<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 333-365
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 17, 1998
$270,646,742
(approximate)
CHEVY CHASE BANK
Seller and Servicer
Chevy Chase Bank, F.S.B.
Mortgage-Backed Pass-Through Certificates, Series 1998-CCB2
$200,132,742 Class A-I Adjustable Rate Certificates
$70,514,000 Class A-II Adjustable Rate Certificates
Asset Backed Securities Corporation
Depositor
-----------
The Chevy Chase Bank, F.S.B. Mortgage-Backed Pass-Through Certificates, Series
1998-CCB2 (the "CERTIFICATES") will consist of the Class A-I Certificates and
Class A-II Certificates (collectively, the "CLASS A CERTIFICATES"), the
Class S Certificates and the Class R Certificates. Only the Class A
Certificates are offered hereby. It is a condition to their issuance that
the Class A Certificates be rated "AAA" by Standard & Poor's Ratings
Services ("S&P") and "Aaa" by Moody's Investors Service ("MOODY'S"). The
Certificates will evidence in the aggregate the entire beneficial
ownership interest in a trust fund (the "TRUST FUND"), to be created
by Asset Backed Securities Corporation (the "DEPOSITOR"), consisting
primarily of a pool (the "MORTGAGE POOL") of conventional, fully-
amortizing, adjustable-rate mortgage loans (some of which may have
conversion options, as more fully described herein) (the "MORTGAGE
LOANS") secured by first liens on one- to four-family, residential
real properties and certain other collateral and other property
held in trust for the benefit of the holders of the Certificates
(the "CERTIFICATEHOLDERS"). The Mortgage Pool consists of two
groups of Mortgage Loans ("LOAN GROUP I" and "LOAN GROUP II";
each, a "LOAN GROUP"), designated as the "GROUP I LOANS" and
"GROUP II LOANS". The Class A-I Certificates will correspond
to the Group I Loans and the Class A-II Certificates will
correspond to the Group II Loans. The Mortgage Loans were
originated by or acquired by Chevy Chase Bank, F.S.B.
("CHEVY CHASE") or its wholly owned subsidiary B.F. Saul
Mortgage Company, and will be sold to the Depositor by
Chevy Chase (in such capacity, the "SELLER"). The
Mortgage Loans are more fully described under
"Description of the Mortgage Loans" herein.
On or before the date of issuance of the Certificates, the Depositor will
obtain from Ambac Assurance Corporation (the "INSURER") a certificate
guaranty insurance policy (the "POLICY"), which will, subject to
its terms, protect the holders of the Class A Certificates
against (i) certain shortfalls in the amount available
to pay the Class A-I Interest Distribution Amount
or the Class A-II Interest Distribution
Amount, and (ii) any Collateralization
Deficit (as defined herein). See
"Description of the Certificates--
Certificate Guaranty Insurance
Policy" herein.
AMBAC (continued on next page.)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" HEREIN ON PAGE S-15 AND IN THE PROSPECTUS ON PAGE 20.
THE CERTIFICATES WILL NOT EVIDENCE A SAVINGS ACCOUNT OR DEPOSIT WITH, OR
OTHER OBLIGATION OF, OR INTEREST IN, AND ARE NOT GUARANTEED BY, ASSET
BACKED SECURITIES CORPORATION, CHEVY CHASE BANK, F.S.B., THE TRUSTEE
OR ANY OF THEIR AFFILIATES. NEITHER THE CERTIFICATES NOR THE
UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY THE
SAVINGS ASSOCIATION INSURANCE FUND, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY
OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The Class A Certificates will be offered by Credit Suisse First Boston
Corporation (the "UNDERWRITER") from time to time in negotiated transactions,
or otherwise, at prices to be determined at the time of sale. The Class A
Certificates are being offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
conditions. For further information with respect to the plan of distribution
and any discounts, commissions and profits on resale that may be deemed
underwriting discounts or commissions, see "Plan of Distribution" herein. It
is expected that the delivery of the Class A Certificates will be made in
book-entry form through the facilities of The Depository Trust Company on or
about June 17, 1998.
CREDIT SUISSE FIRST BOSTON
Prospectus Supplement dated June 17, 1998
<PAGE>
(continued from previous page)
Interest and principal, in the amounts set forth herein, will be distributed
to Certificateholders on the twenty-fifth day of each month (or, if such day
is not a business day, on the following business day), commencing in July,
1998 (each, a "DISTRIBUTION DATE"). On each Distribution Date, payments on the
Class S Certificates will be subordinate to the payment of principal and
interest, in the manner described herein, on the Class A Certificates.
THE YIELD TO INVESTORS IN THE CLASS A CERTIFICATES WILL DEPEND, AMONG OTHER
THINGS, ON THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS IN THE APPLICABLE LOAN GROUP.
SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN.
There is currently no secondary market for the Class A Certificates. Credit
Suisse First Boston Corporation may make a secondary market in the Class A
Certificates, but has no obligation to do so. There can be no assurance that
any secondary market for the Class A Certificates will develop, or if it does
develop, that it will continue.
An election will be made to treat certain assets in the Trust Fund as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. The Class A Certificates and the Class S Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute the sole class of "residual interests" in the REMIC. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
The Class A Certificates will be available to investors only in book-entry
form through the facilities of The Depository Trust Company ("DTC").
Beneficial interests in the Class A Certificates will be shown on, and
transfers thereof will be effected only through, records maintained by DTC and
its participants. Physical certificates for the Class A Certificates will be
available only under certain limited circumstances described herein. See
"Description of Certificates--Book-Entry Registration" herein.
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR FROM
TIME TO TIME PURSUANT TO ITS PROSPECTUS DATED JUNE 17, 1998, WHICH ACCOMPANIES
THIS PROSPECTUS SUPPLEMENT AND OF WHICH THIS PROSPECTUS SUPPLEMENT FORMS A
PART. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING
WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE
PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
----------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND A 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.
----------------
S-2
<PAGE>
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement (the "REGISTRATION STATEMENT") under
the Securities Act of 1933, as amended, with respect to the Class A
Certificates. This Prospectus Supplement and the related Prospectus, which
form a part of the Registration Statement, omit certain information contained
in such Registration Statement pursuant to the Rules and Regulations of the
Commission. The Registration Statement can be inspected and copied at the
Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
D.C. and the Commission's regional offices at 7 World Trade Center, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's web site (http:\\www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued (which will occur under
the limited circumstances described herein), unaudited monthly and unaudited
annual reports concerning the Trust will be sent by the Trustee to Cede & Co.,
as the nominee of DTC and registered holder of the Class A Certificates. So
long as the Class A Certificates are in book-entry form, DTC will supply such
reports to Beneficial Owners (as defined herein) in accordance with its normal
procedures. Such reports will not contain financial information that has been
examined and reported upon by an independent or certified public accountant.
See "Description of the Certificates--Reports to Certificateholders" in the
Prospectus.
This Prospectus Supplement contains a number of defined terms, the meanings
of which are necessary for potential investors to understand in order for them
to evaluate an investment in the Class A Certificates. See the "Index of
Principal Definitions" in this Prospectus Supplement for the locations of the
definitions of certain capitalized terms. See the "Index of Terms" in the
Prospectus for the locations of the definitions of capitalized terms not
otherwise defined in this Prospectus Supplement.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used in this Prospectus
Supplement and not defined herein have the meanings ascribed to them in the
Prospectus.
Description of the The Chevy Chase Bank, F.S.B. Mortgage-Backed
Certificates................ Pass-Through Certificates, Series 1998-CCB2. The
Certificates will be issued pursuant to a Pooling
and Servicing Agreement dated as of June 1, 1998
(the "POOLING AND SERVICING AGREEMENT") and will
evidence interests in a trust fund (the "TRUST
FUND"), the primary assets of which will consist
of residential mortgage loans. The Trust Fund
will also include (i) the Reserve Fund, (ii) the
Trust's rights under the Policy and (iii) any
property that secured a Mortgage Loan and is
acquired by foreclosure or deed in lieu of
foreclosure, and certain other related property,
as more fully described herein and in the
Prospectus.
Certificates Offered........ $200,132,742 (approximate) Certificate Principal
Balance (as defined herein) of Class A-I
Certificates. The Certificate Principal Balance
of the Class A-I Certificates will initially
equal the aggregate Principal Balance (as defined
herein) of the Group I Loans as of the Cut-off
Date. The Class A-I Certificates are "Senior
Certificates" as described in the Prospectus.
$70,514,000 (approximate) Certificate Principal
Balance (as defined herein) of Class A-II
Certificates. The Certificate Principal Balance
of the Class A-II Certificates will initially
equal the aggregate Principal Balance (as defined
herein) of the Group II Loans as of the Cut-off
Date. The Class A-II Certificates are "Senior
Certificates" as described in the Prospectus.
Other Classes of In addition to the Class A Certificates, the
Certificates................ Certificates will include the Class S
Certificates and the Class R Certificates, which
are not offered hereby. The Class S Certificates
will have no principal balance and will be
entitled, subject to the priority of payments and
to the Reserve Fund provisions described herein,
to receive each month interest at a rate equal to
one-twelfth of 0.70% of the aggregate Principal
Balance of the Mortgage Loans as of the Due Date
immediately preceding the related Due Period. The
Class S Certificates are "Subordinated
Certificates" as described in the Prospectus. The
Class R Certificates will have no principal
balance.
Depositor................... Asset Backed Securities Corporation, a Delaware
corporation.
Seller and Servicer......... Chevy Chase Bank, F.S.B. See "Chevy Chase Bank,
F.S.B." herein.
Trustee..................... U.S. Bank National Association, a national
banking association.
Insurer..................... Ambac Assurance Corporation, a Wisconsin-
domiciled stock insurance corporation. See "The
Insurer" herein.
Cut-off Date................ June 1, 1998.
Delivery Date............... On or about June 17, 1998.
S-4
<PAGE>
Available Distribution The "AVAILABLE DISTRIBUTION AMOUNT" with respect
Amount...................... to the Mortgage Loans in a Loan Group for any
Distribution Date will equal (a) the sum of (i)
scheduled payments of principal and interest (net
of the Servicing Fee and the Trustee Fee) due on
the Mortgage Loans in the applicable Loan Group
on the related Due Date (as defined herein) and
received on or prior to the related Determination
Date (as defined herein), (ii) principal
prepayments and other unscheduled collections of
principal received during the related Prepayment
Period (as defined herein) on the Mortgage Loans
in the applicable Loan Group, (iii) any Advances
(as defined herein) with respect to the Mortgage
Loans in the applicable Loan Group made by the
Servicer for such Distribution Date, (iv) amounts
transferred from the Reserve Fund equal to
certain shortfalls in the amount available to pay
the Class A-I Interest Distribution Amount or the
Class A-II Interest Distribution Amount together
with any Collateralization Deficit (as defined
herein) which remain outstanding after the
application of amounts otherwise payable to the
Class S Certificates and (v) any Insured Payments
(as defined herein) payable pursuant to the
Policy and related to the Mortgage Loans in the
applicable Loan Group, less (b) the Insurer
Premium Amount (as defined herein) and amounts
representing reimbursements for previously
unreimbursed Insured Payments by the Insurer,
Nonrecoverable Advances by the Servicer and
certain expenses incurred by the Servicer. All
amounts listed in clauses (a) and (b) of the
preceding sentence shall be as related to the
applicable Loan Group; however, because amounts
on deposit in the Reserve Fund and amounts
otherwise payable to the Class S Certificates are
available as credit enhancement for either the
Class A-I Certificates or the Class A-II
Certificates, as necessary, it is possible that
interest from one Loan Group otherwise payable to
the Class S Certificates or deposited in the
Reserve Fund will be applied towards payments of
interest and principal with respect to the class
of Class A Certificates that relates to the other
Loan Group.
The "DUE DATE" for each Mortgage Loan is the
first day of each month. The "DUE PERIOD" with
respect to any Distribution Date commences on the
second day of the month preceding the month in
which such Distribution Date occurs and ends on
the Due Date in the month in which such
Distribution Date occurs. The "PREPAYMENT PERIOD"
with respect to any Distribution Date is the
calendar month preceding the month in which such
Distribution Date occurs. The "DETERMINATION
DATE" with respect to any Distribution Date is
the 15th day of the month in which such
Distribution Date occurs (or, if such day is not
a business day, the preceding business day).
Interest Distributions...... Interest on the Certificates will be calculated
and payable on the basis of a 360-day year
divided into twelve 30-day months. Interest will
be passed through to Certificateholders on the
twenty-fifth day of each month (or, if such day
is not a business day, on the
S-5
<PAGE>
following business day), commencing in July, 1998
(each, a "DISTRIBUTION DATE").
On each Distribution Date, holders of the Class
A-I Certificates will be entitled to receive, to
the extent of the corresponding Available
Distribution Amount, distributions allocable to
one month's interest in an amount (the "CLASS A-I
INTEREST DISTRIBUTION AMOUNT") equal to (i) one-
twelfth of the product of the Certificate
Principal Balance of the Class A-I Certificates
immediately preceding such Distribution Date
multiplied by a rate (the "GROUP I CERTIFICATE
RATE") equal to the weighted average of the Net
Mortgage Rates (as defined herein) of the Group I
Loans, weighted by the aggregate Principal
Balance of the Group I Loans as of the Due Date
immediately preceding the related Due Period,
minus (ii) the sum of (a) the related Insurer
Premium Amount, (b) Prepayment Interest
Shortfalls, if any, relating to Loan Group I and
(c) Civil Relief Act Shortfalls, if any, relating
to Loan Group I during the related Due Period.
Neither the Servicer, nor the Insurer nor any
other entity will be required to pay any
compensating interest with respect to such
Prepayment Interest Shortfalls or Civil Relief
Act Shortfalls.
On each Distribution Date, holders of the Class
A-II Certificates will be entitled to receive, to
the extent of the corresponding Available
Distribution Amount, distributions allocable to
one month's interest in an amount (the "CLASS A-
II INTEREST DISTRIBUTION AMOUNT") equal to (i)
one-twelfth of the product of the Certificate
Principal Balance of the Class A-II Certificates
immediately preceding such Distribution Date
multiplied by a rate (the "GROUP II CERTIFICATE
RATE") equal to the weighted average of the Net
Mortgage Rates (as defined herein) of the Group
II Loans, weighted by the aggregate Principal
Balance of the Group II Loans as of the Due Date
immediately preceding the related Due Period,
minus (ii) the sum of (a) the related Insurer
Premium Amount, (b) Prepayment Interest
Shortfalls, if any, relating to Loan Group II and
(c) Civil Relief Act Shortfalls, if any, relating
to Loan Group II during the related Due Period.
Neither the Servicer, nor the Insurer nor any
other entity will be required to pay any
compensating interest with respect to such
Prepayment Interest Shortfalls or Civil Relief
Act Shortfalls.
To the extent that any portion of the interest
due on any class of the Class A Certificates is
not paid on a Distribution Date, such interest
will be payable on future Distribution Dates to
the extent of available funds, but no additional
interest will be paid on such unpaid interest.
See "Description of the Certificates--
Distributions in Respect of Interest and
Principal" herein.
Principal Distributions..... Holders of the Class A-I Certificates will be
entitled to receive a distribution of principal
on each Distribution Date, in the amount and
priority set forth herein, to the extent of the
portion of the
S-6
<PAGE>
related Available Distribution Amount remaining
after the Class A-I Interest Distribution Amount
has been distributed to the Class A-I
Certificates.
Holders of the Class A-II Certificates will be
entitled to receive a distribution of principal
on each Distribution Date, in the amount and
priority set forth herein, to the extent of the
portion of the related Available Distribution
Amount remaining after the Class A-II Interest
Distribution Amount has been distributed to the
Class A-II Certificates.
See "Description of Certificates--Distributions
in Respect of Interest and Principal" herein.
Certificate Guaranty The Insurer will issue the Policy as a means of
Insurance Policy............ providing additional credit enhancement for each
class of the Class A Certificates. Under the
Policy, the Insurer will, subject to the terms of
the Policy, pay to the Trustee, for the benefit
of the holders of each class of the Class A
Certificates, on each Distribution Date, as
further described herein, an amount that will
equal the sum of (i) any shortfall in the related
Available Distribution Amount to pay the Class A-
I Interest Distribution Amount or the Class A-II
Interest Distribution Amount, as applicable, and
(ii) the related Collateralization Deficit. The
Policy does not guarantee the Class A
Certificates any specified rate of prepayments or
the payment of the amount of any Realized Loss
with respect to a Mortgage Loan on the
Distribution Date which immediately follows such
Realized Loss unless and only to the extent such
loss results in a Collateralization Deficit and
there is a shortfall in the Available
Distribution Amount to pay such Collateralization
Deficit. A "COLLATERALIZATION DEFICIT" with
respect to a Distribution Date and a Loan Group
is the amount, if any, by which (x) the
Certificate Principal Balance of the related
class of Class A Certificates, after giving
effect to all distributions to be made on such
Distribution Date, exceeds (y) the aggregate
Principal Balance of the Mortgage Loans in such
Loan Group as of the close of business on the
related Due Date. A payment by the Insurer under
the Policy is referred to herein as an "INSURED
PAYMENT". See "Description of the Certificates--
Certificate Guaranty Insurance Policy" and "The
Insurer" herein.
The Mortgage Loans.......... The Mortgage Loans are conventional, fully-
amortizing, adjustable-rate Mortgage Loans
secured by first liens on one- to four-family,
residential real properties.
All percentages and amounts of the Group I Loans,
Group II Loans or Mortgage Loans described herein
are approximate percentages or amounts (except as
otherwise indicated) of the aggregate Principal
Balance of the Group I Loans, Group II Loans or
Mortgage Loans (except as otherwise indicated),
as applicable, as of the Cut-off Date.
The Group I Loans consist of 752 adjustable-rate
Mortgage Loans with an aggregate Principal
Balance as of the Cut-off Date of approximately
$200,132,742. The Group I Loans have individual
S-7
<PAGE>
Principal Balances as of the Cut-off Date of at
least $49,326 but not more than $1,172,022, with
an average Principal Balance as of the Cut-off
Date of approximately $266,134, and original
terms to stated maturity of not more than 30
years, and a weighted average remaining term to
stated maturity of approximately 357 months as of
the Cut-off Date. As of the Cut-off Date, the
Group I Loans bore interest at Mortgage Rates of
at least 4.25% per annum but no more than 7.78%
per annum, with a weighted average Mortgage Rate
of approximately 6.55% per annum. The original
Loan-to-Value Ratio of each of the Group I Loans
was not more than 95.00%, with a weighted average
original Loan-to-Value Ratio of approximately
71.84%. "LOAN-TO-VALUE RATIO", as used in this
Prospectus Supplement, is calculated as the
original Mortgage Loan amount (less, in the case
of a CD Pledge Loan, the amount of cash held in
the related CD Account) divided by the lesser of
(i) the appraised value of the related Mortgaged
Property at origination and (ii) if the Mortgage
Loan is a purchase money loan, the sales price of
the related Mortgaged Property. The Group I Loans
will have different Adjustment Dates, Note
Margins and limitations on the Mortgage Rate
adjustments, as described herein. "ADJUSTMENT
DATES" as used in this Prospectus Supplement, is,
as to each Mortgage Loan, each date set forth in
the related Mortgage Note on which an adjustment
to the interest rate on such Mortgage Loan
becomes effective.
The Group II Loans consist of 294 adjustable-rate
Mortgage Loans with an aggregate Principal
Balance as of the Cut-off Date of approximately
$70,514,000. The Group II Loans have individual
Principal Balances as of the Cut-off Date of at
least $47,887 but not more than $997,402, with an
average Principal Balance as of the Cut-off Date
of approximately $239,844, and original terms to
stated maturity of not more than 30 years, and a
weighted average remaining term to stated
maturity of approximately 357 months as of the
Cut-off Date. As of the Cut-off Date, the Group
II Loans bore interest at Mortgage Rates of at
least 6.13% per annum but no more than 8.15% per
annum, with a weighted average Mortgage Rate of
approximately 6.99% per annum. 2.01% of the Group
II Loans are CD Pledge Loans (as defined herein),
in connection with each of which funds were
deposited into a certificate of deposit account
at Chevy Chase which was pledged as additional
security for the Mortgage Loan in lieu of the
cash downpayment which would otherwise have been
required. The amounts so pledged, as percentages
of the original principal balances of the Group
II Loans, ranged from 5% to 10%. The original
Loan-to-Value Ratio of each of the Group II Loans
was not more than 95.00%, with a weighted average
original Loan-to-Value Ratio of approximately
75.80%. The Group II Loans will have different
Adjustment Dates, Note Margins and limitations on
the Mortgage Rate adjustments, as described
herein.
S-8
<PAGE>
The Mortgage Rate on the Group I Loans and the
Group II Loans will adjust annually, commencing
in some cases after an initial period of years
following origination during which the interest
rate accruing thereon is fixed, on the Adjustment
Date specified in the related Mortgage Note to a
rate equal to the sum of the weekly average yield
on U.S. Treasury securities adjusted to a
constant maturity of one year (the "INDEX"), as
further described herein, and the fixed
percentage set forth in the related Mortgage Note
(the "NOTE MARGIN"), subject to the limitations
described herein.
The Mortgage Rate on the Group I Loans (the
"THREE/ONE GROUP I LOANS") will be fixed for a
period of three years after the origination
thereof, and thereafter will adjust annually in
accordance with the Index, except for less than
1% of the Group I Loans (the "ONE/ONE GROUP I
LOANS") that will adjust annually in accordance
with the Index, after an initial fixed period of
one year after origination. At origination such
Mortgage Loans may have borne an initial annual
interest rate which was lower than the applicable
rate based on the Index and Note Margin; because
of Periodic Rate Caps (as defined herein), some
of these Mortgage Loans continue to bear interest
at rates which are lower than the applicable rate
based on the Index and Note Margin.
The Mortgage Rate on 86.18% of the Group II Loans
(the "FIVE/ONE GROUP II LOANS") will be fixed for
a period of five years after the origination
thereof, and thereafter will adjust annually in
accordance with the Index. The Mortgage Rate on
13.82% of the Group II Loans (the "SEVEN/ONE
GROUP II LOANS") will be fixed for a period of
seven years after the origination thereof, and
thereafter will adjust annually in accordance
with the Index.
The Mortgage Rate effective on any Adjustment
Date shall not exceed the maximum rate set forth
in the related Mortgage Note and the amount of
any increase or decrease on any Adjustment Date
shall not exceed the Periodic Rate Cap set forth
in the related Mortgage Note, so the Mortgage
Rate on any Adjustment Date may not equal the
applicable rate based on the Index and Note
Margin. The monthly payment on each Mortgage Loan
will be adjusted on the Due Date in the month
following the month in which any Adjustment Date
occurs to the amount necessary to pay interest at
the then applicable Mortgage Rate and to fully
amortize the outstanding Principal Balance of the
Mortgage Loan over its then remaining term to
stated maturity.
None of the Mortgage Loans will be guaranteed by
any governmental agency or instrumentality, the
Depositor, Chevy Chase, or any of their
respective affiliates or any other person. For a
further description of the Mortgage Loans, see
"Description of the Mortgage Loans" herein.
Conversion of Mortgage All of the Group I Loans and approximately 0.78%
Loans....................... of the Group II Loans provided at origination
that, at the option of the related
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<PAGE>
Mortgagors, the adjustable interest rate thereon
may be converted to a fixed interest rate,
provided that certain conditions have been
satisfied. The Seller will be required to
purchase any Mortgage Loan that has converted.
See "Certain Yield and Prepayment Considerations"
herein.
Credit Enhancement.......... The credit enhancement provided for the benefit
of the holders of each class of the Class A
Certificates primarily consists of the
subordination provided by the Class S
Certificates, the Reserve Fund and the Policy, in
each case in the manner and to the extent
described herein.
Subordination and the Reserve Fund: On each
Distribution Date, payments on the Class S
Certificates will be subordinate to the payment
of principal and interest, in the amounts
described herein, on the Class A Certificates. In
addition, certain payments otherwise
distributable to the Class S Certificates will be
deposited in a reserve fund (the "RESERVE FUND")
to be held by the Trustee for the benefit of the
Insurer and the Certificateholders. The Reserve
Fund will initially have a zero balance, and will
be funded from such amounts otherwise
distributable to the Class S Certificates to the
extent of the Required Reserve (as defined
herein). Once the amounts on deposit in the
Reserve Fund equal the Required Reserve, the
retention of amounts otherwise distributable to
the Class S Certificates will cease, unless
necessary to maintain the Required Reserve.
Pursuant to the Pooling and Servicing Agreement,
the Required Reserve may, subject to certain
triggers and a minimum amount, decrease from time
to time. In addition, certain triggers or
conditions may cause the Required Reserve to be
increased. Funds on deposit in the Reserve Fund
may be withdrawn to make payments of interest and
principal on the Class A Certificates. See
"Description of the Certificates--Reserve Fund"
herein and "Credit Support--Reserve Fund" in the
Prospectus.
The Certificate Guaranty Insurance Policy: Each
class of the Class A Certificates will be
entitled to the benefit of the Policy to be
issued by the Insurer, which, subject to its
terms, will protect the holders of each class of
the Class A Certificates against (i) any
shortfall in the related Available Distribution
Amount to pay the Class A-I Interest Distribution
Amount or the Class A-II Interest Distribution
Amount, and (ii) any related Collateralization
Deficit. See "Description of the Certificates--
Certificate Guaranty Insurance Policy" herein.
Yield and Maturity The yield to maturity on the Class A Certificates
Considerations.............. will be sensitive to the rate and timing of
principal payments (including prepayments,
defaults and liquidations) on the Mortgage Loans
in the applicable Loan Group, and may fluctuate
significantly from time to time. Since the
Mortgage Rates on the Mortgage Notes will be
based on the Index (which may not rise and fall
consistently with prevailing
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mortgage rates) plus the related Note Margin
(which may be different from the prevailing
margins on other mortgage loans), and may be
limited by the Maximum Mortgage Rate, Minimum
Mortgage Rate and Periodic Rate Caps, the
Mortgage Rates on the Mortgage Loans at any time
may not equal the prevailing rates for other
adjustable rate mortgage loans and the rate of
prepayment may be lower or higher than would
otherwise be anticipated. In addition, to the
extent that Prepayment Interest Shortfalls or
Civil Relief Act Shortfalls occur, such
shortfalls will adversely affect the yield to
investors in the applicable Class A Certificates.
In general, if a Class A Certificate is purchased
at a premium and principal distributions thereon
occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the
time of purchase. Conversely, if a Class A
Certificate is purchased at a discount and
principal distributions thereon occur at a rate
slower than that assumed at the time of purchase,
the investor's actual yield to maturity will be
lower than that assumed at the time of purchase.
See "Certain Yield and Prepayment Considerations"
herein and "Yield Considerations" and "Maturity
and Prepayment Considerations" in the Prospectus.
The yield on each class of the Class A
Certificates will be less than the yield that
would otherwise be produced by the applicable
Certificate Rate minus the applicable Insurer
Premium Amount and the applicable purchase price
because distributions of interest in respect of
any month will be made on the twenty-fifth day of
the following month or, if such day is not a
Business Day, then the next succeeding Business
Day. See "Yield Considerations" in the
Prospectus.
Servicing Fee............... The Servicer will be entitled to receive each
month a servicing fee as compensation for
servicing the Mortgage Loans (the "SERVICING
FEE") equal to (i) one-twelfth of 0.375% per
annum (the "SERVICING FEE RATE") plus (ii) in the
case of Lender-Paid MI Loans (as defined herein),
one-twelfth of the interest rate thereon
attributable to the payment of primary mortgage
insurance premiums by the Servicer for the period
designated in the Mortgage Note. The portion of
the interest rate on the Lender-Paid MI Loans
attributable to insurance premiums will range
from 0.20% to 0.65% on the Principal Balance of
each Mortgage Loan.
Trustee Fee................. The Trustee will be entitled to receive each
month a fee (the "TRUSTEE FEE") equal to one-
twelfth of 0.01% per annum (the "TRUSTEE FEE
RATE") on the Principal Balance of each Mortgage
Loan as compensation for acting as trustee of the
Trust Fund under the Pooling and Servicing
Agreement.
Advances.................... The Servicer will be obligated to advance
delinquent installments of principal and interest
on each Mortgage Loan (net of the related
Servicing Fee) at any time prior to the
commencement of
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foreclosure proceedings with respect to such
Mortgage Loan, but only to the extent the
Servicer believes that the amount advanced will
be recoverable from subsequent payments or
collections (including insurance proceeds and
liquidation proceeds net of liquidation expenses)
in respect of the related Mortgage Loan. See
"Servicing--Advances" herein.
Prepayment Interest In the event of a prepayment in full of a
Shortfalls.................. Mortgage Loan on any day other than the last day
of a Prepayment Period, the related Mortgagor
will be required to pay interest on the amount
prepaid only to the date of such prepayment and
not thereafter. In the event of a prepayment in
part of a Mortgage Loan, any such partial
prepayment will be applied to the Principal
Balance of such Mortgage Loan as of the first day
of the month of receipt, will be passed through
to Certificateholders in the following month, and
will reduce the aggregate amount of interest
distributable on the Certificates in such
following month in an amount equal to 30 days of
interest on the amount of such partial
prepayment. Neither the Servicer, nor the Insurer
nor any other entity will be required to pay any
amounts in excess of the amount of interest paid
by the Mortgagor, if any, in connection with such
prepayments. The amount by which one month's
interest exceeds the amount of interest paid by
the Mortgagor in connection with such prepayment
(the "PREPAYMENT INTEREST SHORTFALL") will not be
covered by the Policy and will be allocated to
the Class A Certificates as described above under
"--Interest Distributions."
Civil Relief Act The Soldiers' and Sailors' Civil Relief Act of
Shortfalls.................. 1940, as amended (the "CIVIL RELIEF ACT") limits
the amount of interest that may be charged to a
Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan.
For each Loan Group, shortfalls in the collection
of interest due to the application of the Civil
Relief Act (the "CIVIL RELIEF ACT SHORTFALL")
will not be covered by the Policy and will be
allocated to the related class of Class A
Certificates as described above under "--Interest
Distributions". See "Certain Legal Aspects of the
Mortgage Loans and Contracts--Soldiers' and
Sailors' Relief Act" in the Prospectus.
Record Date................. The Record Date for each distribution of
principal and interest on the Certificates is the
last business day of the month preceding the
month in which the applicable Distribution Date
occurs.
Certificate Registration.... Each class of the Class A Certificates will be
represented by one or more certificates
registered in the name of Cede & Co., as nominee
of DTC. No beneficial owner will be entitled to
receive a Class A Certificate in fully
registered, certificated form (a "DEFINITIVE
CERTIFICATE"), except under the limited
circumstances described herein. See "Description
of the Certificates--Book-Entry Registration"
herein.
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Optional Termination........ The Trust Fund may be terminated and the
Certificates retired on any Distribution Date on
or after the date on which the aggregate
Principal Balance of the Mortgage Loans has been
reduced to or below 5% of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off
Date pursuant to procedures described herein. See
"Description of the Certificates--Optional
Termination" herein.
Representations and Chevy Chase will have made certain limited
Warranties.................. representations and warranties as to the status
of the mortgages securing the Mortgage Loans, the
payment status of the Mortgage Loans and certain
other information described herein. In the event
that any such representation or warranty is
breached in respect of any Mortgage Loan in a
manner that materially and adversely affects the
interests of Certificateholders or the Insurer
and is not thereafter cured, Chevy Chase will be
required to purchase such Mortgage Loan from the
Trust Fund, or, during certain specified periods
after the date of issuance of the Certificates,
at its option and subject to certain conditions,
to substitute a qualifying mortgage loan or loans
in place of the affected Mortgage Loan. See
"Description of Certificates--Repurchase or
Substitution of Mortgage Loans" herein.
Certain Federal Income Tax
Consequences...............
A REMIC election will be made with respect to
certain assets in the Trust Fund for federal
income tax purposes. Upon the issuance of the
Certificates, Orrick, Herrington & Sutcliffe LLP,
counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming
compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax
purposes, certain assets in the Trust Fund will
qualify as a REMIC under Sections 860A through
860G of the Code.
For federal income tax purposes, (i) the Class A-
I, Class A-II and Class S Certificates will be
the "regular interests" in, and generally will be
treated as debt obligations of, the REMIC, and
(ii) the Class R Certificates will be the sole
class of "residual interests" in the REMIC.
For further information regarding the federal
income tax consequences of investing in the Class
A Certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Legal Investment............ Upon issuance, the Class A Certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as
they are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating agency. Accordingly, the Class
A Certificates will be legal investments for
certain entities to the extent provided in SMMEA.
See "Legal Investment" in the Prospectus.
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<PAGE>
ERISA Considerations........ Any Plan fiduciary or other investor that
proposes to use Plan Assets to effect the
purchase and holding of the Class A Certificates
should consult with its legal counsel with
respect to the potential applicability to such
investment of the fiduciary responsibility and
prohibited transaction provisions of ERISA and
Section 4975 of the Code. See "ERISA
Considerations" herein and in the Prospectus. The
United States Department of Labor has issued an
individual prohibited transaction exemption to
Credit Suisse First Boston Corporation, which
generally exempts from the application of certain
of the prohibited transaction provisions of
Section 406 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and
the excise taxes and civil penalties imposed on
such prohibited transactions by Section 4975(a)
and (b) of the Code and Section 502(i) and (l) of
ERISA, transactions relating to the purchase,
sale and holding of certificates underwritten by
the Underwriter, such as the Class A
Certificates, and the servicing and operation of
asset pools such as the Mortgage Pool, provided
that certain conditions are satisfied. See "ERISA
Considerations" herein and in the Prospectus.
Ratings..................... It is a condition to their issuance that the
Class A Certificates be rated "AAA" by S&P and
"Aaa" by Moody's. Such ratings are based upon the
claims paying ability of the Insurer. 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. In addition, a security rating does not
address the frequency of prepayments of Mortgage
Loans, or the corresponding effect on yield to
investors. See "Certain Yield and Payment
Considerations" herein.
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<PAGE>
RISK FACTORS
Prospective investors should consider, in addition to the factors described
in the accompanying Prospectus, the following additional risk factors in
connection with a purchase of the Class A Certificates.
YIELD AND PREPAYMENT RISKS
The weighted average life of each class of the Class A Certificates will be
affected by the rate of principal payments (including prepayments) of the
Mortgage Loans in the related Loan Group. All of the Mortgage Loans may be
prepaid in whole or in part at any time. Certain of the Mortgage Notes contain
terms requiring payment of a penalty by the Mortgagor in the event the related
Mortgage Loan is prepaid in full. The prepayment experience on the Mortgage
Loans may be affected by a wide variety of factors, including general economic
conditions, interest rates, the availability of alternative financing and
homeowner mobility. In addition, a substantial portion of the Mortgage Loans
contain due-on-sale provisions; the Servicer generally will enforce such
provisions unless such enforcement is not permitted by applicable law, the
permissibility of enforcement is in doubt, or such enforcement would
materially and adversely affect the interests of Certificateholders or the
Insurer. See "Certain Legal Aspects of the Mortgage Loans and Contracts--
Enforcement of "Due-on-Sale" Clauses; Realization on Defaulted Contracts" in
the Prospectus. In addition, prepayments may result from liquidations due to
default, the receipt of Insurance Proceeds, repurchases by the Seller as a
result of certain breaches of representations and warranties made by the
Seller in the Pooling and Servicing Agreement or the purchase by the Seller of
any Convertible Mortgage Loan upon its conversion to a fixed-rate loan or the
Servicer's option to purchase all of the outstanding Mortgage Loans in the
Mortgage Pool pursuant to the optional termination provision in the Pooling
and Servicing Agreement.
As a result of the interaction of the foregoing factors, it may be difficult
to predict the weighted average life of, and the resulting yield to maturity
on, each class of the Class A Certificates. None of the Depositor, the Seller,
the Servicer, the Trustee, the Insurer or the Underwriter makes any
representation as to the weighted average life of, or yield to maturity on,
the Class A Certificates.
INSOLVENCY-RELATED MATTERS
Transfer of Mortgage Loans. The Seller intends that the transfer of all of
the Seller's right, title and interest in the Mortgage Loans to the Depositor
be treated as a sale by the Seller to the Depositor and, accordingly, that
such Mortgage Loans neither be included in the assets of the Seller in the
event of the appointment of a receiver or conservator for the Seller nor be
available to the creditors of the Seller. In the event of an insolvency of the
Seller, however, it is possible that a receiver or a conservator for, or a
creditor of, the Seller may assert that the transaction between the Seller and
the Depositor was a pledge of each such Mortgage Loan in connection with a
borrowing by the Seller, rather than a sale. The Seller will cause the
Mortgage Loans to be assigned to the Depositor, and by the Depositor to the
Trustee for the benefit of the Certificateholders and the Insurer. In
addition, the Seller will deliver or cause to be delivered to the Depositor,
and by the Depositor to the Trustee, each Mortgage Note endorsed to the order
of the Trustee, each Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in
which case the Seller will deliver a copy of such Mortgage together with a
certificate to the effect that the original of such Mortgage was delivered to
such recording office) and an assignment of the Mortgage in recordable form.
Assignments of the Mortgage Loans by the Seller to the Depositor, and by the
Depositor to the Trustee, will be recorded in the appropriate public office
for real property records except in those jurisdictions in which the Seller
has received opinion of counsel that such recordation is not necessary. If the
transfer by the Seller to the Depositor of the Mortgage Loans is deemed to be
a grant to the Depositor of a security interest in the Mortgage Loans, the
Depositor should have a perfected security interest in the Mortgage Loans. If
a receiver or conservator were appointed for the Seller, certain
administrative expenses of the receiver or conservator may have priority over
the Depositor's (and therefore, the Certificateholders') right, title and
interest in the Mortgage Loans. For so long as the Seller is the Servicer,
cash collections on the Mortgage Loans may be held by the Seller and
commingled with its funds until transferred to the Custodial Account or
Certificate Account, and in an insolvency proceeding
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<PAGE>
or receivership or conservatorship of the Seller, or in certain circumstances,
the lapse of certain time periods, the Depositor (and therefore, the
Certificateholders) may not have a perfected interest in such commingled
collections.
Transfer of CD Collateral. With respect to 2.01% of the Group II Loans, the
related Mortgagors have pledged to Chevy Chase certain collateral (the "CD
COLLATERAL") in connection with the origination of such Mortgage Loans, in
lieu of the cash downpayment otherwise payable, as security for such
Mortgagors' obligations under such Mortgage Loans. With respect to each such
Mortgage Loan, the CD Collateral includes, without limitation, the related
pledge and guaranty agreement, the related certificate of deposit and all
right, title and interest in and to the related certificate of deposit account
(the "CD ACCOUNT") established by the Mortgagor at Chevy Chase, and all
proceeds thereof. The certificate of deposit and the pledge and guaranty
agreement will be held by the Trustee as part of each mortgage file. As of the
Cut-off Date, Chevy Chase will have taken certain actions as are required or
reasonably appropriate under applicable state law to perfect Chevy Chase's
security interest against the related Mortgagor in the CD Collateral. The
perfection of a security interest in the CD Collateral may not be governed by
the Uniform Commercial Code as in effect in the Commonwealth of Virginia, the
State of Maryland or such other applicable jurisdiction (the "UCC"), and
existing case-law from such jurisdictions does not definitively establish what
steps are necessary to perfect such an interest. This uncertainty exists both
with respect to the grant of a security interest in the CD Collateral by
Mortgagors to Chevy Chase and with respect to the grant of a security interest
in Chevy Chase's interest in the CD Collateral by Chevy Chase to the Depositor
and from the Depositor to the Trustee. While the matter is not free from
doubt, a state court properly presented with the issue should determine that
Chevy Chase has taken sufficient action and has adequately divested the
Mortgagors of control over the CD Collateral so as to perfect a security
interest therein. Chevy Chase will represent and warrant in the Pooling and
Servicing Agreement that following the transfer of Chevy Chase's interest in
the CD Collateral, if any, to the Trustee, the Trustee will have a security
interest in such CD Collateral. Chevy Chase will take certain actions that it
believes are required under applicable state law to perfect the Trustee's
interest in the CD Collateral, if any.
Although Chevy Chase has taken steps it believes appropriate to perfect
interests given to the Trustee, and on the basis of this belief has made the
related representations and warranties, the legal uncertainty in these areas
is such that no definitive assurance can be given that a security interest in
Chevy Chase's interest in the CD Collateral will exist for the benefit of the
Trustee. Moreover, even if the transfer of Chevy Chase's interest in the CD
Collateral, if any, to the Trustee is deemed to create a security interest
therein, a tax or governmental lien or other nonconsensual lien arising before
Chevy Chase's interest in such CD Collateral comes into existence, or through
fraud or negligence of Chevy Chase, a subsequent transferee of the CD
Collateral, may have priority over the Trustee's interest in such CD
Collateral.
Moreover, if a Mortgagor becomes a debtor in a bankruptcy case under the
United States Bankruptcy Code, as amended (Title 11, U.S.C.) (the "BANKRUPTCY
CODE"), the automatic stay provisions of the Bankruptcy Code will prevent
Chevy Chase, and therefore the Trustee, from, among other things, realizing on
the CD Collateral absent bankruptcy court consent. Accordingly, Chevy Chase,
and therefore the Certificateholders, may suffer a loss of all or part of its
interest in the CD Collateral if such Mortgagor becomes a debtor under the
Bankruptcy Code.
Chevy Chase as Servicer. In addition, while Chevy Chase is the Servicer,
cash collections held by Chevy Chase may, subject to certain conditions, be
commingled and used for the benefit of Chevy Chase prior to the date on which
such collections are required to be deposited in the Custodial Account as
described under "Description of the Certificates-Custodial and Certificate
Account". In the event of the conservatorship, receivership or insolvency of
Chevy Chase or, in certain circumstances, the lapse of certain time periods,
the Trustee may not have a perfected interest in such collections and, in such
event, may suffer a loss of all or part of such collections which may result
in a loss to Certificateholders.
Certain Matters Related to Receivership. To the extent that the Seller's
transfer of the Mortgage Loans and the CD Collateral to the Depositor is
deemed to constitute the creation of a security interest in the Mortgage
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<PAGE>
Loans and the CD Collateral in favor of the Depositor, and to the extent such
security interest was validly perfected before the Seller's insolvency and was
not taken in contemplation of insolvency of the Seller, or with the intent to
hinder, delay or defraud the Seller or the creditors of the Seller, the
Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, as amended
("FIRREA"), provides that such security interest should not be subject to
avoidance by the Federal Deposit Insurance Corporation (the "FDIC"), as
receiver or conservator for the Seller. Positions taken by the FDIC staff
prior to the passage of FIRREA do not suggest that the FDIC, as receiver or
conservator for the Seller, would interfere with the timely transfer to the
Depositor of payments collected on the related Mortgage Loans. If, however,
the FDIC were to assert a contrary position, such as requiring the Depositor
or the Trustee to establish its right to those payments by submitting to and
completing the administrative claims procedure under the FDIA, or the
conservator or receiver for the Seller were to request a stay of proceedings
with respect to the Seller, as provided under the FDIA, delays in payments to
the Depositor, and, therefore, on the Certificates and possible reductions in
the amount of those payments could occur. In the event the FDIC were to be
appointed conservator or receiver for the Seller and were to repudiate the
Pooling and Servicing Agreement, then the amount payable out of available
collateral to the Certificateholders could be lower than the outstanding
principal and accrued interest on the Certificates. In addition, the FDIC, if
it were appointed as receiver or conservator for the Seller, would also have
the power under the FDIA to repudiate contracts, including the Seller's
obligations under the Pooling and Servicing Agreement to repurchase certain
Mortgage Loans. A claim for damages arising from the repudiation of a contract
will be limited by the FDIA to "actual direct compensatory damages." In
addition, in the case of an Event of Default relating to the receivership,
conservatorship or insolvency of the Servicer, the receiver or conservator may
have the power either to terminate the Servicer and replace it with a
successor Servicer or to prevent the termination of the Servicer and its
replacement with a successor Servicer if no Event of Default exists other than
the receivership, conservatorship or insolvency of the Servicer.
Chevy Chase has established the CD Accounts and maintained or caused to be
maintained records sufficient to afford each Mortgagor federal deposit
insurance up to applicable limits. In the event of the insolvency,
conservatorship or receivership of Chevy Chase, although the CD Accounts will
be SAIF-insured up to applicable limits, such an insolvency, conservatorship
or receivership may result in a delay in the payment of funds on deposit in
the CD Accounts, and possible reduction in amount of payment of such funds, to
the Mortgagor or to the Trustee by the FDIC as conservator or receiver for
Chevy Chase.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Depositor will acquire the Mortgage Loans, and the CD Collateral in the
case of CD Pledge Loans, from Chevy Chase and will cause the Mortgage Loans
and the CD Collateral to be assigned to U.S. Bank National Association, as
trustee (the "TRUSTEE"). Chevy Chase, in its capacity as servicer (the
"SERVICER"), will service the Mortgage Loans pursuant to a Pooling and
Servicing Agreement, dated as of June 1, 1998 (the "POOLING AND SERVICING
AGREEMENT"), among the Depositor, Chevy Chase, as Seller and Servicer, and the
Trustee. See "The Trust Fund--The Mortgage Pools" in the Prospectus.
DESCRIPTION OF THE MORTGAGE LOANS
The description of the Mortgage Loans set forth in this Prospectus
Supplement is based on the characteristics of the Mortgage Loans as of the
Cut-off Date. Unless the context otherwise requires, all percentages used
herein are based on the aggregate Principal Balance of the Group I Loans,
Group II Loans or Mortgage Loans, as applicable, as of the Cut-off Date.
Each Mortgage Loan, at the time of origination, was represented by the
related Mortgagor to be owner-occupied. As of the Cut-off Date, none of the
Mortgage Loans were more than 30 days delinquent in scheduled payments of
principal and interest. No Mortgage Loan provides for deferred interest or
negative amortization. The Mortgage Loans were originated by or acquired by
Chevy Chase or its wholly owned subsidiary, B.F. Saul
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Mortgage Company, in the normal course of its business and will be purchased
by the Depositor from Chevy Chase.
The Group I Loans consist of 752 adjustable-rate Mortgage Loans, with an
aggregate Principal Balance as of the Cut-off Date of approximately
$200,132,742 and original terms to stated maturity of not more than 30 years.
The Group I Loans had individual Principal Balances as of the Cut-off Date of
at least $49,326 but not more than $1,172,022, with an average Principal
Balance as of the Cut-off Date of approximately $266,134. The Group I Loans
have a weighted average remaining term to stated maturity of approximately 357
months as of the Cut-off Date. As of the Cut-off Date, the Group I Loans bore
interest at Mortgage Rates of at least 4.25% per annum but no more than 7.78%
per annum, with a weighted average Mortgage Rate of approximately 6.55% per
annum. The original Loan-to-Value Ratio of each of the Group I Loans was not
more than 95.00%, with a weighted average original Loan-to-Value Ratio of
approximately 71.84%.
The Group II Loans consist of 294 adjustable-rate Mortgage Loans, with an
aggregate Principal Balance as of the Cut-off Date of approximately
$70,514,000 and original terms to stated maturity of not more than 30 years.
The Group II Loans had individual Principal Balances as of the Cut-off Date of
at least $47,887 but not more than $997,402 with an average Principal Balance
as of the Cut-off Date of approximately $239,844. The Group II Loans have a
weighted average remaining term to stated maturity of approximately 357 months
as of the Cut-off Date. As of the Cut-off Date, the Group II Loans bore
interest at Mortgage Rates of at least 6.13% per annum but no more than 8.15%
per annum, with a weighted average Mortgage Rate of approximately 6.99% per
annum. The original Loan-to-Value Ratio of each of the Group II Loans was not
more than 95.00%, with a weighted average original Loan-to-Value Ratio of
approximately 75.80%.
"LOAN-TO-VALUE RATIO", as used in this Prospectus Supplement, is calculated
as the original Mortgage Loan amount (less, in the case of a CD Pledge Loan,
the amount of cash held in the related CD Account), divided by the lesser of
(i) the appraised value of the related Mortgaged Property at origination and
(ii) if the Mortgage Loan is a purchase money loan, the sales price of the
related Mortgaged Property.
As of the Cut-off Date, approximately 0.16% of Group I Loans and 1.64% of
Group II Loans were temporary Buy-Down Loans, where Chevy Chase pays a portion
of the monthly interest payments for up to the first two years after
origination. For the temporary Buy-Down Loans in Loan Group I, the portion of
the interest rate paid by the related Mortgagor will not increase by more than
one percentage point for each one-year period, and no Mortgage Rate may exceed
the "bought down" rate by more than two percentage points. For the temporary
Buy-Down Loans in Loan Group II, the portion of the interest rate paid by the
related Mortgagor will not increase by more than one percentage point for each
one-year period, and no Mortgage Rate may exceed the "bought down" rate by
more than two percentage points.
As of the Cut-off Date, approximately 4.22% of Group I Loans and 15.69% of
Group II Loans were Lender-Paid MI Loans. A "LENDER-PAID MI LOAN" is a
Mortgage Loan with an original Loan-to-Value Ratio greater than 80% where the
interest rate payable by the related Mortgagor is increased by 20 to 65 basis
points relative to the interest rate otherwise applicable for so long as the
Loan-to-Value Ratio exceeds 80%, with the proceeds of such increase used by
the Seller to purchase primary mortgage insurance on such Mortgage Loan. The
Servicing Fee on a Lender-Paid MI Loan has been increased by the amount of the
additional interest rate thereon attributable to the payment of primary
mortgage insurance premium by the Servicer for so long as the related Loan-to-
Value Ratio exceeds 80%; hence, the Net Mortgage Rate for a Lender-Paid MI
Loan will be reduced by the amount of such additional interest rate during
such period.
As of the Cut-off Date, approximately 2.01% of Group II Loans were
originated pursuant to Chevy Chase's CD Pledge Program (such Mortgage Loans,
the "CD PLEDGE LOANS"). Under Chevy Chase's CD Pledge Program, a Mortgagor
may, subject to certain underwriting criteria, obtain a Mortgage Loan with a
loan-to-value ratio of up to 100% by securing its payment obligations under
such Mortgage Loan with a grant to Chevy Chase of a security interest in the
CD Collateral. For the CD Pledge Loans in Loan Group II, the amounts on
deposit in the related CD Account, as percentages of the original principal
balances of the Group II Loans, ranged from
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5% to 10%. The original term of a CD Account must generally equal the lesser
of the initial fixed period of the related Mortgage Loan or 60 months. A
Mortgagor under the CD Pledge Program may, at its option, terminate the grant
of the security interest five years after origination of the related Mortgage
Loan if (i) in the case of Mortgage Loans where the CD Account constituted up
to 10% of the original loan-to-value ratio, a new appraisal indicates a loan-
to-value ratio of no more than 90% for the related Mortgaged Property or (ii)
in the case of Mortgage Loans where the CD Account constituted greater than
10% of the original loan-to-value ratio, a new appraisal indicates a loan-to-
value ratio of no more than 75% for the related Mortgaged Property.
The Mortgage Rates on the Group I Loans and the Group II Loans will adjust
annually, commencing in some cases after an initial period of years following
origination during which the interest rate accruing thereon is fixed, on the
Adjustment Date specified in the related Mortgage Note to a rate equal to the
sum (rounded as specified in the related Mortgage Note) of the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year,
as published by the Federal Reserve Board in Statistical Release H.15 (519)
(the "INDEX"), and the fixed percentage set forth in the related Mortgage Note
(the "NOTE MARGIN"), subject to the limitation that the Mortgage Rate will not
exceed the maximum Mortgage Rate as specified in the related Mortgage Note and
any increase or decrease on any Adjustment Date will be limited by the amount
set forth in the related Mortgage Note (the "PERIODIC RATE CAP").
With respect to 746 Mortgage Loans, representing approximately 99.44% of the
Group I Loans, the Mortgage Rate will adjust annually in accordance with the
Index commencing approximately three years after origination (the "THREE/ONE
GROUP I LOANS"). With respect to 6 Mortgage Loans, representing less than 1%
of the Group I Loans, the Mortgage Rate will adjust annually in accordance
with the Index commencing approximately one year after origination (the
"ONE/ONE GROUP I LOANS").
With respect to 244 Mortgage Loans, representing approximately 86.18% of the
Group II Loans, the Mortgage Rate will adjust annually in accordance with the
Index commencing approximately five years after origination (the "FIVE/ONE
GROUP II LOANS"). With respect to 50 Mortgage Loans, representing
approximately 13.82% of the Group II Loans, the Mortgage Rate will adjust
annually in accordance with the Index commencing approximately seven years
after origination (the "SEVEN/ONE GROUP II LOANS").
The monthly payment on each Mortgage Loan will be adjusted on the Due Date
of the month following the month in which the related Adjustment Date occurs
(subject to the related Periodic Rate Cap, as described in the related
Mortgage Note) to equal the amount necessary to pay interest at the then-
applicable Mortgage Rate and to fully amortize the outstanding Principal
Balance of such Mortgage Loan over its then remaining term to stated maturity.
Due to application of the Periodic Rate Cap, the Mortgage Rate on a Mortgage
Loan may be less than the sum of the Index and Note Margin, even following the
Adjustment Date for such Mortgage Loan. The Mortgage Loans will have various
Adjustment Dates, Note Margins and limitations on the Mortgage Rate
adjustments, as described below.
The Mortgage Rate on a Mortgage Loan may not exceed the maximum Mortgage
Rate (the "MAXIMUM MORTGAGE RATE") or be less than the minimum Mortgage Rate
(the "MINIMUM MORTGAGE RATE") specified for such Mortgage Loan in the related
Mortgage Note. The Minimum Mortgage Rate for each Mortgage Loan is equal to
the Note Margin. As of the Cut-off Date, the Minimum Mortgage Rates on the
Group I Loans ranged from 2.88% to 3.65%, with a weighted average Minimum
Mortgage Rate of 3.01%, and as of the Cut-off Date, the Maximum Mortgage Rates
on the Group I Loans ranged from 11.38% to 13.78%, with a weighted average
Maximum Mortgage Rate of 12.55%. As of the Cut-off Date, the Minimum Mortgage
Rates on the Group II Loans ranged from 3.00% to 3.65%, with a weighted
average Minimum Mortgage Rate of 3.05%, and as of the Cut-off Date, the
Maximum Mortgage Rates on the Group II Loans ranged from 12.13% to 14.15%,
with a weighted average Maximum Mortgage Rate of 12.99%.
The tables below set forth certain additional statistical characteristics of
the Mortgage Loans as of the Cut-off Date. Percentages are approximate and are
stated by Principal Balance of the Mortgage Loans as of the Cut-off Date, and
have been rounded in order to add to 100%.
S-19
<PAGE>
DISTRIBUTION OF CURRENT MORTGAGE RATES FOR GROUP I LOANS
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
4.01%--4.50%.............. 2 449,785 0.23
5.01%--5.50%.............. 3 426,996 0.21
5.51%--6.00%.............. 38 7,120,085 3.56
6.01%--6.50%.............. 362 100,073,518 50.00
6.51%--7.00%.............. 313 84,719,946 42.33
7.01%--7.50%.............. 27 5,990,400 2.99
7.51%--8.00%.............. 7 1,352,012 0.68
--- ----------- ------
Total................. 752 200,132,742 100.00%
As of the Cut-off Date, the weighted average Mortgage Rate on the Group I
Loans was 6.55% per annum.
DISTRIBUTION OF MORTGAGE LOAN PRINCIPAL BALANCES FOR GROUP I LOANS
<CAPTION>
RANGE OF CUT-OFF DATE NUMBER OF AGGREGATE PRINCIPAL % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
Up to $50,000.00.......... 1 49,326 0.02
$ 50,000.01--$100,000.00.. 59 4,961,438 2.48
$100,000.01--$150,000.00.. 120 14,983,695 7.49
$150,000.01--$200,000.00.. 121 20,888,151 10.44
$200,000.01--$250,000.00.. 139 31,082,947 15.53
$250,000.01--$300,000.00.. 82 22,704,553 11.34
$300,000.01--$350,000.00.. 67 21,730,662 10.86
$350,000.01--$400,000.00.. 48 18,176,059 9.08
$400,000.01--$450,000.00.. 22 9,408,341 4.70
$450,000.01--$500,000.00.. 30 14,519,882 7.25
$500,000.01--$550,000.00.. 17 8,956,413 4.48
$550,000.01--$600,000.00.. 11 6,346,873 3.17
$600,000.01--$650,000.00.. 10 6,325,512 3.16
$650,000.01--$700,000.00.. 8 5,441,661 2.72
$700,000.01--$750,000.00.. 6 4,454,111 2.23
Over $750,000.00 11 10,103,118 5.05
--- ----------- ------
Total................. 752 200,132,742 100.00%
</TABLE>
As of the Cut-off Date, the average Principal Balance of the Group I Loans
was approximately $266,134.
DISTRIBUTION OF MORTGAGED PROPERTY TYPES FOR GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family Detached....... 641 179,902,703 89.89
Condominium.................. 63 11,158,137 5.58
Townhouse.................... 45 8,373,113 4.18
Two- to Four-Family.......... 3 698,789 0.35
--- ----------- ------
Total.................... 752 200,132,742 100.00%
</TABLE>
DISTRIBUTION OF LOAN TYPES FOR GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
<S> <C> <C> <C>
One/One...................... 6 1,110,793 0.56
Three/One.................... 746 199,021,949 99.44
--- ----------- ------
Total.................... 752 200,132,742 100.00%
</TABLE>
S-20
<PAGE>
DISTRIBUTION OF MORTGAGE LOAN PURPOSE FOR GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Refinancing.................. 507 139,069,528 69.49
Purchase..................... 119 25,132,638 12.56
Cash-Out Refinancing......... 126 35,930,576 17.95
--- ----------- ------
Total.................... 752 200,132,742 100.00%
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES FOR GROUP I LOANS
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Colorado..................... 2 445,519 0.22
Connecticut.................. 58 28,605,778 14.29
Delaware..................... 1 316,048 0.16
District of Columbia......... 31 9,897,126 4.95
Florida...................... 2 198,061 0.10
Georgia...................... 26 6,048,106 3.02
Illinois..................... 92 22,873,696 11.43
Indiana...................... 1 307,257 0.15
Maryland..................... 173 46,099,112 23.03
Massachusetts................ 32 9,102,152 4.55
Michigan..................... 3 579,056 0.29
Minnesota.................... 3 291,826 0.15
Missouri..................... 1 235,802 0.12
New Jersey................... 49 11,965,260 5.98
New York..................... 2 728,728 0.36
North Carolina............... 114 23,946,791 11.97
Pennsylvania................. 16 3,451,618 1.72
Rhode Island................. 2 769,952 0.39
South Carolina............... 8 1,324,455 0.66
Texas........................ 4 1,089,762 0.54
Virginia..................... 130 31,591,030 15.79
West Virginia................ 2 265,607 0.13
--- ----------- ------
Total.................... 752 200,132,742 100.00%
DISTRIBUTION OF PERIODIC RATE CAP FOR GROUP I LOANS
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PERIODIC RATE CAP MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
2.000%....................... 752 200,132,742 100.00%
DISTRIBUTION OF NOTE MARGINS AND MINIMUM MORTGAGE RATES
FOR GROUP I LOANS
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF NOTE MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
2.50% - 3.00%................ 714 192,245,839 96.06
3.01% - 3.50%................ 25 5,359,578 2.68
3.51% - 4.00%................ 13 2,527,325 1.26
--- ----------- ------
Total.................... 752 200,132,742 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Note Margin and Minimum
Mortgage Rate on the Group I Loans was approximately 3.01% per annum.
S-21
<PAGE>
DISTRIBUTION OF REMAINING TERM TO STATED MATURITY FOR GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
174 - 180.................... 2 557,655 0.28
294 - 300.................... 1 317,550 0.16
301 - 353.................... 1 94,844 0.05
354 - 360.................... 748 199,162,693 99.51
--- ----------- ------
Total.................... 752 200,132,742 100.00%
As of the Cut-off Date, the weighted average remaining term to stated
maturity for the Group I Loans was approximately 357 months.
DISTRIBUTION OF MAXIMUM MORTGAGE RATES FOR GROUP I LOANS
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
11.00% - 12.00%.............. 43 7,996,866 4.00
12.01% - 13.00%.............. 674 184,219,457 92.05
13.01% - 14.00%.............. 35 7,916,419 3.95
--- ----------- ------
Total.................... 752 200,132,742 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group I Loans was approximately 12.55% per annum.
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS FOR GROUP I LOANS
<TABLE>
<CAPTION>
RANGE OF ORIGINAL NUMBER OF AGGREGATE % OF AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00%-50.00%................ 50 13,387,594 6.69
50.01%-55.00%................ 25 9,613,747 4.80
55.01%-60.00%................ 31 11,514,635 5.75
60.01%-65.00%................ 54 17,820,046 8.90
65.01%-70.00%................ 61 17,270,012 8.63
70.01%-75.00%................ 121 32,142,574 16.06
75.01%-80.00%................ 277 73,685,318 36.82
80.01%-85.00%................ 32 6,443,681 3.22
85.01%-90.00%................ 66 12,260,414 6.13
90.01%-95.00%................ 35 5,994,721 3.00
--- ----------- ------
Total.................... 752 200,132,742 100.00%
</TABLE>
Original Loan-to-Value Ratio is calculated as the original Mortgage Loan
amount (less, in the case of a CD Pledge Loan, the amount of cash held in the
related CD Account) divided by the lesser of (i) the appraised value of the
related Mortgaged Property at origination and (ii) if the Mortgage Loan is a
purchase money loan, the sales price of the related Mortgaged Property. Group
I Loans do not contain any CD Pledge Loans.
The weighted average Loan-to-Value Ratio at origination of the Group I Loans
was approximately 71.84%.
S-22
<PAGE>
DISTRIBUTION OF CURRENT MORTGAGE RATES FOR GROUP II LOANS
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
6.00%-6.50%.................. 26 5,606,093 7.95
6.51%-7.00%.................. 163 37,656,898 53.41
7.01%-7.50%.................. 92 24,266,236 34.41
7.51%-8.00%.................. 11 2,476,343 3.51
8.01%-8.50%.................. 2 508,430 0.72
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate on the Group II
Loans was 6.99% per annum.
DISTRIBUTION OF MORTGAGE LOAN PRINCIPAL BALANCES FOR GROUP II LOANS
<TABLE>
<CAPTION>
RANGE OF CUT-OFF DATE NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Up to $50,000.00............. 3 147,612 0.21
$ 50,000.01-$100,000.00...... 25 1,992,156 2.83
$100,000.01-$150,000.00...... 59 7,402,347 10.50
$150,000.01-$200,000.00...... 45 7,942,196 11.26
$200,000.01-$250,000.00...... 59 13,300,018 18.86
$250,000.01-$300,000.00...... 40 11,138,795 15.80
$300,000.01-$350,000.00...... 19 6,063,845 8.60
$350,000.01-$400,000.00...... 12 4,444,258 6.30
$400,000.01-$450,000.00...... 6 2,588,321 3.67
$450,000.01-$500,000.00...... 8 3,803,071 5.39
$500,000.01-$550,000.00...... 5 2,600,499 3.69
$550,000.01-$600,000.00...... 3 1,748,888 2.48
$600,000.01-$650,000.00...... 5 3,090,623 4.38
$650,000.01-$700,000.00...... 2 1,495,972 2.12
Over $750,000.00............. 3 2,755,399 3.91
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
As of the Cut-off Date, the average Principal Balance of the Group II Loans
was approximately $239,844.
DISTRIBUTION OF MORTGAGED PROPERTY TYPES FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family Detached....... 241 61,353,842 87.01
Condominium.................. 19 3,029,878 4.30
Townhouse.................... 31 5,649,411 8.01
Two- to Four-Family.......... 3 480,869 0.68
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
DISTRIBUTION OF MORTGAGE LOAN PURPOSE FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Refinancing.................. 150 35,151,508 49.85
Purchase..................... 81 18,288,708 25.94
Cash-Out Refinancing......... 63 17,073,784 24.21
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
S-23
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Colorado..................... 1 243,310 0.35
Connecticut.................. 7 1,488,174 2.11
District of Columbia......... 39 12,031,728 17.06
Georgia...................... 9 2,124,257 3.01
Illinois..................... 12 2,563,618 3.64
Maryland..................... 101 24,880,369 35.28
Massachusetts................ 2 678,454 0.96
Michigan..................... 2 259,057 0.37
New Jersey................... 7 2,723,333 3.86
New York..................... 3 1,041,746 1.48
North Carolina............... 17 3,077,119 4.36
Pennsylvania................. 10 2,264,988 3.21
South Carolina............... 6 667,066 0.95
Virginia..................... 77 16,343,589 23.18
Wyoming...................... 1 127,192 0.18
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
DISTRIBUTION OF LOAN TYPE FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Five/One..................... 244 60,771,207 86.18
Seven/One.................... 50 9,742,793 13.82
--- ----------- ------
Total.................... 294 $70,514,000 100.00%
</TABLE>
DISTRIBUTION OF PERIODIC RATE CAP FOR GROUP II LOANS(/1/)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PERIODIC RATE CAP MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
3.000%....................... 294 70,514,000 100.00%
</TABLE>
- --------
(1) The Periodic Rate Cap applies to the first Adjustment Date on the Five/One
Group II Loans and the Seven/One Group II Loans only. On all Adjustment
Dates thereafter, the Periodic Rate Cap will be 2%.
DISTRIBUTION OF NOTE MARGINS AND MINIMUM MORTGAGE RATES
FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF NOTE MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
2.50% - 3.00%................ 244 60,269,605 85.47
3.01% - 3.50%................ 32 6,809,772 9.66
3.51% - 4.00%................ 18 3,434,623 4.87
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Note Margin and Minimum
Mortgage Rate on the Group II Loans was approximately 3.05% per annum.
S-24
<PAGE>
DISTRIBUTION OF REMAINING TERM TO STATED MATURITY FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
176 - 180.................... 2 588,488 0.83
356 - 360.................... 292 69,925,512 99.17
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
As of the Cut-off Date, the weighted average remaining term to stated
maturity for the Group II Loans was approximately 357 months.
DISTRIBUTION OF MAXIMUM MORTGAGE RATES FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
12.00% - 13.00%.............. 189 43,262,991 61.35
13.01% - 14.00%.............. 103 26,742,579 37.93
14.01% - 15.00%.............. 2 508,430 0.72
--- ---------- ------
Total.................... 294 70,514,000 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans was approximately 12.99% per annum.
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS FOR GROUP II LOANS
<TABLE>
<CAPTION>
RANGE OF ORIGINAL NUMBER OF AGGREGATE % OF AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00 - 50.00%............... 24 4,551,492 6.45
50.01% - 55.00%.............. 9 3,290,453 4.67
55.01% - 60.00%.............. 6 969,586 1.37
60.01% - 65.00%.............. 7 2,662,954 3.78
65.01% - 70.00%.............. 14 4,278,484 6.07
70.01% - 75.00%.............. 29 7,503,665 10.64
75.01% - 80.00%.............. 121 31,333,149 44.44
80.01% - 85.00%.............. 17 3,382,463 4.80
85.01% - 90.00%.............. 39 7,547,818 10.70
90.01% - 95.00%.............. 28 4,993,936 7.08
--- ---------- ------
Total...................... 294 70,514,000 100.00%
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans was approximately 75.80%.
Original Loan-to-Value Ratio is calculated as the original Mortgage Loan
amount (less, in the case of a CD Pledge Loan, the amount of cash held in the
related CD Account), divided by the lesser of (i) the appraised value of the
related Mortgaged Property at origination and (ii) if the Mortgage Loan is a
purchase money loan, the sales price of the related Mortgaged Property.
Less than 1% of the Group I Loans and none of the Group II Loans contain
terms requiring the payment of a penalty by the Mortgagor in the event such
Mortgage Loan is prepaid prior to its maturity. The Certificateholders shall
not have the right to receive any amounts with respect to such penalty.
THE INDEX
The Mortgage Rate on the Group I Loans and Group II Loans will adjust
annually commencing in some cases after an initial period of years following
origination during which the interest rate accruing thereon is fixed,
S-25
<PAGE>
on the Adjustment Date specified in the related Mortgage Note to a rate equal
to the sum of the weekly average yield on U.S. Treasury securities adjusted to
a constant maturity of one year (the "INDEX"), as further described herein,
and the fixed percentage set forth in the related Mortgage Note (the "NOTE
MARGIN"), subject to the limitations described herein.
The Index is based on weekly average yields on U.S. Treasury securities
adjusted to a constant maturity of one year, as published by the Federal
Reserve Board in Statistical Release No. H.15 (519) or any similar
publication, or if not so published, as reported by any Federal Reserve Bank
or by any U.S. Government department or agency and made available to the
Servicer as of a date prior to each Adjustment Date for such Mortgage Loan as
specified in the Mortgage Note. Should the Index not be published or become
otherwise unavailable, the Servicer will select a comparable alternative index
reasonably acceptable to the Trustee.
The following table sets forth the monthly averages of the Index for each of
the last five calendar years or portions thereof, based on information
published by the Federal Reserve Board in Statistical Release No. H.15 (519).
Such monthly averages are not necessarily indicative of the Index on any given
date in the relevant month since significant week-to-week fluctuations in the
Index may occur in any month as well as over longer periods. In addition, such
monthly averages do not purport to be a prediction of the value of the Index
on any Adjustment Date or for the lives of the Mortgage Loans.
INDEX
<TABLE>
<CAPTION>
MONTH 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 5.24% 5.61% 5.09% 7.05% 3.54%
February.......................................... 5.31% 5.53% 4.94% 6.70% 3.87%
March............................................. 5.39% 5.80% 5.34% 6.43% 4.32%
April............................................. 5.38% 5.99% 5.54% 6.27% 4.82%
May............................................... 5.44% 5.87% 5.64% 6.00% 5.31%
June.............................................. -- 5.69% 5.81% 5.64% 5.27%
July.............................................. -- 5.54% 5.85% 5.59% 5.48%
August............................................ -- 5.56% 5.67% 5.75% 5.56%
September......................................... -- 5.52% 5.83% 5.62% 5.76%
October........................................... -- 5.46% 5.55% 5.59% 6.11%
November.......................................... -- 5.46% 5.42% 5.43% 6.54%
December.......................................... -- 5.53% 5.47% 5.31% 7.14%
</TABLE>
The initial Mortgage Rate in effect with respect to a Mortgage Loan
generally will be lower, and may be significantly lower, than the Mortgage
Rate that would have been in effect based on the Index and Note Margin.
Therefore, unless the Index declines after origination of a Mortgage Loan, the
related Mortgage Rate will generally increase on the first Adjustment Date
following origination of such Mortgage Loan subject to the Periodic Rate Cap.
The repayment of the Mortgage Loans will be dependent on the ability of the
Mortgagors to make larger monthly payments following adjustments of the
Mortgage Rate. Mortgage Loans that have the same initial Mortgage Rate may not
always bear interest at the same Mortgage Rate because such Mortgage Loans may
have different Adjustment Dates (and the related Mortgage Rates therefore may
reflect different Index values), Note Margins, Maximum Mortgage Rates and
Minimum Mortgage Rates. The Net Mortgage Rate with respect to each Mortgage
Loan as of the Cut-off Date will be set forth in the Mortgage Loan Schedule
attached to the Pooling and Servicing Agreement. The "NET MORTGAGE RATE" on
each Mortgage Loan will be adjusted on each Adjustment Date to equal the
Mortgage Rate thereon, subject to the Periodic Rate Cap, minus (i) the
Servicing Fee Rate, minus (ii) the rate per annum at which the trustee fee
accrues thereon (the "TRUSTEE FEE RATE"), minus (iii) 0.70% per annum, minus
(iv) in the case of a Lender-Paid MI Loan, the additional interest rate
thereon attributable to the payment of primary mortgage insurance premium by
the Servicer; provided, however, that the Net Mortgage Rate on such Mortgage
Loan may not exceed the Maximum Mortgage Rate minus the sum of the Servicing
Fee Rate, Trustee Fee Rate, 0.70% per annum and, if such Mortgage Loan is a
Lender-Paid MI Loan, the additional interest rate thereon attributable to the
payment of primary mortgage
S-26
<PAGE>
insurance premium by the Servicer (the "MAXIMUM NET MORTGAGE RATE") or be less
than the Minimum Mortgage Rate minus the sum of the Servicing Fee Rate, the
Trustee Fee Rate, 0.70% per annum and, if such Mortgage Loan is a Lender-Paid
MI Loan, the additional interest rate thereon attributable to the payment of
primary mortgage insurance premium by the Servicer (the "MINIMUM NET MORTGAGE
RATE") for such Mortgage Loan.
CONVERSION OF MORTGAGE LOANS
All of the Group I Loans and 0.78% of the Group II Loans (the "CONVERTIBLE
MORTGAGE LOANS") provided at origination that the adjustable interest rate on
such Mortgage Loan may be converted at the option of the related Mortgagor to
a fixed interest rate. Upon the conversion of a Convertible Mortgage Loan, the
related Mortgage Rate will be converted to a fixed interest rate determined in
accordance with the formula set forth in the related Mortgage Note which
formula is intended to result in a Mortgage Rate which is not less than the
then current market interest rate for similar loans (subject to applicable
usury laws). After any such conversion, monthly payments of principal and
interest on the Mortgage Loan will be adjusted to provide for full
amortization over the remaining term to scheduled maturity. The Seller will be
required to purchase each Convertible Mortgage Loan upon its conversion. See
"Certain Yield and Prepayment Considerations" herein.
LOAN UNDERWRITING
The Mortgage Loans are "CLOSED LOANS" as described in the Prospectus under
"The Trust Fund--Mortgage Loan Program." All of the Mortgage Loans were
originated or purchased by Chevy Chase or its wholly owned subsidiary, B.F.
Saul Mortgage Company, in the normal course of its business. The
representations and warranties of Chevy Chase in respect of the Mortgage
Loans, which will be assigned to the Trustee in connection with the issuance
of the Certificates, will be made by Chevy Chase as of the Closing Date. See
"The Trust Fund--Mortgage Loan Program--Representations by Unaffiliated
Sellers; Repurchases" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Chevy Chase Bank, F.S.B. Mortgage-Backed Pass-Through Certificates,
Series 1998-CCB2 (the "CERTIFICATES") will be comprised of the Class A-I
Certificates and Class A-II Certificates (collectively, the "CLASS A
CERTIFICATES"), the Class S Certificates and the Class R Certificates. Only
the Class A Certificates are offered hereby. The Class R Certificates are
sometimes referred to herein as the "RESIDUAL CERTIFICATES."
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Reference is made to the accompanying Prospectus for important
additional information regarding the terms and conditions of the Pooling and
Servicing Agreement and the Certificates. The term "CERTIFICATE PRINCIPAL
BALANCE" is used in the Prospectus Supplement in the same manner as the term
"STATED PRINCIPAL BALANCE" is used in the Prospectus. The following summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
BOOK-ENTRY REGISTRATION
The Class A Certificates will be book-entry certificates (the "BOOK-ENTRY
CERTIFICATES"). Any person acquiring an interest in any Class A Certificate
(each such person, a "BENEFICIAL OWNER") will hold its Class A Certificate
through DTC, if it is a participant in such system, or indirectly through
organizations which are participants in such system. The Book-Entry
Certificates will be issued in one or more certificates the aggregate
Certificate Principal Balance of which will equal the aggregate Certificate
Principal Balance of the Class A
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Certificates and will initially be registered in the name of Cede & Co.
("CEDE"), the nominee of DTC. Except as described below, no person acquiring a
Book-Entry Certificate will be entitled to receive a physical certificate
representing such Certificate (a "DEFINITIVE CERTIFICATE"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
Certificateholder of the Class A Certificates will be Cede & Co., as nominee
of DTC. Beneficial Owners will be permitted to exercise their rights only
indirectly through DTC participants and DTC.
A 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 DTC or, if such Financial Intermediary is not a DTC
participant, on the records of the firm that acts as agent for the Financial
Intermediary and whose ownership of such Book-Entry Certificate will in turn
be recorded on the records of DTC.
Beneficial Owners will receive all distributions of principal of and
interest on the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required
to make book-entry transfers among DTC participants on whose behalf it acts
with respect to the Class A Certificates and is required to receive and
transmit distributions of principal of, and interest on, the Class A
Certificates. DTC participants and indirect participants make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates representing their respective interests in the Class A
Certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not DTC participants may
transfer ownership of such Certificates only through DTC participants and
indirect participants by instructing such participants and indirect
participants to transfer Class A Certificates, by book-entry transfer, through
DTC for the accounts of the purchasers of such Certificates, which accounts
are maintained with their respective DTC participants or Financial
Intermediaries. Under the Rules and in accordance with DTC's normal
procedures, transfers of the interests in the Class A Certificates will be
executed through DTC and the accounts of the related DTC participants at DTC
will be debited and credited appropriately. Similarly, the participants and
indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Transfers between DTC participants will occur in accordance with the Rules.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC 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, as in effect from time to time.
Distributions on Book-Entry Certificates will be made on each Distribution
Date by the Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the Beneficial Owners of the Book-
Entry Certificates that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Because DTC can
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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 DTC 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.
Monthly and annual reports on the Trust will be provided to Cede, as nominee
of DTC, and may be made available by Cede to Beneficial Owners upon request in
accordance with the Rules and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Beneficial Owners of such Certificateholders are
credited.
DEFINITIVE CERTIFICATES
The Class A Certificates will be issued as Definitive Certificates to
Certificateholders or their nominees, rather than to DTC or its nominee, only
if (i) the Depositor advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee and the Depositor are
unable to locate a qualified successor, (ii) the Depositor, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an event of default under the Pooling and Servicing Agreement,
holders of Book-Entry Certificates evidencing not less than 66% of the
aggregate outstanding Certificate Principal Balance advise the Trustee and DTC
through DTC Participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the best interests
of the holders of such Certificates.
Upon notice of the occurrence of any of the events described in the
preceding paragraph, DTC is required to notify all DTC Participants of the
availability of Definitive Certificates. Upon surrender of the global
certificate for the Class A Certificates and receipt from DTC of instructions
for re-registration, the Trustee will issue such Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders under the Pooling and
Servicing Agreement.
DISTRIBUTIONS IN RESPECT OF INTEREST AND PRINCIPAL
On each Distribution Date, payments on the Class S Certificates will be
subordinate to the payment of principal and interest, in the amounts described
herein, on the Class A Certificates.
Distributions on each class of the Class A Certificates in respect of
interest and principal on each Distribution Date will be made from the
Available Distribution Amount with respect to the corresponding Loan Group.
The "AVAILABLE DISTRIBUTION AMOUNT" with respect to the Mortgage Loans in a
Loan Group for any Distribution Date will equal (a) the sum of (i) scheduled
payments of principal and interest (net of the Servicing Fee and the Trustee
Fee) due on the Mortgage Loans in the applicable Loan Group on the related Due
Date (as defined herein) and received on or prior to the related Determination
Date, (ii) principal prepayments and other unscheduled collections of
principal received during the related Prepayment Period on the Mortgage Loans
in the applicable Loan Group, (iii) any Advances with respect to the Mortgage
Loans in the applicable Loan Group made by the Servicer for such Distribution
Date, (iv) amounts transferred from the Reserve Fund equal to certain
shortfalls in the amount available to pay the Class A-I Interest Distribution
Amount or the Class A-II Interest Distribution Amount together with any
Collateralization Deficits which remain outstanding after the application of
amounts otherwise payable to the Class S Certificates for such Distribution
Date, and (v) any Insured Payments payable pursuant to the Policy and related
to the Mortgage Loans in the applicable Loan Group, less (b) the Insurer
Premium Amount and amounts representing reimbursements for previously
unreimbursed Insured Payments by the Insurer, Nonrecoverable Advances by the
Servicer and certain expenses incurred by the Servicer. All amounts listed in
clauses (a) and (b) of the preceding sentence shall be as related to the
applicable Loan Group; however, because amounts on deposit in the Reserve Fund
and amounts otherwise payable to the
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Class S Certificates are available as credit enhancement for either the Class
A-I Certificates or the Class A-II Certificates, as necessary, it is possible
that interest from one Loan Group otherwise payable to the Class S
Certificates or deposited in the Reserve Fund will be applied towards payments
of interest and principal with respect to the class of Class A Certificates
that relates to the other Loan Group. The Available Distribution Amount, when
used without reference to a particular Loan Group, refers to the sum of the
Available Distribution Amounts for both Loan Groups.
The "DUE DATE" for each Mortgage Loan is the first day of each month. The
"DUE PERIOD" with respect to any Distribution Date commences on the second day
of the month preceding the month in which such Distribution Date occurs and
ends on the Due Date in the month in which such Distribution Date occurs. The
"PREPAYMENT PERIOD" with respect to any Distribution Date is the calendar
month preceding the month in which such Distribution Date occurs. The
"DETERMINATION DATE" with respect to any Distribution Date is the 15th day of
the month in which such Distribution Date occurs (or, if such day is not a
business day, the preceding business day).
The "PRINCIPAL BALANCE" of any Mortgage Loan as of any date of determination
is equal to the principal balance thereof as of the Cut-off Date, minus all
amounts allocated to principal that have been distributed to
Certificateholders with respect to such Mortgage Loan on or before such date
of determination as further reduced to the extent any Realized Loss thereon
has been allocated to one or more classes of Certificates on or before such
date of determination.
The "INSURER PREMIUM AMOUNT" with respect to any Distribution Date and Loan
Group is the amount payable on such Distribution Date to the Insurer as a
premium on the Policy with respect to the Mortgage Loans in such Loan Group.
Interest Distribution Amounts
On each Distribution Date, holders of the Class A-I Certificates will be
entitled to receive a distribution allocable to one-month's interest in an
amount (the "CLASS A-I INTEREST DISTRIBUTION AMOUNT"), equal to (i) one-
twelfth of the product of the Certificate Principal Balance of the Class A-I
Certificates immediately preceding such Distribution Date multiplied by a rate
(the "GROUP I CERTIFICATE RATE") equal to the weighted average of the Net
Mortgage Rates of the Group I Loans, weighted by the aggregate Principal
Balance of the Group I Loans as of the Due Date immediately preceding the
related Due Period minus (ii) the sum of (a) the related Insurer Premium
Amount, (b) any related Prepayment Interest Shortfalls occurring during the
related Prepayment Period and (c) any related Civil Relief Act Shortfalls
occurring during the related Due Period.
On each Distribution Date, holders of the Class A-II Certificates will be
entitled to receive a distribution allocable to one-month's interest in an
amount (the "CLASS A-II INTEREST DISTRIBUTION AMOUNT") equal to (i) one-
twelfth of the product of the Certificate Principal Balance of the Class A-II
Certificates immediately preceding such Distribution Date multiplied by a rate
(the "GROUP II CERTIFICATE RATE") equal to the weighted average of the Net
Mortgage Rates of the Group II Loans, weighted by the aggregate Principal
Balance of the Group II Loans as of the Due Date immediately preceding the
related Due Period minus (ii) the sum of (a) the related Insurer Premium
Amount, (b) any related Prepayment Interest Shortfalls occurring during the
related Prepayment Period and (c) any related Civil Relief Act Shortfalls
occurring during the related Due Period.
The "CLASS S INTEREST DISTRIBUTION AMOUNT" with respect to any Distribution
Date will equal one-twelfth of 0.70% multiplied by the aggregate Principal
Balance of the Mortgage Loans as of the Due Date immediately preceding the
related Due Period. On any Distribution Date with respect to which there are
Realized Losses, the Class S Interest Distribution Amount, to the extent of
such Realized Losses, shall be allocated between the Class A-I and Class A-II
Certificates in proportion to the Realized Losses on the related Loan Group
for the related Distribution Date.
Interest on the Certificates will be calculated and payable on the basis of
a 360-day year divided into twelve 30-day months.
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Principal Distribution Amounts
On each Distribution Date, the holders of the Class A-I Certificates will be
entitled to receive the "CLASS A-I PRINCIPAL DISTRIBUTION AMOUNT", which is
equal to the sum of (i) the portion of the Available Distribution Amount
related to Loan Group I that is attributable to scheduled payments of
principal of the Mortgage Loans in Loan Group I received by the Trustee, (ii)
the portion of the Available Distribution Amount related to Loan Group I that
is attributable to unscheduled payments of principal of the Mortgage Loans in
the Loan Group I received by the Servicer, (iii) that portion, if any, of the
Class S Interest Distribution Amount for such Distribution Date allocated to
the Class A-I Certificates (as provided in the definition of Class S Interest
Distribution Amount) in respect of the principal portion of Realized Losses on
Group I Loans in the related Prepayment Period, (iv) draws on the Reserve Fund
in respect of the principal portion of Realized Losses on Group I Loans (to
the extent such Realized Losses exceed the amount paid pursuant to clause
(iii)) and (v) any amounts paid in respect of a Collateralization Deficit with
respect to Loan Group I pursuant to the Policy.
On each Distribution Date, the holders of the Class A-II Certificates will
be entitled to receive the "CLASS A-II PRINCIPAL DISTRIBUTION AMOUNT", which
is equal to the sum of (i) the portion of the Available Distribution Amount
related to Loan Group II that is attributable to scheduled payments of
principal of the Mortgage Loans in Loan Group II received by the Trustee, (ii)
the portion of the Available Distribution Amount related to Loan Group II that
is attributable to unscheduled payments of principal of the Mortgage Loans in
the Loan Group II received by the Servicer, (iii) that portion, if any, of the
Class S Interest Distribution Amount for such Distribution Date allocated to
the Class A-II Certificates (as provided in the definition of Class S Interest
Distribution Amount) in respect of the principal portion of Realized Losses on
Group II Loans in the related Prepayment Period, (iv) draws on the Reserve
Fund in respect of the principal portion of Realized Losses on Group II Loans
(to the extent such Realized Losses exceed the amount paid pursuant to clause
(iii)) and (v) any amounts paid in respect of a Collateralization Deficit with
respect to Loan Group II pursuant to the Policy.
Insured Payments relating to payments of principal are not made in respect
of the principal portion of Realized Losses until such time as the principal
portion of Realized Losses for a Distribution Date exceeds (i) the Class S
Interest Distribution Amount for such Distribution Date plus (ii) amounts then
on deposit in the Reserve Fund, and create a Collateralization Deficit. A
"COLLATERALIZATION DEFICIT" with respect to a Distribution Date and a Loan
Group is the amount, if any, by which (x) the Certificate Principal Balance of
the related class of Class A Certificates, after giving effect to all
distributions to be made on such Distribution Date, exceeds (y) the aggregate
Principal Balance of the Mortgage Loans in such Loan Group as of the close of
business on the related Due Date.
Order of Distributions
On each Distribution Date, amounts in the Certificate Account will be
distributed in the following order of priority:
(a) to the Insurer, the Insurer Premium Amount (with such amount
allocated to each Loan Group pro rata based on the aggregate Principal
Balance of the Mortgage Loans in such Loan Group);
(b) to the Trustee, the Trustee Fee (with such fee allocated to each Loan
Group pro rata based on the aggregate Principal Balance of the Mortgage
Loans in such Loan Group);
(c) to the Servicer, the Servicing Fee (with such fee allocated to each
Loan Group pro rata based on the aggregate Principal Balance of the
Mortgage Loans in such Loan Group);
(d) to the Insurer, the aggregate amount of Insured Payments which have
not been previously reimbursed to the Insurer, together with interest
thereon (with such amount allocated to the related Loan Group);
(e) concurrently,
(i) to the holders of the Class A-I Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-I
Interest Distribution Amount, and any portion of such amount remaining
unpaid from any preceding Distribution Date; and
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(ii) to the holders of the Class A-II Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-II
Interest Distribution Amount, and any portion of such amount remaining
unpaid from any preceding Distribution Date;
(f) concurrently,
(i) to the holders of the Class A-I Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-I
Principal Distribution Amount and any portion of such amount remaining
unpaid from any preceding Distribution Date, until the Certificate
Principal Balance thereof has been reduced to zero; and
(ii) to the holders of the Class A-II Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-II
Principal Distribution Amount and any portion of such amount remaining
unpaid from any preceding Distribution Date, until the Certificate
Principal Balance thereof has been reduced to zero;
(g) to the holders of the Class S Certificates, or to the Reserve Fund to
the extent the Required Reserve has not been satisfied, to the extent of
the Available Distribution Amount remaining, the Class S Interest
Distribution Amount in the following order of priority:
(i) first, to the Reserve Fund, any Reserve Fund Increase Amount (as
defined herein); and
(ii) second, to the holders of the Class S Certificates, the
remaining portion, if any, of the Class S Interest Distribution Amount;
and
(h) to the holder of the Class R Certificates, the balance, if any, of
the Available Distribution Amount remaining.
Within a class of Certificates, distributions of interest or principal will
be made in accordance with the Percentage Interest represented by each
Certificate of such class.
CUSTODIAL AND CERTIFICATE ACCOUNT
Within two business days of receipt by the Servicer, all payments and
collections in respect of the Mortgage Loans will be deposited in an account
(the "CUSTODIAL ACCOUNT") established and maintained by the Servicer with a
depository institution, which may be the Servicer, and in a manner acceptable
to the Rating Agencies and the Insurer. No later than the second Business Day
prior to each Distribution Date, the Servicer will remit to an account (the
"CERTIFICATE ACCOUNT"), to be maintained by the Trustee, all funds on deposit
in the Custodial Account that are required to be distributed on such
Distribution Date. Such funds, together with the Advances, if any, required to
be deposited in the Certificate Account by the Servicer, will be available to
make distributions of interest on, and in reduction of the Certificate
Principal Balance of, the Certificates on each Distribution Date, to make any
required payments to the Reserve Fund and to pay certain other fees and
expenses. See "Description of the Certificates--Payments on Mortgage Loans" in
the Prospectus.
RESERVE FUND
The Reserve Fund will be a segregated trust account held by the Trustee for
the benefit of the Insurer and the Certificateholders. The required level of
the Reserve Fund on a given Distribution Date (the "REQUIRED RESERVE") may
vary. Withdrawals from the Reserve Fund shall be allocated between the Loan
Groups in proportion to Realized Losses on each Loan Group. The initial
Required Reserve and the subsequent determination thereof are as described in
the Pooling and Servicing Agreement. The Insurer may at its sole discretion
modify certain of the provisions of the Pooling and Servicing Agreement
relating to the Reserve Fund. Such modifications may have the effect of
reducing or eliminating, but not increasing, the Required Reserve.
On any Distribution Date, the excess of the Required Reserve as of such
Distribution Date over the amount on deposit in the Reserve Fund as of such
Distribution Date is a "RESERVE FUND INCREASE AMOUNT."
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In the event that the Required Reserve is permitted to decrease or "step
down" on a future Distribution Date, a portion of amounts on deposit in the
Reserve Fund may be withdrawn. As of any Distribution Date, the "RESERVE FUND
DECREASE AMOUNT" is equal to the excess, if any, of the amount on deposit in
the Reserve Fund (after taking into account any withdrawals to be made
therefrom) on such Distribution Date over the Required Reserve as of such
Distribution Date. The Reserve Fund Decrease Amount, on any Distribution Date
on which it is, or after taking into account all other distributions to be
made on such Distribution Date (including payments from the Reserve Fund in
respect of Realized Losses) would be, greater than zero, will be distributed
to the holders of the Class S Certificates on such Distribution Date.
ALLOCATION OF REALIZED LOSSES
Realized Losses in either Loan Group will be allocated first to the Class S
Certificates to the extent of the Class S Interest Distribution Amount for the
applicable period. In the case of Realized Losses in excess of the Class S
Interest Distribution Amount for the applicable period in either Loan Group,
the Trustee will transfer to the Certificate Account from, and to the extent
of, the funds on deposit in the Reserve Fund an amount sufficient to cover
such outstanding Realized Losses. Subject to the terms thereof, the Policy
requires a payment to the holders of each class of the Class A Certificates to
the extent that the related Realized Losses result in a Collateralization
Deficit or shortfall in the related Class A Interest Distribution Amount (to
the extent such Realized Losses are not covered by the Class S Interest
Distribution Amount or amounts on deposit in the Reserve Fund).
Notwithstanding the foregoing, if payments are not made as required under the
Policy, Realized Losses will be allocated to the related class of Class A
Certificates.
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class A
Certificates on each applicable Distribution Date, holders of the Class A
Certificates will have a right to receive distributions of the related
Available Distribution Amount that will be prior to the rights of the holders
of the Class S Certificates to such Available Distribution Amount. In
addition, the Reserve Fund, together with the availability of the Class S
Interest Distribution Amount to cover the interest and principal portion of
current Realized Losses on the Mortgage Loans, will also increase the
likelihood of distribution of full amounts of interest and principal to the
holders of Class A Certificates on each Distribution Date.
"REALIZED LOSS" means (i) with respect to any Liquidated Loan, the excess of
the Principal Balance of each Liquidated Loan immediately prior to
liquidation, together with accrued and unpaid interest thereon, over the
liquidation proceeds, if any, received in connection with such Liquidated
Loan, less liquidation expenses and any unreimbursed Advances made with
respect thereto, (ii) with respect to any Mortgage Loan whose related
Mortgaged Property has been valued (such valuation, a "DEFICIENT VALUATION")
at less than the then current Principal Balance of such Mortgage Loan by a
court of competent jurisdiction as a result of a proceeding (a "BANKRUPTCY
PROCEEDING") under the Bankruptcy Code, the excess of the Principal Balance of
such Mortgage Loan over the principal amount as reduced in the Deficient
Valuation, or (iii) with respect to any Mortgage Loan as to which the amount
of the scheduled payment has been reduced in a Bankruptcy Proceeding (a "DEBT
SERVICE REDUCTION"), the present value of all monthly Debt Service Reductions
on such Mortgage Loan, assuming that the Mortgagor pays each scheduled payment
on the applicable Due Date and that no principal prepayments are received with
respect to such Mortgage Loan, discounted monthly at the applicable Mortgage
Rate.
"LIQUIDATED LOAN" means a Mortgage Loan that has been liquidated through
deed in lieu of foreclosure, sale in foreclosure, trustee's sale or other
realization as provided by applicable real property law to which the related
Mortgage is subject and any security agreements, or with respect to which
payment under related hazard insurance and/or from any public governmental
authority on account of a taking or condemnation of any such property has been
received and as to which, in the best judgment of the Servicer, no further
proceeds will be received.
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CERTIFICATE GUARANTY INSURANCE POLICY
The following information has been supplied by the Insurer for inclusion
herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment will
be received by the Trustee, or its successor, as trustee for the Owners, on
behalf of the Owners from the Insurer, for distribution by the Trustee to each
Owner of each Owner's proportionate share of the Insured Payment. The
Insurer's obligations under the Policy with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the
time set forth in the Policy, and no accelerated Insured Payments shall be
made regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Insurer. The Policy does not cover
Prepayment Interest Shortfalls or Civil Relief Act Shortfalls.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any amounts payable under the Policy no later than
12:00 noon, New York City time, on the later of the Distribution Date on which
the related Deficiency Amount is due or the Business Day following receipt in
New York, New York on a Business Day of a Notice; provided, that if such
Notice is received after 12:00 noon New York City time on such Business Day,
it will be deemed to be received on the following Business Day. If any such
Notice received by the Insurer is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy it shall be
deemed not to have been received by the Insurer for purposes of this
paragraph, and the Insurer shall promptly so advise the Trustee and the
Trustee may submit an amended Notice.
Insured Payments due under the Policy, unless otherwise stated therein, will
be disbursed by the Insurer to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment.
As used in this section and in the Policy, the following terms shall have
the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement, dated as of June 1,
1998, among the Depositor, Chevy Chase, as Seller and Servicer, and the
Trustee, as trustee for the Owners, without regard to any amendment or
supplement thereto unless such amendment or supplement has been approved in
writing by the Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee or the Servicer under the Agreement or
the Insurer is located are authorized or obligated by law or executive order
to close.
"DEFICIENCY AMOUNT" means, with respect to each class of the Class A
Certificates for any Distribution Date, (i) any shortfall in the related
Available Distribution Amount to pay the Class A-I Interest Distribution
Amount or Class A-II Interest Distribution Amount, as applicable, and (ii) the
related Collateralization Deficit.
"INSURED PAYMENT" means, as of any Distribution Date, any Deficiency Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by fax substantially in the form of Exhibit A attached to the Policy,
the original of which is subsequently delivered by registered or certified
mail from the Trustee specifying the Insured Payment which shall be due and
owing on the applicable Distribution Date.
"OWNER" means each Holder (as defined in the Agreement) of any Class A
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the Class A Certificates to payment thereunder.
S-34
<PAGE>
Capitalized terms used in the Policy and not otherwise defined in the Policy
shall have the respective meanings set forth in the Agreement as of the date
of execution of the Policy, without giving effect to any subsequent amendment
to or modification of the Agreement unless such amendment or modification has
been approved in writing by the Insurer.
The Policy is being issued under and pursuant to and shall be construed
under the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
OPTIONAL TERMINATION
On any Distribution Date on or after the date on which the aggregate
Principal Balance of the Mortgage Loans has been reduced to or below 5% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date, the
Servicer will have the right to purchase, in whole, but not in part, all of
the Mortgage Loans and any property acquired in respect of the Mortgage Loans
at a purchase price equal to the sum of (a) the greater of (i) the aggregate
principal amount of each Mortgage Loan plus, in each case, interest accrued
thereon at the sum of the applicable Net Mortgage Rate and the Trustee Fee
Rate to the last day of the month of purchase, plus any unreimbursed Advances
made with respect to the Mortgage Loans, and (ii) the fair market value of the
Mortgage Loans as determined by the Servicer; (b) the appraised value of any
property acquired in respect of the Mortgage Loans; and (c) all amounts due to
the Insurer; provided, however, that if such purchase will cause a draw on the
Policy, the consent of the Insurer shall be necessary prior to the exercise of
such option. The proceeds of any such purchase will be treated as a payment of
principal and interest on the Mortgage Loans for purposes of distributions to
Certificateholders and any such purchase will effect an early retirement of
the Certificates and payment to the Insurer of all amounts due to it. Any such
purchase will be made only in connection with a "Qualified Liquidation" of the
REMIC within the meaning of Section 860F(a)(4)(A) of the Code.
THE TRUSTEE
U.S. Bank National Association, a national banking association, will act as
Trustee for the Certificates pursuant to the Pooling and Servicing Agreement.
The Trustee's principal executive offices are located at 180 East Fifth
Street, St. Paul, MN 55101, Attention: Bondholder Services, and its telephone
number is (800) 934-6802.
The following obligations which are described in the Prospectus as
obligations of the Servicer have been specifically assigned to the Trustee in
the Pooling and Servicing Agreement and will be performed by the Trustee in
the manner and to the extent set forth below. The Trustee will be obligated,
among other things, to establish and maintain the Certificate Account and to
withdraw from the Certificate Account and distribute to Certificateholders of
record on the applicable Record Date the payments on account of principal and
interest required to be so distributed on each Distribution Date. In addition,
the Trustee will undertake reporting responsibilities for federal income tax
purposes.
VOTING RIGHTS
Each Certificate will be allocated voting rights for purposes of certain
actions that may be taken pursuant to the Pooling and Servicing Agreement. 98%
of all voting rights will be allocated to the Class A Certificates in
proportion to their Certificate Principal Balances. 1% of all voting rights
will be allocated to the Class S Certificates in proportion to their
percentage interests. 1% of all voting rights will be allocated to the Class R
Certificates.
S-35
<PAGE>
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
Under certain circumstances, Chevy Chase, as an Unaffiliated Seller (as
described in "The Trust Fund--Mortgage Loan Program" in the Prospectus), may
be required to repurchase one or more Mortgage Loans from the Trust Fund.
Generally, the repurchase obligation arises when the documentation with
respect to a Mortgage Loan is discovered to be materially defective or when a
material breach of representation or warranty is discovered, which defect or
breach materially and adversely affects the interests of the
Certificateholders or the Insurer. This repurchase obligation of Chevy Chase
constitutes the sole remedy available to Certificateholders for a breach of
such representation or warranty. See "Description of the Certificates--
Assignment of Mortgage Loans" in the Prospectus.
In the event of a repurchase of a Mortgage Loan, the repurchase price will
generally be equal to the sum of the Principal Balance of such Mortgage Loan
on the date of repurchase plus interest accrued thereon at the sum of the
applicable Net Mortgage Rate and the Trustee Fee Rate to the following Due
Date.
Within two years from the date of the delivery of the Certificates, Chevy
Chase may, instead of repurchasing a Mortgage Loan required to be repurchased
pursuant to the Pooling and Servicing Agreement, deliver one or more mortgage
loans (each, a "REPLACEMENT MORTGAGE LOAN") in substitution for any Mortgage
Loan that would otherwise have been repurchased (each, a "DELETED MORTGAGE
LOAN"). See "Description of the Certificates--Assignment of Mortgage Loans" in
the Prospectus.
To the extent that Chevy Chase elects, with the consent of the Insurer, to
deliver one or more Replacement Mortgage Loans for a Deleted Mortgage Loan,
such Replacement Mortgage Loan or Loans must, collectively, on the date of
substitution: (a) have an outstanding Principal Balance, after the deduction
of payments due in the month of substitution, not in excess of the Principal
Balance of the Deleted Mortgage Loan; (b) have a Net Mortgage Rate not lower
than the Net Mortgage Rate on the Deleted Mortgage Loan; (c) have a Loan-to-
Value Ratio calculated as of such date no higher than the Loan-to-Value Ratio
of the Deleted Mortgage Loan; (d) have a remaining term to maturity no greater
than (and not more than one year less than) that of the Deleted Mortgage Loan;
(e) be of the same or better credit quality classification as that of the
Deleted Mortgage Loan; and (f) comply with each representation and warranty
with respect to the Mortgage Loans. Upon any such substitution, Chevy Chase
will deliver the mortgage file relating to the Replacement Mortgage Loan to
the Trustee and the Trustee will release the Deleted Mortgage Loan (or any
property acquired in respect thereof) from the Trust Fund.
For any month in which one or more Replacement Mortgage Loans are
substituted for any Deleted Mortgage Loan, the Servicer will determine the
amount, if any, by which the aggregate Principal Balance of all such
Replacement Mortgage Loans as of the date of substitution is less than the
Principal Balance of such Deleted Mortgage Loan (after application of the
scheduled principal portion of the scheduled payments due in such month). The
amount of any such shortage will be deposited by the Servicer from its own
funds into the Custodial Account in the month of substitution, without any
reimbursement therefor, and will be distributed to the Certificateholders on
the Distribution Date in the month following such substitution.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
FACTORS AFFECTING PREPAYMENTS ON THE MORTGAGE LOANS
The yields to maturity of each class of the Class A Certificates and the
aggregate amount of distributions on each class of the Class A Certificates
will be related, among other things, to the rate and timing of payments of
principal on the underlying Mortgage Loans in the related Loan Group. The rate
of principal payments on the Mortgage Loans will be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments thereon. For this purpose, the term "prepayment" includes
prepayments and liquidations due to defaults or other dispositions of the
Mortgage Loans or the Mortgaged Properties, including application of insurance
proceeds or condemnation awards, or the purchase of the Mortgage Loans by the
Servicer under the circumstances described under "Description of the
Certificates--Optional Termination" herein. NO ASSURANCE CAN BE GIVEN AS TO
THE RATE OR TIMING OF PRINCIPAL PAYMENTS OR PREPAYMENTS ON ANY OF THE MORTGAGE
LOANS.
S-36
<PAGE>
All of the Mortgage Loans may be prepaid in whole or in part at any time.
Certain of the Mortgage Notes contain terms requiring payment of a penalty by
the Mortgagor in the event the Mortgage Loan is prepaid in full. Prepayments,
liquidations and purchases of the Mortgage Loans will result in (a) principal
distributions to Certificateholders that would otherwise be distributed over
the remaining terms of the Mortgage Loans and (b) the termination of ongoing
interest distributions with respect to such Mortgage Loans to the
Certificateholders. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The rate of principal prepayments on mortgage loans is influenced by a
variety of economic, geographic, social and other factors, including the level
of mortgage interest rates and the rate at which mortgagors default on their
mortgages. In general, if prevailing interest rates fall significantly below
the Mortgage Rates on the Mortgage Loans, the Mortgage Loans (and the
applicable Class A Certificates) are likely to be subject to a higher
incidence of prepayment than if prevailing rates remain at or above the
Mortgage Rates on the Mortgage Loans. Conversely, if prevailing interest rates
rise significantly above the Mortgage Rates on the Mortgage Loans, the
Mortgage Loans (and the applicable Class A Certificates) are likely to be
subject to a lower incidence of prepayment than if prevailing rates remain at
or below the Mortgage Rates on the Mortgage Loans. The Depositor makes no
representation as to the expected rate of prepayments on the Mortgage Loans.
See "Description of the Mortgage Loans" herein and "Maturity and Prepayment
Considerations" in the Prospectus for additional information about the effect
of the rate of prepayments on the yield on and maturity of the Class A
Certificates.
The "CONVERTIBLE MORTGAGE LOANS" provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such
Mortgage Loans to a fixed interest rate. The Depositor is not aware of any
publicly available statistics that set forth principal prepayment, conversion
experience or conversion forecasts of adjustable-rate mortgage loans over an
extended period of time, and its experience with respect to adjustable-rate
mortgages is insufficient to draw any conclusions with respect to the expected
prepayment or conversion rates on the adjustable-rate Mortgage Loans. As is
the case with conventional, fixed-rate mortgage loans originated in a high
interest rate environment which may be subject to a greater rate of principal
prepayments when interest rates decrease, adjustable-rate mortgage loans may
be subject to a greater rate of principal prepayments due to their refinancing
or conversion to fixed interest rate loans in a low interest rate environment.
For example, if prevailing interest rates fall significantly, adjustable-rate
mortgage loans could be subject to higher prepayment and conversion rates than
if prevailing interest rates remain constant because the availability of
fixed-rate or other adjustable-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their adjustable-rate mortgages to
"lock in" a lower fixed interest rate or to take advantage of the availability
of such other adjustable-rate mortgage loans, or, in the case of convertible
adjustable-rate mortgage loans, to exercise their option to convert the
adjustable interest rates to fixed interest rates. The conversion feature may
also be exercised in a rising interest rate environment as mortgagors attempt
to limit their risk of higher rates. Such a rising interest rate environment
may also result in an increase in the rate of defaults on the Mortgage Loans.
Temporary Buy-Down Loans provide for escalating or variable payments by the
related mortgagor. Such mortgage loans are underwritten on the basis of a
judgment that mortgagors will have the ability to make monthly payments in
later years as scheduled payments become larger. In some instances, however, a
mortgagor's income may not be sufficient to permit continued loan payments as
such payments increase. These types of mortgage loans may also be underwritten
primarily upon the basis of Loan-to-Value Ratios or other favorable
compensating factors. Furthermore, temporary Buy-Down Loans in the Mortgage
Pool may experience a rate of principal prepayments different from the
principal prepayment rate for conventional adjustable-rate mortgage loans
having different characteristics.
The yield to investors on each class of the Class A Certificates will be
sensitive to fluctuations in the Index and may be adversely affected by the
application of the Maximum Mortgage Rates on the Mortgage Loans. The
prepayment of Mortgage Loans with higher Mortgage Rates and the existence of
any Convertible Mortgage Loans which have been converted into fixed interest
rate mortgage loans, may result in lower Class A-I Interest Distribution
Amounts or Class A-II Interest Distribution Amounts, as applicable, with
respect to subsequent
S-37
<PAGE>
Distribution Dates. Investors in the Class A Certificates should also be aware
that although the Mortgage Rates on the Mortgage Loans will adjust
periodically, such increases and decreases will be limited by the applicable
Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates thereon.
In addition, the initial Mortgage Rates borne by the Mortgage Loans may be
lower than the rate based on the sum of the current Index and the Note Margin.
In addition, the Mortgage Rates on the Mortgage Loans will be based on the
Index (which may not rise and fall consistently with prevailing mortgage
rates) plus the related Note Margin (which may be different from the
prevailing margins on other mortgage loans). As a result of these factors, the
Mortgage Rates on the Mortgage Loans at any time may not equal the prevailing
rates for other adjustable rate mortgage loans and the rate of prepayment may
be lower or higher than would otherwise be anticipated.
Investors in the Class A Certificates should consider the risk that rapid
rates of prepayments on the Mortgage Loans, and therefore of principal
distributions on the Class A Certificates, may coincide with periods of low
prevailing interest rates. During such periods, the effective interest rates
on securities in which an investor in the Class A Certificates may choose to
reinvest amounts received as principal distributions on the Class A
Certificates may be lower than the interest rate borne by such Certificates.
Conversely, slow rates of prepayments on the Mortgage Loans, and therefore of
principal distributions on the Class A Certificates may coincide with periods
of high prevailing interest rates. During such periods, the amount of
principal distributions available to an investor in the Class A Certificates
for reinvestment at such high prevailing interest rates may be relatively low.
All of the Mortgage Loans will contain "due-on-sale" clauses. The sale of
Mortgaged Properties encumbered by non-assumable Mortgage Loans will result in
the prepayment of such Mortgage Loans and a corresponding decrease in the
weighted average life of the applicable class of Class A Certificates. See
"Maturity and Prepayment Considerations" in the Prospectus.
The assumed final Distribution Date for the Class A-I Certificates and Class
A-II Certificates is May 25, 2029, which is the Distribution Date occurring in
the 12th month following the month in which the latest stated maturity of any
Mortgage Loan in the Mortgage Pool.
No event of default, change in the priorities for distribution among the
classes or other provision under the Pooling and Servicing Agreement will
arise or become applicable solely by reason of the failure to retire the
entire Certificate Principal Balance of any Class A Certificates on or before
its assumed final Distribution Date.
S-38
<PAGE>
MODELING ASSUMPTIONS
For purposes of preparing the table below, indicating the percentage of
initial Certificate Principal Balance outstanding and the weighted average
life of the Class A Certificates under certain prepayment scenarios, the
following assumptions (the "MODELING ASSUMPTIONS"), among others, have been
made:
(a) the Mortgage Loans consist of four groups with the following
characteristics:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED NEXT
WEIGHTED WEIGHTED WEIGHTED AVERAGE RATE PAYMENT AVERAGE MORTGAGE
AVERAGE AVERAGE NET AVERAGE REMAINING ADJUSTMENT ADJUSTMENT MAXIMUM RATE PERIODIC
LOAN CUT-OFF DATE MORTGAGE MORTGAGE GROSS TERM FREQUENCY FREQUENCY MORTGAGE ADJUSTMENT MORTGAGE
GROUP BALANCE ($) RATE RATE MARGIN INDEX (MONTHS) (MONTHS) (MONTHS) RATE DATE RATE CAP
- ----- -------------- -------- ----------- -------- -------- --------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I 1,110,792.77 5.065% 4.680% 2.949% 1-yr CMT 357 12 12 11.597% 04/01/99 2.00%
I 199,021,949.25 6.558% 6.154% 3.008% 1-yr CMT 357 12 12 12.560% 05/01/01 2.00%
II 60,771,207.04 6.969% 6.533% 3.046% 1-yr CMT 356 12 12 12.969% 05/01/03 3.00%(1)
II 9,742,793.06 7.119% 6.626% 3.100% 1-yr CMT 358 12 12 13.119% 05/01/05 3.00%(1)
Total 270,646,742.12
</TABLE>
- -------
(1) The Periodic Mortgage Rate Cap is 3% for the first Adjustment Date and 2%
thereafter.
(b) there are no repurchases of the Mortgage Loans;
(c) the Certificates will be purchased on June 17, 1998;
(d) distributions on the Certificates will be made on the 25th day of
each month (or, if such day is not a business day, on the following
business day), commencing in July, 1998;
(e) no Mortgage Loan is delinquent and there are no Realized Losses
while the Certificates are outstanding;
(f) there are no Prepayment Interest Shortfalls or shortfalls of
interest with regard to the Mortgage Loans;
(g) throughout the life of the Mortgage Loans, the Index is equal to
5.45%;
(h) there is no optional termination of the Trust Fund by the Servicer.
The Modeling Assumptions have been based on the weighted average
characteristics or aggregate characteristics, as applicable, of the Mortgage
Loans. The actual characteristics of many of the Mortgage Loans may vary
significantly from the Modeling Assumptions.
The prepayment model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of Mortgage Loans prepays at a specified constant annual rate. In
generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume CPR of 18% or any other CPR percentage is to
assume that the stated percentage (in this example 18%) of the outstanding
principal balance of the pool is prepaid over the course of a year. No
representation is made that the Mortgage Loans will prepay at that rate or any
other rate.
The actual characteristics and performance of the Mortgage Loans will differ
from the assumptions used in constructing the tables set forth below, which
are hypothetical in nature and are provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the
same rate until maturity or that all of the Mortgage Loans will prepay at a
constant rate until maturity or that all of the Mortgage Loans could produce
slower or faster principal distributions than indicated in the tables at the
various assumptions specified, even if the weighted average remaining term to
stated maturity of the Mortgage Loans is assumed. Any difference between such
assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment experience, will affect the percentage of initial
Certificate Principal Balance outstanding over time and the weighted average
life of the Class A Certificates.
S-39
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A-I
CERTIFICATES AT THE INDICATED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
8% 15% 18% 25% 30%
DISTRIBUTION DATE...................................... ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100 100 100 100 100
June 25, 1999.......................................... 91 84 81 74 69
June 25, 2000.......................................... 83 71 66 55 48
June 25, 2001.......................................... 75 59 53 41 33
June 25, 2002.......................................... 68 50 43 30 23
June 25, 2003.......................................... 62 42 35 22 16
June 25, 2004.......................................... 56 35 28 17 11
June 25, 2005.......................................... 51 29 23 12 8
June 25, 2006.......................................... 46 25 19 9 5
June 25, 2007.......................................... 42 21 15 7 4
June 25, 2008.......................................... 38 17 12 5 2
June 25, 2009.......................................... 34 14 10 4 2
June 25, 2010.......................................... 31 12 8 3 1
June 25, 2011.......................................... 28 10 6 2 1
June 25, 2012.......................................... 25 8 5 1 1
June 25, 2013.......................................... 22 7 4 1 *
June 25, 2014.......................................... 19 5 3 1 *
June 25, 2015.......................................... 17 4 2 1 *
June 25, 2016.......................................... 15 4 2 * *
June 25, 2017.......................................... 13 3 1 * *
June 25, 2018.......................................... 11 2 1 * *
June 25, 2019.......................................... 10 2 1 * *
June 25, 2020.......................................... 8 1 1 * *
June 25, 2021.......................................... 7 1 * * *
June 25, 2022.......................................... 6 1 * * *
June 25, 2023.......................................... 4 1 * * *
June 25, 2024.......................................... 3 * * * *
June 25, 2025.......................................... 2 * * * *
June 25, 2026.......................................... 1 * * * *
June 25, 2027.......................................... 1 * * * *
June 25, 2028.......................................... 0 0 0 0 0
June 25, 2029.......................................... 0 0 0 0 0
June 25, 2030.......................................... 0 0 0 0 0
June 25, 2031.......................................... 0 0 0 0 0
June 25, 2032.......................................... 0 0 0 0 0
June 25, 2033.......................................... 0 0 0 0 0
June 25, 2034.......................................... 0 0 0 0 0
June 25, 2035.......................................... 0 0 0 0 0
June 25, 2036.......................................... 0 0 0 0 0
June 25, 2037.......................................... 0 0 0 0 0
June 25, 2038.......................................... 0 0 0 0 0
Weighted Average Life (years)**........................ 9.27 5.64 4.75 3.39 2.77
</TABLE>
- --------
* Indicates a number greater than zero but less than 0.50%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of Certificate Principal Balance
described in (i) above.
This table has been prepared based on the Modeling Assumptions (including
the assumptions regarding the characters and performance of the Mortgage
Loans, which differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
S-40
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A-II
CERTIFICATES
AT THE INDICATED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 8% 15% 18% 25% 30%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100 100 100 100 100
June 25, 1999.......................................... 91 84 81 74 69
June 25, 2000.......................................... 83 71 66 55 48
June 25, 2001.......................................... 75 59 53 41 33
June 25, 2002.......................................... 68 50 43 30 23
June 25, 2003.......................................... 62 42 35 22 16
June 25, 2004.......................................... 56 35 28 17 11
June 25, 2005.......................................... 51 29 23 12 8
June 25, 2006.......................................... 46 25 18 9 5
June 25, 2007.......................................... 42 21 15 7 4
June 25, 2008.......................................... 38 17 12 5 2
June 25, 2009.......................................... 34 14 10 4 2
June 25, 2010.......................................... 31 12 8 3 1
June 25, 2011.......................................... 27 10 6 2 1
June 25, 2012.......................................... 25 8 5 1 1
June 25, 2013.......................................... 22 7 4 1 *
June 25, 2014.......................................... 19 5 3 1 *
June 25, 2015.......................................... 17 4 2 1 *
June 25, 2016.......................................... 15 4 2 * *
June 25, 2017.......................................... 13 3 1 * *
June 25, 2018.......................................... 11 2 1 * *
June 25, 2019.......................................... 10 2 1 * *
June 25, 2020.......................................... 8 1 1 * *
June 25, 2021.......................................... 7 1 * * *
June 25, 2022.......................................... 6 1 * * *
June 25, 2023.......................................... 4 1 * * *
June 25, 2024.......................................... 3 * * * *
June 25, 2025.......................................... 2 * * * *
June 25, 2026.......................................... 1 * * * *
June 25, 2027.......................................... 1 * * * *
June 25, 2028.......................................... 0 0 0 0 0
June 25, 2029.......................................... 0 0 0 0 0
June 25, 2030.......................................... 0 0 0 0 0
June 25, 2031.......................................... 0 0 0 0 0
June 25, 2032.......................................... 0 0 0 0 0
June 25, 2033.......................................... 0 0 0 0 0
June 25, 2034.......................................... 0 0 0 0 0
June 25, 2035.......................................... 0 0 0 0 0
June 25, 2036.......................................... 0 0 0 0 0
June 25, 2037.......................................... 0 0 0 0 0
June 25, 2038.......................................... 0 0 0 0 0
Weighted Average Life (years)**........................ 9.25 5.63 4.74 3.39 2.77
</TABLE>
- --------
* Indicates a number greater than zero but less than 0.50%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of Certificate Principal Balance
described in (i) above.
This table has been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Mortgage
Loans, which differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
S-41
<PAGE>
CHEVY CHASE BANK, F.S.B.
GENERAL
The Seller is a federally chartered stock savings bank. The Seller's home
office is located at 7926 Jones Branch Drive, McLean, Virginia 22102, and its
executive offices are located at 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815. The Seller's telephone number is (301) 986-7000. The Seller is
subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision ("OTS") within the Department of the Treasury and the
FDIC. Deposits at the Seller are fully insured up to $100,000 per insured
depositor by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC.
Based on unaudited results, at March 31, 1998, the Seller had consolidated
assets of approximately $6.3 billion, deposits of approximately $5.0 billion
and stockholders' equity of approximately $374.3 million. As a savings bank
chartered under the laws of the United States, the Seller is subject to
certain minimum regulatory capital requirements imposed under FIRREA. At March
31, 1998, the Seller's tangible, core, tier 1 risk-based and total risk-based
regulatory capital ratios were 6.52%, 6.52%, 6.30% and 12.18%, respectively.
As of such date, the Seller's capital ratios exceeded the requirements under
FIRREA as well as the standards established for "well-capitalized"
institutions under the prompt corrective action regulations established
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991.
The OTS has the discretion to treat a "well-capitalized" institution as an
"adequately capitalized" institution for purposes of the prompt corrective
action regulations if, after notice and an opportunity for a hearing, the OTS
determines that the institution (i) is being operated in an unsafe or unsound
condition or (ii) has received and has not corrected a less than satisfactory
examination rating for asset quality, management, earnings or liquidity.
Legislation passed in 1996 requires the merger of the Bank Insurance Fund
("BIF") and the SAIF into a single Deposit Insurance Fund on January 1, 1999,
but only if the thrift charter is eliminated by that date. Congress is
considering legislation in various forms that would require federal thrifts,
like the Seller, to convert their charters to national or state bank charters.
However, the House of Representatives passed a financial modernization bill on
May 13, 1998, that would not require the Seller to convert its charter.
Nevertheless, if legislation were enacted that required the Seller to convert
its charter that lacked appropriate "grandfather" provisions, such legislation
could have an adverse effect on the Seller and its parent company, the B.F.
Saul Real Estate Investment Trust (the "REAL ESTATE INVESTMENT TRUST")
because, among other things, the Real Estate Investment Trust engages in
activities that are not permissible for bank holding companies and the
regulatory capital and accounting treatment for banks and thrifts differs in
certain significant respects. The Seller cannot determine at this time
whether, or in what form, such legislation may eventually be enacted, and
there can be no assurances that any such legislation that is enacted will
contain adequate grandfather rights for the Seller or the Real Estate
Investment Trust.
DELINQUENCY AND FORECLOSURE EXPERIENCE
As of March 31, 1998, the Servicer provided servicing for the Seller's
portfolio of approximately $2,339 million aggregate principal amount of
residential mortgage loans. The Mortgage Loans are being serviced in Laurel,
Maryland.
S-42
<PAGE>
The following table sets forth the delinquency and foreclosure experience by
aggregate principal balance of the residential mortgage loans funded and
serviced by Chevy Chase, as a percentage of all such mortgage loans, as of the
dates indicated.
CHEVY CHASE RESIDENTIAL LOAN PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF MARCH 31,
---------------------------------------------- ----------------------
1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio(1)...... $1,369,570 $1,391,694 $1,601,483 $1,966,879 $1,794,398 $2,339,205
30-59 Days Past Due(2).. 2,509 594 4,964 4,797 5,833 5,318
60-89 Days Past Due(2).. 355 1,711 784 1,958 2,198 1,430
90 or more Days Past
Due(2)................. 6,330 5,373 4,859 5,410 5,236 6,763
Total Delinquencies as a
Percentage of Total
Portfolio.............. 0.67% 0.55% 0.66% 0.62% 0.74% 0.58%
Foreclosures Pending(3). 7,343 5,699 6,132 6,665 7,076 5,542
</TABLE>
- --------
(1) Excluding Real Estate Owned.
(2) Contractually past due.
(3) Are included in the appropriate delinquency bucket.
There can be no assurance that delinquency and foreclosure experience on the
Mortgage Loans will be similar. The information should not be considered to
reflect the credit quality of the Mortgage Loans included in the Mortgage
Pool, or as a basis for assessing the likelihood, amount or severity of losses
on the Mortgage Loans. The statistical data in the table is based on all of
the residential mortgage loans in Chevy Chase's servicing portfolio. The
Mortgage Loans may have characteristics which distinguish them from the
majority of the loans in Chevy Chase's servicing portfolio.
SERVICING
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to receive each month a servicing fee (the
"SERVICING FEE") equal to (i) one-twelfth of 0.375% per annum (the "SERVICING
FEE RATE") plus (ii) in the case of Lender-Paid MI Loans, one-twelfth of the
additional interest rate thereon attributable to the payment of primary
mortgage insurance premiums by the Servicer, which additional rate ranges from
0.20% to 0.65%, on the Principal Balance of each Mortgage Loan. The Servicing
Fee relating to each Mortgage Loan will be retained by the Servicer from
payments and collections (including insurance proceeds and liquidation
proceeds) in respect of such Mortgage Loan. The Servicer will also be entitled
to retain as additional servicing compensation all investment income earned on
amounts on deposit in the Custodial Account and the Certificate Account, all
default charges and all prepayment, late payment and assumption fees and
certain other fees payable by a Mortgagor pursuant to the related Mortgage
Note.
The Servicer will pay all expenses incurred in connection with its
responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described herein and in the Prospectus), including all fees
and expenses payable to any Servicer and the various expenses discussed in the
Prospectus. See "Description of the Certificates--Servicing by Unaffiliated
Sellers" in the Prospectus.
S-43
<PAGE>
ADVANCES
On each Distribution Date, the Servicer will be obligated to advance (each,
an "ADVANCE") any scheduled payments of principal and interest (net of the
related Servicing Fee) that are delinquent as of the close of business on the
preceding Determination Date at any time prior to the commencement of
foreclosure proceedings with respect to such Mortgage Loan, but only if the
Servicer determines that the amount so advanced will be recoverable from
subsequent payments or collections (including insurance proceeds and
liquidation proceeds net of liquidation expenses) in respect of the affected
Mortgage Loan. Advances will be reimbursable from recoveries on the affected
Mortgage Loan and, to the extent the Servicer determines that Advances will
not be ultimately recoverable from related recoveries, from any funds on
deposit in the Custodial Account and the Certificate Account. The Servicer
will also be obligated to advance certain taxes and insurance premiums not
paid by Mortgagors on a timely basis, but only to the extent deemed
recoverable from the related Mortgage Loans. The Servicer's right of
reimbursement out of such recoveries will be prior to the rights of the Class
A Certificateholders to receive any amounts recovered with respect to such
Mortgage Loans. See "Description of the Certificates--Advances" in the
Prospectus.
THE INSURER
The following information has been supplied by Ambac Assurance Corporation
(the "INSURER") for inclusion in this Prospectus Supplement. No representation
is made by the Seller, the Depositor, the Servicer, the Trustee, the
Underwriter or any of their respective affiliates as to the accuracy or
completeness of such information.
The Insurer is a Wisconsin-domiciled stock insurance corporation regulated
by the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the District of Columbia, the
Commonwealth of Puerto Rico and Guam. The Insurer primarily insures newly
issued municipal and structured finance obligations. The Insurer is a wholly
owned subsidiary of Ambac Financial Group, Inc. (formerly AMBAC Inc.), a 100%
publicly held company. Moody's, Standard & Poor's and Fitch IBCA, Inc. have
each assigned a triple-A claims paying ability rating to the Insurer.
The consolidated financial statements of the Insurer and its subsidiaries as
of December 31, 1997 and December 31, 1996 and for the three years ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of Ambac Financial
Group, Inc. (which was filed with the Securities and Exchange Commission (the
"COMMISSION") on March 31, 1998; Commission File No. 1-10777) and the
consolidated financial statements of the Insurer and its subsidiaries as of
March 31, 1998 and for the periods ending March 31, 1998 and March 31, 1997,
included in the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc.
for the period ending March 31, 1998 (which was filed with the Commission on
May 15, 1998) are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof. Any statement contained in
a document incorporated by reference herein shall be modified or superseded
for purposes of this Prospectus Supplement to the extent that a statement
contained herein by reference herein also modified or superseded such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below set forth the capitalization of the Insurer as of December
31, 1995, December 31, 1996, December 31, 1997 and March 31, 1998,
respectively, in conformity with generally accepted accounting principles.
S-44
<PAGE>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997 1998
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums........... $ 906 $ 995 $1,184 $1,202
Other liabilities........... 295 259 520 597
------ ------ ------ ------
Total liabilities........... 1,201 1,254 1,704 1,799
------ ------ ------ ------
Stockholder's equity(1):
Common stock.............. 82 82 82 82
Additional paid-in
capital.................. 481 515 521 525
Accumulated other
comprehensive income..... 87 66 118 114
Retained earnings......... 907 992 1,180 1,236
------ ------ ------ ------
Total stockholder's equity.. 1,557 1,655 1,901 1,957
------ ------ ------ ------
Total liabilities and
stockholder's equity....... $2,758 $2,909 $3,605 $3,756
====== ====== ====== ======
</TABLE>
- --------
(1) Components of stockholders' equity have been restated for all periods
presented to reflect "accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Insurer effective January
1, 1998. As this new standard only requires additional information in the
financial statements, it does not affect the Insurer's financial position
or results of operations.
For additional financial information concerning the Insurer, see the audited
and unaudited financial statements of the Insurer incorporated by reference
herein. Copies of the financial statements of the Insurer incorporated by
reference herein and copies of the Insurer's annual statement for the year
ended December 31, 1997 prepared in accordance with statutory accounting
practices are available, without charge, from the Insurer. The address of the
Insurer's administrative office and its telephone number are One State Street
Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Class A Certificates or
the advisability of investing in the Class A Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus Supplement other than the information supplied by the Insurer and
presented under the headings "Description of the Policy" and "The Insurer" and
in the financial statements incorporated herein by reference.
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Insurer does not guaranty the market price of the Class A
Certificates nor does it guaranty that the ratings on the Class A Certificates
will not be revised or withdrawn.
S-45
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
A REMIC election will be made with respect to certain assets in the Trust
Fund for federal income tax purposes. Upon the issuance of the Certificates,
Orrick, Herrington & Sutcliffe LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, for federal income tax purposes,
certain assets in the Trust Fund will qualify as a REMIC under Sections 860A
through 860G of the Code.
For federal income tax purposes, (i) the Class A-I, Class A-II and Class S
Certificates will be the "regular interests" in, and generally will be treated
as debt obligations of, the REMIC, and (ii) the Class R Certificates will be
the sole class of "residual interests" in the REMIC.
For federal income tax reporting purposes, the Class A Certificates will not
be treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 18% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
REGULATIONS") under sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Class A Certificates should be aware that Section 1272(a)(6) of the
Code and the OID Regulations do not adequately address certain issues relevant
to, or applicable to, prepayable securities bearing a variable rate of
interest such as the Class A Certificates. In the absence of other authority,
the Servicer intends to be guided by certain principles of the OID Regulations
applicable to variable rate debt instruments in determining whether such
Certificates should be treated as issued with original issue discount and in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders and the
IRS. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules relating to
debt instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the Class A Certificates should be governed by some other method not yet
set forth in regulations or should be treated as having been issued with
original issue discount. Prospective purchasers of the Class A Certificates
are advised to consult their tax advisors concerning the tax treatment of such
Certificates.
The Servicer believes that, if the Class A Certificates were determined to
have been issued with original issue discount, a reasonable application of the
principles of the OID Regulations to the Class A Certificates generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by
assuming that the value of the Index will remain constant for purposes of
determining the original yield to maturity of each such class of Certificates
and projecting future distributions on such Certificates, thereby treating
such Certificates as fixed rate instruments to which the original issue
discount computation rules described in the Prospectus can be applied, and
(ii) by accounting for any positive or negative variation in the actual value
of the Index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of a Class A Certificate
may be able to select a method for recognizing original issue discount that
differs from that used by the Servicer in preparing reports to the
Certificateholders and the IRS.
S-46
<PAGE>
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such Class
A Certificates are treated as "real estate assets" under Section 856(c)(4)(A)
of the Code. Moreover, the Class A Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code. However, prospective
investors in Class A Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Servicer to repurchase such Class A Certificates may adversely affect any
REMIC that holds such Class A Certificates if such repurchase is made under
circumstances giving rise to a Prohibited Transaction Tax. See "Pooling and
Servicing AgreementPooling and Servicing Agreement--Termination" herein and
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "NEW REGULATIONS")
which make certain modifications to the withholding, backup withholding and
information reporting rules described in the Prospectus. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December
31, 1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMIC Trust Funds" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans and
arrangements that are subject to ERISA or Section 4975 of the Code ("PLANS"),
including, but not limited to, insurance company general or separate accounts,
collective investment funds and other accounts in which "plan assets" of any
Plan are invested, should review carefully the discussion under "ERISA
Considerations" in the Prospectus and should consult with their legal advisers
as to whether the purchase or holding of Class A Certificates could give rise
to a transaction that is prohibited or not otherwise permissible under either
ERISA or Section 4975 of the Code.
Pursuant to Section 401(c) of ERISA, the U.S. Department of Labor was
required to have issued final regulations no later than December 31, 1997
which were to provide guidance for purposes of determining, in cases where
insurance policies or annuity contracts supported by an insurer's general
account are issued to or for the benefit of a Plan on or before December 31,
1998, which general account assets constitute "Plan Assets." Proposed
regulations were published on December 22, 1997, although final regulations
have not yet been issued. See "ERISA Considerations--Insurance Company General
Accounts" in the Prospectus.
The Depositor believes that the Class A Certificates will constitute an
Exempt Series for purposes of applying PTCE 83-1. See "ERISA Considerations--
Prohibited Transactions Class Exemptions" in the Prospectus. In addition, the
purchase or holding of the Class A Certificates by or on behalf of, or with
"plan assets" of, any Plan may be eligible for exemptive relief under the
Underwriter's PTE, as described under "ERISA Considerations--Underwriter's
PTE" in the Prospectus, as amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21,
1997) (collectively, the "Underwriter's PTE"). The Underwriter believes that
conditions (a) through (d) to the availability of the Underwriter's PTE, as
described under "ERISA Considerations--
S-47
<PAGE>
Underwriter's PTE" in the Prospectus, are satisfied with respect to the Class
A Certificates and that condition (i) set forth therein is likely to be
satisfied. Whether or not the other conditions of the Underwriter's PTE are
met will depend upon the particular circumstances at the time the Class A
Certificates are acquired by or on behalf of, or with "plan assets" of the
Plan.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the offering of the Class A
Certificates towards the simultaneous purchase of the Mortgage Loans from the
Seller.
PLAN OF DISTRIBUTION
The Depositor has entered into an underwriting agreement (the "UNDERWRITING
AGREEMENT") with Credit Suisse First Boston Corporation, an affiliate of the
Depositor, as underwriter (the "UNDERWRITER"). The Underwriting Agreement
provides that the obligations of the Underwriter are subject to certain
conditions precedent, and that the Underwriter will be obligated to purchase
all of the Class A Certificates if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates from time to time for sale in one or more negotiated
transactions or otherwise at prices to be determined at the time of sale. The
Underwriter may effect such transactions by selling the Class A Certificates
to or through dealers and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter and
any purchasers of the Class A Certificates for whom the Underwriter may act as
agent.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the Class A Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
Class A Certificates by them may be deemed to be underwriting discounts or
commissions, under the Securities Act of 1933, as amended.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or contribute to payments which the Underwriter may be required to
make in respect thereof.
EXPERTS
The consolidated financial statements of the Insurer, Ambac Assurance
Corporation, as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997, are incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
The legality of the Class A Certificates and the material federal income tax
consequences of the Class A Certificates will be passed upon for the Depositor
by Orrick, Herrington & Sutcliffe LLP, New York, New York. The legality of the
Class A Certificates will be passed upon for the Underwriter by Orrick,
Herrington & Sutcliffe LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" by S&P and "Aaa" by Moody's. Such ratings are based on the claims
paying ability of the Insurer. The ratings on mortgage pass-
S-48
<PAGE>
through certificates address the likelihood of the receipt by
certificateholders of all distributions on the underlying mortgage loans to
which they are entitled. Such rating opinions address the structural and legal
aspects associated with the certificates, including the nature of the
underlying mortgage loans. Ratings on mortgage pass-through certificates do
not represent an assessment of the likelihood that principal prepayments will
be made by mortgagors or the degree to which such prepayments might differ
from those originally anticipated, and do not address the possibility that
certificateholders might suffer a lower than anticipated yield.
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 organizations. Each security rating should be evaluated independently
of any other security rating. In addition, a security rating does not address
the frequency of prepayments of Mortgage Loans or the corresponding effect on
yield to investors. See "Certain Yield and Prepayment Considerations" herein.
S-49
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustment Dates..................................................... S-8
Advance.............................................................. S-44
Agreement............................................................ S-36
Available Distribution Amount........................................ S-5, S-29
Bankruptcy Code...................................................... S-16
Bankruptcy Proceeding................................................ S-33
Beneficial Owner..................................................... S-27
BIF.................................................................. S-42
Book-Entry Certificates.............................................. S-27
Business Day......................................................... S-36
CD Account........................................................... S-16
CD Collateral........................................................ S-16
CD Pledge Loans...................................................... S-18
Cede................................................................. S-28
Certificate Account.................................................. S-32
Certificate Principal Balance........................................ S-27
Certificateholders................................................... S-1
Certificates......................................................... S-1, S-27
Chevy Chase.......................................................... S-1
Civil Relief Act..................................................... S-12
Civil Relief Act Shortfall........................................... S-12
Class A Certificates................................................. S-1, S-27
Class A-I Interest Distribution Amount............................... S-6, S-30
Class A-I Principal Distribution Amount.............................. S-31
Class A-II Interest Distribution Amount.............................. S-6, S-30
Class A-II Principal Distribution Amount............................. S-31
Class S Interest Distribution Amount................................. S-30
Closed Loans......................................................... S-27
Collateralization Deficit............................................ S-7, S-31
Commission........................................................... S-3, S-44
Convertible Mortgage Loans........................................... S-27, S-37
CPR.................................................................. S-39
Custodial Account.................................................... S-32
Debt Service Reduction............................................... S-33
Deficiency Amount.................................................... S-36
Deficient Valuation.................................................. S-33
Definitive Certificate............................................... S-12, S-28
Deleted Mortgage Loan................................................ S-36
Depositor............................................................ S-1
Determination Date................................................... S-5, S-30
Distribution Date.................................................... S-2, S-6
DTC.................................................................. S-2
Due Date............................................................. S-5, S-30
Due Period........................................................... S-5, S-30
ERISA................................................................ S-14
FDIA................................................................. S-17
FDIC................................................................. S-17
Financial Intermediary............................................... S-28
FIRREA............................................................... S-17
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Five/One Group II Loans......................................... S-9, S-19
Group I Certificate Rate........................................ S-6, S-30
Group I Loans................................................... S-1
Group II Certificate Rate....................................... S-6, S-30
Group II Loans.................................................. S-1
Index........................................................... S-9, S-26
Insured Payment................................................. S-7, S-35
Insurer......................................................... S-1, S-44
Insurer Premium Amount.......................................... S-30
IRS............................................................. S-46
Lender-Paid MI Loan............................................. S-18
Liquidated Loan................................................. S-33
Loan Group...................................................... S-1
Loan Group I.................................................... S-1
Loan Group II................................................... S-1
Loan-to-Value Ratio............................................. S-8, S-18
Maximum Mortgage Rate........................................... S-19
Maximum Net Mortgage Rate....................................... S-27
Minimum Mortgage Rate........................................... S-19
Minimum Net Mortgage Rate....................................... S-27
Modeling Assumptions............................................ S-39
Moody's......................................................... S-1
Mortgage Loans.................................................. S-1
Mortgage Pool................................................... S-1
Net Mortgage Rate............................................... S-26
New Regulations................................................. S-47
Note Margin..................................................... S-9, S-19, S-26
Notice.......................................................... S-36
OID Regulations................................................. S-46
One/One Group I Loans........................................... S-9, S-19
OTS............................................................. S-42
Owner........................................................... S-36
Periodic Rate Cap............................................... S-19
Plans........................................................... S-47
Policy.......................................................... S-1
Pooling and Servicing Agreement................................. S-4, S-17
Prepayment Interest Shortfall................................... S-12
Prepayment Period............................................... S-5, S-30
Principal Balance............................................... S-30
Real Estate Investment Trust.................................... S-42
Realized Loss................................................... S-33
Registration Statement.......................................... S-3
REMIC........................................................... S-2
Replacement Mortgage Loan....................................... S-36
Required Reserve................................................ S-32
Reserve Fund.................................................... S-10
Reserve Fund Decrease Amount.................................... S-33
Reserve Fund Increase Amount.................................... S-32
Residual Certificates........................................... S-27
Rules........................................................... S-28
S&P............................................................. S-1
</TABLE>
S-51
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SAIF................................................................. S-42
Seller............................................................... S-1
Servicer............................................................. S-17
Servicing Fee........................................................ S-11, S-43
Servicing Fee Rate................................................... S-11, S-43
Seven/One Group II Loans............................................. S-9, S-19
SMMEA................................................................ S-13
Stated Principal Balance............................................. S-27
Three/One Group I Loans.............................................. S-9, S-19
Trust Fund........................................................... S-1, S-4
Trustee.............................................................. S-17
Trustee Fee.......................................................... S-11
Trustee Fee Rate..................................................... S-11, S-26
UCC.................................................................. S-16
Underwriter.......................................................... S-1, S-48
Underwriting Agreement............................................... S-48
</TABLE>
S-52
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES CORPORATION
DEPOSITOR
CONDUIT MORTGAGE AND MANUFACTURED HOUSING CONTRACT
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
---------------
The Conduit Mortgage and Manufactured Housing Contract Pass-Through
Certificates (the "Certificates") offered hereby and by the related
Prospectus Supplements will be offered from time to time in series (each, a
"Series") in one or more separate classes (each, a "Class"), which may be
divided into one or more subclasses (each, a "Subclass"), that represent
interests in specified percentages of principal and interest (a
"Percentage Interest") with respect to the related Mortgage Pool or the
Contract Pool (each, as defined below), or that have been assigned a
Stated Principal Balance and an Interest Rate (as such terms are
defined herein), as more fully set forth herein, and will evidence
the undivided interest or beneficial interest specified in the
related Prospectus Supplement in one of a number of trusts, each
to be created by Asset Backed Securities Corporation (the
"Depositor") from time to time. The trust property of each
trust (the "Trust Fund") will consist of (a) a pool (the
"Mortgage Pool") containing (i) conventional one- to four-
family residential mortgage loans, (ii) mortgage loans
secured by multifamily residential rental properties
consisting of five or more dwelling units or apartment
buildings owned by cooperative housing corporations,
(iii) loans made to finance the purchase of certain
rights relating to cooperatively owned
(Continued on next page)
The Certificates do not represent an obligation of or interest in the
Depositor or any affiliate thereof. Neither the Certificates, the
Mortgage Loans, the Contracts nor the Mortgage Certificates are
insured or guaranteed by any governmental agency or
instrumentality, except to the extent provided
herein.
SEE "RISK FACTORS" BEGINNING ON PAGE 20 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS THAT POTENTIAL INVESTORS SHOULD CONSIDER IN DETERMINING
WHETHER TO INVEST IN THE CERTIFICATES OF A SERIES IN RESPECT OF
WHICH THIS PROSPECTUS IS BEING DELIVERED.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE LIMITATIONS
DISCUSSED UNDER "ERISA CONSIDERATIONS"
HEREIN.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, which may include Credit Suisse
First Boston Corporation, an affiliate of the Depositor, as more fully
described under "Plan of Distribution" and in the related Prospectus
Supplement. Certain offerings of the Certificates, as specified in the
related Prospectus Supplement, may be made in one or more transactions
exempt from the registration requirements of the Securities Act of
1933, as amended. Such offerings are not being made pursuant to the
Registration Statement of which this Prospectus forms a part.
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market
will develop as a result of such offering or, if it does develop, that it
will continue.
The Depositor, as specified in the applicable Prospectus Supplement, may
elect to treat the Trust Fund with respect to certain Series of
Certificates, in whole or in part, as one or more Real
Estate Mortgage Investment Conduits (each, a "REMIC").
See "Certain Federal Income Tax Consequences".
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Certificates of such Series may be subject to
early termination and may receive Special Distributions (as
defined herein) in reduction of the Stated Principal
Balance (as defined herein) under the
circumstances described herein and in
such Prospectus Supplement.
This Prospectus may not be used to consummate sales of the
Certificates offered hereby unless
accompanied by a Prospectus
Supplement.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is June 17, 1998.
<PAGE>
(Continued from prior page)
properties secured by a pledge of shares of a cooperative corporation and an
assignment of a proprietary lease or occupancy agreement on a cooperative
dwelling, (iv) mortgage participation certificates evidencing participation
interests in such loans that are acceptable to the nationally recognized
statistical rating agency or agencies rating the related Series of
Certificates (collectively, the "Rating Agency") for a rating in one of the
four highest rating categories of such Rating Agency (such loans and
participation certificates being referred to collectively hereinafter as the
"Mortgage Loans"), or (v) certain conventional mortgage pass-through
certificates (the "Mortgage Certificates") and related property or (b) a
pool (the "Contract Pool") of manufactured housing conditional sales
contracts and installment loan agreements (the "Contracts") or
participation certificates representing participation interests in such
Contracts and related property conveyed to such trust by the Depositor and
(c) certain other assets, if any, described herein under "The Trust Fund-
Government Securities", "The Trust Fund-Private Label Custody Receipt
Securities", "Credit Support" and "Description of Insurance" and in the
related Prospectus Supplement. The Mortgage Loans may be conventional
mortgage loans, conventional cooperative loans, mortgage loans insured by
the Federal Housing Administration (the "FHA"), or mortgage loans
partially guaranteed by the Veterans Administration (the "VA"), or any
combination of the foregoing, bearing fixed or variable rates of
interest. The Contracts may be conventional contracts, contracts insured
by the FHA or partially guaranteed by the VA, or any combination of the
foregoing, bearing fixed or variable rates of interest, as specified in
the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the rights of the holders of the Certificates of
one or more Classes or Subclasses of a Series to receive distributions
with respect to the related Mortgage Pool or Contract Pool may be
subordinated to such rights of the holders of the Certificates of one
or more Classes or Subclasses of such Series to the extent described
herein and in such Prospectus Supplement. As provided in the
applicable Prospectus Supplement, the timing of payments, whether of
principal or of interest, to any one or more of such Classes or
Subclasses may be on a sequential or a pro rata basis, or a
combination thereof. The Prospectus Supplement with respect to each
Series will also set forth specific information relating to the Trust
Fund with respect to the Series in respect of which the Prospectus is
being delivered, together with specific information regarding the
Certificates of such Series.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement with respect to each Series of Certificates will,
among other things, set forth with respect to such Series of Certificates: (i)
the identity of each Class or Subclass within such Series; (ii) the undivided
interest, Percentage Interest, Stated Principal Balance or notional amount of
each Class or Subclass of Certificates; (iii) the Pass-Through Rate, Interest
Rate or Annual Rate borne by each Class or Subclass within such Series; (iv)
certain information concerning the Mortgage Loans, the Mortgage Certificates,
the Contracts, if any, the Government Securities (as defined herein), if any,
the Private Label Custody Receipt Securities (as defined herein), if any, and
the other assets comprising the Trust Fund for such Series; (v) the final
Distribution Date of each Class or Subclass of Certificates within such
Series; (vi) the identity of each Class or Subclass of Compound Interest
Certificates, if any, within such Series; (vii) the method used to calculate
the amount to be distributed with respect to each Class or Subclass of
Certificates; (viii) the order of application of distributions to each of the
Classes or Subclasses within such Series, whether sequential, pro rata, or
otherwise; (ix) the Distribution Dates with respect to such Series; (x)
information with respect to the terms of the Residual Certificates or
Subordinated Certificates offered hereby, if any; (xi) information with
respect to the method of credit support, if any, with respect to such Series;
and (xii) additional information with respect to the plan of distribution of
such Series of Certificates.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each Series of
Certificates, contains, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor
2
<PAGE>
will contain all of the information set forth in the Registration Statement of
which this Prospectus and the related Prospectus Supplement is a part. For
further information, reference is made to such Registration Statement and the
exhibits thereto which the Depositor has filed with the Securities and
Exchange Commission (the "Commission"), under the Securities Act of 1933, as
amended (the "Securities Act"). Statements contained in this Prospectus and
any Prospectus Supplement as to the contents of any contract or other document
referred to are summaries of the material provisions of each such contract or
other document and in each instance reference is made to the copy of the
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies
of the Registration Statement may be obtained from the Commission, upon
payment of the prescribed charges, or may be examined free of charge at the
Commission's offices. Reports and other information filed with the Commission
can be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the Commission at Seven World Trade
Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such site is
(http://www.sec.gov). Copies of the Pooling and Servicing Agreement pursuant
to which a Series of Certificates is issued will be provided to each person to
whom a Prospectus and the related Prospectus Supplement are delivered, upon
written or oral request directed to: Secretary, Asset Backed Securities
Corporation, 11 Madison Avenue, New York, New York 10010, (212) 325-2000.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Underwriter
will promptly deliver, or cause to be delivered, without charge, to such
investor a paper copy of the Prospectus Supplement and Prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), prior to the termination of the offering of
Certificates offered hereby. The Depositor will provide or cause to be
provided without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more Classes of Certificates, upon
request, a copy of any or all such documents or reports incorporated herein by
reference, in each case to the extent such documents or reports relate to one
or more of such Classes of such Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed to: Secretary,
Asset Backed Securities Corporation, 11 Madison Avenue, New York, New York
10010, telephone number (212) 325-2000.
3
<PAGE>
SUMMARY OF TERMS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the
related Prospectus Supplement. Certain capitalized terms used and not otherwise
defined herein shall have the meanings given elsewhere in this Prospectus.
Securities Offered ....... Conduit Mortgage and Manufactured Housing
Contract Pass-Through Certificates (the
"Certificates"), issuable in series (each, a
"Series"). The Certificates may be issued in
one or more classes (each, a "Class") and such
Classes may be divided into one or more
subclasses (each, a "Subclass"). One or more of
such Classes or Subclasses of a Series may be
subordinated to one or more Classes or
Subclasses of such Series, as specified in the
related Prospectus Supplement (any such Class
or Subclass to which another Class or Subclass
is subordinated being hereinafter referred to
as a "Senior Class" or a "Senior Subclass",
respectively, and any such subordinated Class
or Subclass being hereinafter referred to as a
"Subordinated Class" or "Subordinated
Subclass", respectively). One or more of such
Classes or Subclasses of Certificates of a
Series (the "Residual Certificates") may
evidence a residual interest in the related
REMIC. If so specified in the related
Prospectus Supplement, one or more Classes or
Subclasses of Certificates within a Series (the
"Multi-Class Certificates") may be assigned a
principal balance (a "Stated Principal Balance"
or a "Certificate Principal Balance") based on
the cash flow from the Mortgage Loans (as
hereinafter defined), Mortgage Certificates (as
hereinafter defined), the Contracts (as
hereinafter defined), the Government Securities
(as hereinafter defined), the Private Label
Custody Receipt Securities (as hereinafter
defined) and/or the other assets in the Trust
Fund (as defined below) if specified as such in
the related Prospectus Supplement and a stated
annual interest rate, determined in the manner
set forth in such Prospectus Supplement, which
may be fixed or variable (an "Interest Rate").
If so specified in the related Prospectus
Supplement, one or more such Classes or
Subclasses may receive unequal amounts of the
distributions of principal and interest on the
Mortgage Loans, the Contracts, the Mortgage
Certificates, the Government Securities and the
Private Label Custody Receipt Securities
included in the related Trust Fund, as
specified in such Prospectus Supplement (any
such Class or Subclass receiving the higher
proportion of principal distributions being
referred to hereinafter as a "Principal
Weighted Class" or "Principal Weighted
Subclass", respectively, and any such Class or
Subclass receiving the higher proportion of
interest distributions being referred to
hereinafter as an "Interest Weighted Class" or
an "Interest Weighted Subclass", respectively).
If so specified in the related Prospectus
Supplement, the allocation of the principal and
interest distributions may involve as much as
100% of each distribution of principal or
interest being allocated to one or more Classes
or Subclasses and 0% to another. If so
specified in the related Prospectus Supplement,
one or more Classes or Subclasses may receive
disproportionate amounts of certain
4
<PAGE>
distributions of principal, which proportions
may change over time subject to certain
conditions. Payments may be applied to any one
or more Class or Subclass on a sequential, pro
rata basis or other basis, as specified in the
related Prospectus Supplement. Each Certificate
will represent the undivided interest,
beneficial interest or percentage interest
specified in the related Prospectus Supplement
in one of a number of trusts to be created by
the Depositor from time to time. The trust
property of each trust (the "Trust Fund") will
consist of (a) one or more mortgage pools
(each, a "Mortgage Pool") containing (i)
conventional one- to four-family residential
mortgage loans, (ii) loans (the "Cooperative
Loans") made to finance the purchase of certain
rights relating to cooperatively owned
properties secured by the pledge of shares
issued by a cooperative corporation (the
"Cooperative") and the assignment of a
proprietary lease or occupancy agreement
providing the exclusive right to occupy a
particular dwelling unit (a "Cooperative
Dwelling" and, together with one- to four-
family residential properties, each, a "Single
Family Property"), (iii) mortgage loans secured
by multifamily residential rental properties
consisting of five or more dwelling units or
apartment buildings owned by cooperative
housing corporations ("Multifamily Property"),
purchased by the Depositor either directly or
through one or more affiliates or from
unaffiliated sellers, (iv) mortgage
participation certificates evidencing
participation interests in such loans that are
acceptable to the nationally recognized rating
agency or agencies identified in the related
Prospectus Supplement (collectively, the
"Rating Agency") rating the Certificates of
such Series for a rating in one of the four
highest rating categories of such Rating Agency
(such loans and participation certificates
referred to in clauses (i) through (iii) and
mortgage participation certificates being
referred to collectively hereinafter as the
"Mortgage Loans"), or (v) certain conventional
mortgage pass-through certificates (the
"Mortgage Certificates") issued by one or more
trusts established by one or more private
entities or (b) one or more contract pools
(each, a "Contract Pool") containing
manufactured housing conditional sales
contracts and installment loan agreements (the
"Contracts") or participation certificates
representing participation interests in such
Contracts (such Contracts, together with the
Mortgage Loans and the Mortgage Certificates,
being referred to collectively hereinafter as
the "Trust Assets") and (c) certain other
assets, if any, described herein under "The
Trust Fund--Government Securities", "The Trust
Fund--Private Label Custody Receipt
Securities", "Credit Support" and "Description
of Insurance" and in the related Prospectus
Supplement, in each case purchased by the
Depositor either directly or through one or
more affiliates from one or more affiliates or
from Unaffiliated Sellers.
Each Series of Certificates will be offered in
book-entry form (or, if specified in the
applicable Prospectus Supplement, fully
registered, certificated form), in one or more
Classes, which may be divided into one or more
Subclasses evidencing the right to receive a
share of principal payments and the percentages
of interest payments on the
5
<PAGE>
underlying Mortgage Loans, Mortgage
Certificates or Contracts, Government
Securities, if any, and Private Label Custody
Receipt Securities, if any, at the Pass-Through
Rate for the related Mortgage Pool or Contract
Pool, Government Securities, if any and Private
Label Custody Receipt Securities, if any. If so
specified in the Prospectus Supplement, Multi-
Class Certificates of a Series may be issued
with the Stated Principal Balances and the
Interest Rates therein specified. At the time
of issuance, each Certificate offered by means
of this Prospectus and the related Prospectus
Supplements will be rated in one of the four
highest rating categories by at least one
Rating Agency. The minimum undivided interest,
percentage interest or beneficial interest in a
Trust Fund or portion thereof, the minimum
notional amount to be evidenced by a
Certificate of a Class or Subclass, or the
minimum denomination in which a Certificate of
a Class or Subclass is to be issued will be set
forth in the related Prospectus Supplement.
Depositor................. Asset Backed Securities Corporation, a Delaware
corporation.
Master Servicer........... The entity, if any, named as Master Servicer in
the applicable Prospectus Supplement, which may
be an affiliate of the Depositor. See
"Description of the Certificates".
Interest.................. Interest will be distributed on the days
specified in the Prospectus Supplement with
respect to a Series, or if any such day is not
a business day, the next succeeding business
day (each, a "Distribution Date"), at the rate,
or pursuant to the method of determining such
rate, specified in the applicable Prospectus
Supplement for each Class or Subclass within
such Series, commencing on the day specified in
such Prospectus Supplement, in the manner
specified in such Prospectus Supplement. See
"Yield Considerations" and "Description of the
Certificates--Payments on Mortgage Loans", "--
Payments on Contracts" "--Collection of
Payments on Mortgage Certificates", "--
Collection of Payments on Government
Securities", "--Collection of Payments on
Private Label Custody Receipt Securities" and
"--Distributions on Certificates".
Principal (Including Principal on each Trust Asset, Government
Prepayments).............. Security, if any, and Private Label Custody
Receipt Security, if any, underlying a Series
of Certificates will be distributed on each
Distribution Date (or such other date or dates
as may be specified in the applicable
Prospectus Supplement), commencing on the date
specified in the applicable Prospectus
Supplement in the priority and manner specified
in such Prospectus Supplement. If so specified
in the Prospectus Supplement with respect to a
Series that includes Multi-Class Certificates,
distributions on such Multi-Class Certificates
may be made in reduction of the Stated
Principal Balance, in an amount equal to the
Stated Principal Distribution Amount.
The Stated Principal Distribution Amount will
equal the amount by which the Stated Principal
Balance of such Multi-Class Certificates
(before taking into account the amount of
interest accrued and added to
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<PAGE>
the Stated Principal Balance of any Class of
Compound Interest Certificates) exceeds the
Asset Value (as defined herein) of the Trust
Assets, Government Securities, if any, and
Private Label Custody Receipt Securities, if
any, in the related Trust Fund as of the
Business Day prior to the related Distribution
Date (or such other amount as may be specified,
or determined by such method as may be
specified, in the applicable Prospectus
Supplement). See "Maturity and Prepayment
Considerations" and "Description of the
Certificates--Payments on Mortgage Loans", "--
Payments on Contracts" "--Collection of
Payments on Mortgage Certificates", "--
Collection of Payments on Government
Securities", "--Collection of Payments on
Private Label Custody Receipt Securities" and
"--Distributions on Certificates". If so
specified in the Prospectus Supplement relating
to a Series, the Multi-Class Certificates of
such Series which have other than monthly
Distribution Dates may receive special
distributions in reduction of the Stated
Principal Balance ("Special Distributions") in
any month, other than a month in which a
Distribution Date occurs, if, as a result of
principal prepayments on the Trust Assets,
Government Securities, if any, and Private
Label Custody Receipt Securities, if any,
included in the related Trust Fund and/or low
reinvestment yields, the Trustee determines,
based on assumptions specified in the related
Pooling and Servicing Agreement, that the
amount of cash anticipated to be on deposit in
the Certificate Account for such Series on the
next Distribution Date may be less than the sum
of the interest distributions and the amount of
distributions in reduction of Stated Principal
Balance to be made on such Distribution Date.
Special Distributions will be made on such
Certificates in the same priority and manner as
distributions in reduction of the Stated
Principal Balance would be made on the next
Distribution Date for such Certificates (or, if
so specified in the applicable Prospectus
Supplement, a different priority or manner).
See "Description of the Certificates--Special
Distributions".
The Mortgage Pools........ If so specified in the applicable Prospectus
Supplement, the Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in the Mortgage Pool or
Pools included in the Trust Fund for such
Series. The original principal amount of each
Mortgage Loan in a Mortgage Pool will not be
more than 95% (such ratio, the "Loan-to-Value
Ratio") of the value of the property (the
"Mortgaged Property") securing such Mortgage
Loan (or such other Loan-to-Value Ratio as may
be specified in the applicable Prospectus
Supplement), based upon an appraisal of the
Mortgaged Property completed in connection with
the origination of such Mortgage Loan and
considered acceptable to the originator of such
Mortgage Loan or the sales price of such
Mortgaged Property, whichever is less (the
"Original Value"). If specified in the
applicable Prospectus Supplement, Mortgage
Loans secured by Single Family Property having
an original principal amount exceeding 80% of
the Original Value (or such other percentage as
may be specified in the applicable Prospectus
Supplement) will be covered by a policy of
private mortgage insurance until the
outstanding
7
<PAGE>
principal amount is reduced to the percentage
of the Original Value set forth in the
applicable Prospectus Supplement as a result of
principal payments by the borrower (the
"Mortgagor").
The principal balance at origination of each
Mortgage Loan that is secured by Single Family
Property will not exceed $500,000 (or such
other amount as may be specified in the
applicable Prospectus Supplement). The Mortgage
Loans in a Mortgage Pool will have original
maturities ranging from 10 to 40 years (or such
other original maturities as may be specified
in the applicable Prospectus Supplement).
Mortgage Pools may be formed from time to time
in varying sizes.
Fixed Pass-Through Rate
Mortgage Pools...........
With respect to each Mortgage Pool included in
the Trust Fund with respect to a Series bearing
a fixed Pass-Through Rate, the Depositor will
be obligated to deliver Mortgage Loans that (i)
have interest rates (the "Mortgage Rates") that
will exceed by at least 3/8 of 1% (or such
other percentage as may be specified in the
applicable Prospectus Supplement) the interest
rate (the "Pass-Through Rate") for such Series,
(ii) conform to the eligibility requirements
for such Series set forth in the applicable
Prospectus Supplement, and (iii) have an
aggregate principal balance equal to the amount
specified in such Prospectus Supplement,
subject to a permitted variance of up to 10%.
Variable Pass-Through
Rate Mortgage Pools......
If so specified in the applicable Prospectus
Supplement, the Depositor may establish one or
more Mortgage Pools, each of which will have a
variable as opposed to a fixed Pass-Through
Rate. The variable Pass- Through Rate will
equal the weighted average of the Mortgage
Rates of all of the Mortgage Loans in the
Mortgage Pool minus the fixed percentage
servicing fee for each Mortgage Loan set forth
in the applicable Prospectus Supplement or in a
Current Report on Form 8-K (or such other
variable rate as may be specified, or
determined by such method as may be specified,
in the applicable Prospectus Supplement). A
Mortgage Pool with a variable Pass-Through Rate
may be composed of Mortgage Loans that have
fluctuating Mortgage Rates. The characteristics
of a variable Pass-Through Rate and its effect
on the yield to Certificateholders as well as
the servicing compensation payable to the
related Servicer and the Master Servicer and
the amounts, if any, with respect to such
Mortgage Loans payable to the Depositor or to
the person or entity specified in the
applicable Prospectus Supplement will be more
fully described in such Prospectus Supplement.
Mortgage Certificates..... If so specified in the applicable Prospectus
Supplement, the Trust Fund for a Series of
Certificates may include Mortgage Certificates
issued by one or more trusts established by one
or more private entities, with the respective
aggregate principal balances and the
characteristics described in such Prospectus
Supplement. Each Mortgage Certificate included
in a Trust Fund will evidence an interest of
the type specified
8
<PAGE>
in the applicable Prospectus Supplement in a
pool of mortgage loans of the type described in
such Prospectus Supplement, secured principally
by mortgages on one- to four-family residences,
mortgages on multi-family residential rental
properties or apartment buildings owned by
cooperative housing corporations, by pledges of
shares of cooperative corporations and
assignments of proprietary leases or occupancy
agreements on cooperative dwellings or by such
other similar security as may be specified in
such Prospectus Supplement.
The Contract Pools........ If so specified in the applicable Prospectus
Supplement, the Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in the Contract Pool or
Pools included in the Trust Fund for such
Series. The Contracts will be fixed-rate
Contracts (or, if so specified in the
applicable Prospectus Supplement, the Contracts
will be variable rate Contracts). Such
Contracts, as specified in the applicable
Prospectus Supplement, will consist of
manufactured housing conditional sales
contracts and installment loan agreements and
will be conventional Contracts or Contracts
insured by the FHA or partially guaranteed by
the VA. Each Contract may be secured by a new
or used unit of manufactured housing (a
"Manufactured Home").
The applicable Prospectus Supplement will
specify the range of terms to maturity of the
Contracts at origination and the maximum Loan-
to-Value Ratio at origination (the "Contract
Loan-to-Value Ratio"). Because manufactured
homes, unlike site-built homes, generally
depreciate in value, the Loan-to-Value Ratios
of some of the Contracts may be higher at the
Cut-off Date than at origination and may
increase over time. Generally, Contracts that
are conventional Contracts will not be covered
by primary mortgage insurance policies or
primary credit insurance policies. Each
Manufactured Home which secures a Contract will
be covered by a standard hazard insurance
policy (which may be a blanket policy) to the
extent described herein or in the applicable
Prospectus Supplement insuring against hazard
losses due to various causes, including fire,
lightning and windstorm. A Manufactured Home
located in a federally designated flood area
will be required to be covered by flood
insurance. Contract Pools may be formed from
time to time in varying sizes.
None of the Contracts will have been originated
by the Depositor or any of its affiliates.
Government Securities..... If so specified in the applicable Prospectus
Supplement, the Trust Fund for a Series may
include any combination of (i) receipts or
other instruments created under the Department
of the Treasury's Separate Trading of
Registered Interest and Principal of
Securities, or STRIPS, program ("Treasury
Strips"), which interest and/or principal
strips evidence ownership of specific interest
and/or principal payments to be made on certain
United States Treasury Bonds ("Treasury
Bonds"), (ii) Treasury Bonds and (iii) certain
other debt securities ("GSE Bonds") of United
States government sponsored enterprises
("GSEs") (GSE Bonds, together with Treasury
Strips and Treasury Bonds,
9
<PAGE>
collectively, "Government Securities"). The
specific terms of the Government Securities, if
any, included in a Trust Fund will be set forth
in the applicable Prospectus Supplement.
Private Label Custody
Receipt Securities.......
If so specified in the applicable Prospectus
Supplement, the Trust Fund for a Series may
include any combination of (i) receipts or
other instruments (other than Treasury Strips)
evidencing ownership of specific interest
and/or principal payments to be made on certain
Treasury Bonds held by a custodian ("Private
Label Custody Strips") and (ii) receipts or
other instruments evidencing ownership of
specific interest and/or principal payments to
be made on certain Resolution Funding
Corporation ("REFCO") bonds ("REFCO Strips";
and together with Private Label Custody Strips,
"Private Label Custody Receipt Securities").
The specific terms of the Private Label Custody
Receipt Securities, if any, included in a Trust
Fund will be set forth in the applicable
Prospectus Supplement.
Pre-Funding............... If so specified in the related Prospectus
Supplement, a portion of the issuance proceeds
of the Certificates of a particular Series
(such amount, the "Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding
Account") to be established with the Trustee,
which will be used to acquire additional
Mortgage Loans or Contracts from time to time
during the period specified in the related
Prospectus Supplement (the "Pre-Funding
Period"). Prior to the investment of the Pre-
Funded Amount in additional Mortgage Loans or
Contracts, such Pre-Funded Amount may be
invested in one or more Eligible Investments.
Any Eligible Investment must mature no later
than the Business Day prior to the next
Distribution Date. See "Description of the
Certificates--Pre-Funding."
During any Pre-Funding Period, the Depositor
will be obligated (subject only to the
availability thereof) to transfer to the
related Trust Fund additional Mortgage Loans or
Contracts from time to time during such Pre-
Funding Period. Such additional Mortgage Loans
or Contracts will be required to satisfy
certain eligibility criteria more fully set
forth in the related Prospectus Supplement,
which eligibility criteria will be consistent
with the eligibility criteria of the Mortgage
Loans or Contracts included in the Trust Fund
as of the Closing Date, subject to such
exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-
Funding Account with respect to any issuance of
Certificates will be specified in the related
Prospectus Supplement, it is anticipated that:
(a) the Pre-Funding Period will not exceed 90
days from the related Closing Date, (b) the
additional Mortgage Loans or Contracts to be
acquired during the Pre-Funding Period will be
subject to the same representations and
warranties as the Mortgage Loans or Contracts
included in the related Trust Fund on the
Closing Date (although additional criteria may
also be required to be satisfied, as described
in the related Prospectus Supplement) and (c)
that the Pre-Funded Amount will not exceed 25%
10
<PAGE>
of the principal amount of the Certificates
issued pursuant to a particular offering.
Certain Risk Factors...... For a discussion of certain risk factors that
should be considered in connection with an
investment in the Certificates, including those
relating to the limited liquidity of an
investment in the Certificates, the limited
obligations evidenced by the Certificates, the
limited amount and nature of credit support, if
any, and the credit and other risks with
respect to the Trust Assets, see "Risk
Factors".
Yield Considerations...... If so specified in the applicable Prospectus
Supplement, an assumed rate of prepayment will
be used to calculate the expected yield to
maturity on each Class of the Certificates of a
Series. The yield on any Class of Certificates,
the purchase price of which is greater than the
aggregate amount of the Principal Distributions
to be made to such Class (a "Premium
Certificate"), is likely to be adversely
affected by a higher than anticipated level of
principal prepayments on the Trust Assets,
Government Securities, if any, and Private
Label Custody Receipt Securities, if any,
included in related Trust Fund. This effect on
yield will intensify with any increase in the
amount by which the purchase price of such
Certificate exceeds the aggregate amount of
such Principal Distributions. If the
differential is particularly wide and a high
level of prepayments occurs, it is possible for
Holders of Premium Certificates not only to
suffer a lower than anticipated yield but, in
extreme cases, to fail to recoup fully their
initial investment. Conversely, a lower than
anticipated level of principal prepayments
(which can be anticipated to increase the
expected yield to Holders of Certificates that
are Premium Certificates) will likely result in
a lower than anticipated yield to Holders of
Certificates of a Class the purchase price of
which is less than the aggregate amount of the
Principal Distributions to be made to such
Class (a "Discount Certificate"). The
Prospectus Supplement for each Series of
Certificates that includes an Interest Weighted
or a Principal Weighted Class will set forth
certain yield calculations on each such Class
based upon a range of specified prepayment
assumptions on the Trust Assets, Government
Securities, if any, and Private Label Custody
Receipt Securities, if any, included in the
related Trust Fund.
The yield to Certificateholders will also be
adversely affected because interest generally
will accrue on the Mortgage Loans, the
Contracts, the mortgage loans underlying the
Mortgage Certificates, the Government
Securities, if any, or the Private Label
Custody Receipt Securities, if any, included in
a Trust Fund, from the first day of the month
preceding the month in which a Distribution
Date occurs, but the distribution of such
interest will be made no earlier than the 25th
day of the succeeding month, or such other day
as is specified in the applicable Prospectus
Supplement. The adverse effect on yield of this
delay will intensify with any increase in the
period of time by which the Distribution Date
for a Series of Certificates succeeds the date
on which distributions on the Mortgage Loans,
the Contracts, the
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Government Securities, the Private Label
Custody Receipt Securities or the Mortgage
Certificates are received by the Master
Servicer or the Trustee. See "Yield
Considerations".
Credit Support............ Neither the Certificates nor the Trust Assets
are insured or guaranteed by any guarantee
(except to the limited extent described in the
applicable Prospectus Supplement that certain
Trust Assets may be insured or guaranteed, in
whole or in part, by the FHA or VA). Credit
support will be provided on the Mortgage Pools
or Contract Pools by one or more irrevocable
letters of credit (the "Letter of Credit"), a
policy of mortgage pool insurance (the "Pool
Insurance Policy"), a bond or similar form of
insurance coverage against certain losses in
the event of the bankruptcy of a Mortgagor (the
"Mortgagor Bankruptcy Bond") or any combination
of the foregoing, in each such case, to the
extent specified in the applicable Prospectus
Supplement. In lieu of or in addition to the
foregoing credit support arrangements if so
specified in the applicable Prospectus
Supplement, the Certificates of a Series may be
issued in one or more Classes or Subclasses.
Payments on the Certificates of one or more
Classes or Subclasses (the "Senior
Certificates") may be supported by a prior
right to receive distributions attributable or
otherwise payable to another Class or Subclass
(the "Subordinated Certificates") to the extent
specified in the applicable Prospectus
Supplement (the "Subordinated Amount"). In
addition, if so specified in the applicable
Prospectus Supplement, one or more Classes or
Subclasses of Subordinated Certificates may be
subordinated to another Class or Subclass of
Subordinated Certificates and may be entitled
to receive disproportionate amounts of
distributions of principal. If so specified in
the applicable Prospectus Supplement, a reserve
(the "Reserve Fund") and certain other accounts
or funds may be established to support payments
on the Certificates. A Prospectus Supplement
with respect to a Series may also provide for
additional or alternative forms of credit
support, including a guarantee or surety bond,
acceptable to the Rating Agency ("Alternative
Credit Support").
A. Letter Of Credit....... If so specified in the applicable Prospectus
Supplement, the issuer of one or more Letters
of Credit (the "L/C Bank") will deliver to the
Trustee the Letters of Credit for the Mortgage
Pool or Contract Pool. To the extent described
herein and in the applicable Prospectus
Supplement, the L/C Bank will honor the
Trustee's demands with respect to such Letter
of Credit, to the extent of the amount
available thereunder, to make payments to the
Certificate Account on each Distribution Date
in an amount equal to the amount sufficient to
repurchase each Liquidating Loan that has not
been purchased by the related Servicer or the
Master Servicer pursuant to the terms of the
applicable Servicing Agreement or Pooling and
Servicing Agreement referred to herein. The
term "Liquidating Loan" means: (a) each
Mortgage Loan with respect to which foreclosure
proceedings have been commenced (and the
Mortgagor's right of reinstatement has
expired), (b) each Mortgage Loan with respect
to which the Servicer or the Master Servicer
has agreed to accept a deed to the property in
lieu
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<PAGE>
of foreclosure, (c) each Cooperative Loan as to
which the shares of the related Cooperative
Dwelling and the related proprietary lease or
occupancy agreement have been sold or offered
for sale or (d) each Contract with respect to
which repossession proceedings have been
commenced. Any other Mortgage Loan, Cooperative
Loan or Contract constituting a Liquidating
Loan will be described in the applicable
Prospectus Supplement. The liability of the L/C
Bank under the Letter of Credit will be reduced
by the amount of unreimbursed payments
thereunder. In the event that at any time there
remains no amount available under the Letter of
Credit for a specific Mortgage Pool or Contract
Pool, and coverage under another form of credit
support, if any, is exhausted, any losses will
be borne by the holders of Certificates of the
Series evidencing interests in such Mortgage
Pool or Contract Pool, as specified in the
applicable Prospectus Supplement.
The maximum liability of the L/C Bank under the
Letter of Credit for a Mortgage Pool or
Contract Pool will be an amount equal to a
percentage (not greater than 10% (or such other
percentage as may be specified in the
applicable Prospectus Supplement) of the
initial aggregate principal balance of the
Mortgage Loans in such Mortgage Pool or
Contracts in such Contract Pool) (the "L/C
Percentage"), set forth in the Prospectus
Supplement, relating to such Mortgage Pool or
Contract Pool. The maximum amount available at
any time to be paid under the Letter of Credit
will be determined in accordance with the
provisions of the applicable Pooling and
Servicing Agreement referred to herein. The
duration of coverage and the amount and
frequency of any reduction in coverage provided
by the Letter of Credit with respect to a
Series of Certificates will be in compliance
with requirements established by the Rating
Agency rating such Series and will be set forth
in the applicable Prospectus Supplement. If so
specified in the applicable Prospectus
Supplement, the Letter of Credit with respect
to a Series of Certificates may, in addition to
or in lieu of the foregoing, provide coverage
with respect to the unpaid principal or
notional amount of the Certificates of a Class
or Classes within such Series. See "Credit
Support--Letter of Credit".
B. Pool Insurance......... If so specified in the applicable Prospectus
Supplement, the Master Servicer will obtain a
Pool Insurance Policy to cover any loss
(subject to the limitations described below) by
reason of default by the Mortgagors on the
related Mortgage Loans to the extent not
covered by any policy of primary mortgage
insurance (a "Primary Mortgage Insurance
Policy"). The amount of coverage provided by
the Pool Insurance Policy for a Mortgage Pool
will be specified in the applicable Prospectus
Supplement. A Pool Insurance Policy for a
Mortgage Pool, however, will not be a blanket
policy against loss, because claims thereunder
may only be made for particular defaulted
Mortgage Loans and only upon satisfaction of
certain conditions precedent. See "Description
of Insurance--Pool Insurance Policies".
The Master Servicer, if any, or the Depositor
or the applicable Servicer will be required to
use its best reasonable efforts to maintain the
Pool
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Insurance Policy for each such Mortgage Pool
and to present claims thereunder to the issuer
of such Pool Insurance Policy (the "Pool
Insurer") on behalf of the Trustee and the
Certificateholders. See "Description of the
Certificates--Presentation of Claims".
C. Mortgagor Bankruptcy If so specified in the applicable Prospectus
Bond...................... Supplement, the Master Servicer, if any, or the
Depositor or the applicable Servicer will
obtain and use its best reasonable efforts to
maintain a Mortgagor Bankruptcy Bond for such
Series covering certain losses resulting from
action that may be taken by a bankruptcy court
in connection with the bankruptcy of a
Mortgagor. The level of coverage provided by
such Mortgagor Bankruptcy Bond will be
specified in the applicable Prospectus
Supplement. See "Description of Insurance--
Mortgagor Bankruptcy Bond".
D. Subordinated If so specified in the applicable Prospectus
Certificates.............. Supplement, the rights of holders of the
Certificates of one or more Subordinated
Classes or Subclasses of a Series to receive
distributions with respect to the Mortgage
Loans or Mortgage Certificates in the Mortgage
Pool or Contracts in the Contract Pool, the
Government Securities, if any, and Private
Label Custody Receipt Securities, if any, for
such Series, or with respect to a Subordinated
Pool (as defined herein), will be subordinated
to the rights of the holders of the
Certificates of one or more Classes or
Subclasses of such Series to receive such
distributions to the extent described in the
applicable Prospectus Supplement, and limited
to the Subordinated Amount set forth in the
applicable Prospectus Supplement. This
subordination will be intended to enhance the
likelihood of regular receipt by holders of the
Senior Certificates of the full amount of
scheduled payments of principal and interest
due them and to reduce the likelihood that the
holders of such Senior Certificates will
experience losses. See "Credit Support--
Subordinated Certificates".
E. Shifting Interest...... If so specified in the applicable Prospectus
Supplement, the protection afforded to holders
of Senior Certificates of a Series by the
subordination of certain rights of holders of
Subordinated Certificates of such Series to
distributions on the related Mortgage Loans,
Mortgage Certificates, Contracts, Government
Securities, if any, or Private Label Custody
Receipt Securities, if any, may be effected by
the preferential right of the holders of the
Senior Certificates to receive, prior to any
distribution being made in respect of the
holders of the related Subordinated
Certificates, current distributions on the
related Mortgage Loans, Mortgage Certificates,
Contracts, Government Securities, if any, or
Private Label Custody Receipt Securities, if
any, of principal and interest due them on each
Distribution Date out of funds available for
distribution on such date in the related
Certificate Account and by the distribution to
the holders of the Senior Certificates on each
Distribution Date of a greater than pro rata
percentage of certain principal prepayments or
other recoveries of principal specified in the
applicable Prospectus Supplement on a Mortgage
Loan,
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<PAGE>
Mortgage Certificate, Contract, Government
Security or Private Label Custody Receipt
Security that are received in advance of their
scheduled Due Dates and are not accompanied by
an amount as to interest representing scheduled
interest due on any date or dates in any month
or months subsequent to the month of prepayment
(the "Principal Prepayments"). The allocation
of a greater than pro rata share of such
amounts to the Senior Certificates will have
the effect of accelerating the amortization of
the Senior Certificates while increasing the
respective interest in the Trust Fund evidenced
by the Subordinated Certificates. Increasing
the respective interest of the Subordinated
Certificates relative to that of the Senior
Certificates is intended to preserve the
availability of the benefits of the
subordination provided by the Subordinated
Certificates. See "Description of the
Certificates--Distributions of Principal and
Interest" and "--Distributions on Certificates"
and "Credit Support--Shifting Interest".
F. Reserve Fund........... If so specified in the applicable Prospectus
Supplement, a Reserve Fund may be established
for such Series. If so specified in such
Prospectus Supplement, such Reserve Fund will
not be included in the corpus of the Trust Fund
for such Series. If so specified in the
applicable Prospectus Supplement, such Reserve
Fund may be created by the deposit, in escrow,
by the Depositor, of a separate pool of
mortgage loans, cooperative loans, manufactured
housing conditional sales contracts and
installment loan agreements, government
securities or private label custody receipt
securities (the "Subordinated Pool") with the
aggregate principal balance specified in the
applicable Prospectus Supplement, or by the
deposit of cash in the amount specified in the
applicable Prospectus Supplement (the "Initial
Deposit"). The Reserve Fund will be funded by
the retention of specified distributions on the
Trust Assets of the related Mortgage Pool or
Contract Pool and on the related Government
Securities, if any, and Private Label Custody
Receipt Securities, if any, and/or on the
mortgage loans, cooperative loans, manufactured
housing conditional sales contracts and
installment loan agreements, government
securities or private label custody receipt
securities in the Subordinated Pool, until the
Reserve Fund (without taking into account the
amount of any Initial Deposit) reaches an
amount (the "Required Reserve") set forth in
the applicable Prospectus Supplement.
Thereafter, specified distributions on the
Trust Assets of the related Mortgage Pool or
Contract Pool and on the related Government
Securities, if any, and Private Label Custody
Receipt Securities, if any, and/or on the
mortgage loans, cooperative loans, manufactured
housing conditional sales contracts and
installment loan agreements, government
securities or private label custody receipt
securities in the Subordinated Pool, will be
retained to the extent necessary to maintain
such Reserve Fund (without taking into account
the amount of any Initial Deposit) at the
related Required Reserve. In no event will the
Required Reserve for any Series ever be
required to exceed the lesser of the
Subordinated Amount for such Series or the
outstanding aggregate principal amount of
Certificates of the Subordinated Classes or
Subclasses of such Series
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<PAGE>
specified in the applicable Prospectus
Supplement. If so specified in the applicable
Prospectus Supplement, the Reserve Fund with
respect to such Series may be funded at a
lesser amount or in another manner acceptable
to the Rating Agency rating such Series. See
"Credit Support--Subordinated Certificates" and
"--Reserve Fund".
G. Other Funds............ Assets consisting of cash, certificates of
deposit or letters of credit, or any
combination thereof, in the aggregate amount
specified in the applicable Prospectus
Supplement, will be deposited by the Depositor
in one or more accounts to be established with
respect to a Series of Certificates by the
Depositor with the Trustee on the related
Delivery Date if such assets are required to
make timely distributions in respect of
principal of, and interest on, the Certificates
of such Series, are otherwise required as a
condition to the rating of such Certificates in
the rating category specified in the Prospectus
Supplement, or are required in order to provide
for certain contingencies or in order to make
certain distributions regarding Certificates
which represent interests in GPM Loans (a "GPM
Fund") or Buy-Down Loans (a "Buy-Down Fund").
Following each Distribution Date, amounts may
be withdrawn from any such fund and used and/or
distributed in accordance with the Pooling and
Servicing Agreement under the conditions and to
the extent specified in the applicable
Prospectus Supplement.
H. Swap Agreement......... If so specified in the Prospectus Supplement
relating to a Series of Certificates, the Trust
will enter into or obtain an assignment of a
swap agreement or similar agreement pursuant to
which the Trust will have the right to receive
certain payments of interest (or other
payments) as set forth or determined as
described therein. See "Credit Support--Swap
Agreement".
Hazard Insurance and
Special Hazard Insurance
Policies..................
If so specified in the applicable Prospectus
Supplement, all of the Mortgage Loans (except
for the Cooperative Loans) and the Contracts
will be covered by standard hazard insurance
policies insuring against losses due to various
causes, including fire, lightning and
windstorm. In addition, the Depositor will, if
so specified in the applicable Prospectus
Supplement, obtain an insurance policy (the
"Special Hazard Insurance Policy") covering
losses that result from certain other physical
risks that are not otherwise insured against
(including earthquakes and mudflows). The
Special Hazard Insurance Policy, if any, will
be limited in scope and will cover losses in an
amount specified in the applicable Prospectus
Supplement. Any hazard losses not covered by
either standard hazard policies or the Special
Hazard Insurance Policy will not be insured
against and to the extent that the amount
available under any other method of credit
support available for such Series is exhausted,
will be borne by Certificateholders of such
Series. The hazard insurance policies and the
Special Hazard Insurance Policy will be subject
to the limitations described under "Description
of Insurance--Standard Hazard Insurance
Policies on Mortgage
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<PAGE>
Loans", "--Standard Hazard Insurance Policies
on the Manufactured Homes" and "--Special
Hazard Insurance Policies".
Substitution Of Trust If so specified in the Prospectus Supplement
Assets.................... relating to a Series of Certificates, within
the period following the date of issuance of
such Certificates specified in such Prospectus
Supplement, the Depositor or one or more
Servicers will deliver to the Trustee with
respect to such Series Trust Assets, Government
Securities or Private Label Custody Receipt
Securities in substitution for any one or more
of the Trust Assets, Government Securities or
Private Label Custody Receipt Securities as
applicable, included in the Trust Fund relating
to such Series which do not conform in one or
more material respects to the representations
and warranties in the related Pooling and
Servicing Agreement. See "Description of the
Certificates--Assignment of Mortgage Loans",
"--Assignment of Contracts" "--Assignment of
Mortgage Certificates", "--Assignment of
Government Securities" and "--Assignment of
Private Label Custody Receipt Securities".
Advances.................. The Servicers of the Mortgage Loans and
Contracts (and the Master Servicer, if any,
with respect to each Mortgage Loan and Contract
that it services directly, and otherwise to the
extent the related Servicer does not do so)
will be obligated to advance delinquent
installments of principal and interest on the
Mortgage Loans and Contracts (the "Advances")
under certain circumstances. See "Description
of the Certificates--Advances".
Optional Termination...... If so specified in the Prospectus Supplement
with respect to a Series, the Depositor or such
other persons as may be specified in a
Prospectus Supplement may purchase the Trust
Assets, the Government Securities, if any, and
the Private Label Custody Receipt Securities,
if any, in the related Trust Fund and any
property acquired in respect thereof at the
time, in the manner and at the price specified
in such Prospectus Supplement. In the event
that the Depositor elects to treat the related
Trust Fund (or any part thereof) as one or more
Real Estate Mortgage Investment Conduits (each,
a "REMIC") under the Internal Revenue Code of
1986, as amended (the "Code"), any such
repurchase will be effected only in compliance
with the requirements of Section 860F(a)(4) of
the Code, so as to constitute a "qualified
liquidation" thereunder. The exercise of the
right of repurchase will effect early
retirement of the Certificates of that Series.
See "Maturity and Prepayment Considerations"
and "Description of the Certificates--
Termination".
ERISA Limitations......... A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code should carefully
review with its own legal advisers whether the
purchase or holding of Certificates could give
rise to a transaction prohibited or otherwise
impermissible under ERISA or Section 4975 of
the Code. See "ERISA Considerations".
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<PAGE>
Tax Consequences.......... If a Prospectus Supplement specifies that the
Depositor intends to make an election to treat
the Trust as a Real Estate Mortgage Investment
Conduit ("REMIC"), pursuant to the Internal
Revenue Code of 1986, as amended, at least one
class of Certificates issued by the REMIC will
be treated as regular interests in the REMIC
("Regular Certificates") and generally will be
treated as debt interests issued by the REMIC
for federal income tax purposes. Regular
Certificates may be issued with original issue
discount. The prepayment assumption that will
be used in determining the rate of accrual of
any original issue discount on Regular
Certificates for federal income tax purposes
(and whether such original issue discount is de
minimis), and the rate that may be used by the
holder of a Regular Certificate will be
specified in the applicable Prospectus
Supplement. No representation will be made that
the Mortgage Loans will prepay at such a
specified rate or at any other rate. The holder
of the Residual Certificates will be subject to
special federal income tax rules that may
significantly reduce the after-tax yield of
such Certificates. Further, significant
restrictions may apply to the transfer of
Residual Certificates. See "Material Federal
Income Tax Consequences" for additional
information regarding the tax consequences of
purchasing Regular Certificates or Residual
Certificates.
If a Prospectus Supplement specifies that the
Depositor does not intend to make an election
to treat the Trust as a REMIC, counsel to the
Depositor will deliver its opinion to the
effect that the arrangement pursuant to which
such Trust Fund will be administered and the
Trust Certificates issued will be classified as
a trust whose taxation will be governed by the
provisions of subpart E, Part I of subchapter J
of the Code, and will not be classified as an
association taxable as a corporation for
federal income tax purposes (a "Non-REMIC Trust
Fund"). The Trust Certificates issued by a Non-
REMIC Trust Fund will be classified as either
Trust Fractional Certificates of Trust Interest
Certificates. See "Material Federal Income Tax
Consequences" for additional information
regarding the tax consequences of purchasing
Trust Fractional Certificates or Trust Interest
Certificates.
Legal Investment.......... If so specified in the applicable Prospectus
Supplement relating to a Series of
Certificates, a Class or Subclass of such
Certificates will constitute a "mortgage
related security" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") if and
for so long as it is rated in one of the two
highest rating categories by at least one
nationally recognized statistical rating
organization. Such Classes or Subclasses, if
any, will be legal investments for certain
types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any
other regulations which may govern investments
by such institutional investors. See "Legal
Investment".
Use of Proceeds........... The Depositor will use the net proceeds from
the sale of each Series for one or more of the
following purposes: (i) to purchase the related
Trust Assets and any other assets constituting
the related Trust Fund,
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<PAGE>
(ii) to repay indebtedness which has been
incurred to obtain funds to acquire such Trust
Assets and any other assets constituting the
related Trust Fund, (iii) to establish any
reserve funds described in the applicable
Prospectus Supplement and (iv) to pay costs of
structuring and issuing such Certificates. See
"Use of Proceeds".
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<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus and in the
applicable Prospectus Supplement to be prepared and delivered in connection
with the offering of any Series of Certificates, prospective investors should
carefully consider the following risk factors before investing in any Class or
Classes of Certificates of any such Series.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
the life of the Certificates of any Series. The Prospectus Supplement for any
Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates; however, no
underwriter will be obligated to do so. The Certificates will not be listed on
any securities exchange.
LIMITED OBLIGATIONS
Except for any related insurance policies or credit support described in the
applicable Prospectus Supplement, the Trust Assets, Government Securities, if
any, and Private Label Custody Receipt Securities, if any, included in the
related Trust Fund will be the sole source of payments on the Certificates of
a Series. The Certificates of any Series will not represent an interest in or
obligation of the Depositor, the Master Servicer, any Servicer, any
Unaffiliated Seller, the Trustee or any of their affiliates, except for the
limited obligations of the Depositor, the Master Servicer or any Unaffiliated
Seller with respect to certain breaches of representations and warranties and
the Master Servicer's obligations as Master Servicer. Neither the Certificates
of any Series nor the related Trust Assets will be guaranteed or insured by
any governmental agency or instrumentality (except to the limited extent
described in the related Prospectus Supplement that certain Trust Assets may
be insured or guaranteed, in whole or in part, by the FHA or VA), the
Depositor, the Master Servicer, any Servicer, any Unaffiliated Seller, the
Trustee, any of their affiliates or any other person. Consequently, in the
event that payments on the Trust Assets are insufficient or otherwise
unavailable to make all payments required on the Certificates, there will be
no recourse to the Depositor, the Master Servicer, any Servicer, any
Unaffiliated Seller, the Trustee or, except as specified in the applicable
Prospectus Supplement, any other entity.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT SUPPORT
With respect to each Series of Certificates, credit support may be provided
in limited amounts to cover certain types of losses on the underlying Trust
Assets. Credit support may be provided in one or more of the forms referred to
herein, including, but not limited to: a Letter of Credit; a Pool Insurance
Policy; a Mortgagor Bankruptcy Bond; subordination of other Classes of
Certificates of the same Series; a Reserve Fund; and any combination thereof.
See "Credit Support" herein. Regardless of the form of credit support, if any,
provided, the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or
formula. Furthermore, such credit support may provide only very limited
coverage as to certain types of losses, and may provide no coverage as to
certain other types of losses. All or a portion of the credit support, if any,
for any Series of Certificates will generally be permitted to be reduced,
terminated or substituted for, if each applicable Rating Agency indicates that
the then current rating thereof will not be adversely affected. See "Credit
Support".
RISKS OF THE TRUST ASSETS
An investment in securities such as the Certificates of any Series which
generally represent interests in mortgage loans or manufactured housing
conditional sales contracts and installment loan agreements ("contracts"), as
the case may be, may be affected by, among other things, a decline in real
estate values and changes in the mortgagor's or obligor's financial condition.
No assurance can be given that the values of the Mortgaged Properties securing
the Mortgage Loans, the values of the mortgaged properties securing the
20
<PAGE>
mortgage loans underlying the Mortgage Certificates or the values of the
Manufactured Homes securing the Contracts, as the case may be, underlying any
Series of Certificates have remained or will remain at their levels on the
dates of origination of the related Mortgage Loans, mortgage loans or
Contracts. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Mortgage
Loans and the mortgage loans underlying the Mortgage Certificates comprising a
particular Trust Fund, and any secondary financing on the related Mortgaged
Properties and mortgaged properties, become equal to or greater than the value
of the related Mortgaged Properties or mortgaged properties, as applicable,
the actual rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry and
those experienced in the related Originator's portfolio. In addition, adverse
economic conditions generally, in particular geographic areas or industries,
or affecting particular segments of the borrowing community (such as
Mortgagors or Obligors relying on commission income and self-employed
Mortgagors or Obligors) and other factors, may affect the timely payment by
Mortgagors, Obligors or mortgagors of scheduled payments of principal and
interest on the Mortgage Loans, Contracts or Mortgage Certificates, as the
case may be, and, accordingly, the actual rates of delinquencies, foreclosures
and losses with respect to any Trust Fund. See "Yield Considerations" and
"Maturity and Prepayment Considerations" herein. To the extent that such
losses are not covered by the applicable credit support, holders of
Certificates of the Series evidencing interests in the related Trust Fund will
bear all risk of loss resulting from default by Mortgagors. Obligors or
mortgagors and will have to look primarily to the value of the Mortgaged
Properties, mortgaged properties or Manufactured Homes for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans or
Contracts. In addition to the foregoing, certain geographic regions on the
United States from time to time will experience weaker regional economic
conditions and housing markets and, consequently, will experience higher rates
of loss and delinquency on mortgage loans or contracts generally. The Mortgage
Loans, Contracts or mortgage loans underlying the Mortgage Certificates
underlying certain Series of Certificates may be concentrated in these
regions, and such concentration may present risk considerations in addition to
those generally present for similar mortgage-backed or contract-backed
securities without such concentration. See "The Trust Fund--The Mortgage
Pools; --Underwriting Standards; --The Contract Pools; and --Underwriting
Policies".
PREPAYMENT AND YIELD CONSIDERATIONS
The rate and timing of principal payments on the Certificates of each Series
will depend, among other things, on the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the related Mortgage
Loans, Mortgage Certificates or Contracts, Government Securities, if any and
Private Label Custody Receipt Securities, if any. As is the case with
mortgage-backed securities generally, each Series of Certificates are subject
to substantial inherent cash-flow uncertainties because the Mortgage Loans and
Contracts may be prepaid at any time. Generally, when prevailing interest
rates increase, prepayment rates on mortgage loans tend to decrease, resulting
in a slower return of principal to investors at a time when reinvestment at
such higher prevailing rates would be desirable. Conversely, when prevailing
interest rates decline, prepayment rates on mortgage loans tend to increase,
resulting in a faster return of principal to investors at a time when
reinvestment at comparable yields may not be possible.
The yield to maturity on each Class of Certificates of each Series will
depend, among other things, on the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the Mortgage Loans,
Mortgage Certificates or Contracts, Government Securities, if any and Private
Label Custody Receipt Securities, if any, as applicable, and the allocation
thereof to reduce the Certificate Principal Balance of such Class. The yield
to maturity on each Class of Certificates will also depend on the Pass-Through
Rate and the purchase price for such Certificates. The yield to investors on
any Class of Certificates will be adversely affected by any allocation thereto
of interest shortfalls on the Mortgage Loans or Contracts, as applicable,
which are expected to result from the distribution of interest only to the
date of prepayment (rather than a full month's interest) in connection with
prepayments in full and in part (including for this purpose Insurance Proceeds
and Liquidation Proceeds) to the extent not covered by amounts otherwise
payable to the Master Servicer as servicing compensation.
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In general, if a Class of Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class of Certificates
is purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of purchase.
SUBORDINATION
To the extent specified in the applicable Prospectus Supplement,
distributions of interest and principal on one or more Classes of Certificates
of a Series may be subordinated in priority of payment to interest and
principal due on one or more other Classes of Certificates of such Series.
LIMITATION ON EXERCISE OF RIGHTS DUE TO BOOK-ENTRY REGISTRATION
If so specified in the applicable Prospectus Supplement, one or more Classes
of Certificates of a Series initially will be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), or any other
nominee of The Depository Trust Company ("DTC") set forth in the applicable
Prospectus Supplement, and will not be registered in the names of the holders
of the Certificates of such Series or their nominees. Because of this, unless
and until Certificates in fully registered, certificated form ("Definitive
Certificates") for such Series are issued, holders of such Certificates will
not be recognized by the applicable Trustee as "Certificateholders" (as such
terms are used herein or in the related Pooling and Servicing Agreement or the
related Deposit Trust Agreement, as applicable). Hence, until Definitive
Certificates are issued, holders of such Certificates will be able to exercise
the rights of Certificateholders only indirectly through DTC and its
participating organizations.
THE TRUST FUND
Ownership of the Mortgage Pool or Pools or Contract Pool or Pools,
Government Securities, if any, and Private Label Custody Receipt Securities,
if any, included in the Trust Fund (as hereinafter defined) for a Series of
Certificates may be evidenced by one or more Classes of Certificates, which
may consist of one or more Subclasses, as specified in the Prospectus
Supplement for such Series. Each Certificate will evidence the undivided
interest, beneficial interest or notional amount specified in the applicable
Prospectus Supplement in one or more Mortgage Pools containing one or more
Mortgage Loans and/or Mortgage Certificates or Contract Pools containing one
or more Contracts and in the Government Securities, if any, and Private Label
Custody Receipt Securities, if any, included in the related Trust Fund, with
such Mortgage Pool or Pools or Contract Pool or Pools having an aggregate
principal balance of not less than approximately $50,000,000 as of the first
day of the month of its creation (the "Cut-off Date"), or such other minimum
aggregate principal balance as may be specified in the applicable Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, each
Class or Subclass of the Certificates of a Series will evidence the percentage
interest specified in such Prospectus Supplement in the payments of principal
and interest on the Mortgage Loans and/or Mortgage Certificates in the related
Mortgage Pool or Pools or on the Contracts in the related Contract Pool or
Pools and in the Government Securities, if any, and Private Label Custody
Receipt Securities, if any, included in the related Trust Fund (a "Percentage
Interest"). To the extent specified in the applicable Prospectus Supplement,
each Mortgage Pool or Contract Pool with respect to a Series will be covered
by a Letter of Credit, a Pool Insurance Policy, a Special Hazard Insurance
Policy, a Mortgagor Bankruptcy Bond, by the subordination of the rights of the
holders of the Subordinated Certificates of a Series to the rights of the
holders of the Senior Certificates of such Series, which, if so specified in
the applicable Prospectus Supplement, may include Certificates of a
Subordinated Class or Subclass and the establishment of a Reserve, by the
right of one or more Classes or Subclasses of Certificates to receive a
disproportionate amount of certain distributions of principal or interest or
another form or forms of Alternative Credit Support acceptable to the Rating
Agency rating the Certificates of such Series or by any combination of the
foregoing. See "Credit Support" and "Description of Insurance".
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THE MORTGAGE POOLS
If so specified in the Prospectus Supplement with respect to a Series, the
Trust Fund for such Series may include one or more Mortgage Pools containing
(i) conventional one- to four-family residential, first and/or more junior
mortgage loans, (ii) Cooperative Loans made to finance the purchase of certain
rights relating to cooperatively owned properties secured by the pledge of
shares issued by a Cooperative and the assignment of a proprietary lease or
occupancy agreement providing the exclusive right to occupy a particular
Cooperative Dwelling, (iii) mortgage loans secured by Multifamily Property,
(iv) mortgage participation certificates evidencing participation interests in
such loans that are acceptable to the Rating Agency rating the Certificates of
such Series for a rating in one of the four highest rating categories of such
Rating Agency, or (v) certain conventional Mortgage Certificates issued by one
or more trusts established by one or more private entities, in each case
purchased by the Depositor either directly or through one or more affiliates
from one or more affiliates or from Unaffiliated Sellers.
A Mortgage Pool may include Mortgage Loans insured by the FHA ("FHA Loans")
and/or Mortgage Loans partially guaranteed by the Veterans Administration (the
"VA" and such Mortgage Loans are referred to as "VA Loans"). All Mortgage
Loans will be evidenced by promissory notes (the "Mortgage Notes") secured by
first or more junior mortgages or first or more junior deeds of trust or other
similar security instruments creating a first or more junior lien, as
applicable, on, or installment sales contracts for the sale of, the Mortgaged
Properties (as defined below). Single Family Property and Multifamily Property
will consist of single family detached homes, townhouses, row houses, attached
homes (single family units having a common wall), individual units located in
condominiums, individual units located in apartment buildings owned by
cooperative housing corporations, individual units in planned unit
developments, leasehold interests in single family detached homes, multifamily
residential rental properties and apartment buildings owned by cooperative
housing corporations. Each such detached or attached home or multifamily
property will be constructed on land owned in fee simple by the Mortgagor or
on land leased by the Mortgagor for a term at least two years greater than the
term of the applicable Mortgage Loan. Attached homes may consist of duplexes,
triplexes and fourplexes (multifamily structures where each Mortgagor owns the
land upon which the unit is built with the remaining adjacent land owned in
common). Multifamily Property may include mixed commercial and residential
buildings. The Mortgaged Properties may include investment properties and
vacation and second homes. Mortgage Loans secured by Multifamily Property may
also be secured by an assignment of leases and rents and operating or other
cash flow guarantees relating to the Mortgaged Properties to the extent
specified in the applicable Prospectus Supplement.
Each Mortgage Loan in a Mortgage Pool will (i) have an individual principal
balance at origination of not less than $25,000 nor more than $500,000, (ii)
have monthly payments due on the first day of each month (the "Due Date"),
(iii) be secured by Mortgaged Properties or relate to Cooperative Loans
located in any of the 50 states or the District of Columbia, and (iv) consist
of fully-amortizing Mortgage Loans, each with a 10 to 40 year term at
origination, a fixed or variable rate of interest and level or variable
monthly payments over the term of the Mortgage Loan or, in each such case,
such other Mortgage Loan characteristics as are set forth in the applicable
Prospectus Supplement. In addition, to the extent so specified in the
applicable Prospectus Supplement, the Loan-to-Value Ratio (as hereinafter
described) of such Mortgage Loans at origination will not exceed 95% on any
Mortgage Loan with an original principal balance of $150,000 or less, 90% on
any Mortgage Loan with an original principal balance in excess of $150,000
through $200,000, 85% on any Mortgage Loan with an original principal balance
in excess of $200,000 through $300,000 and 80% on any Mortgage Loan with an
original principal balance exceeding $300,000. If so specified in the
applicable Prospectus Supplement, a Mortgage Pool may also include fully
amortizing, adjustable rate Mortgage Loans ("ARM Loans") with a 30-year term
(or other term specified in the applicable Prospectus Supplement) at
origination and a mortgage interest rate adjusted periodically (with
corresponding adjustments in the amount of monthly payments) to equal the sum
(which may be rounded) of a fixed margin and an index described in such
Prospectus Supplement, subject to any applicable restrictions on such
adjustments. The Mortgage Pools may also include other types of Mortgage Loans
to the extent set forth in the applicable Prospectus Supplement.
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If so specified in the applicable Prospectus Supplement, no Mortgage Loan
will have a Loan-to-Value Ratio at origination in excess of 95%, regardless of
its original principal balance. The Loan-to-Value Ratio is the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan at the
date of determination to the lesser of (a) the appraised value determined in
an appraisal obtained by the Originator and (b) the sales price for such
property (the "Original Value"). If so specified in the applicable Prospectus
Supplement, with respect to a Mortgage Loan secured by a mortgage on a
vacation or second home or an investment property (other than Multifamily
Property), no income derived from the property will be considered for
underwriting purposes, the Loan-to-Value Ratio (taking into account any
secondary financing) of such Mortgage Loan may not exceed 80% and the original
principal balance of such Mortgage Loan may not exceed $250,000.
If so specified in the applicable Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans with fluctuating Mortgage Rates. Any such Mortgage Loan
may provide that on the day on which the Mortgage Rate adjusts, the amount of
the monthly payments on the Mortgage Loan will be adjusted to provide for the
payment of the remaining principal amount of the Mortgage Loan with level
monthly payments of principal and interest at the new Mortgage Rate to the
maturity date of the Mortgage Loan. Alternatively, the Mortgage Loan may
provide that the Mortgage Rate adjusts more frequently than the monthly
payment. As a result, a greater or lesser portion of the monthly payment will
be applied to the payment of principal on the Mortgage Loan, thus increasing
or decreasing the rate at which the Mortgage Loan is repaid. See "Yield
Considerations". In the event that an adjustment to the Mortgage Rate causes
the amount of interest accrued in any month to exceed the amount of the
monthly payment on such Mortgage Loan, the excess (the "Deferred Interest")
will be added to the principal balance of the Mortgage Loan (unless otherwise
paid by the Mortgagor), and will bear interest at the Mortgage Rate in effect
from time to time. The amount by which the Mortgage Rate or monthly payment
may increase or decrease and the aggregate amount of Deferred Interest on any
Mortgage Loan may be subject to certain limitations, as described in the
applicable Prospectus Supplement.
If so specified in the Prospectus Supplement for the related Series, the
Mortgage Rate on certain ARM Loans will be convertible from an adjustable rate
to a fixed rate, at the option of the Mortgagor under certain circumstances.
If so specified in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement will provide that the Unaffiliated Seller from which such
convertible ARM Loans were acquired will be obligated to repurchase from the
Trust Fund any such ARM Loan as to which the conversion option has been
exercised (a "Converted Mortgage Loan"), at a purchase price set forth in the
applicable Prospectus Supplement. The amount of such purchase price will be
required to be deposited in the Certificate Account and will be distributed to
the Certificateholders on the Distribution Date in the month following the
month of the exercise of the conversion option. The obligation of the
Unaffiliated Seller to repurchase Converted Mortgage Loans may or may not be
supported by cash, letters of credit, third party guarantees or other similar
arrangements.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments on the Mortgage Loan ("Buy-Down Loans"). The
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor, the seller of the related Mortgaged Property,
the Servicer or another source and placed in a custodial account (the "Buy-
Down Fund") by the Servicer, or if so specified in the applicable Prospectus
Supplement, with the Trustee. In lieu of a cash deposit, if so specified in
the applicable Prospectus Supplement, a letter of credit or guaranteed
investment contract may be delivered to the Trustee to fund the Buy-Down Fund.
See "Description of the Certificates-- Payments on Mortgage Loans". Buy-Down
Loans included in a Mortgage Pool will provide for a reduction in monthly
interest payments by the Mortgagor for a period of up to the first four years
of the term of such Mortgage Loans.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans pursuant to which the monthly payments by the Mortgagor
during the early years of the related Mortgage Loan are less than the amount
of interest that would otherwise be payable thereon, with the interest not so
paid added to the outstanding principal balance of such Mortgage Loan ("GPM
Loans"). If so specified in the applicable Prospectus Supplement, the
resulting difference in payment shall be compensated for from an amount
contributed
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by the Depositor or another source and delivered to the Trustee (the "GPM
Fund"). In lieu of cash deposit, the Depositor may deliver to the Trustee a
letter of credit, guaranteed investment contract or another instrument
acceptable to the Rating Agency rating the related Series to fund the GPM
Fund.
FHA Loans will be insured by the Federal Housing Administration (the
"FHA")as authorized under the National Housing Act, as amended, and the United
States Housing Act of 1937, as amended. Such FHA loans will be insured under
various FHA programs including the standard FHA 203-b programs to finance the
acquisition of one- to four-family housing units, the FHA 245 graduated
payment mortgage program and the FHA 221 and 223 programs to finance certain
multifamily residential rental properties. FHA Loans generally require a
minimum down payment of approximately 5% of the original principal amount of
the FHA Loan. No FHA Loan may have an interest rate or original principal
amount exceeding the applicable FHA limits at the time of origination of such
FHA Loan.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act").
The Servicemen's Readjustment Act permits a veteran (or in certain instances
the spouse of a veteran) to obtain a mortgage loan guarantee by the VA
covering mortgage financing of the purchase of a one- to four-family dwelling
unit at interest rates permitted by the VA. The program has no mortgage loan
limits, requires no down payment from the purchasers and permits the guarantee
of mortgage loans of up to 30 years' duration. However, no VA Loan will have
an original principal amount greater than five times the partial VA guarantee
for such VA Loan. The maximum guarantee that may be issued by the VA under
this program currently is 50% of the principal amount of the Mortgage Loan if
the principal amount of the Mortgage Loan is $45,000 or less, the lesser of
$36,000 and 40% of the principal amount of the Mortgage Loan if the principal
amount of the Mortgage Loan is greater than $45,000 but less than or equal to
$144,000, and the lesser of $46,000 and 25% of the principal amount of the
Mortgage Loan if the principal amount of the Mortgage Loan is greater than
$144,000.
The Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-
K to be filed with the Commission) for each Series of Certificates the Trust
Fund with respect to which contains Mortgage Loans will contain information as
to the type of Mortgage Loans that will comprise the related Mortgage Pool or
Pools and information as to (i) the aggregate principal balance of the
Mortgage Loans as of the applicable Cut-off Date, (ii) the type of Mortgaged
Properties securing the Mortgage Loans, (iii) the original terms to maturity
of the Mortgage Loans, (iv) the largest in principal balance of the Mortgage
Loans, (v) the earliest origination date and latest maturity date of the
Mortgage Loans, (vi) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, (vii) the interest rate or
range of interest rates borne by the Mortgage Loans, (viii) the average
outstanding principal balance of the Mortgage Loans, (ix) the geographical
distribution of the Mortgage Loans, (x) the aggregate principal balance of
Buy-Down Loans or GPM Loans, if applicable, (xi) with respect to ARM Loans,
the adjustment dates, the highest, lowest and weighted average margin, and the
maximum Mortgage Rate variation at the time of any periodic adjustment and
over the life of such ARM Loans, and (xii) with respect to Mortgage Loans
secured by Multifamily Property or such other Mortgage Loans as are specified
in the Prospectus Supplement, whether the Mortgage Loan provides for an
interest only period and whether the principal amount of such Mortgage Loan is
amortized on the basis of a period of time that extends beyond the maturity
date of the Mortgage Loan.
No assurance can be given that values of the Mortgaged Properties in a
Mortgage Pool have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In addition, the value of property securing
Cooperative Loans and the delinquency rate with respect to Cooperative Loans
could be adversely affected if the current favorable tax treatment of
cooperative stockholders were to become less favorable. See "Certain Legal
Aspects of the Mortgage Loans and Contracts--The Mortgage Loans". To the
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extent that such losses are not covered by the methods of credit support or
the insurance policies described herein or by Alternative Credit Support, they
will be borne by holders of the Certificates of the Series evidencing
interests in the Mortgage Pool.
Multifamily lending is generally viewed as exposing the lender to a greater
risk of loss than one- to four-family residential lending. Multifamily lending
typically involve larger loans to single borrowers or groups of related
borrowers than residential one- to four-family mortgage loans. Furthermore,
the repayment of loans secured by income producing properties is typically
dependent upon the successful operation of the related real estate project. If
the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be
impaired. Multifamily real estate can be affected significantly by supply and
demand in the market for the type of property securing the loan and,
therefore, may be subject to adverse economic conditions. Market values may
vary as a result of economic events or governmental regulations outside the
control of the borrower or lender, such as rent control laws, which impact the
future cash flow of the property. Corresponding to the greater lending risk is
a generally higher interest rate applicable to multifamily mortgage lending.
The Depositor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the applicable Prospectus Supplement,
for the benefit of the holders of the Certificates of such Series (the
"Certificateholders"). The Master Servicer, if any, named in the applicable
Prospectus Supplement will service the Mortgage Loans, either by itself or
through other mortgage servicing institutions, if any (each, a "Servicer"),
pursuant to a Pooling and Servicing Agreement, as described herein, among the
Master Servicer, if any, the Depositor and the Trustee (the "Pooling and
Servicing Agreement") and will receive a fee for such services. See "--
Mortgage Loan Program" and "Description of the Certificates". With respect to
those Mortgage Loans serviced by a Servicer, such Servicer will be required to
service the related Mortgage Loans in accordance with the Seller's Warranty
and Servicing Agreement between the Servicer and the Depositor (a "Servicing
Agreement") and will receive the fee for such services specified in such
Servicing Agreement; however, any Master Servicer will remain liable for its
servicing obligations under the Pooling and Servicing Agreement as if the
Master Servicer alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties regarding the
Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will
be without recourse. See "Description of the Certificates--Assignment of
Mortgage Loans". The Master Servicer's obligations with respect to the
Mortgage Loans will consist principally of its contractual servicing
obligations under the Pooling and Servicing Agreement (including its
obligation to enforce certain purchase and other obligations of Servicers
and/or Unaffiliated Sellers, as more fully described herein under "--Mortgage
Loan Program--Representations by Unaffiliated Sellers; Repurchases" and
"Description of the Certificates--Assignment of Mortgage Loans" and "--
Servicing by Unaffiliated Sellers") and its obligations to make Advances in
the event of delinquencies in payments on or with respect to the Mortgage
Loans or in connection with prepayments and liquidations of such Mortgage
Loans, in amounts described herein under "Description of the Certificates--
Advances". Such Advances with respect to delinquencies will be limited to
amounts that the Master Servicer believes ultimately would be reimbursable
under any applicable Letter of Credit, Pool Insurance Policy, Special Hazard
Insurance Policy, Mortgagor Bankruptcy Bond or other policy of insurance, from
amounts in the Reserve Fund, under any Alternative Credit Support or out of
the proceeds of liquidation of the Mortgage Loans, cash in the Certificate
Account or otherwise. See "Description of the Certificates--Advances", "Credit
Support" and "Description of Insurance".
Each Mortgage Pool included in the related Trust Fund will be composed of
Mortgage Loans evidencing interests in Mortgage Loans having Mortgage Rates
that will exceed by at least 3/8 of 1% (or such other percentage as may be
specified in the applicable Prospectus Supplement) the fixed or variable Pass-
Through Rate established for the Mortgage Pool. To the extent and in the
manner specified in the applicable Prospectus Supplement, Certificateholders
of a Series will be entitled to receive distributions based on the payments of
principal on the underlying Mortgage Loans, plus interest on the principal
balance thereof at the related Pass-Through Rate. The difference between a
Mortgage Rate and the related Pass-Through Rate (less any servicing
compensation payable to the Servicers of such Mortgage Loans and the amount,
if any, payable to the Depositor
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or the person or entity specified in the applicable Prospectus Supplement) may
be retained by the Master Servicer as servicing compensation to it. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses".
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either directly
or through affiliates, from one or more affiliates or from sellers
unaffiliated with the Depositor ("Unaffiliated Sellers"). Mortgage Loans
acquired by the Depositor will have been originated in accordance with the
underwriting criteria specified below under "Underwriting Standards" or as
otherwise described in an applicable Prospectus Supplement.
Underwriting Standards
Except in the case of certain Mortgage Loans originated by Unaffiliated
Sellers in accordance with their own underwriting criteria ("Closed Loans") or
such other standards as may be described in the applicable Prospectus
Supplement, all prospective Mortgage Loans will be subject to the underwriting
standards adopted by the Depositor. See "Closed Loan Program" below for a
description of underwriting standards applicable to Closed Loans. Unaffiliated
Sellers will represent and warrant that Mortgage Loans originated by them and
purchased by the Depositor have been originated in accordance with the
applicable underwriting standards established by the Depositor or such other
standards as may be described in the applicable Prospectus Supplement. The
following discussion describes the underwriting standards of the Depositor
with respect to any Mortgage Loan that it purchases.
The mortgage credit approval process for one- to four-family residential
loans follows a standard procedure that generally complies with FHLMC and FNMA
regulations and guidelines (except that certain Mortgage Loans may have higher
loan amounts and qualifying ratios) and applicable federal and state laws and
regulations. The credit approval process for Cooperative Loans follows a
procedure that generally complies with applicable FNMA regulations and
guidelines (except for the loan amounts and qualifying ratios) and applicable
federal and state laws and regulations. The originator of a Mortgage Loan (the
"Originator") generally will review a detailed credit application by the
prospective mortgagor designed to provide pertinent credit information,
including a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report that summarizes the prospective mortgagor's credit history with
local merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the prospective mortgagor's employer
wherein the employer reports the length of employment with that organization,
the current salary, and gives an indication as to whether it is expected that
the prospective mortgagor will continue such employment in the future. If the
prospective mortgagor is self-employed, he or she is required to submit copies
of signed tax returns. The prospective mortgagor may also be required to
authorize verification of deposits at financial institutions. In certain
circumstances, other credit considerations may cause the Originator or
Depositor not to require some of the above documents, statements or proofs in
connection with the origination or purchase of certain Mortgage Loans.
An appraisal generally will be required to be made on each residence to be
financed. Such appraisal generally will be made by an appraiser who meets FNMA
requirements as an appraiser of one- to four-family residential properties.
The appraiser is required to inspect the property and verify that it is in
good condition and that, if new, construction has been completed. The
appraisal generally will be based on the appraiser's judgment of value, giving
appropriate weight to both the market value of comparable homes and the cost
of replacing the residence. These underwriting standards also require a search
of the public records relating to a mortgaged property for liens and judgments
against such mortgaged property.
Based on the data provided, certain verifications and the appraisal, a
determination is made by the Originator as to whether the prospective
mortgagor has sufficient monthly income available to meet the prospective
mortgagor's monthly obligations on the proposed loan and other expenses
related to the residence (such as property taxes, hazard and primary mortgage
insurance and, if applicable, maintenance) and other financial
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obligations and monthly living expenses. Each Originator's lending guidelines
for conventional mortgage loans generally will specify that mortgage payments
plus taxes and insurance and all monthly payments extending beyond one year
(including those mentioned above and other fixed obligations, such as car
payments) would equal no more than specified percentages of the prospective
mortgagor's gross income. These guidelines will be applied only to the
payments to be made during the first year of the loan. For FHA and VA Loans,
the Originator's lending guidelines will follow HUD and VA guidelines,
respectively. Other credit considerations may cause an Originator to depart
from these guidelines. For example, when two individuals co-sign the loan
documents, the incomes and expenses of both individuals may be included in the
computation.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the Mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor's underwriting standards
applicable to all states (including anti-deficiency states) require that the
value of the property being financed, as indicated by the appraisal, currently
supports and is anticipated to support in the future the outstanding loan
balance.
Certain of the types of Mortgage Loans that may be included in the Mortgage
Pools or Subsidiary Trust Funds may involve additional uncertainties not
present in traditional types of loans. For example, Buy-Down Loans and GPM
Loans provide for escalating or variable payments by the Mortgagor. These
types of Mortgage Loans are underwritten on the basis of a judgment that the
Mortgagor will have the ability to make larger monthly payments in subsequent
years. In some instances the Mortgagor's income may not be sufficient to
enable it to continue to make scheduled loan payments as such payments
increase.
To the extent specified in the applicable Prospectus Supplement, the
Depositor may purchase Mortgage Loans for inclusion in a Trust Fund that are
underwritten under standards and procedures which vary from and are less
stringent than those described herein. For instance, Mortgage Loans may be
underwritten under a "limited documentation" program if so specified in the
applicable Prospectus Supplement. With respect to such Mortgage Loans, minimal
investigation into the borrowers' credit history and income profile is
undertaken by the Originator and such Mortgage Loans may be underwritten
primarily on the basis of an appraisal of the Mortgaged Property or
Cooperative Dwelling and the Loan-to-Value Ratio at origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the applicable
Prospectus Supplement, the Originator may forego certain aspects of the review
relating to monthly income, and traditional ratios of monthly or total
expenses to gross income may not be considered.
The underwriting standards for Mortgage Loans secured by Multifamily
Property will be described in the applicable Prospectus Supplement.
Qualifications of Unaffiliated Sellers
Each Unaffiliated Seller of Closed Loans secured by residential properties
must be an institution experienced in originating conventional mortgage loans
and/or FHA Loans or VA Loans in accordance with accepted practices and prudent
guidelines, and must maintain satisfactory facilities to originate those loans
(in each case, subject to certain limited exceptions). In addition, except as
otherwise specified, the Depositor requires adequate financial stability and
adequate servicing experience, where appropriate, as well as satisfaction of
certain other criteria.
Representations by Unaffiliated Sellers; Repurchases
Each Unaffiliated Seller (or the Master Servicer, if the Unaffiliated Seller
is also the Master Servicer under the Pooling and Servicing Agreement) will
have made representations and warranties in respect of the Mortgage Loans sold
by such Unaffiliated Seller to the Depositor. Such representations and
warranties will generally include, among other things: (i) with respect to
each Mortgaged Property, that title insurance (or in the case of Mortgaged
Properties located in areas where such policies are generally not available,
an attorney's certificate of title) and any required hazard and primary
mortgage insurance was effective at the origination of each Mortgage
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Loan, and that each policy (or certificate of title) remained in effect on the
date of purchase of the Mortgage Loan from the Unaffiliated Seller; (ii) that
the Unaffiliated Seller had good and marketable title to each such Mortgage
Loan; (iii) with respect to each Mortgaged Property, that each mortgage
constituted a valid first lien on the Mortgaged Property (subject only to
permissible title insurance exceptions); (iv) that there were no delinquent
tax or assessment liens against the Mortgaged Property; and (v) that each
Mortgage Loan was current as to all required payments, in each such case,
subject to certain exceptions which may be specified in the applicable
Prospectus Supplement. With respect to a Cooperative Loan, the Unaffiliated
Seller will represent and warrant that (a) the security interest created by
the cooperative security agreements constituted a valid first lien on the
collateral securing the Cooperative Loan (subject to the right of the related
Cooperative to cancel shares and terminate the proprietary lease for unpaid
assessments and to the lien of the related Cooperative for unpaid assessments
representing the Mortgagor's pro rata share of the Cooperative's payments for
its mortgage, current and future real property taxes, maintenance charges and
other assessments to which like collateral is commonly subject) and (b) the
related cooperative apartment was free from material damage and was in good
repair.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Unaffiliated Seller sold the Mortgage Loan to the Depositor or its affiliate.
A substantial period of time may have elapsed between such date and the date
of initial issuance of the Series of Certificates evidencing an interest in
such Mortgage Loan. Since the representations and warranties of an
Unaffiliated Seller do not address events that may occur following the sale of
a Mortgage Loan by an Unaffiliated Seller, the repurchase obligation described
below will not arise if, during the period commencing on the date of sale of a
Mortgage Loan by the Unaffiliated Seller to or on behalf of the Depositor, the
relevant event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any Series
of Certificates if anything has come to the Depositor's attention that would
cause it to believe that the representations and warranties of an Unaffiliated
Seller will not be accurate and complete in all material respects in respect
of such Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Certificates of a Series in respect of any Mortgage Loan relating
to the period commencing on the date of sale of such Mortgage Loan to the
Depositor or its affiliates will be certain limited representations of the
Depositor and of the Master Servicer described below under "Description of the
Certificates--Assignment of Mortgage Loans". If the Master Servicer is also an
Unaffiliated Seller of Mortgage Loans with respect to a particular Series,
such representations will be in addition to the representations and warranties
made in its capacity as an Unaffiliated Seller.
Upon the discovery of the breach of any representation or warranty made by
an Unaffiliated Seller in respect of a Mortgage Loan that materially and
adversely affects the interests of the Certificateholders of the related
Series, such Unaffiliated Seller or the Servicer of such Mortgage Loan will be
obligated to repurchase such Mortgage Loan at a purchase price equal to 100%
of the unpaid principal balance thereof at the date of repurchase or, in the
case of a Series of Certificates as to which the Depositor has elected to
treat the related Trust Fund as one or more REMICs, as defined in the Code, at
such other price as may be necessary to avoid a tax on a prohibited
transaction, as described in Section 860F(a) of the Code, in each case
together with accrued interest at the Pass-Through Rate for the related
Mortgage Pool, to the first day of the month following such repurchase and the
amount of any unreimbursed Advances made by the Master Servicer or the
Servicer, as applicable, in respect of such Mortgage Loan. The Master Servicer
will be required to enforce this obligation for the benefit of the Trustee and
the Certificateholders, following the practices it would employ in its good
faith business judgment were it the owner of such Mortgage Loan. Subject to
the ability of the Depositor, the Unaffiliated Seller or the Servicer to
substitute for certain Mortgage Loans as described below, this repurchase
obligation generally constitutes the sole remedy available to the
Certificateholders of such Series for a breach of representation or warranty
by an Unaffiliated Seller.
The obligation of the Master Servicer to purchase a Mortgage Loan if an
Unaffiliated Seller or a Servicer defaults on its obligation to do so is
subject to limitations, and no assurance can be given that Unaffiliated
Sellers will carry out their respective repurchase obligations with respect to
Mortgage Loans. However, to the extent
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that a breach of the representations and warranties of an Unaffiliated Seller
may also constitute a breach of the representations and warranties made by the
Depositor or by the Master Servicer with respect to the insurability of the
Mortgage Loans, the Depositor may have a repurchase obligation, and the Master
Servicer may have a limited purchase obligation, in each case as described
below under "Description of the Certificates--Assignment of Mortgage Loans".
Closed Loan Program
The Depositor may also acquire Closed Loans that have been originated by
Unaffiliated Sellers in accordance with underwriting standards acceptable to
the Depositor. Closed Loans for which 11 or fewer monthly payments have been
received generally will be further subject to the Depositor's customary
underwriting standards. Closed Loans for which 12 to 60 monthly payments have
been received generally will be subject to a review of payment history and
will conform to the Depositor's guidelines for the related mortgage program.
In the event one or two payments were over 30 days delinquent, a letter
explaining the delinquencies will be required of the Mortgagor. The Depositor
will not purchase for inclusion in a Mortgage Pool a Closed Loan for which (i)
more than two monthly payments were over 30 days delinquent, (ii) one payment
was over 60 days delinquent, or (iii) more than 60 monthly payments were
received (in each such case, subject to certain exceptions which may be
specified in the applicable Prospectus Supplement).
MORTGAGE CERTIFICATES
If so specified in the Prospectus Supplement with respect to a Series, the
Trust Fund for such Series may include certain conventional mortgage pass-
through certificates (the "Mortgage Certificates") issued by one or more
trusts (each, an "Underlying Issuer") established by one or more private
entities (which may include the Depositor and/or one or more affiliates
thereof) and evidencing, the entire interest (or such other percentage
interest as may be specified in such Prospectus Supplement) in a pool of
mortgage loans. A description of the mortgage loans underlying the Mortgage
Certificates, the related pooling and servicing arrangements and the insurance
arrangements in respect of such mortgage loans will be set forth in the
applicable Prospectus Supplement or in the Current Report on Form 8-K referred
to below. Such Prospectus Supplement (or, if such information is not available
in advance of the date of such Prospectus Supplement, a Current Report on Form
8-K to be filed by the Depositor with the Commission within 15 days of the
issuance of the Certificates of such Series) will also set forth information
with respect to the entity or entities (which may include the Depositor and/or
one or more affiliates thereof) forming the related mortgage pool, the issuer
of any credit support with respect to such Mortgage Certificates, the
aggregate outstanding principal balance and the pass-through rate borne by
each Mortgage Certificate included in the Trust Fund, together with certain
additional information with respect to such Mortgage Certificates. The
inclusion of Mortgage Certificates in a Trust Fund with respect to a Series of
Certificates is conditioned upon their characteristics being in form and
substance satisfactory to the Rating Agency rating the related Series of
Certificates. Mortgage Certificates, together with the Mortgage Loans and
Contracts, are referred to herein as the "Trust Assets".
As a general rule each Underlying Issuer will be subject to the information
requirements of the Exchange Act and in accordance therewith will file reports
and other information with the Commission. Such reports and other information
filed with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is (http://www.sec.gov). In the event that any Underlying Issuer is not
subject to the information requirements of the Exchange Act on the date of
issuance of the Certificates of the related Series or ceases to be subject to
such requirements after such date, the Depositor or the Trustee will provide,
or cause to be provided (or make available, or cause to be made available) to
Certificateholders upon
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request the information contained in all periodic trustee reports (or similar
reports) that are received by the Trustee with respect to the related Mortgage
Certificates where such Mortgage Certificates represent 20% or more of the
aggregate principal balance of the related Trust Fund.
THE CONTRACT POOLS
If so specified in the Prospectus Supplement with respect to a Series, the
Trust Fund for such Series may include a Contract Pool evidencing interests in
manufactured housing conditional sales contracts and installment loan
agreements (the "Contracts") originated by a manufactured housing dealer in
the ordinary course of business and purchased by the Depositor. The Contracts
may be conventional manufactured housing contracts or contracts insured by the
FHA or partially guaranteed by the VA. Each Contract will be secured by a
Manufactured Home, as defined below. The Contracts will be fully amortizing
(or, if so specified in the applicable Prospectus Supplement, have balloon
payments at maturity) and will bear interest at a fixed annual percentage rate
("APR") (or, if so specified in the applicable Prospectus Supplement, bear
interest at a variable rate).
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to
the required utilities, and includes the plumbing, heating, air conditioning,
and electrical systems contained therein; except that such term shall include
any structure which meets all the requirements of [this] paragraph except the
size requirements and with respect to which the manufacturer voluntarily files
a certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter".
The Depositor will cause the Contracts constituting each Contract Pool to be
assigned to the Trustee named in the applicable Prospectus Supplement for the
benefit of the related Certificateholders. The Master Servicer specified in
the applicable Prospectus Supplement will service the Contracts, either by
itself or through other Servicers, pursuant to the Pooling and Servicing
Agreement. See "Description of the Certificates--Servicing by Unaffiliated
Sellers". With respect to those Contracts serviced by the Master Servicer
through a Servicer, the Master Servicer will remain liable for its servicing
obligations under the Agreement as if the Master Servicer alone were servicing
such Contracts. The Contract documents, if so specified in the applicable
Prospectus Supplement, may be held for the benefit of the Trustee by a
Custodian (the "Custodian") appointed pursuant to a Custodial Agreement (the
"Custodial Agreement") among the Depositor, the Trustee and the Custodian.
Each Contract Pool will be composed of Contracts bearing interest at the
APRs specified in the Prospectus Supplement. Each registered holder of a
Certificate will be entitled to receive periodic distributions, which
generally will be monthly, of all or a portion of principal on the underlying
Contracts or interest on the principal balance thereof at the Pass-Through
Rate, or both. If so specified in the applicable Prospectus Supplement, the
difference between the APR on a Contract and the related Pass-Through Rate
(less sub-servicing compensation), will be retained by the Master Servicer as
servicing compensation to it. See "Description of the Certificates-- Payments
on Contracts".
The applicable Prospectus Supplement (or, if such information is not
available in advance of the date of such Prospectus Supplement, a Current
Report on Form 8-K to be filed with the Commission) will specify, for the
Contracts contained in the related Contract Pool, among other things: (a) the
dates of origination of the Contracts; (b) the weighted average APR on the
Contracts; (c) the range of outstanding principal balances as of the Cut-off
Date; (d) the average outstanding principal balance of the Contracts as of the
Cut-off Date; (e) the weighted average term to maturity as of the Cut-off
Date; and (f) the range of original maturities of the Contracts.
With respect to the Contracts included in the Contract Pool, the Depositor,
the Master Servicer or such other party, as specified in the applicable
Prospectus Supplement, will make or cause to be made representations and
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warranties as to the types and geographical distribution of such Contracts and
as to the accuracy in all material respects of certain information furnished
to the Trustee in respect of each such Contract. In addition, the Master
Servicer or the Unaffiliated Seller of the Contracts will represent and
warrant that, as of the Cut-off Date, no Contract was more than 30 days (or
such other number of days as may be specified in the Prospectus Supplement)
delinquent as to payment of principal and interest. Upon a breach of any
representation that materially and adversely affects the interest of the
Certificateholders in a Contract, the Master Servicer, the Unaffiliated Seller
or such other party, as appropriate, will be obligated either to cure the
breach in all material respects or to repurchase the Contract or, if so
specified in the applicable Prospectus Supplement, to substitute another
Contract as described below. This repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for a breach of representation by the Master Servicer, the Unaffiliated Seller
or such other party.
If so specified in the applicable Prospectus Supplement, in addition to
making certain representations and warranties regarding its authority to enter
into, and its ability to perform its obligations under, the Agreement, the
Master Servicer will make certain representations and warranties, except to
the extent that another party specified in the Prospectus Supplement makes any
such representations, to the Trustee with respect to the enforceability of
coverage under any applicable insurance policy or hazard insurance policy. See
"Description of Insurance" for information regarding the extent of coverage
under certain of such insurance policies. Upon a breach of the insurability
representation that materially and adversely affects the interests of the
Certificateholders in a Contract, the Master Servicer, the Unaffiliated Seller
or such other party, as appropriate, generally will be obligated to cure the
breach in all material respects, to repurchase such Contract at a price equal
to the principal balance thereof as of the date of repurchase plus accrued
interest at the related Pass-Through Rate to the first day of the month
following the month of repurchase or to take such other action as may be
specified in the applicable Prospectus Supplement. The Master Servicer, if
required by the Rating Agency rating the Certificates, will procure a surety
bond, guaranty, letter of credit or other instrument (the "Performance Bond")
acceptable to such Rating Agency to support this repurchase obligation. See
"Credit Support-- Performance Bond". This repurchase obligation constitutes
the sole remedy available to the Certificateholders or the Trustee for a
breach of the Master Servicer's or seller's insurability representation.
If the Depositor discovers or receives notice of any breach of its
representations and warranties relating to a Contract within two years or such
other period as may be specified in such Prospectus Supplement of the date of
the initial issuance of the Certificates, the Depositor generally may remove
such Contract from the Trust Fund ("Deleted Contract"), rather than repurchase
the Contract as provided above, and substitute in its place another Contract
("Substitute Contract"). Any Substitute Contract, on the date of substitution,
will (i) have an outstanding principal balance, after deduction of all
scheduled payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Contract (the amount of any
shortfall to be distributed to Certificateholders in the month of
substitution), (ii) have an APR not less than (and not more than 1% greater
than) the APR of the Deleted Contract, (iii) have a Pass-Through Rate equal to
the Pass-Through Rate of the Deleted Contract, (iv) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Contract and (v) comply with all the representations and warranties
set forth in the Pooling and Servicing Agreement as of the date of
substitution. This repurchase or substitution obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for any such breach.
Underwriting Policies
Conventional Contracts will comply with the underwriting policies of the
Originator or Unaffiliated Seller of the Contracts described in the applicable
Prospectus Supplement. Except as described below or in the applicable
Prospectus Supplement, the Depositor believes that these policies were
consistent with those utilized by mortgage lenders or manufactured home
lenders generally during the period of origination.
With respect to a Contract made in connection with the Obligor's purchase of
a Manufactured Home, the "appraised value" is the amount determined by a
professional appraiser. The appraiser must personally inspect the Manufactured
Home and prepare a report which includes market data based on recent sales of
comparable
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Manufactured Homes and, when deemed applicable, a replacement cost analysis
based on the current cost of a similar Manufactured Home. The Contract Loan-
to-Value Ratio is equal to the original principal amount of the Contract
divided by the lesser of the "appraised value" or the sales price for the
Manufactured Home or such other amount as may be specified, or determined by
such method as may be specified, in the applicable Prospectus Supplement.
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Certificates of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding
Account") to be established with the Trustee, which will be used to acquire
additional Mortgage Loans or Contracts from time to time during the time
period specified in the related Prospectus Supplement (the "Pre-Funding
Period"). Prior to the investment of the Pre-Funded Amount in additional
Mortgage Loans or Contracts, such Pre-Funded Amount may be invested in one or
more Eligible Investments. Except as otherwise provided in the applicable
Agreement, and "Eligible Investments" is any of the following, in each case as
determined at the time of the investment or contractual commitment to invest
therein (to the extent such investments would not require registration of the
Trust Fund as an investment company pursuant to the Investment Company Act of
1940): (a) negotiable instruments or securities represented by instruments in
bearer or registered or book-entry form which evidence: (i) obligations which
have the benefit of full faith and credit of the United States of America,
including depositary receipts issued by a bank as custodian with respect to
any such instrument or security held by the custodian for the benefit of the
holder of such depositary receipt, (ii) demand deposits or time deposits in,
or bankers' acceptances issued by, any depositary institution or trust company
incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by Federal or state banking
or depositary institution authorities; provided that at the time of the
Trustee's investment or contractual commitment to invest therein, the
certificates of deposit or short-term deposits (if any) or long-term unsecured
debt obligations (other than such obligations whose rating is based on
collateral or on the Credit of a Person other than such institution or trust
company) of such depositary institution or trust company has a credit rating
in the highest rating category from each Rating Agency, (iii) certificates of
deposit having a rating in the highest rating from each Rating Agency or (iv)
investments in money market funds which are (or which are composed of
instruments or other investments which are) rated in the highest category from
each Rating Agency; (b) demand deposits in the name of the Trustee in any
depositary institution or trust company referred to in clause (a)(ii) above;
(c) commercial paper (having original or remaining maturities of no more than
270 days) having credit rating in the highest rating category from each Rating
Agency; (d) Eurodollar time deposits that are obligations of institutions
whose time deposits carry a credit rating in the highest rating category from
each Rating Agency; (e) repurchase agreements involving any Eligible
Investment described in any of clauses (a)(i), (a)(iii) or (d) above, so long
as the other party to the repurchase agreement has its long-term unsecured
debt obligations rated in the highest rating category from each Rating Agency;
and (f) any other investment with respect to which each Rating Agency rating
such Certificates indicates will not result in the reduction or withdrawal of
its then existing rating of the certificates. Except as otherwise provided in
the applicable Agreement, any Eligible Investment must mature no later than
the Business Day prior to the next Distribution Date.
During any Pre-Funding Period, the Depositor will be obligated (subject only
to the availability thereof) to transfer to the related Trust Fund additional
Mortgage Loans or Contracts from time to time during such Pre-Funding Period.
Such additional Mortgage Loans or Contracts will be required to satisfy
certain eligibility criteria more fully set forth in the related Prospectus
Supplement which eligibility criteria will be consistent with the eligibility
criteria of the Mortgage Loans or Contracts included in the Trust Fund as of
the Closing Date subject to such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Certificates will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
90 days from the related Closing Date, (b) that the additional loans to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Mortgage Loans or Contracts included
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in the related Trust Fund on the Closing Date (although additional criteria
may also be required to be satisfied, as described in the related Prospectus
Supplement) and (c) the Pre-Funded Amount will not exceed 25% of the principal
amount of the Certificates issued pursuant to a particular offering.
GOVERNMENT SECURITIES
General
If so specified in the applicable Prospectus Supplement, the Trust Fund for
a Series may include any combination of (i) receipts or other instruments
created under the Department of the Treasury's Separate Trading of Registered
Interest and Principal of Securities, or STRIPS, program ("Treasury Strips"),
which interest and/or principal strips evidence ownership of specific interest
and/or principal payments to be made on certain United States Treasury Bonds
("Treasury Bonds"), (ii) Treasury Bonds and (iii) certain other debt
securities ("GSE Bonds") of United States government sponsored entities
("GSEs") (GSE Bonds, together with Treasury Strips, and Treasury Bonds,
collectively, "Government Securities"). The Government Securities, if any,
included in a Trust Fund are intended to assure investors that funds will be
available to make certain specified payments of principal and/or interest due
on the related Certificates. As such, the Government Securities, if any,
included in a Trust Fund are intended to both (i) support the ratings assigned
to the related Certificates and (ii) perform a function similar to that
described herein under "Credit Support". A description of the respective
general features of Treasury Bonds, Treasury Strips and GSE Bonds is set forth
below.
The Prospectus Supplement for each Series of Certificates the Trust Fund
with respect to which contains Government Securities will contain information
as to: (i) the title and series of each such Government Security, the
aggregate principal amount, denomination and form thereof; (ii) the limit, if
any, upon the aggregate principal amount of such Government Security; (iii)
the dates on which, or the range of dates within which, the principal of (and
premium, if any, on) such Government Security will be payable; (iv) the rate
or rates, or the method of determination thereof, at which such Government
Security will bear interest, if any; the date or dates from which such
interest will accrue; and the dates on which such interest will be payable;
(v) whether such Government Security was issued at a price lower than the
principal amount thereof; (vi) material events of default or restrictive
covenants provided for with respect to such Government Security; (vii) the
rating thereof, if any; (viii) the issuer of each Government Security; (ix)
the material risks, if any, posed by any such Government Securities and the
issuers thereof (which risks, if appropriate, will be described in the "Risk
Factors"section of the related Prospectus Supplement; and (x) any other
material terms of such Government Security. With respect to a Trust Fund which
includes a pool of Government Securities, the related Prospectus Supplement
will, to the extent applicable, describe the composition of the Government
Securities' pool, certain material events of default or restrictive covenants
common to the Government Securities, and, on an aggregate, percentage or
weighted average basis, as applicable, the characteristics of the pool with
respect to the terms set forth in (iii), (iv), (v) of the preceding sentence
and any other material terms regarding such pool.
The Government Securities included in a Trust Fund will be senior,
unsecured, nonredeemable obligations of the issuer thereof, will be
denominated in United States dollars and, if rated, will be rated at least
investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Government Securities in a Trust Fund with respect
to a Series of Certificates is conditioned upon their characteristics being in
form and substance satisfactory to the Rating Agency rating the related Series
of Certificates.
Treasury Bonds
Treasury Bonds are issued by and are the obligations of The United States of
America. As such, the payment of principal and interest on each Treasury Bond
will be guaranteed by the full faith and credit of the United States of
America. Interest is typically payable on the Bonds semiannually. Treasury
Bonds are issued in registered form in denominations of $1,000, $5,000,
$10,000, $100,000 and $1,000,000 and in book-entry form in integral multiples
thereof.
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Treasury Strips
In general, Treasury Strips are created by separating, or "stripping", the
principal and interest components of Treasury Bonds that have an original
maturity of 10 or more years from the date of issue. A particular Treasury
Strip evidences ownership of the principal payment or one of the periodic
interest payments (generally semiannual) due on the Treasury Bond to which
such Treasury Strip relates.
In 1985 the Department of the Treasury announced that all new issues of
Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs
(which are described below under "--Private Label Custody Receipt
Securities"), and investment banks no longer sponsor new issues of custodial
receipts.
Treasury Strips may be either "serial" or "callable". A serial Treasury
Strip evidences ownership of one of the periodic interest payments to be made
on a Treasury Bond. No payments are made on such Treasury Strip, nor is it
redeemable, prior to its maturity, at which time the holder becomes entitled
to receive a single payment of the face amount thereof. Callable Treasury
Strips relate to payments scheduled to be made after the related Treasury
Bonds have become subject to redemption. Such Treasury Strips evidence
ownership of both principal of the related Treasury Bonds and each of the
related interest payments commencing, typically, on the first interest payment
date following the first optional redemption date. If the underlying Treasury
Bonds are actually redeemed, holders of callable Treasury Strips generally
receive a payment equal to the principal portion of the total face amount of
such Treasury Strips plus the interest payment represented by the Treasury
Strips maturing on the redemption date. No callable Treasury Strip will be
included in a Trust Fund. The face amount of any Treasury Strip is the
aggregate of all payments scheduled to be received thereon. Treasury Strips
are available in registered form and generally may be transferred and
exchanged by the holders thereof in accordance with procedures applicable to
the particular issue of such Treasury Strips.
GSE Bonds
As specified in the applicable Prospectus Supplement, the obligations of one
or more of the following GSEs may be included in a Trust Fund: Federal
National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage
Association ("Freddie Mac"), Student Loan Marketing Association ("Sallie
Mae"), REFCO, Tennessee Valley Authority ("TVA"), Federal Home Loan Banks
("FHLB") (to the extent such obligations represent the joint and several
obligations of the twelve Federal Home Loan Banks), and Federal Farm Credit
Banks ("FFCB"). GSE debt securities are exempt from registration under the
Securities Act pursuant to Section 3(a)(2) of the Securities Act (or are
deemed by statute to be so exempt) and are not required to be registered under
the Exchange Act. The securities of any GSE will be included in a Trust Fund
only to the extent that (i) its obligations are supported by the full faith
and credit of the United States government or (ii) such organization makes
publicly available its annual report which shall include financial statements
or similar financial information with respect to such organization (a "GSE
Issuer"). Unless otherwise specified in the related Prospectus Supplement, the
GSE Bonds will not be guaranteed by the United States and do not constitute a
debt or obligation of the United States or of any agency or instrumentality
thereof other than the related GSE.
Unless otherwise specified in the related Prospectus Supplement, none of the
GSE Bonds will have been issued pursuant to an indenture, and no trustee is
provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be
governed by a fiscal agency agreement. A Fiscal Agent is not a trustee for the
holders of the GSE Bonds and does not have the same responsibilities or duties
to act for the holders as would a trustee.
GSE Bonds may be subject to certain contractual and statutory restrictions
which may provide some protection to securityholders against the occurrence or
effects of certain specified events. Unless otherwise specified in the related
Prospectus Supplement, each GSE is limited to such activities as will promote
its statutory
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purposes as set forth in the publicly available information with respect to
such issuer. A GSE's promotion of its statutory purposes, as well as its
statutory, structural and regulatory relationships with the federal
government, may cause or require such GSE to conduct its business in a manner
that differs from what an enterprise which is not a GSE might employ.
The Federal National Mortgage Association
Fannie Mae is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. It is the largest investor in home mortgage loans in the United States.
Fannie Mae originally was established in 1938 as a corporation wholly owned by
the United States government to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968 and 1970. Fannie Mae provides funds
to the mortgage market by purchasing mortgage loans from lenders, thereby
replenishing their funds for additional lending. Fannie Mae acquires funds to
purchase loans from many capital market investors that ordinarily may not
invest in mortgage loans, thereby expanding the total amount of funds
available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas. Fannie Mae also
issues mortgage-backed securities ("MBS"). Fannie Mae receives guaranty fees
for its guaranty of timely payment of principal of and interest on MBS. Fannie
Mae issues MBS primarily in exchange for pools of mortgage loans from lenders.
The issuance of MBS enables Fannie Mae to further its statutory purpose of
increasing the liquidity of residential mortgage loans.
Fannie Mae prepares an Information Statement annually which describes Fannie
Mae, its business and operations and contains Fannie Mae's audited financial
statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include certain unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable Prospectus Supplement, these documents
can be obtained without charge from the Office of Investor Relations, Fannie
Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016; telephone (202) 752-
7115. Fannie Mae is not subject to the periodic reporting requirements of the
Exchange Act.
The Federal Home Loan Mortgage Corporation
Freddie Mac is a publicly held government-sponsored enterprise created on
July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act,
Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). Freddie Mac's statutory mission is to provide stability in the
secondary market for home mortgages, to respond appropriately to the private
capital market and to provide ongoing assistance to the secondary market for
home mortgages (including mortgages secured by housing for low- and moderate-
income families involving a reasonable economic return to Freddie Mac) by
increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for home mortgage financing. The
principal activity of Freddie Mac consists of the purchase of conventional
residential mortgages and participation interests in such mortgages from
mortgage lending institutions and the sale of guaranteed mortgage securities
backed by the mortgages so purchased. Freddie Mac generally matches and
finances its purchases of mortgages with sales of guaranteed securities.
Mortgages retained by Freddie Mac are financed with short- and long-term debt,
cash temporarily held pending disbursement to security holders, and equity
capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to
its Information Statement which include certain unaudited financial data and
other information concerning the business and operations of Freddie Mac.
Unless otherwise specified in the applicable Prospectus Supplement, these
documents can be obtained from Freddie Mac by writing or calling Freddie Mac's
Investor Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia,
22102; outside Washington, D.C. metropolitan area, telephone (800) 336-3672;
within Washington, D.C. metropolitan area, telephone(703) 759-8160. Freddie
Mac is not subject to the periodic reporting requirements of the Exchange Act.
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The Student Loan Marketing Association
Sallie Mae is a stockholder-owned corporation established by the 1972
amendments to the Higher Education Act of 1965, as amended, to provide
liquidity, primarily through secondary market and warehousing activities, for
lenders participating in federally sponsored student loan programs, primarily
the Federal Family Education Loan ("FFEL") program and the Health Education
Assistance Loan Program. Under the Higher Education Act, Sallie Mae is
authorized to purchase, warehouse, sell and offer participations or pooled
interests in, or otherwise deal in, student loans, including, but not limited
to, loans insured under the FFEL program, and to make commitments for any of
the foregoing. Sallie Mae is also authorized to buy, sell, hold, underwrite
and otherwise deal in obligations of eligible lenders, if such obligations are
issued by such eligible lenders for the purpose of making or purchasing
federally guaranteed student loans under the Higher Education Act. As a
federally chartered corporation, Sallie Mae's structure and operational
authorities are subject to revision by amendments to the Higher Education Act
or other federal enactments.
Sallie Mae prepares an Information Statement annually which describes Sallie
Mae, its business and operations and contains Sallie Mae's audited financial
statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include certain unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable Prospectus Supplement, these documents
can be obtained without charge upon written request to the Corporate and
Investor Relations Division of Sallie Mae at 1050 Thomas Jefferson Street,
N.W., Washington, D.C. 20007; telephone (202) 298-3010. Sallie Mae is not
subject to the periodic reporting requirements of the Exchange Act.
The Resolution Funding Corporation
REFCO is a mixed-ownership government corporation established by Title V of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"). The sole purpose of REFCO is to provide financing for the
Resolution Trust Corporation (the "RTC"). REFCO is to be dissolved, as soon as
practicable, after the maturity and full payment of all obligations issued by
it. REFCO is subject to the general oversight and direction of the Oversight
Board, which is comprised of the Secretary of the Treasury, the Chairman of
the Board of Governors of the Federal Reserve System, the Secretary of Housing
and Urban Development and two independent members to be appointed by the
President with the advice and consent of the Senate. The day-to-day operations
of REFCO are under the management of a three-member Directorate comprised of
the Director of the Office of Finance of the FHLB and two members selected by
the Oversight Board from among the presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases involving
failed savings and loan institutions pursuant to policies established by the
Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the Secretary/Treasurer,
Resolution Funding Corporation, Suite 1000, 11921 Freedom Drive, Reston,
Virginia 22090; telephone (703) 487-9517. REFCO is not subject to the periodic
reporting requirements of the Exchange Act.
The Federal Home Loan Banks
The Federal Home Loan Banks constitute a system of twelve federally
chartered corporations (collectively, the "FHLB"), each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source
of funds to their member institutions. A primary source of funds for the FHLB
is the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all
the FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal
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agency in the executive branch of the United States government, but
obligations of the FHLB are not obligations of the United States government.
The Federal Home Loan Bank System produces annual and quarterly financial
reports in connection with the original offering and issuance by the Federal
Housing Finance Board of consolidated bonds and consolidated notes of the
FHLB. Unless otherwise specified in the applicable Prospectus Supplement,
questions regarding such financial reports should be directed to the Deputy
Director, Financial Reporting and Operations Division, Federal Housing Finance
Board, 1777 F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901.
Unless otherwise specified in the applicable Prospectus Supplement, copies of
such reports may be obtained by written request to Capital Markets Division,
Office of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive,
Reston, Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to
the periodic reporting requirements of the Exchange Act.
Tennessee Valley Authority
TVA is a wholly owned corporate agency and instrumentality of the United
States of America established pursuant to the Tennessee Valley Authority Act
of 1933, as amended (the "TVA Act"). TVA's objective is to develop the
resources of the Tennessee Valley region in order to strengthen the regional
and national economy and the national defense. The programs of TVA consist of
power and nonpower programs. For the fiscal year ending September 30, 1995,
TVA received $139 million in congressional appropriations from the federal
government for the nonpower programs. The power program is required to be
self-supporting from revenues it produces. The TVA Act authorizes TVA to issue
evidences of indebtedness that may be serviced only from proceeds of its power
program. TVA bonds are not obligations of or guaranteed by the United States
government.
TVA prepares an Information Statement annually which describes TVA, its
business and operations and contains TVA's audited financial statements. From
time to time TVA prepares supplements to its Information Statement which
include certain unaudited financial data and other information concerning the
business and operations of TVA. Unless otherwise specified in the applicable
Prospectus Supplement, these documents can be obtained by writing or calling
Tennessee Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee
37902-1499, Attention: Vice President and Treasurer; telephone (423) 632-3366.
TVA is not subject to the periodic reporting requirements of the Exchange Act.
Federal Farm Credit Banks
The Farm Credit System is a nationwide system of lending institutions and
affiliated service and other entities (the "System"). Through its Banks
("FCBs") and related associations, the System provides credit and related
services to farmers, ranchers, producers and harvesters of aquatic products,
rural homeowners, certain farm-related businesses, agricultural and aquatic
cooperatives and rural utilities. System institutions are federally chartered
under the Farm Credit Act of 1971, as amended (the "Farm Credit Act"), and are
subject to regulation by a Federal agency, the Farm Credit Administration (the
"FCA"). The FCBs and associations are not commonly owned or controlled. They
are cooperatively owned, directly or indirectly, by their respective
borrowers. Unlike commercial banks and other financial institutions that lend
to the agricultural sector in addition to other sectors of the economy, under
the Farm Credit Act the System institutions are restricted solely to making
loans to qualified borrowers in the agricultural sector, to certain related
businesses and to rural homeowners. Moreover, the System is required to make
credit and other services available in all areas of the nation. In order to
fulfill its broad statutory mandate, the System maintains lending units in all
50 states and the Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the sale
of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on
all Systemwide Debt Securities. Systemwide Debt Securities are issued by the
FCBs through the Federal Farm Credit Banks Funding Corporation, as agent for
the FCBs (the "Funding Corporation").
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Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent thereto and certain press releases
issued from time to time by the Funding Corporation. Unless otherwise
specified in the applicable Prospectus Supplement, such information and the
Farm Credit System Annual Report to Investors for the current and two
preceding fiscal years are available for inspection at the Federal Farm Credit
Banks Funding Corporation, Investment Banking Services Department, 10 Exchange
Place, Suite 1401, Jersey City, New Jersey 07302; telephone (201) 200-8000.
Upon request, the Funding Corporation will furnish, without charge, copies of
the above information. The FCBs are not subject to the periodic reporting
requirements of the Exchange Act.
PRIVATE LABEL CUSTODY RECEIPT SECURITIES
General
If so specified in the applicable Prospectus Supplement, the Trust Fund for
a Series may include any combination of (i) receipts or other instruments
(other than Treasury Strips) evidencing ownership of specific interest and/or
principal payments to be made on certain Treasury Bonds held by a custodian
("Private Label Custody Strips") and (ii) receipts or other instruments
evidencing ownership of specific interest and/or principal payments to be made
on certain Resolution Funding Corporation ("REFCO") bonds ("REFCO Strips"; and
together with Private Label Custody Strips, "Private Label Custody Receipt
Securities"). The Private Label Custody Receipt Securities, if any, included
in a Trust Fund are intended to assure investors that funds are available to
make certain specified payments of principal and/or interest due on the
related Certificates. As such the Private Label Custody Receipt Securities, if
any, included in a Trust Fund are intended to both (i) support the ratings
assigned to such Certificates and (ii) perform a function similar to that
described herein under "Credit Support". A description of the respective
general features of Private Label Custody Receipt Securities is set forth
below.
The Prospectus Supplement for each Series of Certificates the Trust Fund
with respect to which contains Private Label Custody Receipt Securities will
contain information as to: (i) the title and series of each such Private Label
Custody Receipt Security, the aggregate principal amount, denomination and
form thereof; (ii) the limit, if any, upon the aggregate principal amount of
such Private Label Custody Receipt Security; (iii) the dates on which, or the
range of dates within which, the principal of (and premium, if any, on) such
Private Label Custody Receipt Security will be payable; (iv) the rate or
rates, or the method of determination thereof, at which such Private Label
Custody Receipt Security will bear interest, if any, the date or dates from
which such interest will accrue; and the dates on which such interest will be
payable; (v) whether such Private Label Custody Receipt Security was issued at
a price lower than the principal amount thereof, (vi) material events of
default or restrictive covenants provided for with respect to such Private
Label Custody Receipt Security; (vii) the rating thereof, if any; (viii) the
issuer of such Private Label Custody Receipt Security; (ix) the material
risks, if any, posed by any such Private Label Custody Receipt Security and
the issuer thereof (which risks, if appropriate, will be described in the
"Risk Factors" section of the Prospectus Supplement; and (x) any other
material terms of such Private Label Custody Receipt Security. With respect to
a Trust Fund which includes a pool of Private Label Custody Receipt
Securities, the related Prospectus Supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities'
pool, certain material events of default or restrictive covenants common to
the Private Label Custody Receipt Securities, and, on an aggregate, percentage
or weighted average basis, as applicable, the characteristics of the pool with
respect to the terms set forth in (iii), (iv) and (v) of the preceding
sentence and any other material terms regarding such pool.
The Private Label Custody Receipt Securities included in a Trust Fund will
be senior, unsecured, nonredeemable obligations of the issuers thereof, will
be denominated in United States dollars and, if rated, will be rated at least
investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Private Label Custody Receipt Securities in a Trust
Fund with respect to a Series of Certificates is conditioned upon their
characteristics being in form and substance satisfactory to the Rating Agency
rating the related Series
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of Certificates. Each Trust will be provided with an opinion of Sidley &
Austin to the effect that the Private Label Custody Receipt Securities
included in the related Trust Fund are exempt from the registration
requirements of the Securities Act. A copy of such opinion will be filed with
the SEC in a Current Report on Form 8-K or in a post-effective amendment to
the Registraton Statement.
Private Label Custody Strips
The first "stripping" of Treasury Bonds occurred in the 1970s when
government securities dealers physically separated coupons from definitive
certificates and offered them to investors as tax-deferred investments.
Investors were able to purchase the "strip" at a deep discount and pay no
federal income tax until resale or maturity. This tax treatment was limited in
1982 by the Tax Equity and Fiscal Responsibility Act ("TEFRA") which required
holders of such strips to accrue a portion of the discount toward par annually
and report such accrual, even though unrealized, as taxable income. TEFRA also
required that all new Treasury issues be made available only in book-entry
form.
The shift to "book-entry only" Treasury Bonds created a shortage of the
physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would thereupon issue certificates
evidencing rights in principal and interest payments. Some of the better known
programs first came to market in 1982 and 1983. Although available eventually
in denominations as small as $1,000, these custodial receipts lacked the
liquidity of the physical strips. While physical strips had multiple market-
makers, custodial receipts were proprietary and, as such, the sole market-
maker would usually be an affiliate of the program's sponsor. As a result, the
market that developed for such receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security
known as a TR (Treasury Receipt). A large secondary market quickly developed
in these generic Treasury Strips
Treasury Receipts, physical strips and the proprietary receipts trade at
varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip (as opposed to a STRIP) cannot
enforce payment on such Treasury Strip against the Treasury; instead, such
holder must look to the custodian for payment. Such custodian (and such holder
of a Private Label Custody Strip that obtains ownership of the underlying
Treasury Bond) can enforce payment of the underlying Treasury Bond against the
Treasury. In the event any Private Label Custody Strips are included in a
Trust Fund with respect to any Series of Certificates, the Prospectus
Supplement for such Series will include the identity and a brief description
of each custodian that issued such Private Label Custody Strips. In the event
the Depositor knows that the depositor of the Treasury Bonds underlying such
Private Label Custody Strips is the Depositor or any of its affiliates, the
Depositor will disclose such fact in such Prospectus Supplement.
REFCO Strips
A REFCO Bond may be divided into its separate components, consisting of: (i)
each future semi-annual interest distribution (an "Interest Component"); and
(ii) the principal payment (the "Principal Component") (each component
individually hereinafter referred to as a "REFCO Strip"). REFCO Strips are not
created by REFCO; instead, third parties such as investment banking firms
create them. Each REFCO Strip has an identifying designation and CUSIP number.
REFCO Strips generally trade in the market for Treasury Strips at yields of a
few basis points over Treasury Strips of similar maturities. REFCO Strips are
viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount of the
REFCO Bond must be in an amount which, based on the stated interest rate of
the REFCO Bond, will produce a semi-annual interest payment
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of $1,000 or an integral multiple thereof. REFCO Bonds may be separated into
their components at any time from the issue date until maturity. Once created,
REFCO Strips are maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on such REFCO Strip against
REFCO; instead, such holder must look to the custodian for payment . Such
custodian (and such holder of a REFCO Strip that obtains ownership of the
underlying REFCO Bond) can enforce payment of the underlying REFCO Bond
against REFCO. The identity and a brief description of each custodian that has
issued any REFCO Strip included in the Trust Fund will be set forth in the
related Prospectus Supplement. In the event the Depositor knows that the
depositor of the REFCO Bonds underlying the REFCO Strips included in the Trust
Fund is the Depositor or any of its affiliates, the Depositor will disclose
such fact in such Prospectus Supplement.
THE DEPOSITOR
The Depositor is a special purpose Delaware corporation organized for the
purpose of causing the issuance of Certificates and other securities issued
under the Registration Statement backed by receivables or underlying
securities of various types and acting as settlor or depositor with respect to
trusts, custody accounts or similar arrangements or as general or limited
partner in partnerships formed to issue securities. It is not expected that
the Depositor will have any significant assets. The Depositor is an indirect,
wholly owned finance subsidiary of Collateralized Mortgage Securities
Corporation, which is a wholly owned subsidiary of Credit Suisse First Boston
Securities Corporation, which is a wholly owned subsidiary of Credit Suisse
First Boston, Inc. Neither Credit Suisse First Boston Securities Corporation,
nor Credit Suisse First Boston, Inc., nor any of their affiliates, has
guaranteed, will guarantee or is or will be otherwise obligated with respect
to any Series of Certificates. The Depositor's principal executive office is
located at 11 Madison Avenue, New York, New York 10010, and its telephone
number is (212) 325-2000.
Trust Assets, Government Securities, if any, and Private Label Custody
Receipt Securities, if any, will be acquired by the Depositor directly or
through one or more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series offered hereby and by the applicable Prospectus
Supplement to purchase the Trust Assets and any other assets constituting the
related Trust Fund, to repay indebtedness which has been incurred to obtain
funds to acquire the Trust Assets, to establish the Reserve Funds, if any, for
the Series and to pay costs of structuring and issuing the Certificates. If so
specified in the applicable Prospectus Supplement, the Trust Assets,
Government Securities, if any, and Private Label Custody Receipt Securities,
if any, for each Series of Certificates will be acquired by the Depositor
either directly, or through one or more affiliates which will have acquired
such assets from time to time either in the open market or in privately
negotiated transactions (in the case of Trust Assets and any other assets
constituting the related Trust Fund other than Mortgage Certificates).
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YIELD CONSIDERATIONS
Each monthly payment on a Mortgage Loan is calculated as one-twelfth of the
applicable Mortgage Rate multiplied by the unpaid principal balance of such
Mortgage Loan. The amount of such interest payment distributed monthly to
Certificateholders with respect to each Mortgage Loan generally will be
similarly calculated based on the applicable Pass-Through Rate for the related
Mortgage Pool. The Pass-Through Rate for a Mortgage Pool will be either fixed
or variable, as specified in the applicable Prospectus Supplement.
Each monthly accrual of interest on a Contract is calculated as one-twelfth
of the product of the APR and he principal balance outstanding on the
scheduled payment date for such Contract in the preceding month. If so
specified in the applicable Prospectus Supplement, the Pass-Through Rate with
respect to each Contract will be calculated on a Contract-by-Contract basis
and the servicing fee applicable to each Contract from the applicable APR.
With respect to a Mortgage Pool or a Contract Pool bearing a fixed Pass-
Through Rate, each Mortgage Loan or Contract will have a Mortgage Rate or APR
that exceeds the Pass-Through Rate by at least 3/8 of 1% (or such other
percentage as may be specified in the applicable Prospectus Supplement). The
difference between a Mortgage Rate or APR and the related fixed Pass-Through
Rate for the Mortgage Pool or Contract Pool (less any servicing compensation
payable to the related Servicers and the amounts, if any, payable to the
Depositor or the person or entity specified in the applicable Prospectus
Supplement) will be retained by the Master Servicer as servicing compensation
to it. See "Description of the Certificates--Servicing Compensation and
Payment of Expenses". Although Mortgage Rates and APRs in a fixed Pass-Through
Rate Mortgage Pool or Contract Pool, respectively, may vary, disproportionate
principal prepayments among Mortgage Loans bearing different Mortgage Rates or
APRs will not affect the return to Certificateholders since, as set forth
above, the Pass-Through Rate may not exceed any Mortgage Rate or APR.
With respect to Mortgage Pools having a variable Pass-Through Rate, the
Pass-Through Rate will equal the weighted average of the Mortgage Rates on all
the Mortgage Loans in the Mortgage Pool, minus the servicing compensation
payable to the Master Servicer and the Servicer of such Mortgage Loans and the
amounts, if any, retained by the Depositor or an Unaffiliated Seller or paid
to the person or entity specified in the applicable Prospectus Supplement. The
servicing fee and such other amounts will be fixed as to each Mortgage Loan at
a rate per annum, and may vary among Mortgage Loans. Because the Mortgage
Rates in such a Mortgage Pool will differ and the aggregate servicing
compensation and such other amounts to be retained or distributed with respect
to each Mortgage Loan will be fixed, it is likely that the weighted average of
the Mortgage Rates, and the corresponding variable Pass-Through Rate, will
change as the Mortgage Loans amortize and as a result of prepayments.
If so specified in the applicable Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to such Mortgage Loans. As a
result, the portion of each monthly payment allocated to principal may vary
from month to month. Negative amortization with respect to a Mortgage Loan
will occur if an adjustment to the Mortgage Rate causes the amount of interest
accrued in any month, calculated at the new Mortgage Rate for such period, to
exceed the amount of the monthly payment or if the allowable increase in any
monthly payment is limited to an amount that is less than the amount of
interest accrued in any month. The amount of any resulting Deferred Interest
will be added to the principal balance of the Mortgage Loan and will bear
interest at the Mortgage Rate in effect from time to time. To the extent that,
as a result of the addition of any Deferred Interest, the Mortgage Loan
negatively amortizes over its term, the weighted average life of the
Certificates of the related Series will be greater than would otherwise be the
case. As a result, the yield on any such Mortgage Loan at any time may be less
than the yields on similar adjustable rate mortgage loans, and the rate of
prepayment may be lower or higher than would otherwise be anticipated.
Generally, when a full prepayment is made on a Mortgage Loan or Contract,
the Mortgagor or the borrower under a Contract (the "Obligor"), is charged
interest for the number of days actually elapsed from the due date
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of the preceding monthly payment up to the date of such prepayment, at a daily
interest rate determined by dividing the Mortgage Rate or APR by 365. Full
prepayments will reduce the amount of interest paid by the Mortgagor or the
Obligor because interest on the principal amount of any Mortgage Loan or
Contract so prepaid will be paid only to the date of prepayment instead of for
a full month; however, the Master Servicer with respect to a Series (subject
to certain limitations which, if applicable, herein or in the applicable
Prospectus Supplement) will be required to advance from its own funds the
portion of any interest at the related Pass-Through Rate that is not so
received. Partial prepayments generally are applied on the first day of the
month following receipt, with no resulting reduction in interest payable for
the period in which the partial prepayment is made. Full and partial
prepayments, together with interest on such full and partial prepayments at
the Pass-Through Rate for the related Mortgage Pool or Contract Pool to the
last day of the month in which such prepayments occur (subject to certain
limitations which, if applicable, herein or in the applicable Prospectus
Supplement) will be deposited in the Certificate Account and will be available
for distribution to Certificateholders on the next succeeding Distribution
Date in the manner specified in the applicable Prospectus Supplement. See
"Maturity and Prepayment Considerations".
Generally, the effective yield to holders of Certificates having a monthly
Distribution Date will be lower than the yield otherwise produced by the Pass-
Through Rate with respect to a Mortgage Pool or Contract Pool or the pass-
through rate borne by a Mortgage Certificate, Government Security or Private
Label Custody Receipt Security because, while interest will accrue on each
Mortgage Loan, Contract, Mortgage Certificate, Government Security or Private
Label Custody Receipt Security to the first day of the month, the distribution
of such interest to holders of such Certificates, to the extent so specified
in the applicable Prospectus Supplement, will be made no earlier than the 25th
day of the month following the month of the accrual (or such other day as is
set forth in the applicable Prospectus Supplement). The adverse effect on
yield will intensify with any increase in the period of time by which the
Distribution Date with respect to a Series of Certificates succeeds such 25th
day (or such other day as is set forth in the applicable Prospectus
Supplement). With respect to the Multi-Class Certificates of a Series having
other than monthly Distribution Dates, the yield to holders of such
Certificates will also be adversely affected by any increase in the period of
time from the date to which interest accrues on such Certificate to the
Distribution Date on which such interest is distributed.
In the event that the Certificates of a Series are divided into two or more
Classes or Subclasses and that a Class or Subclass is an Interest Weighted
Class, in the event that such Series includes a Class of Residual
Certificates, or as otherwise may be appropriate, the Prospectus Supplement
for such Series will indicate the manner in which the yield to
Certificateholders will be affected by different rates of prepayments on the
Mortgage Loans, on the Contracts or on the mortgage loans underlying the
Mortgage Certificates (and, if applicable, on the related Government
Securities, if any and Private Label Custody Receipt Securities, if any). In
general, the yield on Certificates that are offered at a premium to their
principal or notional amount ("Premium Certificates") is likely to be
adversely affected by a higher than anticipated level of principal prepayments
on the Mortgage Loans, on the Contracts or on the mortgage loans underlying
the Mortgage Certificates. This relationship will become more sensitive as the
amount by which the Percentage Interest of such Class in each Interest
Distribution is greater than the corresponding Percentage Interest of such
Class in each Principal Distribution. If the differential is particularly wide
(e.g., the Interest Distribution is allocated primarily or exclusively to one
Class or Subclass and the Principal Distribution primarily or exclusively to
another) and a high level of prepayments occurs, there is a possibility that
Certificateholders of Premium Certificates will not only suffer a lower than
anticipated yield but, in extreme cases, will fail to recoup fully their
initial investment. Conversely, a lower than anticipated level of principal
prepayments (which can be anticipated to increase the expected yield to
holders of Certificates that are Premium Certificates) will likely result in a
lower than anticipated yield to holders of Certificates that are offered at a
discount to their principal amount ("Discount Certificates"). If so specified
in the applicable Prospectus Supplement, a disproportionately large amount of
Principal Prepayments may be distributed to the holders of the Senior
Certificates at the times and under the circumstances described therein.
In the event that the Certificates of a Series include one or more Classes
or Subclasses of Multi-Class Certificates, the Prospectus Supplement for such
Series will set forth information, measured relative to a
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prepayment standard or model specified in such Prospectus Supplement, with
respect to the projected weighted average life of each such Class or Subclass
and the percentage of the initial Stated Principal Balance of each such
Subclass that would be outstanding on special Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement,
including assumptions that prepayments on the Mortgage Loans, Contracts,
Government Securities, Private Label Custody Receipt Securities or on the
mortgage loans underlying the Mortgage Certificates in the related Trust Fund
are made at rates corresponding to the various percentages of such prepayment
standard or model.
MATURITY AND PREPAYMENT CONSIDERATIONS
The scheduled maturities of all of the Mortgage Loans (or the mortgage loans
underlying the Mortgage Certificates) at origination will not be less than
approximately 10 years or exceed 40 years and all the Contracts will have
maturities at origination of not more than 20 years (or, in each such case,
such other scheduled maturities as are set forth in the applicable Prospectus
Supplement), but such Mortgage Loans (or such underlying mortgage loans) or
Contracts may be prepaid in full or in part at any time. If so specified in
the applicable Prospectus Supplement, no such Mortgage Loan (or mortgage loan)
or Contract will provide for a prepayment penalty and each will contain
(except in the case of FHA and VA Loans) due-on-sale clauses permitting the
mortgagee or obligee to accelerate the maturity thereof upon conveyance of the
Mortgaged Property, Cooperative Dwelling or Manufactured Home.
The FHA has compiled statistics relating to one- to four-family, level
payment mortgage loans insured by the FHA under the National Housing Act of
1934, as amended, at various interest rates, all of which permit assumption by
the new buyer if the home is sold. Such statistics indicate that while some of
such mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentages of the
original number of FHA Loans in pools of level payment mortgage loans of
varying maturities that will remain outstanding on each anniversary of the
original date of such mortgage loans (assuming they all have the same
origination date) ("FHA Experience"). Published information with respect to
conventional residential mortgage loans indicates that such mortgage loans
have historically been prepaid at higher rates than government insured loans
because, unlike government insured mortgage loans, conventional mortgage loans
may contain due-on-sale clauses that allow the holder thereof to demand
payment in full of the remaining principal balance of such mortgage loans upon
sales or certain transfers of the mortgaged property. There are no similar
statistics with respect to the prepayment rates of cooperative loans or loans
secured by multifamily properties.
It is customary in the residential mortgage industry in quoting yields (a)
on a pool of 30-year fixed-rate, level payment mortgages, to compute the yield
as if the pool were a single loan that is amortized according to a 30-year
schedule and is then prepaid in full at the end of the twelfth year and (b) on
a pool of 15-year fixed-rate, level payment mortgages, to compute the yield as
if the pool were a single loan that is amortized according to a 15-year
schedule and then is prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans are also commonly measured
relative to a prepayment standard or model. If so specified in the Prospectus
Supplement relating to a Series of Certificates, the model used in a
Prospectus Supplement will be the Standard Prepayment Assumption ("SPA"). SPA
represents an assumed rate of prepayment relative to the then outstanding
principal balance of a pool of mortgages. A prepayment assumption of 100% of
SPA assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of such mortgages in the first month of the life of the
mortgages and an additional 0.2% per annum in each month thereafter until the
thirtieth month and in each month thereafter during the life of the mortgages,
100% of SPA assumes a constant prepayment rate of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA or
any other rate of assumed prepayment, as applicable, will be set forth in the
Prospectus Supplement with respect to a Series of Certificates.
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There is, however, no assurance that prepayment of the Mortgage Loans
underlying a Series of Certificates will conform to FHA Experience, mortgage
industry custom, any level of SPA, or any other rate specified in the
applicable Prospectus Supplement. A number of factors, including homeowner
mobility, economic conditions, enforceability of due-on-sale clauses, mortgage
market interest rates, mortgage recording taxes and the availability of
mortgage funds, may affect prepayment experience on residential mortgage
loans.
The terms of the Pooling and Servicing Agreement will require the Servicer
or the Master Servicer to enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or the proposed conveyance of the underlying
Mortgaged Property or Cooperative Dwelling; provided, however, that any
enforcement action that would impair or threaten to impair any recovery under
any related Insurance Policy will not be required or permitted. See
"Description of the Certificates--Enforcement of "Due-On-Sale" Clauses;
Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects of the
Mortgage Loans and Contracts--The Mortgage Loans--"Due-On-Sale" Clauses" for a
description of certain provisions of each Pooling and Servicing Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
At the request of the Mortgagor, the Servicer may refinance the Mortgage
Loans in any Mortgage Pool by accepting prepayments thereon and making new
loans secured by a mortgage on the same property. Upon such refinancing, the
new loans will not be included in the Mortgage Pool and the related Servicer
will be required to repurchase the affected Mortgage Loan. A Mortgagor may be
legally entitled to require the Servicer to allow such a refinancing. Any such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Contracts may be influenced
by a variety of economic, geographic, social and other facts, including
repossessions, aging, seasonality and interest rate fluctuations. Other
factors affecting prepayment of mortgage loans or Contracts include changes in
housing needs, job transfers, unemployment and servicing decisions. An
investment in Certificates evidencing interests in Contracts may be affected
by, among other things, a downturn in regional or local economic conditions.
These regional or local economic conditions are often volatile, and
historically have affected the delinquency, loan loss and repossession
experience of the Contracts. To the extent that losses on the Contracts are
not covered by the Subordinated Amount, if any, Letters of Credit, applicable
Insurance Policies, if any, or by any Alternative Credit Support, holders of
the Certificates of a Series evidencing interests in such Contracts will bear
all risk of loss resulting from default by Obligors and will have to look
primarily to the value of the Manufactured Homes, which generally depreciate
in value, for recovery of the outstanding principal and unpaid interest of the
defaulted Contracts. See "The Trust Fund--The Contract Pools".
While most Contracts will contain "due-on-sale" provisions permitting the
holder of the Contract to accelerate the maturity of the Contract upon
conveyance by the borrower, the Master Servicer may permit proposed
assumptions of Contracts where the proposed buyer meets the underwriting
standards described above. Such assumption would have the effect of extending
the average life of the Contract. FHA Mortgage Loans and Contracts and VA
Mortgage Loans and Contracts are not permitted to contain "due on sale"
clauses, and are freely assumable.
Mortgage Loans made with respect to Multifamily Properties may have
provisions that prevent prepayment for a number of years and may provide for
payments of interest only during a certain period followed by amortization of
principal on the basis of a schedule extending beyond the maturity of the
related Mortgage Loan. Prepayments of Mortgage Loans secured by Multifamily
Property may be affected by these and other factors, including changes in
interest rates and the relative tax benefits associated with ownership of
Multifamily Property.
If set forth in the applicable Prospectus Supplement, the Depositor or other
specified entity will have the option to repurchase the Trust Assets,
Government Securities, if any, and Private Label Custody Receipt Securities,
if any, included in the related Trust Fund under the conditions stated in such
Prospectus Supplement.
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For any Series of Certificates for which the Depositor has elected to treat
the Trust as one or more REMICs pursuant to the provisions or the Code, any
such repurchase will be effected in compliance with the requirements of
Section 860F(a)(4) of the Code so as to constitute a "qualifying liquidation"
thereunder. In addition, the Depositor will be obligated, under certain
circumstances, to repurchase certain of the Trust Assets, Government
Securities, if any and Private Label Custody Receipt Securities, if any. The
Master Servicer and Unaffiliated Sellers will also have certain repurchase
obligations, as more fully described herein. In addition, the mortgage loans
underlying the Mortgage Certificates may be subject to repurchase under
circumstances similar to those described above. Such repurchases will have the
same effect as prepayments in full. See "The Trust Fund--Mortgage Loan
Program--Representations by Unaffiliated Sellers; Repurchases", "Description
of the Certificates--Assignment of Mortgage Loans", "--Assignment of Mortgage
Certificates", "--Assignment of Contracts", "--Assignment of Government
Securities", "--Assignment of Private Label Custody Receipt Securities" and
"--Termination".
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an agreement
consisting of either (a) a Pooling and Servicing Agreement or (b) a Reference
Agreement (the "Reference Agreement") and the Standard Terms and Provisions of
Pooling and Servicing Agreement (such Standard Terms, the "Standard Terms",
either the Standard Terms together with the Reference Agreement or the Pooling
and Servicing Agreement referred to as the "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer, if any, and the Trustee named in the
applicable Prospectus Supplement or a deposit trust agreement between the
Depositor and the Trustee (the "Deposit Trust Agreement", together with the
Pooling and Servicing Agreement, the "Agreement"). Forms of the Pooling and
Servicing Agreement and the Deposit Trust Agreement have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
following summaries describe the material provisions common to each Pooling
and Servicing Agreement and Deposit Trust Agreement. The summaries are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the Pooling and Servicing Agreement or Deposit Trust Agreement for the
applicable Series and the applicable Prospectus Supplement. Wherever defined
terms of the Pooling and Servicing Agreement or Deposit Trust Agreement are
referred to, such defined terms are thereby incorporated herein by reference.
GENERAL
Each Certificate offered hereby and by means of the applicable Prospectus
Supplement will be issued in book-entry form (or, if specified in the
applicable Prospectus Supplement, fully registered, certificated form) and
will represent the undivided interest or beneficial interest attributable to
such Class or Subclass in the Trust Fund. The Trust Fund with respect to a
Series will consist of: (i) such Mortgage Loans, Contracts, Mortgage
Certificates, Government Securities, Private Label Custody Receipt Securities
and distributions thereon as from time to time are subject to the applicable
Agreement; (ii) such assets as from time to time are identified as deposited
in the Certificate Account referred to below; (iii) property acquired by
foreclosure of Mortgage Loans or deed in lieu of foreclosure, or Manufactured
Homes acquired by repossession; (iv) the Letter of Credit, if any, with
respect to such Series; (v) the Pool Insurance Policy, if any, with respect to
such Series (described below under "Description of Insurance"); (vi) the
Special Hazard Insurance Policy, if any, with respect to such Series
(described below under "Description of Insurance"); (vii) the Mortgagor
Bankruptcy Bond and proceeds thereof, if any, with respect to such Series (as
described below under "Description of Insurance"); (viii) the Performance Bond
and proceeds thereof, if any, with respect to such Series; (ix) the Primary
Mortgage Insurance Policies, if any, with respect to such Series (as described
below under "Description of Insurance"); (x) the Depositor's rights under the
Warranty and Servicing Agreement with respect to the Mortgage Loans or
Contracts, if any, with respect to such Series; and (xi) the GPM and Buy-Down
Funds, if any, with respect to such Series; or, in lieu of some or all of the
foregoing, such Alternative Credit Support as shall be described in the
applicable Prospectus Supplement. Upon the original issuance of a Series of
Certificates, Certificates representing the minimum undivided interest or
beneficial ownership interest in the related Trust Fund or the minimum
notional
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amount allocable to each Class will evidence the undivided interest,
beneficial ownership interest or percentage ownership interest specified in
the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, one or more
Servicers or the Depositor may directly perform some or all of the duties of a
Master Servicer with respect to a Series.
If so specified in the Prospectus Supplement for a Series with respect to
which the Depositor has elected to treat the Trust Fund, in whole or in part,
as one or more REMICs under the Code, ownership of the Trust Fund for such
Series may be evidenced by Multi-Class Certificates and Residual Certificates.
Distributions of principal and interest with respect to Multi-Class
Certificates may be made on a sequential or concurrent basis, as specified in
the applicable Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, one or more of such Classes or Subclasses may be
Compound Interest Certificates.
The Residual Certificates, if any, included in a Series will be designated
by the Depositor as the "residual interest" in the related REMIC for purposes
of Section 860G(a)(2) of the Code, and will represent the right to receive
distributions as specified in the Prospectus Supplement for such Series. All
other Classes of Certificates of such Series will constitute "regular
interests" in the related REMIC, as defined in the Code. If so specified in
the applicable Prospectus Supplement, such Residual Certificates may be
offered hereby and by means of such Prospectus Supplement. See "Certain
Federal Income Tax Consequences".
If so specified in the Prospectus Supplement for a Series which includes
Multi-Class Certificates, each Trust Asset, Government Security, if any, and
Private Label Custody Receipt Security, if any, in the related Trust Fund will
be assigned an initial "Asset Value". The Asset Value of each Trust Asset,
Government Security, if any, and Private Label Custody Receipt Security, if
any, in the related Trust Fund generally will be the Stated Principal Balance
of each Class or Classes of Certificates of such Series that, based upon
certain assumptions, can be supported by distributions on such Trust Assets,
Government Securities and Private Label Custody Receipt Securities allocable
to such Class or Subclass, together with reinvestment income thereon, to the
extent specified in the applicable Prospectus Supplement, and amounts
available to be withdrawn from any Buy-Down, GPM Fund or Reserve Fund for such
Series. The method of determining the Asset Value of the Trust Assets,
Government Securities and Private Label Custody Receipt Securities in the
Trust Fund for such a Series that includes Multi-Class Certificates will be
specified in the applicable Prospectus Supplement.
If so specified in the Prospectus Supplement with respect to a Series,
ownership of the Trust Fund for such Series may be evidenced by one or more
Classes or Subclasses of Certificates that are Senior Certificates and
Subordinated Certificates, each representing the undivided interests in the
Trust Fund specified in such Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, one or more Classes or Subclasses or
Subordinated Certificates of a Series may be subordinated to the right of the
holders of Certificates of one or more Classes or Subclasses within such
Series to receive distributions with respect to the Mortgage Loans, Mortgage
Certificates or Contracts, Government Securities, if any, and Private Label
Custody Receipt Securities, if any, in the related Trust Fund, in the manner
and to the extent specified in such Prospectus Supplement. If so specified in
the applicable Prospectus Supplement, the holders of each Subclass of Senior
Certificates will be entitled to the Percentage Interests in the principal
and/or interest payments on the Mortgage Loans, Mortgage Certificates or
Contracts, Government Securities, if any, and Private Label Custody Receipt
Securities, if any, specified in such Prospectus Supplement. If so specified
in the applicable Prospectus Supplement, the Subordinated Certificates of a
Series will evidence the right to receive distributions with respect to a
specific pool of Mortgage Loans, Mortgage Certificates or Contracts,
Government Securities, if any, and Private Label Custody Receipt Securities,
if any, which right will be subordinated to the right of the holders of the
Senior Certificates of such Series to receive distributions with respect to
such Trust Assets, Government Securities, if any, and Private Label Custody
Receipt Securities, if any, as more fully set forth in such Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
holders of the Senior Certificates may have the right to receive a greater
than pro rata percentage of Principal Prepayments in the manner and under the
circumstances described in the Prospectus Supplement.
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If so specified in the applicable Prospectus Supplement, the Depositor may
sell certain Classes or Subclasses of the Certificates of a Series, including
one or more Classes or Subclasses of Subordinated or Residual Certificates, in
privately negotiated transactions exempt from registration under the
Securities Act. Such Certificates will be transferable only pursuant to an
effective registration statement or an applicable exemption under the
Securities Act and pursuant to any applicable state law. Alternatively, if so
specified in the applicable Prospectus Supplement, the Depositor may offer one
or more Classes or Subclasses of the Subordinated or Residual Certificates of
a Series by means of this Prospectus and such Prospectus Supplement.
The Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee for such purpose set forth in the applicable
Prospectus Supplement. No service charge will be made for any transfer or
exchange of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge in connection with
such transfer or exchange.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the applicable Prospectus Supplement,
distributions of principal and interest on the Certificates of a Series will
be made by the Master Servicer or Trustee, if so specified in the Prospectus
Supplement, on each Distribution Date to persons in whose name the
Certificates are registered at the close of business on the day specified in
such Prospectus Supplement (the "Record Date"). Such distributions of interest
will be made periodically at the intervals, in the manner and at the per annum
rate specified in the applicable Prospectus Supplement, which rate may be
fixed or variable. Interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months or on such other
basis as may be specified in the applicable Prospectus Supplement.
Distributions of principal on the Certificates will be made in the priority
and manner and in the amounts specified in the applicable Prospectus
Supplement.
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, distributions of interest and principal to a Certificateholder
will be equal to the product of the undivided interest evidenced by such
Certificate and the payments of principal and interest (adjusted to the
related Pass-Through Rate) on or with respect to the Mortgage Loans, Contracts
(including any Advances thereof), the Mortgage Certificates the Government
Securities, if any, and Private Label Custody Receipt Security, if any,
included in the Trust Fund with respect to such Series.
If so specified in the applicable Prospectus Supplement, distributions on a
Class or Subclass of Certificates of a Series may be based on the Percentage
Interest evidenced by a Certificate of such Class or Subclass in the
distributions (including any Advances thereof) of principal (the "Principal
Distribution") and interest (adjusted to the Pass-Through Rate for the related
Mortgage Pool or Contract Pool) (the "Interest Distribution") on or with
respect to the Mortgage Loans, the Contracts, the Mortgage Certificates, the
Government Securities, if any, and Private Label Custody Receipt Securities,
if any, in the related Trust Fund. On each Distribution Date, the Trustee will
distribute to each holder of a Certificate of such Class or Subclass an amount
equal to the product of the Percentage Interest evidenced by such Certificate
and the interest of such Class or Subclass in the Principal Distribution and
the Interest Distribution (in each case, subject to certain limitations which,
if applicable, will be described in the applicable Prospectus Supplement). A
Certificate of such a Class or Subclass may represent a right to receive a
percentage of both the Principal Distribution and the Interest Distribution or
a percentage of either the Principal Distribution or the Interest
Distribution, as specified in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, the holders of the
Senior Certificates may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled
payments of principal such holder is entitled to receive. Such percentages may
vary from time to time, subject to the terms and conditions specified in the
Prospectus Supplement.
Distributions of interest on each such Class or Subclass will be made on the
Distribution Dates, and at the Interest Rates, specified in such Prospectus
Supplement (subject to certain limitations in the case of a Series of
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Certificates that includes Multi-Class Certificates, which limitations, if
applicable, will be specified in the applicable Prospectus Supplement).
Distributions of interest on each Class or Subclass of Compound Interest
Certificates of such Series will be made on each Distribution Date after the
Stated Principal Balance of all Certificates of such Series having a Final
Scheduled Distribution Date prior to that of such Class or Subclass of
Compound Interest Certificates has been reduced to zero (subject to certain
limitations in the case of a Series of Certificates that includes Multi-Class
Certificates, which limitations, if applicable, will be specified in the
applicable Prospectus Supplement). Prior to such time, interest on such Class
or Subclass of Compound Interest Certificates will be added to the Stated
Principal Balance thereof on each Distribution Date for such Series.
If so specified in the Prospectus Supplement relating to a Series of
Certificates that includes Multi-Class Certificates, distributions in
reduction of the Stated Principal Balance of such Certificates will be made as
described herein. Distributions in reduction of the Stated Principal Balance
of such Certificates will be made on each Distribution Date for such Series to
the holders of the Certificates of the Class or Subclass then entitled to
receive such distributions until the aggregate amount of such distributions
have reduced the Stated Principal Balance of such Certificates to zero.
Allocation of distributions in reduction of the Stated Principal Balance will
be made to each Class or Subclass of such Certificates in the order specified
in the applicable Prospectus Supplement, which, if so specified in such
Prospectus Supplement, may be concurrently. Distributions in reduction of the
Stated Principal Balance of each Certificate of a Class or Subclass then
entitled to receive such distributions will be made pro rata among the
Certificates of such Class or Subclass (or on such other basis as is specified
in the applicable Prospectus Supplement).
The maximum amount which will be distributed in reduction of the Stated
Principal Balance to holders of Certificates of a Class or Subclass then
entitled thereto on any Distribution Date generally will equal, to the extent
funds are available in the Certificate Account, the sum of (i) the amount of
the interest, if any, that has accrued but is not yet payable on the Compound
Interest Certificates of such Series since the prior Distribution Date (or
since the date specified in the applicable Prospectus Supplement in the case
of the first Distribution Date) (the "Accrual Distribution Amount"); (ii) the
Stated Principal Distribution Amount; and (iii) to the extent specified in the
applicable Prospectus Supplement, the applicable percentage of the Excess Cash
Flow specified in such Prospectus Supplement.
The "Stated Principal Distribution Amount" with respect to a Distribution
Date will equal the sum of the Accrual Distribution Amount, if any, and the
amount, if any, by which the then outstanding Stated Principal Balance of the
Multi-Class Certificates of such Series (before taking into account the amount
of interest accrued on any Class of Compound Interest Certificates of such
Series to be added to the Stated Principal Balance thereof on such
Distribution Date) exceeds the Asset Value of the Trust Assets, the Government
Securities, if any, and Private Label Custody Receipt Securities, if any, in
the Trust Fund underlying such Series as of the end of a period (a "Due
Period") specified in the applicable Prospectus Supplement (or such other
amount as is specified in the applicable Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates). For purposes
of determining the Stated Principal Distribution Amount with respect to a
Distribution Date, the Asset Value of the Trust Assets, the Government
Securities, if any, and Private Label Custody Receipt Securities, if any, will
be reduced to take into account the interest evidenced by such Classes or
Subclasses of Certificates in the principal distributions on or with respect
of such Trust Assets, Government Securities and Private Label Custody Receipt
Securities received by the Trustee during the preceding Due Period.
"Excess Cash Flow" represents the excess of (i) the interest evidenced by
such Multi-Class Certificates in the distributions received on the Mortgage
Loans, Mortgage Certificates or Contracts, Government Securities, if any, and
Private Label Custody Receipt Securities, if any, underlying such Series in
the Due Period preceding a Distribution Date for such Series (and, in the case
of the first Due Period, the amount deposited in the Certificate Account on
the closing day for the sale of such Certificates), together with income from
the reinvestment thereof, and, to the extent specified in such Prospectus
Supplement, the amount of cash withdrawn from any Reserve, GPM or Buy-Down
Fund for such Series in the Due Period preceding such Distribution Date, over
(ii) the sum of all interest accrued, whether or not then distributable, on
the Multi-Class Certificates since the preceding Distribution Date (or since
the date specified in the applicable Prospectus Supplement in the case of the
first
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Distribution Date), the Stated Principal Distribution Amount for the then
current Distribution Date and, if applicable, any payments made on any
Certificates of such Class or Subclass pursuant to any special distributions
in reduction of Stated Principal Balance during such Due Period (or such other
amount as is specified in the applicable Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates).
The Stated Principal Balance of a Multi-Class Certificate of a Series at any
time represents the maximum specified dollar amount (exclusive of interest at
the related Interest Rate) to which the holder thereof is entitled from the
cash flow on the Trust Assets, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, in the Trust Fund for such Series,
and will decline to the extent distributions in reduction of Stated Principal
Balance are received by such holder. The Initial Stated Principal Balance of
each Class or Subclass within a Series that has been assigned a Stated
Principal Balance will be specified in the applicable Prospectus Supplement.
Distributions (other than the final distribution in retirement of the
Certificates) will be made by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register, except that, with
respect to any holder of a Certificate meeting the requirements specified in
the applicable Prospectus Supplement, distributions shall be made by wire
transfer in immediately available funds, provided that the Trustee shall have
been furnished with appropriate wiring instructions not less than two Business
Days prior to the related Distribution Date. The final distribution in
retirement of Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency designated by the Master Servicer
for such purpose, as specified in the final distribution notice to
Certificateholders.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Pooling and Servicing Agreement for a Series of
Certificates that includes Mortgage Certificates in the related Trust Fund,
the Depositor will cause such Mortgage Certificates to be transferred to the
Trustee together with all principal and interest distributed on such Mortgage
Certificates after the Cut-off Date. Each Mortgage Certificate included in a
Trust Fund will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing Agreement. Such schedule will include
information as to the principal balance of each Mortgage Certificate as of the
date of issuance of the Certificates and its coupon rate, maturity and
original principal balance. In addition, such steps will be taken by the
Depositor as are necessary to cause the Trustee to become the registered owner
of each Mortgage Certificate which is included in a Trust Fund and to provide
for all distributions on each such Mortgage Certificate to be made directly to
the Trustee.
In connection with such assignment, the Depositor will make certain
representations and warranties in the Pooling and Servicing Agreement as to,
among other things, its ownership of the Mortgage Certificates. In the event
that these representations and warranties are breached, and such breach or
breaches adversely affect the interests of the Certificateholders in the
Mortgage Certificates, the Depositor will be required to repurchase the
affected Mortgage Certificates at a price equal to the principal balance
thereof as of the date of purchase together with accrued and unpaid interest
thereon at the related pass-through rate to the distribution date for such
Mortgage Certificates or, in the case of a Series in which an election has
been made to treat the related Trust Fund (or part thereof) as one or more
REMICs, at the lesser of the price set forth above, or the adjusted tax basis,
as defined in the Code, of such Mortgage Certificates. The Mortgage
Certificates with respect to a Series may also be subject to repurchase, in
whole but not in part, under the circumstances and in the manner described in
the applicable Prospectus Supplement. Any amounts received in respect of such
repurchases will be distributed to Certificateholders on the immediately
succeeding Distribution Date.
If so specified in the applicable Prospectus Supplement, within the
specified period following the date of issuance of a Series of Certificates,
the Depositor may, in lieu of the repurchase obligation set forth above, and
in certain other circumstances, deliver to the Trustee Mortgage Certificates
("Substitute Mortgage Certificates") in substitution for any one or more of
the Mortgage Certificates ("Deleted Mortgage Certificates") initially included
in the Trust Fund. The required characteristics or any such Substitute
Mortgage Certificates and any
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additional restrictions relating to the substitution of Mortgage Certificates
will be set forth in the applicable Prospectus Supplement.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will cause the Mortgage Loans constituting a Mortgage Pool to
be assigned to the Trustee, together with all principal and interest received
on or with respect to such Mortgage Loans after the Cut-off Date, but not
including principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to
the Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement. Such schedule will include information as to the adjusted
principal balance of each Mortgage Loan as of the Cut-off Date, as well as
information with respect to the Mortgage Rate, the currently scheduled monthly
payment of principal and interest, the maturity of the Mortgage Note and the
Loan-to-Value Ratio at origination.
In addition, the Depositor will, as to each Mortgage Loan that is not a
Cooperative Loan, deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) the Mortgage Note endorsed to the order of
the Trustee, the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver a copy of such Mortgage together with its
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. Assignments of
the Mortgage Loans to the Trustee will be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect
the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
Originator of such Mortgage Loan.
The Depositor will cause to be delivered to the Trustee, its agent, or a
custodian, with respect to any Cooperative Loan, the related original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing statement and the relevant stock certificate
and related blank stock powers. The Master Servicer will file in the
appropriate office a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will, generally
within 60 days after receipt thereof, review and hold such documents in trust
for the benefit of the Certificateholders. If any such document is found to be
defective in any material respect, the Trustee will promptly notify the Master
Servicer and the Depositor, and the Master Servicer will notify the related
Servicer. If the Servicer cannot cure the defect within 60 days after notice
is given to the Master Servicer, the Servicer will be obligated either to
substitute for the related Mortgage Loan a Replacement Mortgage Loan or Loans,
or to purchase within 90 days of such notice the related Mortgage Loan from
the Trustee at a price equal to the principal balance thereof as of the date
of purchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund (or part thereof) as one or more REMICs, at
such other price as may be necessary to avoid a tax on a prohibited
transaction, as described in Section 860F(a) of the Code, in each case
together with accrued interest at the applicable Pass-Through Rate, to the
first day of the month following such repurchase, plus the amount of any
unreimbursed Advances made by the Master Servicer or the Servicer, as
applicable, in respect of such Mortgage Loan. The Master Servicer is obligated
to enforce the repurchase obligation of the Servicer, to the extent described
above under "The Trust Fund--Mortgage Loan Program--Representations by
Unaffiliated Sellers; Repurchases". This repurchase obligation generally
constitutes the sole remedy available to the Certificateholders or the Trustee
for a material defect in a constituent document.
With respect to the Mortgage Loans in a Mortgage Pool, the Depositor will
make representations and warranties as to the types and geographical
distribution of such Mortgage Loans and as to the accuracy in all material
respects of certain information furnished to the Trustee in respect of each
such Mortgage Loan. In addition, if so specified in the applicable Prospectus
Supplement, the Depositor will represent and warrant that, as of the Cut-off
Date for the related Series of Certificates, no Mortgage Loan is more than 30
days delinquent
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as to payment of principal and interest. Upon a breach of any representation
or warranty by the Depositor that materially and adversely affects the
interest of the Certificateholders in a Mortgage Loan, the Depositor will be
obligated either to cure the breach in all material respects or to repurchase
such Mortgage Loan at the purchase price set forth above. Subject to the
ability of the Depositor, if so specified in the applicable Prospectus
Supplement, to substitute for certain Mortgage Loans as described below, this
repurchase obligation generally constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of representation or warranty
by the Depositor.
Within the period specified in the applicable Prospectus Supplement,
following the date of issuance of a Series of Certificates, the Depositor, the
Master Servicer or the related Servicer, as the case may be, may deliver to
the Trustee Mortgage Loans ("Substitute Mortgage Loans") in substitution for
any one or more of the Mortgage Loans ("Deleted Mortgage Loans") initially
included in the Trust Fund but which do not conform in one or more respects to
the description thereof contained in the applicable Prospectus Supplement, or
as to which a breach of a representation or warranty is discovered, which
breach materially and adversely affects the interests of the
Certificateholders in such Mortgage Loans. The required characteristics of any
such Substitute Mortgage Loan and any additional restrictions relating to the
substitution of Mortgage Loans will generally be as described under "The Trust
Fund--The Mortgage Pools" with respect to the substitution of Mortgage Loans.
In addition to making certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under the
Pooling and Servicing Agreement relating to a Series of Certificates, the
Master Servicer may make certain representations and warranties to the Trustee
in such Pooling and Servicing Agreement with respect to the enforceability of
coverage under any applicable Primary Insurance Policy, Pool Insurance Policy,
Special Hazard Insurance Policy or Mortgagor Bankruptcy Bond. See "Description
of Insurance" for information regarding the extent of coverage under certain
of the aforementioned insurance policies. Upon a breach of any such
representation or warranty that materially and adversely affects the interests
of the Certificateholders of such Series in a Mortgage Loan, the Master
Servicer will be obligated either to cure the breach in all material respects
or to purchase such Mortgage Loan at the price calculated as set forth above.
To the extent described in the applicable Prospectus Supplement, the Master
Servicer will procure a surety bond, corporate guaranty or another similar
form of insurance coverage acceptable to the Rating Agency rating the related
Series of Certificates to support, among other things, this purchase
obligation. The aforementioned purchase obligation generally constitutes the
sole remedy available to the Certificateholders or the Trustee for a breach of
the Master Servicer's insurability representation. The Master Servicer's
obligation to purchase Mortgage Loans upon such a breach is subject to
limitations.
The Trustee will be authorized, with the consent of the Depositor and the
Master Servicer, to appoint a custodian pursuant to a custodial agreement to
maintain possession of documents relating to the Mortgage Loans as the agent
of the Trustee.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Servicers, will service and administer the Mortgage
Loans assigned to the Trustee as more fully set forth below.
ASSIGNMENT OF CONTRACTS
The Depositor will cause the Contracts constituting the Contract Pool to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the Cut-off Date, but not including principal
and interest due on or before the Cut-off Date. If the Depositor is unable to
obtain a perfected security interest in a Contract prior to transfer and
assignment to the Trustee, the Unaffiliated Seller will be obligated to
repurchase such Contract. The Trustee, concurrently with such assignment, will
authenticate and deliver the Certificates. Each Contract will be identified in
a schedule appearing as an exhibit to the Agreement (the "Contract Schedule").
The Contract Schedule generally will specify, with respect to each Contract,
among other things: the original principal amount and the adjusted principal
balance as of the close of business on the Cut-off
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Date; the APR; the current scheduled monthly level payment of principal and
interest; and the maturity of the Contract.
In addition, the Depositor, as to each Contract, will deliver or cause to be
delivered to the Trustee, or, if specified in the applicable Prospectus
Supplement, the Custodian, the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Certificateholders to the Contracts, the
Depositor will cause a UCC-1 financing statement to be executed by the
Depositor identifying the Trustee as the secured party and identifying all
Contracts as collateral. The Contracts generally will not be stamped or
otherwise marked to reflect their assignment from the Depositor to the Trust
Fund. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the interest of
the Certificateholders in the Contracts could be defeated. See "Certain Legal
Aspects of Mortgage Loans and Contracts--The Contracts".
The Trustee (or the Custodian) will review and hold such documents in trust
for the benefit of the Certificateholders. If any such document is found to be
defective in any material respect, the Unaffiliated Seller must cure such
defect within 60 days, or within such other period specified in the applicable
Prospectus Supplement, after the Trustee's notice to the Unaffiliated Seller
of the defect. If the defect is not cured, the Unaffiliated Seller will
repurchase the related Contract or any property acquired in respect thereof
from the Trustee at a price equal to the remaining unpaid principal balance of
such Contract (or, in the case of a repossessed Manufactured Home, the unpaid
principal balance of such Contract immediately prior to the repossession) or,
in the case of a Series as to which an election has been made to treat the
related Trust Fund (or part thereof) as one or more REMICs, at such other
price as may be necessary to avoid a tax on a prohibited transaction, as
described in Section 860F(a) of the Code, in each case together with accrued
but unpaid interest to the first day of the month following repurchase at the
related Pass-Through Rate, plus any unreimbursed Advances with respect to such
Contract. This repurchase obligation generally constitutes the sole remedy
available to the Certificateholders or the Trustee for a material defect in a
Contract document.
Each Unaffiliated Seller of Contracts will have represented, among other
things, that (i) immediately prior to the transfer and assignment of the
Contracts, the Unaffiliated Seller had good title to, and was the sole owner
of each Contract and there had been no other sale or assignment thereof, (ii)
as of the date of such transfer, the Contracts are subject to no offsets,
defenses or counterclaims, (iii) each Contract at the time it was made
complied in all material respects with applicable state and federal laws,
including usury, equal credit opportunity and disclosure laws, (iv) as of the
date of such transfer, each Contract is a valid first lien on the related
Manufactured Home and such Manufactured Home is free of material damage and is
in good repair, (v) as of the date of such transfer, no Contract is more than
30 days delinquent in payment and there are no delinquent tax or assessment
liens against the related Manufactured Home and (vi) with respect to each
Contract, the Manufactured Home securing the Contract is covered by a Standard
Hazard Insurance Policy in the amount required in the Pooling and Servicing
Agreement and that all premiums now due on such insurance have been paid in
full (in each case, subject to certain exceptions which, if applicable, will
be specified in the applicable Prospectus Supplement).
All of the representations and warranties of a seller in respect of a
Contract will have been made as of the date on which such seller sold the
Contract to the Depositor or its affiliate; the date such representations and
warranties were made may be a date prior to the date of initial issuance of
the related Series of Certificates. A substantial period of time may have
elapsed between the date as of which the representations and warranties were
made and the later date of initial issuance of the related Series of
Certificates. Since the representations and warranties referred to in the
preceding paragraph are the only representations and warranties that will be
made by a seller, the seller's repurchase obligation described below will not
arise if, during the period commencing on the date of sale of a Contract by
the seller to the Depositor or its affiliate, the relevant event occurs that
would have given rise to such an obligation had the event occurred prior to
sale of the affected Contract. Nothing, however, has come to the Depositor's
attention that would cause it to believe that the representations and
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warranties referred to in the preceding paragraph will not be accurate and
complete in all material respects in respect of Contracts as of the date of
initial issuance of the related Series of Certificates.
The only representations and warranties to be made for the benefit of
Certificateholders in respect of any Contract relating to the period
commencing on the date of sale of such Contract to the Depositor or its
affiliate will be certain limited representations of the Depositor and of the
Master Servicer described above under "The Trust Fund--The Contract Pools".
If an Unaffiliated Seller cannot cure a breach of any representation or
warranty made by it in respect of a Contract that materially and adversely
affects the interest of the Certificateholders in such Contract within 90 days
(or such other period specified in the applicable Prospectus Supplement) after
notice from the Master Servicer, such Unaffiliated Seller will be obligated to
repurchase such Contract at a price equal to, the principal balance thereof
(or such other price as may be specified, or determined by such method as may
be specified, in the applicable Prospectus Supplement) as of the date of
repurchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund (or part thereof) as one or more REMICs, at
such other price as may be necessary to avoid a tax on a prohibited
transaction, as described in Section 860F(a) of the Code, in each case
together with accrued and unpaid interest to the first day of the month
following repurchase at the related Pass-Through Rate, plus the amount of any
unreimbursed Advances in respect of such Contract (the "Purchase Price"). The
Master Servicer will be required under the applicable Pooling and Servicing
Agreement to enforce this obligation for the benefit of the Trustee and the
Certificateholders, following the practices it would employ in its good faith
business judgment were it the owner of such Contract. This repurchase
obligation generally will constitute the sole remedy available to
Certificateholders or the Trustee for a breach of representation by an
Unaffiliated Seller.
Neither the Depositor nor the Master Servicer will be obligated to purchase
a Contract if an Unaffiliated Seller defaults on its obligation to do so, and
no assurance can be given that sellers will carry out their respective
repurchase obligations with respect to Contracts. However, to the extent that
a breach of the representations and warranties of an Unaffiliated Seller may
also constitute a breach of a representation made by the Depositor or the
Master Servicer, the Depositor or the Master Servicer may have a purchase
obligation as described above under "The Trust Fund--The Contract Pools".
ASSIGNMENT OF GOVERNMENT SECURITIES
Pursuant to the applicable Pooling and Servicing Agreement for a Series of
Certificates that includes Government Securities in the related Trust Fund,
the Depositor will cause such Government Securities to be transferred to the
Trustee together with all principal and interest distributed on such
Government Securities after the Cut-off Date. Each Government Security
included in a Trust Fund will be identified in a schedule appearing as an
exhibit to the applicable Pooling and Servicing Agreement. Such schedule will
include information as to the principal balance of each Government Security as
of the date of issuance of the Certificates and its interest rate, maturity
and original principal balance. In addition, such steps will be taken by the
Depositor as are necessary to cause the Trustee to become the registered owner
of each Government Security which is included in a Trust Fund and to provide
for all distributions on each such Government Security to be made directly to
the Trustee.
In connection with such assignment, the Depositor will make certain
representations and warranties in the Pooling and Servicing Agreement as to,
among other things, its ownership of the Government Securities. In the event
that these representations and warranties are breached, and such breach or
breaches adversely affect the interests of the Certificateholders in a
Government Security, the Depositor will be required to repurchase such
Government Security at a price equal to the principal balance thereof as of
the date of purchase together with accrued and unpaid interest thereon at the
related interest rate to the distribution date for such Government Security.
The Government Securities with respect to a Series may also be subject to
repurchase, in whole but not in part, under the circumstances and in the
manner described in the applicable Prospectus Supplement. Any
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amounts received in respect of such repurchases will be distributed to
Certificateholders on the immediately succeeding Distribution Date.
If so specified in the applicable Prospectus Supplement, within the
specified period following the date of issuance of a Series of Certificates,
the Depositor may, in lieu of the repurchase obligation set forth above, and
in certain other circumstances, deliver to the Trustee Government Securities
("Substitute Government Securities") in substitution for any one or more of
the Government Securities ("Deleted Government Securities") initially included
in the Trust Fund. The required characteristics or any such Substitute
Government Securities and any additional restrictions relating to the
substitution of Government Securities will be set forth in the applicable
Prospectus Supplement.
ASSIGNMENT OF PRIVATE LABEL CUSTODY RECEIPT SECURITIES
Pursuant to the applicable Pooling and Servicing Agreement for a Series of
Certificates that includes Private Label Custody Receipt Securities in the
related Trust Fund, the Depositor will cause such Private Label Custody
Receipt Securities to be transferred to the Trustee together with all
principal and interest distributed on such Private Label Custody Receipt
Securities after the Cut-off Date. Each Private Label Custody Receipt Security
included in a Trust Fund will be identified in a schedule appearing as an
exhibit to the applicable Pooling and Servicing Agreement. Such schedule will
include information as to the principal balance of each Private Label Custody
Receipt Security as of the date of issuance of the Certificates and its
interest rate, maturity and original principal balance. In addition, such
steps will be taken by the Depositor as are necessary to cause the Trustee to
become the registered owner of each Private Label Custody Receipt Security
which is included in a Trust Fund and to provide for all distributions on each
such Private Label Custody Receipt Security to be made directly to the
Trustee.
In connection with such assignment, the Depositor will make certain
representations and warranties in the Pooling and Servicing Agreement as to,
among other things, its ownership of the Private Label Custody Receipt
Securities. In the event that these representations and warranties are
breached, and such breach or breaches adversely affect the interests of the
Certificateholders in a Private Label Custody Receipt Security, the Depositor
will be required to repurchase such Private Label Custody Receipt Security at
a price equal to the principal balance thereof as of the date of purchase
together with accrued and unpaid interest thereon at the related interest rate
to the distribution date for such Private Label Custody Receipt Security. The
Private Label Custody Receipt Securities with respect to a Series may also be
subject to repurchase, in whole but not in part, under the circumstances and
in the manner described in the applicable Prospectus Supplement. Any amounts
received in respect of such repurchases will be distributed to
Certificateholders on the immediately succeeding Distribution Date.
If so specified in the applicable Prospectus Supplement, within the
specified period following the date of issuance of a Series of Certificates,
the Depositor may, in lieu of the repurchase obligation set forth above, and
in certain other circumstances, deliver to the Trustee Private Label Custody
Receipt Securities ("Substitute Private Label Custody Receipt Securities") in
substitution for any one or more of the Private Label Custody Receipt
Securities ("Deleted Private Label Custody Receipt Securities") initially
included in the Trust Fund. The required characteristics or any such
Substitute Private Label Custody Receipt Securities and any additional
restrictions relating to the substitution of Private Label Custody Receipt
Securities will be set forth in the applicable Prospectus Supplement.
SERVICING BY UNAFFILIATED SELLERS
Each Unaffiliated Seller of a Mortgage Loan or a Contract may have the
option to act as the Servicer (or Master Servicer) for such Mortgage Loan or
Contract pursuant to a Servicing Agreement. A representative form of Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary describes the material
provisions common to each Servicing Agreement but is qualified in its entirety
by reference to the form of Servicing Agreement and by the discretion of the
Master
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Servicer or Depositor to modify the Servicing Agreement and to enter into
different Servicing Agreements. The Pooling and Servicing Agreement provides
that, if for any reason the Master Servicer for such Series of Certificates is
no longer the Master Servicer of the related Mortgage Loans or Contracts, the
Trustee or any successor master Servicer must recognize the Servicer's rights
and obligations under such Servicing Agreement.
A Servicer may delegate its servicing obligations to third-party Servicers,
but continue to act as Servicer under the related Servicing Agreement. The
Servicer will be required to perform the customary functions of a Servicer,
including collection of payments from Mortgagors and Obligors and remittance
of such collections to the Master Servicer, maintenance of primary mortgage
insurance, hazard insurance, FHA insurance and VA guarantees and filing and
settlement of claims thereunder, subject in certain cases to (a) the right of
the Master Servicer to approve in advance any such settlement; (b) maintenance
of escrow accounts of Mortgagors and Obligors for payment of taxes, insurance,
and other items required to be paid by the Mortgagor pursuant to terms of the
related Mortgage Loan or the Obligor pursuant to the related Contract; (c)
processing of assumptions or substitutions; (d) attempting to cure
delinquencies; (e) supervising foreclosures or repossessions; (f) inspection
and management of Mortgaged Properties, Cooperative Dwellings or Manufactured
Homes under certain circumstances; and (g) maintaining accounting records
relating to the Mortgage Loans and Contracts. A Servicer will also be
obligated to make Advances in respect of delinquent installments of principal
and interest on Mortgage Loans and Contracts (as described more fully below
under "--Payments on Mortgage Loans" and "--Payments on Contracts"), and in
respect of certain taxes and insurance premiums not paid on a timely basis by
Mortgagors and Obligors.
As compensation for its servicing duties, a Servicer will be entitled to
amounts from payments with respect to the Mortgage Loans and Contracts
serviced by it. The Servicer will also be entitled to collect and retain, as
part of its servicing compensation, certain fees and late charges provided in
the Mortgage Note or related instruments. The Servicer will be reimbursed by
the Master Servicer for certain expenditures that it makes, generally to the
same extent that the Master Servicer would be reimbursed under the applicable
Pooling and Servicing Agreement.
Each Servicer will be required to agree to indemnify the Master Servicer for
any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Servicer in its servicing capacity.
Each Servicer will be required to service each Mortgage Loan or Contract
pursuant to the terms of the Servicing Agreement for the entire term of such
Mortgage Loan or Contract, unless the Servicing Agreement is earlier
terminated by the Master Servicer or unless servicing is released to the
Master Servicer. The Master Servicer may (subject to certain limitations
which, if applicable, will be specified in the applicable Prospectus
Supplement) terminate a Servicing Agreement upon 30 days' written notice to
the Servicer, without cause, upon payment of an amount equal to the fair
market value of the right to service the Mortgage Loans or Contracts serviced
by any such Servicer under such Servicing Agreement, or if such fair market
value cannot be determined, a specified percentage of the aggregate
outstanding principal balance of all such Mortgage Loans or Contracts, or
immediately upon the giving of notice upon certain stated events, including
the violation of such Servicing Agreement by the Servicer.
The Master Servicer may agree with a Servicer to amend a Servicing
Agreement. The Master Servicer may also, at any time and from time to time,
release servicing to third-party Servicers, but continue to act as Master
Servicer under the related Pooling and Servicing Agreement. Upon termination
of a Servicing Agreement, the Master Servicer may act as Servicer of the
related Mortgage Loans or Contracts or enter into one or more new Servicing
Agreements. If the Master Servicer acts as Servicer, it will not assume
liability for the representations and warranties of the Servicer that it
replaces. If the Master Servicer enters into a new Servicing Agreement, each
new Servicer must be an Unaffiliated Seller or meet the standards for becoming
an Unaffiliated Seller or have such servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer will make reasonable
efforts to have the new Servicer assume liability for the representations and
warranties of the terminated Servicer, but no assurance can be given that such
an assumption will occur. In the event of such an
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assumption, the Master Servicer may, in the exercise of its business judgment,
release the terminated Servicer from liability in respect of such
representations and warranties. Any amendments to a Servicing Agreement or new
Servicing Agreements may contain provisions different from those described
above that are in effect in the original Servicing Agreements. However, the
Pooling and Servicing Agreement with respect to a Series will provide that any
such amendment or new agreement may not be inconsistent with or violate such
Pooling and Servicing Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will (subject to certain exceptions which, if
applicable, will be specified in the applicable Prospectus Supplement)
establish and maintain a separate account or accounts in the name of the
Trustee (the "Certificate Account"), which must be maintained with a
depository institution and in a manner acceptable to the Rating Agency rating
the Certificates of a Series.
If so specified in the applicable Prospectus Supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth herein for the Certificate
Account. In such a case, amounts in such Custodial Account, after making the
required deposits and withdrawals specified below, shall be remitted to the
Certificate Account maintained by the Trustee for distribution to
Certificateholders in the manner set forth herein and in such Prospectus
Supplement.
In those cases where a Servicer is servicing a Mortgage Loan pursuant to a
Servicing Agreement, the Servicer will establish and maintain an account (the
"Servicing Account") that will comply with either the standards set forth
above or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository meeting the requirements of the Rating Agency
rating the Certificates of the related Series, and that is otherwise
acceptable to the Master Servicer. The Servicer will be required to deposit
into the Servicing Account on a daily basis all amounts enumerated in the
following paragraph in respect of the Mortgage Loans received by the Servicer,
less its servicing compensation. On the date specified in the Servicing
Agreement, the Servicer shall remit to the Master Servicer all funds held in
the Servicing Account with respect to each Mortgage Loan. The Servicer will
also be required to advance any monthly installment of principal and interest
that was not timely received, less its servicing fee, provided that, such
requirement shall only apply to the extent such Servicer determines in good
faith any such advance will be recoverable out of Insurance Proceeds, proceeds
of the liquidation of the related Mortgage Loans or otherwise.
The Certificate Account may be maintained with a depository institution that
is an affiliate of the Master Servicer. The Master Servicer will deposit in
the Certificate Account for each Series of Certificates on a daily basis the
following payments and collections received or made by it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date) in the
manner set forth in the applicable Prospectus Supplement:
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans, net of any portion of such payments
that represent unreimbursed or unrecoverable Advances made by the related
Servicer;
(ii) all payments on account of interest on the Mortgage Loans, net of
any portion thereof retained by the Servicer, if any, as its servicing fee;
(iii) all proceeds of (A) any Special Hazard Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guarantee, Mortgagor
Bankruptcy Bond or Pool Insurance Policy with respect to such Series of
Certificates and any title, hazard or other insurance policy covering any
of the Mortgage Loans included in the related Mortgage Pool (to the extent
such proceeds are not applied to the restoration of the related property or
released to the Mortgagor in accordance with customary servicing
procedures) (collectively, "Insurance Proceeds") or any Alternative Credit
Support established in lieu of any such insurance and described in the
applicable Prospectus Supplement; and (B) all other cash amounts received
and retained in connection with the liquidation of defaulted Mortgage
Loans, by foreclosure or otherwise, other than Insurance Proceeds, payments
under the Letter of Credit or proceeds of any Alternative Credit
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Support, if any, with respect to such Series ("Liquidation Proceeds"), net
of expenses of liquidation, unpaid servicing compensation with respect to
such Mortgage Loans and unreimbursed or unrecoverable Advances made by the
Servicers of the related Mortgage Loans;
(iv) all payments under the Letter of Credit, if any, with respect to
such Series;
(v) all amounts required to be deposited therein from the Reserve Fund,
if any, for such Series;
(vi) any Advances made by a Servicer or the Master Servicer (as described
herein under "--Advances");
(vii) any Buy-Down Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account, as described
below; and
(viii) all proceeds of any Mortgage Loan repurchased by the Master
Servicer, the Depositor, any Servicer or any Unaffiliated Seller (as
described under "The Trust Fund-Mortgage Loan Program--Representations by
Unaffiliated Sellers; Repurchases" or "--Assignment of Mortgage Loans"
above or repurchased by the Depositor as described under "--Termination"
below)
With respect to each Buy-Down Loan, if so specified in the applicable
Prospectus Supplement, the Master Servicer or the related Servicer will
deposit the Buy-Down Funds with respect thereto in a custodial account
complying with the requirements set forth above for the Certificate Account,
which may be an interest-bearing account. The amount of such required
deposits, together with investment earnings thereon at the rate specified in
the applicable Prospectus Supplement, will provide sufficient funds to support
the full monthly payments due on such Buy-Down Loan on a level debt service
basis. Neither the Master Servicer nor the Depositor will be obligated to add
to the Buy-Down Fund should investment earnings prove insufficient to maintain
the scheduled level of payments on the Buy-Down Loans. To the extent that any
such insufficiency is not recoverable from the Mortgagor under the terms of
the related Mortgage Note, distributions to Certificateholders will be
affected. With respect to each Buy-Down Loan, the Master Servicer will
withdraw from the Buy-Down Fund and deposit in the Certificate Account on or
before each Distribution Date the amount, if any, for each Buy-Down Loan that,
when added to the amount due on that date from the Mortgagor on such Buy-Down
Loan, equals the full monthly payment that would be due on the Buy-Down Loan
if it were not subject to the buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays such loan in its entirety, or
defaults on such loan and the Mortgaged Property is sold in liquidation
thereof, during the period when the Mortgagor is not obligated, on account of
the buy-down plan, to pay the full monthly payment otherwise due on such loan,
the related Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account the amounts remaining in the Buy-Down Fund with respect to
such Buy-Down Loan. In the event of a default with respect to which a claim,
including accrued interest supplemented by amounts in the Buy-Down Fund with
respect to the related Buy-Down Loan, has been made, the Master Servicer or
the related Servicer will pay an amount equal to the remaining amounts in the
Buy- Down Fund with respect to the related Buy-Down Loan, to the extent the
claim includes accrued interest supplemented by amounts in the Buy-Down Fund,
to the related Pool Insurer or the insurer under the related Primary Insurance
Policy (the "Primary Insurer") if the Mortgaged Property is transferred to the
Pool Insurer or the Primary Insurer, as the case may be, which pays 100% of
the related claim (including accrued interest and expenses) in respect of such
default, to the L/C Bank in consideration of such payment under the related
Letter of Credit, or to the guarantor or other person which pays the same
pursuant to Alternative Credit Support described in the applicable Prospectus
Supplement. In the case of any such prepaid or defaulted Buy-Down Loan the
amounts in the Buy-Down Fund in respect of which were supplemented by
investment earnings, the Master Servicer will withdraw from the Buy-Down Fund
and remit to the Depositor or the Mortgagor, depending on the terms of the
related buy-down plan, any investment earnings remaining in the related Buy-
Down Fund.
If so specified in the Prospectus Supplement with respect to a Series, in
lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund
the Buy-Down Fund for such Series, which shall be drawn upon by the Trustee in
the manner and at the times specified in such Prospectus Supplement.
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PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under "Description
of the Certificates--Payments on Mortgage Loans" will be established in the
name of the Trustee.
There will be deposited in the Certificate Account on a daily basis the
following payments and collections received or made by it subsequent to the
Cut-off Date (including scheduled payments of principal and interest due after
the Cut-off Date but received by the Master Servicer on or before the Cut-off
Date):
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts,
adjusted to the Pass-Through Rate;
(iii) all Liquidation Proceeds received with respect to Contracts or
property acquired in respect thereof by foreclosure or otherwise;
(iv) all Insurance Proceeds received with respect to any Contract, other
than proceeds to be applied to the restoration or repair of the
Manufactured Home or released to the Obligor;
(v) any Advances made as described under "--Advances" and certain other
amounts required under the Pooling and Servicing Agreement to be deposited
in the Certificate Account with respect to any Contract;
(vi) all amounts received from Credit Support provided with respect to a
Series of Certificates with respect to any Contract;
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Master Servicer, the Depositor or otherwise as
described above or under "--Termination" below; and
(viii) all amounts, if any, required to be transferred to the Certificate
Account from the Reserve Fund with respect to any Contract.
COLLECTION OF PAYMENTS ON MORTGAGE CERTIFICATES
The Mortgage Certificates, if any, included in the Trust Fund with respect
to a Series of Certificates will be registered in the name of the Trustee so
that all distributions thereon will be made directly to the Trustee. The
Pooling and Servicing Agreement will require the Trustee, if it has not
received a distribution with respect to any Mortgage Certificate by the second
business day after the date on which such distribution was due and payable
pursuant to the terms of such Mortgage Certificate, to request the issuer or
guarantor, if any, of such Mortgage Certificate to make such payment as
promptly as possible and legally permitted and to take such legal action
against such issuer or guarantor as the Trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection
therewith. The reasonable legal fees and expenses incurred by the Trustee in
connection with the prosecution of any such legal action will be reimbursable
to the Trustee out of the proceeds of any such action and will be retained by
the Trustee prior to the deposit of any remaining proceeds in the Certificate
Account pending distribution thereof to Certificateholders of the affected
Series. In the event that the Trustee has reason to believe that the proceeds
of any such legal action may be insufficient to reimburse it for its projected
legal fees and expenses, the Trustee will notify such Certificateholders that
it is not obligated to pursue any such available remedies unless adequate
indemnity for its legal fees and expenses is provided by such
Certificateholders.
COLLECTION OF PAYMENTS ON GOVERNMENT SECURITIES
The Government Securities, if any, included in the Trust Fund with respect
to a Series of Certificates will be registered in the name of the Trustee so
that all distributions thereon will be made directly to the Trustee. The
Pooling and Servicing Agreement will require the Trustee, if it has not
received a distribution with respect to any Government Security by the second
business day after the date on which such distribution was due and payable
pursuant to the terms of such Government Security, to request the issuer or
guarantor, if any, of such Government Security to make such payment as
promptly as possible and legally permitted and to take such legal action
against such issuer or guarantor as the Trustee deems appropriate under the
circumstances, including the
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prosecution of any claims in connection therewith. The reasonable legal fees
and expenses incurred by the Trustee in connection with the prosecution of any
such legal action will be reimbursable to the Trustee out of the proceeds of
any such action and will be retained by the Trustee prior to the deposit of
any remaining proceeds in the Certificate Account pending distribution thereof
to Certificateholders of the affected Series. In the event that the Trustee
has reason to believe that the proceeds of any such legal action may be
insufficient to reimburse it for its projected legal fees and expenses, the
Trustee will notify such Certificateholders that it is not obligated to pursue
any such available remedies unless adequate indemnity for its legal fees and
expenses is provided by such Certificateholders.
COLLECTION OF PAYMENTS ON PRIVATE LABEL CUSTODY RECEIPT SECURITIES
The Private Label Custody Receipt Securities, if any, included in the Trust
Fund with respect to a Series of Certificates will be registered in the name
of the Trustee so that all distributions thereon will be made directly to the
Trustee. The Pooling and Servicing Agreement will require the Trustee, if it
has not received a distribution with respect to any Private Label Custody
Receipt Security by the second business day after the date on which such
distribution was due and payable pursuant to the terms of such Private Label
Custody Receipt Security, to request the issuer or guarantor, if any, of such
Private Label Custody Receipt Security to make such payment as promptly as
possible and legally permitted and to take such legal action against such
issuer or guarantor as the Trustee deems appropriate under the circumstances,
including the prosecution of any claims in connection therewith. The
reasonable legal fees and expenses incurred by the Trustee in connection with
the prosecution of any such legal action will be reimbursable to the Trustee
out of the proceeds of any such action and will be retained by the Trustee
prior to the deposit of any remaining proceeds in the Certificate Account
pending distribution thereof to Certificateholders of the affected Series. In
the event that the Trustee has reason to believe that the proceeds of any such
legal action may be insufficient to reimburse it for its projected legal fees
and expenses, the Trustee will notify such Certificateholders that it is not
obligated to pursue any such available remedies unless adequate indemnity for
its legal fees and expenses is provided by such Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
On each Distribution Date with respect to a Series of Certificates as to
which credit support is provided by means other than the creation of a
Subordinated Class or Subclasses and the establishment of a Reserve Fund, the
Master Servicer will withdraw from the applicable Certificate Account funds on
deposit therein and distribute, or, if so specified in the applicable
Prospectus Supplement, will withdraw from the Custodial Account funds on
deposit therein and remit to the Trustee, who will distribute, such funds to
Certificateholders of record on the applicable Record Date. Such distributions
shall occur in the manner described herein under "Description of the
Certificates--Distributions of Principal and Interest" and in the applicable
Prospectus Supplement. If so specified in the applicable Prospectus
Supplement, the Master Servicer will withdraw from the applicable Certificate
Account funds on deposit therein and distribute them to the Trustee. Such
funds shall consist of the aggregate of all previously undistributed payments
on account of principal (including principal prepayments, if any) and interest
received (relating to each Mortgage Loan or Mortgage Certificate in the
Mortgage Pool or each Contract in the Contract Pool and each Government
Security, if any and Private Label Custody Receipt Security, if any,) after
the Cut-off Date and on or prior to the 20th day (or if such day is not a
business day, the next preceding business day) of the month of such
distribution or such other day as may be specified in the applicable
Prospectus Supplement (in either case the "Determination Date"), except (other
than with respect to a Series which includes Multi-Class Certificates):
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments and, if so specified in the applicable
Prospectus Supplement, Liquidation Proceeds and all payments in respect of
certain repurchased Mortgage Loans, Mortgage Certificates, Contracts,
Government Securities, if any, or Private Label Custody Receipt Securities,
if any, received during the month of distribution and all payments of
interest representing interest for the month of distribution or any portion
thereof;
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(iii) all payments which represent early receipt (other than prepayments)
of scheduled payments of principal and interest due on a date or dates
subsequent to the first day of the month of distribution;
(iv) amounts received on particular Mortgage Loans or Contracts as late
payments of principal or interest and with respect to which the Master
Servicer has made an unreimbursed Advance;
(v) amounts representing reimbursement for other Advances which the
Master Servicer has determined to be otherwise nonrecoverable and amounts
representing reimbursement for certain losses and expenses incurred or
Advances made by the Master Servicer and discussed below; and
(vi) that portion of each collection of interest on a particular Mortgage
Loan or Mortgage Certificate in such Mortgage Pool, on a Government
Security or a Private Label Custody Receipt Security or on a particular
Contract in such Contract Pool that represents (A) servicing compensation
to the Master Servicer, (B) amounts payable to the entity or entities
specified in the applicable Prospectus Supplement or permitted withdrawals
from the Certificate Account out of payments under the Letter of Credit, if
any, with respect to the Series, (C) related Insurance Proceeds or
Liquidation Proceeds, (if so specified in the applicable prospectus
supplement, to the extent such amounts exceed the aggregate of unpaid
principal and interest on the related Contract) (D) amounts to be deposited
in the Reserve Fund, if any, with respect to the Series or (E) proceeds of
any Alternative Credit Support, each deposited in the Certificate Account
to the extent described under "Description of the Certificates--Maintenance
of Insurance Policies", "--Presentation of Claims", "--Enforcement of Due-
on-Sale Clauses; Realization Upon Defaulted Mortgage Loans" and""--
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Contracts"
or in the applicable Prospectus Supplement.
No later than the Business Day immediately preceding the Distribution Date
for a Series of Certificates, the Master Servicer will furnish a statement to
the Trustee setting forth the amount to be distributed on the next succeeding
Distribution Date on account of principal and interest on the Mortgage Loans,
Mortgage Certificates or Contracts, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, stated separately or the information
enabling the Trustee to determine the amount of distribution to be made on the
Certificates and a statement setting forth certain information with respect to
the Mortgage Loans, Mortgage Certificates or Contracts, Government Securities,
if any and Private Label Custody Receipt Securities, if any.
If so specified in the applicable Prospectus Supplement, the Trustee will
establish and maintain the Certificate Account for the benefit of the holders
of the Certificates of the related Series in which the Trustee shall deposit,
as soon as practicable after receipt, each distribution made to the Trustee by
the Master Servicer, as set forth above, with respect to the Mortgage Loans or
Contracts, any distribution received by the Trustee with respect to the
Mortgage Certificates, if any, Government Securities, if any, or Private Label
Custody Receipt Securities, if any, included in the Trust Fund and deposits
from any Reserve Fund or GPM Fund. If so specified in the applicable
Prospectus Supplement, prior to making any distributions to
Certificateholders, any portion of the distribution on the Mortgage
Certificates, if any, Government Securities, if any, or Private Label Custody
Receipt Securities, if any, that represents servicing compensation, if any,
payable to the Trustee shall be deducted and paid to the Trustee.
Funds on deposit in the Certificate Account may be invested in Eligible
Investments maturing in general not later than the Business Day preceding the
next Distribution Date. If so provided in the Prospectus Supplement, all
income and gain realized from any such investment will be for the benefit of
the Master Servicer. The Master Servicer will be required to deposit the
amount of any losses incurred with respect to such investments out of its own
funds, when realized. The Certificate Account established pursuant to the
Deposit Trust Agreement shall be a non-interest bearing account or accounts.
The timing and method of distribution of funds in the Certificate Account to
Classes or Subclasses of Certificates having differing terms, whether
subordinated or not, to the extent not described herein, shall be set forth in
the applicable Prospectus Supplement.
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SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a Series of
Certificates, one or more Classes of Multi-Class Certificates that do not
provide for monthly Distribution Dates may receive Special Distributions in
reduction of the Stated Principal Balance ("Special Distributions") in any
month, other than a month in which a Distribution Date occurs, if, as a result
of principal prepayments on the Trust Assets, Government Securities, if any,
or Private Label Custody Receipt Securities, if any, in the related Trust Fund
and/or low reinvestment yields, the Trustee determines, based on assumptions
specified in the related Pooling and Servicing Agreement, that the amount of
cash anticipated to be on deposit in the Certificate Account on the next
Distribution Date for such Series and available to be distributed to the
holders of the Certificates of such Classes or Subclasses may be less than the
sum of (i) the interest scheduled to be distributed to holders of the
Certificates of such Classes or Subclasses and (ii) the amount to be
distributed in reduction of the Stated Principal Balance of such Certificates
on such Distribution Date. Any such Special Distributions will be made in the
same priority and manner as distributions in reduction of the Stated Principal
Balance would be made on the next Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee will include with each distribution to
Certificateholders of record of such Series, or within a reasonable time
thereafter, a statement generally setting forth, among other things, the
following information, if applicable (per each Certificate, as to (i) through
(iii) or (iv) through (vi) below, as applicable):
(i) to each holder of a Certificate, other than a Multi-Class Certificate
or Residual Certificate, the amount of such distribution allocable to
principal of the Trust Assets, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, separately identifying the
aggregate amount of any Principal Prepayments included therein, and the
portion, if any, advanced by a Servicer or the Master Servicer (such
portion of Advances, may, if so specified in the applicable Prospectus
Supplement, be given as an aggregate amount of principal and interest);
(ii) to each holder of a Certificate, other than a Multi-Class
Certificate or Residual Certificate, the amount of such distribution
allocable to interest on the related Trust Assets, Government Securities,
if any, and Private Label Custody Receipt Securities, if any, and the
portion, if any, advanced by a Servicer or the Master Servicer (such
portion of Advances, may, if so specified in the applicable Prospectus
Supplement, be given as an aggregate amount of principal and interest);
(iii) to each holder of a Certificate, the amount of servicing
compensation with respect to the related Trust Assets, Government
Securities, if any, and Private Label Custody Receipt Securities, if any,
and such other customary information as the Master Servicer deems necessary
or desirable to enable Certificateholders to prepare their tax returns;
(iv) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of the Stated Principal
Balance are then being made, the amount of such interest distribution and
distribution in reduction of the Stated Principal Balance, and the Stated
Principal Balance of each Class after giving effect to the distribution in
reduction of the Stated Principal Balance made on such Distribution Date or
on any Special Distribution Date occurring subsequent to the last report;
(v) to each holder of a Multi-Class Certificate on which a distribution
of interest only is then being made, the aggregate Stated Principal Balance
of Certificates outstanding of each Class or Subclass after giving effect
to the distribution in reduction of the Stated Principal Balance made on
such Distribution Date and on any Special Distribution Date occurring
subsequent to the last such report and after including in the aggregate
Stated Principal Balance the Stated Principal Balance of the Compound
Interest Certificates, if any, outstanding and the amount of any accrued
interest added to the Compound Value of such Compound Interest Certificates
on such Distribution Date;
(vi) to each holder of a Compound Interest Certificate (but only if such
holder shall not have received a distribution of interest on such
Distribution Date equal to the entire amount of interest accrued on such
Certificate with respect to such Distribution Date):
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(a) the information contained in the report delivered pursuant to
clause (v) above;
(b) the interest accrued on such Class or Subclass of Compound
Interest Certificates with respect to such Distribution Date and added
to the Compound Value of such Compound Interest Certificate; and
(c) the Stated Principal Balance of such Class or Subclass of
Compound Interest Certificates after giving effect to the addition
thereto of all interest accrued thereon;
(vii) in the case of a Series of Certificates with a variable Pass-
Through Rate, the weighted average Pass-Through Rate applicable to the
distribution in question;
(viii) the amount or the remaining obligations of an L/C Bank with
respect to a Letter of Credit, after giving effect to the declining amount
available and any payments thereunder and other amounts charged thereto on
the applicable Distribution Date, expressed as a percentage of the amount
reported pursuant to (x) below, and the amount of coverage remaining under
the Pool Insurance Policy, Special Hazard Insurance Policy, Mortgagor
Bankruptcy Bond, or Reserve Fund as applicable, in each case, as of the
applicable Determination Date, after giving effect to any amounts with
respect thereto distributed to Certificateholders on the Distribution Date;
(ix) in the case of a Series of Certificates benefiting from the
Alternative Credit Support described in the applicable Prospectus
Supplement, the amount of coverage under such Alternative Credit Support as
of the close of business on the applicable Determination Date, after giving
effect to any amounts with respect thereto distributed to
Certificateholders on the Distribution Date;
(x) the aggregate scheduled principal balance of the Trust Assets,
Government Securities, if any, and Private Label Custody Receipt
Securities, if any, as of a date not earlier than such Distribution Date
after giving effect to payments of principal distributed to
Certificateholders on the Distribution Date;
(xi) the book value of any collateral acquired by the Mortgage Pool or
Contract Pool through foreclosure, repossession or otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, or the Trustee, if specified in the
applicable Prospectus Supplement, will cause to be furnished to each
Certificateholder of record at any time during such calendar year a report as
to the aggregate of amounts reported pursuant to (i) through (iii) or (iv)
through (vi) above and such other information as in the judgment of the Master
Servicer or the Trustee, as the case may be, is needed for the
Certificateholder to prepare its tax return, as applicable, for such calendar
year or, in the event such person was a Certificateholder of record during a
portion of such calendar year, for the applicable portion of such year.
ADVANCES
Each Servicer and the Master Servicer (with respect to Mortgage Loans or
Contracts serviced by it and with respect to Advances required to be made by
the Servicers that were not so made) will be obligated (subject to certain
limitations which, if applicable, will be specified herein or in the
applicable Prospectus Supplement) to advance funds in an amount equal to the
aggregate scheduled installments of payments of principal and interest
(adjusted to the applicable Pass-Through Rate) that were due on the Due Date
with respect to a Mortgage Loan or Contract and that were delinquent
(including any payments that have been deferred by the Servicer or the Master
Servicer) as of the close of business on the date specified in the Pooling and
Servicing Agreement, to be remitted no later than the close of business on the
business day immediately preceding the Distribution Date, subject to their
respective determinations that such advances are reimbursable under any Letter
of Credit, Pool Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor
Bankruptcy Bond, from the proceeds of Alternative Credit Support, from cash in
the Reserve Fund, the Servicing or Certificate Accounts or otherwise. In
making such advances, the Servicers and Master Servicer will endeavor to
maintain a regular flow of scheduled interest and principal payments to the
Certificateholders, rather than to guarantee or insure against
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losses. Any such Advances are reimbursable to the Servicer or Master Servicer
out of related recoveries on the Mortgage Loans or Contracts, as applicable
with respect to which such amounts were advanced. In addition, such Advances
are reimbursable from cash in the Reserve Fund, the Servicing or Certificate
Accounts to the extent that the Servicer or the Master Servicer, as the case
may be, shall determine that any such Advances previously made are not
ultimately recoverable. The Servicers and the Master Servicer generally will
also be obligated to make Advances in respect of certain taxes and insurance
premiums not paid by Mortgagors or Obligors on a timely basis and, to the
extent deemed recoverable, foreclosure costs, including reasonable attorney's
fees. Funds so advanced are reimbursable out of recoveries on the related
Mortgage Loans or Contracts, as applicable. This right of reimbursement for
any Advance will be prior to the rights of the Certificateholders to receive
any amounts recovered with respect to such Mortgage Loans or Contracts. The
Servicers and the Master Servicer will also be required (subject to certain
limitations which, if applicable, will be specified herein or in the
applicable Prospectus Supplement) to advance an amount necessary to provide a
full month's interest (adjusted to the applicable Pass-Through Rate) in
connection with full or partial prepayments, liquidations, defaults and
repurchases of the Mortgage Loans or Contracts. Any such Advances will not be
reimbursable to the Servicers or the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through the Servicers, as the case may be,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans or Contracts and will, consistent with the applicable Pooling
and Servicing Agreement and any applicable Letter of Credit, Pool Insurance
Policy, Special Hazard Insurance Policy, Primary Mortgage Insurance Policy,
Mortgagor Bankruptcy Bond, or Alternative Credit Support, follow such
collection procedures as it follows with respect to mortgage loans or
contracts serviced by it that are comparable to the Mortgage Loans or
Contracts, except when, in the case of FHA or VA Loans, applicable regulations
require otherwise. Consistent with the above, the Master Servicer may, in its
discretion, waive any late payment charge or any prepayment charge or penalty
interest in connection with the prepayment of a Mortgage Loan or Contract or
extend the due dates for payments due on a Mortgage Note or Contract for a
period of not greater than 270 days, provided that the insurance coverage for
such Mortgage Loan or Contract or the coverage provided by any Letter of
Credit or any Alternative Credit Support, will not be adversely affected.
Under the Pooling and Servicing Agreement, the Master Servicer, either
directly or through Servicers, to the extent permitted by law, may establish
and maintain an escrow account (the "Escrow Account") in which Mortgagors or
Obligors will be required to deposit amounts sufficient to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable
items. This obligation may be satisfied by the provision of insurance coverage
against loss occasioned by the failure to escrow insurance premiums rather
than causing such escrows to be made. Withdrawals from the Escrow Account may
be made to effect timely payment of taxes, assessments, mortgage and hazard
insurance, to refund to Mortgagors or Obligors amounts determined to be
overages, to pay interest to Mortgagors or Obligors on balances in the Escrow
Account, if required, and to clear and terminate such account. The Master
Servicer will be responsible for the administration of each Escrow Account and
will be obligated to make advances to such accounts when a deficiency exists
therein. Alternatively, in lieu of establishing an Escrow Account, the
Servicer may procure a performance bond or other form of insurance coverage,
in an amount acceptable to the Rating Agency rating the related Series of
Certificates, covering loss occasioned by the failure to escrow such amounts.
MAINTENANCE OF INSURANCE POLICIES
To the extent that the applicable Prospectus Supplement does not expressly
provide for a method of credit support described below under "Credit Support"
or for Alternative Credit Support in lieu of some or all of the insurance
coverage set forth below, the following paragraphs on insurance shall apply.
STANDARD HAZARD INSURANCE
To the extent specified in the applicable Prospectus Supplement, the terms
of each Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract that it services (and the
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Master Servicer will be required to maintain for each Mortgage Loan or
Contract serviced by it directly) a policy of standard hazard insurance (a
"Standard Hazard Insurance Policy") covering the Mortgaged Property underlying
such Mortgage Loan or Manufactured Home underlying such Contract in an amount
at least equal to the maximum insurable value or the improvements securing
such Mortgage Loan or Contract or the principal balance of such Mortgage Loan
or Contract, whichever is less. Each Servicer or the Master Servicer, as the
case may be, shall also maintain on property acquired upon foreclosure, or
deed in lieu of foreclosure, of any Mortgage Loan or Contract, a Standard
Hazard Insurance Policy in an amount that is at least equal to the maximum
insurable value of the improvements that are a part of the Mortgaged Property
or Manufactured Home. Any amounts collected by the Servicer or the Master
Servicer under any such policies (other than amounts to be applied to the
restoration or repair of the Mortgaged Property or Manufactured Home or
released to the borrower in accordance with normal servicing procedures) shall
be deposited in the related Servicing Account for deposit in the Certificate
Account or, in the case of the Master Servicer, shall be deposited directly
into the Certificate Account. Any cost incurred in maintaining any such
insurance shall not, for the purpose of calculating monthly distributions to
Certificateholders, be added to the amount owing under the Mortgage Loan or
Contract, notwithstanding that the terms of the Mortgage Loan or Contract may
so permit. Such cost shall be recoverable by the Servicer only by withdrawal
of funds from the Servicing Account or by the Master Servicer only by
withdrawal from the Certificate Account, as described in the Pooling and
Servicing Agreement. No earthquake or other additional insurance is to be
required of any borrower or maintained on property acquired in respect of a
Mortgage Loan or Contract, other than pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance. When the Mortgaged Property or Manufactured Home is
located at the time of origination of the Mortgage Loan or Contract in a
federally designated flood area, the related Servicer (or the Master Servicer,
in the case of each Mortgage Loan or Contract serviced by it directly) will
maintain or cause flood insurance to be maintained, to the extent available,
in those areas where flood insurance is required under the National Flood
Insurance Act of 1968, as amended.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the cooperative corporation itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value
of the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
The Pooling and Servicing Agreement will require the Master Servicer to
perform the aforementioned obligations of the Servicer in the event the
Servicer fails to do so. In the event that the Master Servicer obtains and
maintains a blanket policy insuring against hazard losses on all of the
related Mortgage Loans or Contracts, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a Standard Hazard
Insurance Policy for each Mortgage Loan or Contract that it services. This
blanket policy may contain a deductible clause, in which case the Master
Servicer will, in the event that there has been a loss that would have been
covered by such policy absent such deductible, deposit in the Certificate
Account the amount not otherwise payable under the blanket policy because of
the application of such deductible clause.
Since the amount of hazard insurance to be maintained on the improvements
securing the Mortgage Loans or Contracts may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to fully restore the damaged Mortgaged Property
or Manufactured Home. See "Description of Insurance--Special Hazard Insurance
Policies" for a description of the limited protection afforded by a Special
Hazard Insurance Policy against losses occasioned by certain hazards that are
otherwise uninsured against as well as against losses caused by the
application of the coinsurance provisions contained in the Standard Hazard
Insurance Policies.
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SPECIAL HAZARD INSURANCE
If so specified in the applicable Prospectus Supplement, the Master Servicer
will be required to exercise its best reasonable efforts to maintain the
Special Hazard Insurance Policy, if any, with respect to a Series of
Certificates in full force and effect, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premium for the Special
Hazard Insurance Policy on a timely basis; provided, however, that the Master
Servicer shall be under no such obligation if coverage under the Pool
Insurance Policy, if any, with respect to such Series has been exhausted. In
the event that the Special Hazard Insurance Policy is cancelled or terminated
for any reason (other than the exhaustion of total policy coverage), the
Master Servicer will exercise its best reasonable efforts to obtain from
another insurer a replacement policy comparable to the Special Hazard
Insurance Policy with a total coverage that is equal to the then existing
coverage of the Special Hazard Insurance Policy; provided that if the cost of
any such replacement policy is greater than the cost of the terminated Special
Hazard Insurance Policy, the amount of coverage under the replacement Special
Hazard Insurance Policy may be reduced to a level such that the applicable
premium will not exceed the cost of the Special Hazard Insurance Policy that
was replaced. Certain characteristics of the Special Hazard Insurance Policy
are described under "Description of Insurance--Special Hazard Insurance
Policies".
POOL INSURANCE
To the extent specified in the applicable Prospectus Supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Pool
Insurance Policy with respect to a Series of Certificates in effect throughout
the term of the Pooling and Servicing Agreement, unless coverage thereunder
has been exhausted through payment of claims, and will pay the premiums for
such Pool Insurance Policy on a timely basis. In the event that the Pool
Insurer ceases to be a qualified insurer because it is not qualified to
transact a mortgage guaranty insurance business under the laws of the state of
its principal place of business or any other state which has jurisdiction over
the Pool Insurer in connection with the Pool Insurance Policy, or if the Pool
Insurance Policy is cancelled or terminated for any reason (other than the
exhaustion of total policy coverage), the Master Servicer will exercise its
best reasonable efforts to obtain a replacement policy of pool insurance
comparable to the Pool Insurance Policy and may obtain, under the
circumstances described above with respect to the Special Hazard Insurance
Policy, a replacement policy with reduced coverage. In the event the Pool
Insurer ceases to be a qualified insurer because it is not approved as an
insurer by FHLMC, FNMA or any successors thereto, the Master Servicer will
agree to review, not less often than monthly, the financial condition of the
Pool Insurer with a view towards determining whether recoveries under the Pool
Insurance Policy are jeopardized and, if so, will exercise its best reasonable
efforts to obtain from another qualified insurer a replacement insurance
policy under the above-stated limitations. Certain characteristics of the Pool
Insurance Policy are described under "Description of Insurance--Pool Insurance
Policies".
PRIMARY MORTGAGE INSURANCE
To the extent specified in the applicable Prospectus Supplement, the Master
Servicer will be required to keep in force and effect for each Mortgage Loan
secured by Single Family Property serviced by it directly, and each Servicer
of a Mortgage Loan secured by Single Family Property will be required to keep
in full force and effect with respect to each such Mortgage Loan serviced by
it, in each case to the extent required by the underwriting standards of the
Depositor, a Primary Mortgage Insurance Policy issued by a qualified insurer
(the "Primary Mortgage Insurer") with regard to each Mortgage Loan for which
such coverage is required pursuant to the applicable Servicing Agreement and
the Pooling and Servicing Agreement and to act on behalf of the Trustee (the
"Insured") under each such Primary Mortgage Insurance Policy. Neither the
Servicer nor the Master Servicer will cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the date of the initial
issuance of a Series of Certificates that is required to be kept in force
under the Pooling and Servicing Agreement or applicable Servicing Agreement
unless the replacement Primary Mortgage Insurance Policy for such cancelled or
non-renewed policy is maintained with an insurer whose claims-paying ability
is acceptable to the Rating Agency rating the Certificates. See "Description
of Insurance--Primary Mortgage Insurance Policies."
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MORTGAGOR BANKRUPTCY BOND
If so specified in the applicable Prospectus Supplement, the Master Servicer
will exercise its best reasonable efforts to maintain a Mortgagor Bankruptcy
Bond for a Series of Certificates in full force and effect throughout the term
of the Pooling and Servicing Agreement, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premiums for such
Mortgagor Bankruptcy Bond on a timely basis. At the request of the Depositor,
coverage under a Mortgagor Bankruptcy Bond will be cancelled or reduced by the
Master Servicer to the extent permitted by the Rating Agency rating the
related Series of Certificates, provided that such cancellation or reduction
does not adversely affect the then current rating of such Series. See
"Description of Insurance--Mortgagor Bankruptcy Bond".
PRESENTATION OF CLAIMS
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to HUD, the VA, the Pool Insurer, the
Special Hazard Insurer, the issuer of the Mortgagor Bankruptcy Bond, and each
Primary Mortgage Insurer, as applicable, and take such reasonable steps as are
necessary to permit recovery under such insurance policies or Mortgagor
Bankruptcy Bond, if any, with respect to a Series concerning defaulted
Mortgage Loans or Contracts or Mortgage Loans or Contracts that are the
subject of a bankruptcy proceeding. All collections by the Master Servicer
under any FHA insurance or VA guarantee, any Pool Insurance Policy, any
Primary Mortgage Insurance Policy or any Mortgagor Bankruptcy Bond and, where
the related property has not been restored, any Special Hazard Insurance
Policy, are to be deposited in the Certificate Account, subject to withdrawal
as heretofore described. In those cases in which a Mortgage Loan or Contract
is serviced by a Servicer, the Servicer, on behalf of itself, the Trustee and
the Certificateholders, will present claims to the applicable Primary Mortgage
Insurer and to the FHA and the VA, as applicable, and all collections
thereunder shall be deposited in the Servicing Account, subject to withdrawal,
as set forth above, for deposit in the Certificate Account
If any property securing a defaulted Mortgage Loan or Contract is damaged
and proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to
expend its own funds to restore the damaged property unless it determines,
and, in the case of a determination by a Servicer, the Master Servicer agrees,
(i) that such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan or Contract after reimbursement of the
expenses incurred by the Servicer or the Master Servicer, as the case may be,
and (ii) that such expenses will be recoverable through proceeds of the sale
of the Mortgaged Property or proceeds of any related Pool Insurance Policy,
any related Primary Mortgage Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary Mortgage
Insurance Policy is not available because the related Servicer or the Master
Servicer has been unable to make the above determinations or otherwise, the
Servicer or the Master Servicer is nevertheless obligated to follow such
normal practices and procedures as are deemed necessary or advisable to
realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property or Manufactured Home are less than the principal
balance of the defaulted Mortgage Loan or Contract, respectively, plus
interest accrued thereon at the applicable Pass-Through Rate, and if coverage
under any other method of credit support with respect to such Series is
exhausted, the related Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Servicer or the
Master Servicer in connection with such proceedings and which are reimbursable
under the related Servicing Agreement or the Pooling and Servicing Agreement.
In the event that any such proceedings result in a total recovery that is,
after reimbursement to the Servicer or the Master Servicer of its expenses, in
excess of the principal balance of the related Mortgage Loan or Contract,
together with accrued and unpaid interest thereon at the applicable Pass-
Through Rates, the Servicer and the Master Servicer will be entitled to
withdraw amounts representing normal servicing compensation on such Mortgage
Loan or Contract from the Servicing Account or the Certificate Account, as the
case may be.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the Pooling and Servicing Agreement with
respect to Certificates representing interests in a Mortgage Pool will provide
that, when any Mortgaged Property has been conveyed by the Mortgagor, such
Servicer or the Master Servicer, as the case may be, will, to the extent it
has knowledge of such conveyance, exercise its rights to accelerate the
maturity of such Mortgage Loan under any "due-on-sale" clause applicable
thereto, if any, unless it reasonably believes that such enforcement is not
exercisable under applicable law or regulations or if such exercise would
result in loss of insurance coverage with respect to such Mortgage Loan. In
either case, where the due-on-sale clause will not be exercised, the Servicer
or the Master Servicer is authorized to take or enter into an assumption and
modification agreement from or with the person to whom such Mortgaged Property
has been or is about to be conveyed, pursuant to which such person becomes
liable under the Mortgage Note and, unless prohibited by applicable state law,
the Mortgagor remains liable thereon, provided that the Mortgage Loan will
continue to be covered by any Pool Insurance Policy and any related Primary
Mortgage Insurance Policy. In the case of an FHA Loan, such an assumption can
occur only with HUD approval of the substitute Mortgagor. Each Servicer and
the Master Servicer will also be authorized, with the prior approval of the
Insurer under any required insurance policies, to enter into a substitution of
liability agreement with such person, pursuant to which the original Mortgagor
is released from liability and such person is substituted as Mortgagor and
becomes liable under the Mortgage Note.
Under the Servicing Agreements and the Pooling and Servicing Agreement, the
Servicer or the Master Servicer, as the case may be, will foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
related Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer or the
Master Servicer will follow such practices and procedures as are deemed
necessary or advisable and as shall be normal and usual in its general
mortgage servicing activities and in accordance with FNMA guidelines, except
when, in the case of FHA or VA Loans, applicable regulations require
otherwise. However, neither the Servicer nor the Master Servicer will be
required to expend its own funds in connection with any foreclosure or towards
the restoration of any property unless it determines and, in the case of a
determination by a Servicer, the Master Servicer agrees (i) that such
restoration and/or foreclosure will increase the proceeds of liquidation of
the related Mortgage Loan to Certificateholders after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds, Insurance Proceeds, payments under the Letter of
Credit, or amounts in the Reserve Fund, if any, with respect to the related
Series, or otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans and Contracts--The Mortgage
Loans--Foreclosure" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for
those shares and otherwise limit the Trust Fund's ability to sell and realize
the value of those shares.
The market value of any Multifamily Property obtained in foreclosure or by
deed in lieu of foreclosure will be based substantially on the operating
income obtained from renting the dwelling units. Since a default on a Mortgage
Loan secured by Multifamily Property is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service
payments on the related Mortgage Loan, it can be anticipated that the market
value of such property will be less than was anticipated when such Mortgage
Loan was originated. To the extent that the equity in the property does not
absorb the loss in market value and such loss is not covered by other credit
support, a loss may be experienced by the related Trust Fund. With respect to
Multifamily Property consisting of an apartment building owned by a
Cooperative, the Cooperative's ability to meet debt service obligations on the
Mortgage Loan, as well as all other operating expenses, will be dependent in
large part on the receipt of maintenance payments from the tenant-
stockholders, as well as any rental income from
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units or commercial areas the Cooperative might control. Unanticipated
expenditures may in some cases have to be paid by special assessments of the
tenant-stockholders. The Cooperative's ability to pay the principal amount of
the Mortgage Loan at maturity may depend on its ability to refinance the
Mortgage Loan. The Depositor, the Unaffiliated Seller and the Master Servicer
will have no obligation to provide refinancing for any such Mortgage Loan.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES; REALIZATION UPON DEFAULTED CONTRACTS
Each Servicing Agreement and Pooling and Servicing Agreement with respect to
Certificates representing interests in a Contract Pool will provide that, when
any Manufactured Home securing a Contract is about to be conveyed by the
Obligor, the Master Servicer, to the extent it has knowledge of such
prospective conveyance and prior to the time of the consummation of such
conveyance, may exercise its rights to accelerate the maturity of such
Contract under the applicable "due-on-sale" clause, if any, unless it is not
exercisable under applicable law. In such case, the Master Servicer is
authorized to take or enter into an assumption agreement from or with the
person to whom such Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Contract and, unless
determined to be materially adverse to the interests of Certificateholders,
with the prior approval of the Pool Insurer, if any, to enter into a
substitution of liability agreement with such person, pursuant to which the
original Obligor is released from liability and such person is substituted as
Obligor and becomes liable under the Contract. Where authorized by the
Contract, the APR may be increased, upon assumption, to the then-prevailing
market rate, but shall not be decreased.
Under the Servicing Agreement or the Pooling and Servicing Agreement, the
Master Servicer will repossess or otherwise comparably convert the ownership
of properties securing such of the related Manufactured Homes as come into and
continue in default and as to which no satisfactory arrangements can be made
for collection of delinquent payments. In connection with such repossession or
other conversion, the Servicer or Master Servicer will follow such practices
and procedures as it shall deem necessary or advisable and as shall be normal
and usual in its general Contract servicing activities. The Servicer or Master
Servicer, however, will not be required to expend its own funds in connection
with any repossession or towards the restoration of any property unless it
determines (i) that such restoration or repossession will increase the
proceeds of liquidation of the related Contract to the Certificateholders
after reimbursement to itself for such expenses and (ii) that such expenses
will be recoverable to it either through liquidation proceeds or through
insurance proceeds.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Under the Pooling and Servicing Agreement for a Series of Certificates, the
Depositor or the person or entity specified in the applicable Prospectus
Supplement and any Master Servicer will be entitled to receive an amount
described in such Prospectus Supplement. The Master Servicer's primary
compensation generally will be equal to the difference, with respect to each
interest payment on a Mortgage Loan, between the Mortgage Rate and the Pass-
Through Rate for the related Mortgage Pool and with respect to each interest
payment on a Contract, between the APR and the Pass-Through Rate for the
related Contract (less any servicing compensation payable to the Servicer of
the related Mortgage Loan or Contract, if any, as set forth below, and the
amount, if any, payable to the Depositor or to the person or entity specified
in the applicable Prospectus Supplement). As compensation for its servicing
duties, a Servicer will be entitled to receive a monthly servicing fee in the
amount specified in the related Servicing Agreement. Such servicing
compensation shall be payable by withdrawal from the related Servicing Account
prior to deposit in the Certificate Account. Each Servicer (with respect to
the Mortgage Loans or Contracts serviced by it) and the Master Servicer will
be entitled to servicing compensation out of Insurance Proceeds, Liquidation
Proceeds, or Letter of Credit payments. Additional servicing compensation in
the form of prepayment charges, assumption fees, late payment charges or
otherwise shall be retained by the Servicers and the Master Servicer to the
extent not required to be deposited in the Certificate Account.
The Servicers and the Master Servicer, subject to certain exceptions which,
if applicable, will be specified in the applicable Prospectus Supplement, will
pay from their servicing compensation certain expenses incurred
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in connection with the servicing of the Mortgage Loans or Contracts,
including, without limitation, payment of the Insurance Policy premiums and,
in the case of the Master Servicer, fees or other amounts payable for any
Alternative Credit Support, payment of the fees and disbursements of the
Trustee (and any custodian selected by the Trustee), the Certificate Register
and independent accountants and payment of expenses incurred in enforcing the
obligations of Servicers and Unaffiliated Sellers. Certain of these expenses
may be reimbursable by the Depositor pursuant to the terms of the Pooling and
Servicing Agreement. In addition, the Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Servicers
and Unaffiliated Sellers under certain limited circumstances.
As set forth in the preceding section, the Servicers and the Master Servicer
will be entitled to reimbursement for certain expenses incurred by them in
connection with the liquidation of defaulted Mortgage Loans or Contracts. The
related Trust Fund will suffer no loss by reason of such expenses to the
extent claims are fully paid under the Letter of Credit, if any, the related
insurance policies, from amounts in the Reserve Fund or under any applicable
Alternative Credit Support described in a Prospectus Supplement. In the event,
however, that claims are either not made or fully paid under such Letter of
Credit, Insurance Policies or Alternative Credit Support, or if coverage
thereunder has ceased, or if amounts in the Reserve Fund are not sufficient to
fully pay such losses, the related Trust Fund will suffer a loss to the extent
that the proceeds of the liquidation proceedings, after reimbursement of the
expenses of the Servicers or the Master Servicer, as the case may be, are less
than the principal balance of the related Mortgage Loan or Contract. In
addition, the Servicers and the Master Servicer will be entitled to
reimbursement of expenditures incurred by them in connection with the
restoration of a Mortgaged Property, Cooperative Dwelling or Manufactured
Home, such right of reimbursement being prior to the rights of the
Certificateholders to receive any payments under the Letter of Credit, or from
any related Insurance Proceeds, Liquidation Proceeds, amounts in the Reserve
Fund or any proceeds of Alternative Credit Support.
To the extent set forth in the Deposit Trust Agreement or the Pooling and
Servicing Agreement, the Trustee will be entitled to deduct, from
distributions of interest with respect to the Mortgage Certificates,
Government Securities, if any, and Private Label Custody Receipt Securities,
if any, a specified percentage of the unpaid principal balance of each
Mortgage Certificate, Government Security or Private Label Custody Receipt
Security, as applicable, as servicing compensation. The Trustee shall be
required to pay all expenses, except as expressly provided in the Deposit
Trust Agreement, subject to limited reimbursement as provided therein.
EVIDENCE AS TO COMPLIANCE
The Master Servicer will deliver to the Depositor and the Trustee, on or
before the date specified in the Pooling and Servicing Agreement, an Officer's
Certificate stating that (i) a review of the activities of the Master Servicer
and the Servicers during the preceding calendar year and of its performance
under the Pooling and Servicing Agreement has been made under the supervision
of such officer, and (ii) to the best of such officer's knowledge, based on
such review, the Master Servicer and each Servicer has fulfilled all its
obligations under the Pooling and Servicing Agreement and the applicable
Servicing Agreement throughout such year, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default known to
such officer and the nature and status thereof. Such Officer's Certificate
shall be accompanied by a statement of a firm of independent public
accountants to the effect that, on the basis of an examination of certain
documents and records relating to servicing of the Mortgage Loans or
Contracts, conducted in accordance with generally accepted accounting
principles in the mortgage banking industry, the servicing of the Mortgage
Loans or Contracts was conducted in compliance with the provisions of the
Pooling and Servicing Agreement and the Servicing Agreements, except for such
exceptions as such firm believes it is required to report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE DEPOSITOR AND THE TRUSTEE
The Master Servicer under each Pooling and Servicing Agreement will be named
in the applicable Prospectus Supplement. The entity acting as Master Servicer
may be an Unaffiliated Seller and have other normal business relationships
with the Depositor and/or affiliates of the Depositor and may be an affiliate
of the
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Depositor. In the event there is no Master Servicer under a Pooling and
Servicing Agreement, all servicing of Mortgage Loans or Contracts will be
performed by a Servicer pursuant to a Servicing Agreement.
The Master Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement except upon a determination that its duties
thereunder are no longer permissible under applicable law. No such resignation
will become effective until the Trustee or a successor Servicer has assumed
the Master Servicer's obligations and duties under the Pooling and Servicing
Agreement.
The Trustee under each Pooling and Servicing Agreement or Deposit Trust
Agreement will be named in the applicable Prospectus Supplement. The
commercial bank or trust company serving as Trustee may have normal banking
relationships with the Depositor and/or its affiliates and with the Master
Servicer and/or its affiliates.
The Trustee may resign from its obligations under the Pooling and Servicing
Agreement at any time, in which event a successor trustee will be appointed.
In addition, the Depositor may remove the Trustee if the Trustee ceases to be
eligible to act as Trustee under the Pooling and Servicing Agreement or if the
Trustee becomes insolvent, at which time the Depositor will become obligated
to appoint a successor Trustee. The Trustee may also be removed at any time by
the holders of Certificates evidencing voting rights aggregating not less than
50% of the voting rights evidenced by the Certificates of such Series. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of such appointment by the
successor Trustee.
The Trustee may resign at any time from its obligations and duties under the
Deposit Trust Agreement by executing an instrument in writing resigning as
Trustee, filing the same with the Depositor, mailing a copy of a notice of
resignation to all Certificateholders then of record, and appointing a
qualified successor trustee. No such resignation will become effective until
the successor trustee has assumed the Trustee's obligations and duties under
the Deposit Trust Agreement.
Each Pooling and Servicing Agreement and Deposit Trust Agreement will also
provide that neither the Depositor nor the Master Servicer nor any director,
officer, employee or agent of the Depositor or the Master Servicer or the
Trustee, or any responsible officers of the Trustee will be under any
liability to the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the
applicable Agreement, or for errors in judgment; provided, however, that none
of the Depositor, the Master Servicer or the Trustee nor any such person will
be protected against, in the case of the Master Servicer and the Depositor,
any breach of representations or warranties made by them, and in the case of
the Master Servicer, the Depositor and the Trustee, against any liability that
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties thereunder. Each Pooling and Servicing Agreement
and Deposit Trust Agreement will further provide that the Depositor, the
Master Servicer and the Trustee and any director, officer and employee or
agent of the Depositor, the Master Servicer or the Trustee shall be entitled
to indemnification, by the Trust Fund in the case of the Depositor and Master
Servicer and by the Master Servicer in the case of the Trustee and will be
held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the applicable Agreement or the Certificates
and in the case of the Trustee, resulting from any error in any tax or
information return prepared by the Master Servicer or from the exercise of any
power of attorney granted pursuant to the applicable Agreement, other than any
loss, liability or expense related to any specific Mortgage Loan, Contract,
Mortgage Certificate, Government Security or Private Label Custody Receipt
Security (except any such loss, liability or expense otherwise reimbursable
pursuant to the applicable Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of their duties thereunder or by reason of reckless disregard of
their obligations and duties thereunder. In addition, each Agreement will
provide that neither the Depositor nor the Master Servicer, as the case may
be, will be under any obligation to appear in, prosecute or defend any legal
action that is not incidental to its duties under the Agreement and that in
its opinion may involve it in any expense or liability. The Depositor or the
Master Servicer may, however, in their discretion, undertake any such action
deemed by them necessary or desirable with respect to the applicable Agreement
and the rights and duties of the parties thereto and the
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interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will
be expenses, costs and liabilities of the Trust Fund, and the Master Servicer
or the Depositor, as the case may be, will be entitled to be reimbursed
therefor out of the Certificate Account.
DEFICIENCY EVENT
To the extent a Deficiency Event is specified in the applicable Prospectus
Supplement, a deficiency event (a "Deficiency Event") with respect to the
Certificates of each Series may be defined in the Pooling and Servicing
Agreement as being the inability of the Trustee to distribute to holders of
one or more Classes of Certificates of such Series, in accordance with the
terms thereof and the Pooling and Servicing Agreement, any distribution of
principal or interest thereon when and as distributable, in each case because
of the insufficiency for such purpose of the funds then held in the related
Trust Fund.
To the extent a Deficiency Event is specified in the applicable Prospectus
Supplement, upon the occurrence of a Deficiency Event, the Trustee is required
to determine whether or not the application on a monthly basis (regardless of
the frequency of regular Distribution Dates) of all future scheduled payments
on the Mortgage Loans, Contracts, Mortgage Certificates, Government Security,
if any, and Private Label Custody Receipt Security, if any, included in the
related Trust Fund and other amount receivable with respect to such Trust Fund
towards payments on such Certificates in accordance with the priorities as to
distributions of principal and interest set forth in such Certificates will be
sufficient to make distributions of interest at the applicable Interest Rates
and to distribute in full the principal balance of each such Certificate on or
before the latest Final Distribution Date of any outstanding Certificates of
such Series.
To the extent a Deficiency Event is specified in the applicable Prospectus
Supplement, the Trustee will obtain and rely upon an opinion or report of a
firm of independent accountants of recognized national reputation as to the
sufficiency of the amounts receivable with respect to such Trust Fund to make
such distributions on the Certificates, which opinion or report will be
conclusive evidence as to such sufficiency. Pending the making of any such
determination, distributions on the Certificates shall continue to be made in
accordance with their terms.
To the extent a Deficiency Event is specified in the applicable Prospectus
Supplement, in the event that the Trustee makes a positive determination, the
Trustee will apply all amounts received in respect of the related Trust Fund
(after payment of fees and expenses of the Trustee and accountants for the
Trust Fund) to distributions on the Certificates of such Series in accordance
with their terms, except that such distributions shall be made monthly and
without regard to the amount of principal that would otherwise be
distributable on any Distribution Date. Under certain circumstances following
such positive determination, the Trustee may resume making distributions on
such Certificates expressly in accordance with their terms.
To the extent a Deficiency Event is specified in the applicable Prospectus
Supplement, if the Trustee is unable to make the positive determination
described above, the Trustee will apply all amounts received in respect of the
related Trust Fund (after payment of Trustee and accountants' fees and
expenses) to monthly distributions on the Certificates of such series pro
rata, without regard to the priorities as to distribution of principal set
forth in such Certificates, and such Certificates will, to the extent
permitted by applicable law, accrue interest at the highest Interest Rate
borne by any Certificate of such Series, or in the event any Class of such
Series shall accrue interest at a floating rate, at the weighted average
Interest Rate, calculated on the basis of the maximum interest rate applicable
to the Class having such floating interest rate and on the original principal
amount of the Certificates of that Class. In such event, the holders of a
majority in outstanding principal balance of such Certificates may direct the
Trustee to sell the related Trust Fund, any such direction being irrevocable
and binding upon the holders of all Certificates of such Series and upon the
owners of the residual interests in such Trust Fund. In the absence of such a
direction, the Trustee may not sell all or any portion of such Trust Fund.
EVENTS OF DEFAULT
Events of Default under each Pooling and Servicing Agreement will consist
of: (i) any failure to make a specified payment which continues unremedied, in
most cases, for five business days after the giving of written
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notice; (ii) any failure by the Trustee, the Servicer or the Master Servicer,
as applicable, duly to observe or perform in any material respect any other of
its covenants or agreements in the Pooling and Servicing Agreement which
failure shall continue for 60 days (15 days in the case of a failure to pay
the premium for any insurance policy) or any breach of any representation and
warranty made by the Master Servicer or the Servicer, if applicable, which
continues unremedied for the period set forth in the applicable Prospectus
Supplement after the giving of written notice of such failure or breach; (iii)
a breach of any of certain representations and warranties made by the Master
Servicer in the Pooling and Servicing Agreement that materially and adversely
affects the interests of Certificateholders, which continues unremedied for 30
days after the giving of written notice of such breach; (iv) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings regarding the Master Servicer or a Servicer, as
applicable; and (v) any lowering, withdrawal or notice of an intended or
potential lowering, of the outstanding rating of the Certificates by the
Rating Agency rating such Certificates because the existing or prospective
financial condition or mortgage loan servicing capability of the Master
Servicer is insufficient to maintain such rating.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default with respect to a Series of Certificates
remains unremedied, the Depositor, the Trustee or the holders of Certificates
evidencing not less than 25% of the voting rights evidenced by the
Certificates of such Series may terminate all of the rights and obligations of
the Master Servicer under the Pooling and Servicing Agreement and in and to
the Mortgage Loans and Contracts and the proceeds thereof, whereupon (subject
to applicable law regarding the Trustee's ability to make advances) the
Trustee or, if the Depositor so notifies the Trustee and the Master Servicer,
the Depositor or its designee, will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under such Pooling and Servicing
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but
is unwilling or unable so to act, it may appoint, or petition to a court of
competent jurisdiction for the appointment of, a successor master Servicer.
Pending such appointment, the Trustee (unless prohibited by law from so
acting) shall be obligated to act in such capacity. The Trustee and such
successor master Servicer may agree upon the servicing compensation to be paid
to such successor, which in no event may be greater than the compensation to
the Master Servicer under the Pooling and Servicing Agreement.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer and the Trustee, without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement
any provision therein that may be inconsistent with any other provision
therein, (iii) if so specified in the applicable Prospectus Supplement, to
amend any provision thereof to the extent necessary or desirable to maintain
the rating or ratings assigned to any Class of Certificate by any Rating
Agency, or (iv) to make any other provisions with respect to matters or
questions arising under such Pooling and Servicing Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of any
Certificateholder of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Master Servicer and the Trustee with
the consent of holders of Certificates evidencing not less than 66 2/3% of the
voting rights evidenced by the Certificates, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of such Pooling and Servicing Agreement or of modifying in any manner the
rights of the Certificateholders; provided, however, that no such amendment
may (i) reduce in any manner the amount of, delay the timing of or change the
manner in which payments received on or with respect to Mortgage Loans and
Contracts are required to be distributed with respect to any Certificate
without the consent of the holder of such Certificate, (ii) adversely affect
in any material respect the interests of the holders of a Class or Subclass of
Certificates of a Series in a manner other than that set forth in (i) above
without the consent of the holders of such Class or Subclass evidencing not
less than 66 2/3% of such Class or Subclass, or (ii) reduce the aforesaid
percentage of the Certificates, the holders of which are required to consent
to such amendment, without the consent of the holders of the Class affected
thereby. Further, the Depositor, the Master Servicer and the Trustee, at any
time and from time to time, without the consent of the Certificateholders, may
amend the Pooling and Servicing Agreement to modify, eliminate or add to any
of its
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provisions to such extent as shall be necessary to maintain the qualification
of the Trust (or any part thereof) as a REMIC, or to prevent the imposition of
any additional material state or local taxes, at all times that any
Certificates are outstanding; provided, however, that such action, as
evidenced by an opinion of counsel (obtained at the expense of the Trust
Fund), is necessary or helpful to maintain such qualification or to prevent
the imposition of any such taxes, and would not adversely affect in any
material respect the interest of any Certificateholder.
The Deposit Trust Agreement for a Series may be amended by the Trustee and
the Depositor without Certificateholder consent, (i) to cure any ambiguity,
(ii) to correct or supplement any provision therein that may be inconsistent
with any other provision therein, or (iii) to make any other provisions with
respect to matters or questions arising thereunder that are not inconsistent
with any other provisions thereof, provided that such action will not, as
evidenced by an opinion of counsel, adversely affect the interests of any
Certificateholders of that Series in any material respect. The Deposit Trust
Agreement for each Series may also be amended by the Trustee and the Depositor
with the consent of the Holders of Certificates evidencing Percentage
Interests aggregating not less than 66 2/3% of each Class of the Certificates
of such Series affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement
or modifying in any manner the rights of Certificateholders of that Series;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, or change the manner in which payments
received on Mortgage Certificates are required to be distributed in respect of
any Certificate, without the consent of the Holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates the Holders of which are
required to consent to any such amendment, without the consent of the Holders
of all Certificates of such Series then outstanding. Further, the Depositor,
the Master Servicer and the Trustee, at any time and from time to time,
without the consent of the Certificateholders, may amend the Deposit Trust
Agreement to modify, eliminate or add to any of its provisions to such extent
as shall be necessary to maintain the qualification of the Trust (or any part
thereof) as a REMIC, or to prevent the imposition of any additional material
state or local taxes, at all times that any Certificates are outstanding;
provided, however, that such action, as evidenced by an opinion of counsel
(obtained at the expense of the Trust Fund), is necessary or helpful to
maintain such qualification or to prevent the imposition of any such taxes,
and would not adversely affect in any material respect the interest of any
Certificateholder.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate upon the earlier of (a) the repurchase of all
Mortgage Loans or Contracts and all property acquired by foreclosure of any
such Mortgage Loan or Contract and (b) the later of (i) the maturity or other
liquidation of the last Mortgage Loan or Contract subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan or Contract and (ii) the payment to the Certificateholders of all amounts
held by the Master Servicer and required to be paid to them pursuant to such
Pooling and Servicing Agreement. The obligations created by the Deposit Trust
Agreement for a Series of Certificates will terminate upon the distribution to
Certificateholders of all amounts required to be distributed to them pursuant
to such Deposit Trust Agreement. In no event, however, will the trust created
by either such Agreement continue beyond the expiration of 21 years from the
death of the last survivor of certain persons identified therein. For each
Series of Certificates, the Master Servicer will give written notice of
termination of the applicable Agreement of each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency specified in the notice of termination.
If so provided in the applicable Prospectus Supplement, the Agreement for
each Series of Certificates will permit, but not require, the Depositor or
such other person as may be specified in the Prospectus Supplement to
repurchase from the Trust Fund for such Series all remaining Mortgage Loans,
Mortgage Certificates, Contracts or Government Securities or Private Label
Custody Receipt Securities subject to such Agreement at a price specified in
such Prospectus Supplement. In the event that the Depositor elects to treat
the related Trust Fund (or any part thereof) as one or more REMICs, under the
Code, any such repurchase will be effected in compliance with the requirements
of Section 860F(a)(4) of the Code, in order to constitute a "qualifying
liquidation"
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thereunder. The exercise of any such right will effect early retirement of the
Certificates of that Series, but the right so to repurchase may be effected
only on or after the aggregate principal balance of the Mortgage Loans,
Mortgage Certificates, Contracts, Government Securities or Private Label
Custody Receipt Securities for such Series at the time of repurchase is less
than a specified percentage of the aggregate principal balance at the Cut-off
Date for the Series, or on or after the date set forth in the applicable
Prospectus Supplement.
CREDIT SUPPORT
Credit support for a Series of Certificates may be provided by one or more
Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Certificates (which may, if so specified in the applicable Prospectus
Supplement, be issued in notional amounts), the provision for shifting
interest credit enhancement, the establishment of a Reserve Fund, the method
of Alternative Credit Support specified in the applicable Prospectus
Supplement, or any combination of the foregoing, in addition to, or in lieu
of, the insurance arrangements set forth below under Description of Insurance.
The amount and method of credit support will be set forth in the Prospectus
Supplement with respect to a Series of Certificates.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Certificates will
be issued by the bank or financial institution specified in the applicable
Prospectus Supplement (the "L/C Bank"). The maximum obligation of the L/C Bank
under the Letter of Credit will be to honor requests for payment thereunder in
an aggregate fixed dollar amount, net of unreimbursed payments thereunder,
equal to the percentage of the aggregate principal balance on the related Cut-
off Date of the Mortgage Loans or Contracts evidenced by each Series (the "L/C
Percentage") specified in the Prospectus Supplement for such Series. The
duration of coverage and the amount and frequency of any reduction in coverage
provided by the Letter of Credit with respect to a Series of Certificates will
be in compliance with the requirements established by the Rating Agency rating
such Series and will be set forth in the Prospectus Supplement relating to
such Series of Certificates. The amount available under the Letter of Credit
in all cases shall be reduced to the extent of the unreimbursed payments
thereunder. The obligations of the L/C Bank under the Letter of Credit for
each Series of Certificates will expire 30 days after the latest of the
scheduled final maturity dates of the Mortgage Loans or Contracts in the
related Mortgage Pool or Contract Pool or the repurchase of all Mortgage Loans
or Contracts in the Mortgage Pool or Contract Pool in the circumstances
specified above. See "Description of the Certificates--Termination".
Under the Pooling and Servicing Agreement, the Master Servicer (subject to
certain exceptions which, if applicable, will be specified in the applicable
Prospectus Supplement) will be required not later than three business days
prior to each Distribution Date to determine whether a payment under the
Letter of Credit will be necessary on the Distribution Date and will, no later
than the third business day prior to such Distribution Date, advise the L/C
Bank and the Trustee of its determination, setting forth the amount of any
required payment. On the Distribution Date, the L/C Bank will be required to
honor the Trustee's request for payment thereunder in an amount equal to the
lesser of (A) the remaining amount available under the Letter of Credit and
(B) the outstanding principal balances of any Liquidating Loans to be assigned
on such Distribution Date (together with accrued and unpaid interest thereon
at the related Mortgage Rate or APR to the related Due Date). The proceeds of
such payments under the Letter of Credit will be deposited into the
Certificate Account and will be distributed to Certificateholders, in the
manner specified in the applicable Prospectus Supplement, on such Distribution
Date, except to the extent of any unreimbursed Advances, servicing
compensation due to the Servicers and the Master Servicer and other amounts
payable to the Depositor or the person or entity named in the applicable
Prospectus Supplement therefrom.
If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of such Liquidating
Loan, and the L/C Bank will thereafter own such Liquidating Loan free of any
further obligation to the Trustee or the Certificateholders with respect
thereto. Payments made to the Certificate Account by the L/C
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Bank under the Letter of Credit with respect to such a Liquidating Loan will
be reimbursed to the L/C Bank only from the proceeds (net of liquidation
costs) of such Liquidating Loan. The amount available under the Letter of
Credit will be increased to the extent it is reimbursed for such payments.
To the extent the proceeds of liquidation of a Liquidating Loan acquired by
the L/C Bank in the manner described in the preceding paragraph exceed the
amount of payments made with respect thereto, the L/C Bank will be entitled to
retain such proceeds as additional compensation for issuance of the Letter of
Credit.
Prospective purchasers of Certificates of a Series with respect to which
credit support is provided by a Letter of Credit must look to the credit of
the L/C Bank, to the extent of its obligations under the Letter of Credit, in
the event of default by Mortgagors or Obligors. If the amount available under
the Letter of Credit is exhausted, or the L/C Bank becomes insolvent, and
amounts in the Reserve Fund, if any, with respect to such Series are
insufficient to pay the entire amount of the loss and still be maintained at
the level specified in the applicable Prospectus Supplement (the "Required
Reserve"), the Certificateholders (in the priority specified in the applicable
Prospectus Supplement) will thereafter bear all risks of loss resulting from
default by Mortgagors or Obligors (including losses not covered by insurance
or Alternative Credit Support), and must look primarily to the value of the
properties securing defaulted Mortgage Loans or Contracts for recovery of the
outstanding principal and unpaid interest.
In the event that a Subordinated Class or Subclass of a Series of
Certificates is issued with a notional amount, the coverage provided by the
Letter of Credit with respect to such Series, and the terms and conditions of
such coverage, will be set forth in the applicable Prospectus Supplement.
SUBORDINATED CERTIFICATES
To the extent specified in the Prospectus Supplement with respect to a
Series of Certificates, credit support may be provided by the subordination of
the rights of the holders of one or more Classes or Subclasses of Certificates
to receive distributions with respect to the Mortgage Loans or Mortgage
Certificates in the Mortgage Pool, Contracts in the Contract Pool, the
Government Securities, if any, and the Private Label Custody Receipt
Securities, if any, underlying such Series, or with respect to a Subordinated
Pool of mortgage loans, manufactured housing conditional sales contracts and
installment loan agreements, government securities or private label custody
receipt securities, to the rights of the Senior Certificateholders or holders
of one or more Classes or Subclasses of Subordinated Certificates of such
Series to receive such distributions, to the extent of the applicable
Subordinated Amount. In such a case, credit support may also be provided by
the establishment of a Reserve Fund, as described below. The Subordinated
Amount, as described below, will be reduced by an amount equal to Aggregate
Losses. Aggregate Losses are defined in the related Pooling and Servicing
Agreement for any given period as the aggregate amount of delinquencies,
losses and other deficiencies in the amounts due to the holders of the
Certificates of one or more classes or Subclasses of such Series paid or borne
by the holders of one or more Classes or Subclasses of Subordinated
Certificates of such Series ("payment deficiencies"), but excluding any
payments of interest on any amounts originally due to the holders of the
Certificates of a Class or Subclass to which the applicable Class or Subclass
of Subordinated Certificates are subordinated on a previous Distribution Date,
but not paid as due, whether by way of withdrawal from the Reserve Fund, if
any (including, prior to the time that the Subordinated Amount is reduced to
zero, any such withdrawal of amounts attributable to the Initial Deposit, if
any), reduction in amounts otherwise distributable to the Subordinated
Certificateholders on any Distribution Date or otherwise, less the aggregate
amount of previous payment deficiencies recovered by the related Trust Fund
during such period in respect of the Mortgage Loans, Mortgage Certificates,
Contracts, Government Securities, if any, or Private Label Custody Receipt
Securities, if any, giving rise to such previous payment deficiencies,
including, without limitation, such recoveries resulting from the receipt of
delinquent principal and/or interest payments, Liquidation Proceeds or
Insurance Proceeds (net, in each case, of servicing compensation, foreclosure
costs and other servicing costs, expenses and unreimbursed Advances relating
to such assets). The Prospectus Supplement for each Series of Certificates
with respect to which credit support will be provided by one or more Classes
or Subclasses of Subordinated Certificates will set forth the Subordinated
Amount for such Series. If specified in the applicable Prospectus Supplement,
the Subordinated Amount will
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decline over time in accordance with a schedule which will also be set forth
in the applicable Prospectus Supplement.
SHIFTING INTEREST
If specified in the Prospectus Supplement for a Series of Certificates for
which credit enhancement is provided by shifting interest as described herein,
the rights of the holders of the Subordinated Certificates of a Series to
receive distributions with respect to the Mortgage Loans, Mortgage
Certificates, Contracts, Government Securities, if any, and Private Label
Custody Receipt Securities, if any, in the related Trust Fund or Subsidiary
Trust will be subordinated to such right of the holders of the Senior
Certificates of the same Series to the extent described in such Prospectus
Supplement. This subordination feature is intended to enhance the likelihood
of regular receipt by holders of Senior Certificates of the full amount of
scheduled monthly payments of principal and interest due them and to provide
limited protection to the holders of the Senior Certificates against losses
due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series by
the shifting interest subordination feature will be effected by distributing
to the holders of the Senior Certificates a disproportionately greater
percentage (the "Senior Prepayment Percentage") of Principal Prepayments. The
initial Senior Prepayment Percentage will be the percentage specified in the
applicable Prospectus Supplement and will decrease in accordance with the
schedule and subject to the conditions set forth in such Prospectus
Supplement. This disproportionate distribution of Principal Prepayments will
have the effect of accelerating the amortization of the Senior Certificates
while increasing the respective interest of the Subordinated Certificates in
the Mortgage Loans, Mortgage Certificates, Contract Pool, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, in
the related Trust Fund or Subsidiary Trust. Increasing the respective interest
of the Subordinated Certificates relative to that of the Senior Certificates
is intended to preserve the availability of the benefits of the subordination
provided by the Subordinated Certificates.
SWAP AGREEMENT
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Trust will enter into or obtain an assignment of a swap
agreement or other similar agreement pursuant to which the Trust will have the
right to receive certain payments of interest (or other payments) as set forth
or determined as described therein. The Prospectus Supplement relating to a
Series of Certificates having the benefit of an interest rate swap agreement
will describe the material terms of such agreement and the particular risks
associated with the interest rate swap feature, including market and credit
risk, the effect of counterparty defaults and other risks, if any, addressed
by the rating. The Prospectus Supplement relating to such Series of
Certificates also will set forth certain information relating to the corporate
status, ownership and credit quality of the counterparty or counterparties to
such swap agreement.
RESERVE FUND
If so specified in the applicable Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of a
Reserve Fund for such Series. If so specified in the applicable Prospectus
Supplement, the Reserve Fund for a Series will not be included in the Trust
Fund for such Series. The Reserve Fund for each Series will be created by the
Depositor and shall be funded by the retention by the Master Servicer of
certain payments on the Mortgage Loans, Mortgage Certificates, Contracts,
Government Securities, if any, or Private Label Custody Receipt Securities, if
any, by the deposit with the Trustee, in escrow, by the Depositor of a
Subordinated Pool of mortgage loans, manufactured housing conditional sales
contracts and installment loan agreements, government securities and private
label custody receipt securities with the aggregate principal balance, as of
the related Cut-off Date, set forth in the applicable Prospectus Supplement,
by any combination of the foregoing, or in another manner specified in the
applicable Prospectus Supplement. Following the initial issuance of the
Certificates of a Series and until the balance of the Reserve Fund first
equals or exceeds the Required Reserve, the Master Servicer will retain
specified distributions on the Mortgage Loans, Mortgage Certificates,
Contracts, Government
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Securities, if any or Private Label Custody Receipt Securities, if any, and/or
on the mortgage loans, manufactured housing conditional sales contracts and
installment loan agreements, government securities or private label custody
receipt securities in the Subordinated Pool otherwise distributable to the
holders of Subordinated Certificates and deposit such amounts in the Reserve
Fund. After the amounts in the Reserve Fund for a Series first equal or exceed
the applicable Required Reserve, the Master Servicer will retain such
distributions and deposit so much of such amounts in the Reserve Fund as may
be necessary, after the application of such distributions to amounts due and
unpaid on the Certificates or on the Certificates of such Series to which the
applicable Class or Subclass of Subordinated Certificates are subordinated and
the reimbursement of unreimbursed Advances and liquidation expenses, to
maintain the Reserve Fund at the Required Reserve. The balance in the Reserve
Fund in excess of the Required Reserve shall be paid to the applicable Class
or Subclass of Subordinated Certificates, or to another specified person or
entity, as set forth in the applicable Prospectus Supplement, and shall be
unavailable thereafter for future distribution to Certificateholders of any
Class. The Prospectus Supplement for each Series will set forth the amount of
the Required Reserve applicable from time to time. The Required Reserve may
decline over time in accordance with a schedule which will also be set forth
in the applicable Prospectus Supplement.
Amounts held in the Reserve Fund for a Series from time to time will
continue to be the property of the Subordinated Certificateholders of the
Classes or Subclasses specified in the applicable Prospectus Supplement until
withdrawn from the Reserve Fund and transferred to the Certificate Account as
described below. If on any Distribution Date the amount in the Certificate
Account available to be applied to distributions on the Senior Certificates of
such Series, after giving effect to any Advances made by the Servicers or the
Master Servicer on such Distribution Date, is less than the amount required to
be distributed to such Senior Certificateholders (the "Required Distribution")
on such Distribution Date, the Master Servicer will withdraw from the Reserve
Fund and deposit into the Certificate Account the lesser of (i) the entire
amount on deposit in the Reserve Fund available for distribution to the Senior
Certificateholders (which amount will not in any event exceed the Required
Reserve) or (ii) the amount necessary to increase the funds in the Certificate
Account eligible for distribution to the Senior Certificateholders on such
Distribution Date to the Required Distribution; provided, however, that in no
event will any amount representing investment earnings on amounts held in the
Reserve Fund be transferred into the Certificate Account or otherwise used in
any manner for the benefit of the Senior Certificateholders. If so specified
in the applicable Prospectus Supplement, the balance, if any, in the Reserve
Fund in excess of the Required Reserve shall be released, to the Subordinated
Certificateholders. Whenever the Reserve Fund is less than the Required
Reserve (subject to certain exceptions which, if applicable, will be specified
in the applicable Prospectus Supplement), holders of the Subordinated
Certificates of the applicable Class or Subclass will not receive any
distributions with respect to the Mortgage Loans, Mortgage Certificates,
Contracts and Government Securities, if any, and Private Label Custody Receipt
Securities, if any, other than amounts attributable to interest on the
Mortgage Loans, Mortgage Certificates, Contracts, Government Securities, if
any, and Private Label Custody Receipt Securities, if any, after the initial
Required Reserve has been attained and amounts attributable to any income
resulting from investment of the Reserve Fund as described below. Whether or
not the amount of the Reserve Fund exceeds the Required Reserve on any
Distribution Date, the holders of the Subordinated Certificates of the
applicable Class or Subclass are entitled to receive from the Certificate
Account their share of the proceeds of any Mortgage Loan, Mortgage
Certificate, Contract, Government Security or Private Label Custody Receipt
Security, or any property acquired in respect thereof, repurchased by reason
of defective documentation or the breach of a representation or warranty
pursuant to the Pooling and Servicing Agreement. Amounts in the Reserve Fund
shall be applied in the following order:
(i) to the reimbursement of Advances determined by the Master Servicer
and the Servicers to be otherwise unrecoverable, other than Advances of
interest in connection with prepayments in full, repurchases and
liquidations, and the reimbursement of liquidation expenses incurred by the
Servicers and the Master Servicer if sufficient funds for such
reimbursement are not otherwise available in the related Servicing Accounts
and Certificate Account;
(ii) to the payment to the holders of the Senior Certificates of such
Series of amounts distributable to them on the related Distribution Date in
respect of scheduled payments of principal and interest due on the related
Due Date to the extent that sufficient funds in the Certificate Account are
not available therefor; and
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(iii) to the payment to the holders of the Senior Certificates of such
Series of the principal balance or purchase price, as applicable, of
Mortgage Loans, Mortgage Certificates, Contracts, Government Securities and
Private Label Custody Receipt Securities repurchased, liquidated or
foreclosed during the period ending on the day prior to the Due Date to
which such distribution relates and interest thereon at the related Pass-
Through Rate, to the extent that sufficient funds in the Certificate
Account are not available therefor.
Amounts in the Reserve Fund in excess of the Required Reserve, including any
investment income on amounts therein, as set forth below, shall then be
released to the holders of the Subordinated Certificates, or to such other
person as is specified in the applicable Prospectus Supplement, as set forth
above.
Funds in the Reserve Fund for a Series shall be invested as provided in the
related Pooling and Servicing Agreement in certain types of eligible
investments. The earnings on such investments will be withdrawn and paid to
the holders of the applicable Class or Subclass of Subordinated Certificates
in accordance with their respective interests in the Reserve Fund in the
priority specified in the applicable Prospectus Supplement. Investment income
in the Reserve Fund is not available for distribution to the holders of the
Senior Certificates of such Series or otherwise subject to any claims or
rights of the holders of the applicable Class or Subclass of Senior
Certificates. Eligible investments for monies deposited in the Reserve Fund
will be specified in the Pooling and Servicing Agreement for a Series of
Certificates for which a Reserve Fund is established and in some instances
will be limited to investments acceptable to the Rating Agency rating the
Certificates of such Series from time to time as being consistent with its
outstanding rating of such Certificates. Such eligible investments will be
limited, however, to obligations or securities that mature at various time
periods up to 30 days according to a schedule in the Pooling and Servicing
Agreement based on the current balance of the Reserve Fund at the time of such
investment or the contractual commitment providing for such investment.
The time necessary for the Reserve Fund of a Series to reach and maintain
the applicable Required Reserve at any time after the initial issuance of the
Certificates of such Series and the availability of amounts in the Reserve
Fund for distributions on such Certificates will be affected by the
delinquency, foreclosure and prepayment experience of the Mortgage Loans,
Mortgage Certificates, Contracts, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, in the related Trust Fund and/or in
the Subordinated Pool and therefore cannot be accurately predicted.
PERFORMANCE BOND
If so specified in the applicable Prospectus Supplement, the Master Servicer
may be required to obtain a Performance Bond that would provide a guarantee of
the performance by the Master Servicer of one or more of its obligations under
the Agreement, including its obligation to advance delinquent installments of
principal and interest on Mortgage Loans or Contracts and its obligation to
repurchase Mortgage Loans, Mortgage Certificates, Contracts and Government
Securities, if any, and Private Label Custody Receipt Securities, if any, in
the event of a breach by the Master Servicer of a representation or warranty
contained in the Agreement. In the event that the outstanding credit rating of
the obligor of the Performance Bond is lowered by the Rating Agency, with the
result that the outstanding rating on the Certificates would be reduced by
such Rating Agency, the Master Servicer will be required to secure a
substitute Performance Bond issued by an entity with a rating sufficient to
maintain the outstanding rating on the Certificates or to deposit and maintain
with the Trustee cash in the amount specified in the applicable Prospectus
Supplement.
DESCRIPTION OF INSURANCE
To the extent that the applicable Prospectus Supplement does not expressly
provide for a form of credit support specified above or for Alternative Credit
Support in lieu of some or all of the insurance mentioned below, the following
paragraphs on insurance shall apply with respect to the Mortgage Loans
included in the related Trust Fund. Each Manufactured Home that secures a
Contract will be covered by a standard hazard insurance policy and other
insurance policies to the extent described in the applicable Prospectus
Supplement. Any material
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changes in such insurance from the description that follows or the description
of any Alternative Credit Support will be set forth in the applicable
Prospectus Supplement.
PRIMARY MORTGAGE INSURANCE POLICIES
To the extent specified in the applicable Prospectus Supplement, each
Servicing Agreement will require the Servicer to cause a Primary Mortgage
Insurance Policy to be maintained in full force and effect with respect to
each Mortgage Loan that is secured by a Single Family Property covered by the
Servicing Agreement requiring such insurance and to act on behalf of the
Insured with respect to all actions required to be taken by the Insured under
each such Primary Mortgage Insurance Policy. Any primary mortgage insurance or
primary credit insurance policies relating to the Contracts underlying a
Series of Certificates will be described in the applicable Prospectus
Supplement.
The amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan in the related Mortgage Pool (herein referred to as
the "Loss") generally will consist of the insured portion of the unpaid
principal amount of the covered Mortgage Loan (as described herein) and
accrued and unpaid interest thereon and reimbursement of certain expenses,
less (i) all rents or other payments collected or received by the Insured
(other than the proceeds of hazard insurance) that are derived from or in any
way related to such Mortgaged Property, (ii) hazard insurance proceeds in
excess of the amount required to restore such Mortgaged Property and which
have not been applied to the payment of such Mortgage Loan, (iii) amounts
expended but not approved by the Primary Mortgage Insurer, (iv) claim payments
previously made by the Primary Mortgage Insurer, and (v) unpaid premiums.
As conditions precedent to the filing of or payment of a claim under a
Primary Mortgage Insurance Policy covering a Mortgage Loan in the related
Mortgage Pool, the Insured generally will be required to, in the event of
default by the Mortgagor: (i) advance or discharge (A) all hazard insurance
premiums and (B) as necessary and approved in advance by the Primary Mortgage
Insurer, (1) real estate property taxes, (2) all expenses required to
preserve, repair and prevent waste to the Mortgaged Property so as to maintain
such Mortgaged Property in at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and
tear excepted, (3) property sales expenses, (4) any outstanding liens (as
defined in such Primary Mortgage Insurance Policy) on the Mortgaged Property
and (5) foreclosure costs, including court costs and reasonable attorneys'
fees; (ii) in the event of a physical loss or damage to the Mortgaged
Property, have restored and repaired the Mortgaged Property to at least as
good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Mortgage Insurer good and merchantable title to and possession of the
Mortgaged Property.
Other provisions and conditions of each Primary Mortgage Insurance Policy
covering a Mortgage Loan in the related Mortgage Pool generally will provide
that: (a) no change may be made in the terms of such Mortgage Loan without the
consent of the Primary Mortgage Insurer; (b) written notice must be given to
the Primary Mortgage Insurer within 10 days after the Insured becomes aware
that a Mortgagor is delinquent in the payment of a sum equal to the aggregate
of two scheduled monthly payments due under such Mortgage Loan or that any
proceedings affecting the Mortgagor's interest in the Mortgaged Property
securing such Mortgage Loan have commenced, and thereafter the Insured must
report monthly to the Primary Mortgage Insurer the status of any such Mortgage
Loan until such Mortgage Loan is brought current, such proceedings are
terminated or a claim is filed; (c) the Primary Mortgage Insurer will have the
right to purchase such Mortgage Loan, at any time subsequent to the 10 days'
notice described in (b) above and prior to the commencement of foreclosure
proceedings, at a price equal to the unpaid principal amount of the Mortgage
Loan, plus accrued and unpaid interest thereon and reimbursable amounts
expended by the Insured for the real estate taxes and fire and extended
coverage insurance on the Mortgaged Property for a period not exceeding 12
months, and less the sum of any claim previously paid under the Primary
Mortgage Insurance Policy and any due and unpaid premiums with respect to such
policy; (d) the Insured must commence proceedings at certain times specified
in the Primary Mortgage Insurance Policy and diligently proceed to obtain good
and merchantable title to and possession of the Mortgaged Property; (e) the
Insured must notify the Primary Mortgage Insurer of the price specified in (c)
above
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at least 15 days prior to the sale of the Mortgaged Property by foreclosure,
and bid such amount unless the Mortgage Insurer specifies a lower or higher
amount; and (f) the Insured may accept a conveyance of the Mortgaged Property
in lieu of foreclosure with written approval of the Mortgage Insurer provided
the ability of the Insured to assign specified rights to the Primary Mortgage
Insurer are not thereby impaired or the specified rights of the Primary
Mortgage Insurer are not thereby adversely affected.
The Primary Mortgage Insurer generally will be required to pay to the
Insured either: (1) the insured percentage of the Loss; or (2) at its option
under certain of the Primary Mortgage Insurance Policies, the sum of the
delinquent monthly payments plus any advances made by the Insured, both to the
date of the claim payment, and thereafter, monthly payments in the amount that
would have become due under the Mortgage Loan if it had not been discharged
plus any advances made by the Insured until the earlier of (A) the date the
Mortgage Loan would have been discharged in full if the default had not
occurred or (B) an approved sale. Any rents or other payments collected or
received by the Insured which are derived from or are in any way related to
the Mortgaged Property will be deducted from any claim payment.
FHA INSURANCE AND VA GUARANTEES
The FHA is responsible for administering various federal programs, including
mortgage insurance, authorized under the National Housing Act, as amended, and
the United States Housing Act of 1937, as amended. Any FHA Insurance or VA
Guarantees relating to Contracts underlying a Series of Certificates will be
described in the applicable Prospectus Supplement.
The insurance premiums for FHA Loans are collected by HUD approved lenders
or by the Servicers of such FHA Loans and are paid to the FHA. The regulations
governing FHA single-family mortgage insurance programs provide that insurance
benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted FHA Loan to HUD. With respect to a defaulted FHA Loan, the
Servicer of such FHA Loan will be limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the Mortgagor's control, the
Servicer will be expected to make an effort to avoid foreclosure by entering,
if feasible, into one of a number of available forms of forbearance plans with
the Mortgagor. Such plans may involve the reduction or suspension of scheduled
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or beyond the scheduled maturity date. In addition,
when a default caused by such circumstances is accompanied by certain other
criteria, HUD may provide relief by making payments to the Servicer of such
Mortgage Loan in partial or full satisfaction of amounts due thereunder (which
payments are to be repaid by the Mortgagor to HUD) or by accepting assignment
of the Mortgage Loan from the Servicer. With certain exceptions, at least
three full monthly installments must be due and unpaid under the Mortgage
Loan, and HUD must have rejected any request for relief from the Mortgagor
before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA Loan in a Mortgage Pool will
be obligated to purchase any such debenture issued in satisfaction of a
defaulted FHA Loan serviced by it for an amount equal to the principal amount
of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal balance of the defaulted FHA Loan, adjusted to
reimburse the Servicer of such FHA Loan for certain costs and expenses and to
deduct certain amounts received or retained by such Servicer after default.
When entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance to HUD, the Servicer is compensated
for no more than two-thirds of its foreclosure costs, and is compensated for
interest accrued and unpaid prior to such date in general only to the extent
it was allowed pursuant to a forbearance plan approved by
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HUD. When entitlement to insurance benefits results from assignment of the FHA
Loan to HUD, the insurance payment includes full compensation for interest
accrued and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA Loan, bears interest from a date 30 days after the
mortgagor's first uncorrected failure to perform any obligation or make any
payment due under the Mortgage Loan and, upon assignment, from the date of
assignment, to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described
above.
The maximum guarantee that may be issued by the VA under a VA Loan is 50% of
the principal amount of the VA Loan if the principal amount of the Mortgage
Loan is $45,000 or less, the lesser of $36,000 and 40% if the principal amount
of the VA Loan if the principal amount of such VA Loan is greater than $45,000
but less than or equal to $144,000, and the lesser of $46,000 and 25% of the
principal amount of the Mortgage Loan if the principal amount of the Mortgage
Loan is greater than $144,000. The liability on the guarantee is reduced or
increased pro rata with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guarantee exceed
the amount of the original guarantee. The VA may, at its option and without
regard to the guarantee, make full payment to a mortgage holder of unsatisfied
indebtedness on a Mortgage Note upon its assignment to the VA.
With respect to a defaulted VA Loan, the Servicer is, absent exceptional
circumstances, authorized to announce its intention to foreclose only when the
default has continued for three months. Generally, a claim for the guarantee
is submitted after liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA Loan
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations. Payments under the
guarantee will be equal to the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA Loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
STANDARD HAZARD INSURANCE POLICIES ON MORTGAGE LOANS
The Standard Hazard Insurance Policies covering the Mortgage Loans in a
Mortgage Pool will provide for coverage at least equal to the applicable state
standard form of fire insurance policy with extended coverage. In general, the
standard form of fire and extended coverage policy will cover physical damage
to, or destruction of, the improvements on the Mortgaged Property caused by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Because the Standard Hazard Insurance Policies relating to such
Mortgage Loans will be underwritten by different insurers and will cover
Mortgaged Properties located in various states, such policies will not contain
identical terms and conditions. The most significant terms thereof, however,
generally will be determined by state law and generally will be similar. Most
such policies typically will not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive.
The Standard Hazard Insurance Policies, if any, covering Mortgaged
Properties securing Mortgage Loans typically will contain a "coinsurance"
clause which, in effect, will require the insured at all times to carry
insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the dwellings, structures and other improvements on the
Mortgaged Property in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, such clause will
provide that the insurer's liability in the event of partial loss will not
exceed the greater of (i) the actual cash value (the replacement cost less
physical depreciation) of the dwellings, structures and other improvements
damaged or destroyed or (ii) such
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proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such dwellings, structures and other improvements.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the cooperative corporation itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value
of the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows and, with respect to Mortgaged Properties
located other than in HUD designated flood areas, floods) or insufficient
hazard insurance proceeds and any hazard losses incurred with respect to
Cooperative Loans could affect distributions to the Certificateholders.
With respect to Mortgage Loans secured by Multifamily Property, certain
additional insurance policies may be required with respect to the Multifamily
Property; for example, general liability insurance for bodily injury and
property damage, steam boiler coverage where a steam boiler or other pressure
vessel is in operation, and rent loss insurance to cover income losses
following damage or destruction of the Mortgaged Property. The applicable
Prospectus Supplement will specify the required types and amounts of
additional insurance that may be required in connection with Mortgage Loans
secured by Multifamily Property and will describe the general terms of such
insurance and conditions to payment thereunder.
STANDARD HAZARD INSURANCE POLICIES ON THE MANUFACTURED HOMES
The terms of the Pooling and Servicing Agreement will require the Master
Servicer to cause to be maintained with respect to each Contract one or more
Standard Hazard Insurance Policies which provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that
is customary for manufactured housing, issued by a company authorized to issue
such policies in the state in which the Manufactured Home is located, and in
an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the Obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each Standard Hazard Insurance Policy shall be sufficient to avoid
the application of any co-insurance clause contained therein. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated flood area, the Master Servicer also
shall cause flood insurance to be maintained (or maintain itself), which
coverage shall be at least equal to the minimum amount specified in the
preceding sentence or such lesser amount as may be available under the federal
flood insurance program. Each Standard Hazard Insurance Policy caused to be
maintained by the Master Servicer shall contain a standard loss payee clause
in favor of the Master Servicer and its successors and assigns. If any Obligor
is in default in the payment of premiums on its Standard Hazard Insurance
Policy or Policies, the Master Servicer shall pay such premiums out of its own
funds, and may add separately such premium to the Obligor's obligation as
provided by the Contract, but may not add such premium to the remaining
principal balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual Standard
Hazard Insurance Policies to be maintained with respect to each Manufactured
Home, and shall maintain, to the extent that the related Contract does not
require the Obligor to maintain a Standard Hazard Insurance Policy with
respect to the related Manufactured Home, one or more blanket insurance
policies covering losses on the Obligor's interest in the Contracts resulting
from the absence or insufficiency of individual Standard Hazard Insurance
Policies. Any such blanket policy shall be substantially in the form and in
the amount carried by the Master Servicer as of the date of the Pooling and
Servicing Agreement. The Master Servicer shall pay the premium for such policy
on the basis described therein and shall pay any deductible amount with
respect to claims under such policy relating to the
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Contracts. If the insurer thereunder shall cease to be acceptable to the
Master Servicer, the Master Servicer shall exercise its best reasonable
efforts to obtain from another insurer a replacement policy comparable to such
policy.
If the Master Servicer shall have repossessed a Manufactured Home on behalf
of the Trustee, the Master Servicer shall either (i) maintain at its expense
hazard insurance with respect to such Manufactured Home or (ii) indemnify the
Trustee against any damage to such Manufactured Home prior to resale or other
disposition.
POOL INSURANCE POLICIES
If so specified in the applicable Prospectus Supplement, the Master Servicer
will obtain a Pool Insurance Policy for a Mortgage Pool underlying
Certificates of such Series. Such Pool Insurance Policy will be issued by the
Pool Insurer named in the applicable Prospectus Supplement. Any Pool Insurance
Policy for a Contract Pool underlying a Series of Certificates will be
described in the applicable Prospectus Supplement. Each Pool Insurance Policy
will cover any loss (subject to the limitations described below) by reason of
default to the extent the related Mortgage Loan is not covered by any Primary
Mortgage Insurance Policy, FHA insurance or VA guarantee. The amount of the
Pool Insurance Policy, if any, with respect to a Series will be specified in
the applicable Prospectus Supplement. A Pool Insurance Policy, however, will
not be a blanket policy against loss, because claims thereunder may only be
made for particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Any Pool Insurance Policies
relating to the Contracts will be described in the applicable Prospectus
Supplement.
The Pool Insurance Policy, if any, will provide that as a condition
precedent to the payment of any claim the Insured generally will be required
(i) to advance hazard insurance premiums on the Mortgaged Property securing
the defaulted Mortgage Loan; (ii) to advance, as necessary and approved in
advance by the Pool Insurer, (a) real estate property taxes, (b) all expenses
required to preserve and repair the Mortgaged Property, to protect the
Mortgaged Property from waste, so that the Mortgaged Property is in at least
as good a condition as existed on the date upon which coverage under the Pool
Insurance Policy with respect to such Mortgaged Property first became
effective (ordinary wear and tear excepted), (c) property sales expenses, (d)
any outstanding liens on the Mortgaged Property and (e) foreclosure costs
including court costs and reasonable attorneys' fees; and (iii) if there has
been physical loss or damage to the Mortgaged Property, to restore the
Mortgaged Property to its condition (reasonable wear and tear excepted) as of
the issue date of the Pool Insurance Policy. It also will be a condition
precedent to the payment of any claim under the Pool Insurance Policy that the
Insured maintain a Primary Mortgage Insurance Policy that is acceptable to the
Pool Insurer on all Mortgage Loans that have Loan-to-Value Ratios at the time
of origination in excess of 80%. FHA insurance and VA guarantees will be
deemed to be an acceptable Primary Mortgage Insurance Policy under the Pool
Insurance Policy. Assuming satisfaction of these conditions, the Pool Insurer
will pay to the Insured the amount of loss, determined as follows: (i) the
amount of the unpaid principal balance of the Mortgage Loan immediately prior
to the Approved Sale (as described below) of the Mortgaged Property, (ii) the
amount of the accumulated unpaid interest on such Mortgage Loan to the date of
claim settlement at the applicable Mortgage Rate and (iii) advances as
described above, less (a) all rents or other payments (excluding proceeds of
fire and extended coverage insurance) collected or received by the Insured,
which are derived from or in any way related to the Mortgaged Property, (b)
amounts paid under applicable fire and extended coverage policies which are in
excess of the cost of restoring and repairing the Mortgaged Property and which
have not been applied to the payment of the Mortgage Loan, (c) any claims
payments previously made by the Pool Insurer on the Mortgage Loan, (d) due and
unpaid premiums payable with respect to the Pool Insurance Policy and (e) all
claim payments received by the Insured pursuant to any Primary Mortgage
Insurance Policy. An "Approved Sale" is (1) a sale of the Mortgaged Property
acquired because of a default by the Mortgagor to which the Pool Insurer has
given prior approval, (2) a foreclosure or trustee's sale of the Mortgaged
Property at a price exceeding the maximum amount specified by the Pool
Insurer, (3) the acquisition of the Mortgaged Property under the Primary
Insurance Policy by the Primary Mortgage Insurer or (4) the acquisition of the
Mortgaged Property by the Pool Insurer. The Pool Insurer must be provided with
good and merchantable title to the Mortgaged Property as a condition precedent
to the payment of any Loss. If any Mortgaged Property securing a defaulted
Mortgage Loan is damaged and the proceeds, if any, from the related Standard
Hazard Insurance Policy or the applicable Special Hazard Insurance Policy are
insufficient to
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restore the Mortgaged Property to a condition sufficient to permit recovery
under the Pool Insurance Policy, the Master Servicer or the Servicer of the
related Mortgage Loan will not be required to expend its own funds to restore
the damaged Mortgaged Property unless it is determined (A) that such
restoration will increase the proceeds to the Certificateholders of the
related Series on liquidation of the Mortgage Loan, after reimbursement of the
expenses of the Master Servicer or the Servicer, as the case may be, and (B)
that such expenses will be recoverable by it through payments under the Letter
of Credit, if any, with respect to such Series, Liquidation Proceeds,
Insurance Proceeds, amounts in the Reserve Fund, if any, or payments under any
Alternative Credit Support, if any, with respect to such Series.
No Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies may not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor,
the Unaffiliated Seller, the Originator or other persons involved in the
origination thereof, (ii) the exercise by the Insured of its right to call the
Mortgage Loan, or the term of the Mortgage Loan is shorter than the
amortization period and the defaulted payment is for an amount more than twice
the regular periodic payments of principal and interest for such Mortgage
Loan, or (iii) the exercise by the Insured of a "due-on-sale" clause or other
similar provision in the Mortgage Loan; provided, in either case (ii) or
(iii), such exclusion shall not apply if the Insured offers a renewal or
extension of the Mortgage Loan or a new Mortgage Loan at the market rate in an
amount not less than the then outstanding principal balance with no decrease
in the amortization period. A failure of coverage attributable to one of the
foregoing events might result in a breach of the Master Servicer's
insurability representation described under "Description of the Certificates--
Assignment of Mortgage Loans" above, and in such event, subject to the
limitations described therein, might give rise to an obligation on the part of
the Master Servicer to purchase the defaulted Mortgage Loan if the breach
materially and adversely affects the interests of the Certificateholders of
the related Series and cannot be cured by the Master Servicer. Depending upon
the nature of the event, a breach of representation made by the Depositor or
an Unaffiliated Seller may also have occurred. Such a breach, if it materially
and adversely affects the interests of the Certificateholders of such Series
and cannot be cured, would give rise to a repurchase obligation on the part of
the Unaffiliated Seller as more fully described under "The Trust Fund--
Mortgage Loan Program--Representations by Unaffiliated Sellers; Repurchases"
and "Description of the Certificates--Assignment of Mortgage Loans".
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Certificates of the related Series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed Mortgaged
Properties covered thereby. The amount of claims paid will include certain
expenses incurred by the Master Servicer or by the Servicer of the defaulted
Mortgage Loan as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under
a Pool Insurance Policy reach the original policy limit, coverage under the
Pool Insurance Policy will lapse and any further losses will be borne by the
holders of the Certificates of such Series. In addition, unless the Master
Servicer or the related Servicer could determine that an Advance in respect of
a delinquent Mortgage Loan would be recoverable to it from the proceeds of the
liquidation of such Mortgage Loan or otherwise, neither such Servicer nor the
Master Servicer would be obligated to make an Advance respecting any such
delinquency, since the Advance would not be ultimately recoverable to it from
either the Pool Insurance Policy or from any other related source. See
"Description of the Certificates--Advances".
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the applicable Prospectus Supplement, the Master Servicer
shall obtain a Special Hazard Insurance Policy for the Mortgage Pool
underlying a Series of Certificates. Any Special Hazard Insurance Policies for
a Contract Pool underlying a Series of Certificates will be described in the
applicable Prospectus Supplement. The Special Hazard Insurance Policy for the
Mortgage Pool underlying the Certificates of a Series will be issued by the
Special Hazard Insurer named in the applicable Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to the limitations described
below, protect against loss by reason of damage to Mortgaged Properties caused
by certain hazards (including vandalism and earthquakes and, except where the
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Mortgagor is required to obtain flood insurance, floods and mudflows) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located. See
"Description of the Certificates--Maintenance of Insurance Policies" and "--
Standard Hazard Insurance". The Special Hazard Insurance Policy will not cover
losses occasioned by war, certain governmental actions, nuclear reaction and
certain other perils. Coverage under a Special Hazard Insurance Policy will be
at least equal to the amount set forth in the applicable Prospectus
Supplement.
Subject to the foregoing limitations, each Special Hazard Insurance Policy,
if any, will provide that, when there has been damage to the Mortgaged
Property securing a defaulted Mortgage Loan and to the extent such damage is
not covered by the Standard Hazard Insurance Policy, if any, maintained by the
Mortgagor, the Master Servicer or the Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such Mortgaged
Property or (ii) upon transfer of such Mortgaged Property to the Special
Hazard Insurer, the unpaid balance of such Mortgage Loan at the time of
acquisition of such Mortgaged Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement (excluding
late charges and penalty interest) and certain expenses incurred in respect of
such Mortgaged Property. No claim may be validly presented under a Special
Hazard Insurance Policy unless (i) hazard insurance on the Mortgaged Property
has been kept in force and other reimbursable protection, preservation and
foreclosure expenses have been paid (all of which must be approved in advance
as necessary by the insurer) and (ii) the insured has acquired title to the
Mortgaged Property as a result of default by the Mortgagor. If the sum of the
unpaid principal balance plus accrued interest and certain expenses is paid by
the Special Hazard Insurer, the amount of further coverage under the related
Special Hazard Insurance Policy will be reduced by such amount less any net
proceeds from the sale of the Mortgaged Property. Any amount paid as the cost
of repair of the Mortgaged Property will further reduce coverage by such
amount.
The terms of the Pooling and Servicing Agreement will require the Master
Servicer to maintain the Special Hazard Insurance Policy in full force and
effect throughout the term of the Pooling and Servicing Agreement. If a Pool
Insurance Policy is required to be maintained pursuant to the Pooling and
Servicing Agreement, the Special Hazard Insurance Policy will be designed to
permit full recoveries under the Pool Insurance Policy in circumstances where
such recoveries would otherwise be unavailable because Mortgaged Property has
been damaged by a cause not insured against by a Standard Hazard Insurance
Policy. In such event the Pooling and Servicing Agreement will provide that,
if the related Pool Insurance Policy shall have terminated or been exhausted
through payment of claims, the Master Servicer will be under no further
obligation to maintain such Special Hazard Insurance Policy.
MORTGAGOR BANKRUPTCY BOND
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court may
establish the value of the related Mortgaged Property or Cooperative Dwelling
at an amount less than the then outstanding principal balance of the related
Mortgage Loan. The amount of the secured debt could be reduced to such value,
and the holder of such Mortgage Loan thus would become an unsecured creditor
to the extent the outstanding principal balance of such Mortgage Loan exceeds
the value so assigned to the Mortgaged Property or Cooperative Dwelling by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. If so specified in the
applicable Prospectus Supplement, losses resulting from a bankruptcy
proceeding affecting the Mortgage Loans in a Mortgage Pool with respect to a
Series of Certificates will be covered under a Mortgagor Bankruptcy Bond (or
any other instrument that will not result in a downgrading of the rating of
the Certificates of a Series by the Rating Agency that rated such Series). Any
Mortgagor Bankruptcy Bond will provide for coverage in an amount acceptable to
the Rating Agency rating the Certificates of the related Series, which will be
set forth in the applicable Prospectus Supplement. Subject to the terms of the
Mortgagor Bankruptcy Bond, the issuer thereof may have the right to purchase
any Mortgage Loan with respect to which a payment or drawing has been made or
may be made for an amount equal to the outstanding principal amount of such
Mortgage Loan plus accrued and unpaid interest thereon. The coverage of the
Mortgagor Bankruptcy Bond with respect to a Series of Certificates may be
reduced as long as any such
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reduction will not result in a reduction of the outstanding rating of the
Certificates of such Series by the Rating Agency rating such Series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing conditional sales contracts and
installment loan agreements which are general in nature. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans or Contracts is situated. The summaries
are qualified in their entirety by reference to the applicable federal and
state laws governing the Mortgage Loans and Contracts.
THE MORTGAGE LOANS
General
The Mortgage Loans (other than the Cooperative Loans) comprising or
underlying the Trust Assets for a Series will be secured by either first or
more junior mortgages or deeds of trust, depending upon the prevailing
practice in the state in which the underlying property is located. The filing
of a mortgage, deed of trust or deed to secure debt creates a lien or title
interest upon the real property covered by such instrument and represents the
security for the repayment of an obligation that is customarily evidenced by a
promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers.
Priority with respect to such instruments depends on their terms, the
knowledge of the parties to the mortgage and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage: the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or bond evidencing the loan and the mortgage. Although
a deed of trust is similar to a mortgage, a deed of trust has three parties:
the borrower-homeowner called the trustor (similar to a mortgagor) a lender
called the beneficiary (similar to a mortgagee) and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale,
to the trustee to secure payment of the loan. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
the express provisions of the deed of trust or mortgage, applicable law and,
in some cases, with respect to the deed of trust, the directions of the
beneficiary.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
Though a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon a default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person
who has recorded a request for a copy of a notice of default and notice of
sale. In addition, the trustee must provide notice in some states to any other
individual having an interest in the real property, including any junior
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lienholders. If the loan is not reinstated within any applicable cure period,
a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the
property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Certain state laws control the amount of foreclosure expenses
and costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of
title and the fact that the physical condition of the property may have
deteriorated during the foreclosure proceedings, it is uncommon for a third
party to purchase the property at the foreclosure sale. Rather, it is common
for the lender to purchase the property from the trustee or receiver for a
credit bid less than or equal to the unpaid principal amount of the note,
accrued and unpaid interest and the expenses of foreclosure. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal
the lender's investment in the property. Any loss may be reduced by the
receipt of mortgage insurance proceeds.
Cooperative Loans
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced
by promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under
the Code and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the
corporations' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property that it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office.
Such a lien or title interest is not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative under
the Code owns all the real property or some interest therein sufficient to
permit it to own the building and all separate dwelling units therein. The
cooperative is directly responsible for property management and, in most
cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage or mortgages on the cooperative apartment building
and/or underlying land, as is generally the case, or an underlying lease of
the land, as is the case in some instances, the cooperative, as property
mortgagor, is also responsible for meeting these mortgage or rental
obligations. The interest of the occupancy under proprietary leases or
occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and
to the interest of the holder of a land lease. If the cooperative is unable to
meet the payment obligations (i) arising under a blanket mortgage, the
mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the land lease could terminate it
and all subordinate proprietary leases and occupancy agreements. Also, a
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative
to refinance a mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee. Similarly, a land lease
has an expiration date and the inability of the cooperative
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to extend its term or, in the alternative, to purchase the land could lead to
termination of the cooperative's interest in the property and termination of
all proprietary leases and occupancy agreements. A foreclosure by the holder
of a blanket mortgage could eliminate or significantly diminish the value of
any collateral held by the lender who financed an individual tenant-
stockholder of cooperative shares including, in the case of the Cooperative
Loans, the collateral securing the Cooperative Loans. Similarly, the
termination of the land lease by its holder could eliminate or significantly
diminish the value of any collateral held by the lender who financed an
individual tenant-stockholder of the cooperative shares or, in the case of the
Cooperative Loans, the collateral securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally,
a tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured by
a security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement,
and a financing statement covering the proprietary lease or occupancy
agreement and the cooperative shares is filed in the appropriate state and
local offices to perfect the lender's interest in its collateral. Subject to
the limitations discussed below, upon default of the tenant-stockholder, the
lender may sue for judgment on the promissory note, dispose of the collateral
at a public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and
the pledge of cooperative shares. See "--Realizing upon Cooperative Loan
Security" below.
Tax Aspects of Cooperative Loans
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Section 216(a) of the Code to
the corporation under Sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for its taxable
year in which such items are allowable as a deduction to the corporation, such
section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholder. By virtue of this
requirement the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can
be no assurance that cooperatives relating to the Cooperative Loans will
qualify under such section for any particular year. In the event that such a
cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Section 216(a) of the Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that such a
failure would be permitted to continue over a period of years appears remote.
Realizing upon Cooperative Loan Security
The cooperative shares and proprietary lease or occupancy agreement owned by
the tenant- stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease
or occupancy agreement. The proprietary lease or occupancy agreement, even
while pledged, may be cancelled by the cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owed by such tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy
agreement which are owed to the cooperative are made liens upon the shares to
which the proprietary lease or occupancy agreement relates.
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In addition, the proprietary lease or occupancy agreement generally permits
the cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. The lender and the
cooperative will typically enter into a recognition agreement which
establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the value of the
collateral below the outstanding principal balance of the cooperative loan and
accrued and unpaid interest thereon.
Recognition agreements also provide that in the event the lender succeeds to
the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon the collateral for a cooperative loan, the
lender must obtain the approval or consent of the cooperative as required by
the proprietary lease before transferring the cooperative shares or assigning
the proprietary lease. Such approval or consent is usually based on the
prospective purchaser's income and net worth, among other factors, and may
significantly reduce the number of potential purchasers, which could limit the
ability of the lender to sell and realize upon the value of the collateral.
Generally, the lender is not limited in any rights it may have to dispossess
the tenant- shareholders.
The terms of the Cooperative Loans do not require either the Mortgagor or
the Cooperative to obtain title insurance of any type. Consequently, the
existence of any prior liens or other imperfections of title also may
adversely affect the marketability of the Cooperative Dwelling in the event of
foreclosure.
In New York, lenders generally realize upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given
the debtor and the method, manner, time, place and terms of the sale.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See "Anti-
Deficiency Legislation and Other Limitations on Lenders" below.
In the case of foreclosure on a Multifamily Property that was converted from
a rental building to a building owned by a cooperative housing corporation
under a non-eviction plan, some states require that a purchaser at a
foreclosure sale take the property subject to rent control and rent
stabilization laws which apply to certain tenants who elected to remain in the
building but not to purchase shares in the cooperative when the building was
so converted. Any such restrictions could adversely affect the number of
potential purchasers for and the value of such property.
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Rights of Redemption
In some states, after a sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to a sale
following judicial foreclosure, and not a sale pursuant to a non-judicial
power of sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In some states, the right to redeem is an
equitable right.
The effect of a statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property. The exercise of a right of
redemption would defeat the title of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or a
non-judicial sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the net amount realized upon the
foreclosure sale. Other statutes prohibit a deficiency judgment where the loan
proceeds were used to purchase a dwelling occupied by the borrower.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In the case of cooperative loans, lenders generally realize on cooperative
shares and the accompanying proprietary lease or occupancy agreement given to
secure a cooperative loan under Article 9 of the UCC. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a
Chapter 13 proceeding under the federal Bankruptcy Code, when a court
determines that the value of a home is less than the principal balance of the
loan, the court may prevent a lender from foreclosing on the home, and, as
part of the rehabilitation plan, reduce the amount of the secured
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indebtedness to the value of the home as it exists at the time of the
proceeding, leaving the lender as a general unsecured creditor for the
difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a mortgage loan not secured by the debtor's
principal residence, also may reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. Certain court decisions have applied such relief to claims
secured by the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to certain
tax liens over the lien of the mortgage or deed of trust. Numerous federal and
some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and the
enforcement of mortgage loans. These laws include the federal Truth in Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Each Mortgage Loan secured by Multifamily Property will be a non-recourse
loan to the Mortgagor (subject to certain exceptions which, if applicable,
will be specified in the applicable Prospectus Supplement). As a result, the
Mortgagor's obligation to repay the Mortgage Loan can be enforced only against
the Mortgaged Property regardless of whether the Mortgagor has other assets
from which it could repay the loan.
The mortgage securing each Mortgage Loan relating to Multifamily Property
will contain an assignment of rents and an assignment of leases or similar
agreement (subject to certain exceptions which, if applicable, will be
specified in the applicable Prospectus Supplement), pursuant to which the
borrower assigns its right, title and interest as landlord under each lease
and the income derived therefrom to the Depositor, while retaining a license
to collect the rents so long as there is no default. In the event the borrower
defaults, the license terminates and the Trustee (as the assignee of such
assignment) is entitled to collect the rents. The Trustee may enforce its
right to such rents by seeking the appointment of a receiver to collect the
rents immediately after giving notice to the borrower of the default.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of
the maturity of a loan if the borrower transfers its interest in the property.
The enforceability of these clauses has been subject of legislation or
litigation in many states, and in some cases the enforceability of these
clauses was limited or denied. However, the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of due-
on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain
Act does "encourage" lenders to permit assumption of loans at the original
rate of interest or at some other rate less than the average of the original
rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a due-on-
sale clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also
prohibit the imposition of prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may
be outstanding until maturity.
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Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. State and federal statutes or
regulations may also limit a lender's right to collect a prepayment penalty
when the prepayment is caused by the lender's acceleration of the loan
pursuant to a due-on-sale clause. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Servicing Agreements and the Pooling and Servicing
Agreement, late charges and prepayment fees (to the extent permitted by law
and not waived by the Servicers) will be retained by the Servicers or Master
Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and sometimes expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able
to reinstate the loan. In some cases, courts have substituted their judgment
for the lender's judgment and have required lenders to reinstate loans or
recast payment schedules to accommodate borrowers who are suffering from
temporary financial disability. In some cases, courts have limited the right
of lenders to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain or insure the
property or the borrower executing a second mortgage or deed of trust
affecting the property. In other cases, some courts have been faced with the
issue whether federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under the deeds of
trust receive notices in addition to the statutorily-prescribed minimum
requirements. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the sale by a trustee under a deed of
trust or under a mortgage having a power of sale does not involve sufficient
state action to afford constitutional protections to the borrower.
Environmental Considerations
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, and similar state laws, a secured party which takes
a deed in lieu of foreclosure or purchases a mortgaged property at a
foreclosure sale may become liable in certain circumstances for the costs of
environmental investigation and remedial action ("Cleanup Costs") if hazardous
wastes or hazardous substances have been released or disposed of on the
property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred.
Except as otherwise specified in the applicable Prospectus Supplement, each
Unaffiliated Seller will represent, as of the date of delivery of the related
Series of Certificates, that to the best of its knowledge no Mortgaged
Property secured by Multifamily Property is subject to an environmental hazard
that would have to be eliminated under applicable law before the sale of, or
which could otherwise affect the marketability of, such Mortgaged Property or
which would subject the owner or operator of such Mortgaged Property or a
lender secured by such Mortgaged Property to liability under law, and that
there are no liens which relate to the existence of any clean-up of a
hazardous substance (and to the best of its knowledge no circumstances are
existing that under law would give rise to any such lien) affecting the
Mortgaged Property which are or may be liens prior to or on a parity with the
lien of the related mortgage. The Agreement will further provide that the
Master Servicer, acting on behalf of the Trust Fund, may not acquire title to
a Mortgaged Property or take over its operation unless the Master Servicer has
received a report from a qualified independent person selected by the Master
Servicer setting forth whether such Mortgaged Property is subject to or
presents any toxic wastes or environmental hazards and an estimate of the cost
of curing or cleaning up such hazard.
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THE CONTRACTS
General
As a result of the Depositor's assignment of the Contract to the Trustee,
the Certificateholders will succeed collectively to all of the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the Obligor to repay the loan evidenced thereby and (b) the
grant of a security interest in the Manufactured Home to secure repayment of
such loan. Certain aspects of both features of the Contracts are described
more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the Pooling and
Servicing Agreement, the Master Servicer or the Depositor, as the case may be,
will transfer physical possession of the Contracts to the Trustee or its
custodian. In addition, the Master Servicer will make an appropriate filing of
a UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. The Contracts will not be stamped or
marked otherwise to reflect their assignment from the Depositor to the
Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of a Contract without notice of such assignment, the Trustee's
interest in such Contract could be defeated.
Security Interests in the Manufactured Homes
The law governing perfection of a security interest in a Manufactured Home
varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the
state motor vehicle authority, depending on state law. In some nontitle
states, perfection pursuant to the provisions of the UCC is required. The
lender or Master Servicer may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home
securing a manufactured housing conditional sales contract is registered. In
the event the Master Servicer or the lender fails, due to clerical errors, to
effect such notation or delivery, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the Certificateholders may not have a first
priority security interest in the Manufactured Home securing a Contract. As
manufactured homes have become larger and often have been attached their sites
without any apparent intention to move them, courts in many states have held
that manufactured homes, under certain circumstances, may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law. In order to perfect a security interest in a manufactured home under real
estate laws, the holder of the security interest must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage under the
real estate laws of the state where the manufactured home is located. These
filings must be made in the real estate records office of the county where the
manufactured home is located. Substantially all of the Contracts will contain
provisions prohibiting the borrower from permanently attaching the
Manufactured Home to its site. So long as the Obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by
the certificate of title laws or the UCC, and the notation of the security
interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the seller's security
interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in
the Manufactured Home which is prior to the security interest originally
retained by the Unaffiliated Seller and transferred to the Depositor. With
respect to a Series of Certificates and as described in the applicable
Prospectus Supplement, the Master Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws.
If such real estate filings are not required and if any of the foregoing
events were to occur, the only recourse of the Certificateholders would be
against the Unaffiliated Seller pursuant to its repurchase obligation for
breach of warranties. Based on the representations of the Unaffiliated Seller,
the Depositor, however, believes that it has
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obtained a perfected first priority security interest by proper notation or
delivery of the required documents and fees with respect to substantially all
of the Manufactured Homes securing the Contracts.
The Depositor will assign its security interests in the Manufactured Homes
to the Trustee on behalf of the Certificateholders. Neither the Depositor nor
the Trustee will amend the certificates of title to identify the Trustee as
the new secured party. Accordingly, the Depositor or such other entity as may
be specified in the Prospectus Supplement will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to the assignor's rights as the
secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest might not be held effective against creditors of the
assignor.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Depositor on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Depositor and the
Certificateholders is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Certificateholders as the new secured party on the
certificate of title that, through fraud or negligence, the security interest
of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured
Home would continue for four months after such relocation and thereafter only
if and after the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not re-
register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee, or the Master Servicer as
custodian for the Trustee, must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, the Trustee
would receive notice of surrender if the security interest in the Manufactured
Home is noted on the certificate of title. Accordingly, the Trustee would have
the opportunity to re-perfect its security interest in the Manufactured Home
in the state of relocation. In states which do not require a certificate of
title for registration of a Manufactured Home, re-registration could defeat
perfection. In the ordinary course of servicing manufactured housing
conditional sales contracts and installment loan agreements, the Master
Servicer takes steps to effect such re-perfection upon receipt of notice of
re-registration or information from the Obligor as to relocation. Similarly,
when an Obligor under a manufactured housing conditional sales contract or
installment loan agreement sells a Manufactured Home, the Trustee, or the
Master Servicer as custodian for the Trustee, must surrender possession of the
certificate of title or will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of
the related manufactured housing conditional sales contract or installment
loan agreement before release of the lien. Under the Pooling and Servicing
Agreement, the Master Servicer, on behalf of the Depositor, is obligated to
take such steps, at the Master Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority over a perfected security interest. The Depositor will
represent in the Pooling and Servicing Agreement that it has no knowledge of
any such liens with respect to any Manufactured Home securing payment on any
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee
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or Certificateholders in the event such a lien arises and such lien would not
give rise to a repurchase obligation on the part of the party specified in the
Pooling and Servicing Agreement.
Enforcement of Security Interests in Manufactured Homes
The Master Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by
repossession and resale of the Manufactured Homes securing such Defaulted
Contracts. Except in Louisiana, so long as the Manufactured Home has not
become subject to the real estate law, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or, in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number of
days notice, which varies from 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the debtor be given notice of any
sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the Obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
against such Obligor. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending pursuant to
the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act,
the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and
the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related Contract.
Transfers of Manufactured Homes, Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Depositor or the Master Servicer
and permit the acceleration of the maturity of the Contracts by the Depositor
or the Master Servicer upon any such sale or transfer that is not consented
to. The Depositor or the Master Servicer expects that it will permit most
transfers of Manufactured Homes and not accelerate the maturity of the related
Contracts. In certain cases, the transfer may be made by a delinquent Obligor
in order to avoid a repossession proceeding with respect to a Manufactured
Home.
In the case of a transfer of a Manufactured Home after which the Depositor
desires to accelerate the maturity of the related Contract, the Depositor's
ability to do so will depend on the enforceability under state law of the
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"due-on-sale" clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. In some states the Depositor or
the Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan that is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading
to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels has been included in the Trust
Assets or Trust Fund. The Depositor, or the party specified in the related
Pooling and Servicing Agreement will represent that all of the Contracts
comply with applicable usury laws.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
I. GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. Sidley & Austin, New York, New York ("Sidley"), counsel to the
Depositor, is delivering its opinion regarding certain federal income tax
matters discussed below, a copy of which will be filed with the SEC in a
Current Report on Form 8-K or in a post-effective amendment to the
Registration Statement . The opinion of Sidley addresses only those issues
specifically identified below as being covered by such opinion; however, such
opinion also states that the additional discussion set forth below accurately
sets forth Sidley's advice with respect to material federal income tax issues.
As used hereinafter in "Certain Federal Income Tax Consequences", "Mortgage
Loans" shall include Mortgage Certificates and Contracts and "Mortgage Pool"
shall include "Contract Pool". The following discussion does not purport to
discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which may be subject to special
rules. Further, the authorities on which this discussion is based are subject
to change or differing interpretation, which change or differing
interpretation could apply retroactively. This discussion does not address the
state or local tax consequences of the purchase, ownership and disposition of
such Certificates. Investors should consult their own tax advisers in
determining the federal, state, local, or other tax consequences to them of
the purchase, ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Mortgage Pool
("REMIC Mortgage Pool") which the Master Servicer elects to have treated as a
real estate mortgage investment conduit ("REMIC") under Code Sections 860A
through 860G ("REMIC Provisions") and (ii) certificates ("Trust Certificates")
representing certain interests in a Trust Fund which the Master Servicer does
not elect to have treated as a REMIC. No REMIC election will be made in the
case of a Trust Fund including Government Securities or Private Label Custody
Receipt Securities unless the
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amount of Government Securities or Private Label Custody Receipt Securities in
the Trust Fund is sufficiently small that the de minimis test in Treasury
Regulation Section 1.860D-1(b)(3) is met. REMIC Certificates and Trust
Certificates will be referred to collectively as "Certificates".
Under the REMIC Provisions, REMICs may issue one or more classes of
"regular" interests and must issue one and only one class of "residual"
interests. A REMIC Certificate representing a regular interest in a REMIC
Mortgage Pool will be referred to as a "REMIC Regular Certificate" and a REMIC
Certificate representing a residual interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Residual Certificate".
A Trust Certificate representing an undivided equitable ownership interest
in the principal of the Mortgage Loans (and Government Securities or Private
Label Custody Receipt Securities if applicable) constituting the related Trust
Fund, together with interest thereon at a remittance rate (which may be less
than, greater than, or equal to the pass-through rate), will be referred to as
a "Trust Fractional Certificate" and a Trust Certificate representing an
equitable ownership of all or a portion of the interest paid on each Mortgage
Loan (and Government Security or Private Label Custody Receipt Security, if
applicable) constituting the related Trust Fund (net of normal servicing fees)
will be referred to as a "Trust Interest Certificate."
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Code Sections 1271 through 1273 and 1275
and in Treasury regulations issued under the original issue discount
provisions of the Code (the "OID Regulations"), and the Treasury regulations
issued under the provisions of the Code relating to REMICs (the "REMIC
Regulations"). The OID Regulations generally are effective with respect to
debt instruments issued on or after April 4, 1994.
II. REMIC TRUST FUNDS
A. Classification of REMIC Trust Funds
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, Sidley will deliver their opinion generally to the effect that,
assuming that (i) a REMIC election is made timely in the required form, (ii)
there is ongoing compliance with all provisions of the related Pooling and
Servicing Agreement, (iii) certain representations set forth in the Pooling
and Servicing Agreement are true and (iv) there is continued compliance with
applicable provisions of the Code, as it may be amended from time to time, and
applicable Treasury regulations issued thereunder, such REMIC Mortgage Pool
will qualify as a REMIC and the classes of interests offered will be
considered to be "regular interests" or "residual interests" in that REMIC
Mortgage Pool within the meaning of the REMIC Provisions.
Holders of REMIC Certificates ("REMIC Certificateholders") should be aware
that, if an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In such event, an entity electing to be treated
as a REMIC may be taxable as a separate corporation under Treasury
regulations, and the REMIC Certificates issued by such entity may not be
accorded the status described below under the heading "Characterization of
Investments in REMIC Certificates". In the case of an inadvertent termination
of REMIC status, the Code provides the Treasury Department with authority to
issue regulations providing relief. Any such relief, however, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or
a portion of the REMIC's income for the period of time in which the
requirements for REMIC status are not satisfied.
Among the ongoing requirements in order to qualify for REMIC treatment is
that substantially all of the assets of the Trust Fund (as of the close of the
third calendar month beginning after the creation of the REMIC and continually
thereafter) must consist of only "qualified mortgages" and "permitted
investments". In order to be a "qualified mortgage", or to support treatment
of a certificate of participation therein as a "qualified mortgage" an
obligation must be principally secured by an interest in real property. The
REMIC Regulations treat an obligation secured by manufactured housing
qualifying as a single family residence under Code Section 25(e)(10) as an
obligation secured by real property, without regard to the treatment of the
obligation or the
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property under state law. Under Code Section 25(e)(10), a single family
residence includes any manufactured home that has a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches and that is of a
kind customarily used at a fixed location.
B. Characterization of Investments in REMIC Certificates
In general, REMIC Certificates are not treated for federal income tax
purposes as ownership interests in the assets of a REMIC Mortgage Pool.
However, (i) REMIC Certificates held by a domestic building and loan
association will constitute a "regular or residual interest in a REMIC" within
the meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion that the
Assets would be treated as "loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C)(i) through (x); and (ii) REMIC
Certificates held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c)(4)(A), and any amount
includible in gross income on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that the Assets and income of the REMIC would be treated as
"interests in real property" as defined in Code Section 856(c)(5)(C) (or, as
provided in the Committee Report, as "real estate assets" as defined in Code
Section 856(c)(5)(B)) and as "interest on obligations secured by mortgages on
real property or on interests in real property", respectively. See, in this
regard, "Characterization of Investments in Trust Certificates-- Buydown
Mortgage Loans", below. Moreover, if 95% or more of the Assets qualify for any
of the foregoing treatments, the REMIC Certificates (and income thereon) will
qualify for the corresponding status in their entirety. Investors should be
aware that the investment of amounts in any Reserve Fund or GPM Fund in non-
qualifying assets would, and, holding property acquired by foreclosure pending
sale might, reduce the amount of the REMIC Certificates that would qualify for
the foregoing treatment. The REMIC Regulations provide that payments on
Mortgage Loans held pending distribution are considered part of the Mortgage
Loans for purposes of Code Sections 856(c)(4)(A); it is unclear whether such
collected payments would be so treated for purposes of Code Section
7701(a)(19)(C)(v), but there appears to be no reason why analogous treatment
should not be given to such collected payments under that provision. The
determination as to the percentage of the REMIC's assets (or income) that will
constitute assets (or income) described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average
adjusted basis (or average amount of income) of each category of the assets
held (or income accrued) by the REMIC during such calendar quarter. The REMIC
will report those determinations to Certificateholders in the manner and at
the times required by applicable Treasury regulations. The Prospectus
Supplement or the related Current Report on Form 8-K for each Series of REMIC
Certificates will describe the Assets as of the Cut-off Date. REMIC
Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1); in
addition, regular interests in any other REMIC acquired by a REMIC in
accordance with the requirements of Section 860G(a)(3)(A)(i) and (ii) or
Section 860G(a)(4)(B) of the Code will be treated as "qualified mortgages"
within the meaning of Code Section 860D(a)(4).
For purposes of characterizing an investment in REMIC Certificates, a
Contract secured by a Manufactured Home qualifying as a "single family
residence" under Code Section 25(e)(10) will constitute (i) a "real estate
asset" within the meaning of Code Section 856, and (ii) an asset described in
Code Section 7701(a)(19)(C). With respect to the Contracts included in a Trust
Fund that makes an election to be treated as a REMIC, each Unaffiliated Seller
will represent and warrant that each of the Manufactured Homes securing such
Contracts meets the definition of a "single family residence".
C. Tiered REMIC Structures
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Sidley will deliver their opinion generally to the effect
that, assuming
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compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Certificates
issued by the Tiered REMICs will be considered to evidence ownership of REMIC
Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of
the Code, the Tiered REMICs will be treated as one REMIC.
D. Taxation of Owners of REMIC Regular Certificates
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC Mortgage Pool and not as ownership interests
in the REMIC Mortgage Pool or its Assets. In general, interest, original issue
discount and market discount paid or accrued on a REMIC Regular Certificate
will be treated as ordinary income to the holder of such REMIC Regular
Certificate. Distributions in reduction of the stated redemption price at
maturity of the REMIC Regular Certificate will be treated as a return of
capital to the extent of such holder's basis in such REMIC Regular
Certificate. Holders of REMIC Regular Certificates that otherwise report
income under a cash method of accounting will be required to report income
with respect to REMIC Regular Certificates under an accrual method.
1. Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant yield method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. The Master Servicer will report annually (or more frequently if
required) to the Internal Revenue Service ("IRS") and to Certificateholders
such information with respect to the original issue discount accruing on the
REMIC Regular Certificates as may be required under Code Section 6049 and the
regulations thereunder. See "Reporting and Other Administrative Matters of
REMICs" below.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275 and in the OID Regulations. Code Section 1272(a)(6)
provides special original issue discount rules applicable to REMIC Regular
Certificates.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates, and for certain other federal income
tax purposes. The Prepayment Assumption is to be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The Committee Report indicates that the regulations will provide
that the Prepayment Assumption, if any, used with respect to a particular
transaction must be the same as that used by the parties in pricing the
transaction. The Master Servicer will use a Prepayment Assumption in reporting
original issue discount that is consistent with this standard. However,
neither the Depositor nor the Master Servicer makes any representation that
the Mortgage Loans will in fact prepay at the rate reflected in the Prepayment
Assumption or at any other rate. Each investor must make its own decision as
to the appropriate prepayment assumption to be used in deciding whether or not
to purchase any of the REMIC Regular Certificates. The Prospectus Supplement
with respect to a Series of REMIC Certificates will disclose the Prepayment
Assumption to be used in reporting original issue discount, if any, and for
certain other federal income tax purposes.
The total amount of original issue discount on a REMIC Regular Certificate
is the excess of the "stated redemption price at maturity" of the REMIC
Regular Certificate over its "issue price". Except as discussed in
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the following two paragraphs, in general, the issue price of a particular
class of REMIC Regular Certificates offered hereunder will be the price at
which a substantial amount of REMIC Regular Certificates of that class are
first sold to the public (excluding bond houses and brokers), and the stated
redemption price at maturity of a REMIC Regular Certificate will be its Stated
Principal Balance.
If a REMIC Regular Certificate is sold with accrued interest that relates to
a period prior to the issue date of such REMIC Regular Certificate, the amount
paid for the accrued interest will be treated instead as increasing the issue
price of the REMIC Regular Certificate. In addition, that portion of the first
interest payment in excess of interest accrued from the date of initial
issuance of the Certificates (the "Closing Date") to the first Distribution
Date will be treated for federal income tax reporting purposes as includible
in the stated redemption price at maturity of the REMIC Regular Certificates,
and as excludible from income when received as a payment of interest on the
first Distribution Date (except to the extent of any market discount accrued
as of that date). The OID Regulations suggest, however, that some or all of
this pre-issuance accrued interest "may" be treated as a separate asset (and
hence not includible in a REMIC Regular Certificate's issue price or stated
redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first Distribution Date.
The stated redemption price at maturity of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest". Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments
or (ii) a current value of a single "qualified floating rate" or "objective
rate" (each, a "Single Variable Rate"). A "current value" is the value of a
variable rate on any day that is no earlier than three months prior to the
first day on which that value is in effect and no later than one year
following that day. A "qualified floating rate" is a rate whose variations can
reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds in the currency in which the Certificate is denominated.
Such a rate remains qualified even though it is multiplied by a fixed,
positive multiple not exceeding 1.35, and not less than 0.65, increased or
decreased by a fixed rate, or both. Certain combinations of rates constitute a
single qualified floating rate, including (i) interest stated at a fixed rate
for an initial period of less than one year followed by a qualified floating
rate if the value of the floating rate at the Closing Date is intended to
approximate the fixed rate, and (ii) two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout
the term of the Certificate. A combination of such rates is conclusively
presumed to be a single floating rate if the values of all rates on the
Closing Date are within 0.25 percentage points of each other. A variable rate
that is subject to an interest rate cap, floor, "governor" or similar
restriction on rate adjustment may be a qualified floating rate only if such
restriction is fixed throughout the term of the instrument, or is not
reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. Final regulations issued on June 11, 1996 define an "objective
rate" as a rate determined using a single fixed formula and based on objective
financial information or economic information. However, an objective rate does
not include a rate based on information that is in the control of the issuer
or that is unique to the circumstances of the issuer or a related party. A
combination of interest stated at a fixed rate for an initial period of less
than one year followed by an objective rate is treated as a single objective
rate if the value of the objective rate at the Closing Date is intended to
approximate the fixed rate; such a combination of rates is conclusively
presumed to be a single objective rate if the objective rate on the Closing
Date does not differ from the fixed rate by more than 0.25 percentage points.
The qualified stated interest payable with respect to certain variable rate
debt instruments not bearing stated interest at a Single Variable Rate is
discussed below under "Variable Rate Certificates". Under the foregoing rules,
some of the payments of interest on a Certificate bearing a fixed rate of
interest for an initial period followed by a qualified floating rate of
interest in subsequent periods could be treated as included in the stated
redemption price at maturity if the initial fixed rate were to differ
sufficiently from the rate that would have been set using the formula
applicable to subsequent periods. See "Variable Rate Certificates". REMIC
Regular Certificates offered hereby other than such Certificates providing for
variable rates of interest are not anticipated to have stated interest other
than "qualified stated interest", but if any such REMIC Regular Certificates
are so offered, appropriate disclosures will be made in the Prospectus
Supplement. Some or all of the payments on REMIC Regular Certificates
providing for the
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accretion of interest will be included in the stated redemption price at
maturity of such Certificates. Further, because interest is payable to
Certificateholders only to the extent that amounts are received with respect
to the Mortgage Loans, such interest may not be considered "unconditionally
payable" and hence may not be considered qualified stated interest; however,
the Master Servicer will not adopt such treatment for purposes of information
reporting.
Under a de minimis rule in the Code, as interpreted in the OID Regulations,
original issue discount on a REMIC Regular Certificate will be considered to
be zero if such original issue discount is less than 0.25% of the stated
redemption price at maturity of the REMIC Regular Certificate multiplied by
the weighted average life of the REMIC Regular Certificate. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the amount of each payment under
the instrument (other than a payment of qualified stated interest) by a
fraction, whose numerator is the number of complete years from the issue date
until such payment is made and whose denominator is the stated redemption
price at maturity of such REMIC Regular Certificate. The IRS may take the
position that this rule should be applied taking into account the Prepayment
Assumption and the effect of any anticipated investment income. Under the OID
Regulations, REMIC Regular Certificates bearing only qualified stated interest
except for any "teaser" rate, interest holiday or similar provision would be
treated as subject to the de minimis rule if the greater of the foregone
interest or any excess of the Certificates' stated principal amount over their
issue price is less than such de minimis amount.
The OID Regulations generally would treat de minimis original issue discount
as includible in income as each principal payment is made, based on the
product of the total amount of such de minimis original issue discount and a
fraction, whose numerator is the amount of such principal payment and whose
denominator is the outstanding principal balance of the REMIC Regular
Certificate. The OID Regulations also would permit a Certificateholder to
elect to accrue de minimis original issue discount (together with stated
interest, market discount and original issue discount) into income currently
based on a constant yield method. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount and Premium".
Each holder of a REMIC Regular Certificate must include in gross income the
sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held such REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular Certificate, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of
the original issue discount that accrued during each accrual period, that is
generally each period that ends on a date that corresponds to a Distribution
Date on the REMIC Regular Certificate and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date). For any accrual period such portion will
equal the excess, if any, of (i) the sum of (A) the present value of all of
the distributions remaining to be made on the REMIC Regular Certificate, if
any, as of the end of the accrual period and (B) distributions made on such
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price at maturity, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining payments referred to in the preceding sentence
will be calculated based on (i) the yield to maturity of the REMIC Regular
Certificate, calculated as of the settlement date, giving effect to the
Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. The adjusted issue price of a REMIC Regular Certificate at the
beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount with
respect to such REMIC Regular Certificate that accrued in prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
Regular Certificate in prior accrual periods of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will then be allocated ratably to each day during the period to
determine the daily portion of original issue discount for each day. With
respect to an accrual period between the settlement date and the first
Distribution Date on the REMIC Regular Certificate that is shorter than a full
accrual period, the OID Regulations permit the daily portions of original
issue discount to be determined according to any reasonable method.
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A subsequent purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on
which it holds such REMIC Regular Certificate, the daily portions of original
issue discount with respect to such REMIC Regular Certificate, but reduced, if
such cost exceeds the "adjusted issue price", by an amount equal to the
product of (i) such daily portions and (ii) a constant fraction, whose
numerator is such excess and whose denominator is the sum of the daily
portions of original issue discount on such REMIC Regular Certificate for all
days on or after the day of purchase. The adjusted issued price of a REMIC
Regular Certificate on any given day is equal to the sum of the adjusted issue
price (or, in the case of the first accrual period, the issue price) of the
REMIC Regular Certificate at the beginning of the accrual period during which
such day occurs and the daily portions of original issue discount for all days
during such accrual period prior to such day, reduced by the aggregate amount
of distributions made during such accrual period prior to such day other than
distributions of qualified stated interest.
Variable Rate Certificates. REMIC Regular Certificates bearing interest at
one or more variable rates are subject to certain special rules. The qualified
stated interest payable with respect to certain variable rate debt instruments
not bearing interest at a Single Variable Rate generally is determined under
the OID Regulations by converting such instruments into fixed rate debt
instruments. Instruments qualifying for such treatment generally include those
providing for stated interest at (i) more than one qualified floating rate, or
(ii) a single fixed rate and (a) one or more qualified floating rates or (b) a
single "qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably
be expected to inversely reflect contemporaneous variations in the cost of
newly borrowed funds (disregarding permissible rate caps, floors, governors
and similar restrictions such as are described above).
Purchasers of REMIC Regular Certificates bearing a variable rate of interest
should be aware that there is uncertainty concerning the application of
Section 1272(a)(6) of the Code and the OID Regulations to such Certificates.
In the absence of other authority, the Master Servicer intends to be guided by
the provisions of the OID Regulations governing variable rate debt instruments
in adapting the provisions of Section 1272(a)(6) of the Code to such
Certificates for the purpose of preparing reports furnished to
Certificateholders. The effect of the application of such provisions generally
will be to cause Certificateholders holding Certificates bearing interest at a
Single Variable Rate to take into account for each period an amount
corresponding approximately to the sum of (i) the qualified stated interest
accruing on the outstanding face amount of the REMIC Regular Certificate as
the stated interest rate for that Certificate varies from time to time and
(ii) the amount of original issue discount that would have been attributable
to that period on the basis of a constant yield to maturity for a bond issued
at the same time and issue price as the REMIC Regular Certificate, having the
same face amount and schedule of payments of principal as such Certificate,
subject to the same Prepayment Assumption, and bearing interest at a fixed
rate equal to the value of the applicable qualified floating rate or qualified
inverse floating rate in the case of a Certificate providing for either such
rate, or equal to the fixed rate that reflects the reasonably expected yield
on the Certificate in the case of a Certificate providing for an objective
rate other than an inverse floating rate, in each case as of the issue date.
Certificateholders holding REMIC Regular Certificates bearing interest at a
Multiple Variable Rate generally will take into account interest and original
issue discount under a similar methodology, except that the amounts of
qualified stated interest and original issue discount attributable to such a
Certificate first will be determined for an "equivalent" debt instrument
bearing fixed rates, the assumed fixed rates for which are (a) for each
qualified floating rate, the value of each such rate as of the Closing Date
(with appropriate adjustment for any differences in intervals between interest
adjustment dates), (b) for a qualified inverse floating rate, the value of the
rate as of the Closing Date, and (c) for any other objective rate, the fixed
rate that reflects the yield that is reasonably expected for the Certificate.
If the interest paid or accrued with respect to a Multiple Variable Rate
Certificate during an accrual period differs from the assumed fixed interest
rate, such difference will be an adjustment (to interest or original issue
discount, as applicable) to the Certificateholder's taxable income for the
taxable period or periods to which such difference relates.
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In the case of a Certificate that provides for stated interest at a fixed
rate in one or more accrual periods and either one or more qualified floating
rates or a qualified inverse floating rate in other accrual periods, the fixed
rate is first converted into an assumed variable rate. The assumed variable
rate will be a qualified floating rate or a qualified inverse floating rate
according to the type of actual variable rates provided by the Certificate,
and must be such that the fair market value of the REMIC Regular Certificate
as of issuance is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the assumed variable
rate in lieu of the fixed rate. The REMIC Regular Certificate is then subject
to the determination of the amount and accrual of original issue discount as
described above, by reference to the hypothetical variable rate instrument.
Purchasers of variable rate REMIC Regular Certificates further should be
aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. If such a Certificate is not governed by
the provisions of the OID Regulations applicable to variable rate debt
instruments, it may be subject to provisions of Treasury regulations, issued
in final form on June 11, 1996, applicable to instruments having contingent
payments (the "1996 Contingent Debt Regulations"). The application of those
provisions to instruments such as variable rate REMIC Regular Certificates is
subject to differing interpretations. Prospective purchasers of variable rate
REMIC Regular Certificates are advised to consult their tax advisers
concerning the tax treatment of such Certificates.
2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the REMIC Regular
Certificate's stated redemption price at maturity, or, in the case of a REMIC
Regular Certificate issued with original issue discount, the REMIC Regular
Certificate's adjusted issue price (as defined under "Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount"), will recognize market
discount upon receipt of each payment of principal. In particular, such a
holder will generally be required to allocate each payment of principal on a
REMIC Regular Certificate first to accrued market discount, and to recognize
ordinary income, to the extent such principal payment does not exceed the
aggregate amount of accrued market discount on such REMIC Regular Certificate
not previously included in income. Such market discount must be included in
income in addition to any original issue discount includible in income with
respect to such REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income currently
as it accrues, rather than including it on a deferred basis in accordance with
the foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies. In addition, the OID Regulations
permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
for a REMIC Regular Certificate with market discount, the Certificateholder
would be deemed to have made an election to currently include market discount
in income with respect to all other debt instruments having market discount
that such Certificateholder acquires during the year of the election or
thereafter. Similarly, a Certificateholder that makes this election for a
Certificate that is acquired at a premium is deemed to have made an election
to amortize bond premium, as described below, with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns
or acquires. The election to accrue interest, discount and premium on a
constant yield method with respect to a Certificate is irrevocable without the
consent of the IRS.
Under a statutory de minimis exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate
multiplied by the number of complete years to maturity remaining after the
date of its purchase. In interpreting a similar de minimis rule with respect
to original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
Regular
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Certificate would be treated in a manner similar to original issue discount of
a de minimis amount. See "Taxation of Holders of REMIC Regular Certificates--
Original Issue Discount". Such treatment would result in discount being
included in income at a slower rate than discount would be required to be
included using the method described above. However, Treasury regulations
implementing the market discount de minimis exception have not been issued in
proposed, temporary or final form, and the precise treatment of de minimis
market discount on obligations payable in more than one installment therefore
remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more than
a de minimis amount on debt instruments, the principal of which is payable in
more than one installment. Until such time as regulations are issued by the
Treasury Department, certain rules described in the Committee Report will
apply. Under those rules, the holder of a bond purchased with more than de
minimis market discount may elect to accrue such market discount either on the
basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total
remaining market discount, multiplied by (ii) a fraction, the numerator of
which is the original issue discount accruing during the period and the
denominator of which is the total remaining original issue discount at the
beginning of the period. Under the proportionate method for obligations issued
without original issue discount, the amount of market discount that accrues
during a period is equal to the product of (i) the total remaining market
discount, multiplied by (ii) a fraction, the numerator of which is the amount
of stated interest paid during the accrual period and the denominator of which
is the total amount of stated interest remaining to be paid at the beginning
of the period. The Prepayment Assumption, if any, used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount under any of the above methods. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
REMIC Regular Certificate purchased at a discount in the secondary market.
Further, a purchaser generally will be required to treat a portion of any
gain on sale or exchange of a REMIC Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income. Such purchaser also may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry such REMIC Regular Certificate. Any
such deferred interest expense is, in general, allowed as a deduction not
later than the year in which the related market discount income is recognized.
If such holder elects to include market discount in income currently as it
accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will
not apply.
A REMIC Regular Certificate purchased at a cost (not including payment for
accrued qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC Regular Certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally,
as described above. The Committee Report indicates a Congressional intent that
the same rules that will apply to accrual of market discount on installment
obligations will also apply in amortizing bond premium under Code Section 171
on installment obligations such as the REMIC Regular Certificates. On December
31, 1997, the IRS issued final regulations (the "Premium Regulations") on the
amortization of bond premium. The Premium Regulations describe the constant
yield method under which such premium is amortized and provide that the
resulting offset to interest income can be taken into account only as a
Certificateholder takes the corresponding interest income into account under
such holder's regular accounting method. In the case of instruments that may
be called or repaid prior to maturity, the Premium Regulations provide that
the premium is calculated by assuming that the issuer will exercise or not
exercise its redemption rights in the manner that maximizes the
Certificateholder's yield and the Certificateholder will exercise or not
exercise its option in a manner that maximizes the Certificateholder's Yield.
The Premium
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Regulations are effective for debt instruments acquired on or after the date
60 days after the date final regulations were published in the Federal
Register. However, if a Certificateholder elects to amortize bond premium for
the taxable year containing such effective date, the Premium Regulations would
apply to all the Certificateholder's debt instruments held on or after the
first day of that taxable year.
3. Treatment of Subordinated Certificates
As described above under "Credit Support--Subordinated Certificates",
certain Series of Certificates may contain one or more Classes or Subclasses
of Subordinated Certificates. Holders of Subordinated Certificates will be
required to report income with respect to such Certificates on the accrual
method without giving effect to delays and reductions in distributions
attributable to defaults or delinquencies on any Mortgage Loans, except
possibly, in the case of income that constitutes qualified stated interest, to
the extent that it can be established that such amounts are uncollectible. As
a result, the amount of income reported by a Certificateholder of a
Subordinated Certificate in any period could significantly exceed the amount
of cash distributed to such Certificateholder in that period.
Although not entirely clear, it appears that a corporate holder or a holder
who holds a Regular Certificate in the course of a trade or business generally
should be allowed to deduct as an ordinary loss any loss sustained on account
of partial or complete worthlessness of a Subordinated Certificate. Although
similarly unclear, a noncorporate holder who does not hold such Regular
Certificate in the course of a trade or business generally should be allowed
to deduct as a short-term capital loss any loss sustained on account of
complete worthlessness of a Subordinated Certificate. Special rules are
applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Holders of Subordinated Certificates should consult
their own tax advisers regarding the appropriate timing, character and amount
of any loss sustained with respect to Subordinated Certificates.
E. Taxation of Owners of REMIC Residual Certificates
1. General
An owner of a REMIC Residual Certificate ("Residual Owner") generally will
be required to report its daily portion of the taxable income or, subject to
the limitation described below in "Taxation of Owners of REMIC Residual
Certificates-Basis Rules and Distributions", the net loss of the REMIC
Mortgage Pool for each day during a calendar quarter that the Residual Owner
owned such REMIC Residual Certificate. For this purpose, the daily portion
will be determined by allocating to each day in the calendar quarter, using a
30 days per month/90 days per quarter/360 days per year counting convention,
its ratable portion of the taxable income or net loss of the REMIC Mortgage
Pool for such quarter, and by allocating the daily portions among the Residual
Owners (on such day) in accordance with their percentage of ownership
interests on such day. Any amount included in the gross income of, or allowed
as a loss to, any Residual Owner by virtue of the rule referred to in this
paragraph will be treated as ordinary income or loss. Purchasers of REMIC
Residual Certificates should be aware that taxable income from such
Certificates may exceed cash distributions with respect thereto in any taxable
year. For example, if the Mortgage Loans are acquired by a REMIC at a
discount, then the holder of a residual interest may recognize income without
corresponding cash distributions. This result could occur because a payment
produces recognition by the REMIC of discount on the Mortgage Loan while all
or a portion of such payment could be used in whole or in part to make
principal payments on REMIC Regular Certificates issued without substantial
discount. Taxable income may also be greater in earlier years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of the REMIC Regular Certificates, will increase
over time as the lower yielding sequences of Certificates are paid, whereas
interest income with respect to any given Mortgage Loan will remain constant
over time as a percentage of the outstanding principal amount of that loan.
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Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into account
in determining the income of such holder for federal income tax purposes.
Although it appears likely that any such payment would be includible in income
immediately upon its receipt, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisers concerning the treatment of such payments for
income tax purposes.
2. Taxable Income or Net Loss of the REMIC Trust Fund
The taxable income or net loss of the REMIC Mortgage Pool will reflect a
netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and the deductions and losses allowed to the REMIC Mortgage Pool. Such taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for an individual having the calendar year as his taxable year and
using the accrual method of accounting, with certain modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including original issue discount) on the REMIC Regular Certificates. Second,
market discount equal to the excess of any Mortgage Loan's adjusted issue
price (as determined under "Taxation of Owners of REMIC Regular Certificates-
Market Discount and Premium") over its fair market value at the time of its
transfer to the REMIC Mortgage Pool generally will be included in income as it
accrues, based on a constant yield method and on the Prepayment Assumption.
For this purpose, the Master Servicer intends to treat the fair market value
of the Mortgage Loans as being equal to the aggregate issue prices of the
REMIC Regular Certificates and REMIC Residual Certificates; if one or more
classes of REMIC Regular Certificates or REMIC Residual Certificates are
retained by the Depositor, the Master Servicer will estimate the value of such
retained interests in order to determine the fair market value of the Mortgage
Loans for this purpose. Third, no item of income, gain, loss or deduction
allocable to a prohibited transaction (see "Prohibited Transactions and Other
Possible REMIC Taxes", below) will be taken into account. Fourth, the REMIC
Mortgage Pool generally may not deduct any item that would not be allowed in
calculating the taxable income of a partnership by virtue of Code Section
703(a)(2). Fifth, the REMIC Regulations provide that the limitation on
miscellaneous itemized deductions imposed on individuals by Code Section 67
will not be applied at the Mortgage Pool level to the servicing fees paid to
the Master Servicer or Subordinated Lenders-Servicers if any. (See, however,
"Pass-Through of Servicing Fees", below.) If the deductions allowed to the
REMIC Mortgage Pool exceed its gross income for a calendar quarter, such
excess will be the net loss for the REMIC Mortgage Pool for that calendar
quarter.
3. Basis Rules and Distributions
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not be
included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC
Residual Certificate. Such distribution will reduce the adjusted basis of such
interest, but not below zero. To the extent a distribution exceeds the
adjusted basis of the REMIC Residual Certificate, it will be treated as gain
from the sale of the REMIC Residual Certificate. (See "Sales of REMIC
Certificates", below.) The adjusted basis of a REMIC Residual Certificate is
equal to the amount paid for such REMIC Residual Certificate, increased by
amounts included in the income of the Residual Owner (see "Taxation of Owners
of REMIC Residual Certificates-Daily Portions" above), and decreased by
distributions and by net losses taken into account with respect to such
interest.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Certificate.
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The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC Residual Certificate, but may only
recover its basis through distributions, through the deduction of any net
losses of the REMIC Mortgage Pool or upon the sale of its REMIC Residual
Certificate. See "Sales of REMIC Certificates", below. The Residual Owner
does, however, receive reduced taxable income over the life of the REMIC
because the REMIC's basis in the underlying REMIC Mortgage Pool includes the
fair market value of the REMIC Regular Certificates and REMIC Residual
Certificates.
4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each
day during a calendar quarter its ratable portion of the product of the
"adjusted issue price" of the REMIC Residual Certificate at the beginning of
the calendar quarter and 120 percent of the long-term "applicable federal
rate" (generally, an average of current yields on Treasury securities of
comparable maturity, and hereafter the "AFR") in effect at the time of
issuance of the REMIC Residual Certificate. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any
calendar quarter is the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters and decreased
by any distributions made with respect to such REMIC Residual Certificate
before the beginning of such quarter. The issue price of a REMIC Residual
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the REMIC Residual Certificates
were sold.
For Residual Owners, an excess inclusion cannot be offset by deductions,
losses or loss carryovers from other activities. For Residual Owners that are
subject to tax on unrelated business taxable income (as defined in Code
Section 511), an excess inclusion is treated as unrelated business taxable
income. For Residual Owners that are nonresident alien individuals or foreign
corporations generally subject to United States 30% withholding tax, even if
interest paid to such Residual Owners is generally eligible for exemptions
from such tax, an excess inclusion will be subject to such tax and no tax
treaty rate reduction or exemption may be claimed with respect thereto. See
"Foreign Investors in REMIC Certificates."
Although it has not done so, the Treasury also has authority to issue
regulations that, if REMIC Residual Certificates are found in the aggregate
not to have "significant value", would treat as excess inclusions with respect
to any REMIC Residual Certificate the entire daily portion of taxable income
for such REMIC Residual Certificate. Each Prospectus Supplement pursuant to
which REMIC Residual Certificates are offered will state whether such REMIC
Residual Certificates will have, or may be regarded as having, significant
value under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a
REMIC Residual Certificate will have "significant value" for purposes of the
above described rules or that a REMIC Residual Owner will receive
distributions of amounts calculated pursuant to those assumptions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder.
The Small Business Job Protection Act 1996 provides three technical
amendments to clarify the interaction of the foregoing rules and the
alternative minimum tax. First, "taxable income" as determined for purposes of
computing alternative minimum taxable income for a Residual Owner is
determined without regard to the special rule that taxable income cannot be
less than excess inclusions. Second, the Residual Owner's alternative
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minimum taxable income for the taxable year cannot be less than the excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Owner elects to have such rules apply
only to taxable years beginning after August 20, 1996.
5. Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate is noneconomic
unless, at the time of its transfer and based on the Prepayment Assumption and
any required or permitted clean-up calls or required liquidation provided for
in the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the AFR) on the REMIC Residual
Certificate equals at least the product of the present value of the
anticipated excess inclusions and the highest tax rate applicable to
corporations for the year of the transfer, and (2) the transferor reasonably
expects that the transferee will receive distributions with respect to the
REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement
that are intended to reduce the possibility of any such transfer being
disregarded. Such restrictions will require each party to a transfer to
provide an affidavit that no purpose of such transfer is to impede the
assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee. Prior to purchasing a REMIC
Residual Certificate, prospective purchasers should consider the possibility
that a purported transfer of such REMIC Residual Certificate by such a
purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules, which would result in the retention
of tax liability by such purchaser. The applicable Prospectus Supplement will
disclose whether offered REMIC Residual Certificates may be considered
"noneconomic" residual interests under the REMIC Regulations; provided,
however, that any disclosure that a REMIC Residual Certificate will or will
not be considered "noneconomic" will be based upon certain assumptions, and
the Depositor will make no representation that a REMIC Residual Certificate
will not be considered "noneconomic" for purposes of the above-described rules
or that a REMIC Residual Owner will receive distributions calculated pursuant
to such assumptions. See "Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
6. Tax-Exempt Investors
Tax-exempt organizations (including employee benefit plans) that are subject
to tax on unrelated business taxable income (as defined in Code Section 511)
will be subject to tax on any excess inclusions attributed to them as owners
of Residual Certificates. Excess inclusion income associated with a Residual
Certificate may significantly exceed cash distributions with respect thereto.
See "Excess Inclusions".
Generally, tax-exempt organizations that are not subject to federal income
taxation on "unrelated business taxable income" pursuant to Code Section 511
are treated as "disqualified organizations" under provisions of the 1988 Act.
Under provisions of the Pooling and Servicing Agreement, such organizations
generally are prohibited from owning Residual Certificates. See "Sales of
REMIC Certificates".
7. Real Estate Investment Trusts
If the applicable Prospectus Supplement so provides, a Mortgage Pool may
hold Mortgage Loans bearing interest based wholly or partially on Mortgagor
profits, Mortgaged Property appreciation, or similar
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contingencies. Such interest, if earned directly by a real estate investment
trust ("REIT"), would be subject to the limitations of Code sections 856(f)
and 856(j). Treasury Regulations treat a REIT holding a REMIC Residual
Certificate for a principal purpose of avoiding such Code provisions as
receiving directly the income of the REMIC Mortgage Pool, hence potentially
jeopardizing its qualification for taxation as a REIT and exposing such income
to taxation as a prohibited transaction at a 100 percent rate.
8. Mark-to-Market Rules
Code Section 475 generally requires that securities dealers include
securities in inventory at their fair market value, recognizing gain or loss
as if the securities were sold at the end of each tax year. Prospective
purchasers of the REMIC Residual Certificates should be aware that on December
23, 1996, the Internal Revenue Service issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to
the extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a REMIC Residual Certificate is not treated as a
security and thus may not be marked to market.
F. Sales of REMIC Certificates
If a REMIC Certificate is sold, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted
basis in the REMIC Certificate. The adjusted basis of a REMIC Regular
Certificate generally will equal the cost of such REMIC Regular Certificate to
the seller, increased by any original issue discount or market discount
included in the seller's gross income with respect to such REMIC Regular
Certificate and reduced by premium amortization deductions and distributions
previously received by the seller of amounts included in the stated redemption
price at maturity of such REMIC Regular Certificate. The adjusted basis of a
REMIC Residual Certificate will be determined as described under "Taxation of
Owners of REMIC Residual Certificates-Basis Rules and Distributions". Gain
from the disposition of a REMIC Regular Certificate that might otherwise be
treated as a capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that
would have been includible in such holder's income had income accrued at a
rate equal to 110% of the AFR as of the date of purchase, over (ii) the amount
actually includible in such holder's income. Except as otherwise provided
under "Taxation of Owners of REMIC Regular Certificates-Market Discount and
Premium" and under Code Section 582(c), any additional gain or any loss on the
sale or exchange of a REMIC Certificate will be capital gain or loss, provided
such REMIC Certificate is held as a capital asset (generally, property held
for investment) within the meaning of Code Section 1221.
All or a portion of any gain from the sale of a REMIC Certificate that might
otherwise be capital gain may be treated as ordinary income (i) if such
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the
appropriate applicable Federal rate under Code Section 1274(d) in effect at
the time the taxpayer entered into the transaction reduced by any amount
treated as ordinary income with respect to any prior disposition or other
termination of a position that was held as part of such transaction, or (ii)
in the case of a noncorporate taxpayer that has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the loss
will not be recognized if, within six months before or after the sale of the
REMIC Residual Certificate, such Residual Owner purchases another residual in
any REMIC or any interest in a taxable mortgage pool (as defined in Code
Section 7701(i)) comparable to a residual interest in a REMIC. Such disallowed
loss will be allowed upon the sale of the other residual interest (or
comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While the Committee Report states that this rule may
be modified by Treasury regulations, the REMIC Regulations do not address this
issue and it is not clear whether any such modification will in fact be
implemented or, if implemented, what its precise nature or effective date
would be.
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The 1988 Act makes transfers of a residual interest to certain "disqualified
organizations" subject to an additional tax on the transferor in an amount
equal to the maximum corporate tax rate applied to the present value (using a
discount rate equal to the AFR) of the total anticipated excess inclusions
with respect to such residual interest for the periods after the transfer. For
this purpose, "disqualified organizations" includes the United States, any
state or political subdivision of a state, any foreign government or
international organization or any agency or instrumentality of any of the
foregoing; any tax-exempt entity (other than a Code Section 521 cooperative)
which is not subject to the tax on unrelated business income; and any rural
electrical or telephone cooperative. The anticipated excess inclusions must be
determined as of the date that the REMIC Residual Certificate is transferred
and must be based on events that have occurred up to the time of such
transfer, the Prepayment Assumption, and any required or permitted clean-up
calls or required liquidation provided for in the REMIC's organizational
documents. The tax generally is imposed on the transferor of the REMIC
Residual Certificate, except that it is imposed on an agent for a disqualified
organization if the transfer occurs through such agent. The Pooling and
Servicing Agreement requires, as a prerequisite to any transfer of a Residual
Certificate, the delivery to the Trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a Residual Certificate
to a disqualified organization void.
In addition, if a "pass-through entity" includes in income excess inclusions
with respect to a REMIC Residual Certificate, and a disqualified organization
is the record holder of an interest in such entity at any time during any
taxable year of such entity, then a tax will be imposed on such entity equal
to the product of (i) the amount of excess inclusions on the REMIC Residual
Certificate for such taxable year that are allocable to the interest in the
pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-
through entity will not be subject to this tax for any period, however, if the
record holder of an interest in such entity furnishes to such entity (i) such
holder's social security number and a statement under penalties of perjury
that such social security number is that of the record holder or (ii) a
statement under penalties of perjury that such record holder is not a
disqualified organization. For these purposes, a "pass-through entity" means
any regulated investment company, real estate investment trust, trust,
partnership or certain other entities described in Section 860E(e)(6) of the
Code. In addition, a person holding an interest in a pass-through entity as a
nominee for another person shall, with respect to such interest, be treated as
a pass-through entity.
G. Pass-Through of Servicing Fees
The general rule is that Residual Owners take into account taxable income or
net loss of the related REMIC Mortgage Pool. Under that rule, servicing
compensation of the Master Servicer and the subservicers (if any) would be
allocated to the holders of the REMIC Residual Certificates, and therefore
would not affect the income or deductions of holders of REMIC Regular
Certificates. However, in the case of a "single-class REMIC", such expenses
and an equivalent amount of additional gross income will be allocated among
all holders of REMIC Regular Certificates and REMIC Residual Certificates for
purposes of the limitations on the deductibility of certain miscellaneous
itemized deductions by individuals contained in Code Sections 56(b)(1) and 67.
Generally, any holder of a REMIC Residual Certificate and any holder of a
REMIC Certificate issued by a "single-class REMIC" who is an individual,
estate or trust (including such a person that holds an interest in a pass-
through entity holding such a REMIC Certificate) will be able to deduct such
expenses in determining regular taxable income only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC Residual Certificates, and REMIC
Regular Certificates receiving an allocation of servicing compensation, may
not be appropriate investments for individuals, estates or trusts, and such
persons should carefully consult with their own tax advisers regarding the
advisability of an investment in such Certificates.
A "single-class REMIC" is a REMIC that either (i) would be treated as an
investment trust under the provisions of Treasury Regulation Section 301.7701-
4(c) in the absence of a REMIC election, or (ii) is substantially similar to
such an investment trust and is structured with the principal purpose of
avoiding the
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allocation of investment expenses to holders of REMIC Regular Certificates.
The Depositor intends (subject to certain exceptions which, if applicable,
will be stated in the applicable Prospectus Supplement) to treat each REMIC
Mortgage Pool as other than a "single-class REMIC", consequently allocating
servicing compensation expenses and related income amounts entirely to REMIC
Residual Certificates and in no part to REMIC Regular Certificates.
H. Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMIC Mortgage Pools equal to 100 percent of the
net income derived from "prohibited transactions". In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. The Code also imposes a 100 percent
tax on the value of any contribution of assets to the REMIC after the "startup
day" (the day on which the regular and residual interests are issued), other
than pursuant to specified exceptions, and subjects "net income from
foreclosure property" to tax at the highest corporate rate. It is not
anticipated that a REMIC Mortgage Pool will engage in any such transactions or
receive any such income.
I. Termination of a REMIC Trust Fund
In general, no special tax consequences will apply to a holder of a REMIC
Regular Certificate upon the termination of the REMIC Mortgage Pool by virtue
of the final payment or liquidation of the last Mortgage Loan remaining in the
REMIC Mortgage Pool. If a Residual Owner's adjusted basis in its REMIC
Residual Certificate at the time such termination occurs exceeds the amount of
cash distributed to such Residual Owner in liquidation of its interest, then,
although the matter is not entirely free from doubt, it appears that the
Residual Owner would be entitled to a loss (which could be a capital loss)
equal to the amount of such excess.
J. Reporting and Other Administrative Matters of REMICs
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. Certain holders of REMIC
Regular Certificates who are generally exempt from information reporting on
debt instruments, such as corporations, banks, registered securities or
commodities brokers, real estate investment trusts, registered investment
companies, common trust funds, charitable remainder annuity trusts and
unitrusts, will be provided interest and original issue discount income
information and the information set forth in the following paragraph upon
request in accordance with the requirements of the Treasury regulations. The
information must be provided by the later of 30 days after the end of the
quarter for which the information was requested, or two weeks after the
receipt of the request. The REMIC Mortgage Pool must also comply with rules
requiring the face of a REMIC Certificate issued at more than a de minimis
discount to disclose the amount of original issue discount and the issue date
and requiring such information to be reported to the Treasury Department.
The REMIC Regular Certificate information reports must include a statement
of the "adjusted issue price" of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
Mortgage Pool may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
The responsibility for complying with the foregoing reporting rules will be
borne by the Master Servicer.
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For purposes of the administrative provisions of the Code, REMIC Pools will
be treated as partnerships and the holders of Residual Certificates will be
treated as partners. The Master Servicer will file federal income tax
information returns on behalf of the related REMIC Pool, and will be
designated as agent for and will act on behalf of the "tax matters person"
with respect to the REMIC Pool in all respects.
As agent for the tax matters person, the Master Servicer will, subject to
certain notice requirements and various restrictions and limitations,
generally have the authority to act on behalf of the REMIC and the Residual
Owners in connection with the administrative and judicial review of items of
income, deduction, gain or loss of the REMIC Mortgage Pool, as well as the
REMIC Mortgage Pool's classification. Residual Owners will generally be
required to report such REMIC Mortgage Pool items consistently with their
treatment on the REMIC Mortgage Pool's federal income tax information return
and may in some circumstances be bound by a settlement agreement between the
Master Servicer, as agent for the tax matters person, and the IRS concerning
any such REMIC Mortgage Pool item. Adjustments made to the REMIC Mortgage Pool
tax return may require a Residual Owner to make corresponding adjustments on
its return, and an audit of the REMIC Mortgage Pool's tax return, or the
adjustments resulting from such an audit, could result in an audit of a
Residual Owner's return.
K. Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal on REMIC Regular Certificates, as well as
payment of proceeds from the sale of REMIC Certificates, may be subject to the
"backup withholding tax" under Section 3406 of the Code at a rate of 31
percent if recipients of such payments fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise
fail to establish an exemption from such tax. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties
may be imposed by the IRS on a recipient of payments that is required to
supply information but that does not do so in the manner required.
L. Foreign Investors in REMIC Certificates
1. REMIC Regular Certificates
Except as qualified below, payments made on a REMIC Regular Certificate to a
REMIC Regular Certificateholder that is not a U.S. Person, as hereinafter
defined (a "non-U.S. Person"), or to a person acting on behalf of such a
Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided that (a) the holder of the Certificate is not
subject to U.S. tax as a result of a connection to the United States other
than ownership of such Certificate, (b) the holder of such Certificate signs a
statement under penalties of perjury that certifies that such holder is a Non-
U.S. Person, and provides the name and address of such holder, and (c) the
last U.S. Person in the chain of payment to the holder receives such statement
from such holder or a financial institution holding on its behalf and does not
have actual knowledge that such statement is false. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
withholding tax rate of 30 percent, subject to reduction under any applicable
tax treaty.
"U.S. Person" means a citizen or resident of the United States (as
determined for United States federal income tax purposes), a corporation,
partnership or other entity treated as a corporation or partnership for United
States federal income tax purposes, created or organized in or under the laws
of the United States, any state thereof or the District of Columbia, or an
estate or trust described in section 7701(a)(30) of the Code.
Holders of REMIC Regular Certificates should be aware that the IRS may take
the position that exemption from U.S. withholding taxes does not apply to such
a holder that also directly or indirectly owns 10 percent or more of the REMIC
Residual Certificates. Further, the foregoing rules will not apply to exempt a
"United States shareholder" (as such term is defined in Code Section 951) of a
controlled foreign corporation from taxation on such United States
shareholder's allocable portion of the interest or original issue discount
income earned by such controlled foreign corporation.
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2. REMIC Residual Certificates
Amounts paid to a Residual Owner that is not a "U.S. Person" (as defined
above) (a "non-U.S. Person") generally will be treated as interest for
purposes of applying the withholding tax on non-U.S. Persons with respect to
income on its REMIC Residual Certificate. However, it is unclear whether
distributions on REMIC Residual Certificates will be eligible for the general
exemption from withholding tax that applies to REMIC Regular Certificates as
described above. Treasury Regulations provide that, for purposes of the
portfolio interest exception, payments to the foreign owner of a REMIC
Residual Certificate are to be considered paid on the obligations held by the
REMIC, rather than on the Certificate itself. Such payments would thus only
qualify for the portfolio interest exception if the underlying obligations
held by the REMIC would so qualify. Such withholding tax generally would be
imposed at a rate of 30 percent but would be subject to reduction under any
tax treaty applicable to the Residual Owner. However, there is no exemption
from withholding tax nor may the rate of such tax be reduced, under a tax
treaty or otherwise, with respect to any distribution of income that is an
excess inclusion. Although no regulations have been proposed or adopted
addressing withholding on residual interests held by non-U.S. Persons, the
provisions of the REMIC Regulations, described below, relating to the transfer
of residual interests to non-U.S. Persons can be read as implying that
withholding with respect to excess inclusion income is to be determined by
reference to the amount of the accrued excess inclusion income rather than to
the amount of cash distributions. If the IRS were successfully to assert such
a position, cash distributions on Residual Certificates held by non-U.S.
Persons could be subject to withholding at rates as high as 100 percent,
depending on the relationship of accrued excess inclusion income to cash
distributions with respect to such Residual Certificates. See "Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions".
Certain restrictions relating to transfers of REMIC Residual Certificates to
and by investors who are non-U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC Residual Certificates to a non-U.S.
Person that have "tax avoidance potential" are disregarded for all federal
income tax purposes. If such transfer is disregarded, the purported transferor
of such a REMIC Residual Certificate to a non-U.S. Person would continue to
remain liable for any taxes due with respect to the income on such REMIC
Residual Certificate. A transfer of a REMIC Residual Certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects (1) that the REMIC will distribute to the transferee
Residual Certificateholder amounts that will equal at least 30 percent of each
excess inclusion, and (2) that such amounts will be distributed at or after
the time at which the excess inclusion accrues and not later than the close of
the calendar year following the calendar year of accrual. This rule does not
apply to transfers if the income from the REMIC Residual Certificate is taxed
in the hands of the transferee as income effectively connected with the
conduct of a U.S. trade or business. Second, if a non-U.S. Person transfers a
REMIC Residual Certificate to a U.S. Person (or to a non-U.S. Person in whose
hands income from the REMIC Residual Certificate would be effectively
connected), and the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, that transfer is disregarded for all
federal income tax purposes and the purported non-U.S. Person transferor
continues to be treated as the owner of the REMIC Residual Certificate. Thus,
the REMIC's liability to withhold 30 percent of the accrued excess inclusions
is not terminated even though the REMIC Residual Certificate is no longer held
by a non-U.S. Person.
Holders of REMIC Regular Certificates and REMIC Residual Certificates should
be aware that final Treasury Regulations (the "1997 Withholding Regulations")
were issued on October 6, 1997 which affect the United States taxation of
foreign investors in REMIC Certificates. The 1997 Withholding Regulations are
generally effective for payments after December 31, 1999, regardless of the
issue date of the REMIC Certificate with respect to which such payments are
made, subject to certain transition rules. One of the effects of the 1997
Withholding Regulations will be to provide certain presumptions with respect
to withholding for holders not providing the required certifications to
qualify for the withholding exemption described above. In addition, the 1997
Withholding Regulations will replace a number of current tax certification
forms with a single, restated form and standardize the period of time for
which withholding agents could rely on such certifications.
The discussion under this heading is not intended to be a complete
discussion of the provisions of the 1997 Withholding Regulations, and
prospective investors are urged to consult their tax advisors with respect to
the effect the 1997 Withholding Regulations may have.
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M. State and Local Taxation
Many states do not automatically conform to changes in the federal income
tax laws. Consequently, a REMIC Mortgage Pool that would not qualify as a
fixed investment trust for federal income tax purposes may be characterized as
a corporation, a partnership, or some other entity for purposes of state
income tax law. Such characterization could result in entity level income or
franchise taxation of the REMIC Mortgage Pool formed in, owning mortgages or
property in, or having servicing activity performed in a state without
conforming REMIC provisions in its income or franchise tax law. Further, REMIC
Regular Certificateholders resident in non-conforming states may have their
ownership of REMIC Regular Certificates characterized as an interest other
than debt of the REMIC such as stock or a partnership interest. Investors are
advised to consult their tax advisers concerning the state and local income
tax consequences of their purchase and ownership of REMIC Regular
Certificates.
III. NON-REMIC TRUST FUNDS
A. Classification of Trust Funds
With respect to each series of Trust Certificates for which they are
identified as counsel to the Depositor in the applicable Prospectus
Supplement, Sidley will deliver their opinion to the effect that the
arrangements pursuant to which such Trust Fund will be administered and such
Trust Certificates will be issued will not be classified as an association
taxable as a corporation and that each such Trust Fund will be classified as a
trust whose taxation will be governed by the provisions of subpart E, Part I
of subchapter J of the Code.
B. Characterization of Investments in Trust Certificates
1. Trust Fractional Certificates
In the case of Trust Fractional Certificates, counsel to the Depositor will
deliver an opinion that, in general (and subject to the discussion below of
Contracts and under "Buydown Mortgage Loans"), (i) Trust Fractional
Certificates held by a thrift institution taxed as a "domestic building and
loan association" will represent "loans......... secured by an interest in real
property'' within the meaning of Code Section 7701 (a)(19)(C)(v), except to
the extent that they represent interests in Government Securities or Private
Label Custody Receipt Securities ; (ii) Trust Fractional Certificates held by
a real estate investment trust will represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A) and interest on Trust Fractional
Certificates will be considered "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(4)(B), except to the extent that they represent interests in
Government Securities or Private Label Custody Receipt Securities; and (iii)
Trust Fractional Certificates acquired by a REMIC in accordance with the
requirements of Section 860G(a)(3)(A)(i) and (ii) or Section 860G(a)(4)(B) of
the Code will be treated as "qualified mortgages" within the meaning of Code
Section 860D(a)(4), unless the Trust Fractional Certificates represent
interests in Government Securities or Private Label Custody Receipt
Securities. In the case of a Trust Fractional Certificate evidencing interests
in Contracts, such Certificates will qualify for the treatment described in
(i) through (iii) of the preceding sentence only to the extent of the fraction
of such Certificate corresponding to the fraction of the Contract Pool that
consists of Contracts that would receive such treatment if held directly by
the Trust Fractional Certificateholder.
2. Trust Interest Certificates
With respect to each Series of Certificates for which they are identified as
counsel to the Depositor in the applicable Prospectus Supplement, Sidley will
advise the Depositor that in their opinion, based on the legislative history,
a REMIC that acquires a Trust Interest Certificate in accordance with the
requirements of Section 860G(a)(3)(A)(i) and (ii) or Section 860G(a)(4)(B) of
the Code will be treated as owning a "Qualified Mortgage" within the meaning
of Section 860G(a)(3) of the Code, unless the Trust Interest Certificate
represents the right to payments from Government Securities or Private Label
Custody Receipt Securities.
Although there appears to be no policy reason not to accord to Trust
Interest Certificates the treatment described above for Trust Fractional
Certificates, there is no authority addressing such characterization for
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instruments similar to Trust Interest Certificates. Consequently, it is
unclear to what extent, if any, (1) a Trust Interest Certificate owned by a
"domestic building and loan association" within the meaning of Code Section
7701 (a)(19) will be considered to represent "loans..... secured by an interest
in real property'' within the meaning of Code Section 7701(a)(19)(C)(v); or
(2) a real estate investment trust which owns a Trust Interest Certificate
will be considered to own "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and interest income thereon will be considered "interest
on obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B). Prospective purchasers to which such
characterization of an investment in Trust Interest Certificates is material
should consult their own tax advisers regarding whether the Trust Interest
Certificates, and the income therefrom, will be so characterized.
3. Buydown Mortgage Loans
It is contemplated that the assets of certain Trust Funds may include
Buydown Mortgage Loans. The characterization of an investment in Buydown
Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement. There are no directly applicable precedents with respect to the
federal income tax treatment or the characterization of investments in Buydown
Mortgage Loans. Accordingly, holders of Trust Certificates should consult
their own tax advisers with respect to characterization of investments in
Trust Funds that include Buydown Mortgage Loans.
Although the matter is not entirely free from doubt, the portion of a Trust
Certificate representing an interest in Buydown Mortgage Loans may be
considered to represent an investment in "loans...... secured by an interest in
real property'' within the meaning of Code Section 7701(a)(19)(C)(v) and to
the extent the outstanding principal balance of the Buydown Mortgage Loans
exceeds the amount held from time to time in the Buydown Fund. It is also
possible that the entire interest in Buydown Mortgage Loans may be so
considered, because the fair market value of the real property securing each
Buydown Mortgage Loan will exceed the amount of such loan at the time it is
made. Purchasers and their tax advisers are advised to review Section 1.593-
11(d)(2) of the Treasury Regulations, which suggests that this latter
treatment may be available, and to compare Revenue Ruling 81-203, 1981-2 C.B.
137, which may be read to imply that apportionment is generally required
whenever more than a minimal amount of assets other than real property may be
available to satisfy purchasers' claims.
For similar reasons, the portion of such Trust Certificate representing an
interest in Buydown Mortgage Loans may be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A). Purchasers and their
tax advisers are advised to review Section 1.856-5(c)(1)(i) of the Treasury
Regulations, which specifies that if a mortgage loan is secured by both real
property and by other property and the value of the real property alone equals
or exceeds the amount of the loan, then all interest income will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B).
C. Taxation of Owners of Trust Fractional Certificates
Each holder of a Trust Fractional Certificate (a "Trust Fractional
Certificateholder") will be treated as the owner of an undivided percentage
interest in the principal of, and possibly a different undivided percentage
interest in the interest portion of, each of the Mortgage Loans (and
Government Securities or Private Label Custody Receipt Securities, if
applicable) included in a Trust Fund. Accordingly, each Trust Fractional
Certificateholder must report on its federal income tax return its allocable
share of income from its interests, as described below, at the same time and
in the same manner as if it had held directly interests in the Mortgage Loans
(and Government Securities or Private Label Custody Receipt Securities, if
applicable) and received directly its share of the payments on such Mortgage
Loans (and Government Securities or Private Label Custody Receipt Securities,
if applicable). Because those interests represent interests in "stripped
bonds" or "stripped coupons" within the meaning of Code Section 1286, such
interests would be considered to be newly issued debt instruments, and thus to
have no market discount or premium, and the amount of original issue discount
may differ from the amount of original issue discount on the Mortgage Loans
(and Government Securities or Private Label Custody Receipt Securities, if
applicable) and the amount includible in income on account of a Trust
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Fractional Certificate may differ significantly from the amount payable
thereon from payments of interest on the Mortgage Loans (and Government
Securities or Private Label Custody Receipt Securities, if applicable). Each
Trust Fractional Certificateholder may report and deduct its allocable share
of the servicing and related fees and expenses paid to or retained by the
Company at the same time, to the same extent, and in the same manner as such
items would have been reported and deducted had it held directly interests in
the Mortgage Loans and paid directly its share of the servicing and related
fees and expenses. A holder of a Trust Fractional Certificate who is an
individual, estate or trust will be allowed a deduction for servicing fees in
determining its regular tax liability only to the extent that the aggregate of
such holder's miscellaneous itemized deductions exceeds two percent of
adjusted gross income, and will be allowed no deduction for such fees in
determining its liability for alternative minimum tax. Amounts received by
Trust Fractional Certificateholders in lieu of amounts due with respect to any
Mortgage Loan but not received by the Depositor from the Mortgagor will be
treated for federal income tax purposes as having the same character as the
payments which they replace.
Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Stripped Mortgage Loans
(and Stripped Government Securities or Stripped Private Label Custody Receipt
Securities, if applicable) should read the material under the headings
"Application of Stripped Bond Rules", "Market Discount and Premium" and
"Allocation of Purchase Price" for a discussion of particular rules applicable
to their Certificates. A "Stripped Mortgage Loan", a "Stripped Government
Security" and a "Stripped Private Label Custody Receipt Security" mean a
Mortgage Loan having a Retained Yield (as that term is defined below) or a
Mortgage Loan, Government Security or Private Label Custody Receipt Security
included in a Trust Fund having either Trust Interest Certificates or more
than one class of Trust Fractional Certificates or identified in the
Prospectus Supplement as related to a Class of Trust Certificates identified
as representing interests in Stripped Mortgage Loans, Stripped Government
Securities or Stripped Private Label Custody Receipt Securities.
Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Unstripped Mortgage Loans
(and Unstripped Government Securities or Unstripped Private Label Custody
Receipt Securities, if applicable) should read the material under the headings
"Treatment of Unstripped Certificates", "Market Discount and Premium", and
"Allocation of Purchase Price" for a discussion of particular rules applicable
to their Certificates. However, the IRS has indicated that under some
circumstances it will view a portion of servicing and related fees and
expenses paid to or retained by the Master Servicer or Subordinated Lenders-
Servicers as an interest in the Mortgage Loans, essentially equivalent to that
portion of interest payable with respect to each Mortgage Loan that is
retained by the Depositor ("Retained Yield"). If such a view were sustained
with respect to a particular Trust Fund, such purchasers would be subject to
the rules set forth under "Application of Stripped Bond Rules" rather than
those under "Treatment of Unstripped Certificates". The Depositor does not
expect any Servicing Fee or Master Servicing Fee to constitute a retained
interest in the Mortgage Loans; nevertheless, any such expectation generally
will be a matter of uncertainty, and prospective purchasers are advised to
consult their own tax advisers with respect to the existence of a retained
interest and any effects on investment in Trust Fractional Certificates.
1. Application of Stripped Bond Rules
Each Trust Fund will consist of an interest in each of the Mortgage Loans
(and Government Securities or Private Label Custody Receipt Securities, if
applicable) relating thereto, exclusive of the Depositor's Retained Yield, if
any. With respect to each Series of Certificates for which they are identified
as counsel to the Depositor in the applicable Prospectus Supplement, Sidley
will advise the Depositor that, in their opinion, any Retained Yield will be
treated for federal income tax purposes as an ownership interest retained by
the Depositor in a portion of each interest payment on the underlying Mortgage
Loans. The sale of the Trust Certificates associated with any Trust Fund for
which there is a class of Trust Interest Certificates or two or more Classes
of Trust Fractional Certificates bearing different interest rates or of Trust
Certificates identified in the Prospectus Supplement as representing interests
in Stripped Mortgage Loans (and Stripped Government Securities or Stripped
Private Label Custody Receipt Securities, if applicable) (subject to certain
exceptions which, if
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applicable, will be stated in the applicable Prospectus Supplement) will be
treated for federal income tax purposes as having effected a separation in
ownership between the principal of each Mortgage Loan (or Government Security
or Private Label Custody Receipt Security, if applicable) and some or all of
the interest payable thereon. As a consequence, each Stripped Mortgage Loan,
Stripped Government Security or Stripped Private Label Custody Receipt
Security will become subject to the "stripped bond" rules of the Code (the
"Stripped Bond Rules"). The effect of applying those rules will generally be
to require each Trust Fractional Certificateholder to accrue and report income
attributable to its share of the principal and interest on each of the
Stripped Mortgage Loans (and Stripped Government Securities or Stripped
Private Label Custody Receipt Securities, if applicable) as original issue
discount on the basis of the yield to maturity of such Stripped Mortgage Loans
(or Stripped Government Securities or Stripped Private Label Custody Receipt
Securities, if applicable), as determined in accordance with the provisions of
the Code dealing with original issue discount. For a description of the
general method of calculating original issue discount, see "REMIC Trust Funds-
Taxation of Owners of REMIC Regular Certificates-Original Issue Discount". The
yield to maturity of a Trust Fractional Certificateholder's interest in the
Stripped Mortgage Loans, Stripped Government Securities or Stripped Private
Label Custody Receipt Securities will be calculated taking account of the
price at which the holder purchased the Certificate and the holder's share of
the payments of principal and interest to be made thereon. Although the
provisions of the Code and the OID Regulations do not directly address the
treatment of instruments similar to Trust Fractional Certificates, in
reporting to Trust Fractional Certificateholders the Trustee intends to treat
such Certificates as a single obligation with payments corresponding to the
aggregate of the payments allocable thereto from each of the Mortgage Loans
(and Government Securities or Private Label Custody Receipt Securities, if
applicable), and to determine the amount of original issue discount on such
certificates accordingly. See "Aggregate Reporting".
Under Treasury regulations, original issue discount so determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as
market discount. See "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". Those regulations also provide that
original issue discount so determined with respect to a particular Stripped
Mortgage Loan will be treated as market discount if the rate of interest on
the Stripped Mortgage Loan, including a reasonable Servicing Fee, is no more
than one percentage point less than the unstripped rate of interest. See "--
Market Discount and Premium". The Trustee intends to apply the foregoing de
minimis and market discount rules on an aggregate poolwide basis, although it
is possible that investors may be required to apply them on a loan by loan
basis. The loan by loan information required for such application of those
rules may not be available. See "Aggregate Reporting".
Subsequent purchasers of the Certificates may be required to include
"original issue discount" in income in an amount computed using the price at
which such subsequent purchaser purchased the Certificate. Further, such
purchasers may be required to determine if the above described de minimis and
market discount rules apply at the time a Trust Fractional Certificate is
acquired, based on the characteristics of the Mortgage Loans at that time.
Variable Rate Certificates. Purchasers of Trust Fractional Certificates
bearing a variable rate of interest should be aware that there is considerable
uncertainty concerning the application of the OID Regulations to Mortgage
Loans bearing a variable rate of interest. Although such regulations are
subject to a different interpretation, as discussed below, in the absence of
other contrary authority in preparing reports furnished to Certificateholders
the Trustee intends to treat Stripped Mortgage Loans bearing a variable rate
of interest (other than those treated as having market discount pursuant to
the regulations described above) as subject to the provisions therein
governing variable rate debt instruments. The effect of the application of
such provisions generally will be to cause Certificateholders holding Trust
Fractional Certificates bearing interest at a Single Variable Rate or at a
Multiple Variable Rate (as defined above under "REMIC Trust Funds--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount") to accrue
original issue discount and interest as though the value of each variable rate
were a fixed rate, which is (a) for each qualified floating rate, the value of
each such rate as of the Closing Date (with appropriate adjustment for any
differences in intervals between
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interest adjustment dates), (b) for a qualified inverse floating rate, the
value of the rate as of Closing Date, and (c) for any other objective rate,
the fixed rate that reflects the yield that is reasonably expected for the
Trust Fractional Certificate. If the interest paid or accrued with respect to
such Variable Rate Trust Fractional Certificate during an accrual period
differs from the assumed fixed interest rate, such difference will be an
adjustment (to interest or original issue discount, as applicable) to the
Certificateholder's taxable income for the taxable period or periods to which
such difference relates.
Prospective purchasers of Trust Fractional Certificates bearing a variable
rate of interest should be aware that the provisions in the OID Regulations
applicable to variable rate debt instruments may not apply to certain
adjustable and variable rate mortgage loans, possibly including the Mortgage
Loans, or to Stripped Certificates representing interests in such Mortgage
Loans. If variable rate Trust Fractional Certificates are not governed by the
provisions of the OID Regulations applicable to variable rate debt
instruments, such Certificates may be subject to the provisions of the 1996
Contingent Debt Regulations. The application of those provisions to
instruments such as the Trust Fractional Certificates is subject to differing
interpretations. Prospective purchasers of variable rate Trust Fractional
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting information relating
to original issue discount to Certificateholders to provide such information
on an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount on
a mortgage loan by mortgage loan, or security by security, basis (or on the
basis of the rights to individual payments) taking account of an allocation of
their basis in the Certificates among the interests in the various mortgage
loans (and Government Securities or Private Label Custody Receipt Securities,
if applicable) represented by such Certificates according to their respective
fair market values. Investors should be aware that it may not be possible to
reconstruct after the fact sufficient mortgage by mortgage (or security by
security) information should a computation on that basis be required by the
IRS.
Because the treatment of the Certificates under the OID Regulations is both
complicated and uncertain, Certificateholders should consult their tax
advisers to determine the proper method of reporting amounts received or
accrued on Certificates.
Certificates representing an interest in REFCO Strips and Treasury Strips
will be treated in the same manner as Certificates representing an interest in
Stripped Government Securities.
2. Treatment of Unstripped Certificates.
Mortgage Loans (and Government Securities or Private Label Custody Receipt
Securities, if applicable) in a Trust Fund for which there is neither any
Class of Trust Interest Certificates, nor more than one Class of Trust
Fractional Certificates, nor any Retained Yield otherwise identified in the
Prospectus Supplement as being unstripped mortgage loans, unstripped
government securities or unstripped private label custody receipt securities
("Unstripped Mortgage Loans", "Unstripped Government Securities" or
"Unstripped Private Label Custody Receipt Securities") will be treated as
wholly owned by the Trust Fractional Certificateholders of a Trust Fund. Trust
Fractional Certificateholders using the cash method of accounting must take
into account their pro rata shares of original issue discount as it accrues
and qualified stated interest (as described in "REMIC Trust Funds--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount") from
Unstripped Mortgage Loans as and when collected by the Trustee. Trust
Fractional Certificateholders using an accrual method of accounting must take
into account their pro rata shares of qualified stated interest from
Unstripped Mortgage Loans (and Unstripped Government Securities or Unstripped
Private Label Custody Receipt Securities, if applicable) as it accrues or is
received by the Trustee, whichever is earlier.
Code Sections 1272 through 1275 provide rules for the current inclusion in
income of original issue discount on obligations issued by natural persons on
or after March 2, 1984. Generally those sections provide that original issue
discount should be included on the basis of a constant yield to maturity.
However, the application of the
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original issue discount rules to mortgages is unclear in certain respects. The
Treasury Department has issued the OID Regulations relating to original issue
discount, which generally address the treatment of mortgages issued on or
after April 4, 1994. The OID Regulations provide a new de minimis rule for
determining whether certain self-amortizing installment obligations, such as
the Mortgage Loans, are to be treated as having original issue discount. Such
obligations would have original issue discount if the points charged at
origination (or other loan discount) exceeded the greater of one-sixth of one
percent times the number of full years to final maturity or one-fourth of one
percent times weighted average maturity. The OID Regulations treat certain
variable rate mortgage loans as having original issue discount because of an
initial rate of interest that differs from that determined by the mechanism
for setting the interest rate during the remainder of the loan, or because of
the use of an index that does not vary in a manner approved the OID
Regulations. For a description of the general method of calculating the amount
of original issue discount see "REMIC Trust Funds--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" and "Application of Stripped
Bond Rules--Variable Rate Certificates".
A subsequent purchaser of a Trust Fractional Certificate that purchases such
Certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the Unstripped Mortgage Loans (and
Unstripped Government Securities or Unstripped Private Label Custody Receipt
Securities, if applicable) will also be required to include in gross income,
for each day on which it holds such Trust Fractional Certificate, its
allocable share of the daily portion of original issue discount with respect
to each Unstripped Mortgage Loan (and Unstripped Government Security or
Unstripped Private Label Custody Receipt Security, if applicable), but
reduced, if the cost of such subsequent purchaser's interest in such
Unstripped Mortgage Loan (and Unstripped Government Security or Unstripped
Private Label Custody Receipt Security, if applicable) exceeds its "adjusted
issue price", by an amount equal to the product of (i) such daily portion and
(ii) a constant fraction whose numerator is such excess and whose denominator
is the sum of the daily portions of original issue discount allocable to such
subsequent purchaser's interest for all days on or after the day of purchase.
The adjusted issue price of an Unstripped Mortgage Loan (or Unstripped
Government Security, if applicable) on any given day is equal to the sum of
the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such Unstripped Mortgage Loan (or Unstripped Government
Security or Unstripped Private Label Custody Receipt Security, if applicable)
at the beginning of the accrual period during which such day occurs and the
daily portions of original issue discount for all days during such accrual
period prior to such day, reduced by the aggregate amount of payments made
during such accrual period prior to such day other than payments of qualified
stated interest.
3. Market Discount and Premium
In general, if the Stripped Bond Rules do not apply to a Trust Fractional
Certificate, a purchaser of a Trust Fractional Certificate will be treated as
acquiring market discount bonds to the extent that the share of such
purchaser's purchase price allocable to any Unstripped Mortgage Loan (and
Unstripped Government Security or Unstripped Private Label Custody Receipt
Security, if applicable) is less than its allocable share of the "adjusted
issue price" of such Mortgage Loan (or Government Security or Unstripped
Private Label Custody Receipt Security). See "Treatment of Unstripped
Certificates" and "Application of Stripped Bond Rules". Thus, with respect to
such Mortgage Loans (or Government Securities or Private Label Custody Receipt
Securities), a holder will be required, under Code Section 1276, to include as
ordinary income the previously unrecognized accrued market discount in an
amount not exceeding each principal payment on any such Mortgage Loans (or
Government Securities or Private Label Custody Receipt Securities) at the time
each principal payment is received or due, in accordance with the purchaser's
method of accounting, or upon a sale or other disposition of the Certificate.
In general, the amount of market discount that has accrued is determined on a
ratable basis. A Trust Fractional Certificateholder may, however, elect to
determine the amount of accrued market discount on a constant yield to
maturity basis. This election is made on a bond-by-bond basis and is
irrevocable. In addition, the description of the market discount rules in
"Taxation of Owners of REMIC Regular Certificates--Market Discount and
Premium" with respect to (i) conversion to ordinary income of a portion of any
gain recognized on sale or exchange of a market discount bond, (ii) deferral
of interest expense deductions, (iii) the de minimis
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exception from the market discount rules and (iv) the elections to include in
income either market discount or all interest, discount and premium as they
accrue, is also generally applicable to Trust Fractional Certificates.
Treasury regulations implementing the market discount rules, including the
1986 Act amendments thereto, have not yet been issued and investors therefore
should consult their own tax advisers regarding the application of these
rules.
If a Trust Fractional Certificate is purchased at a premium, under existing
law such premium must be allocated to each of the Mortgage Loans (on the basis
of its relative fair market value). The portion of any premium allocated to
Unstripped Mortgage Loans originated after September 27, 1985 can be amortized
and deducted under the provisions of the Code relating to amortizable bond
premium. The portion of such premium allocated to Unstripped Mortgage Loans
originated on or before September 27, 1985 may only be deducted upon the sale
or final distribution in respect of any such Mortgage Loan, as the special
rules of the Code that permit the amortization of such premium apply in the
case of debt instruments other than corporate and governmental obligations,
only to obligations issued after that date. Upon such a sale or final
distribution in respect of such a Mortgage Loan, the premium, if any,
allocable thereto would be recognized as a short-term or long-term capital
loss by a Certificateholder holding the interests in Mortgage Loans
represented by such Certificate as capital assets, depending on how long the
Certificate had been held.
The application of the Stripped Bond Rules to Stripped Mortgage Loans (and
Stripped Government Securities or Stripped Private Label Custody Receipt
Securities, if applicable) will generally cause any premium allocable to
Stripped Mortgage Loans to be amortized automatically by adjusting the rate of
accrual of interest and discount to take account of the allocable portion of
the actual purchase price of the Certificate. In that event, no additional
deduction for the amortization of premium would be allowed. It is possible
that the IRS may take the position that the application of the Stripped Bond
Rules to the Stripped Mortgage Loans should be adjusted so as not to take
account of any premium allocable to a Stripped Mortgage Loan originated on or
before September 27, 1985. Any such premium would then be subject to the
provisions of the Code relating to the amortization of bond premium, including
the limitations described in the preceding paragraph on the amortization of
premium allocable to Mortgage Loans originated on or before September 27,
1985.
On December 31, 1997, the IRS issued final regulations (the "Premium
Regulations") on the amortization of bond premium. The Premium Regulations
describe the constant yield method under which such premium is amortized and
provide that the resulting offset to interest income can be taken into account
only as a Certificateholder takes the corresponding interest income into
account under such holder's regular accounting method. In the case of
instruments that may be called or repaid prior to maturity, the Premium
Regulations provide that the premium is calculated by assuming that the issuer
will exercise or not exercise its redemption rights in the manner that
maximizes the Certificateholder's yield and the Certificateholder will
exercise or not exercise its option in a manner that maximizes the
Certificateholder's Yield. The Premium Regulations are effective for debt
instruments acquired on or after the date 60 days after the date final
regulations were published in the Federal Register. However, if a
Certificateholder elects to amortize bond premium for the taxable year
containing such effective date, the Premium Regulations would apply to all the
Certificateholder's debt instruments held on or after the first day of that
taxable year.
4. Allocation of Purchase Price
As noted above, it is anticipated that a purchaser of a Trust Fractional
Certificate relating to Unstripped Mortgage Loans (or Unstripped Government
Securities or Unstripped Private Label Custody Receipt Securities, if
applicable) will be required to allocate the purchase price thereof to the
undivided interest it acquires in each of the Mortgage Loans (or Government
Securities or Unstripped Private Label Custody Receipt Securities, if
applicable), in proportion to the respective fair market values of the
portions of such Mortgage Loans (or Government Securities or Unstripped
Private Label Custody Receipt Securities, if applicable) included in the Trust
Fund at the time the Certificate is purchased. In the case of Mortgage Loans,
the Depositor believes that it
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may be reasonable to make such allocation in proportion to the respective
principal balances of the Mortgage Loans, where the interests in the Mortgage
Loans represented by a Trust Fractional Certificate have a common remittance
rate and other common characteristics, and otherwise so as to produce a common
yield for each interest in a Mortgage Loan, provided the Mortgage Loans are
not so diverse as to evoke differing prepayment expectations. However, if
there is any significant variation in interest rates among the Mortgage Loans,
a disproportionate allocation of the purchase price taking account of
prepayment expectations may be required.
D. Taxation of Owners of Trust Interest Certificates
With respect to each Series of Certificates for which they are identified as
counsel to the Depositor in the applicable Prospectus Supplement, Sidley will
advise the Depositor that, in their opinion, each holder of a Trust Interest
Certificate (a "Trust Interest Certificateholder") will be treated as the
owner of an undivided interest in the interest portion ("Interest Coupon") of
each of the Mortgage Loans (and Government Securities or Private Label Custody
Receipt Securities, if applicable). Accordingly, and subject to the discussion
under "Application of Stripped Bond Rules" below, each Trust Interest
Certificateholder is treated as owning its allocable share of the entire
Interest Coupon from the Mortgage Loans (and Government Securities or Private
Label Custody Receipt Securities, if applicable), will report income as
described below, and may deduct its allocable share of the servicing and
related fees and expenses paid to or retained by the Depositor at the same
time and in the same manner as such items would have been reported under the
Trust Interest Certificateholder's tax accounting method had it held directly
an interest in the Interest Coupon from the Mortgage Loans (or in the interest
payments from the Government Securities or Private Label Custody Receipt
Securities, if applicable), received directly its share of the amounts
received with respect to the Mortgage Loans (and Government Securities or
Private Label Custody Receipt Securities, if applicable) and paid directly its
share of the servicing and related fees and expenses. An individual, estate or
trust holder of a Trust Interest Certificate will be allowed a deduction for
servicing fees in determining its regular tax liability only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of adjusted gross income, and will be allowed no deduction for
such fees in determining its liability for alternative minimum tax. Amounts,
if any, received by Trust Interest Certificateholders in lieu of amounts due
with respect to any Mortgage Loan but not received by the Master Servicer from
the Mortgagor will be treated for federal income tax purposes as having the
same character as the payment which they replace.
1. Application of Stripped Bond Rules
A Trust Interest Certificate will consist of an undivided interest in the
Interest Coupon of each of the Mortgage Loans (and in the interest payments
from each Government Security or Private Label Custody Receipt Security, if
applicable). With respect to each Series of Certificates for which they are
identified as counsel to the Depositor in the applicable Prospectus
Supplement, Sidley will advise the Depositor that, in their opinion a Trust
Interest Certificate will be treated for federal income tax purposes as
comprised of an ownership interest in a portion of the Interest Coupon of each
of the Mortgage Loans (and in the interest payments from each Government
Security or Private Label Custody Receipt Security, if applicable) (a
"Stripped Interest") separated by the Depositor from the right to receive
principal payments and the remainder, if any, of each interest payment on the
underlying Mortgage Loan. As a consequence, the Trust Interest Certificates
will become subject to the Stripped Bond Rules. Each Trust Interest
Certificateholder will be required to apply the Stripped Bond Rules to its
interest in the Interest Coupon (and the interest payments from Government
Securities or Private Label Custody Receipt Securities, if applicable) under
the method prescribed by the Code, taking account of the price at which the
holder purchased the Trust Interest Certificate and the Trust Interest
Certificateholder's share of the scheduled payments to be made thereon. The
Stripped Bond Rules generally require a holder of Stripped Coupons to accrue
and report income from such Stripped Coupons daily on the basis of the yield
to maturity of such stripped bonds or coupons, as determined in accordance
with the provisions of the Code dealing with original issue discount. For a
discussion of the general method of calculating the amount of original issue
discount, see "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". The provisions of the Code and the OID
Regulations do not directly address the treatment of instruments similar to
Trust Interest Certificates. In reporting to Trust Interest Certificateholders
such Certificates
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will be treated as a single obligation with payments corresponding to the
aggregate of the payments allocable thereto from each of the Mortgage Loans
(and Government Securities or Private Label Custody Receipt Securities, if
applicable). See "Aggregate Reporting". Alternatively, Trust Interest
Certificateholders may be required by the IRS to treat their interests in each
scheduled payment on each Stripped Interest (or their interests in all
scheduled payments from each of the Stripped Interests) as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
The tax treatment of the Trust Interest Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Trust Interest Certificate
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect
to a Trust Interest Certificate must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with a constant yield
method that takes into account the compounding of interest and such accrual of
income may be in advance of the receipt of any cash attributable to such
income. In general, the rules for accruing original issue discount set forth
above in "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" apply. See "Prepayments" below. For
purposes of applying the original issue discount provisions of the Code, the
issue price used in reporting original issue discount with respect to a Trust
Interest Certificate will be the purchase price paid by each holder thereof
and the stated redemption price at maturity may include the aggregate amount
of all payments to be made with respect to the Trust Interest Certificate
whether or not denominated as interest. The amount of original issue discount
with respect to a Trust Interest Certificate may be treated as zero under the
original issue discount de minimis rules described above.
Aggregate Reporting. The Trustee intends in reporting information relating
to original issue discount to Certificateholders to provide such information
on an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount
either on a mortgage loan by mortgage loan (or security by security) basis or
on a payment by payment basis taking account of an allocation of their basis
in the Certificates among the interests in the various mortgage loans (and
Government Securities or Private Label Custody Receipt Securities, if
applicable) represented by such Certificates according to their respective
fair market values. The effect of an aggregate computation for the inclusion
of original issue discount in income may be to defer the recognition of losses
due to early prepayments relative to a computation on a mortgage by mortgage
basis. Investors should be aware that it may not be possible to reconstruct
after the fact sufficient mortgage by mortgage information should a
computation on that basis be required by the IRS.
Because the treatment of the Trust Interest Certificates under current law,
and the potential application of the 1996 Contingent Debt Regulations are both
complicated and uncertain, Trust Interest Certificateholders should consult
their tax advisers to determine the proper method of reporting amounts
received or accrued on Trust Interest Certificates.
E. Prepayments
The Taxpayer Relief Act of 1997 (the "Act") contains a provision requiring
original issue discount on any pool of debt instruments the yield on which may
be affected by reason of prepayments be calculated taking into account a
prepayment assumption and requiring such discount to be taken into income on
the basis of a constant yield to assumed maturity taking account of actual
prepayments.
F. Sales of Trust Certificates
If a Certificate is sold, gain or loss will be recognized by the holder
thereof in an amount equal to the difference between the amount realized on
the sale and the Certificateholder's adjusted tax basis in the Certificate.
Such tax basis will equal the Certificateholder's cost for the Certificate,
increased by any original issue or market discount with respect to the
interest in the Mortgage Loans (and Government Securities or Private Label
Custody Receipt Securities, if applicable) represented by such Certificate
previously included in income, and decreased by any deduction previously
allowed for premium and by the amount of payments, other than
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payments of qualified stated interest, previously received with respect to
such Certificate. The portion of any such gain attributable to accrued market
discount not previously included in income will be ordinary income, as will
gain attributable to a Certificate which is part of a "conversion transaction"
or which the holder elects to treat as ordinary. See "REMIC Trust Funds--Sales
of REMIC Certificates" above. Any remaining gain or any loss will be capital
gain or loss if the Certificate was held as a capital asset except to the
extent that section 582(c) of the Code applies to such gain or loss.
G. Trust Reporting
The Master Servicer will furnish to each holder of a Trust Fractional
Certificate with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and
to interest thereon at the Pass-Through Rate. In addition, the Master Servicer
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Trust Certificate who was such a holder at any time during
such year, information regarding the amount of servicing compensation received
by the Master Servicer and Subordinated Lenders-Servicer (if any) and such
other customary factual information as the Master Servicer deems necessary or
desirable to enable holders of Trust Certificates to prepare their tax
returns.
H. Back-up Withholding
In general, the rules described in "REMIC Trust Funds--Back-up Withholding"
will also apply to Trust Certificates.
I. Foreign Certificateholders
Payments in respect of interest or original issue discount (including
amounts attributable to servicing fees) on the Mortgage Loans (and Government
Securities or Private Label Custody Receipt Securities, if applicable) to a
Certificateholder who is not a citizen or resident of the United States, a
corporation or other entity organized in or under the laws of the United
States or of any State thereof (including the District of Columbia), or a
United States estate or trust, will not generally be subject to 30% United
States withholding tax, provided that such Certificateholder (i) does not own,
directly or indirectly, 10% of more of, and is not a controlled foreign
corporation (within the meaning of Section 957 of the Code) related to, each
of the issuers of the Mortgages and (ii) provides required certification as to
its non-United States status under penalty of perjury and then will be free of
such tax only to the extent that the underlying Mortgages (and Government
Securities or Private Label Custody Receipt Securities, if applicable) were
issued after July 18, 1984. This withholding tax may be reduced or eliminated
by an applicable tax treaty. Notwithstanding the foregoing, if any such
payments are effectively connected with a United States trade or business
conducted by the Certificateholder, they will be subject to regular United
States income tax and, in the case of a corporation, to a possible branch
profits tax, but will ordinarily be exempt from United States withholding tax
provided that applicable documentation requirements are met.
Holders of Trust Certificates should be aware that final Treasury
Regulations were issued on October 6, 1997 which affect the United States
taxation of foreign investors in Trust Certificates. For further discussion of
those proposed regulations, see "II. REMIC TRUST FUNDS- L. Foreign Investors
in REMIC Certificates" above.
J. State and Local Taxation
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition
of the Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisers with respect to the various state tax
consequences of an investment in the Certificates.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA
("ERISA Plans") and on those persons who are ERISA fiduciaries with respect to
the assets of such ERISA Plans. In accordance with the general fiduciary
standards of ERISA, an ERISA Plan fiduciary should consider whether an
investment in the Certificates is permitted by the documents and instruments
governing the Plan, consistent with the Plan's overall investment policy and
appropriate in view of the composition of its investment portfolio.
Employee benefit plans which are governmental plans and certain church plans
(if no election has been made under Section 410(d) of the Code) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Certificates subject to the provisions of applicable federal
and state law and, in the case of any such plan which is qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of
the Code, the restrictions imposed under Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA and Section 4975
of the Code prohibit a broad range of transactions involving assets of ERISA
Plans and other plans subject to Section 4975 of the Code (together with ERISA
Plans, "Plans") and certain persons ("Parties in Interest") who have certain
specified relationships to the Plans and taxes and/or imposes other penalties
on any such transaction under ERISA and/or Section 4975 of the Code, unless an
exemption applies. If the assets of a Trust Fund are treated for ERISA
purposes as the assets of the Plans that purchase or hold Certificates of the
applicable Series, an investment in Certificates of that Series by or with
"plan assets" of a Plan might constitute or give rise to a prohibited
transaction under ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption applies. Violation of the prohibited transaction
rules could result in the imposition of excise taxes and/or other penalties
under ERISA and/or Section 4975 of the Code.
PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a final regulation
(the "Regulation") under which assets of an entity in which a Plan makes an
equity investment will be treated as assets of the investing Plan in certain
circumstances. Unless the Regulation provides an exemption from this "plan
asset" treatment, and if such an exemption is not otherwise available under
ERISA, an undivided portion of the assets of a Trust Fund will be treated, for
purposes of applying the fiduciary standards and prohibited transaction rules
of ERISA and Section 4975 of the Code, as an asset of each Plan which becomes
a Certificateholder of the applicable Series.
The Regulation provides an exemption from "plan asset" treatment for
securities issued by an entity if, immediately after the most recent
acquisition of any equity interest in the entity, less than 25% of the value
of each class of equity interests in the entity, excluding interests held by a
person who has discretionary authority or control with respect to the assets
of the entity (or any affiliate of such a person), are held by "benefit plan
investors" (e.g., Plans, governmental and other benefit plans not subject to
ERISA and entities holding assets deemed to be "plan assets"). Because the
availability of this exemption to any Trust Fund depends upon the identity of
the Certificateholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Certificates will qualify for this
exemption.
PROHIBITED TRANSACTION CLASS EXEMPTIONS
Prohibited Transaction Class Exemption 83-1 (Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts) ("PTCE 83-1") permits,
subject to certain conditions, certain transactions involving the creation,
maintenance and termination of certain residential mortgage pools and the
acquisition and holding of certain residential mortgage pool pass-through
certificates by Plans, regardless of whether (a) the mortgage pool is exempt
from "plan asset" treatment or (b) the transactions would otherwise be
prohibited under ERISA or Section 4975 of the Code. A Series of Certificates
will be an "Exempt Series" if the general
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<PAGE>
conditions (described below) of PTCE 83-1 are satisfied, and if the applicable
Series of Certificates evidences ownership interests in Trust Assets which do
not include Mortgage Certificates, Cooperative Loans, Mortgage Loans secured
by cooperative buildings, Mortgage Loans secured by Multifamily Property, or
Contracts (collectively "Nonexempt Assets"). An investment by a Plan in
Certificates of an Exempt Series (1) will be exempt from the prohibitions of
Section 406(a) of ERISA (relating generally to Plan transactions involving
Parties in Interest who are not fiduciaries) if the Plan purchases the
Certificates at no more than fair market value and the rights and interests
evidenced by such Certificates are not subordinated to the rights and
interests evidenced by other Certificates of the Trust, and (2) will be exempt
from the prohibitions of Sections 406(b) (1) and (2) of ERISA (relating
generally to Plan transactions with fiduciaries) if, in addition, (i) the
purchase is approved by an independent fiduciary, (ii) the Plan pays no more
for the Certificates than would be paid in an arm's length transaction with an
unrelated party, (iii) no sales commission or other fee is paid to the
Depositor as Mortgage Pool sponsor, (iv) the Plan does not purchase more than
25% of the Certificates of that Series and (v) at least 50% of the
Certificates of that Series is purchased by persons independent of the
Depositor, the Trustee and the Insurer, as applicable. It does not appear that
PTCE 83-1 applies to a Series of Certificates with respect to which the Trust
Assets include Nonexempt Assets (a "Nonexempt Series"). See "The Trust Fund--
The Mortgage Pools" and "--The Contract Pools". Accordingly, it appears that
PTCE 83-1 will not exempt Plans that acquire Certificates of a Nonexempt
Series from the prohibited transaction rules of ERISA and Section 4975 of the
Code. The applicable Prospectus Supplement will state whether a Series of
Certificates is an Exempt Series or a Nonexempt Series.
PTCE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption: (1) the existence of a pool trustee
who is not an affiliate of the pool sponsor; (2) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against
reductions in pass-through payment due to property damage or defaults in loan
payments; and (3) a limitation on the amount of the payment retained by the
pool sponsor, together with other benefits inuring to it, to not more than
adequate consideration for selling the mortgage loans and reasonable
compensation for services provided by the pool sponsor to the mortgage pool.
The Trustee for all Series will be unaffiliated with the Depositor, and,
accordingly, the first general condition will be satisfied. With respect to
the second general condition of PTCE 83-1, the credit support method
represented by the issuance of a Subordinated Class or Subclasses of
Certificates and/or the establishment of a Reserve Fund, with respect to any
Exempt Series for which such a method of Credit Support is provided (see
"Credit Support--Subordinated Certificates" and "--Reserve Fund"), is
substantially similar to a system for protecting Certificateholders against
reductions in pass-through payments which has been reviewed and accepted by
the DOL as an alternative to pool insurance or a letter of credit
indemnification system. This may support a Plan fiduciary's conclusion that
the second general condition is satisfied with respect to any such Exempt
Series although, in the absence of a ruling to this effect, there can be no
assurance that these features will be so viewed by the DOL. In addition, the
Depositor intends to use its best efforts to establish, for each Exempt Series
for which credit support is provided by a Letter of Credit (see "Credit
Support--Letters of Credit") and/or the insurance arrangements set forth above
under "Description of Insurance" (an "Insured Series"), a system that will
adequately protect the Mortgage Pools and indemnify Certificateholders of the
applicable Series against pass-through payment reductions resulting from
property damage or defaults in loan payments. With respect to the third
general condition of PTCE 83-1, the Depositor intends to use its best efforts
to establish a compensation system which will produce for the Depositor total
compensation that will not exceed adequate consideration for forming the
Mortgage Pool and selling the Certificates. However, the Depositor does not
guarantee that its systems will be sufficient to meet the second and third
general conditions (described above) with respect to any Exempt Series.
If an Exempt Series of Certificates is subdivided into two or more Classes
or Subclasses which are entitled to disproportionate allocations of the
principal and interest payments on the Mortgage Loans held by the applicable
Trust Fund, the availability of the exemption afforded by PTCE 83-1 may be
adversely affected, as described in the applicable Prospectus Supplement.
Moreover, if the Certificateholders of any Class or Subclass
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<PAGE>
of Certificates are entitled to pass-through payment of principal (but no or
only nominal interest) or interest (but no or only nominal principal), it
appears that PTCE 83-1 will not exempt Plans which acquire Certificates of
that Class or Subclass from the prohibited transaction rules of ERISA and
Section 4975 of the Code.
If an Exempt Series of Certificates includes a Class of Subordinated
Certificates, PTCE 83-1 will not provide an exemption from the prohibited
transaction rules of ERISA and Section 4975 of the Code for Plans that acquire
such Subordinated Certificates.
If for any reason PTCE 83-1 does not provide an exemption for a particular
Plan Certificateholder, one of five other prohibited transaction class
exemptions issued by the DOL might apply, i.e., PTCE 96-23 (Class Exemption
for Plan Asset Transactions Determined by In-House Asset Managers), PTCE 95-60
(Class Exemption for Certain Transactions Involving Insurance Company General
Accounts), PTCE 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds), PTCE 90-1 (Class Exemption for Certain
Transactions Involving Insurance Company Pooled Separate Accounts), PTCE 90-1
(Class Exemption for Certain Transactions Involving Insurance Company Pooled
Separate Accounts) or PTCE 84-14 (Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers). There can be
no assurance that any of these class exemptions will apply with respect to any
particular Plan Certificateholder or, even if it were to apply, that the
exemption would apply to all transactions involving the applicable Trust Fund.
Any person who is a fiduciary by reason of his or her authority to invest
"plan assets" of any Plan (a "Plan Investor") and who is considering the use
of "plan assets" of any Plan to purchase the offered Certificates should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investments, and should determine on its own whether PTCE
83-1 or another exemption would be applicable (and whether all conditions have
been satisfied with respect to any such exemptions), and whether the offered
Certificates are an appropriate investment for a Plan. Moreover, each Plan
fiduciary should determine whether, under the general fiduciary standards of
investment prudence and diversification, an investment in the offered
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
UNDERWRITER'S PTE
Credit Suisse First Boston Corporation ("First Boston") is the recipient of
a final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989),
as amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21, 1997) (the
"Underwriter's PTE" or "Credit Suisse First Boston Corporation's PTE" if
specified in the applicable Prospectus Supplement), which may accord
protection from violations under Sections 406 and 407 of ERISA and Section
4975 of the Code for Plans that acquire Certificates. The Underwriter's PTE
applies to certificates (a) which represent (1) a beneficial ownership
interest in the assets of a trust and entitle the holder to pass-through
payments of principal, interest and/or other payments made with respect to the
assets of the trust, or (2) an interest in a REMIC if the certificates are
issued by and are obligations of a trust; and (b) with respect to which First
Boston or any of its affiliates is either the sole underwriter, the manager or
co-manager of the underwriting syndicate or a selling or placement agent. The
corpus of a trust to which the Underwriter's PTE applies may consist of (i)
obligations which bear interest or are purchased at a discount and which are
secured by (A) single-family residential, multifamily residential or
commercial real property (including obligations secured by leasehold interests
on such real property) or (B) shares issued by a cooperative housing
association; and (ii) "guaranteed governmental mortgage pool certificates" (as
defined in the Regulation).
Plans acquiring Certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Trust Assets have been included in
other investment pools ("Other Pools");
(b) certificates evidencing interests in Other Pools have been both (1)
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff & Phelps
Inc. or Fitch IBCA, Inc. and (2) purchased by investors other than Plans,
for at least one year prior to a Plan's acquisition of Certificates in
reliance upon the Underwriter's PTE;
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<PAGE>
(c) at the time of such acquisition, the Class of Certificates acquired
by the Plan has received a rating in one of the rating categories referred
to in condition (b) above;
(d) the Trustee is not an affiliate of any member of the Restricted Group
(as defined below);
(e) the applicable Series of Certificates evidences ownership in Trust
Assets which may include non-Subordinated Mortgage Certificates (whether or
not interest and principal payable with respect to the Mortgage
Certificates are guaranteed by the GNMA, FHLMC or FNMA) or Contracts;
(f) the Class of Certificates acquired by the Plan are not subordinated
to other Classes of Certificates of that Series with respect to the right
to receive payment in the event of defaults or delinquencies on the
underlying Trust Assets;
(g) the Plan is an "accredited investor" (as defined in Rule 501(a)(1) of
Regulation D under the Securities Act);
(h) the acquisition of the Certificates by a Plan is on terms (including
the price for the Certificates) that are at least as favorable to the Plan
as they would be in an arm's length transaction with an unrelated party;
and
(i) the sum of all payments made to and retained by the Underwriter or
members of any underwriting syndicate in connection with the distribution
of the Certificates represents not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained
by the Seller pursuant to the sale of the Trust Assets to the Trust
represents not more than the fair market value of such Trust Assets; and
the sum of all payments made to and retained by the Master Servicer and all
Servicers represents not more than reasonable compensation for such
Servicers' services under the Pooling and Servicing Agreement and
reimbursement of such Servicers' reasonable expenses in connection
therewith.
In addition, the Underwriter's PTE will not apply to a Plan's investment in
Certificates if the Plan fiduciary responsible for the decision to invest in a
Class of Certificates is a Mortgagor or Obligor with respect to more than 5%
of the fair market value of the obligations constituting the Trust Assets or
an affiliate of such person, unless:
(1) in the case of an acquisition in connection with the initial issuance
of any Series of Certificates, at least 50% of each Class of Certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least 50% of the aggregate interest in the Trust is
acquired by persons independent of the Restricted Group;
(2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of
acquisition;
(3) immediately after such acquisition, no more than 25% of the Plan
assets with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in certificates
evidencing interest in trusts sponsored or containing assets sold or
serviced by the same entity; and
(4) the Plan is not sponsored by the Depositor, any Underwriter, the
Trustee, any Servicer, any Pool, Special Hazard or Primary Mortgage Insurer
or the obligor under any other credit support mechanism, a Mortgagor or
Obligor with respect to obligations constituting more than 5% of the
aggregate unamortized principal balance of the Trust Assets on the date of
the initial issuance of Certificates, or any of their affiliates (the
"Restricted Group").
Each Series of Certificates generally is expected to satisfy condition (a).
If a Series includes a Class of Subordinated Certificates, that Class will not
satisfy condition (f). Additionally, the Prospectus permits the issuance of
Certificates rated in one of the four highest rating categories, so a
particular Class of a Series may not satisfy condition (c).
Whether the other conditions in the Underwriter's PTE will be satisfied as
to Certificates or any particular Class will depend upon the relevant facts
and circumstances existing at the time the Plan acquires Certificates of that
Class. Any Plan Investor who proposes to use "plan assets" of a Plan to
acquire Certificates in reliance
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<PAGE>
upon the Underwriter's PTE should determine whether the Plan satisfies all of
the applicable conditions and consult with its counsel regarding other factors
that may affect the applicability of the Underwriter's PTE.
GENERAL CONSIDERATIONS
Any member of the Restricted Group, a Mortgagor or Obligor, or any of their
affiliates might be considered or might become a Party in Interest with
respect to a Plan. In that event, the acquisition or holding of Certificates
of the applicable Series or Class by, on behalf of or with "plan assets" of
such Plan might be viewed as giving rise to a prohibited transaction under
ERISA and Section 4975 of the Code, unless PTCE 83-1, the Underwriter's PTE or
another exemption is available. Accordingly, before a Plan Investor makes the
investment decision to purchase, to commit to purchase or to hold Certificates
of any Series or Class, the Plan Investor should determine (a) whether the
second and third general conditions and the specific conditions (described
briefly above) of PTCE 83-1 have been satisfied; (b) whether the Underwriter's
PTE is applicable and adequate exemptive relief is available thereunder; (c)
whether any other prohibited transaction exemption (if required) is available
under ERISA and Section 4975 of the Code; or (d) whether an exemption from
"plan asset" treatment is available to the applicable Trust Fund. The Plan
Investor should also consult the ERISA discussion, if any, in the applicable
Prospectus Supplement for further information regarding the application of
ERISA to any Series or Class of Certificates.
Subordinated Certificates are not available for purchase by or with "plan
assets" of any Plan, other than an insurance company general account which
satisfies the conditions set forth in Sections I and III of PTCE 95-60 or a
governmental or church plan which is not subject to ERISA or Section 4975 of
the Code (as described above), and any acquisition of Subordinated
Certificates by, on behalf of or with "plan assets" of any such Plan will be
treated as null and void for all purposes.
INSURANCE COMPANY GENERAL ACCOUNTS
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
CERTIFICATES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH CERTIFICATES.
LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Certificates will
specify whether a Class or Subclass of such Certificates, as long as it is
rated in one of the two highest rating categories by one or more nationally
recognized statistical rating organizations, will constitute a "mortgage
related security" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Such Class or Subclass, if any, constituting a
"mortgage related security" will be a legal investment for persons, trusts,
corporations, partnerships, associations, business trusts and business
entities (including depository institutions, insurance companies, trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued
by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities.
Pursuant to SMMEA, a number of states enacted legislation, on or prior to
the October 3, 1991 cutoff for such enactments, limiting to varying extents
the ability of certain entities (in particular, insurance companies) to invest
in "mortgage related securities", in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Accordingly,
the investors affected by such legislation will be authorized to invest in
Certificates qualifying as "mortgage related securities" only to the extent
provided in such legislation.
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SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review NCUA Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, codified as 12 C.F.R. Section
703.5(f)-(k), which prohibit federal credit unions from investing in certain
mortgage related securities (including securities such as certain Series,
Classes or Subclasses of Certificates), except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992, as revised April 15, 1994 (the "Policy Statement") of
the Federal Financial Institutions Examination Council.
The Policy Statement which has been adopted by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, the
FDIC and the Office of Thrift Supervision and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain Series,
Classes or Subclasses of the Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain Series, Classes or Subclasses may be deemed
unsuitable investments, or may otherwise be restricted, under such rules,
policies or guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying", and, with regard to any
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities", no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase 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 Certificates) may adversely
affect the liquidity of the Certificates.
Investors should consult their own legal advisers in determining whether and
to what extent such Certificates constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Each Series of Certificates offered hereby and by means of the applicable
Prospectus Supplements may be sold directly by the Depositor or may be offered
through First Boston, an affiliate of the Depositor, or underwriting
syndicates represented by First Boston (the "Underwriters"). The Prospectus
Supplement with respect to each such Series of Certificates will set forth the
terms of the offering of such Series or Certificates and each Subclass within
such Series, including the name or names of the Underwriters, the proceeds to
the
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<PAGE>
Depositor, and either the initial public offering price, the discounts and
commissions to the Underwriters and any discounts or concessions allowed or
reallowed to certain dealers, or the method by which the price at which the
Underwriters will sell such Certificates will be determined.
Unless otherwise specified in the Prospectus Supplement, the Underwriters
will be obligated to purchase all of the Certificates of a Series described in
the Prospectus Supplement with respect to such Series if any such Certificates
are purchased. The Certificates may be acquired by the Underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
If so indicated in the Prospectus Supplement, the Depositor will authorize
Underwriters or other persons acting as the Depositor's agents to solicit
offers by certain institutions to purchase the Certificates from the Depositor
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Depositor. The obligation of any
purchaser under any such contract will be subject to the condition that the
purchase of the offered Certificates shall not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject. The Underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
The Depositor may also sell the Certificates offered hereby and by means of
the applicable Prospectus Supplements from time to time in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Depositor may effect such transactions by selling Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Certificates for whom they may act as agents.
The place and time of delivery for each Series of Certificates offered
hereby and by means of the applicable Prospectus Supplement will be set forth
in the Prospectus Supplement with respect to such Series.
If and to the extent required by applicable law or regulation, this
Prospectus and the Prospectus Supplement will also be used by First Boston
after the completion of the offering in connection with offers and sales
related to market-making transactions in the Certificates offered hereby in
which First Boston acts as principal. First Boston may also act as agent in
such transactions. Sales will be made at negotiated prices determined at the
time of sale.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters by Sidley &
Austin, New York, New York or Orrick, Herrington & Sutcliffe LLP, New York,
New York.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
1996 Contingent Debt Regulations.............................. 104
1997 Withholding Regulations.................................. 114
Accrual Distribution Amount................................... 49
Act........................................................... 123
Advances...................................................... 17
AFR........................................................... 108
Agreement..................................................... 46
Alternative Credit Support.................................... 12
Application of Stripped Bond Rules............................ 117
Approved Sale................................................. 84
APR........................................................... 31
ARM Loans..................................................... 23
Asset Value................................................... 47
Assets........................................................ 99
Buy-Down Fund................................................. 16, 24
Buy-Down Loans................................................ 24
Cede.......................................................... 22
Certificate Account........................................... 57
Certificate Principal Balance................................. 4
Certificateholders............................................ 22, 26
Certificates.................................................. 1,4
Class......................................................... 1,4
Cleanup Costs................................................. 93
Closed Loans.................................................. 27
Closing Date.................................................. 101
Code.......................................................... 17
Commission.................................................... 3
Contract Loan-to-Value Ratio.................................. 9
Contract Pool................................................. 2,5
Contract Schedule............................................. 52
Contracts..................................................... 2, 5, 20, 31
Converted Mortgage Loan....................................... 24
Cooperative................................................... 5
Cooperative Dwelling.......................................... 5
Cooperative Loans............................................. 5
Credit Suisse First Boston Corporation's PTE.................. 127
Cut-off Date.................................................. 22
Custodial Account............................................. 57
Custodial Agreement........................................... 31
Custodian..................................................... 31
Deferred Interest............................................. 24
Deficiency Event.............................................. 72
Definitive Certificates....................................... 22
Deleted Contract.............................................. 32
Deleted Government Securities................................. 55
Deleted Mortgage Certificates................................. 50
Deleted Mortgage Loans........................................ 52
Deleted Private Label Custody Receipt Securities.............. 55
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Deposit Trust Agreement....................................... 46
Depositor..................................................... 1
Determination Date............................................ 60
Discount Certificate.......................................... 11, 43
disqualified organizations.................................... 110
Distribution Date............................................. 6
DOL........................................................... 126
DTC........................................................... 22
Due Date...................................................... 23
Due Period.................................................... 49
Eligible Investments.......................................... 33
ERISA......................................................... 17, 125
ERISA Plans................................................... 125
Escrow Account................................................ 64
Excess Cash Flow.............................................. 49
Exchange Act.................................................. 3
Exempt Series................................................. 126
Fannie Mae.................................................... 35
Farm Credit Act............................................... 38
FCA........................................................... 38
FCBs.......................................................... 38
FFCB.......................................................... 35
FFEL.......................................................... 37
FHA........................................................... 2, 23, 25
FHA Experience................................................ 44
FHA Loans..................................................... 23
FHLB.......................................................... 35, 37
FHLMC Act..................................................... 36
FIRREA........................................................ 37
First Boston.................................................. 127
Fiscal Agent.................................................. 35
Freddie Mac................................................... 35
Funding Corporation........................................... 38
Garn-St Germain Act........................................... 92
Government Securities......................................... 10, 34
GPM Fund...................................................... 16, 25
GPM Loans..................................................... 24
GSE Bonds..................................................... 9, 34
GSE Issuer.................................................... 35
GSEs.......................................................... 9, 34
Initial Deposit............................................... 15
Insurance Proceeds............................................ 57
Insured....................................................... 66
Insured Series................................................ 126
Interest Component............................................ 40
Interest Coupon............................................... 122
Interest Distribution......................................... 48
Interest Rate................................................. 4
Interest Weighted Class....................................... 4
</TABLE>
133
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Interest Weighted Subclass.................................... 4
IRS........................................................... 100
L/C Bank...................................................... 12, 75
L/C Percentage................................................ 13, 75
Letter of Credit.............................................. 12
Liquidating Loan.............................................. 12
Liquidation Proceeds.......................................... 58
Loan-to Value Ratio........................................... 7
Loss.......................................................... 80
Manufactured Home............................................. 9
Mark to Market Regulations.................................... 110
Master Servicer............................................... 6
MBS........................................................... 36
Mortgage Certificates......................................... 2, 5, 30
Mortgage Loans................................................ 2, 5, 23
Mortgage Notes................................................ 23
Mortgage Pool................................................. 1, 5
Mortgage Rates................................................ 8
Mortgaged Property............................................ 7
Mortgagor..................................................... 8
Mortgagor Bankruptcy Bond..................................... 12
Multi-Class Certificates...................................... 4
Multifamily Property.......................................... 5
Multiple Variable Rate........................................ 103
Nonexempt Assets.............................................. 126
Nonexempt Series.............................................. 126
non-U.S. Person............................................... 113, 114
Non-REMIC Trust Fund.......................................... 18
Obligor....................................................... 42
OID Regulations............................................... 98
Original Value................................................ 7, 24
Originator.................................................... 27
Other Pools................................................... 128
Parties in Interest........................................... 125
Pass-Through Rate............................................. 8
Payment deficiencies.......................................... 76
Percentage Interest........................................... 1, 22
Performance Bond.............................................. 32
Plan Investor................................................. 127
Plans......................................................... 125
Policy Statement.............................................. 130
Pool Insurance Policy......................................... 12
Pool Insurer.................................................. 14
Pooling and Servicing Agreement............................... 26, 46
Premium Certificate........................................... 11, 43
Premium Regulations........................................... 105
Prepayment Assumption......................................... 100
Pre-Funding Account........................................... 10, 33
Pre-Funded Amount............................................. 10, 33
</TABLE>
134
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Pre-Funding Period............................................ 10, 33
Primary Insurer............................................... 58
Primary Mortgage Insurance Policy............................. 13
Primary Mortgage Insurer...................................... 66
Principal Component........................................... 40
Principal Distribution........................................ 48
Principal Prepayments......................................... 15
Principal Weighted Class...................................... 4
Principal Weighted Subclass................................... 4
Private Label Custody Receipt Securities...................... 10
Private Label Custody Strips.................................. 10, 39
PTCE 83-1..................................................... 126
Purchase Price................................................ 54
Rating Agency................................................. 2, 5
Record Date................................................... 48
Reference Agreement........................................... 46
Regular Certificates.......................................... 18
Regulation.................................................... 125
REFCO......................................................... 10, 39
REFCO Strips.................................................. 10, 39, 40
REIT.......................................................... 110
REMIC......................................................... 1, 17, 18, 97
REMIC Certificateholders...................................... 98
REMIC Certificates............................................ 97
REMIC Mortgage Pool........................................... 97
REMIC Provisions.............................................. 97
REMIC Regular Certificate..................................... 98
REMIC Regulations............................................. 98
REMIC Residual Certificate.................................... 98
RTC........................................................... 37
Required Distribution......................................... 78
Required Reserve.............................................. 15, 76
Reserve Fund.................................................. 12
Residual Certificates......................................... 4
Residual Owner................................................ 106
Restricted Group.............................................. 128
Retained Yield................................................ 117
Sallie Mae.................................................... 35
Securities Act................................................ 3
Senior Certificates........................................... 12
Senior Class.................................................. 4
Senior Prepayment Percentage.................................. 77
Senior Subclass............................................... 4
Series........................................................ 1, 4
Servicer...................................................... 26
Servicemen's Readjustment Act................................. 25
Servicing Account............................................. 57
Servicing Agreement........................................... 26
Sidley........................................................ 97
</TABLE>
135
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Single Family Property........................................ 5
Single Variable Rate.......................................... 101
single-class REMIC............................................ 111
SMMEA......................................................... 18, 129
SPA........................................................... 44
Special Distributions......................................... 7, 62
Special Hazard Insurance Policy............................... 16
Standard Hazard Insurance Policy.............................. 65
Standard Terms................................................ 46
Stated Principal Balance...................................... 4
Stated Principal Distribution Amount.......................... 49
Stripped Bond Rules........................................... 118
Stripped Government Security.................................. 118
Stripped Interest............................................. 122
Stripped Mortgage Loan........................................ 118
Stripped Private Label Custody Receipt Security............... 118
Subclass...................................................... 1, 4
Subordinated Amount........................................... 12
Subordinated Certificates..................................... 12
Subordinated Class............................................ 4
Subordinated Pool............................................. 15
Subordinated Subclass......................................... 4
Substitute Contract........................................... 32
Substitute Government Securities.............................. 55
Substitute Private Label Custody Receipt Securities........... 55
Substitute Mortgage Certificates.............................. 50
Substitute Mortgage Loans..................................... 52
System........................................................ 38
Systemwide Debt Securities.................................... 38
TEFRA......................................................... 40
Tiered REMICS................................................. 99
Title V....................................................... 97
Treasury Bonds................................................ 9, 34
Treasury Strips............................................... 9, 34
Trust Assets.................................................. 5, 30
Trust Certificates............................................ 97
Trust Fractional Certificate.................................. 98
Trust Fractional Certificateholder............................ 116
Trust Fund.................................................... 1, 5
Trust Interest Certificate.................................... 98
Trust Interest Certificateholder.............................. 122
TVA........................................................... 35
TVA Act....................................................... 38
UCC........................................................... 90
U.S. Person................................................... 113
Unaffiliated Sellers.......................................... 27
Underlying Issuer............................................. 30
Underwriters' PTE............................................. 127
Underwriters.................................................. 130
</TABLE>
136
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Unstripped Government Securities.............................. 119
Unstripped Mortgage Loans..................................... 119
Unstripped Private Label Custody Receipt Securities........... 119
VA............................................................ 2, 23
VA Loans...................................................... 23
</TABLE>
137
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR BY
THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURI-
TIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE ANY SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
SINCE SUCH DATE.
------------
INDEX
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Terms........................................................... S-4
Risk Factors............................................................... S-15
Description of the Mortgage Loans.......................................... S-17
Description of the Certificates............................................ S-27
Certain Yield and Prepayment Considerations................................ S-36
Chevy Chase Bank, F.S.B.................................................... S-42
Servicing.................................................................. S-43
The Insurer................................................................ S-44
Certain Federal Income Tax Consequences.................................... S-46
Erisa Considerations....................................................... S-47
Use of Proceeds............................................................ S-48
Plan of Distribution....................................................... S-48
Experts.................................................................... S-48
Legal Matters.............................................................. S-48
Ratings.................................................................... S-48
Index Of Principal Definitions............................................. S-50
PROSPECTUS
Prospectus Supplement...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Information by Reference.......................... 3
Summary of Terms........................................................... 4
Risk Factors............................................................... 20
The Trust Fund............................................................. 22
The Depositor.............................................................. 41
Use of Proceeds............................................................ 41
Yield Considerations....................................................... 42
Maturity and Prepayment Considerations..................................... 44
Description of the Certificates............................................ 46
Credit Support............................................................. 75
Description of Insurance................................................... 79
Certain Legal Aspects of the Mortgage Loans and Contracts.................. 87
Material Federal Income Tax Consequences................................... 97
ERISA Considerations....................................................... 125
Legal Investment........................................................... 129
Plan of Distribution....................................................... 130
Legal Matters.............................................................. 131
Index of Terms............................................................. 132
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$270,646,742
(Approximate)
Chevy Chase Bank, F.S.B.
Mortgage-Backed
Pass-Through
Certificates
Series 1998-CCB2
$200,132,742 Class A-I Adjustable Rate Certificates
$70,514,000 Class A-II Adjustable Rate Certificates
Chevy Chase Bank, F.S.B.
Seller and Servicer
Asset Backed Securities Corporation
Depositor
PROSPECTUS SUPPLEMENT
CREDIT FIRST
SUISSE BOSTON
- -------------------------------------------------------------------------------
