 13 0 68 34 8 3 1
October 2017......... 100 100 80 10 0 64 30 6 2 1
October 2018......... 100 100 61 7 0 59 26 5 2 *
October 2019......... 100 100 46 5 0 54 23 3 1 *
October 2020......... 100 100 34 3 0 48 19 3 1 *
October 2021......... 100 100 25 2 0 42 16 2 1 *
October 2022......... 100 100 18 1 0 37 13 1 * *
October 2023......... 100 100 13 1 0 31 10 1 * *
October 2024......... 100 100 8 1 0 26 8 1 * *
October 2025......... 100 100 5 * 0 20 6 * * *
October 2026......... 100 100 3 * 0 13 4 * * *
October 2027......... 100 63 1 * 0 6 1 * * *
October 2028......... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)...... 29.7 29.2 21.5 14.8 7.0 20.8 15.6 11.1 9.8 8.7
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
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-35
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS M, CLASS B1 AND CLASS B2 CLASS R
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 100% 295% 400% 500% 0% 100% 295% 400% 500%
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
October 1999......... 99 99 99 99 99 0 0 0 0 0
October 2000......... 98 98 98 98 98 0 0 0 0 0
October 2001......... 97 97 97 97 97 0 0 0 0 0
October 2002......... 95 95 95 95 95 0 0 0 0 0
October 2003......... 94 94 94 94 94 0 0 0 0 0
October 2004......... 93 91 87 85 83 0 0 0 0 0
October 2005......... 91 87 79 75 71 0 0 0 0 0
October 2006......... 89 82 69 63 56 0 0 0 0 0
October 2007......... 87 77 58 49 42 0 0 0 0 0
October 2008......... 85 70 47 37 28 0 0 0 0 0
October 2009......... 83 65 38 27 19 0 0 0 0 0
October 2010......... 81 59 30 20 13 0 0 0 0 0
October 2011......... 78 54 24 15 9 0 0 0 0 0
October 2012......... 75 49 19 11 6 0 0 0 0 0
October 2013......... 73 44 15 8 4 0 0 0 0 0
October 2014......... 69 40 12 6 3 0 0 0 0 0
October 2015......... 66 35 9 4 2 0 0 0 0 0
October 2016......... 62 31 7 3 1 0 0 0 0 0
October 2017......... 58 28 6 2 1 0 0 0 0 0
October 2018......... 54 24 4 2 1 0 0 0 0 0
October 2019......... 49 21 3 1 * 0 0 0 0 0
October 2020......... 44 17 2 1 * 0 0 0 0 0
October 2021......... 39 14 2 * * 0 0 0 0 0
October 2022......... 33 12 1 * * 0 0 0 0 0
October 2023......... 29 9 1 * * 0 0 0 0 0
October 2024......... 23 7 1 * * 0 0 0 0 0
October 2025......... 18 5 * * * 0 0 0 0 0
October 2026......... 12 3 * * * 0 0 0 0 0
October 2027......... 5 1 * * * 0 0 0 0 0
October 2028......... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)...... 19.3 14.6 10.5 9.4 8.7 0.1 0.1 0.1 0.1 0.1
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
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-36
<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,
1995 1996 1997
------------------------ ------------------------ ------------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
--------- ------------- --------- ------------- --------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total portfolio............. 821,839 $ 91,977,411 785,928 $ 88,188,662 726,869 $ 83,535,531
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
Period of delinquency(1)
30 to 59 days.......... 3,813 $ 408,131 3,362 $ 353,209 2,687 $ 281,657
60 to 89 days.......... 1,788 202,503 1,177 135,668 632 71,245
90 days or more(2)..... 6,437 919,526 6,867 892,643 5,442 662,342
--------- ------------- --------- ------------- --------- -------------
Total delinquent loans...... 12,038 $ 1,530,160 11,406 $ 1,381,520 8,761 $ 1,015,244
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
Percent of portfolio........ 1.46% 1.66% 1.45% 1.57% 1.21% 1.22%
<CAPTION>
AS OF SEPTEMBER 30, AS OF SEPTEMBER 30,
1997 1998
------------------------ ------------------------
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............. 741,395 $ 84,554,200 662,871 $ 79,153,364
--------- ------------- --------- -------------
--------- ------------- --------- -------------
Period of delinquency(1)
30 to 59 days.......... 2,473 $ 260,046 2,524 $ 260,849
60 to 89 days.......... 578 62,722 510 55,853
90 days or more(2)..... 5,991 749,726 4,603 522,525
--------- ------------- --------- -------------
Total delinquent loans...... 9,042 $ 1,072,494 7,637 $ 839,227
--------- ------------- --------- -------------
--------- ------------- --------- -------------
Percent of portfolio........ 1.22% 1.27% 1.15% 1.06%
</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-37
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total portfolio......... $ 91,977,411 $ 88,188,662 $ 83,535,531
Foreclosures(1)......... 268,478 372,800 271,046
Foreclosure ratio....... 0.29% 0.42% 0.32%
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------
1997 1998
------------- -------------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Total portfolio......... $ 84,554,200 $ 79,153,364
Foreclosures(1)......... 273,407 214,027
Foreclosure ratio....... 0.32% 0.27%
</TABLE>
- ------------------
(1) Foreclosures represent the principal balance of mortgage loans secured by
mortgaged properties, the title to which has been acquired by the Company,
by investors or by an insurer following foreclosure or delivery of a deed in
lieu of foreclosure and which had not been liquidated at the end of the
period indicated. The length of time necessary to complete the liquidation
of such mortgaged properties may be affected by prevailing economic
conditions and the marketability of the mortgaged properties.
The delinquency and foreclosure experience set forth above is historical
and is based on the servicing of mortgage loans that may not be representative
of the Mortgage Loans in 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.
Approximately two-thirds (by aggregate Scheduled Principal Balance as of
the Cut-off Date) of the Mortgage Loans are expected to be directly serviced by
North American Mortgage Company ("North American") pursuant to a Direct Master
Servicing Arrangement (as defined in the accompanying Prospectus). For
information concerning the delinquency and foreclosure experience on certain
residential mortgage loans serviced by North American, see "The Pooling and
Servicing Agreement--Servicing Arrangement with Respect to the Mortgage
Loans--North American Mortgage Company" herein.
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.
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.
S-38
<PAGE>
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 than in respect of unavailable recording information).
Except in the case of a Cooperative Loan, the Company will also deliver
originals of the recorded Mortgages, any intervening assignments of the
Mortgages and title insurance policies with respect to the Mortgage Loans, as
promptly as practicable, and in any case within thirty days, after receiving all
such documents from the applicable recording offices and title insurance
companies. Pending such delivery, the Company will retain and furnish to the
Trustee upon request copies of the Mortgages and intervening assignments of
Mortgage delivered for recording and the evidence of title insurance issued at
origination of the Mortgage Loans. The Company will retain and furnish to the
Trustee upon request any applicable evidence of primary mortgage insurance (any
policy with respect to such insurance being referred to herein as a "Primary
Mortgage Insurance Policy") so long as such insurance remains in force. With
respect to any Mortgage Loans which are Cooperative Loans, the Company, as
seller, will cause to be delivered to the Trustee the related original
promissory note endorsed to the order of the Trustee (or a lost-note affidavit),
the original security agreement, the proprietary lease or occupancy agreement,
the recognition agreement, an executed financing statement by the Mortgagor and
the relevant stock certificate and related blank stock powers. The Company will
deliver to the Trustee a financing statement in fileable form evidencing the
assignment of the Company's security interest in the collateral securing each
Cooperative Loan to the Trustee. In 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 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 to the Trustee or
the filing of financing statements relating to the Cooperative Loans 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
S-39
<PAGE>
parties to such sale, assignment, satisfaction or discharge might have rights
superior to those of the Trustee. If the Company were to do so without authority
under the Agreement, it would be liable to the Certificateholders. Moreover, if
insolvency proceedings relating to the Company were commenced prior to such
recording or filing, creditors or the trustee-in-bankruptcy may be able to
assert rights in the affected Mortgage Loans superior to those of the Trustee.
SERVICING ARRANGEMENT WITH RESPECT TO THE MORTGAGE LOANS
It is expected that the Company will directly service at least 26% (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.
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. See "Servicing of the
Mortgage Loans and Contracts--Collection and Other Servicing Procedures" in the
Prospectus.
North American Mortgage Company. Approximately two-thirds (by aggregate
Scheduled Principal Balance as of the Cut-off Date) of the Mortgage Loans will
be directly serviced by North American pursuant to a Direct Master Servicing
Agreement. North American has, since October 15, 1997, been an indirect
wholly-owned subsdiary of Dime Bancorp, Inc. ("DBI"), the holding company of The
Dime Savings Bank of New York, FSB ("DSB"). On December 16, 1997, DBI's mortgage
banking affiliate, Dime Mortgage, Inc. ("DMI") was merged into North American.
Since this merger, North American has been the primary originator of residential
mortgage loans for DBI except for loans secured by properties in New York and
New Jersey. The New York and New Jersey loans continue to be originated by DSB
but are then simultaneously sold on a servicing-released basis to North
American. North American's loan servicing facility is in Albion, New York. Other
North American functions are performed in Santa Rosa, California and Tampa,
Florida.
The following table summarizes the delinquency and pending foreclosure
experience of the mortgage loan portfolio serviced by North American (the "North
American Portfolio") as of the dates indicated each of which is subsequent to
North American's acquisition by DBI and the merger of DMI into North American.
Comparable information relating to periods prior to the acquisition and merger
is not available. The North American Portfolio includes all conventional and
government-insured loans with the exception of (1) mortgage loans secured by
mortgaged properties, the title to which has been acquired by North American,
investors or an insurer and (2) government-insured loans that have been
repurchased from GNMA pools. No assurances can be given that the foreclosure and
delinquency experience presented in the table below will be indicative of the
foreclosure and delinquency experience of the Mortgage Loans serviced by North
American.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT SEPTEMBER 30, 1998
--------------------------- ---------------------------
BY DOLLAR BY DOLLAR
AMOUNT OF AMOUNT OF
BY NUMBER LOANS BY NUMBER LOANS
OF LOANS (IN THOUSANDS) OF LOANS (IN THOUSANDS)
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Total portfolio......................................... 353,076 $ 34,940,855 381,435 $ 40,223,935
Period of delinquency
30-59 days............................................ 10,363 884,668 9,545 835,066
60-89 days............................................ 2,154 174,361 2,103 156,962
90 days or more (excluding pending foreclosure)....... 1,825 155,806 1,785 144,080
------- ------------ ------- ------------
------- ------------ ------- ------------
Total of delinquencies............................. 14,342 $ 1,214,835 13,433 $ 1,136,108
------- ------------ ------- ------------
Foreclosures pending.................................... 2,218 $ 212,437 1,574 $ 146,896
------- ------------ ------- ------------
------- ------------ ------- ------------
Total delinquencies and foreclosures pending............ 16,560 1,427,272 15,007 1,283,004
------- ------------ ------- ------------
Percent of portfolio.................................... 4.69% 4.08% 3.93% 3.19%
------- ------------ ------- ------------
------- ------------ ------- ------------
</TABLE>
S-40
<PAGE>
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 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
S-41
<PAGE>
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 0.25% and 0.29%. As to each Mortgage Loan, the rate at
which the Supplemental Servicing Fee is payable (the "Supplemental Servicing Fee
Rate") will be a fixed rate per annum of the outstanding principal balance of
the Mortgage Loan equal to the excess, if any, of the Net Mortgage Rate over
6.50%. The Supplemental Servicing Fee Rate is expected to range from 0% to
approximately 3.38%, with an anticipated initial weighted average rate of
between 0.76% and 0.80%. 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) and (ii) of the definition thereof) allocable to
Certificateholders with respect to any Distribution Date, the Company will be
obligated to remit an amount (such amount, a "Compensating Interest Payment")
sufficient to pass through to 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 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 74% 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
S-42
<PAGE>
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.
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 (the "Regular
Certificates") will be designated as "regular interests" in the REMIC and the
Residual Certificates will be designated as the "residual interest" in the
REMIC.
S-43
<PAGE>
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 295% 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.
The United States Department of Labor (the "DOL") has issued to Salomon
Smith Barney Inc. an individual administrative exemption, Prohibited Transaction
Exemption 89-89 (54 Fed. Reg. 42589, 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) Salomon Smith Barney Inc. 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 &
S-44
<PAGE>
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 Salomon Smith Barney Inc. 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) Salomon Smith Barney Inc., (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 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.
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
S-45
<PAGE>
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 Underwriting
Agreement between the Company and Salomon Smith Barney Inc. (the "Underwriter"),
the Certificates offered hereby are being purchased from the Company by the
Underwriter upon issuance. Distribution of the Certificates offered hereby will
be made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Certificates offered hereby will be
approximately 99.897052% of the aggregate initial Class Certificate Principal
Balance of the Certificates offered hereby, plus accrued interest thereon from
the Cut-off Date to the Closing Date but before deducting issuance expenses
payable by the Company. In connection with the purchase and sale of the
Certificates offered hereby, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting discounts.
The Company has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Underwriter has entered into an agreement with the Company to purchase
the Class 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 S&P.
S-46
<PAGE>
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 Underwriter by Brown & Wood LLP, Washington, D.C.
S-47
<PAGE>
INDEX OF CERTAIN PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------ -----------
<S> <C>
Accrued Certificate Interest................................ S-19
Adjustment Amount........................................... S-26
Agreement................................................... S-15
Allocable Share............................................. S-23
Available Funds............................................. S-17
Bankruptcy Coverage Termination Date........................ S-26
Bankruptcy Loss............................................. S-24
Bankruptcy Loss Amount...................................... S-26
Base Servicing Fee.......................................... S-42
Base Servicing Fee Rate..................................... S-42
beneficial owner............................................ S-15
BIF......................................................... S-41
Book-Entry Certificates..................................... S-15
Cede........................................................ S-15
Certificate Principal Balance............................... S-19
Certificates................................................ Cover
Class....................................................... S-13
Class B Certificates........................................ S-23
Class Certificate Principal Balance......................... S-13
Class PO Deferred Amount.................................... S-24
Class PO Deferred Payment Writedown Amount.................. S-19
Class PO Principal Distribution Amount...................... S-22
Class Prepayment Distribution Trigger....................... S-23
Code........................................................ S-11
Collection Account.......................................... S-41
Company..................................................... Cover
Compensating Interest Payment............................... S-42
Cross-Over Date............................................. S-18
Cut-Off Date................................................ S-13
DBI......................................................... S-40
Debt Service Reduction...................................... S-24
Defaulted Mortgage Loan..................................... S-42
Deficient Valuation......................................... S-24
Definitive Certificate...................................... S-15
Depository.................................................. S-15
Detailed Description........................................ S-13
Discount Mortgage Loan...................................... S-20
Distribution Date........................................... S-17
DMI......................................................... S-40
DOL......................................................... S-44
DSB......................................................... S-40
ERISA....................................................... S-11
ERISA Plan.................................................. S-44
</TABLE>
S-48
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------ -----------
<S> <C>
Excess Loss................................................. S-25
Exemption................................................... S-44
FDIC........................................................ S-41
Financial Intermediary...................................... S-15
Fitch....................................................... S-39
Fraud Coverage Termination Date............................. S-26
Fraud Loss.................................................. S-24
Fraud Loss Amount........................................... S-26
GE Capital.................................................. S-39
Group I Final Distribution Date............................. S-23
Group I Senior Certificates................................. S-17
Group II Senior Certificates................................ S-17
Group II Senior Distribution Percentage..................... S-21
Group II Senior Percentage.................................. S-21
Group II Senior Principal Distribution Amount............... S-21
Interest Accrual Period..................................... S-18
Interest Shortfall.......................................... S-19
Junior Certificate Writedown Amount......................... S-19
Junior Certificates......................................... S-3
Junior Optimal Principal Amount............................. S-23
Junior Percentage........................................... S-23
Junior Prepayment Percentage................................ S-23
Liquidated Mortgage Loan.................................... S-24
Loss Allocation Limitation.................................. S-25
Modeling Assumptions........................................ S-32
Mortgage.................................................... S-13
Mortgage Loan Group......................................... S-32
Mortgage Loans.............................................. S-13
Mortgage Pool............................................... S-13
Mortgage Rates.............................................. S-13
mortgage related securities................................. S-11
Mortgaged Properties........................................ S-13
Mortgagor................................................... S-13
Net Interest Shortfall...................................... S-19
Net Mortgage Rate........................................... S-19
NMR......................................................... S-20
Non-Book-Entry Certificates................................. S-16
Non-Discount Mortgage Loan.................................. S-20
Non-PO Percentage........................................... S-20
Nonrecoverable Advance...................................... S-41
North American.............................................. S-38
North American Portfolio.................................... S-40
Original Junior Principal Balance........................... S-22
Outstanding Mortgage Loan................................... S-13
Participant................................................. S-15
</TABLE>
S-49
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------ -----------
<S> <C>
PO Percentage............................................... S-20
Pool Scheduled Principal Balance............................ S-13
Prepayment Assumption....................................... S-32
Prepayment Interest......................................... S-30
Prepayment Period........................................... S-21
Primary Mortgage Insurance Policy........................... S-39
Realized Loss............................................... S-24
Record Date................................................. S-17
Regular Certificates........................................ S-43
regular interests........................................... S-43
REMIC....................................................... S-10
Residual Certificates....................................... S-15
residual interest........................................... S-43
Restricted Group............................................ S-45
S&P......................................................... S-39
SAIF........................................................ S-41
Scheduled Principal Balance................................. S-13
Senior Certificates......................................... S-3
Senior Final Distribution Date.............................. S-23
Senior Optimal Principal Amount............................. S-20
Senior Percentage........................................... S-21
Senior Prepayment Percentage................................ S-22
Senior Prepayment Percentage Stepdown Limitation............ S-22
Servicing Fee............................................... S-42
Servicing Portfolio......................................... S-37
SMMEA....................................................... S-46
Special Hazard Loss......................................... S-24
Special Hazard Loss Amount.................................. S-26
Special Hazard Termination Date............................. S-26
Supplemental Servicing Fee.................................. S-42
Supplemental Servicing Fee Rate............................. S-42
Tax-Exempt Investor......................................... S-45
Trigger Event............................................... S-39
Trust Fund.................................................. S-13
Trustee..................................................... S-15
Underwriter................................................. S-46
</TABLE>
S-50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
PROSPECTUS. ANY INFORMATION OR REPRESENTATIONS GIVEN OR MADE OUTSIDE OF THIS
PROSPECTUS SUPPLEMENT AND PROSPECTUS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND 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 A
SOLICITATION OF AN OFFER TO BUY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. THE INFORMATION CONTAINED IN THE PROSPECTUS SUPPLEMENT
AND PROSPECTUS IS CORRECT ONLY AS OF THE DATE RELATING TO SUCH INFORMATION;
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS, OR ANY SALE MADE
THEREUNDER, SUBSEQUENT TO THE DATE OF THIS PROSPECTUS SUPPLEMENT SHALL NOT,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION IS CORRECT
AS OF THAT SUBSEQUENT DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
---------
Summary of Terms................................... S-3
Description of the Mortgage Pool and the Mortgaged
Properties....................................... S-13
Description of the Certificates.................... S-15
Yield and Weighted Average Life Considerations..... S-28
GE Capital Mortgage Services, Inc.................. S-37
Delinquency and Foreclosure Experience of the
Company.......................................... S-37
Use of Proceeds.................................... S-38
The Pooling and Servicing Agreement................ S-38
Certain Federal Income Tax Consequences............ S-43
ERISA Considerations............................... S-44
Legal Investment Matters........................... S-46
Plan of Distribution............................... S-46
Certificate Ratings................................ S-46
Legal Matters...................................... S-47
Index of Certain Prospectus Supplement
Definitions...................................... S-48
PROSPECTUS
Available Information.............................. 2
Incorporation of Certain Documents by Reference.... 3
Reports to Certificateholders...................... 3
Prospectus Summary................................. 6
Description of the Certificates.................... 14
The Trust Fund..................................... 19
Credit Support..................................... 30
Yield, Maturity and Weighted Average Life
Considerations................................... 36
Servicing of the Mortgage Loans and Contracts...... 38
The Pooling and Servicing Agreement................ 49
GE Capital Mortgage Services, Inc.................. 56
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............................... 83
Use of Proceeds.................................... 84
Legal Matters...................................... 84
Financial Information.............................. 84
------------------
Until January 25, 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a Prospectus Supplement and Prospectus. 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$346,465,058
(APPROXIMATE)
GE CAPITAL MORTGAGE
SERVICES, INC.
(SELLER AND SERVICER)
REMIC MULTI-CLASS
PASS-THROUGH CERTIFICATES,
SERIES 1998-20
------------
PROSPECTUS SUPPLEMENT
OCTOBER 27, 1998
------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
