<PAGE>
Subject to Completion, Dated November 17, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 17, 1997
$400,000,000
WMC Mortgage Loan Pass-Through Certificates, Series 1997-2
WMC MORTGAGE CORP.
Seller and Servicer
CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.
Depositor
--------
The WMC Mortgage Loan Pass-Through Certificates, Series 1997-2 consisting of
(i) the Class A Adjustable Rate Certificates (the "Class A Certificates"), (ii)
the Class M-1 Adjustable Rate Certificates (the "Class M-1 Certificates") and
the Class M-2 Adjustable Rate Certificates (the "Class M-2 Certificates" and,
collectively with the Class M-1 Certificates, the "Mezzanine Certificates"),
(iii) the Class B Adjustable Rate Certificates (the "Class B Certificates"
and, collectively with the Mezzanine Certificates, the "Subordinate
Certificates"), (iv) the Class C Certificates (the "Class C Certificates"),
(v) the Class R-1 Certificates (the "Class R-1 Certificates"), and (vi) the
Class R-2 Certificates (the "Class R-2 Certificates", and together with the
Class R-1 Certificates and the Class C Certificates, the "Non-Offered
Certificates") will represent beneficial interests in a trust, the assets
of which will consist primarily of a pool of adjustable rate (having
initial fixed rate periods of six months, two years or three years),
closed-end, sub-prime mortgage loans secured by first lien mortgages on
residential one- to four-family properties (the "Mortgage Loans" and,
together with all other assets of such trust, the "Trust Fund")
originated or purchased by WMC Mortgage Corp. (the "Seller") in the
ordinary course of its business and conveyed together with certain
related property described herein by the Seller to Credit Suisse First
Boston Mortgage Securities Corp. (the "Depositor") and then conveyed
by the Depositor to the Trust Fund. The Trust Fund will be created and
the Class A Certificates, the Subordinate Certificates (collectively,
the "Offered Certificates") and the Non-Offered Certificates
(together with the Offered Certificates, collectively the
"Certificates") will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, WMC Mortgage Corp., as Servicer (in
such capacity the "Servicer"), and The First National Bank of
Chicago, as Trustee (the "Trustee"). See "Description of the
Offered Certificates" herein. Only the Offered Certificates are
offered hereby.
(Continued on following page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE OFFERED
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-25 HEREIN,
"PREPAYMENT AND YIELD CONSIDERATIONS" BEGINNING ON PAGE S-45 HEREIN AND
"RISK FACTORS" BEGINNING ON PAGE 18 IN THE PROSPECTUS.
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER,
THE SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
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. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
Initial Underwriting
Certificate Pass- Discounts
Principal Through Price to and Proceeds to
Balance Rate Public(1) Commissions Depositor(1)
------------ ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Class A Adjustable Rate Certifi-
cates............................ $316,000,000 (2) % % %
Class M-1 Adjustable Rate Certifi-
cates............................ $ 31,000,000 (2) % % %
Class M-2 Adjustable Rate Certifi-
cates............................ $ 29,000,000 (2) % % %
Class B Adjustable Rate Certifi-
cates............................ $ 24,000,000 (2) % % %
------------ --- --- --- ---
Total............................. $400,000,000 $ $ $
============ === === ===
</TABLE>
(1) Before deducting expenses, estimated to be $ .
(2) The Pass-Through Rate on each Class of Offered Certificates is adjustable
based on one-month LIBOR as described herein subject to the Available Funds
Cap as described herein.
The Offered Certificates are offered by Credit Suisse First Boston
Corporation, Bear, Stearns & Co. Inc., Lehman Brothers Inc., and NationsBanc
Montgomery Securities, Inc. (collectively, the "Underwriters") when, as and if
issued, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that delivery of the
Offered Certificates will be made by the Trust Fund in book-entry form through
the facilities of The Depository Trust Company, Cedel Bank, societe anonyme and
the Euroclear System on or about December 10, 1997, against payment in
immediately available funds.
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES, INC.
The date of this Prospectus Supplement is November , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
<PAGE>
(Cover continued from previous page)
The Class M-1 Certificates are subordinate in right of distribution to the
Class A Certificates to the extent described herein. The Class M-2 Certificates
are subordinate in right of distribution to the Class A Certificates and the
Class M-1 Certificates to the extent described herein. The Class B Certificates
are subordinate in right of distribution to the Class A Certificates and the
Mezzanine Certificates to the extent described herein. The initial aggregate
Certificate Principal Balance of the Subordinate Certificates will equal
approximately 21% of the initial aggregate Certificate Principal Balance of the
Offered Certificates.
Distributions of interest will be made to the holders of the Offered
Certificates (each a "Holder" or a "Certificateholder") on the 20th day of each
month (or, if such day is not a Business Day (as defined herein), the next
Business Day) beginning January 20, 1998. To the extent available, interest will
be passed through on each Distribution Date to the Holders of the Offered
Certificates based on the related Certificate Principal Balance (as defined
herein) and at the rate applicable to each Class of the Offered Certificates
(each, a "Pass-Through Rate"). The Pass-Through Rate for each Class of the
Offered Certificates adjusts monthly based on one-month LIBOR (as defined
herein) or as otherwise described herein. Distributions of principal in
reduction of the Certificate Principal Balances will be made on each
Distribution Date in the manner and the amounts described herein.
EXCEPT AS DESCRIBED FURTHER HEREIN, THE SUBORDINATE CERTIFICATES MAY NOT BE
ACQUIRED BY PLANS (AS DEFINED HEREIN). SEE "ERISA CONSIDERATIONS" HEREIN.
On the Closing Date aggregate cash amounts of approximately $25,000,000 and
approximately $________, respectively, from the proceeds of the sale of the
Offered Certificates will be deposited with the Trustee in the pre-funding
account (the "Pre-Funding Account") and the capitalized interest account (the
"Capitalized Interest Account"), respectively. Additional mortgage loans (the
"Subsequent Mortgage Loans") may be purchased by the Trust Fund from time to
time during the Pre-Funding Period (as defined herein) from funds on deposit in
the Pre-Funding Account.
The yield to investors on the Offered Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans, which may vary over time. The yield to maturity on each Class of
Subordinate Certificates will be extremely sensitive to losses due to defaults
on the Mortgage Loans (and the timing thereof) to the extent such losses are not
covered by overcollateralization (as described herein) or, with respect to the
Mezzanine Certificates, the further subordination of the Class B Certificates.
The Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment will generally subject the related mortgagor to a prepayment charge.
The yield to investors on the Offered Certificates (and in particular the
Subordinate Certificates) will be adversely affected by any shortfalls in
interest collected on the Mortgage Loans due to prepayments, liquidations or
otherwise, to the extent not otherwise covered as described herein. See
"Prepayment and Yield Considerations" herein.
An election will be made to treat certain assets of the Trust Fund as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes ("REMIC I"). REMIC I will issue "regular interests" and one "residual
interest." An election will be made to treat the regular interests in REMIC I as
a REMIC ("REMIC II"). As described more fully herein, all Classes of the Offered
Certificates and the Class C Certificates will constitute "regular interests" in
REMIC II and the Class R-I and Class R-2 Certificates (collectively, the "Class
R Certificates") will constitute the sole classes of "residual interests" in
REMIC I and REMIC II, respectively. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop or if it does
develop, that it will provide the Holders of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
____________
S-2
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE OFFERED
CERTIFICATES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES SEE "UNDERWRITING" HEREIN.
THE OFFERED CERTIFICATES WILL BE PART OF A SEPARATE SERIES OF ABS MORTGAGE
AND MANUFACTURED HOUSING PASS-THROUGH CERTIFICATES BEING OFFERED BY THE
DEPOSITOR FROM TIME TO TIME PURSUANT TO A PROSPECTUS DATED NOVEMBER 17, 1997, OF
WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THE OFFERING
OF THE OFFERED CERTIFICATES THAT IS NOT CONTAINED HEREIN, AND PROSPECTIVE
INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
IN FULL. Sales of the Offered Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
No prospectus in respect of the Offered Certificates has been or will be
prepared and filed in the United Kingdom pursuant to the United Kingdom Public
Offers of Securities Regulations 1995. Accordingly, the Offered Certificates
being offered hereby may not be offered or sold or re-offered or re-sold to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing and disposing of investments (as
principal or agent) for the purpose of their businesses, or otherwise in
circumstances that will not constitute or result in an offer to the public in
the United Kingdom within the meaning of the United Kingdom Public Offers of
Securities Regulation 1995. Neither this Prospectus Supplement nor the
Prospectus nor any other document inviting applications or offers to purchase
Offered Certificates or offering Certificates for purchase may be passed to any
person in the United Kingdom who does not fall within article 11(3) of the
Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or
who is not otherwise a person to whom the document may lawfully be issued or
passed.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933 with
respect to the Offered 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 Seven World Trade
Center, 13th Floor, 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 OWNERS
Monthly and annual reports concerning the Offered Certificates and the
Trust Fund will be sent by the Trustee to the Holders of Offered Certificates.
So long as any Offered Certificate is in book-entry form, such reports will be
sent to Cede & Co., as the nominee of DTC and as Holder of such Offered
Certificates pursuant to the Pooling and Servicing Agreement. DTC will supply
such reports to Holders of any such Offered Certificates in accordance with its
procedures. The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to the Trust Fund as are required under the
Securities Exchange Act of 1934 and the rules and regulations of the Commission
thereunder. It is the Depositor's intent to suspend the filing of such reports
as soon as such reports are no longer statutorily required.
S-3
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this Prospectus Supplement may
constitute forward-looking statements within the meaning of Section 7A of the
Securities Act of 1933, as amended, and as such may involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the mortgage loan portfolio of WMC Mortgage Corp.
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
S-4
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index to Location of Principal
Defined Terms for the location of certain capitalized terms.
Issuer................... The Trust Fund created under the Pooling and
Servicing Agreement, designated as the WMC Mortgage
Loan Trust 1997-2 .
Certificates Offered..... $400,000,000 WMC Mortgage Loan Pass-Through
Certificates, Series 1997-2, to be issued in the
following classes (each, a "Class") and initial
Certificate Principal Balances (each, a "Certificate
Principal Balance"), set forth below:
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
----------------- ---- -----
<S> <C> <C>
$ 316,000,000 (1)(5) Class A Adjustable Rate
Certificates
$ 31,000,000 (2)(5) Class M-1 Adjustable Rate
Certificates
$ 29,000,000 (3)(5) Class M-2 Adjustable Rate
Certificates
$ 24,000,000 (4)(5) Class B Adjustable Rate
Certificates
</TABLE>
(1) On each Distribution Date, the Class A Pass-
Through Rate will be equal to the lesser of (x)
with respect to any Distribution Date which
occurs on or prior to the Clean-Up Call Date (as
defined herein), LIBOR plus ____% per annum and
for any Distribution Date thereafter, LIBOR plus
_____% per annum, and (y) the Available Funds
Cap (as defined herein).
(2) On each Distribution Date, the Class M-1 Pass-
Through Rate will be equal to the lesser of (x)
with respect to any Distribution Date which
occurs on or prior to the Clean-Up Call Date,
LIBOR plus ____% per annum and for any
Distribution Date thereafter, LIBOR plus _____%
per annum, and (y) the Available Funds Cap.
(3) On each Distribution Date, the Class M-2 Pass-
Through Rate will be equal to the lesser of (x)
with respect to any Distribution Date which
occurs on or prior to the Clean-Up Call Date,
LIBOR plus ____% per annum and for any
Distribution Date thereafter, LIBOR plus _____%
per annum, and (y) the Available Funds Cap.
(4) On each Distribution Date, the Class B Pass-
Through Rate will be equal to the lesser of (x)
with respect to any Distribution Date which
occurs on or prior to the Clean-Up Call Date,
LIBOR plus ____% per annum and for any
Distribution Date thereafter, LIBOR plus _____%
per annum, and (y) the Available Funds Cap.
(5) The Pass-Through Rates for each Class of Offered
Certificates generally will be limited to the
Available Funds Cap. The "Available Funds Cap"
will be, with respect to any Distribution Date,
the per annum rate equal to the percentage
obtained by dividing (x) the amount of interest
that accrued on the Mortgage
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
Loans in respect of the related Due Period at
the weighted average of the related Coupon Rates
applicable to monthly payments due on such
Mortgage Loans during such Due Period, reduced
by the sum of (i) the related Servicing Fee for
such Due Period and (ii) the related Trustee Fee
for such Due Period, by (y) the product of (i)
the Aggregate Certificate Principal Balance as
of the first day of the related Accrual Period
and (ii) the actual number of days elapsed
during such Accrual Period divided by 360. Since
the margin over LIBOR is different for each
Class of Offered Certificates, it is possible
that, on any particular Distribution Date the
"Formula Pass-Through Rate" (the rate described
using the margins above LIBOR described in
clause (x) of footnotes (1), (2), (3) and (4)
applicable to one or more Classes of Offered
Certificates), may be less than the Available
Funds Cap, while the Formula Pass-Through Rate
applicable to one or more other Classes of
Offered Certificates may exceed the Available
Funds Cap. In such event, the Pooling and
Servicing Agreement provides that the excess
moneys resulting from such Classes having
Formula Pass-Through Rates less than the
Available Funds Cap shall be applied to increase
the amount of interest payable with respect to
the Class A, Class M-1, Class M-2 and Class B
Certificates, in that order, having Formula
Pass-Through Rates greater than the Available
Funds Cap, up to the amount of interest at the
related Formula Pass-Through Rate due to such
Class.
The Class A Certificates are referred to herein as
the "Class A Certificates." The Class M-1
Certificates and the Class M-2 Certificates are
collectively referred to as the "Mezzanine
Certificates". The Class B Certificates are
referred to as the "Class B Certificates". The
Mezzanine Certificates and the Class B Certificates
are collectively referred to as the "Subordinate
Certificates". The Class A Certificates and the
Subordinate Certificates are collectively referred
to as the "Offered Certificates."
The initial aggregate Certificate Principal Balance
of the Subordinate Certificates will equal 21% of
the initial aggregate Certificate Principal Balance
of the Offered Certificates. The initial aggregate
Certificate Principal Balance of the Class B
Certificates will equal 6% of the initial aggregate
Certificate Principal Balance of the Offered
Certificates. The Subordinate Certificates are
subordinate in right of distribution to the Class A
Certificates to the extent described herein. The
Class M-1 Certificates are subordinate to the Class
A Certificates to the extent described herein. The
Class M-2 Certificates are subordinate to the Class
A Certificates and the Class M-1 Certificates to
the extent described herein. The Class B
Certificates are subordinate to the Class A
Certificates and the Mezzanine Certificates to the
extent described herein.
On any date after the Closing Date, the "Aggregate
Certificate Principal Balance" is the sum of the
Certificate Principal Balance of all Classes of the
Offered Certificates.
Depositor................ Credit Suisse First Boston Mortgage Securities Corp.
(the "Depositor"), a Delaware corporation.
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Servicer............... WMC Mortgage Corp. (in such capacity, the
"Servicer"), a California corporation.
Seller................. WMC Mortgage Corp. (in such capacity, the "Seller").
Trustee................ The First National Bank of Chicago (the "Trustee"),
a national banking association.
Closing Date........... On or about December 10, 1997.
Cut-Off Date........... With respect to (i) each Initial Mortgage Loan (as
defined herein), the close of business on December
1, 1997 (the "Initial Cut-Off Date") and (ii) each
Subsequent Mortgage Loan, the related Subsequent
Cut-Off Date. A "Subsequent Cut-Off Date" is the
later of (x) the close of business of the first day
of the month in which such Subsequent Mortgage Loan
was transferred to the Trust Fund (each such date, a
"Subsequent Transfer Date") and (y) the date of
origination if any such Subsequent Mortgage Loan is
originated in the month of the related Subsequent
Transfer Date.
Statistical Calculation
Date................... The close of business on October 31, 1997 (the
"Statistical Calculation Date").
Distribution Date...... The 20/th/ day of each month or, if such day is not
a Business Day, then the next succeeding Business
Day, commencing in January 1998 (each, a
"Distribution Date").
Determination Date..... The second Business Day prior to each Distribution
Date (each a "Determination Date").
Due Period............. "Due Period" means the period from and including the
second day of the month preceding the month of such
Distribution Date to and including the first day of
the month of such Distribution Date.
Record Date............ With respect to the first Distribution Date, the
Closing Date, and with respect to each Distribution
Date thereafter, the last Business Day of the month
immediately preceding the month in which each
Distribution Date occurs (each, a "Record Date").
Description of the
Certificates........... The WMC Mortgage Loan Pass-Through Certificates,
Series 1997-2 (the "Certificates") will consist of
the Offered Certificates and the Non-Offered
Certificates. The Certificates will be issued
pursuant to a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be dated as of
December 1, 1997, among the Depositor, the Servicer
and the Trustee. Only the Offered Certificates will
be offered hereby.
Denominations.......... The Offered Certificates are issuable in book-entry
form in minimum original principal amounts of
$1,000, in the case of the Class A Certificates, and
$25,000, in the case of the Subordinate
Certificates, and in each case in integral multiples
of $1.00 in excess thereof.
Assets of the Trust
Fund................... The assets of the Trust Fund will consist primarily
of a pool of adjustable rate, closed-end, sub-prime
mortgage loans secured by first lien mortgages on
residential one- to four-family properties
originated or
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
acquired by the Seller for transfer to the Depositor
and from the Depositor to the Trust Fund prior to
the Closing Date (the "Initial Mortgage Loans") and
additional adjustable rate, closed-end, sub-prime
mortgage loans secured by first lien mortgages on
residential one-to four-family properties (the
"Subsequent Mortgage Loans") transferred by the
Seller to the Depositor and from the Depositor to
the Trust Fund from time to time after the Closing
Date and prior to the end of the Pre-Funding Period
(as defined below). The Initial Mortgage Loans and
the Subsequent Mortgage Loans are referred to
collectively herein as the "Mortgage Loans." See
"The Mortgage Loans" in this Prospectus Supplement.
The assets of the Trust Fund will also include (i)
payments in respect of (x) the Initial Mortgage
Loans of interest due and principal received after
the Initial Cut-Off Date and (y) the Subsequent
Mortgage Loans of interest due and principal
received after the applicable Subsequent Cut-Off
Date, (ii) amounts on deposit in the Collection
Account, Certificate Account, Pre-Funding Account
and Capitalized Interest Account and (iii) certain
other ancillary or incidental funds, rights and
properties related to the foregoing.
The Mortgage Loans......... The statistical information presented in this
Prospectus Supplement concerning the Initial
Mortgage Loans is based on the pool of Initial
Mortgage Loans as of the close of business on the
Statistical Calculation Date. The aggregate
principal balance (the "Loan Balance") of the
Initial Mortgage Loans as of the Statistical
Calculation Date is $311,312,593.59 (the "Aggregate
Statistical Calculation Date Loan Balance"). Initial
Mortgage Loans will also include Mortgage Loans
originated or acquired by the Seller after the
Statistical Calculation Date and prior to the
Initial Cut-Off Date ("Additional Mortgage Loans").
In addition, with respect to the pool of Initial
Mortgage Loans as of the Statistical Calculation
Date as to which statistical information is
presented herein, some amortization of the pool will
occur prior to the Closing Date. Moreover, certain
loans included in the pool of Initial Mortgage Loans
as of the Statistical Calculation Date may prepay in
full, or may be determined not to meet the
eligibility requirements for the final pool of
Initial Mortgage Loans, and may not be included in
the final pool of Initial Mortgage Loans. As a
result of the foregoing, the statistical
distribution of characteristics as of the Closing
Date for the final Initial Mortgage Loan pool will
vary somewhat from the statistical distribution of
such characteristics as of the Statistical
Calculation Date as presented in this Prospectus
Supplement. Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by either the Aggregate Statistical
Calculation Date Loan Balance or the number of
Initial Mortgage Loans in the pool as of the
Statistical Calculation Date.
The Mortgage Loans will consist of adjustable rate,
closed-end, sub-prime mortgage loans evidenced by
promissory notes (the "Notes") secured by first lien
deeds of trust, security deeds or mortgages (the
"Mortgages"). The properties securing the Mortgage
Loans (the "Mortgaged Properties") are located in 48
states and the District of Columbia and consist
primarily of single-family residences (which may be
attached, detached, part of a two- to four-family
dwelling, a condominium unit or a unit in a planned
unit development) and also include manufactured
housing. The Mortgaged Properties may be owner-
occupied or non-owner-occupied investment
properties. No
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
Loan-to-Value Ratio exceeded 91.70% as of the
Statistical Calculation Date. The Mortgage Loans are
not insured by either primary mortgage or mortgage
pool insurance policies. The Mortgage Loans are not
guaranteed by the Depositor, the Seller, the
Servicer, the Trustee or any affiliate thereof. See
"The Mortgage Loans" in this Prospectus Supplement.
As of the Statistical Calculation Date, the average
Loan Balance of the Initial Mortgage Loans was
$108,094.65; the interest rate applicable to each
Initial Mortgage Loan (the "Coupon Rate") ranged
from 6.49% to 14.50%, the weighted average Loan-to-
Value Ratio of such Initial Mortgage Loans was
77.45%, the weighted average Coupon Rate of such
Initial Mortgage Loans was 10.11%, and the weighted
average remaining term to maturity of such Initial
Mortgage Loans was 359.73 months. The maximum Loan
Balance of the Initial Mortgage Loans as of the
Statistical Calculation Date was $604,000.00. As of
the Statistical Calculation Date, no Initial
Mortgage Loan has a scheduled maturity date later
than December 1, 2027. As of the Statistical
Calculation Date, 80.00% of the Initial Mortgage
Loans by Aggregate Statistical Calculation Date Loan
Balance were secured by mortgages on single-family
dwellings, 8.52% by mortgages on single-family
planned unit developments, 3.46% by condominiums,
and 8.02% by other types of dwellings. See "The
Mortgage Loans" herein.
All of the Initial Mortgage Loans have maximum
Coupon Rates. As of the Statistical Calculation
Date, the weighted average maximum Coupon Rate of
the Initial Mortgage Loans is 16.61%, with maximum
Coupon Rates that range from approximately 10.00% to
20.75%. The Initial Mortgage Loans have a weighted
average gross margin as of the Statistical
Calculation Date of 6.52%. As of the Statistical
Calculation Date, the gross margin for the Initial
Mortgage Loans ranges from 1.075% to 9.39%.
Approximately $84,526,870.21 or 27.15% of the
Initial Mortgage Loans by Aggregate Statistical
Calculation Date Loan Balance bear interest at rates
that adjust, along with the related monthly
payments, semiannually based on Six-Month LIBOR (the
"Six-Month LIBOR Loans"). The Six-Month LIBOR Loans
have a periodic reset cap of 1.00%.
Approximately $224,408,552.82 or 72.08% of the
Initial Mortgage Loans by Aggregate Statistical
Calculation Date Loan Balance bear interest at a
fixed rate for two years after origination and
thereafter have periodic adjustments at frequencies
in the same manner as the Six-Month LIBOR Loans (as
described above) (the "2/28 Loans"). After the first
adjustment, the 2/28 Loans have a periodic reset cap
of 1.00%.
Approximately $2,377,170.56 or 0.76% of the Initial
Mortgage Loans by Aggregate Statistical Calculation
Date Loan Balance bear interest at a fixed rate for
three years after origination and thereafter have
periodic adjustments at frequencies in the same
manner as the Six-Month LIBOR Loans (as described
above) (the "3/27 Loans"). After the first
adjustment, the 3/27 Loans have a periodic reset cap
of 1.00%.
Although none of the Initial Mortgage Loans is more
than 30 days contractually past due as of the
Statistical Calculation Date,
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approximately 2,836 Initial Mortgage Loans
(constituting approximately 98.36% of the Aggregate
Statistical Calculation Date Loan Balance) did not
have a first payment date prior to November 1, 1997
and thus could not be more than 30 days past due as
of the Statistical Calculation Date, and as of the
Statistical Calculation Date, the majority of the
Initial Mortgage Loans will not have a first payment
date until December 1, 1997.
Pre-Funding Feature........ On the Closing Date, approximately $25,000,000.00
(the "Original Pre-Funded Amount") will be deposited
from proceeds of the sale of the Offered
Certificates with the Trustee in the Pre-Funding
Account and used by the Trust Fund to purchase the
Subsequent Mortgage Loans during the Pre-Funding
Period. The Trust Fund will be obligated, subject to
the satisfaction of certain conditions described
herein, to purchase the Subsequent Mortgage Loans
from time to time during the Pre-Funding Period
defined below, subject to the availability thereof.
In connection with each purchase of a Subsequent
Mortgage Loan, the Trust Fund will be required to
pay to the Depositor a cash purchase price of 100%
of the Loan Balance thereof as of the Subsequent
Cut-Off Date from the Pre-Funding Account. The Trust
Fund may purchase the Subsequent Mortgage Loans only
from the Depositor and not from any other person and
the Depositor may purchase the Subsequent Mortgage
Loans only from the Seller and not from any other
person. See "Description of the Mortgage Loans."
The "Pre-Funding Period' is the period from the
Closing Date until the earliest of (i) the date
after the Subsequent Transfer Date on which the
amount on deposit in the Pre-Funding Account is less
than $50,000, (ii) the date on which an Event of
Default occurs under the Pooling and Servicing
Agreement or (iii) January 31, 1998. The Original
Pre-Funded Amount, as reduced from time to time by
the amount thereof applied to the purchase of
Subsequent Mortgage Loans is referred to herein as
the "Pre-Funded Amount." Any Pre-Funded Amount
remaining in the Pre-Funding Account at the end of
the Pre-Funding Period will be distributed to the
Holders of the Class A Certificates as an additional
distribution of principal on the Distribution Date
which follows the end of the Pre-Funding Period.
Capitalized Interest
Account.................... On the Closing Date, a portion of the proceeds
of the sale of the Offered Certificates will be
required to be deposited in an account (the
"Capitalized Interest Account") in the name of the
Trustee on behalf of the Trust Fund. The amount
deposited therein will be used, as necessary, by the
Trustee during the Pre-Funding Period to fund the
excess, if any, of (i) interest accruing on the
excess of the Aggregate Certificate Principal
Balance over the aggregate Loan Balance over (ii)
reinvestment income on the Pre-Funded Amount. Any
amounts remaining in the Capitalized Interest
Account on the Distribution Date which follows the
end of the Pre-Funding Period and not used for such
purpose on such Distribution Date are required to be
paid directly to the Seller on such Distribution
Date.
Final Scheduled
Distribution Dates......... The Final Scheduled Distribution Dates for
each of the respective Classes of Offered
Certificates is March 20, 2029, although it is
anticipated that the actual final Distribution Date
for each Class will
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occur earlier than the Final Scheduled Distribution
Date. See "Prepayment and Yield Considerations"
herein.
Distributions--General..... On each Distribution Date, the Trustee will be
required, subject to the availability of amounts
therefor, pursuant to the cashflow priorities
hereinafter described, to distribute to the Holders
of Offered Certificates as of the Record Date the
"Class Distribution Amount" for the related Class
which shall be the sum of (x) the related Current
Interest for such Class, (y) the related Interest
Carry Forward Amount and (z) the related Principal
Distribution Amount for such Class (each as defined
below).
For each Distribution Date, interest due with
respect to the Offered Certificates will be the
interest which has accrued thereon at the applicable
Pass-Through Rate from the preceding Distribution
Date (or from the Closing Date in the case of the
first Distribution Date) to and including the day
prior to the current Distribution Date. Each period
referred to above relating to the accrual of
interest is the "Accrual Period" for the related
Class of Offered Certificates. All calculations of
interest on the Offered Certificates will be made on
the basis of the actual number of days elapsed in
the related Accrual Period and a year of 360 days. A
"Business Day" is any day other than a Saturday,
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 is located are
authorized or obligated by law or executive order to
close.
Interest................... On each Distribution Date the Interest Remittance
Amount (as defined below) will be distributed in the
following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Holders of the Class A Certificates,
the Class A Current Interest plus the Interest Carry
Forward Amount with respect to the Class A
Certificates; provided, that if the Interest
Remittance Amount less the amount paid to the
Trustee as the Trustee Fee (such amount the
"Interest Amount Available") is not sufficient to
make a full distribution of interest to the Class A
Certificates, the amount of the shortfall will be
carried forward with accrued interest;
Third, to the extent of the Interest Amount
Available then remaining, to the Holders of the
Class M-1 Certificates, the Class M-1 Current
Interest;
Fourth, to the extent of the Interest Amount
Available then remaining, to the Holders of the
Class M-2 Certificates, the Class M-2 Current
Interest;
Fifth, to the extent of the Interest Amount
Available then remaining, to the Holders of the
Class B Certificates, the Class B Current Interest;
and
Sixth, the sum of (x) the amount, if any, of the
Interest Amount Available remaining in the
Certificate Account after application with respect
to the priorities set forth above plus (y) the
amount of any Overcollateralization Release Amount
for such Distribution Date (such amount, the
"Monthly Excess Cashflow Amount" for a Distribution
Date) shall be applied as described below under
"Credit Enhancement--
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Application of Monthly Excess Cashflow Amounts" in
this Summary of Terms.
"Current Interest" with respect to each Class of
Offered Certificates means, with respect to any
Distribution Date the aggregate amount of interest
accrued during the preceding Accrual Period on the
Certificate Principal Balance of the related Class
of Offered Certificates at the related Pass-Through
Rate in effect with respect to such Class of Offered
Certificates.
"Interest Remittance Amount" means, as of any
Determination Date, the sum, without duplication, of
(i) all interest received during the related Due
Period on the Mortgage Loans (less the Servicing
Fee), (ii) all Delinquency Interest Advances (as
defined herein) and Compensating Interest (as
defined herein) paid by the Servicer with respect to
such Due Period and (iii) the portion of any
Substitution Amount (as defined herein) or Loan
Purchase Price (as defined herein) relating to
interest received with respect to the related Due
Period; provided, however, that the "Interest
Remittance Amount" shall not include any amounts
received as late payments of interest with respect
to which the Servicer has previously made any
unreimbursed Delinquency Interest Advances (as
defined herein).
The "Interest Carry Forward Amount" means, with
respect to any Class of the Offered Certificates for
any Distribution Date, the sum of (x) the amount, if
any, by which (i) the Current Interest for such
Class as of the immediately preceding Distribution
Date exceeded (ii) the amount of the actual
distribution with respect to interest made to the
Holders of such Class of Offered Certificates on
such immediately preceding Distribution Date plus
(y) interest on such amount calculated for the
related Accrual Period at the related Pass-Through
Rate in effect with respect to such Class of Offered
Certificates.
The Pooling and Servicing Agreement provides that if
the Pass-Through Rate on any Offered Certificate is
less than the Formula Pass-Through Rate, and any
resulting shortfall in interest is not paid on such
Distribution Date from any available Monthly Excess
Cashflow Amount then the amount of any such
shortfall will be carried forward and paid on a
subordinated basis to the extent of the Monthly
Excess Cashflow Amount, as described below, to the
Holders of the applicable Offered Certificates on
future Distribution Dates and shall accrue interest
at the applicable Formula Pass-Through Rate, until
paid or until the Certificate Principal Balance of
such Class has been reduced to zero (such shortfall
as determined with respect to each Class of Offered
Certificates, together with such accrued interest,
the "Available Funds Cap Carry Forward Amount"). The
ratings assigned to the Offered Certificates do not
address the payment of the Available Funds Cap Carry
Forward Amount.
Principal.................. With respect to each Distribution Date (a) before
the Stepdown Date or (b) as to which a Trigger Event
(as defined herein) is in effect, Holders of the
Class A Certificates will be entitled to receive
payment of 100% of the Principal Distribution Amount
for such Distribution Date until the Class A
Certificate Principal Balance has been reduced to
zero.
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With respect to each Distribution Date (a) on or
after the Stepdown Date and (b) as to which a
Trigger Event is not in effect and is not
continuing, the Holders of all Classes of the
Offered Certificates will be entitled to receive
payments of principal, in the order of priority, in
the amounts set forth below and to the extent of the
Principal Distribution Amount as follows:
First, the lesser of (x) the Principal Distribution
Amount and (y) the Class A Principal Distribution
Amount shall be distributed to the Holders of the
Class A Certificates until the Class A Certificate
Principal Balance has been reduced to zero;
Second, the lesser of (x) the excess of (i) the
Principal Distribution Amount over (ii) the amount
distributed to the Holders of the Class A
Certificates in clause First above and (y) the Class
M-1 Principal Distribution Amount shall be
distributed to the Holders of the Class M-1
Certificates, until the Class M-1 Certificate
Principal Balance has been reduced to zero;
Third, the lesser of (x) the excess of (i) the
Principal Distribution Amount over (ii) the sum of
the amount distributed to the Holders of the Class A
Certificates in clause First above and the amount
distributed to the Holders of the Class M-1
Certificates in clause Second above and (y) the
Class M-2 Principal Distribution Amount shall be
distributed to the Holders of the Class M-2
Certificates, until the Class M-2 Certificate
Principal Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the
Principal Distribution Amount over (ii) the sum of
the amount distributed to the Holders of the Class A
Certificates pursuant to clause First above, the
amount distributed to the Holders of the Mezzanine
Certificates pursuant to clauses Second and Third
above and (y) the Class B Principal Distribution
Amount shall be distributed to the Holders of the
Class B Certificates, until the Class B Certificate
Principal Balance has been reduced to zero; and,
Fifth, any amount of the Principal Distribution
Amount remaining after making all of the
distributions in clauses First, Second, Third and
Fourth above shall be distributed as part of the
Monthly Excess Cashflow Amount and shall be applied
as described below under "Credit Enhancement--
Application of Monthly Excess Cashflow Amounts" in
this Summary of Terms.
Notwithstanding the foregoing, (i) if a Trigger
Event exists after the Certificate Principal Balance
of the Class A Certificates has been reduced to
zero, principal will be distributed exclusively to
the Class M-1 Certificates and, after the
Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero, exclusively
to the Class M-2 Certificates and, after the
Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero, exclusively
to the Class B Certificates and (ii) while a
Subordinated Trigger Event (as defined herein)
exists, principal otherwise distributable to the
Non-Offered Certificates will be distributed to the
Subordinated Certificates (in inverse order of
seniority).
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In addition to the following definitions, the above
discussion makes use of a number of defined terms
which are defined under "Description of the Offered
Certificates--Distributions" herein.
"Principal Distribution Amount" means as of any
Distribution Date, the sum of (i) the Principal
Remittance Amount minus, for Distribution Dates
occurring on and after the Stepdown Date, the
Overcollateralization Release Amount, if any, and
(ii) the Extra Principal Distribution Amount (as
defined herein), if any.
A "Liquidated Mortgage Loan" is, in general, a
defaulted Mortgage Loan as to which the Servicer has
determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered
(exclusive of any possibility of a deficiency
judgment).
"Principal Remittance Amount" means as of any
Determination Date, the sum, without duplication, of
(i) the principal actually collected by the Servicer
on the Mortgage Loans during the related Due Period,
(ii) the Loan Balance of each Mortgage Loan that was
repurchased from the Trust Fund during the related
Due Period, (iii) any amounts relating to principal
delivered by the Seller in connection with a
substitution of a Mortgage Loan during the related
Due Period (a "Substitution Amount"), and (iv) all
Net Liquidation Proceeds (as defined herein)
actually collected by the Servicer during the
related Due Period with respect to Mortgage Loans
(to the extent such Net Liquidation Proceeds related
to principal).
A "Trigger Event" has occurred with respect to a
Distribution Date if the percentage obtained by
dividing (x) the principal amount of all Mortgage
Loans 60 or more days delinquent as of the last day
of the preceding calendar month by (y) the sum of
(i) the aggregate outstanding Loan Balance of the
Mortgage Loans as of the last day of the preceding
calendar month and (ii) the Pre-Funded Amount as of
the last day of the preceding calendar month equals
or exceeds 50% of the Senior Enhancement Percentage
(as defined herein).
"Stepdown Date" means the earlier to occur of (i)
the later to occur of (x) the Distribution Date in
January 2001 and (y) the first Distribution Date on
which the Senior Enhancement Percentage, after
taking into account distributions of principal on
such Distribution Date, is greater than or equal to
the Senior Specified Enhancement Percentage and (ii)
the Distribution Date on which the Certificate
Principal Balance of the Class A Certificates has
been reduced to zero.
"Class A Principal Distribution Amount" means as of
any Distribution Date (a) prior to the Stepdown Date
or with respect to which a Trigger Event is in
effect, 100% of the Principal Distribution Amount
and (b) on or after the Stepdown Date and as long as
a Trigger Event is not in effect, the excess of (x)
the aggregate Certificate Principal Balance of the
Class A Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the
product of (i) 49.5% and (ii) the outstanding
aggregate Loan Balance of the Mortgage Loans as of
the last day of the related Due Period and (B) the
outstanding aggregate Loan Balance of the Mortgage
Loans as of the last day of the related Due Period
minus $2,000,000.
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"Class M-1 Principal Distribution Amount" means as
of any Distribution Date on or after the Stepdown
Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class
A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount
on such Distribution Date) and (ii) the Class M-1
Certificate Principal Balance immediately prior to
such Distribution Date over (y) the lesser of (A)
the product of (i) 65.0% and (ii) the outstanding
aggregate Loan Balance of the Mortgage Loans as of
the last day of the related Due Period and (B) the
outstanding aggregate Loan Balance of the Mortgage
Loans as of the last day of the related Due Period
minus $2,000,000.
"Class M-2 Principal Distribution Amount" means as
of any Distribution Date on or after the Stepdown
Date and as long as Trigger Event is not in effect,
the excess of (x) the sum of (i) the aggregate
Certificate Principal Balance of the Class A
Certificates (after taking into account the payment
of the Class A Principal Distribution Amount on such
Distribution Date), (ii) the Class M-1 Certificate
Principal Balance (after taking into account the
payment of the Class M-1 Principal Distribution
Amount on such Distribution Date) and (iii) the
Class M-2 Certificate Principal Balance immediately
prior to such Distribution Date over (y) the lesser
of (A) the product of (i) 79.5% and (ii) the
outstanding aggregate Loan Balance of the Mortgage
Loans as of the last day of the related Due Period
and (B) the outstanding aggregate Loan Balance of
the Mortgage Loans as of the last day of the related
Due Period minus $2,000,000.
"Class B Principal Distribution Amount" means as of
any Distribution Date on or after the Stepdown Date
and as long as a Trigger Event is not in effect, the
excess of (x) the sum of (i) the aggregate
Certificate Principal Balance of the Class A
Certificates (after taking into account the payment
of the Class A Principal Distribution Amount on such
Distribution Date), (ii) the Class M-1 Certificate
Principal Balance (after taking into account the
payment of the Class M-1 Principal Distribution
Amount on such Distribution Date), (iii) the Class
M-2 Certificate Principal Balance (after taking into
account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date) and
(iv) the Class B Certificate Principal Balance
immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) 91.5% and (ii)
the outstanding aggregate Loan Balance of the
Mortgage Loans as of the last day of the related Due
Period and (B) the outstanding aggregate Loan
Balance of the Mortgage Loans as of the last day of
the related Due Period minus $2,000,000.
"Overcollateralization Amount" means as of any
Distribution Date the excess, if any, of (x) the sum
of (i) the Loan Balance of the Mortgage Loans as of
the last day of the related Due Period and (ii) the
Pre-Funded Amount as of the last day of the related
Due Period over (y) the Certificate Principal
Balance of all Classes of Offered Certificates
(after taking into account all distributions of
principal on such Distribution Date).
"Senior Enhancement Percentage" for any Distribution
Date is the percentage obtained by dividing (x) the
sum of (i) the aggregate
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Ceritificate Principal Balance of the Subordinate
Certificates (or if the Certificate Principal
Balance of the Class A Certificate has been reduced
to zero, the aggregate Certificate Principal Balance
of each Class of Subordinate Certificates other than
the most senior Class of Subordinate Certificates
then outstanding) and (ii) the Overcollateralization
Amount after taking into account the distribution of
the related Principal Distribution Amount on such
Distribution Date by (y) the sum of (i) the
aggregate Loan Balance of the Mortgage Loans as of
the last day of the related Due Period and (ii) the
Pre-Funded Amount as of the last day of the related
Due Period.
"Senior Specified Enhancement Percentage" on any
date of determination thereof means 50.5%.
"Extra Principal Distribution Amount" means as of
any Distribution Date, the lesser of (x) the Monthly
Excess Interest Amount for such Distribution Date
remaining after application to the Class A Interest
Carry Forward Amount and (y) the
Overcollateralization Deficiency for such
Distribution Date.
"Overcollateralization Deficiency" means as of any
Distribution Date, the excess, if any, of (x) the
Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization
Amount for such Distribution Date, calculated for
this purpose after taking into account the reduction
on such Distribution Date of the Certificate
Principal Balance of all Classes of the Offered
Certificates resulting from the distribution of the
related Principal Remittance Amount (but not the
related Extra Principal Distribution Amount) on such
Distribution Date, but prior to taking into account
any related Applied Realized Loss Amount on such
Distribution Date.
"Overcollateralization Release Amount" means as of
any Distribution Date, the lesser of (x) the related
Principal Remittance Amount for such Distribution
Date and (y) the excess of (i) the related
Overcollateralization Amount for such Distribution
Date, assuming that 100% of the related Principal
Remittance Amount is applied on such Distribution
Date to the payment of principal on the Offered
Certificates and (ii) the Targeted
Overcollateralization Amount for such Distribution
Date; provided, however, that if a Trigger Event has
occurred and is continuing, the
Overcollateralization Release Amount will equal
approximately zero.
"Targeted Overcollateralization Amount" means as of
any Distribution Date, (x) prior to the Stepdown
Date, $17,000,000 and (y) on and after the Stepdown
Date, the greater of (i) 8.5% of the sum of (A) the
aggregate outstanding Loan Balance of the Mortgage
Loans as of the last day of the related Due Period
and (B) the Pre-Funded Amount as of the last day of
the related Due Period and (ii) $2,000,000;
provided, however, if as of such Distribution Date a
Trigger Event has occurred and is continuing, the
Targeted Overcollateralization Amount shall equal
the Targeted Overcollateralization Amount
immediately prior to such Distribution Date; and
provided, further, that the Targeted
Overcollateralization Amount shall never exceed
$17,000,000.
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Servicing of the Mortgage
Loans...................... The Servicer has agreed to service the Mortgage
Loans in accordance with the Pooling and Servicing
Agreement with the same care as it customarily
employs in servicing and administering mortgage
loans of the same type for its own account in
accordance with accepted mortgage servicing
practices of prudent lending institutions ("Accepted
Servicing Practices"). The Servicer has limited
historical experience in servicing sub-prime
mortgage loans. See "Risk Factors" and "The Seller
and the Servicer" herein.
Delinquency Interest
Advances, Servicing
Advances and Compensating
Interest.................. The Servicer will be obligated to make Delinquency
Interest Advances (as defined below) on a Mortgage
Loan unless it determines in accordance with
Accepted Servicing Practices that the amount of such
Delinquency Interest Advance will ultimately not be
recoverable from either payments to be made by the
borrower of such Mortgage Loan (exclusive of any
possibility of a deficiency judgment) or proceeds
from the related Mortgaged Property. Delinquency
Interest Advances may be funded by the Servicer from
subsequent collections on the Mortgage Loans
generally, and are reimbursable from (i) future
collections and (ii) Net Liquidation Proceeds, in
each case, with respect to the related Mortgage
Loan. "Delinquency Interest Advances" are amounts
deposited in the Collection Account by the Servicer
equal to the sum of the interest portions (net of
the Servicing Fees) of scheduled payments with
respect to delinquent Mortgage Loans due during the
related Due Period but not collected prior to the
related Determination Date. Notwithstanding the
Servicer's determination at the time such
Delinquency Interest Advance was made that it would
not be a nonrecoverable Delinquency Interest
Advance, in the event such Delinquency Interest
Advance becomes a nonrecoverable Delinquency
Interest Advance, the Servicer will be entitled to
reimbursement therefor from the Trust Fund.
Subject to the Servicer's good faith determination
that such action would not constitute a
nonrecoverable Servicing Advance and that a prudent
mortgage lender would make a like advance if it or
an affiliate owned the Mortgage Loan, the Servicer
is required to advance amounts with respect to the
Mortgage Loans ("Servicing Advances") constituting
"out-of-pocket" costs and expenses relating to (a)
the preservation and restoration of the Mortgaged
Property, (b) enforcement proceedings, including
foreclosures and (c) certain other customary amounts
described in the Pooling and Servicing Agreement.
Such Servicing Advances by the Servicer are
reimbursable to the Servicer subject to certain
conditions and restrictions. In the event that,
notwithstanding the Servicer's good faith
determination at the time such Servicing Advance was
made, that it would not be a nonrecoverable
Servicing Advance, such Servicing Advance becomes a
nonrecoverable Servicing Advance, the Servicer will
be entitled to reimbursement therefor from the Trust
Fund. See "Prepayment and Yield Considerations"
herein.
In addition, the Servicer will also be required to
deposit Compensating Interest in the Certificate
Account with respect to any full prepayment received
on a Mortgage Loan during the related Due Period,
out of its own funds without any right of
reimbursement therefor. "Compensating Interest" is
an amount equal to the difference between (x) 30
days'
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interest at the Coupon Rate (net of the rate
at which the Servicing Fee is calculated) on the
Loan Balance of such Mortgage Loan as of the first
day of the related Due Period and (y) to the extent
not previously advanced, the interest paid by the
mortgagor with respect to the Mortgage Loan during
such Due Period. The Servicer will not be required
to pay Compensating Interest with respect to any Due
Period in an amount in excess of the aggregate
Servicing Fee received by the Servicer for such Due
Period and any resulting shortfall will be borne by
the Certificateholders to the extent not covered by
Monthly Excess Cashflow Amounts. See "Description of
the Offered Certificates-- Distributions" in this
Prospectus Supplement.
Monthly Servicing Fee...... The Servicer is entitled to a fee equal to 0.50% per
annum, payable monthly at one-twelfth the annual
rate, of the then outstanding principal amount of
each Mortgage Loan as of the first day of each Due
Period, and the Servicer shall also be paid a fee
for expenses associated with the administration of
REMIC I and REMIC II as set forth in the Pooling and
Servicing Agreement (collectively, the "Servicing
Fee").
Monthly Trustee Fee........ The Trustee is entitled to a fee (the "Trustee Fee")
equal to 0.0075% per annum (subject to certain
limitations described in the Pooling and Servicing
Agreement), payable monthly at one-twelfth the
annual rate, of the then outstanding principal
amount of each Mortgage Loan as of the first day of
each Due Period.
Fees and Expenses of the
Trust...................... On each Distribution Date, amounts will be
distributed to pay the Trustee Fee from the Interest
Remittance Amount and the Servicing Fee will be
netted from Daily Collections (as defined herein),
in each case, prior to distributions on the Offered
Certificates; provided, however, that with respect
to the first Distribution Date the payment of all
such Servicing Fees and Trustee Fees will be
prorated for the first Due Period from the Closing
Date. See "Description of the Offered Certificates--
Distributions" herein.
Credit Enhancement......... The Credit Enhancement provided for the benefit of
the Holders of the Class A Certificates consists of
the subordination of the Subordinate Certificates,
the priority of application of Realized Losses (as
defined herein), the application of Monthly Excess
Cashflow Amounts and the overcollateralization
feature of the Trust.
Subordination of Subordinate Certificates. The
rights of the Holders of the Subordinate
Certificates and the Non-Offered Certificates to
receive distributions with respect to the Mortgage
Loans will be subordinated, to the extent described
herein, to such rights of the Holders of the Class A
Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the
Holders of the Class A Certificates of the full
amount of their scheduled monthly payment of
interest and principal and to afford such Holders
protection against Realized Losses.
The protection afforded to the Holders of the Class
A Certificates by means of the subordination of the
Subordinate Certificates and the Non-Offered
Certificates will be accomplished by the
preferential right of the Holders of the Class A
Certificates to receive, prior to any distribution
being made on a Distribution Date in respect of such
Subordinate Certificates and any Class of Non-
Offered Certificates, the amounts of
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S-18
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interest due them and principal available for
distribution on such Distribution Date, and, if
necessary, by the right of the Holders of the Class
A Certificates to receive future distributions of
amounts that would otherwise be payable to the
Holders of such Subordinate Certificates and each
such Class of Non-Offered Certificates.
The rights of the Holders of the Class M-2, Class B
and Non-Offered Certificates to receive
distributions will be subordinated, to the extent
described herein, to such rights of the Holders of
the Class A and Class M-1 Certificates. This
subordination is intended to enhance the likelihood
of regular receipt by the Holders of the Class A and
Class M-1 Certificates of the amount of interest due
them and principal available for distribution and to
afford such Holders with protection against Realized
Losses.
The rights of the Holders of the Class B and Non-
Offered Certificates to receive distributions will
be subordinated in the same manner to such rights of
the Holders of the Class A and Mezzanine
Certificates and the rights of Holders of the Non-
Offered Certificates to receive distributions will
be subordinated in the same manner to such rights of
the Holders of the Offered Certificates.
Application of Realized Losses. If a Mortgage Loan
becomes a Liquidated Loan during a Due Period, the
Net Liquidation Proceeds relating thereto and
allocated to principal may be less than the Loan
Balance of such Mortgage Loan. The amount of such
insufficiency is a "Realized Loss". Realized Losses
which occur will, in effect, be absorbed first, by
the Non-Offered Certificates (both through the
application of the Monthly Excess Interest Amount to
fund such deficiency and through a reduction in the
Overcollateralization Amount), second, by the
Holders of the Class B Certificates, third, by the
Holders of the Class M-2 Certificates, and, fourth,
by the Holders of the Class M-1 Certificates.
To the extent that Realized Losses occur, such
Realized Losses will reduce the aggregate
outstanding Loan Balance of the Mortgage Loans
(i.e., a reduction in the collateral balance will
occur). Since the Overcollateralization Amount is
the excess, if any, of the collateral balance
(including the Pre-Funded Amount) over the Aggregate
Certificate Principal Balance, Realized Losses, to
the extent experienced, will in the first instance
reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that
the Overcollateralization Amount be initially
increased to, and thereafter maintained at, the
Targeted Overcollateralization Amount. This increase
and subsequent maintenance is intended to be
accomplished by the application of Monthly Excess
Interest Amounts (after application thereof to the
payment of any Class A Interest Carry Forward
Amount) to the funding of the Extra Principal
Distribution Amount. Such Extra Principal
Distribution Amounts, since they are funded from
interest collections on the collateral but are
distributed as principal on the Offered
Certificates, will increase the
Overcollateralization Amount.
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If, on any Distribution Date after taking into
account all Realized Losses experienced during the
prior Due Period and after taking into account the
distribution of principal (including the Extra
Principal Distribution Amount) with respect to the
Offered Certificates on such Distribution Date, the
Aggregate Certificate Principal Balance exceeds the
aggregate Loan Balance of the Mortgage Loans as of
the end of the related Due Period (i.e., if the
level of overcollateralization is negative), then
the Certificate Principal Balance of the Subordinate
Certificates will be reduced (in effect, "written
down") such that the level of overcollateralization
is zero, rather than negative. Such a negative level
of overcollateralization is an "Applied Realized
Loss Amount", which will be applied as a reduction
in the Certificate Principal Balance of the
Subordinate Certificates in reverse order of
seniority (i.e., first against the Class B
Certificate Principal Balance until it is reduced to
zero, then against the Class M-2 Certificate Balance
until it is reduced to zero and then against the
Class M-1 Certificate Principal Balance until it is
reduced to zero). The Pooling and Servicing
Agreement does not permit the "write down" of the
Certificate Principal Balance of any Class A
Certificate.
Once the Certificate Principal Balance of a Class of
Subordinate Certificates has been "written down,"
the amount of such write down will no longer bear
interest, nor will such amount thereafter be
"reinstated" or "written up," although the amount of
such write down may, on future Distribution Dates be
paid to Holders of the Subordinate Certificates
which experienced the write down, in direct order of
seniority (i.e., first, the Class M-1 Certificates,
second, the Class M-2 Certificates and, third, the
Class B Certificates). The source of funding of such
payments will be the amount, if any, of the Monthly
Excess Cashflow Amount remaining on such future
Distribution Dates after the funding of the Extra
Principal Distribution Amount and after the payment
of Interest Carry Forward Amounts and the related
Realized Loss Amortization Amounts with respect to
each Class of the Offered Certificates having a
higher payment priority on such Distribution Date.
Application of Monthly Excess Cashflow Amounts. The
weighted average net Coupon Rate for the Mortgage
Loans is generally expected to be higher than the
weighted average of the Pass-Through Rates on the
Offered Certificates, thus generating certain excess
interest collections which, in the absence of losses
will not be necessary to fund interest distributions
on the Offered Certificates. The Pooling and
Servicing Agreement provides that this excess
interest be applied, to the extent available, to
make accelerated payments of principal (i.e., the
Extra Principal Distribution Amount) to the Class or
Classes then entitled to receive distributions of
principal; such application will cause the Aggregate
Certificate Principal Balance to amortize more
rapidly than the Mortgage Loans, resulting in
overcollateralization. This excess interest for a
Due Period, together with interest on the
Overcollateralization Amount itself, is the "Monthly
Excess Interest Amount" for the related Distribution
Date.
The required level of overcollateralization for any
Distribution Date is the Targeted
Overcollateralization Amount for such Distribution
Date. The Targeted Overcollateralization Amount is
initially (i.e., prior to the Stepdown Date)
$17,000,000. Because the Overcollateralization
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Amount as of the Closing Date is equal to zero, in
the early months of the transaction, subject to the
availability of Monthly Excess Interest Amounts, it
is anticipated that Extra Principal Distribution
Amounts will be paid, with the result that the
Overcollateralization Amount will increase to the
level of the Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount
has been reached, Realized Losses occur, such
Realized Losses will result in an
Overcollateralization Deficiency (since such
Realized Losses reduce the Loan Balance of the
Mortgage Loans without giving rise to a
corresponding reduction of the Aggregate Certificate
Principal Balance). The cashflow priorities of the
Trust Fund require that, in this situation, an Extra
Principal Distribution Amount be paid (subject to
the availability of any Monthly Excess Interest
Amount) for the purpose of re-establishing the
Overcollateralization Amount at the then-required
Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted
Overcollateralization Amount is permitted to
decrease or "step-down" below $17,000,000 to a level
equal to 8.5% of the then current aggregate
outstanding Loan Balance (subject to a floor of
$2,000,000); provided, however, if as of such
Distribution Date a Trigger Event has occurred and
is continuing, the Targeted Overcollateralization
Amount shall equal the Targeted
Overcollateralization Amount immediately prior to
such Distribution Date. If the Targeted
Overcollateralization Amount is permitted to "step-
down" on a Distribution Date, the Pooling and
Servicing Agreement permits all or a portion of the
related Principal Remittance Amount for such
Distribution Date not to be passed through as a
distribution of principal on such Distribution Date.
This has the effect of decelerating the amortization
of the Offered Certificates relative to the
aggregate outstanding Loan Balance of the Mortgage
Loans, thereby reducing the actual level of the
Overcollateralization Amount to the new, lower
Targeted Overcollateralization Amount. This amount
of the Principal Remittance Amount not distributed
as principal on a Class or Classes of Offered
Certificates therefore releases
overcollateralization from the Trust. The amount of
such releases are the Overcollateralization Release
Amounts.
On any Distribution Date, the sum of the Monthly
Excess Interest Amount and the Overcollateralization
Release Amount is the Monthly Excess Cashflow
Amount, which is required to be applied in the
following order of priority on such Distribution
Date.
(1) to fund the Class A Interest Carry Forward
Amount, if any, for such Distribution Date;
(2) to fund the Extra Principal Distribution
Amount for such Distribution Date;
(3) to fund the Class M-1 Interest Carry Forward
Amount, if any, for such Distribution Date;
(4) to fund the Class M-1 Realized Loss
Amortization Amount for such Distribution
Date;
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(5) to fund the Class M-2 Interest Carry Forward
Amount, if any, for such Distribution Date;
(6) to fund the Class M-2 Realized Loss
Amortization Amount for such Distribution
Date;
(7) to fund the Class B Interest Carry Forward
Amount, if any, for such Distribution Date;
(8) to fund the Class B Realized Loss
Amortization Amount for such Distribution
Date;
(9) to the Servicer to the extent of any
unreimbursed Delinquency Interest Advances or
Servicing Advances;
(10) if a Subordinated Trigger Event exists, the
excess of the Principal Remittance Amount
over the sum of the Class A, Class M-1, Class
M-2 and Class B Principal Distribution
Amounts, to the Subordinated Certificates in
reverse order of seniority;
(11) to the Class A, Class M-1, Class M-2 and
Class B Certificates, in that order, any
Available Funds Cap Carry Forward Amount with
respect to such Class;
(12) to fund a distribution to the Holders of the
Class C Certificates; and
(13) to fund a distribution to the Holders of the
Class R Certificates.
See "Credit Enhancement--Application of Monthly
Excess Cashflow Amounts" herein.
Optional Termination....... The Servicer will have the right to purchase all the
Mortgage Loans (a "Clean-Up Call") on any
Determination Date after the month in which the
aggregate Loan Balances of the Mortgage Loans in the
Trust Fund has declined to less than 10% of the
Initial Pool Balance (the "Clean-Up Call Date"). The
"Initial Pool Balance" equals the sum of (i) the
aggregate Loan Balance of the Initial Mortgage Loans
as of the Initial Cut-Off Date and (ii) the
aggregate Loan Balance of the Subsequent Mortgage
Loans as of their respective Subsequent Cut-Off
Dates. In addition, if the Servicer does not
exercise its Clean-Up Call rights within two
Distribution Dates after the Clean-Up Call Date, the
Holders of the Non-Offered Certificates shall
thereafter have the right to declare a Clean-Up Call
in accordance with the Pooling and Servicing
Agreement. See "Description of the Sale and Purchase
Agreement, and the Pooling and Servicing Agreement--
Optional Termination" herein.
Book-Entry Registration of
the Offered Certificates.. The Offered Certificates will initially be
issued in book-entry form. Persons acquiring
beneficial ownership interests in such Offered
Certificates ("Beneficial Holders") may elect to
hold their interests through The Depository Trust
Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear"), in Europe. Transfers within
DTC, Cedel or Euroclear, as the case may be, will be
in accordance with the usual rules and operating
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procedures of the relevant system. So long as the
Offered Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be evidenced
by one or more Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC or one
of the European Depositaries. Cross-market transfers
between persons holding directly or indirectly
through DTC, on the one hand, and counterparties
holding directly or indirectly through Cedel or
Euroclear, on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase," and together with Citibank,
the "European Depositaries"), the relevant
depositaries of Cedel and Euroclear, respectively,
and each a participating member of DTC. The Offered
Certificates will initially be registered in the
name of Cede. The interests of the Holders of such
Certificates will be represented by book-entries on
the records of DTC and participating members
thereof. No Beneficial Holder will be entitled to
receive a definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein) are
issued under the limited circumstances described
herein. All references in this Prospectus Supplement
to any Offered Certificates reflect the rights of
Beneficial Holders only as such rights may be
exercised through DTC and its participating
organizations for so long as such Offered
Certificates are held by DTC. See "Description of
the Offered Certificates--Book-Entry Registration of
the Offered Certificates" herein, and Annex I
hereto.
Ratings.................... It is a condition to the issuance of the Class A
Certificates that they be rated "AAA" or its
equivalent by at least two nationally recognized
statistical rating agencies (each a "Rating Agency"
and collectively, the "Rating Agencies"); it is a
condition to the issuance of the Class M-1
Certificates that they be rated at least "AA" or its
equivalent by at least two Rating Agencies; it is a
condition to the issuance of the Class M-2
Certificates that they be rated at least "A" or its
equivalent by at least two Rating Agencies; and it
is a condition to the issuance of the Class B
Certificates that they be rated at least "BBB" or
its equivalent by at least two Rating Agencies. 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 entity.
Also, the ratings assigned by a Rating Agency to the
Offered Certificates do not address the payment of
the Available Funds Cap Carry Forward Amount. See
"Prepayment and Yield Considerations" and "Ratings"
herein.
Federal Tax Aspects........ For federal income tax purposes, the Trust Fund
created by the Pooling and Servicing Agreement will
consist of two segregated asset pools ("REMIC I" and
"REMIC II") with respect to which elections will be
made to treat each as a separate "real estate
mortgage investment conduit" (a "REMIC"). Upon the
issuance of the Offered Certificates, Stroock &
Stroock & Lavan 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, REMIC I and REMIC II will each qualify
as a REMIC under Sections 860A through 860G of the
Code. The Offered Certificates will constitute
"regular interests" in a REMIC and each class of the
Class R Certificates will constitute the sole class
of "residual interests" in the related REMIC. See
"Certain Federal Income Tax Consequences" herein.
Holders of the Offered Certificates, including
Holders that generally report income on the cash
method of accounting,
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will be required to include interest on the Offered
Certificates in income in accordance with the
accrual method of accounting. See "Prepayment and
Yield Considerations" and "Certain Federal Income
Tax Consequences" herein.
ERISA Considerations....... Subject to the considerations discussed under "ERISA
Considerations" herein and in the Prospectus, the
Class A Certificates may be purchased by an employee
benefit plan or other retirement arrangement (a
"Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
Section 4975 of the Internal Revenue Code of 1986,
as amended (the "Code"). A fiduciary of a Plan
should consider whether the purchase of a Class A
Certificate is consistent with its fiduciary duties
under ERISA and does not result in a nonexempt
prohibited transaction as defined in Section 406 of
ERISA or Section 4975 of the Code. The Subordinate
Certificates may not be purchased by employee
benefit plans that are subject to ERISA except as
provided herein. See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment
Considerations............ The Class M-2 Certificates and Class B Certificates
will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). The appropriate
characterization of the Class M-2 Certificates and
the Class B Certificates under various legal
investment restrictions applicable to the investment
activities of certain institutions, and thus the
ability of investors subject to these restrictions
to purchase the Class M-2 Certificates and the Class
B Certificates, may be subject to significant
interpretive uncertainties.
The Class A and Class M-1 Certificates will
constitute "mortgage related securities" for
purposes of SMMEA for so long as they are rated in
one of the two highest rating categories by one or
more nationally recognized statistical rating
organizations. As such, the Class A Certificates and
the Class M-1 Certificates will be legal investments
for certain entities to the extent provided in
SMMEA, subject to state laws overriding SMMEA.
Furthermore, certain states have enacted legislation
overriding the legal investment provisions of SMMEA.
In addition, institutions whose activities are
subject to review by federal or state regulatory
authorities may be or may become subject to
restrictions, which may be retroactively imposed by
such regulatory authorities, on the investment by
such institutions in certain forms of mortgage
related securities.
All investors whose investment authority is subject
to legal restrictions should consult their own legal
advisors to determine whether, and to what extent,
the Offered Certificates will constitute legal
investments for them. See "Legal Investment
Considerations" herein and "Legal Investment" in the
Prospectus.
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S-24
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
LIMITED LIQUIDITY
The Underwriters intend to make a secondary market in the Offered
Certificates, but will have no obligation to do so. There can be no assurance
that a secondary market for any Class of Offered Certificates will develop, or
if one does develop, that it will continue or provide sufficient liquidity of
investment or that it will remain for the term of such Class of Offered
Certificates. See "Certain Legal Matters" herein.
RISK OF MORTGAGE LOAN RATES REDUCING THE PASS-THROUGH RATE ON THE OFFERED
CERTIFICATES
The calculation of the Pass-Through Rate on the Offered Certificates is
based upon (i) the value of an index (the London interbank offered rate for one-
month deposits of U.S. dollars, "LIBOR") which is different from the rate
applicable to the Mortgage Loans as described under "The Mortgage Loans" (either
as a result of the use of a fixed rate for an initial period of six months, two
years or three years or a different index, rate determination date or rate
adjustment date) and (ii) the weighted average of the Coupon Rates of the
Mortgage Loans which are subject to periodic adjustment caps, maximum rate caps
and minimum rate floors. 27.15% of the Mortgage Loans by Aggregate Statistical
Calculation Date Loan Balance adjust semi-annually based upon the London
interbank offered rate for six-month United States dollar deposits ("Six-Month
LIBOR"). 72.08% of the Mortgage Loans by Aggregate Statistical Calculation Date
Loan Balance are 2/28 Loans that provide for a fixed interest rate for a period
of approximately two years following origination and 0.76% of the Mortgage Loans
by Aggregate Statistical Calculation Date Loan Balance are 3/27 Loans that
provide for a fixed interest rate for a period of approximately three years
following origination. However, the Pass-Through Rate on the Offered
Certificates adjusts monthly based upon LIBOR as described under "Description of
the Offered Certificates--Calculation of LIBOR" herein, subject to the Available
Funds Cap. Consequently, the interest which becomes due on the Mortgage Loans
(net of the Servicing Fee and the Trustee Fee) during any Due Period may not
equal the amount of interest that would accrue at LIBOR plus the margin on the
Offered Certificates during the related Accrual Period.
The Mortgage Loans may have Coupon Rates that could become lower than the
prevailing rate of LIBOR.
In particular, the Pass-Through Rate on the Offered Certificates adjusts
monthly, while the interest rates of the Mortgage Loans adjust less frequently
with the result that the Available Funds Cap may limit increases in the Pass-
Through Rate on the Offered Certificates for extended periods in a rising
interest rate environment. In addition, LIBOR and Six-Month LIBOR may respond to
different economic and market factors, and there is not necessarily a
correlation between them. Thus, it is possible, for example, that LIBOR may rise
during periods in which Six-Month LIBOR is stable or is falling or that, even if
both LIBOR and Six-Month LIBOR rise during the same period, LIBOR may rise more
rapidly than Six-Month LIBOR. Furthermore, if the Available Funds Cap determines
the Pass-Through Rate on the Offered Certificates for a Distribution Date, the
value of the Offered Certificates will be temporarily or permanently reduced.
TRUST FUND ASSETS ARE THE ONLY SOURCES OF CREDIT ENHANCEMENT
The assets of the Trust Fund are the sole source of funds for distributions
on the Certificates. The subordination of the Subordinate Certificates to the
Class A Certificates, the further subordination within the Subordinate
Certificates and the overcollateralization features of the Trust Fund are the
sole sources of protection against losses on the Mortgage Loans and other
shortfalls in available funds. If losses or other shortfalls exceed the
protection afforded by such mechanisms, holders of Offered Certificate will bear
their proportionate share of such losses and shortfalls. The Offered
Certificates represent interests only in the Trust Fund and do not represent
interests in, or obligations of the Depositor, the Seller, the Servicer, the
Trustee or any of their respective affiliates.
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<PAGE>
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Certificates will be
provided by (i) the subordination of distributions in respect of the Offered
Certificates (as well as the subordination of certain Classes of Certificates to
other Classes of Certificates, as described herein) and (ii) the
overcollateralization feature which results from the limited acceleration of the
principal amortization of the Offered Certificates relative to the amortization
of the Mortgage Loans by the application of the Monthly Excess Interest Amount,
as described herein. If the Mortgage Loans experience higher rates of
delinquencies, defaults and losses than initially anticipated in connection with
the ratings of the Offered Certificates, the amounts available from the credit
enhancement may not be adequate to cover the delays or shortfalls in
distributions to the Holders of the Offered Certificates that result from such
higher delinquencies, defaults and losses. If the amounts available from the
credit enhancement are inadequate, the Holders of the Offered Certificates will
bear the risk of any delays and losses resulting from the delinquencies,
defaults and losses on the Mortgage Loans.
While the distribution of the Monthly Excess Interest Amount to the Holders
of the Offered Certificates in the manner specified herein has been designed to
produce and maintain a specified level of overcollateralization with respect to
the Offered Certificates, there can be no assurance that the Monthly Excess
Interest Amount will be generated in sufficient amounts to ensure that such
overcollateralization level will be achieved or maintained at all times. In
particular, as a result of delinquencies on the Mortgage Loans during any Due
Period, the amount of Monthly Excess Interest Amounts available to decrease the
Aggregate Certificate Principal Balance will be reduced, thereby slowing the
rate at which overcollateralization builds, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Applied Realized
Loss Amount.
The Subordinate Certificates will not be entitled to any principal
distributions prior to the Stepdown Date or on any Distribution Date during the
continuation of a Trigger Event (unless the aggregate Certificate Principal
Balance of the Class A Certificates has been reduced to zero). As a result, the
weighted average lives of the Subordinate Certificates will be longer than would
be the case if distributions of principal were to be allocated on a pro rata
basis among the Class A and Subordinate Certificates. As a result of the longer
weighted average lives of the Subordinate Certificates, the Holders of
Subordinate Certificates have a greater risk of suffering a loss on their
investments.
The rights of the holders of Subordinate Certificates to receive
distributions with respect to collections on the Mortgage Loans will be
subordinate to the rights of the holders of the Class A Certificates. In
addition, the Subordinate Certificates will be allocated all Applied Realized
Loss Amounts. Because of these two features, the yields to maturity of the
Mezzanine and Class B Certificates will be sensitive, in varying degrees, to
defaults on the Mortgage Loans (and the timing thereof). Investors should fully
consider the risks associated with an investment in the Subordinate
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Mortgage
Loans. See "Summary of Terms--Credit Enhancement--Application of Realized
Losses," "Credit Enhancement--Application of Realized Losses" and "Prepayment
and Yield Considerations--Projected Pre-Payment and Yield for Offered
Certificates" herein.
ADDITIONAL MORTGAGE LOANS AND SUBSEQUENT MORTGAGE LOANS
Initial Mortgage Loans will also include Mortgage Loans originated or
acquired by the Seller after the Statistical Calculation Date and prior to the
Initial Cut-Off Date ("Additional Mortgage Loans") and the final pool of
Mortgage Loans may also include Subsequent Mortgage Loans. As a result of the
foregoing, the statistical distribution of characteristics as of the Closing
Date for the final Mortgage Loan pool will vary somewhat from the statistical
distribution of such characteristics as of the Statistical Calculation Date as
presented in this Prospectus Supplement.
Any purchase of Additional Mortgage Loans and Subsequent Mortgage Loans by
the Trust Fund is subject to the following conditions, among others: (i) each
such Mortgage Loan must satisfy the representations and warranties specified in
the Sale and Purchase Agreement and in the Pooling and Servicing Agreement; (ii)
the Seller will not select such Mortgage Loans in a manner that it believes is
adverse to the interests of the Certificateholders; and (iii) as of the Initial
Cut-Off Date, the Mortgage Loans will satisfy the criteria described herein
under "The Mortgage Loans--Purchase of Additional Mortgage Loans and Subsequent
Mortgage Loans." Following the transfer of such Mortgage Loans to the
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Trust Fund, the Seller anticipates that the statistical characteristics of the
Mortgage Loans will vary somewhat from those of the Initial Mortgage Loans
measured as of the Statistical Calculation Date and presented herein.
MANDATORY PRE-PAYMENT OF THE CLASS A CERTIFICATES
If the principal amount of eligible Subsequent Mortgage Loans available
during the Pre-Funding Period and sold by the Depositor to the Trust Fund is
less than 100% of the Original Pre-Funded Amount, a prepayment of principal to
the Holders of the Class A Certificates will occur as described herein.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
Fund by the end of the Pre-Funding Period, the Holders of the Class A
Certificates will receive a prepayment of principal in an amount equal to the
related Pre-Funded Amount remaining in the Pre-Funding Account on the
Distribution Date following the end of the Pre-Funding Period. Although no
assurances can be given, the Seller expects that the principal amount of
Subsequent Mortgage Loans sold to the Depositor for sale to the Trust Fund will
require the application of substantially all amounts on deposit in the Pre-
Funding Account and that there will be no material principal prepayment to the
Holders of the Class A Certificates from the Pre-Funding Account.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Seller began originating sub-prime mortgage loans comparable to the
Mortgage Loans during April, 1995. The Seller's underwriting standards generally
are less stringent than those of the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") with respect to
a borrower's credit standing and repayment ability and in certain other
respects. The Mortgage Loans originated or acquired by the Seller will have been
made to borrowers that typically have limited access to traditional mortgage
financing for a variety of reasons, such as high level of debt-to-income ratios,
past credit experience or a limited credit history. As a result of this approach
to underwriting, the Mortgage Loans in the Trust Fund are likely to experience
higher rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in accordance with FNMA and FHLMC standards.
LIMITED SUB-PRIME SERVICING EXPERIENCE
Prior to June, 1997, the Servicer sold all of its sub-prime mortgage loans
in whole loan transactions on a servicing released basis and consequently, the
Servicer does not have any significant historical loss and delinquency data
relating to its sub-prime mortgage loan portfolio. Although the Servicer has
significant prior experience in servicing prime mortgage loans, it is in the
process of converting its systems and hiring and reallocating personnel to
service its sub-prime mortgage loan portfolio. While the Servicer believes that
its historical experience in servicing prime mortgage loans will be helpful in
servicing its sub-prime mortgage loan portfolio, the servicing of sub-prime
mortgage loans requires special skill and diligence. Moreover, often immediately
following a servicing or systems conversion, there are temporary disruptions in
servicing. Holders of the Offered Certificates, in general, and the Subordinate
Certificates, in particular, will be relying on the ability of the Servicer to
adequately service sub-prime mortgage loans and the risk of any failure by the
Servicer to adequately service the Mortgage Loans will be borne by the Holders
of the Offered Certificates.
SENSITIVITY TO PREPAYMENTS
All of the Mortgage Loans may be prepaid in full or in part at any time.
Where permitted by law and the related loan origination program, the borrower
will be required to pay a prepayment charge in connection with any voluntary
prepayments. In addition, a substantial portion of the Mortgage Loans contain
due-on-sale provisions which are required to be enforced by the Servicer to the
extent set forth in the Pooling and Servicing Agreement and will result in
prepayment of such Mortgage Loans. The rate of prepayments of the Mortgage Loans
cannot be predicted and may be affected by a wide variety of economic, social,
competitive and other factors, including state and federal income tax policies
(including possible future changes affecting the deductibility for federal
income tax purposes of interest payments on mortgage loans), interest rates, the
availability of alternative financing and homeowner mobility. Therefore, no
assurance can be given as to the level of prepayments that the Trust Fund will
experience. See "Prepayment and Yield Considerations" herein.
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<PAGE>
The rate of prepayments on the Mortgage Loans is sensitive to the credit
standing of the borrower, which may improve and thereby allow the borrower to
refinance on more favorable terms, or may decline and thereby limit the
borrower's ability to refinance. The rate of prepayments on fixed rate mortgage
loans that have not yet become adjustable rate mortgage loans, such as the
Mortgage Loans that are 2/28 Loans or 3/27 Loans, is sensitive to prevailing
interest rates. The prepayment behavior of the 2/28 Loans and 3/27 Loans may
differ from that of the other Mortgage Loans. As a 2/28 Loan or 3/27 Loan
approaches its initial adjustment date, the borrower may become more likely to
refinance such loan to avoid an increase in the Coupon Rate, even if fixed rate
loans are only available at rates that are slightly lower or higher than the
Coupon Rate before adjustment. The existence of the applicable periodic rate
cap, lifetime cap and lifetime floor also may affect the likelihood of
prepayments resulting from refinancings. Generally, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
rates remain at or above the interest rates on the Mortgage Loans. Conversely,
if prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans, the rate of prepayments is likely to decrease. The average life
of the Offered Certificates and, if purchased at other than par, the yields
realized by Holders of the Offered Certificates will be sensitive to levels of
payment (including prepayments relating to the Mortgage Loans (the
"Prepayments")) on the Mortgage Loans. In general, the yield on an Offered
Certificate that is purchased at a premium from the outstanding principal amount
thereof may be adversely affected by a higher than anticipated level of
Prepayments of the Mortgage Loans. Conversely, the yield on an Offered
Certificate that is purchased at a discount from the outstanding principal
amount thereof may be adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
GEOGRAPHIC CONCENTRATION
As of the Statistical Calculation Date, approximately 24.93%, 8.26% and
7.42% of the Initial Mortgage Loans by Aggregate Statistical Calculation Date
Loan Balance are secured by Mortgaged Properties located in the States of
California, Illinois and Minnesota, respectively. Because of the relatively high
geographic concentration of the Mortgage Loans within California, Illinois and
Minnesota, losses on the Mortgage Loans may be higher than would be the case if
the Mortgage Loans were more geographically diversified. For example, certain of
the Mortgaged Properties may be more susceptible to certain types of special
hazards, such as earthquakes, floods, hurricanes and other natural disasters and
major civil disturbances, than residential properties located in other parts of
the country. In addition, the regional economies of the areas in which the
Mortgaged Properties are located may be adversely affected to a greater degree
than the economies of other areas of the country by certain regional
developments. If the relevant California, Illinois or Minnesota residential real
estate markets experience an overall decline in property values after the dates
of origination of the respective Mortgage Loans, then the rates of
delinquencies, foreclosures and losses on the Mortgage Loans may be expected to
increase and such increase may be substantial. Further, the State of California
is an "election of remedies" state, which generally means that in the event of
default on Mortgage Loans in that state, the lender, in this case the Servicer,
in the name of and on behalf of the Trustee, must elect either to sue the
borrower on the debt or pursue its remedies against the property. If the
Servicer chooses to pursue its remedies against the borrower, then generally it
will not be able to foreclose against the Mortgaged Property. Any such losses
are intended to be (but no assurances can be given that they will be) covered by
the subordination and overcollateralization features described herein. Such
losses may affect the rate and timing of principal amortization of certain
Classes of the Offered Certificates. The Pooling and Servicing Agreement will
provide that the final Mortgage Loan pool, as of the end of the Pre-Funding
Period, will be comprised of no more than 30% of Mortgage Loans, by aggregate
Loan Balance as of the related Cut-Off Date, that are secured by Mortgaged
Properties located in the State of California and no than more than 10% of
Mortgage Loans, by aggregate Loan Balance as of the related Cut-Off Date, that
are secured by Mortgaged Properties located in any other state.
OTHER LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Seller. In addition,
other state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the Mortgage
Loans. The Seller will be required to repurchase, subject to the terms of the
Sale and Purchase
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Agreement and the Pooling and Servicing Agreement, any Mortgage Loans which, at
the time of origination, did not comply with applicable federal and state laws
and regulations. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of the Trust Fund to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower to
a refund of amounts previously paid and, in addition, could subject the Seller
to damages and administrative enforcement. See "Certain Legal Aspects of the
Mortgage Loans" herein.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the ability of
the Servicer to collect all or part of the principal of or interest on the
Mortgage Loans and in addition could subject the Seller and the Trust Fund to
damages and administrative enforcement. The Seller will be required to
repurchase any Mortgage Loans which, at the time of origination, did not comply
with such federal laws or regulations. See "Certain Legal Aspects of the
Mortgage Loans" herein.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect the
ability of the Servicer to collect full amounts of interest on certain Mortgage
Loans and could interfere with the ability of the Servicer to foreclose on
certain properties. If a borrower's obligation to repay amounts otherwise due on
a Mortgage Loan is relieved pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940, none of the Trust Fund, the Servicer, the Seller, the Depositor nor
the Trustee will be required to advance such amounts, and any loss in respect
thereof may reduce the amounts available to be paid to the Holders of the
Certificates. Any such shortfall will be borne first by the Holders of the
Subordinate Certificates, second, by the Holders of the Mezzanine Certificates
and third, by the Holders of the Senior Certificates. See "Certain Legal Aspects
of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940" herein.
Certain of the Mortgage Loans will be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. The Riegle
Act adds certain additional provisions to Regulation Z, the implementing
regulation of the Truth-In-Lending Act. These provisions impose additional
disclosure and other requirements on creditors with respect to non-purchase
money mortgage loans with high interest rates or high upfront fees and charges.
In general, mortgage loans within the purview of the Riegle Act have annual
percentage rates over 10% greater than the yield on Treasury Securities of
comparable maturity and/or fees and points which exceed the greater of 8% of the
total loan amount or $400. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
RISKS ASSOCIATED WITH CERTAIN ORIGINATION FEES
Fees earned on the origination of loans, placement of related insurance and
other services provided by the Seller and certain of its affiliates are often
paid by the borrower out of related loan proceeds. From time to time, in the
ordinary course of their businesses, originators of mortgage loans have been
named in legal actions brought by mortgagors challenging the amount or method of
imposing or disclosing such fees. To date, no such action has been decided
against the Seller and any of its affiliates. If such an action against the
Seller with respect to any Mortgage Loan were successful, a court might require
that the principal balances of the related Mortgage Loans be reduced by the
amount of contested fees
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or charges. Any such reductions could result in substantial Realized Losses
during one or more Due Periods, and may result in losses on one or more Classes
of the Offered Certificates.
RISK OF SELLER INSOLVENCY
The Seller believes that the transfer of the Mortgage Loans to the
Depositor by the Seller constitutes a sale by the Seller to the Depositor and,
accordingly, that such Mortgage Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller, and will not be available
to the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Depositor was a pledge of
such Mortgage Loans in connection with a borrowing by the Seller rather than a
true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Offered Certificates.
THE SELLER AND THE SERVICER
GENERAL
The Initial Mortgage Loans will be acquired by the Depositor on the Closing
Date from WMC Mortgage Corp. ("WMC" or the "Seller" or the "Servicer"). From
time to time prior to the end of the Pre-Funding Period, the Depositor will
acquire additional Mortgage Loans (the "Subsequent Mortgage Loans") from the
Seller which will be transferred to the Trust Fund. WMC will be responsible for
servicing the Mortgage Loans for the Trust Fund in accordance with WMC's
policies and procedures for servicing mortgage loans and in accordance with the
terms of the Pooling and Servicing Agreement.
WMC is a mortgage banking company incorporated in the State of California.
Established in 1955, WMC has developed a mortgage origination franchise in the
western United States and maintains additional operations in the Southeast,
Southwest, Midwest and the Mid-Atlantic, with special emphasis on originating
single-family mortgage loans in each of the regions in which it competes. WMC
originates both prime-quality mortgage loans and sub-prime-quality mortgage
loans. WMC has approximately 1,600 employees and operates both production
support and loan servicing platforms for its originations.
WMC was owned by a subsidiary of Weyerhaeuser Company until May, 1997 when
it was sold to WMC Finance Co., a company owned principally by affiliates of
Apollo Management, L.P. ("Apollo"), a private investment firm.
WMC Equity Services ("Equity Services"), a division of WMC formed in April
1995, is the primary business unit responsible for the sub-prime residential
mortgage origination business. Equity Services' business is headquartered in
WMC's home office in Woodland Hills, California with underwriting and closing
centers in Schaumburg, Illinois; Chantilly, Virginia; Santa Ana, California; the
Woodland Hills, California headquarters; and 6 satellite offices. Equity
Services currently has approximately 550 employees.
Equity Services' originations to date have come primarily through its
broker relationships. There are approximately 130 sub-prime loan officers who
are responsible for recruiting and managing the independent broker network. In
July 1996, Equity Services began a sub-prime retail origination effort by
placing a sub-prime loan officer in most of WMC's retail branches. The
sub-prime-quality mortgage loan production of Equity Services totaled
approximately $430 million in 1996 and approximately $1.2 billion for the nine
months ending September 30, 1997.
UNDERWRITING GUIDELINES
The Mortgage Loans will have been originated generally in accordance with
underwriting guidelines (the "WMC Guidelines") established by Equity Services.
The WMC Guidelines are primarily intended to (a) determine that the borrower has
the ability to repay the mortgage loan in accordance with its terms and (b)
determine that the related mortgaged property will provide sufficient value to
recover the investment if the borrower defaults. On a case-by-case
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basis Equity Services may determine that, based upon compensating factors, a
prospective mortgagor not strictly qualifying under the underwriting risk
category or other guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio at origination ("LTV"), low debt-to-income ratio ("Debt Ratio"), good
mortgage payment history, stable employment and time in residence at the
applicant's current address. It is expected that a substantial number of the
Mortgage Loans to be included in the Trust Fund will represent such underwriting
exceptions.
The Mortgage Loans in the Trust Fund will fall within the following six
documentation type categories established by Equity Services: Full
Documentation, Full-Alternative Documentation, Lite Documentation, Stated
Documentation, No Ratio Documentation and Simple 65 Documentation. Certain of
the Mortgage Loans will have been underwritten (in many cases, as described
above, subject to exceptions for compensating factors) in accordance with
programs established by Equity Services for the origination of mortgage loans
secured by mortgages on condominiums, vacation and second homes, manufactured
housing and two- to four-family properties. In addition, Equity Services has
established specific parameters for Super Jumbo Loans, which are designated in
the WMC Guidelines as mortgage loans with original principal balances of
$500,000 or more.
Under the WMC Guidelines, Equity Services or the applicable originating
broker reviews and verifies the loan applicant's eligible sources of income
(except under the Stated Documentation, No Ratio Documentation and Simple 65
Documentation categories), calculates the amount of income from eligible sources
indicated on the loan application, reviews the credit and mortgage payment
history of the applicant and calculates the Debt Ratio (except under the No
Ratio Documentation category) to determine the applicant's ability to repay the
loan, and reviews the mortgaged property for compliance with the WMC Guidelines.
The WMC Guidelines are applied in accordance with a procedure which complies
with applicable federal and state laws and regulations and require, among other
things, (i) an appraisal of the mortgaged property which conforms to FHLMC and
FNMA standards and (ii) unless such appraisal was completed by Lenders Service
Inc., First American Appraisal Services, Nationwide Appraisals, Valuation
Information Technology, G.F. Hansen & Associates, Appraisal Enhancement Services
or Bobick and Associates a review of such appraisal by a WMC-approved review
appraiser, which review, depending upon the original principal balance and LTV
of the related mortgaged property, may consist of a second appraisal, a field
review or a desk review. The WMC Guidelines permit mortgage loans with LTVs of
up to 90% (lower in the case of (i) risk categories below "A-", (ii) Lite
Documentation, Stated Documentation, No Ratio Documentation and Simple 65
Documentation categories, (iii) condominium, vacation and second home and
manufactured housing mortgaged property types, (iv) Super Jumbo Loans and (v)
refinance mortgage loans). The WMC Guidelines permit combined LTVs ("CLTV") of
up to 100% first and second lien mortgage loans (lower in the case of risk
categories below "C", No Ratio Documentation and Simple 65 Documentation
categories), provided that mortgage loans with LTVs of 90% or more are not
eligible for second lien financing. Under the WMC Guidelines, cash out on
refinance mortgage loans is generally (i) unlimited on Full Documentation
mortgage loans with LTVs of up to 85%, Stated Documentation and No Ratio
Documentation mortgage loans with LTVs of up to 80%, and Simple 65 Documentation
mortgage loans with LTVs of up to 65%, (ii) limited to 20% of the loan amount
after payment of all revolving debt for mortgage loans with LTVs over 85% and
(iii) limited to $125,000 on mortgage loans in risk categories "D" and "Z".
All mortgage loans originated under the WMC Guidelines are based on loan
application packages submitted through mortgage brokerage companies or WMC's
retail branches. Loan application packages submitted through mortgage brokerage
companies, containing in each case relevant credit, property and underwriting
information on the loan request, are compiled by the applicable mortgage
brokerage company and submitted to Equity Services for approval and funding. The
mortgage brokerage companies receive a portion of the loan origination fee
charged to the mortgagor at the time the loan is made. No single mortgage
brokerage company accounts for more than 5%, measured by outstanding principal
balance, of the sub-prime mortgage loans originated by WMC.
The WMC Guidelines require that the documentation accompanying each
mortgage loan application include, among other things, a credit report on the
related applicant from a credit reporting company. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcy, repossession, suits or judgments. In the case of purchase money
mortgage loans, WMC generally verifies the source of funds for the downpayment.
In the case of mortgage loans originated under the Full Documentation category,
the WMC Guidelines require documentation of income (which may consist of (i)
verification of employment form covering a specified time period which varies
with LTV, (ii) two most
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recent pay stubs and two years of tax returns and/or (iii) two years of bank
statements) and telephonic verification. Under the Full-Alternative
Documentation category, only two years of bank statements are required. In the
case of mortgage loans originated under the Lite Documentation category, the WMC
Guidelines require similar documentation of income, provided that such
documentation may cover shorter periods of time and telephonic verification may
be omitted. Lite Documentation mortgage loans are generally acceptable at 5%
greater LTV than Stated Documentation mortgage loans, up to a maximum of 80%
LTV. In the case of mortgage loans originated under the Stated Documentation
category, the WMC Guidelines require (i) that income be stated on the
application, accompanied by proof of self employment in the case of self-
employed individuals, (ii) that a WMC prefunding auditor conduct telephonic
verification of employment, or in the case of self-employed individuals,
telephonic verification of business line and (iii) that stated income be
consistent with type of work and that assets listed on the application be
consistent with stated income. No Ratio Documentation mortgage loans (A-risk
categories only) and Simple 65 Documentation mortgage loans require no proof of
self-employment, income documentation or proof of assets. Debt Ratio
calculations are not used in the case of No Ratio Documentation mortgage loans.
The general collateral requirements in the WMC Guidelines specify that a
mortgaged property not have a rating of lower than "average". For mortgage loans
with LTVs greater than 80%, deferred maintenance costs may generally not exceed
$1,500. At LTVs of 80% and below, deferred maintenance costs are generally
acceptable at the lesser of $4,000 or 3% of the value of the mortgaged property.
Each appraisal includes a market data analysis based on recent sales of
comparable homes in the area. The general collateral requirements in the WMC
Guidelines specify conditions and parameters relating to zoning, land to
improvement ratio, special hazard zones, neighborhood property value trends,
whether the property site is too isolated, whether the property site is too
close to commercial businesses, whether the property site is rural, city or
suburban, whether the property site is typical for the neighborhood in which it
is located and whether the property site is sufficient in size and shape to
support all improvements.
The WMC Guidelines used by Equity Services are less stringent than the
standards generally acceptable to FNMA and FHLMC with regard to the mortgagor's
credit standing and repayment ability and in certain other respects. Mortgagors
who qualify under the WMC Guidelines generally have payment histories and Debt
Ratios which would not satisfy FNMA and FHLMC underwriting guidelines and may
have a record of major derogatory credit items such as outstanding judgments or
prior bankruptcies. The WMC Guidelines establish the maximum permitted LTV for
each loan type based upon these and other risk factors.
Equity Services requires that all mortgage loans have title insurance and
be secured by liens on real property. Equity Services also requires that fire
and extended coverage casualty insurance be maintained on the mortgaged property
in an amount equal to the greater of full replacement or the amount of all liens
on such mortgaged property. In addition, flood insurance is obtained where
applicable and a tax service is used to monitor the payment of property taxes on
all loans.
RISK CATEGORIES
Under the WMC Guidelines, various risk categories are used to grade the
likelihood that the mortgagor will satisfy the repayment conditions of the
mortgage loan. These risk categories establish the maximum permitted LTV and
loan amount, given the borrower's mortgage payment history, the borrower's
consumer credit history, the borrower's liens/charge-offs/bankruptcy history,
the borrower's Debt Ratio (except under the No Ratio Documentation category),
the borrower's use of proceeds (purchase or refinance), the documentation type
and other factors. Lite Documentation mortgage loans are generally acceptable at
5% greater LTV than Stated Documentation mortgage loans, up to a maximum of 80%
LTV. No Ratio Documentation mortgage loans have a maximum loan amount of
$350,000 and a maximum LTV of 80%. Simple 65 Documentation mortgage loans have a
maximum loan amount of $250,000 and a maximum LTV of 65%. In general, higher
credit risk mortgage loans are graded in categories which permit higher Debt
Ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies. Tax liens are not considered in
determining risk category; derogatory medical collections are not considered in
determining risk category and are not required to be paid off; and delinquent
student loans are not considered in determining risk category if other consumer
credit is paid as agreed.
The WMC Guidelines specify the following risk categories and associated
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan. However, as described above, the
following
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are guidelines only, and exceptions are made on a case specific basis. In
addition, variations of the following criteria are applicable under the programs
established by Equity Services for the origination of Super Jumbo Loans and for
the origination of mortgage loans secured by mortgages on condominiums, vacation
and second homes, manufactured housing and two- to four-family properties.
Risk Category "A-"
- ------------------
Maximum loan amount: $600,000 for Full Documentation; $400,000 for Stated
Documentation; $300,000 for non-owner-occupied mortgaged property.
Mortgage payment history: not more than two 30 day delinquencies during the
preceding 12 months (a rolling 30 day delinquency counts as only one such
delinquency) and no 60 day delinquencies during the preceding 12 months.
Consumer credit history: majority paid as agreed during the preceding 12
months; 30 day delinquencies and isolated 60 day delinquencies during the
preceding 12 months are permitted.
Liens/charge-offs: minor in nature.
Bankruptcy: permitted if filed more than two years preceding origination of
loan.
Notice of Default ("NOD")/foreclosures: none permitted within the preceding
two years.
Maximum LTV: 90% for Full Documentation and owner-occupied mortgaged
property; 80% for Full Documentation and non-owner-occupied mortgaged property;
80% for Stated Documentation and owner-occupied mortgaged property; 70% for
Stated Documentation and non-owner-occupied mortgaged property. For 90% LTV
mortgage loans, maximum loan amount is limited to $400,000 and maximum Debt
Ratio is limited to 45%.
Debt Ratio: 45% to 60%.
Risk Category "B"
- -----------------
Maximum loan amount: $500,000 for Full Documentation; $400,000 for Stated
Documentation; $300,000 for non-owner-occupied mortgaged property.
Mortgage payment history: either (i) not more than two 30 day delinquencies
and one 60 day delinquency during the preceding 12 months (a rolling 30 day or
60 day delinquency counts as only one such delinquency) or (ii) not more than
four 30 day delinquencies during the preceding 12 months (a rolling 30 day
delinquency counts as only one such delinquency) and no 60 day delinquencies
during the preceding 12 months.
Consumer credit history: some 60 day and some 90 day delinquencies during
the preceding 12 months are permitted. A borrower with no consumer credit
history will be deemed to have a "B" risk category consumer credit history.
Liens/charge-offs: minor in nature.
Bankruptcy: permitted if filed more than two years preceding origination of
loan.
NODs/foreclosures: none permitted within the preceding two years.
Maximum LTV: 85% for Full Documentation and owner-occupied mortgaged
property; 75% for Full Documentation and non-owner-occupied mortgaged property;
75% for Stated Documentation and owner-occupied mortgaged property; 65% for
Stated Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 50% to 60%.
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Risk Category "C"
- -----------------
Maximum loan amount: $400,000 for Full Documentation; $350,000 for Stated
Documentation; $250,000 for non-owner-occupied mortgaged property.
Mortgage payment history: 60 day and 90 day delinquencies during the
preceding 12 months are permitted at Equity Services' discretion.
Consumer credit history: a pattern of late payments during the preceding 12
months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
Bankruptcy: permitted if filed more than 12 months preceding origination of
loan; if Chapter 13, an LTV of 70% or less is allowed and the Seller will pay
off a bankruptcy trustee if payments in the plan were as agreed.
NODs/foreclosures: none permitted within the preceding 12 months.
Maximum LTV: 75% for Full Documentation and owner-occupied mortgaged
property (80% where borrower has 5 years steady employment with the same
employer, borrower has 5 years of residency in the same house, loan amount does
not exceed $300,000, mortgaged property is a single-family residence and Debt
Ratio does not exceed 50%); 70% for Full Documentation and non-owner-occupied
mortgaged property; 70% for Stated Documentation and owner-occupied mortgaged
property; 60% for Stated Documentation and non-owner-occupied mortgaged
property.
Debt Ratio: 50% to 60%.
Risk Category "D"
- -----------------
Maximum loan amount: $400,000 for Full Documentation; $200,000 for Stated
Documentation; $200,000 for non-owner-occupied mortgaged property.
Mortgage payment history: maximum 120 day delinquency status (up to 149
actual days) during the preceding 12 months.
Consumer credit history: poor consumer credit history during the preceding
12 months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
Bankruptcy: permitted if discharged at least one day prior to origination
of the loan.
NODs/foreclosures: NOD outstanding less than 150 days at the time of
origination of the loan is permitted.
Maximum LTV: 70% for Full Documentation and owner-occupied mortgaged
property; 60% for Full Documentation and non-owner-occupied mortgaged property;
65% for Stated Documentation and owner-occupied mortgaged property; 60% for
Stated Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 60%.
Risk Category "Z"
- -----------------
Maximum loan amount: $300,000 for Full Documentation; $200,000 for Stated
Documentation; $200,000 for non-owner-occupied mortgaged property.
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Mortgage payment history: mortgage payment history not considered as a
factor for this risk category.
Consumer credit history: a poor consumer credit history during the
preceding 12 months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
Bankruptcy: permitted if discharged at least one day prior to origination
of the loan.
NODs/foreclosures: NOD outstanding 150 or more days at the time of
origination of the loan is permitted.
Maximum LTV: 65% for Full Documentation and owner-occupied mortgaged
property; 60% for Full Documentation and non-owner-occupied mortgaged property;
60% for Stated Documentation and owner-occupied mortgaged property; 60% for
Stated Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 60%.
LIMITED SUB-PRIME SERVICING EXPERIENCE
Until recently, Equity Services sold its sub-prime product on a whole-loan,
servicing-released basis to secondary market investors. Consequently, there is
currently no meaningful information regarding the delinquency and loss
experience relating to WMC's sub-prime mortgage portfolio. In addition, WMC
historically has serviced only conforming or prime quality mortgage loans, and
the majority of that servicing portfolio has been sold in connection with the
acquisition of WMC by Apollo. WMC has modified and intends to expand its
existing servicing platform to serve the sub-prime market.
QUALITY CONTROL PROCEDURES HIGHLIGHTS
Each month, WMC's quality control department conducts a review and
verification of approximately 5% of the loans originated and purchased during
the previous month with specific attention to the following areas:
Legal Documentation: Promissory note, mortgage, deed of trust, truth-in-
lending disclosure, title policy and all other applicable origination documents
are reviewed for accuracy and proper signatures.
Credit Documentation: All credit verifications, credit applications and
credit reports are reviewed for accuracy and proper signatures.
All reviews are reported to management on a monthly basis. Management meets
with the department supervisors in both underwriting and quality control to
review results. Quality control functions are performed separately from loan
originating and underwriting.
Quality Control Appraisals: Each appraisal is reviewed with emphasis on the
following areas: verification of occupancy, valuation method, and review of
comparable sales.
In addition to the review above, re-inspections are performed on 10% of the
reviewed loans, i.e., approximately 0.5% of originations. If a pattern of
questionable values or methodology becomes apparent for an appraiser, a meeting
is arranged to discuss these problems, and the appraisal may be replaced.
COLLECTION PROCEDURES
Collections are conducted by WMC's service center at its corporate
headquarters in Woodland Hills, California.
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The collection department is structured in such a way that generally the
most experienced collectors are responsible for the accounts which are most
delinquent. Accounts which are 1-29 days delinquent are handled by collectors
with a minimum of 2 years of experience in sub-prime mortgage collections.
Accounts which are 30-59 days delinquent are handled by collectors with a
minimum of 3 years of experience in sub-prime mortgage collections. All accounts
over 60 days delinquent are reviewed by a loss mitigation collector with a
minimum of 5 years of experience in sub-prime mortgage collections. Accounts may
be transferred to a loss mitigation collector at any time during the delinquency
process, depending on the loan situation and the degree of delinquency. Loss
mitigation collectors are responsible for accounts requiring "special handling",
such as short pays, forbearance, settlement, and overall workout handling. Loss
mitigation collectors review all pre-foreclosure accounts and are responsible
for packaging loans for foreclosure committee approval. Bankruptcy and
foreclosure collectors (or processors) with a minimum of 3 years of experience
in sub-prime mortgage collections are responsible for monitoring
trustee/attorney performance. The REO department is responsible for marketing
and managing the sale effort for any property acquired through foreclosure, and
a minimum of 2 years of experience in mortgage collections is required.
WMC utilizes an automatic telephone dialer (DAVOX) for sequence calling and
an on-line servicing system (LSAMS). WMC's policy is to initiate telephone calls
not later than the 10th day of delinquency; and to send late notices after the
15th day of delinquency; and to send notices of intent to foreclose or demand
notices generally after the 60th day of delinquency. Between the 30th and 45th
day of delinquency, it is WMC's policy to order broker price opinions ("BPOs")
and begin the account analysis process. It is WMC's policy to confirm senior
lienholder, tax and mortgage insurance status. Borrower contact is maintained
for the possibility of a recovery or curing the delinquency. Accounts are
prioritized by the degree of delinquency and transferred at the end of each
month, if appropriate, to the next level of collection action. After all
collection efforts have been exhausted, the foreclosure committee (consisting of
the Collection Manager, Senior Vice President of Loan Servicing and an
origination designee (if available) approves foreclosure action.
In all workout situations, the borrower is asked to provide current
financial information and must complete a new loan application. WMC obtains a
current credit report and updated appraisal (drive-by or BPO). All information
is used to determine a workout decision.
Collector assignments are controlled and monitored daily by the Collection
Manager. The Collection Manager reviews each collector's workload, and telephone
activity is adjusted as necessary. Reports are generated daily and month-end
recap activity is discussed with the Senior Vice President of Loan Servicing.
The Senior Vice President is responsible for corporate reporting on a monthly
basis.
INDEMNIFICATION BY THE SELLER
Under the Sale and Purchase Agreement, the Seller agrees to indemnify and
hold the Depositor harmless against certain losses, liabilities and expenses.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust Fund
concurrently with the delivery of the Certificates. Net proceeds from the sale
of the Offered Certificates will be applied by the Depositor to the purchase of
the Initial Mortgage Loans from the Seller and to make the initial deposits to
the Pre-Funding Account and Capitalized Interest Account. Such net proceeds will
represent the purchase price to be paid by the Trust Fund to the Depositor for
the Initial Mortgage Loans and to fund the Pre-Funding Account and Capitalized
Interest Account. The Class C, Class R-1 and Class R-2 Certificates will be
transferred to the Seller, or one of its affiliates, as part of the
consideration due to the Seller for the Mortgage Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on December 31,
1985, and is a wholly-owned subsidiary of Credit Suisse First Boston Management
Corporation. Credit Suisse First Boston Management Corporation is a wholly-
S-36
<PAGE>
owned subsidiary of Credit Suisse First Boston, Inc. Credit Suisse First Boston
Corporation, which may act as an underwriter in offerings made hereby, as
described in "Plan of Distribution" below, is also a wholly owned subsidiary of
Credit Suisse First Boston, Inc. The principal executive offices of the
Depositor are located at 11 Madison Avenue, New York, NY 10010. Its telephone
number is (212) 325- 2000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. Neither the Depositor, its parent nor
any of the Depositor's affiliates will ensure or guarantee distributions on the
securities of any series.
Trust Fund assets will be acquired by the Depositor directly or through one
or more affiliates.
THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the Initial Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the Statistical Calculation Date. As of the Statistical Calculation
Date, the aggregate Loan Balance of the Initial Mortgage Loans is
$311,312,593.59 (the "Aggregate Statistical Calculation Date Loan Balance").
Initial Mortgage Loans will also include Mortgage Loans originated or acquired
or to be originated or acquired by the Seller after the Statistical Calculation
Date and prior to the Initial Cut-Off Date ("Additional Mortgage Loans"). In
addition, with respect to the pool of Initial Mortgage Loans as of the
Statistical Calculation Date as to which statistical information is presented
herein, some amortization of the pool will occur prior to the Closing Date.
Moreover, certain loans included in the pool as of the Statistical Calculation
Date may prepay in full, or may be determined not to meet the eligibility
requirements for the final pool of Initial Mortgage Loans and may not be
included in the final pool of Initial Mortgage Loans. As a result of the
foregoing, the statistical distribution of characteristics as of the Closing
Date for the final Initial Mortgage Loan pool will vary somewhat from the
statistical distribution of such characteristics as of the Statistical
Calculation Date as presented in this Prospectus Supplement. Unless otherwise
noted, all statistical percentages in this Prospectus Supplement are measured by
the Aggregate Statistical Calculation Date Loan Balance or the number of Initial
Mortgage Loans in the pool as of the Statistical Calculation Date. On or
subsequent to the Closing Date, the Trust Fund may also purchase up to
$25,000,000 by aggregate Loan Balance of Subsequent Mortgage Loans during the
Pre-Funding Period.
The Mortgage Loans to be included in the Trust Fund are adjustable rate
Mortgage Loans with remaining terms to maturity of not more than 360 months. The
Initial Mortgage Loans have the characteristics set forth below as of the
Statistical Calculation Date. Percentages expressed herein based on Loan
Balances and number of Mortgage Loans have been rounded, and in the tables set
forth herein the sum of the percentages may not equal the respective totals due
to such rounding.
The Loan-to-Value Ratios shown below were calculated based upon the lowest
of (i) the appraised values of the Mortgaged Properties at the time of
origination, (ii) a review appraisal and (iii) the purchase price of the
Mortgaged Property (the "Appraised Values").
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
Initial Mortgage Loans. If the residential real estate market has experienced or
should experience an overall decline in property values such that the
outstanding balance of any Initial Mortgage Loan, together with the outstanding
balance of any first mortgage, become equal to or greater than the value of the
Property, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry.
MORTGAGE LOANS
As of the Statistical Calculation Date, the average Loan Balance of the
Initial Mortgage Loans was $108,094.65; the Coupon Rates of the Initial Mortgage
Loans ranged from 6.49% to 14.50%; the weighted average Loan-to-Value Ratio of
S-37
<PAGE>
the Initial Mortgage Loans was 77.45%; the weighted average Coupon Rate of the
Initial Mortgage Loans was 10.11%; the weighted average remaining term to
maturity of the Initial Mortgage Loans was 359.73 months; and the weighted
average original term to maturity of the Initial Mortgage Loans was 359.86
months. The remaining terms to maturity as of the Statistical Calculation Date
of the Initial Mortgage Loans ranged from 180 months to 360 months. The minimum
and maximum Loan Balances of the Initial Mortgage Loans as of the Statistical
Calculation Date were $13,500.00 and $604,000.00, respectively. As of the
Statistical Calculation Date, no Initial Mortgage Loan has a scheduled maturity
date later than December 1, 2027.
All of the Initial Mortgage Loans have maximum Coupon Rates. As of the
Statistical Calculation Date, the weighted average maximum Coupon Rate of the
Initial Mortgage Loans was 16.61%, with maximum Coupon Rates that range from
10.00% to 20.75%. The Initial Mortgage Loans have a weighted average gross
margin as of the Statistical Calculation Date of 6.52%. As of the Statistical
Calculation Date, the gross margin for the Initial Mortgage Loans ranges from
1.075% to 9.390%.
Approximately $84,526,870.21 or 27.15 % of the Initial Mortgage Loans by
Aggregate Statistical Calculation Date Loan Balance are Six-Month LIBOR Loans.
The Six-Month LIBOR Loans have a periodic reset cap of 1.00%.
Approximately $224,408,552.82 or 72.08% of the Initial Mortgage Loans by
Aggregate Statistical Calculation Date Loan Balance are 2/28 Loans. After the
first adjustment, the 2/28 Loans have a periodic reset cap of 1.00%.
Approximately $2,377,170.56 or 0.76% of the Initial Mortgage Loans by
Aggregate Statistical Calculation Date Loan Balance are 3/27 Loans. After the
first adjustment, the 3/27 Loans have a periodic reset cap of 1.00%.
Although none of the Initial Mortgage Loans are more than 30 days
contractually past due as of the Statistical Calculation Date, approximately
2,836 Initial Mortgage Loans (constituting approximately 98.36% of the Aggregate
Statistical Calculation Date Loan Balance) did not have a first payment date
prior to November 1, 1997 and thus could not be more than 30 days past due as of
the Statistical Calculation Date, and as of the Statistical Calculation Date,
the majority of the Initial Mortgage Loans will not have a first payment date
until December 1, 1997.
S-38
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
The geographic distribution of Initial Mortgage Loans by state, as of the
Statistical Calculation Date, was as follows:
<TABLE>
<CAPTION>
Aggregate % of Aggregate Number of Initial % of Initial
State Loan Balance Loan Balance Mortgage Loans Mortgage Loans
- ----- ------------ -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Alaska....................................... $ 2,204,859.00 0.71% 22 0.76%
Arizona...................................... 15,106,422.19 4.85 148 5.14
Arkansas..................................... 2,062,572.76 0.66 31 1.08
California................................... 77,623,258.38 24.93 432 15.00
Colorado..................................... 12,351,184.57 3.97 105 3.65
Connecticut.................................. 4,332,797.81 1.39 44 1.53
Delaware..................................... 131,400.00 0.04 2 0.07
Florida...................................... 9,790,013.07 3.14 119 4.13
Georgia...................................... 3,675,867.19 1.18 42 1.46
Hawaii....................................... 1,149,176.84 0.37 6 0.21
Idaho........................................ 2,646,780.82 0.85 33 1.15
Illinois..................................... 25,719,618.43 8.26 243 8.44
Indiana...................................... 1,266,485.89 0.41 19 0.66
Iowa......................................... 945,870.00 0.30 14 0.49
Kansas....................................... 2,830,662.30 0.91 31 1.08
Kentucky..................................... 121,359.42 0.04 3 0.10
Louisiana.................................... 3,633,264.74 1.17 52 1.81
Maine........................................ 2,530,219.33 0.81 27 0.94
Maryland..................................... 4,988,839.96 1.60 52 1.81
Massachusetts................................ 4,323,283.12 1.39 30 1.04
Michigan..................................... 7,727,518.72 2.48 84 2.92
Minnesota.................................... 23,109,754.69 7.42 269 9.34
Mississippi.................................. 3,008,235.54 0.97 52 1.81
Missouri..................................... 5,609,503.35 1.80 89 3.09
Montana...................................... 1,246,996.70 0.40 14 0.49
Nebraska..................................... 657,000.00 0.21 11 0.38
Nevada....................................... 10,467,830.28 3.36 84 2.92
New Hampshire................................ 989,019.43 0.32 15 0.52
New Jersey................................... 9,098,439.27 2.92 77 2.67
New Mexico................................... 5,036,951.05 1.62 38 1.32
New York..................................... 9,811,358.88 3.15 73 2.53
North Carolina............................... 2,524,372.03 0.81 24 0.83
Ohio......................................... 2,235,312.18 0.72 37 1.28
Oklahoma..................................... 1,614,950.00 0.52 28 0.97
Oregon....................................... 5,867,552.05 1.88 55 1.91
Pennsylvania................................. 4,037,056.71 1.30 54 1.88
Rhode Island................................. 323,300.00 0.10 5 0.17
South Carolina............................... 458,250.00 0.15 8 0.28
South Dakota................................. 450,976.96 0.14 7 0.24
Tennessee.................................... 1,704,640.75 0.55 26 0.90
Texas........................................ 6,616,166.70 2.13 79 2.74
Utah......................................... 3,612,633.29 1.16 30 1.04
Vermont...................................... 990,801.12 0.32 9 0.31
Virginia..................................... 5,343,982.83 1.72 44 1.53
Washington................................... 16,721,356.91 5.37 151 5.24
Washington, D.C.............................. 801,450.00 0.26 9 0.31
West Virginia................................ 515,786.43 0.17 12 0.42
Wisconsin.................................... 3,062,361.90 0.98 39 1.35
Wyoming...................................... 235,100.00 0.08 2 0.07
--------------- ------ ----- ------
Total................................... $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
S-39
<PAGE>
LOAN-TO-VALUE RATIOS
The original Loan-to-Value Ratios of the Initial Mortgage Loans as of the
Statistical Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Range of LTV Aggregate % of Aggregate Number of Initial % of Initial
----- -- --- Loan Balance Loan Balance Mortgage Loans Mortgage Loans
------------ ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
15.00% to 19.99% $ 25,000.00 0.01% 1 0.03%
20.00 to 24.99 94,000.00 0.03 3 0.10
25.00 to 29.99 130,000.00 0.04 4 0.14
30.00 to 34.99 315,643.94 0.10 7 0.24
35.00 to 39.99 874,000.00 0.28 9 0.31
40.00 to 44.99 1,186,759.77 0.38 19 0.66
45.00 to 49.99 1,277,207.02 0.41 17 0.59
50.00 to 54.99 2,763,668.25 0.89 29 1.01
55.00 to 59.99 3,793,190.65 1.22 43 1.49
60.00 to 64.99 10,455,431.93 3.36 113 3.92
65.00 to 69.99 24,634,783.80 7.91 250 8.68
70.00 to 74.99 33,214,480.26 10.67 345 11.98
75.00 to 79.99 64,566,767.04 20.74 654 22.71
80.00 to 84.99 92,077,226.17 29.58 787 27.33
85.00 to 89.99 41,411,019.81 13.30 340 11.81
90.00 to 94.99 34,493,414.95 11.08 259 8.99
--------------- ------ ----- ------
Total................................. $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
CUT-OFF DATE COUPON RATES
The Coupon Rates borne by the Notes relating to the Initial Mortgage Loans
were distributed as follows as of the Statistical Calculation Date:
<TABLE>
<CAPTION>
Range of Coupon Current Outstanding % of Aggregate Number of Initial % of Initial
----- -- Rates Loan Balance Loan Balance Mortgage Loans Mortgage Loans
----- ------------ ------------ ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
6.000% to 6.999% $ 1,000,464.95 0.32% 6 0.21%
7.000 to 7.999 6,952,751.17 2.23 56 1.94
8.000 to 8.999 42,485,417.74 13.65 301 10.45
9.000 to 9.999 102,241,598.04 32.84 869 30.17
10.000 to 10.999 108,844,502.41 34.96 1,068 37.08
11.000 to 11.999 45,966,827.43 14.77 526 18.26
12.000 to 12.999 3,385,554.39 1.09 48 1.67
13.000 to 13.999 202,450.00 0.07 3 0.10
14.000 to 14.999 233,027.46 0.07 3 0.10
--------------- ------ ----- -----
Total............................... $311,312,593.59 100.00% 2,880 100.00%
=============== ======= ===== =======
</TABLE>
S-40
<PAGE>
STATISTICAL CALCULATION DATE LOAN BALANCES
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Range of Loan Current Outstanding % of Aggregate Number of Initial % of Initial
----- -- Balances Loan Balance Loan Balance Mortgage Loans Mortgage Loans
-------- ------------ -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 10,000 to $ 19,999 $ 377,588.88 0.12% 20 0.69%
20,000 to 39,999 8,379,906.45 2.69 270 9.38
40,000 to 59,999 25,582,181.09 8.22 509 17.67
60,000 to 79,999 36,434,572.63 11.70 526 18.26
80,000 to 99,999 34,973,953.20 11.23 391 13.58
100,000 to 119,999 32,550,020.78 10.46 299 10.38
120,000 to 139,999 25,866,180.31 8.31 200 6.94
140,000 to 159,999 24,170,958.60 7.76 162 5.63
160,000 to 179,999 18,550,581.89 5.96 110 3.82
180,000 to 199,999 16,276,922.27 5.23 86 2.99
200,000 to 219,999 13,092,245.83 4.21 63 2.19
220,000 to 239,999 12,813,444.74 4.12 56 1.94
240,000 to 259,999 10,696,473.63 3.44 43 1.49
260,000 to 279,999 8,083,585.40 2.60 30 1.04
280,000 to 299,999 4,922,034.29 1.58 17 0.59
300,000 to 319,999 5,544,464.15 1.78 18 0.63
320,000 to 339,999 4,602,134.52 1.48 14 0.49
340,000 to 359,999 4,547,342.87 1.46 13 0.45
360,000 to 379,999 2,229,950.00 0.72 6 0.21
380,000 to 399,999 3,924,153.91 1.26 10 0.35
400,000 to 419,999 2,050,500.00 0.66 5 0.17
420,000 to 439,999 2,139,500.00 0.69 5 0.17
440,000 to 459,999 2,674,098.15 0.86 6 0.21
460,000 to 479,999 2,342,100.00 0.75 5 0.17
480,000 to 499,999 3,412,200.00 1.10 7 0.24
500,000 to 519,999 1,026,000.00 0.33 2 0.07
520,000 to 539,999 1,067,500.00 0.34 2 0.07
560,000 to 579,999 578,000.00 0.19 1 0.03
600,000 to 619,999 2,404,000.00 0.77 4 0.14
--------------- ------ ----- ------
Total........................... $311,312,593.59 100.00% 2,880 100.00%
=============== ======= ===== =======
</TABLE>
TYPES OF MORTGAGED PROPERTIES
The Mortgaged Properties securing the Initial Mortgage Loans as of the
Statistical Calculation Date were of the property types as follows:
<TABLE>
<CAPTION>
Current Outstanding % of Aggregate Number of Initial % of Initial
Property Type Loan Balance Loan Balance Mortgage Loans Mortgage Loans
------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Condominium............................. $ 10,783,798.18 3.46% 123 4.27%
Duplex.................................. 16,559,433.86 5.32 180 6.25
PUD Project............................. 4,011,155.48 1.29 32 1.11
PUD Single Family....................... 26,511,208.85 8.52 175 6.08
Single Family 4 Unit.................... 3,526,907.95 1.13 28 0.97
Single Family Detached.................. 245,537,726.10 78.87 2,305 80.03
Triplex................................. 4,382,363.17 1.41 37 1.28
--------------- ------ ----- ------
Total............................. $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
S-41
<PAGE>
DISTRIBUTION OF MONTHS OF SEASONING
The distribution of the number of months of seasoning of the Initial
Mortgage Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Months of Current Outstanding % of Aggregate Number of % of Initial
Seasoning Loan Balance Loan Balance Initial Mortgage Loans
--------- ------------------ ----------- Mortgage Loans --------------
--------------
<S> <C> <C> <C> <C>
0................................. $273,056,056.77 87.71% 2,514 87.29%
1................................. 36,343,829.62 11.67 348 12.08
2................................. 1,517,539.13 0.49 15 0.52
3................................. 395,168.07 0.13 3 0.10
--------------- ------ ----- ------
Total........................ $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Remaining Current Outstanding % of Aggregate Number of Initial % of Initial
Range of Terms Loan Balance Loan Balance Mortgage Loans Mortgage Loans
----- -- ----- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
180 months to 180 months $ 244,780.00 0.08% 2 0.07%
357 months to 359 months 38 ,256,536.82 12.29 366 12.71
360 months to 360 months 272,811,276.77 87.63 2,512 87.22
--------------- ------ ------ ------
Total .................................. $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ====== ======
</TABLE>
OCCUPANCY STATUS
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION> Number of
Current Outstanding % of Aggregate Initial % of Initial
Occupancy Status Loan Balance Loan Balance Mortgage Loans Mortgage Loans
---------------- ------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Primary Residence ................................. $290,748,124.38 93.39% 2,610 90.63%
Investment ........................................ 18,867,662.31 6.06 252 8.75
Secondary Home .................................... 1,696.806.90 0.55 18 0.63
--------------- ------ ------ -------
Total...................................... $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ====== =======
</TABLE>
DISTRIBUTION OF MARGINS
The range of margins borne by the Notes relating to the Initial Mortgage Loans
as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Current Outstanding % of Aggregate Number of Initial % of Initial
Range of Margins Loan Balance Loan Balance Mortgage Loans Mortgage Loans
- ---- --- ------- ------------ ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1.000% to 1.999 % $ 84,800.00 0.03% 1 0.03%
5.000 to 5.999 30,915,906.49 9.93 273 9.48
6.000 to 6.999 218,790,804.83 70.28 2,078 72.15
7.000 to 7.999 60,954,831.40 19.58 521 18.09
8.000 to 8.999 507,766.18 0.16 6 0.21
9.000 to 9.999 58,484.69 0.02 1 0.03
--------------- ------ ----- ------
Total.................... $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
S-42
<PAGE>
DISTRIBUTION OF MAXIMUM COUPON RATES
The range of maximum Coupon Rates borne by the Notes relating to the Initial
Mortgage Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Maximum
Coupon Current Outstanding % of Aggregate Number of Initial % of Initial
Range of Rates Loan Balance Loan Balance Mortgage Loans Mortgage Loans
----- -- ----- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
10.000 to 10.999 36,000.00 0.01 1 0.03
12.000 to 12.999 83,000.00 0.03 1 0.03
13.000 to 13.999 1,708,164.95 0.55 12 0.42
14.000 to 14.999 13,470,291.05 4.33 102 3.54
15.000 to 15.999 56,582,980.31 18.18 429 14.90
16.000 to 16.999 115,257,993.79 37.02 980 34.03
17.000 to 17.999 102,294,715.53 32.86 1,095 38.02
18.000 to 18.999 20,072,745.40 6.45 235 8.16
19.000 to 19.999 1,624,160.05 0.52 22 0.76
20.000 to 20.999 182,542.51 0.06 3 0.10
-------------- ------ ----- ------
Total.................................. $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
DISTRIBUTION OF COUPON RATES CHANGE
The next Coupon Rate change for each of the Notes relating to the Initial
Mortgage Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Current Outstanding % of Aggregate Number of Initial % of Initial
Month Loan Balance Loan Balance Mortgage Loans Mortgage Loans
----- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
1998 - March $ 2,533,407.33 0.81% 21 0.73%
1998 - April 42,795,981.09 13.75 367 12.74
1998 - May 39,069,481.79 12.55 339 11.77
1998 - June 128,000.00 0.04 1 0.03
1999 - August 634,461.01 0.20 5 0.17
1999 - September 1,932,170.46 0.62 18 0.63
1999 - October 76,714,672.08 24.64 719 24.97
1999 - November 144,877,499.27 46.54 1,381 47.95
1999 - December 249,750.00 0.08 4 0.14
2000 - October 1,020,930.56 0.33 8 0.28
2000 - November 1,356,240.00 0.44 17 0.59
Total.................... $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
DISTRIBUTION OF DOCUMENTATION TYPE
The documentation type of the Initial Mortgage Loans as of the Statistical
Calculation Date was as follows:
<TABLE>
<CAPTION>
Documentation Current Outstanding % of Aggregate Number of Initial % of Initial
Type Loan Balance Loan Balance Mortgage Loans Mortgage Loans
---- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Full Doc.................................... $185,521,981.87 59.59% 1,776 61.67%
Full-Alternative............................ 13,391,237.44 4.30 99 3.44
Lite Doc.................................... 7,563,426.60 2.43 64 2.22
Stated...................................... 92,095,332.56 29.58 765 26.56
Simple 65 / No Ratio........................ 12,740,615.12 4.09 176 6.11
--------------- ------ ----- ------
Total............................... $311,312,593.59 100.00% 2,880 100.00%
=============== ====== ===== ======
</TABLE>
S-43
<PAGE>
INTEREST PAYMENTS ON THE MORTGAGE LOANS
The Mortgage Loans to be included in the Trust Fund will bear interest
rates that, after a period of approximately six months, two years or three years
following the date of origination, adjust based on the rate of Six-Month LIBOR
as reported by quotations of major banks as published in The Wall Street Journal
and as most recently available as of the date specified in the related Note. The
Mortgage Loans to be included in the Trust Fund will have semi-annual interest
rate and payment adjustment frequencies after the first interest rate adjustment
date. Approximately 27.15% of the Initial Mortgage Loans (by Aggregate
Statistical Calculation Date Loan Balance) have initial Coupon Rates that are
currently adjusting based upon Six-Month LIBOR. As of the Statistical
Calculation Date, approximately 27.15% of the Initial Mortgage Loans (by
Aggregate Statistical Calculation Date Loan Balance) have Coupon Rates that will
remain fixed for less than one year from the Statistical Calculation Date before
next adjustment and approximately 72.84% of the Initial Mortgage Loans (by
Aggregate Statistical Calculation Date Loan Balance) have Coupon Rates that will
remain fixed for one year or more from the Statistical Calculation Date before
next adjustment.
The Mortgage Loans to be included in the Trust Fund will provide that
interest is charged to the obligor thereunder (the "Mortgagor") and payments are
due from such Mortgagors, as of a scheduled day of each month which is fixed at
the time of origination. Scheduled monthly payments made by the Mortgagors
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
PURCHASE OF ADDITIONAL MORTGAGE LOANS AND SUBSEQUENT MORTGAGE LOANS
Additional Mortgage Loans originated or acquired prior to the Initial Cut-
Off Date will be included in the assets of the Trust Fund on the Closing Date.
In addition, the Pooling and Servicing Agreement permits the Trust Fund to
acquire approximately $25,000,000 in aggregate Loan Balance of Subsequent
Mortgage Loans. Accordingly, the statistical characteristics of the Mortgage
Loans upon the acquisition of Additional Mortgage Loans or Subsequent Mortgage
Loans will vary somewhat from the statistical characteristics as of the
Statistical Calculation Date as presented in this Prospectus Supplement.
The obligation of the Trust Fund to purchase Additional Mortgage Loans and
Subsequent Mortgage Loans, as of the Closing Date or Subsequent Transfer Date,
respectively, is subject to the following requirements, among others: (i) the
Rating Agency Condition shall have been satisfied; (ii) such Mortgage Loans may
not be 30 or more days contractually delinquent; (iii) the remaining term to
maturity of such Mortgage Loans may not exceed 360 months; and (iv) following
the purchase of all of such Mortgage Loans by the Trust, such Mortgage Loans, as
a whole and by aggregate Loan Balance, (a) will have a weighted average Loan-to-
Value Ratio of not more than 78%; (b) will have a weighted average gross margin
that is not more than 25 basis points less than the weighted average gross
margin as of the Initial Cut-Off Date; (c) will have no more than 55% of such
Mortgage Loans with combined Loan-to-Value Ratios equal to or in excess of 80%;
(d) will have no more than 62% that are cash out refinancings; (e) will not
include more than 74% 2/28 Loans and 1.0% 3/27 Loans; (f) each of such Mortgage
Loans will have a gross margin which exceeds the highest margin on any Class of
Certificates; and (g) will have no more than 7.5% that are non-owner occupied
properties. In addition, the final Mortgage Loan pool, as of the end of the Pre-
Funding Period, will be comprised of no more than 30% of Mortgage Loans, by
aggregate Loan Balance as of the related Cut-Off Date, that are secured by
Mortgaged Properties located in the State of California and no than more than
10% of Mortgage Loans, by aggregate Loan Balance as of the related Cut-Off Date,
that are secured by Mortgaged Properties located in any other state. Moreover,
the obligation of the Trust Fund to purchase Additional Mortgage Loans and
Subsequent Mortgage Loans will also be subject to the requirements set forth in
"Risk Factors--Additional Mortgage Loans and Subsequent Mortgage Loans" above.
The "Rating Agency Condition" shall be satisfied if after five (5) days
prior written notice to each Rating Agency of the transfer of Subsequent
Mortgage Loans to the Trust Fund on the related Subsequent Transfer Date, no
Rating Agency shall have notified any of the Seller, the Depositor or the
Trustee that the then-current ratings on any class of Offered Certificates is
subject to review or downgrade.
S-44
<PAGE>
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found by
the Depositor or the Trustee to have defective documentation, or in respect of
which the Seller has breached a representation or warranty, to the extent set
forth in the Sale and Purchase Agreement and the Pooling and Servicing Agreement
to repurchase such Mortgage Loans or substitute such Mortgage Loan with a
Mortgage Loan having essentially the same characteristics as the Mortgage Loan
being replaced, using criteria set forth in the Pooling and Servicing Agreement.
See "Description of the Sale and Servicing Agreement, and the Pooling and
Servicing Agreement--Assignment of Mortgage Loans and--Covenant of the Seller to
Take Certain Actions With Respect to the Mortgage Loans in Certain Situations"
herein.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date), the yield to maturity
on the Offered Certificates will relate to the rate of payment of principal of
the Mortgage Loans, including for this purpose Prepayments, liquidations due to
defaults, casualties and condemnations, and repurchases by the Seller of
Mortgage Loans and any accelerated payment of principal. The actual rate of
principal prepayments on pools of mortgage loans is influenced by a variety of
economic, state and federal income tax (including possible future policy changes
affecting the deductibility for federal income tax purposes of interest payments
on mortgage loans), geographic, demographic, social, legal and other factors and
has fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of mortgage loans at any time because of
specific factors relating to the mortgage loans in the particular pool,
including, among other things, the credit standing of the mortgagor, the age of
the mortgage loans, the geographic locations of the properties securing the
loans and the extent of the mortgagors' equity in such properties, and changes
in the mortgagors' housing needs, job transfers and unemployment. Therefore, no
assurance can be given as to the level of prepayments that the Trust Fund will
experience. See "Risk Factors-- Sensitivity to Prepayments" herein and
"Maturity, Prepayment and Yield Considerations" in the Prospectus.
A number of factors suggest that the prepayment behavior of the pool may be
significantly different from that of a pool of higher balance conventional first
lien residential mortgage loans with equivalent interest rates and maturities. A
mortgage loan with a small principal balance may be easier for a borrower to
refinance or otherwise prepay than a mortgage loan with a larger balance and,
therefore, a higher prepayment rate may result for the pool than for a pool of
conventional first lien mortgage loans, irrespective of the relative average
interest rates and the general interest rate environment. Accordingly, the
Mortgage Loans may experience higher rates of prepayment than higher balance
conventional first lien mortgage loans. Conversely, a borrower with a Mortgage
Loan having a small principal balance may view refinancing such Mortgage Loan at
a lower interest rate as less attractive because the impact to the borrower of
lower interest rates on the size of the related monthly payment may be perceived
as insignificant.
The rate of prepayments on the Mortgage Loans is sensitive to the credit
standing of the borrower, which may improve and thereby allow the borrower to
refinance on more favorable terms, or may decline and limit the borrower's
ability to refinance. The prepayment behavior of the 2/28 Loans and 3/27 Loans
may differ from that of the other Mortgage Loans. As a 2/28 Loan or 3/27 Loan
approaches its initial adjustment date, the borrower may become more likely to
refinance such loan to avoid an increase in the Coupon Rate, even if fixed rate
loans are only available at rates that are slightly lower or higher than the
Coupon Rate before adjustment. The existence of the applicable periodic rate
cap, lifetime cap and lifetime floor also may affect the likelihood of
prepayments resulting from refinancings. All of the Mortgage Loans are
adjustable rate mortgage loans. As is the case with conventional fixed rate
mortgage loans, adjustable rate mortgage loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable rate mortgage loan to "lock in" a lower fixed interest rate. However,
no assurance can be given as to the level of prepayments that the Mortgage Loans
will experience.
S-45
<PAGE>
The prepayment experience on non-conventional mortgage loans may differ
from that on conventional first mortgage loans, primarily due to the credit
quality of the typical borrower. Because the credit histories of many non-
conventional borrowers may preclude them from other traditional sources of
financing or they may be required to incur relatively higher origination costs
than borrowers under conventional first lien mortgage loans, such borrowers may
be less likely to refinance due to a decline in market interest rates. As a
result, the Mortgage Loans may prepay at slower rates than those of conventional
first lien loans. In the alternative, non-conventional mortgage loans may
experience more prepayments in a rising interest rate environment as the
borrowers' finances are stressed to the point of default. Prepayments may also
affect the yield to the Holders of the Offered Certificates, if the weighted
average margins are reduced.
In addition to the foregoing factors affecting the weighted average life of
each Class of the Offered Certificates, the overcollateralization provisions of
the Trust Fund may result in an additional reduction of the Class A Certificates
relative to the amortization of the Mortgage Loans in early months of the
transaction. The accelerated amortization is achieved by the application of the
Monthly Excess Interest Amount to the payment of the Certificate Principal
Balance of the related Classes of Offered Certificates. This creates
overcollateralization which results from the excess of the aggregate Loan
Balances of the Mortgage Loans over the Aggregate Certificate Principal Balance.
Once the Targeted Overcollateralization Amount is reached, the application of
the Monthly Excess Interest Amount to pay down principal will cease, unless
necessary to maintain the Targeted Overcollateralization Amount.
MANDATORY PREPAYMENT
In the event that at the end of the Pre-Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans,
then the Holders of the Class A Certificates will receive a partial prepayment
in an amount equal to the remaining Pre-Funded Amount in the Pre-Funding
Account.
Although no assurances can be given, the Seller expects that the Loan
Balance of Subsequent Mortgage Loans sold to the Trust Fund will require the
application of substantially all the amount on deposit in the Pre-Funding
Account and that there should be no material amount of principal prepaid to the
Holders of the Class A Certificates in respect of the Original Pre-Funded
Amount.
PROJECTED PREPAYMENT AND YIELD FOR OFFERED CERTIFICATES
As indicated above, if purchased at other than par, the yield to maturity
on an Offered Certificate will be affected by the rate of the payment of
principal of the Mortgage Loans. If the actual rate of payments on the Mortgage
Loans is slower than the rate anticipated by an investor who purchases an
Offered Certificate at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments on
the Mortgage Loans is faster than the rate anticipated by an investor who
purchases an Offered Certificate at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield.
The "Final Scheduled Distribution Date" for each Class of the Offered
Certificates is as set forth in the Summary of Terms hereof. The Final Scheduled
Distribution Date for the Offered Certificates is the thirteenth Distribution
Date following the calendar month in which the Loan Balances of all Mortgage
Loans have been reduced to zero assuming that such Mortgage Loans pay in
accordance with their terms and that all the Subsequent Mortgage Loans are
delivered no later than January 31, 1998. The weighted average life of each
Class of the Offered Certificates is likely to be shorter than would be the case
if payments actually made on the Mortgage Loans conformed to the foregoing
assumptions, and the final Distribution Date with respect to the Offered
Certificates could occur significantly earlier than the related Final Scheduled
Distribution Date because (i) Prepayments are likely to occur, (ii) Monthly
Excess Interest Amounts will be used to make accelerated payments of principal
on the Class A Certificates until the Stepdown Date (unless a Trigger Event is
in effect), and (iii) the Servicer or Holders of the Class R Certificates may
cause a termination of the Trust Fund on or after the Clean-Up Call Date.
'Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of any
Class of the Offered Certificates will be influenced by, among other things, the
rate at which principal of the Mortgage Loans is paid,
S-46
<PAGE>
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes Prepayments and liquidations due to
default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. A common model (the "Constant Prepayment Rate" or
"CPR") represents an assumed annualized rate of prepayment relative to the then
outstanding principal balance on a pool of new mortgage loans. The prepayment
model used in this Prospectus Supplement assumes a fixed rate of CPR. CPR does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. Neither the Seller nor the Depositor is aware of
any statistics that provide a reliable basis for predicting the amount or the
timing of receipt of prepayments on the related Mortgage Loans.
It is very unlikely that the Mortgage Loans will prepay at rates consistent
with the Prepayment Assumption until maturity or that all of the Mortgage Loans
will prepay at the same rate. There will be discrepancies between the actual
characteristics of the Mortgage Loans included in the Trust Fund and the assumed
characteristics used in preparing the following tables. Any discrepancy may have
an effect upon the percentages of Initial Certificate Principal Balance
outstanding set forth in the table and the weighted average lives of the Offered
Certificates.
MODELING ASSUMPTIONS
The model used in this Prospectus Supplement is the prepayment assumption
(the "Prepayment Assumption") which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. The Prepayment Assumption
does not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. The Seller and the Depositor believe that no
existing statistics of which it is aware provide a reliable basis for holders of
Offered Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in the tables. In addition,
since the actual Mortgage Loans in the Trust Fund have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Offered Certificates may be made earlier or
later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of a pool of loans with level-pay amortization methodologies, Cut-
Off Date Loan Balances, mortgage rates and original and remaining terms to
maturity as set forth in the "Representative Loan Pools" table below, (ii) the
Closing Date for the Offered Certificates occurs on December 10, 1997, (iii)
distributions on the Offered Certificates are made on the 20th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
January 20, 1998, in accordance with the priorities described herein, (iv) the
Due Period is the calendar month preceding the Distribution Date; (v) the
Mortgage Loans' prepayment rates are constant percentages of conditional
prepayment rates (CPR) each as stated in the "Prepayment Scenarios" table be
low; (vi) prepayments include 30 days' interest thereon, (vii) no optional
termination or mandatory termination is exercised, (viii) the Targeted
Overcollateralization Amount is set initially as specified in the Pooling and
Servicing Agreement and thereafter decreases in accordance with the provisions
of the Pooling and Servicing Agreement, (ix) the Coupon Rate for each Mortgage
Loan is adjusted on its next rate adjustment date (and on subsequent rate
adjustment dates, if necessary) to equal the sum of (a) the assumed level of the
applicable index is 5.9062% and (b) the respective gross margin (such sum being
subject to the applicable periodic adjustment cap and maximum interest rate),
(x) the Pass-Through Rate for each Class of Offered Certificates remains
constant at its respective initial rates, (xi) all Subsequent Mortgage Loans are
included in the pool of Mortgage Loans on the Closing Date, and (xii) the
Mortgage Loan pool consists of 3 synthetic mortgages having the following
characteristics:
S-47
<PAGE>
REPRESENTATIVE MORTGAGE LOANS
<TABLE>
<CAPTION>
Unit Original Remaining
Mortgage Gross Months Initial Term to Term to
Loan Principal Coupon to Rate Rate Life Maturity Maturity Amortization
Number Balance Rate Change Margin Cap Cap (in months) (in months) Method
-------- ---------- ------- ------- ------- ------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $108,607,068 9.61% 6 6.39% 1.00% 16.10% 360 360 Level Pay
2 288,338,548 10.30 24 6.56 3.00 16.80 360 360 Level Pay
3 3,054,384 10.11 36 6.61 3.00 16.61 360 360 Level Pay
------------ ----- ------- ------- ------- ------ ------ ------
Total...... $400,000,000 10.11% 6.52% 2.46% 16.61% 360 360
============ ===== ======= ======= ====== ====== ======
</TABLE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
----------- ------------ ------------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(1) 0% 15% 20% 25% 30% 35% 40%
</TABLE>
__________
(1) As a conditional prepayment rate (CPR) percentage.
The following tables set forth the percentages of the initial principal
amount of the Offered Certificates that would be outstanding after each of the
dates shown, based on prepayment scenarios described in the table entitled
"Prepayment Scenarios." The percentages have been rounded to the nearest 1%.
S-48
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
CLASS A SCENARIO
-------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................................................... 100 100 100 100 100 100 100
December 20, 1998................................................. 95 76 70 64 58 52 45
December 20, 1999................................................. 93 59 48 38 29 21 13
December 20, 2000................................................. 93 45 32 21 11 2 0
December 20, 2001................................................. 92 33 25 19 11 2 0
December 20, 2002................................................. 91 27 20 14 10 2 0
December 20, 2003................................................. 91 23 16 11 7 2 0
December 20, 2004................................................. 90 19 13 8 5 2 0
December 20, 2005................................................. 89 16 10 6 3 2 0
December 20, 2006................................................. 88 14 8 4 2 1 0
December 20, 2007................................................. 86 12 6 3 2 1 0
December 20, 2008................................................. 85 10 5 2 1 0 0
December 20, 2009................................................. 83 8 4 2 1 0 0
December 20, 2010................................................. 82 7 3 1 0 0 0
December 20, 2011................................................. 79 6 2 1 0 0 0
December 20, 2012................................................. 77 5 2 1 0 0 0
December 20, 2013................................................. 74 4 1 0 0 0 0
December 20, 2014................................................. 71 3 1 0 0 0 0
December 20, 2015................................................. 68 3 1 0 0 0 0
December 20, 2016................................................. 64 2 1 0 0 0 0
December 20, 2017................................................. 60 2 0 0 0 0 0
December 20, 2018................................................. 55 1 0 0 0 0 0
December 20, 2019................................................. 49 1 0 0 0 0 0
December 20, 2020................................................. 43 1 0 0 0 0 0
December 20, 2021................................................. 36 1 0 0 0 0 0
December 20, 2022................................................. 29 0 0 0 0 0 0
December 20, 2023................................................. 25 0 0 0 0 0 0
December 20, 2024................................................. 20 0 0 0 0 0 0
December 20, 2025................................................. 14 0 0 0 0 0 0
December 20, 2026................................................. 7 0 0 0 0 0 0
December 20, 2027................................................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity (Years) (1)..................... 19.87 4.31 3.24 2.52 1.95 1.42 1.09
Weighted Average Life to Call (Years) (1)......................... 19.85 4.02 3.00 2.33 1.79 1.32 1.09
</TABLE>
__________
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
S-49
<PAGE>
<TABLE>
<CAPTION>
CLASS M-1 SCENARIO
-----------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................................................... 100 100 100 100 100 100 100
December 20, 1998.................................................. 100 100 100 100 100 100 100
December 20, 1999.................................................. 100 100 100 100 100 100 100
December 20, 2000.................................................. 100 100 100 100 100 100 100
December 20, 2001.................................................. 100 100 80 62 87 100 100
December 20, 2002.................................................. 100 87 64 46 33 72 64
December 20, 2003.................................................. 100 73 51 34 23 38 38
December 20, 2004.................................................. 100 62 40 26 16 16 23
December 20, 2005.................................................. 100 52 32 19 11 6 13
December 20, 2006.................................................. 100 44 25 14 8 4 6
December 20, 2007.................................................. 100 37 20 11 5 2 1
December 20, 2008.................................................. 100 31 16 8 4 0 0
December 20, 2009.................................................. 100 26 13 6 2 0 0
December 20, 2010.................................................. 100 22 10 4 0 0 0
December 20, 2011.................................................. 100 18 8 3 0 0 0
December 20, 2012.................................................. 100 15 6 1 0 0 0
December 20, 2013.................................................. 100 12 5 0 0 0 0
December 20, 2014.................................................. 100 10 4 0 0 0 0
December 20, 2015.................................................. 100 8 3 0 0 0 0
December 20, 2016.................................................. 100 7 1 0 0 0 0
December 20, 2017.................................................. 100 6 0 0 0 0 0
December 20, 2018.................................................. 100 5 0 0 0 0 0
December 20, 2019.................................................. 100 4 0 0 0 0 0
December 20, 2020.................................................. 100 3 0 0 0 0 0
December 20, 2021.................................................. 100 1 0 0 0 0 0
December 20, 2022.................................................. 94 0 0 0 0 0 0
December 20, 2023.................................................. 80 0 0 0 0 0 0
December 20, 2024.................................................. 63 0 0 0 0 0 0
December 20, 2025.................................................. 45 0 0 0 0 0 0
December 20, 2026.................................................. 24 0 0 0 0 0 0
December 20, 2027.................................................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity (Years) (1)...................... 27.65 9.77 7.32 5.94 5.45 5.96 5.99
Weighted Average Life to Call (Years) (1).......................... 27.56 8.88 6.59 5.36 4.97 5.17 4.50
</TABLE>
__________
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
S-50
<PAGE>
<TABLE>
<CAPTION>
CLASS M-2 SCENARIO
-------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................................................... 100 100 100 100 100 100 100
December 20, 1998................................................. 100 100 100 100 100 100 100
December 20, 1999................................................. 100 100 100 100 100 100 100
December 20, 2000................................................. 100 100 100 100 100 100 100
December 20, 2001................................................. 100 100 80 62 47 60 32
December 20, 2002................................................. 100 87 64 46 33 23 15
December 20, 2003................................................. 100 73 51 34 23 15 9
December 20, 2004................................................. 100 62 40 26 16 9 5
December 20, 2005................................................. 100 52 32 19 11 6 1
December 20, 2006................................................. 100 44 25 14 8 3 0
December 20, 2007................................................. 100 37 20 11 5 0 0
December 20, 2008................................................. 100 31 16 8 2 0 0
December 20, 2009................................................. 100 26 13 6 0 0 0
December 20, 2010................................................. 100 22 10 3 0 0 0
December 20, 2011................................................. 100 18 8 1 0 0 0
December 20, 2012................................................. 100 15 6 0 0 0 0
December 20, 2013................................................. 100 12 5 0 0 0 0
December 20, 2014................................................. 100 10 2 0 0 0 0
December 20, 2015................................................. 100 8 0 0 0 0 0
December 20, 2016................................................. 100 7 0 0 0 0 0
December 20, 2017................................................. 100 6 0 0 0 0 0
December 20, 2018................................................. 100 4 0 0 0 0 0
December 20, 2019................................................. 100 2 0 0 0 0 0
December 20, 2020................................................. 100 0 0 0 0 0 0
December 20, 2021................................................. 100 0 0 0 0 0 0
December 20, 2022................................................. 94 0 0 0 0 0 0
December 20, 2023................................................. 80 0 0 0 0 0 0
December 20, 2024................................................. 63 0 0 0 0 0 0
December 20, 2025................................................. 45 0 0 0 0 0 0
December 20, 2026................................................. 24 0 0 0 0 0 0
December 20, 2027................................................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity (Years) (1)..................... 27.65 9.72 7.27 5.82 5.05 4.75 4.22
Weighted Average Life to Call (Years) (1)......................... 27.56 8.88 6.59 5.28 4.61 4.38 3.90
</TABLE>
__________
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
S-51
<PAGE>
<TABLE>
<CAPTION>
CLASS B SCENARIO
-------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................................................... 100 100 100 100 100 100 100
December 20, 1998................................................. 100 100 100 100 100 100 100
December 20, 1999................................................. 100 100 100 100 100 100 100
December 20, 2000................................................. 100 100 100 100 100 100 75
December 20, 2001................................................. 100 100 80 62 47 35 25
December 20, 2002................................................. 100 87 64 46 33 23 15
December 20, 2003................................................. 100 73 51 34 23 15 7
December 20, 2004................................................. 100 62 40 26 16 8 1
December 20, 2005................................................. 100 52 32 19 10 2 0
December 20, 2006................................................. 100 44 25 14 5 0 0
December 20, 2007................................................. 100 37 20 10 1 0 0
December 20, 2008................................................. 100 31 16 5 0 0 0
December 20, 2009................................................. 100 26 13 2 0 0 0
December 20, 2010................................................. 100 22 9 0 0 0 0
December 20, 2011................................................. 100 18 5 0 0 0 0
December 20, 2012................................................. 100 15 2 0 0 0 0
December 20, 2013................................................. 100 12 0 0 0 0 0
December 20, 2014................................................. 100 9 0 0 0 0 0
December 20, 2015................................................. 100 6 0 0 0 0 0
December 20, 2016................................................. 100 3 0 0 0 0 0
December 20, 2017................................................. 100 1 0 0 0 0 0
December 20, 2018................................................. 100 0 0 0 0 0 0
December 20, 2019................................................. 100 0 0 0 0 0 0
December 20, 2020................................................. 100 0 0 0 0 0 0
December 20, 2021................................................. 100 0 0 0 0 0 0
December 20, 2022................................................. 94 0 0 0 0 0 0
December 20, 2023................................................. 80 0 0 0 0 0 0
December 20, 2024................................................. 63 0 0 0 0 0 0
December 20, 2025................................................. 45 0 0 0 0 0 0
December 20, 2026................................................. 24 0 0 0 0 0 0
December 20, 2027................................................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity (Years) (1)..................... 27.64 9.55 7.12 5.67 4.82 4.32 3.77
Weighted Average Life to Call (Years) (1)......................... 27.56 8.88 6.59 5.25 4.47 4.04 3.52
</TABLE>
__________
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
S-52
<PAGE>
FORMATION OF THE TRUST FUND
WMC Mortgage Loan Trust 1997-2 will be created and established pursuant to
the Pooling and Servicing Agreement. The Depositor will convey without recourse
the Mortgage Loans to the Trust Fund and the Trust Fund will issue the Offered
Certificates and the Non-Offered Certificate. The property of the Trust Fund
will include (a) the Mortgage Loans together with the Mortgage Loan documents
and the Seller's interest in any Mortgaged Property which secures a Mortgage
Loan and all payments thereon and proceeds of the conversion, voluntary or
involuntary, of the foregoing, (b) such amounts as may be held by the Trustee in
the Certificate Account, Pre-Funding Account and Capitalized Interest Account
and any other accounts held by the Trustee for the Trust Fund together with
investment earnings on such amounts and such amounts as may be held in the name
of the Trustee in the Collection Account, if any, exclusive of investment
earnings thereon (except as otherwise provided) whether in the form of cash,
instruments, securities or other properties and (c) proceeds of all the
foregoing (including, but not by way of limitation, all proceeds of any hazard
insurance and title insurance policies relating to the Mortgage Loans, cash
proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel
paper, checks, deposit accounts, rights to payment of any and every kind, and
other forms of obligations and receivables which at any time constitute all or
part of or are included in the proceeds of any of the foregoing) to pay the
Offered Certificates as specified in the Pooling and Servicing Agreement
(collectively, the "Trust Fund").
The Offered Certificates will not represent an interest in or an obligation
of, nor will the Mortgage Loans be guaranteed by, the Depositor, the Seller, the
Servicer or any of their affiliates.
Prior to its formation the Trust Fund will have had no assets or
obligations. Upon formation, the Trust Fund will not engage in any business
activity other than acquiring, holding and collecting payments on the Mortgage
Loans, issuing the Certificates and distributing payments thereon. The Trust
Fund will not acquire any receivables or assets other than the Mortgage Loans
and the rights appurtenant thereto and will not have any need for additional
capital resources. To the extent that borrowers make scheduled payments under
the Mortgage Loans, the Trust Fund will have sufficient liquidity to make
distributions on the Offered Certificates. As the Trust Fund does not have any
operating history and will not engage in any business activity other than
issuing the Certificates and making distributions thereon, there has not been
included any historical or pro forma ratio of earnings to fixed charges with
respect to the Trust Fund.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Loans and the
Mortgaged Properties is based upon the pool as constituted at the close of
business on the Statistical Calculation Date. Prior to the issuance of the
Offered Certificates, additional Initial Mortgage Loans will be included in the
pool of Initial Mortgage Loans on the Closing Date and other Initial Mortgage
Loans may be removed from the pool as a result of incomplete documentation or
non-compliance with representations and warranties set forth in the Pooling and
Servicing Agreement, if the Depositor deems such removal necessary or
appropriate.
A current report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed and incorporated by reference to the Registration
Statement together with the Pooling and Servicing Agreement with the Securities
and Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. An additional current report on Form 8-K may also be
filed prior to the Closing Date and will contain detailed information relating
to the Initial Mortgage Loans as of the Initial Cut-Off Date to the extent such
information is not included in the final Prospectus Supplement relating to the
Offered Certificates. In addition, a current report on Form 8-K will be
available to purchasers of the Offered Certificates and will be filed and
incorporated by reference to the Registration Statement with the Securities and
Exchange Commission within fifteen days after the end of the Pre-Funding Period.
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DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust Fund created and held pursuant to the Pooling and
Servicing Agreement, subject to the limits and the priority of distribution
described therein.
DISTRIBUTION DATES
On each Distribution Date, the Holders of each Class of the Offered
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
Certificate Principal Balance of such Class of Offered Certificates is reduced
to zero, and to the extent funds are available therefor, the Current Interest,
any Interest Carry Forward Amount and the portion of the Principal Distribution
Amount, if any, allocated therefor as of such Distribution Date, allocated among
the Classes of the Offered Certificates as described below. Distributions will
be made in immediately available funds to Holders of Offered Certificates by
wire transfer or otherwise, to the account of such Holder at a domestic bank or
other entity having appropriate facilities therefor, if such Holder has so
notified the Trustee, or by check mailed to the address of the person entitled
thereto as it appears on the register (the "Register") maintained by the Trustee
as registrar (the "Registrar"). Beneficial Holders may experience some delay in
the receipt of their payments due to the operations of DTC. See "Description of
the Offered Certificates--Book Entry Registration of the Offered Certificates"
herein.
The Pooling and Servicing Agreement will provide that a Holder, upon
presentation of such Holder's Certificate to the Trustee, will be entitled to
receive the final distribution on such Holder's Certificate.
Each Holder of record of the related Class of the Offered Certificates will
be entitled to receive such Holder's Percentage Interest in the amounts due such
Class on such Distribution Date. The "Percentage Interest" of an Offered
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Certificate as of the Cut-Off
Date by the Certificate Principal Balance for the related Class of the Offered
Certificates as of the Cut-Off Date.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the Certificate
Account (i) the total of the principal and interest collections on the Mortgage
Loans, including any Net Liquidation Proceeds, remitted by the Servicer,
together with any Substitution Amount and any Loan Purchase Price and (ii) the
proceeds of any liquidation of the Trust Fund.
The Pooling and Servicing Agreement establishes a pass-through rate on each
Class of the Offered Certificates (each, a "Pass-Through Rate") as set forth in
the Summary of Terms herein.
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement with respect to interest and principal:
Interest: On each Distribution Date the Interest Remittance Amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Holders of the Class A Certificates, the Class A
Current Interest plus the Interest Carry Forward Amount with respect to the
Class A Certificates; provided, that if the Interest Remittance Amount less
the amount paid to the Trustee as the Trustee Fee (such amount the
"Interest Amount Available") is not sufficient to make a full
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distribution of interest to the Class A Certificates, the amount of the
shortfall will be carried forward with accrued interest;
Third, to the extent of the Interest Amount Available then remaining,
to the Holders of the Class M-1 Certificates, the Class M-1 Current
Interest;
Fourth, to the extent of the Interest Amount Available then remaining,
to the Holders of the Class M-2 Certificates, the Class M-2 Current
Interest;
Fifth, to the extent of the Interest Amount Available then remaining,
to the Holders of the Class B Certificates, the Class B Current Interest;
and
Sixth, the Monthly Excess Cashflow Amount shall be applied as
described under "Credit Enhancement-Application of Monthly Excess Cashflow
Amount."
Principal: On each Distribution Date (a) before the Stepdown Date or (b)
with respect to which a Trigger Event is in effect, Holders of the Class A
Certificates will be entitled to receive payment of 100% of the Principal
Distribution Amount until the Certificate Principal Balance of the Class A
Certificates has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) as long
as a Trigger Event is not in effect and is not continuing, the Holders of all
Classes of the Offered Certificates will be entitled to receive payments of
principal, in the order of priority, in the amounts set forth below and to the
extent of the Principal Distribution Amount as follows:
First, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount shall be distributed to the Holders
of the Class A Certificates until the Class A Certificate Principal Balance
has been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Holders of the Class A
Certificates in clause First above and (y) the Class M-1 Principal
Distribution Amount shall be distributed to the Holders of the Class M-1
Certificates, until the Class M-1 Certificate Principal Balance has been
reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Holders of the
Class A Certificates in clause First above and the amount distributed to
the Holders of the Class M-1 Certificates in clause Second above and (y)
the Class M-2 Principal Distribution Amount shall be distributed to the
Holders of the Class M-2 Certificates, until the Class M-2 Certificate
Principal Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Holders of the
Class A Certificates pursuant to clause First above, the amount distributed
to the Holders of the Class M-1 Certificates pursuant to clause Second
above and the amount distributed to the Holders of the Class M-2
Certificates pursuant to clause Third above and (y) the Class B Principal
Distribution Amount shall be distributed to the Holders of the Class B
Certificates, until the Class B Certificate Principal Balance has been
reduced to zero; and,
Fifth, any amount of the Principal Distribution Amount remaining after
making all of the distributions in clauses First, Second, Third and Fourth
above shall be distributed as part of the Monthly Excess Cashflow Amount as
described under "Credit Enhancement-Application of Monthly Excess Cashflow
Amounts" in the Summary of Terms.
Notwithstanding the foregoing, (i) if a Trigger Event exists after the
Certificate Principal Balance of the Class A Certificates has been reduced to
zero, principal will be distributed exclusively to the Class M-1 Certificates
and, after the Certificate Principal Balance of the Class M-1 Certificates has
been reduced to zero, exclusively to the Class M-2 Certificates and, after the
Certificate Principal Balance of the Class M-2 Certificates has been reduced to
zero, exclusively to the Class B Certificates and (ii) while a Subordinated
Trigger Event (as defined herein) exists, principal otherwise
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distributable to the Non-Offered Certificates will be distributed to the
Subordinated Certificates (in inverse order of seniority).
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited in
the Pre-Funding Account, which account shall be in the name of and maintained by
the Trustee and shall be part of the Trust Fund. During the Pre-Funding Period,
the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Original Pre-Funded Amount will be reduced during the Pre-Funding Period by the
amount thereof used to purchase Subsequent Mortgage Loans in accordance with the
Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the end of
the Pre-Funding Period will be distributed to the Holders of the Class A
Certificates on the Distribution Date after the expiration of the Pre-Funding
Period in reduction of the Class A Certificate Principal Balance, thus resulting
in a principal prepayment of such Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Distribution Date during the Pre-Funding Period. The Pre-
Funding Account will not be an asset of either REMIC.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust Fund. The amount on deposit in the Capitalized
Interest Account, including reinvestment income thereon and amounts deposited
thereto from the Pre-Funding Account, will be used by the Trustee to fund the
excess, if any, of (i) the sum of the amount of interest accruing at the
weighted average applicable Pass-Through Rates on the amount by which the
aggregate Certificate Principal Balance of the Offered Certificates exceeds the
aggregate Loan Balance of the Mortgage Loans, plus the Trustee Fee accruing on
such excess balance over (ii) the amount of any reinvestment income on monies on
deposit in the Pre-Funding Account; such amounts on deposit will be so applied
by the Trustee on the January and February 1998 Distribution Dates to fund such
excess, if any. Any amounts remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period and not needed for such purpose will be paid
to the Seller and will not thereafter be available for distribution to the
Holders of the Class A Certificates. Amounts on deposit in the Capitalized
Interest Account will be invested in Eligible Investments. The Capitalized
Interest Account will not be an asset of either REMIC.
CALCULATION OF LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine LIBOR for the next Accrual Period for each Class of Offered
Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in
United States dollars for a period equal to the relevant Accrual Period
(commencing on the first day of such Accrual Period) which appears in Telerate
Page 3750 as of 11:00 a.m., London time, on such date. If such rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the rates at which deposits in United States dollars are offered by the
Reference Banks at approximately 11:00 a.m., London time, on that day to prime
banks in the London interbank market for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period). The Trustee will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for that day will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Trustee, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
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"LIBOR Determination Date" means, with respect to any Accrual Period, the
second London Business Day preceding the commencement of such Accrual Period.
For purposes of determining LIBOR, a "London Business Day" is any day on which
dealings in deposits of United States dollars are transacted in the London
interbank market.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and "Reference
Banks" means leading banks selected by the Trustee and engaged in transactions
in Eurodollar deposits in the international Eurocurrency market.
BOOK ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be book-entry certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in such Book-
Entry Certificates ("Beneficial Holders") may elect to hold their Book- Entry
Certificates directly through DTC in the United States, or Cedel or Euroclear
(in Europe) if they are participants of such systems ("Participants") or
indirectly through organizations which are Participants. The Book- Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede, the nominee
of DTC. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank will act as depositary for Cedel and Chase will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Holder 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 "Holder" of such Book-Entry Certificates will be
Cede, as nominee of DTC. Beneficial Holders will not be Holders as that term is
used in the Pooling and Servicing Agreement. Beneficial Holders are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Holder'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 Holder'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 of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Holder's Financial Intermediary is not a DTC Participant, and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Holders will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such 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 Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Holders have accounts with
respect to Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Holders. Accordingly, although Beneficial Holders will not
possess certificates, the Rules provide a mechanism by which Beneficial Holders
will receive distributions and will be able to transfer their interest.
Beneficial Holders will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Holders who are not Participants may
transfer ownership of Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer such Offered Certificates, by book-entry transfer, through DTC for
the account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of such Offered
Certificates will be executed through DTC and the accounts of the
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respective Participants at DTC will be debited and credited. 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
Holders.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the Business Day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such Business Day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the Business Day following
settlements in DTC. For information with respect to tax documentation procedures
relating to the Offered Certificates. See "Certain Federal Income Tax
Consequences--REMIC Trust Funds--Foreign Investors in REMIC Certificates" and"--
Backup Withholding With Respect to REMIC Certificates" in the Prospectus and
"Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC 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, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against
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payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United States
dollars. Euroclear includes various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the 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 payment to the Beneficial Holders 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 Holders of the Book-Entry Certificates that
it represents.
Under a book-entry format, Beneficial Holders 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. Distributions with respect to
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Holder to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund provided by the Trustee to
Cede, as nominee of DTC, may be made available to Beneficial Holders upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Holders are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by a Holder under the Pooling and Servicing
Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its
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behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Certificates which conflict with
actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to Beneficial Holders of the Book-
Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or
the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Holders representing a majority of the
outstanding Percentage Interests of the Offered Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Holders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Holders of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for re-
registration, the Trustee will issue Definitive Certificates, and thereafter the
Trustee will recognize the holders of such Definitive Certificates as Holders
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among Participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF RIGHTS
Any Holder may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee a Holder of the Trust
Fund without compliance with the provisions of the Pooling and Servicing
Agreement.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the Holders of the
Offered Certificates consists of the subordination of the Subordinate
Certificates, the priority of application of Realized Losses, the application of
Monthly Excess Cashflow Amounts and the overcollateralization feature of the
Trust Fund.
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of the Holders of the Subordinate Certificates and the Non-
Offered Certificates to receive distributions with respect to the Mortgage Loans
will be subordinated, to the extent described herein, to such rights of the
Holders of the Class A Certificates. This subordination is intended to enhance
the likelihood of regular receipt by the Holders of the Class A Certificates of
the full amount of their scheduled monthly payment of interest and principal and
to afford such Holders protection against Realized Losses.
In addition, the rights of the Holders of the Class M-2, Class B and Non-
Offered Certificates to receive distributions will be subordinated, to the
extent described herein, to such rights of the Holders of the Class A and Class
M-1 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the Holders of the Class A and Class M-1 Certificates of the
amount of interest due them and principal available for distribution and to
afford such Holders with protection against Realized Losses.
The rights of the Holders of the Class B and Non-Offered Certificates to
receive distributions will be subordinated in the same manner to such rights of
the Holders of the Class A, Class M-1 and Class M-2 Certificates and the rights
of Holders of the Non-Offered Certificates to receive distributions will be
subordinated in the same manner to such rights of the Holders of the Offered
Certificates.
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APPLICATION OF REALIZED LOSSES
If a Mortgage Loan becomes a Liquidated Loan during a Due Period, the Net
Liquidation Proceeds relating thereto and allocated to principal may be less
than the Loan Balance of such Mortgage Loan. The amount of such insufficiency is
a Realized Loss. Realized Losses which occur will, in effect, be absorbed first,
by the Non-Offered Certificates (both through the application of the Monthly
Excess Interest Amount to fund such deficiency and through a reduction in the
Overcollateralization Amount), second, by the Holders of the Class B
Certificates, third, by the Holders of the Class M-2 Certificates, and, fourth,
by the Holders of the Class M-1 Certificates.
To the extent that Mortgage Loans experience Realized Losses, such Realized
Losses will reduce the aggregate outstanding Loan Balance of the Mortgage Loans
(i.e., a reduction in the collateral balance will occur). Since the
Overcollateralization Amount is the excess, if any, of the collateral balance
over the Aggregate Certificate Principal Balance, Realized Losses, to the extent
experienced, will in the first instance reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that the Overcollateralization
Amount be initially increased to, and thereafter maintained at, the Targeted
Overcollateralization Amount. This increase and subsequent maintenance is
intended to be accomplished by the application of Monthly Excess Interest
Amounts to the funding of the Extra Principal Distribution Amount after
application to the Class A Interest Carry Forward Amount. Such Extra Principal
Distribution Amounts, since they are funded from interest collections on the
collateral but are distributed as principal on the Offered Certificates, will
increase the Overcollateralization Amount.
If, on any Distribution Date after taking into account all Realized Losses
experienced during the prior Due Period and after taking into account the
distribution of principal (including the Extra Principal Distribution Amount)
with respect to the Offered Certificates on such Distribution Date, the
Aggregate Certificate Principal Balance exceeds the aggregate Loan Balance of
the Mortgage Loans as of the end of the related Due Period (i.e., if the level
of overcollateralization is negative), then the Certificate Principal Balance of
the Subordinate Certificates will be reduced (in effect, "written down") such
that the level of overcollateralization is zero, rather than negative. Such a
negative level of overcollateralization is an Applied Realized Loss Amount,
which will be applied as a reduction in the Certificate Principal Balance of the
Subordinate Certificates in reverse order of seniority (i.e., first against the
Class B Certificate Principal Balance until it is reduced to zero, then against
the Class M-2 Certificate Balance until it is reduced to zero and then against
the Class M-1 Certificate Principal Balance until it is reduced to zero). The
Pooling and Servicing Agreement does not permit the "write down" of the
Certificate Principal Balance of any Class A Certificate.
Once the Certificate Principal Balance of a Class of Subordinate
Certificates has been "written down," the amount of such write down will no
longer bear interest, nor will such amount thereafter be "reinstated" or
"written up," although the amount of such write down may, on future Distribution
Dates be paid to Holders of the Subordinate Certificates which experienced the
write down, in direct order of seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2 Certificates and, third, the Class B
Certificates). The source of funding of such payments will be the amount, if
any, of the Monthly Excess Cashflow Amount remaining on such future Distribution
Dates after the funding of the Extra Principal Distribution Amount and after the
payment of Interest Carry Forward Amounts with respect to the Offered
Certificates on such Distribution Date.
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average net Coupon Rate for the Mortgage Loans is generally
expected to be higher than the weighted average of the Pass-Through Rates on the
Offered Certificates, thus generating certain excess interest collections which,
in the absence of losses will not be necessary to fund interest distributions on
the Offered Certificates. The Pooling and Servicing Agreement provides that this
excess interest be applied to the extent available, to make accelerated payments
of principal (i.e., the Extra Principal Distribution Amount) to the Class or
Classes then entitled to receive distributions of principal; such application
will cause the Aggregate Certificate Principal Balance to amortize more rapidly
than the Mortgage Loans, resulting in overcollateralization. This excess
interest for a Due Period and, together with interest on the
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Overcollateralization Amount itself, on the related Distribution Date is the
Monthly Excess Interest Amount for such Distribution Date.
The required level of overcollateralization for any Distribution Date is
the Targeted Overcollateralization Amount for such Distribution Date. The
Targeted Overcollateralization Amount is initially (i.e., prior to the Stepdown
Date) $17,000,000. Because the Overcollateralization Amount as of the Closing
Date is equal to approximately zero, in the early months of the transaction,
subject to the availability of Monthly Excess Interest Amounts, it is
anticipated that Extra Principal Distribution Amounts will be paid, with the
result that the Overcollateralization Amount will increase to the level of the
Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has been reached,
Realized Losses occur, such Realized Losses will result in an
Overcollateralization Deficiency (since such Realized Losses reduce the Loan
Balance without giving rise to a corresponding reduction of the Aggregate
Certificate Principal Balance). The cashflow priorities of the Trust Fund
require that, in this situation, an Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly Excess Interest Amount) for the
purpose of re-establishing the Overcollateralization Amount at the then-required
Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted Overcollateralization Amount
is permitted to decrease or "step-down" below $17,000,000 to a level equal to
8.5% of the then current aggregate outstanding Loan Balance of the Mortgage
Loans (subject to a floor of $2,000,000). If the Targeted Overcollateralization
Amount is permitted to "step-down" on a Distribution Date, the Pooling and
Servicing Agreement permits a portion of the Principal Remittance Amount for
such Distribution Date not to be passed through as a distribution of principal
on such Distribution Date. This has the effect of decelerating the amortization
of the Offered Certificates relative to the aggregate outstanding Loan Balance
of the Mortgage Loans, thereby reducing the actual level of the
Overcollateralization Amount to the new, lower Targeted Overcollateralization
Amount. This amount of the Principal Remittance Amount not distributed as
principal on the Offered Certificates therefore releases overcollateralization
from the Trust Fund. The amount of such releases are the Overcollateralization
Release Amounts.
On any Distribution Date, the sum of the Monthly Excess Interest Amount and
the Overcollateralization Release Amount is the Monthly Excess Cashflow Amount,
which is required to be applied in the following order of priority on such
Distribution Date.
(1) to fund the Class A Interest Carry Forward Amount, if any, for
such Distribution Date;
(2) to fund the Extra Principal Distribution Amount for such
Distribution Date;
(3) to fund the Class M-1 Interest Carry Forward Amount, if any, for
such Distribution Date;
(4) to fund the Class M-1 Realized Loss Amortization Amount for such
Distribution Date;
(5) to fund the Class M-2 Interest Carry Forward Amount, if any, for
such Distribution Date;
(6) to fund the Class M-2 Realized Loss Amortization Amount for such
Distribution Date;
(7) to fund the Class B Interest Carry Forward Amount, if any, for
such Distribution Date;
(8) to fund the Class B Realized Loss Amortization Amount for such
Distribution Date;
(9) to the Servicer to the extent of any unreimbursed Delinquency
Interest Advances or Servicing Advances;
(10) if a Subordinated Trigger Event exists, the excess of the
Principal Remittance Amount over the sum of the Class A, Class M-1, Class
M-2 and Class B Principal Distribution Amounts to the Subordinated
Certificates in reverse order of seniority;
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(11) to the Class A, Class M-1, Class M-2, and Class B Certificates,
in that order, any Available Funds Cap Carry Forward Amount with respect to
such Class;
(12) to fund a distribution to the Holders of the Class C
Certificates; and
(13) to fund a distribution to the Holders of the Class R
Certificates.
The Certificate Principal Balance of the Class A Certificates is the
Original Certificate Principal Balance of such Class as reduced by all amounts
actually distributed in respect of principal to the Holders of the Class A
Certificates on all prior Distribution Dates.
"Class B Applied Realized Loss Amount" means, as of any Distribution Date,
the lesser of (x) the Class B Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such
Distribution Date, but prior to the application of the Class B Applied Realized
Loss Amount, if any, on such Distribution Date) and (y) the Applied Realized
Loss Amount as of such Distribution Date.
"Class B Certificate Principal Balance" means, as of any date of
determination, the Original Class B Certificate Principal Balance of such Class
as reduced by the sum of (x) all amounts actually distributed to the Holders of
the Class B Certificates on all prior Distribution Dates on account of principal
and (y) the aggregate, cumulative amount of Class B Applied Realized Loss
Amounts on all prior Distribution Dates.
"Class B Realized Loss Amortization Amount" means, as of any Distribution
Date, the lesser of (x) the Class B Unpaid Realized Loss Amount as of such
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the Class A Interest Carry Forward Amount, the Extra
Principal Distribution Amount, the Class M-1 Realized Loss Amortization Amount,
the Class M-2 Realized Loss Amortization Amount, the Class M-1 Interest Carry
Forward Amount, the Class M-2 Interest Carry Forward Amount and the Class B
Interest Carry Forward Amount in each case for such Distribution Date.
"Class M-1 Applied Realized Loss Amount" means, as of any Distribution
Date, the lesser of (x) the Class M-1 Certificate Principal Balance (after
taking into account the distribution of the Principal Distribution Amount on
such Distribution Date, but prior to the application of the Class M-1 Applied
Realized Loss Amount, if any, on such Distribution Date) and (y) the excess of
(i) the Applied Realized Loss Amount as of such Distribution Date over (ii) the
sum of the Class M-2 Applied Realized Loss Amount and the Class B Applied
Realized Loss Amount, in each case as of such Distribution Date.
"Class M-1 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-1 Certificate Principal Balance of such
Class as reduced by the sum of (x) all amounts actually distributed to the
Holders of the Class M-1 Certificates on all prior Distribution Dates on account
of principal and (y) the aggregate, cumulative amount of Class M-1 Applied
Realized Loss Amounts on all prior Distribution Dates.
"Class M-1 Realized Loss Amortization Amount" means, as of any Distribution
Date, the lesser of (x) the Class M-1 Unpaid Realized Loss Amount as of such
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the Class A Interest Carry Forward Amount, the Extra
Principal Distribution Amount and the Class M-1 Interest Carry Forward Amount,
in each case for such Distribution Date.
"Class M-2 Applied Realized Loss Amount" means, as of any Distribution
Date, the lesser of (x) the Class M-2 Certificate Principal Balance (after
taking into account the distribution of the Principal Distribution Amount on
such Distribution Date, but prior to the application of the Class M-2 Applied
Realized Loss Amount, if any, on such Distribution Date) and (y) the excess of
(i) the Applied Realized Loss Amount as of such Distribution Date over (ii) the
Class B Applied Realized Loss Amount as of such Distribution Date.
"Class M-2 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-2 Certificate Principal Balance of such
Class as reduced by the sum of (x) all amounts actually distributed to the
Holders of the Class M-2 Certificates on all prior Distribution Dates on account
of principal and (y) the aggregate, cumulative amount of Class M-2 Applied
Realized Loss Amounts on all prior Distribution Dates.
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"Class M-2 Realized Loss Amortization Amount" means, as of any Distribution
Date, the lesser of (x) the Class M-2 Unpaid Realized Loss Amount as of such
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the Class A Interest Carry Forward Amount, the Extra
Principal Distribution Amount, the Class M-1 Realized Loss Amortization Amount,
the Class M-1 Interest Carry Forward Amount and the Class M-2 Interest Carry
Forward Amount, in each case for such Distribution Date.
A "Subordinated Trigger Event," with respect to each Distribution Date after the
Stepdown Date, exists if:
(a) Realized Losses since the Cut-Off Date with respect to the
Mortgage Loans as a percentage of the Initial Pool Balance exceed the
percentage set out below with respect to a Distribution Date:
<TABLE>
<S> <C>
Distribution Date (inclusive)
January 2000--December 2000.................................... 2.90%
January 2001--December 2001.................................... 4.90
January 2002--December 2002.................................... 6.10
January 2003--December 2003.................................... 6.90
January 2004--December 2004.................................... 7.50
January 2005 and thereafter.................................... 7.90
</TABLE>
and
(b) the aggregate Loan Balance of the Mortgage Loans that, as of the last
day of the preceding calendar month are 60 or more days delinquent as a
percentage of the aggregate Loan Balance of the Mortgage Loans as of such
Distribution Date exceeds the percentage set out below with respect to a
Distribution Date:
<TABLE>
<S> <C>
Distribution Date (inclusive)
January 2000--December 2000.................................... 8.5%
January 2001--December 2001.................................... 8.5
January 2002--December 2002.................................... 11.5
January 2003--December 2003.................................... 11.5
January 2004--December 2004.................................... 17.0
January 2005 and thereafter.................................... 17.0
</TABLE>
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates and as to any Distribution Date, the excess of (x) the aggregate
cumulative amount of Applied Realized Loss Amounts with respect to such Class
for all prior Distribution Dates over (y) the aggregate, cumulative amount of
Realized Loss Amortization Amounts with respect to such Class for all prior
Distribution Dates.
DESCRIPTION OF THE SALE AND PURCHASE AGREEMENT,
AND THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Sale and Purchase Agreement, dated as
of December __, 1997, between WMC Mortgage Corp., as seller, and Credit Suisse
First Boston Mortgage Securities Corp., as purchaser (the "Sale and Purchase
Agreement"), and the Pooling and Servicing Agreement summarized elsewhere in the
Prospectus and this Prospectus Supplement, set forth below is a summary of
certain other provisions of the Sale and Purchase Agreement and the Pooling and
Servicing Agreement.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Sale and Purchase Agreement, the Seller on the Closing Date
with respect to the Initial Mortgage Loans and on each Subsequent Transfer Date
with respect to the Subsequent Mortgage Loans will transfer, assign, set over
and otherwise convey such Mortgage Loans without recourse to the Depositor.
Pursuant to the Pooling and Servicing Agreement, the Depositor will immediately
sell, transfer, assign, set over and otherwise convey without recourse to the
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Trustee in trust for the benefit of the Certificateholders all right, title, and
interest in and to each such Mortgage Loan and will assign certain of its rights
in, to and under the Sale and Purchase Agreement. Each such transfer will convey
all right, title and interest in and to interest due and principal received on
the Mortgage Loans so transferred after the related Cut-Off Date. Purely as a
protective measure and not to be construed as contrary to the parties' intent
that the transfer on the Closing Date and each Subsequent Transfer Date is a
sale, the Seller has also been deemed to have granted to the Depositor and the
Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Fund in the event that the transfer of the Mortgage Loans
is deemed to be security for a loan and not a sale.
The Seller expressly acknowledges and consents to the Depositor's transfer
of certain of its rights relating to the Mortgage Loans under the Sale and
Purchase Agreement to the Trust Fund. The Seller also agrees to perform its
obligations relating to the Mortgage Loans under the Sale and Purchase Agreement
for the benefit of the Trust Fund.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE MORTGAGE
LOANS IN CERTAIN SITUATIONS
Pursuant to the Sale and Purchase Agreement and the Pooling and Servicing
Agreement, upon the discovery by the Depositor, the Seller, the Servicer, any
Sub-Servicer, any Holder or the Trustee that any representations and warranties
with respect to the Mortgage Loans were untrue in any material respect as of the
Closing Date with the result that the interests of the Holders are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties.
Upon the earliest to occur of the Seller's discovery or its receipt of
notice of breach from any of the other parties which breach materially and
adversely affects the interests of the Holders, the Seller will be required
promptly to cure such breach in all material respects or, within 90 days of such
discovery or receipt of notice the Seller shall (i) substitute in lieu of each
Mortgage Loan which has given rise to the requirement for action by the Seller a
Qualified Replacement Mortgage Loan (as such term is defined in the Pooling and
Servicing Agreement) and deliver the Substitution Amount to the Servicer who
will deliver the same to the Trustee on behalf of the Trust Fund as part of the
amount due to be remitted by the Servicer from collections received on the
Mortgage Loans during the related Due Period on such Determination Date (the
"Monthly Remittance") or (ii) purchase such Mortgage Loan from the Trust Fund at
a purchase price equal to the Loan Purchase Price (as defined below) thereof.
Notwithstanding any provision of the Pooling and Servicing Agreement to the
contrary, with respect to any Mortgage Loan which is not in default or as to
which no default is imminent, no such repurchase or substitution will be made
unless the Seller obtains for the Trustee an opinion of counsel experienced in
federal income tax matters and acceptable to the Trustee to the effect that such
a repurchase or substitution would not constitute a Prohibited Transaction for
the Trust Fund or otherwise subject the Trust Fund to tax and would not
jeopardize the status of either REMIC as a "real estate mortgage investment
conduit" (a "REMIC Opinion") addressed to the Trustee and acceptable to the
Trustee. Any Mortgage Loan as to which repurchase or substitution was delayed
pursuant to the Pooling and Servicing Agreement shall be repurchased or
substituted for (subject to compliance with the provisions of the Pooling and
Servicing Agreement) upon the earlier of (a) the occurrence of a default or
imminent default with respect to such Mortgage Loan and (b) receipt by the
Trustee of a REMIC Opinion. In connection with any breach of a representation,
warranty or covenant or defect in documentation giving rise to such repurchase
or substitution obligation, the Seller has agreed, subject to the foregoing,
that it shall, at its expense, furnish the Trustee with a REMIC Opinion as a
result of any such repurchase or substitution. The obligation of the Seller so
to substitute or purchase any Mortgage Loan as to which such a statement set
forth below is untrue in any material respect and has not been remedied
constitutes the sole remedy respecting a discovery of any such statement which
is untrue in any material respect available to the Holders and the Trustee.
"Loan Purchase Price" means the outstanding Loan Balance of the Mortgage
Loan as of the date of purchase (assuming that the Monthly Remittance remitted
by the Servicer on such Determination Date has already been remitted), plus
accrued and unpaid interest at the Coupon Rate together with the aggregate
amount of all Servicing Advances theretofore made and reimbursed with respect to
such Mortgage Loan from amounts in the Collection Account which did not
represent late collections of such Servicing Advance.
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THE MORTGAGE LOAN FILES
In connection with the transfer and assignment of the Mortgage Loans, the
Seller will be required to:
(i) deliver without recourse to the Trustee on the Closing Date with
respect to each Initial Mortgage Loan or on each Subsequent Transfer Date
with respect to each Subsequent Mortgage Loan identified in the related
Schedule of Mortgage Loans (A) the original Notes or certified copies
thereof, endorsed in blank or to the order of the Trustee, (B) the original
title insurance policy or a copy certified by the Seller or the issuer of
the title insurance policy, or the attorney's opinion of title, (C)
originals or certified copies of all intervening assignments, showing a
complete chain of title from the originator to the Seller, including
warehousing assignments, if any, with evidence of recording thereon, (D)
original assignments of Mortgage from the Seller to the Trustee or in blank
in recordable form, (E) originals of all assumption and modification
agreements, if any and (F) either: (1) the original Mortgage with evidence
of recording thereon (or a certified copy if such original Mortgage has not
been returned to the Seller from the applicable recording office) or (2) a
copy of the Mortgage certified by the public recording office in those
instances where the original recorded Mortgage has been lost;
(ii) cause, within 60 days following the Closing Date with respect to
the Initial Mortgage Loans or related Subsequent Transfer Date with respect
to the Subsequent Mortgage Loans, assignments of the Mortgages to "The
First National Bank of Chicago, as Trustee of WMC Mortgage Loan Trust 1997-
2 under the Pooling and Servicing Agreement dated as of December 1, 1997"
to be submitted for recording in the appropriate jurisdictions; provided,
however, that the Seller shall not be required to prepare any assignment of
Mortgage for a Mortgage with respect to which the original recording
information is lacking or to record an assignment of a Mortgage if the
Seller furnishes to the Trustee, on or before the Closing Date, at its
expense an opinion of counsel with respect to the relevant jurisdiction
that such recording is not required to effect the transfer of the Mortgage
Loans to the Trustee (in form satisfactory to the Rating Agencies); and
(iii) deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of receipt
thereof by the Seller (but in any event, with respect to any Mortgage as to
which original recording information has been made available to the Seller
within one year after the Closing Date with respect to the Initial Mortgage
Loans, or related Subsequent Transfer Date with respect to the Subsequent
Mortgage Loans).
The Trustee will agree, for the benefit of the Holders, to review the
documents relating to (i) (ii) and (iii) above with respect to each Mortgage
Loan (each a "File") within 45 days after the Closing Date or related Subsequent
Transfer Date (or the date of receipt of any documents delivered to the Trustee
after such date) to ascertain that all required documents (or certified copies
of documents) have been executed and received.
If the Trustee during such 45-day period finds any document constituting a
part of a File which is not properly executed, has not been received, is
unrelated to the Mortgage Loans or that any Mortgage Loan does not conform in
certain specified respects to the description thereof as set forth in the
Schedule of Mortgage Loans, the Trustee will be required to promptly notify the
Depositor and the Seller. The Seller will agree in the Pooling and Servicing
Agreement to use reasonable efforts to remedy a material defect in a document
constituting part of a File of which it is so notified by the Trustee. If,
however, within 90 days after the Trustee's notice to it respecting such defect
the Seller shall not have remedied the defect and the defect materially and
adversely affects the interest in the related Mortgage Loan of the Holders, the
Seller will be required by the next succeeding Determination Date to (or will
cause an affiliate of the Seller to) (i) substitute in lieu of such Mortgage
Loan another Mortgage Loan of like kind (a "Qualified Replacement Mortgage
Loan," as such term is defined in the Pooling and Servicing Agreement) and
deliver any "Substitution Amount" (the excess, if any, of the Loan Balance of a
Mortgage Loan being replaced over the outstanding principal balance of a
replacement Mortgage Loan plus accrued and unpaid interest) to the Servicer who
will deliver the same to the Trustee on behalf of the Trust Fund as part of the
Monthly Remittance remitted by the Servicer on such Determination Date or (ii)
purchase such Mortgage Loan at a purchase price equal to the Loan Purchase Price
thereof, which purchase price shall be delivered to the Servicer who will
deliver the same to the Trustee on behalf of the Trust Fund as part of the
Monthly Remittance remitted by the Servicer on such Determination Date. In
addition to the foregoing, the Trustee will agree to conduct a review during the
18 months after the Closing Date indicating the current status of the exceptions
previously noted by the Trustee and deliver a certification with respect thereto
(the "Final Certification"). After delivery of the Final
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Certification, the Trustee and the Servicer shall monitor no less frequently
than monthly updated certifications indicating the then current status of
exceptions, until all such exceptions have been eliminated.
SERVICING AND SUB-SERVICING
Collection and Other Servicing Procedures. The Servicer will be obligated
under the Pooling and Servicing Agreement to service and administer the Mortgage
Loans, on behalf of the Trust Fund, solely in the best interest of and for the
benefit of the Certificateholders in accordance with the terms of the Pooling
and Servicing Agreement, and will have full power and authority to do any and
all things in connection with such servicing and administration which it may
deem necessary or desirable in accordance with the terms of the Pooling and
Servicing Agreement.
The Servicer may perform any of its obligations under the Pooling and
Servicing Agreement through one or more subservicers (each a "Sub-Servicer").
Notwithstanding any such subservicing arrangement, the Servicer will remain
liable for its servicing duties and obligations under the Pooling and Servicing
Agreement as if the Servicer alone were servicing the Mortgage Loans. The
Servicer will be obligated under the Pooling and Servicing Agreement to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Notes and will be obligated, consistent with the other terms
of the Pooling and Servicing Agreement, to follow such collection procedures as
it would normally follow with respect to mortgage loans comparable to the
Mortgage Loans and which are required to generally conform to the mortgage loan
servicing practices of prudent mortgage lending institutions which service
mortgage loans of the same type as the Mortgage Loans for their own account in
the jurisdictions in which the related Mortgaged Properties are located
("Accepted Servicing Practices").
Servicing and Other Compensation. As compensation for its activities as
Servicer under the Pooling and Servicing Agreement, the Servicer shall be
entitled to the Servicing Fee, which shall be payable monthly. The "Servicing
Fee" shall be an amount equal to one-twelfth of 0.50% per annum times the
aggregate Loan Balance of Mortgage Loans at the beginning of the applicable Due
Period, plus a fee, as set forth in the Pooling and Servicing Agreement, for
expenses associated with the administration of REMIC I and REMIC II. In
addition, the Servicer will be entitled to retain additional servicing
compensation in the form of prepayment charges, release fees, bad check charges,
assumption fees, modification fees, late payment charges, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Collection Account pursuant to the Pooling and Servicing Agreement, and
similar items.
The Collection Account. The Servicer is required to create, or cause to be
created, in the name of the Trustee at one or more depository institutions a
principal and interest account maintained as a trust account in the trust
department of such institution (the "Collection Account"). All funds in the
Collection Account are required to be held (i) uninvested or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Collection Account must mature or be withdrawable at
par on or prior to the immediately succeeding Determination Date. Any investment
earnings on funds held in the Collection Account are for the account of, and any
losses therein are also for the account of and must be promptly replenished by,
the Servicer.
The Servicer is required to deposit in the Collection Account, within one
Business Day following receipt, all principal collections on the Mortgage Loans
received after the applicable Cut-Off Date, including any Prepayments, the
proceeds of any liquidation of a Mortgage Loan and any income from REO
Properties net of unreimbursed Servicing Fees, Delinquency Interest Advances and
Servicing Advances ("Net Liquidation Proceeds") and all interest due on the
Mortgage Loans after the applicable Cut-Off Date but net of (without
duplication) (i) the Servicing Fee with respect to each Mortgage Loan and other
servicing compensation, (ii) interest due and principal received on any Mortgage
Loan on or before the applicable Cut-Off Date, (iii) Net Liquidation Proceeds to
the extent that such Net Liquidation Proceeds exceed the sum of (A) the Loan
Balance of the related Mortgage Loan, plus (B) accrued and unpaid interest on
such Mortgage Loan (net of the Servicing Fee) to the date of such liquidation,
(iv) reimbursements for Servicing Advances and Delinquency Interest Advances,
and (v) reimbursement for amounts deposited in the Collection Account
representing payments of principal and/or interest on a Note by a Mortgagor
which are subsequently returned by a depository institution as unpaid (all such
net amounts being referred to herein as the "Daily Collections"). The Servicer
may make withdrawals for its or the Seller's own account from the amounts on
deposit in the Collection Account, only for the following purposes:
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(i) to withdraw interest paid with respect to any Mortgage Loans
that was due for periods on or prior to the applicable Cut-Off Date;
(ii) to withdraw investment earnings on amounts on deposit in the
Collection Account;
(iii) to reimburse itself for unrecovered Delinquency Interest
Advances and Servicing Advances;
(iv) to withdraw amounts that have been deposited to the Collection
Account in error; and
(v) to clear and terminate the Collection Account following the
termination of the Trust Fund.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Due Period not later than the
related Determination Date, and Loan Purchase Prices and Substitution Amounts
together with Compensating Interest and Delinquency Advances to be paid by the
Servicer and allocable to a Due Period, not later than the related Determination
Date.
Delinquency Interest Advances. The Servicer will be obligated to make
Delinquency Interest Advances on a Mortgage Loan unless it determines in
accordance with Accepted Servicing Practices that the amount of such Delinquency
Interest Advance will ultimately not be recoverable from either payments to be
made by the borrower of such Mortgage Loan (exclusive of any possibility of a
deficiency judgment) or proceeds from the related Mortgaged Property.
Delinquency Interest Advances may be funded by the Servicer from subsequent
collections on the Mortgage Loans generally, and are reimbursable from (i)
future collections and (ii) Net Liquidation Proceeds, in each case with respect
to the related Mortgage Loan. "Delinquency Interest Advances" are amounts
deposited in the Collection Account by the Servicer equal to the sum of the
interest portions (net of the Servicing Fees) of scheduled payments with respect
to delinquent Mortgage Loans due during the related Due Period but not collected
prior to the related Determination Date. Notwithstanding the Servicer's
determination at the time such Delinquency Interest Advance was made that it
would not be a nonrecoverable Delinquency Interest Advance, in the event such
Delinquency Interest Advance becomes a nonrecoverable Delinquency Interest
Advance, the Servicer will be entitled to reimbursement therefor from the Trust
Fund.
Servicing Advances. Subject to the Servicer's good faith determination that
such action would not be a nonrecoverable Servicing Advance, the Servicer will
be required to advance all "out of pocket" costs and expenses incurred in the
performance of its servicing obligations, including, but not limited to, (i)
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) certain
other customary amounts described in the Pooling and Servicing Agreement. Such
costs will constitute "Servicing Advances." The Servicer may reimburse itself
for a Servicing Advance (x) to the extent permitted by the Mortgage Loans or, in
the event that, notwithstanding the Servicer's good faith determination at the
time such Servicing Advance was made that it would not be a nonrecoverable
Servicing Advance, in the event such Servicing Advance becomes a nonrecoverable
Servicing Advance, the Servicer will be entitled to reimbursement therefor from
the Trust Fund.
Compensating Interest. A full month's interest at the related Coupon Rate
less the Servicing Fee will be due to the Trust Fund on the outstanding Loan
Balance of each Mortgage Loan as of the beginning of each Due Period. If a
Prepayment of a Mortgage Loan occurs during any Due Period, any difference
between the interest collected from the Mortgagor in connection with such
prepayment and the full month's interest at the Coupon Rate less the Servicing
Fee ("Compensating Interest") will be required to be deposited to the
Certificate Account on the Determination Date by the Servicer and shall be
included in the Monthly Remittance to be made available to the Trustee on such
Determination Date; provided, however, that the Servicer will not be required to
pay Compensating Interest with respect to any Due Period in an amount in excess
of the aggregate Servicing Fee received by the Servicer for such Due Period. The
Servicer will have the right and the option, but not the obligation, to purchase
for its own account any Mortgage Loan which becomes delinquent, in whole or in
part, as to four consecutive monthly installments or any Mortgage Loan as to
which enforcement proceedings have been brought by the Servicer. The purchase
price for any such Mortgage Loan is equal to the Loan Purchase Price thereof,
which purchase price shall be delivered to the Trustee.
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Realization Upon or Sale of Defaulted Mortgage Loans. In an effort to
collect upon delinquent Mortgage Loans, the Servicer will attempt to contact the
borrower to determine both ability and intent to pay. In accordance with the
policies and procedures of the Servicer and in accordance with Accepted
Servicing Practices and the REMIC provisions, appropriate action may be taken at
the discretion of the Servicer, including but not limited to extending payment
arrangements, modifications, forbearance and referral for legal actions.
A "Liquidated Loan" is a Mortgage Loan as to which the Servicer, in its
reasonable, good faith business judgment, in accordance with Accepted Servicing
Practices has determined that all amounts which will be recovered with respect
to such Mortgage Loan have been so recovered (exclusive of any possibility of a
deficiency judgment).
Except as described below, the Servicer may foreclose upon or otherwise
comparably convert the ownership of properties securing such of the 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 will be required to
follow Accepted Servicing Practices. However, the Servicer shall not be required
to expend its own funds in connection with any foreclosure or to restore any
damaged property unless it shall determine that (i) such foreclosure and/or
restoration will increase the proceeds of liquidation of the Mortgage Loan to
Certificateholders after reimbursement to itself for such expenses in accordance
with the Pooling and Servicing Agreement and (ii) such expenses shall be
recoverable to it through Net Liquidation Proceeds (respecting which it shall
reimburse itself for such expense prior to the deposit in the Collection Account
of such proceeds).
The Servicer will be permitted to foreclose against the Mortgaged Property
securing a defaulted Mortgage Loan either by foreclosure, by sale or by strict
foreclosure, or may accept a deed in lieu of foreclosure, and in the event a
deficiency judgment is available against the Mortgagor or any other person, may
proceed for the deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be required to be issued to the Trustee, or to the Servicer in the name of
the Trustee on behalf of the Trustee and the Certificateholders. Notwithstanding
any such acquisition of title and cancellation of the related Mortgage Loan,
such Mortgage Loan is required to be considered to be a Mortgage Loan held in
the Trust Fund until such time as the related Mortgaged Property is sold and
such Mortgage Loan becomes a Liquidated Loan. Consistent with the foregoing, for
purposes of all calculations under the Pooling and Servicing Agreement, so long
as such Mortgage Loan is an outstanding Mortgage Loan:
(i) It will be assumed that, notwithstanding that the indebtedness
evidenced by the related Note shall have been discharged, such Note and the
related amortization schedule in effect at the time of any such acquisition
of title (after giving effect to any previous partial prepayments and
before any adjustment thereto by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period) remain in
effect, except that such schedule shall be adjusted to reflect the
application of proceeds received in any month pursuant to the succeeding
clause.
(ii) Proceeds from an REO Property, net of any related Servicing
Advances or Delinquency Interest Advances of the Servicer ("Net REO
Proceeds"), received in any month shall be deemed to have been received
first in payment of the accrued interest that remained unpaid on the date
that title to the related Mortgaged Property was acquired by the Trust
Fund, with the excess thereof, if any, being deemed to have been received
in respect of the delinquent principal installments that remained unpaid on
such date. Thereafter, Net REO Proceeds from such property received in any
month shall be applied to the payment of installments of principal and
accrued interest on such Mortgage Loan deemed to be due and payable in
accordance with the terms of such related Note and such amortization
schedule.
In the event that the Trust Fund acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, such Mortgaged Property will be required to be disposed of by or
on behalf of the Trust Fund within two years after its acquisition by the Trust
Fund unless (a) the Trustee shall have received an opinion of counsel to the
effect that the holding by the Trust Fund of such Mortgaged Property subsequent
to two years after its acquisition (and specifying the period beyond such two-
year period for which the Mortgaged Property may be held) will not cause the
Trust Fund to be subject to the tax on prohibited transactions imposed by
Section 860F(a)(1) of the Code, otherwise subject the Trust Fund to tax or cause
the Trust Fund to fail to qualify as a REMIC at any time that any Offered
Certificates are outstanding, or (b) the Trustee (at the Servicer's expense) or
the Servicer shall have applied for, prior to the expiration of such two-year
period, an extension of such two-year period in the manner contemplated by
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Section 856(e)(3) of the Code, in which case the two-year period shall be
extended by the applicable period. The Servicer will also be required to
administer the Mortgaged Property so that it constitutes "foreclosure property"
within the meaning of Section 860G(a)(8) of the Code at all times, that the sale
of such property does not result in the receipt by the Trust Fund of any income
from non-permitted assets as described in Section 860F(a)(2)(B) of the Code, and
that the Trust Fund does not derive any "net income from foreclosure property"
within the meaning of Section 860G(c)(2) of the Code, with respect to such
property.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Servicer may,
in its discretion, permit the assumption of such Mortgage Loan if, in the
Servicer's reasonable judgment, such default is unlikely to be cured. In
connection with any such assumption, the Coupon Rate of the related Note and the
payment terms will not be permitted to be changed. Any fee collected by the
Servicer for entering into an assumption agreement will be retained by the
Servicer as servicing compensation.
Enforcement of Due-on-Sale Clauses. When a Mortgaged Property has been or
is about to be conveyed by the Mortgagor, the Servicer shall, to the extent it
has knowledge of such conveyance or prospective conveyance, exercise its rights
to accelerate the maturity of the related Mortgage Loan under any "due-on-sale"
clause contained in the related Mortgage or Note; provided, however, that the
Servicer shall not exercise any such right if the "due-on-sale" clause in the
reasonable belief of the Servicer, is not enforceable under applicable law. In
such event, the Servicer may enter into an assumption and modification agreement
with the person to whom such property has been or its about to be conveyed,
pursuant to which such person becomes liable under the Note and, unless
prohibited by applicable law or the Mortgage or Note, the Mortgagor remains
liable thereon. The Servicer is also authorized 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 Note.
Maintenance of Insurance Policies; Limited Releases; Other Modifications.
If so required by the terms of any Mortgage Loan, the Servicer will be required
to cause fire and hazard insurance to be maintained with respect to the related
Mortgaged Property and to advance sums on account of the premiums therefor if
not paid by the Mortgagor if permitted by the terms of such Mortgage Loan. The
Servicer will have the right under the Pooling and Servicing Agreement to accept
applications of Mortgagors for consent to (i) partial releases of Mortgages,
(ii) alterations and (iii) removal, demolition or division of Mortgaged
Properties. No application for approval may be considered by the Servicer
unless: (i) the provisions of the related Note and Mortgage have been complied
with; (ii) the loan-to-value ratio and debt-to-income ratio after any release
does not exceed the maximum loan-to-value ratio and debt-to-income ratio
established in accordance with the underwriting standards set forth under the
caption "The Seller and the Servicer" herein to be applicable to such Mortgage
Loan; and (iii) the lien priority of the related Mortgage is not affected.
Indemnification. The Servicer (except The First National Bank of Chicago if
it is required to succeed the Servicer under the Pooling and Servicing
Agreement) agrees to indemnify and hold the Trustee and each Holder harmless
against any and all claims, losses, penalties, fines, forfeitures, legal fees
and related costs, judgments, and any other costs, fees and expenses that the
Trustee and any Holder may sustain in any way related to the failure of the
Servicer to perform its duties and service the Mortgage Loans in compliance with
the terms of the Pooling and Servicing Agreement. The Servicer shall immediately
notify the Trustee and each Holder if a claim is made by a third party with
respect to the Pooling and Servicing Agreement, and the Servicer shall assume
(with the consent of the Trustee) the defense of any such claim and pay all
expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against the Servicer, the Trustee and/or Holder in respect of such claim. The
Trustee shall reimburse the Servicer from the Trust Fund for all amounts
advanced by it pursuant to the preceding sentence except when such amounts
result from the failure of the Servicer to service and administer the Mortgage
Loans in compliance with the Pooling and Servicing Agreement. In addition,
certain losses and liabilities not attributable to the failure of the Trustee or
the Servicer to perform their duties in accordance with the Pooling and
Servicing Agreement will be paid from the Trust Fund.
Servicer Reports. The Servicer will be required to deliver to the Trustee
and the Rating Agencies: (1) on or before March 31 of each year, commencing in
1998, an officers' certificate stating, as to each signer thereof, that (i) a
review of the activities of the Servicer during such preceding calendar year and
of performance under the Pooling and Servicing Agreement has been made under
such officers' supervision, and (ii) to the best of such officers' knowledge,
based on such review, the Servicer has fulfilled all its obligations under the
Pooling and Servicing Agreement for such year, or, if there
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has been a default in the fulfillment of all such obligation, specifying each
such default known to such officers and the nature and status thereof including
the steps being taken by the Servicer to remedy such default; and (2) on or
before June 30 of any year commencing in 1998, a letter or letters of a firm of
independent, nationally recognized certified public accountants as of the date
of the Servicer's fiscal audit stating that such firm has examined the
Servicer's overall servicing operations in accordance with the requirements of
the Uniform Single Attestation Program for Mortgage Bankers, and stating such
firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF SERVICER
The Trustee may (or, acting at the direction of the Holders of a majority
in Percentage Interest of the then outstanding Certificates, shall) remove the
Servicer upon the occurrence of: (a) certain acts of bankruptcy or insolvency on
the part of the Servicer; (b) certain failures on the part of the Servicer to
perform its obligations under the Pooling and Servicing Agreement; (c) the
failure to cure material breaches of the Servicer's representations in the
Pooling and Servicing Agreement; or (d) the occurrence and continuation of
certain loss and/or delinquency triggers in respect of the Mortgage Loans as
described in the Pooling and Servicing Agreement. The Servicer is not permitted
to resign from the obligations and duties imposed on it under the Pooling and
Servicing Agreement except upon determination that its duties thereunder are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it, the other activities
of the Servicer so causing such conflict being of a type and nature carried on
by the Servicer on the date of the Pooling and Servicing Agreement. Any such
determination permitting the resignation of the Servicer is required to be
evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee. Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as Servicer.
The Trustee, if it is unable to obtain a qualifying bid and is prevented by law
from acting as servicer, will be required to appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution designated as an approved seller-servicer
by FHLMC or FNMA having equity of not less than $5,000,000, and acceptable to
the Holders of the Class R Certificates, as the successor to the Servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the Servicer.
The Trustee and any other successor servicer in such capacity is entitled
to the same reimbursement for advances and no more than the same servicing
compensation as the Servicer.
No removal or resignation of the Servicer will become effective until the
Trustee or other successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
REPORTING REQUIREMENTS
On each Distribution Date the Trustee is required to report in writing to
each Holder:
(i) the amount of the distribution with respect to each Class of
Certificates;
(ii) the amount of such distribution allocable to principal on the
Mortgage Loans, separately identifying the aggregate amount of any
Prepayments or other recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest on the
Mortgage Loans;
(iv) the Interest Carry Forward Amount for each Class of
Certificates;
(v) the principal amount of each Class of the Offered Certificates
which will be outstanding after giving effect to any payment in respect of
principal on such Distribution Date;
(vi) the aggregate Loan Balance of all Mortgage Loans after giving
effect to any payment of principal on such Distribution Date;
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(vii) based upon information furnished by the Servicer such
information as may be required by Section 6049(d)(7)(C) of the Code and the
regulations promulgated thereunder to assist the Holders in computing their
market discount;
(viii) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution;
(ix) the weighted average Coupon Rate of the Mortgage Loans;
(x) whether a Trigger Event or Subordinated Trigger Event has
occurred;
(xi) the Available Funds Cap Carry Forward Amount for each Class of
Offered Certificates;
(xii) the Senior Enhancement Percentage;
(xiii) LIBOR for the related Accrual Period;
(xiv) the Overcollateralization Amount and the Certificate Principal
Balance of each Class of the Offered Certificates then outstanding after
giving effect to any payment of principal on such Distribution Date;
(xv) the amount of any Applied Realized Loss Amount, Realized Loss
Amortization Amount and Unpaid Realized Loss Amount for each Class of
Offered Certificates as of the close of such Distribution Date;
(xvi) during the Pre-Funding Period, the Loan Balance of the
Subsequent Mortgage Loans added to the Trust Fund during the related Due
Period; and
(xvii) during the Pre-Funding Period, the remaining Pre-Funded Amount
as of the last day of the Due Period.
Certain obligations of the Trustee to provide information to the Holders
are conditioned upon such information being received from the Servicer.
In addition, on each Distribution Date the Trustee will be required to
distribute to each Holder, together with the information described above, the
following information prepared by the Servicer and furnished to the Trustee for
such purpose:
(a) the number and aggregate principal balances of Mortgage Loans (i)
30-59 days delinquent, (ii) 60-89 days delinquent and (iii) 90 or more days
delinquent, as of the close of business on the last Business Day of the
calendar month next preceding the Distribution Date and the number and
aggregate Loan Balances of the Mortgage Loans and related data;
(b) the status and the number and dollar amounts of all Mortgage
Loans in foreclosure proceedings as of the close of business on the last
Business Day of the calendar month next preceding such Distribution Date;
(c) the number of Mortgagors and the Loan Balances of the Mortgages
involved in bankruptcy proceedings as of the close of business on the last
Business Day of the calendar month next preceding such Distribution Date;
(d) the existence and status of any Mortgaged Properties as to which
title has been taken in the name of, or on behalf of the Trustee ("REO
Properties"), as of the close of business on the last Business Day of the
month next preceding the Distribution Date;
(e) the book value of any REO Properties as of the close of business
on the last Business Day of the calendar month next preceding the
Distribution Date; and
(f) the amount of cumulative Realized Losses.
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GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
RIGHTS OF CERTIFICATEHOLDERS
At any time the rights of the Certificateholders of the Trust Fund will be
determined pursuant to the terms and provisions of the Pooling and Servicing
Agreement.
AMENDMENTS
The Trustee, the Depositor, the Seller and the Servicer may, at any time
and from time to time and without notice to or the consent of the Holders, amend
the Pooling and Servicing Agreement, and the Trustee will be required to consent
to such amendment, for the purposes of (i) if accompanied by a favorable opinion
of counsel experienced in federal income tax matters, removing the restriction
against the transfer of either the Class R-1 or Class R-2 Certificate to a
Disqualified Organization (as such term is defined in the Code), (ii) complying
with the requirements of the Code including any amendments necessary to maintain
REMIC status, (iii) curing any ambiguity, (iv) correcting or supplementing any
provisions therein which are inconsistent with any other provisions therein or
(v) for any other purpose, provided that in the case of clause (v), such
amendment shall not adversely affect in any material respect any Holder. Any
such amendment shall be deemed not to adversely affect in any material respect
any Holder if there is delivered to the Trustee written notification from each
Rating Agency that such amendment will not cause such Rating Agency to reduce
its then current rating assigned to any Class of the Offered Certificates.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required to
be distributed to any Holder without the consent of the Holder of such
Certificate or (b) change the percentages of Percentage Interest which are
required to consent to any such amendments, without the consent of the Holders
of all Certificates of the Class or Classes affected then outstanding.
TERMINATION OF THE TRUST FUND
The Pooling and Servicing Agreement provides that the Trust Fund will
terminate upon the payment to the Holders of all Certificates of all amounts
required to be paid to such Holders upon the last to occur of (a) the final
payment or other liquidation (or any advance made with respect thereto) of the
last Mortgage Loan, (b) the disposition of all property acquired in respect of
any Mortgage Loan remaining in the Trust Fund and (c) at any time when a
Qualified Liquidation of the Trust Fund is effected as described below. To
effect a termination pursuant to clause (c) above, the Holders of all
Certificates then outstanding will be required (i) unanimously to direct the
Trustee on behalf of the REMIC to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code and (ii) to furnish to the
Trustee an opinion of counsel experienced in federal income tax matters
acceptable to the Trustee to the effect that such liquidation constitutes a
Qualified Liquidation.
OPTIONAL TERMINATION
By the Servicer or Holders of Class R Certificates or the Servicer. The
Servicer will have the right to purchase all the Mortgage Loans (a "Clean-Up
Call") on any Determination Date after the month in which the aggregate Loan
Balances of the Mortgage Loans in the Trust Fund has declined to less than 10%
of the Initial Pool Balance (the "Clean-Up Call Date"). In addition, if the
Servicer does not exercise its Clean-Up Call rights within two Distribution
Dates after the Clean-Up Call Date, the Holders of the Non-offered Certificates
shall thereafter have the right to declare a Clean-Up Call. The party that
chooses to exercise its right to declare a Clean-Up Call shall purchase from the
Trust Fund all (but not fewer than all) remaining Mortgage Loans, in whole only,
and other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Fund at a price equal to 100% of the
aggregate Loan Balance of the related Mortgage Loans as of the day of purchase,
plus one month's interest on such amount computed at the Adjusted
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Pass-Through Rate (as defined in the Pooling and Servicing Agreement), plus the
fair market value of any REO Properties minus amounts remitted from the
Collection Account to the Certificate Account representing collections of
principal on the Mortgage Loans during the current Due Period, plus all accrued
and unpaid Servicing Fees plus the aggregate amount of any unreimbursed
Delinquency Interest Advances and Servicing Advances.
Termination Upon Loss of REMIC Status. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, in either
case from which no appeal is taken within the permitted time for such appeal, or
if any appeal is taken, following a final determination of such appeal from
which no further appeal can be taken, to the effect that the REMIC does not and
will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30 calendar
days following such Final Determination, the Holders of a majority in Percentage
Interests represented by the Offered Certificates then Outstanding may direct
the Trustee on behalf of the Trust Fund to adopt a plan of complete liquidation,
as contemplated by Section 860F(a)(4) of the Code.
THE TRUSTEE
The First National Bank of Chicago, a national banking association, has
been named Trustee pursuant to the Pooling and Servicing Agreement. The Trustee
will serve initially as the custodian of the Files. The Pooling and Servicing
Agreement provides that the Trustee shall be entitled to a fee (the "Trustee
Fee") in respect of its services as Trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by a successor
trustee.
The Trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Servicer shall promptly appoint a successor
in the manner set forth in the Pooling and Servicing Agreement. The Servicer
will deliver a copy of the instrument used to appoint a successor trustee to the
Certificateholders and the Depositor, and upon acceptance of appointment by a
successor trustee in the manner provided in the Pooling and Servicing Agreement,
the Servicer will give notice thereof to the Certificateholders. If no successor
trustee shall have been appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee. Such court may thereupon, after such notice, if any, as it may deem
proper and prescribe, appoint a successor trustee.
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement. If any such
event occurs and is continuing, then and in every such case (x) the Servicer,
may appoint a successor trustee in the manner set forth in the Pooling and
Servicing Agreement.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund and to vest in such person or persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Servicer and the Trustee may consider
necessary or desirable.
The Trustee maintains normal banking relations with the Seller.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete, do not reflect the
laws of any particular state and do not encompass the laws of all states in
which the properties securing the Mortgage Loans are situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans. See "Certain Legal Aspects of the Mortgage
Loans and Contracts" in the Prospectus for further discussion.
LIENS ON MORTGAGED PROPERTIES
The Mortgage Loans will be secured by either mortgages or deeds of trust or
deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to a Mortgage Loan is located. In California, for
example, mortgage loans are secured by deeds of trust. 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.
Such liens are not prior to the lien for real estate taxes and assessments or
other charges imposed under governmental police powers and may also be subject
to other liens pursuant to the laws of the jurisdiction in which the Mortgaged
Property is located. 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/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which borrower/property owner is the beneficiary; at origination of
a mortgage loan, the borrower executes a separate undertaking to make payments
on the related Note. A deed of trust transaction normally has three parties, the
trustor, who is the borrower/property owner; the beneficiary, who is the lender,
and the trustee, a third-party grantee. Under a deed of trust, the trustor
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 obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
FORECLOSURE ON MORTGAGES
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. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time-consuming and
expensive. 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.
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 which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. 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 in
some states must provide notice to any other individual having an interest in
the real property, including any subordinate lienholders. The trustor borrower,
or any person having a subordinate encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. In
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addition, some state laws require that a copy of the notice of sale be posted on
the property, recorded and sent to all parties having an interest in the real
property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers. A
foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Generally, a mortgagor is bound by the terms of the
related mortgage note and the mortgage as made and cannot be relieved from his
default if the mortgagee has exposed his rights in a commercially reasonable
manner. However, since a foreclosure action historically was equitable in
nature, the court may exercise equitable powers to relieve a mortgagor of a
default and deny the mortgagee foreclosure on proof that either the mortgagor's
default was neither willful nor in bad faith or the mortgagee's action
established a waiver, fraud, bad faith, or oppressive or unconscionable conduct
such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. 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, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property.
In some states, the borrower has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In general, in
such states, 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. Some states require that for a specified redemption period, the
borrower can repay the defaulted mortgage loan and regain title to the related
mortgaged property. In such jurisdictions, the lenders' ability to liquidate the
foreclosed property before the applicable redemption period has expired is
limited.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed subordinate lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, such as
California, there is no right to redeem property after a trustee's sale under a
deed of trust.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states (including California), statutes limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. 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. Finally, other
statutory provisions 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 the public sale. The purpose of
these statues is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Soldiers'
and Sailors' Civil Relief Act of 1940, and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitation plan to cure a monetary default with respect to a
loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus post-
petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lenders
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate due-
on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the organization and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
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 impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some case, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, 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 exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-
St. Germain Act which ended in all cases not later than October 15, 1982, and
(ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period" states, five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale causes with respect to certain
categories of window period loans. Also, 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.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may 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 the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realized upon their security,
courts, including California courts, have invoked general equitable principles.
The equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some case, including cases in California, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to realize upon its security if the
default under the security agreement is not monetary, such as the borrower's
failure to adequately maintain the property or the borrower's execution of
secondary financing affecting the property. Finally, some courts have been faced
with the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
security agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that, in cases involving the sale by a trustee
under a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision, as successor to the Federal Home Loan
Bank Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. Title V authorized any
state to reimpose interest rate limits by adopting before April 1, 1983, a state
law, or by certifying that the voters of such state have voted in favor of any
provision, constitutional or otherwise, which expressly rejects an application
of the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Mortgage Loan included in the Trust Fund is relieved pursuant to the Soldiers'
and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Seller or the Trustee will be required to advance such amounts, and any loss in
respect thereof may reduce the amounts available to be paid to the Holders of
the Offered Certificates. Any such shortfall will be borne first, by the Holders
of the Class B Certificates, second, by the Holders of the Mezzanine
Certificates and third, by the Holders of the Class A Certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of regular
interests in a REMIC generally and of the Offered Certificates specifically is
to be considered only in connection with "Certain Federal Income Tax
Consequences" in the Prospectus. The discussion herein and in the Prospectus is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change. The discussion below and in the Prospectus does not
purport to deal with all federal tax consequences applicable to all categories
of investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Offered Certificates.
REMIC ELECTION
Upon the issuance of the Offered Certificates, Stroock & Stroock & Lavan
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, REMIC I and REMIC II will each
qualify as a REMIC under the Code.
For federal income tax purposes, an election will be made to treat certain
assets of the Trust Fund as a REMIC ("REMIC I"). REMIC I will issue "regular
interests" and one "residual interest." An election will be made to treat the
regular interests in REMIC I as a REMIC ("REMIC II"). The Offered Certificates
and the Class C Certificates will be treated as "regular interests" in REMIC II
and the Class R-1 and Class R-2 Certificates will constitute the sole classes of
"residual interests" in REMIC I and REMIC II, respectively. For federal income
tax purposes, regular interests in a
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REMIC are generally treated as debt instruments issued by the REMIC on the date
on which those interests are created, and not as ownership interests in the
REMIC or its assets. Holders of the Offered Certificates that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Offered Certificates under an accrual method. It is not
anticipated that the Offered Certificates will be issued with original issue
discount. See "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount" in the Prospectus. The
Prepayment Assumption for the Offered Certificates used for calculating original
issue discount is 25% CPR. See "Prepayment and Yield Considerations--Projected
Prepayment and Yield for Offered Certificates" herein.
In general, as a result of being regular interests in a REMIC, (i) Offered
Certificates held by a thrift institution taxed as a "domestic building and loan
association" will constitute "assets" described in Section 7701(a)(19)(C) of the
Code; and (ii) Offered Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. If less than 95% of the assets comprising the REMICs are assets
qualifying under any of the foregoing sections of the Code, then the Offered
Certificates will be qualifying assets only to the extent that the assets
comprising the REMICs are qualifying assets. Interest on the Offered
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that the Offered Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, ("ERISA")
imposes certain requirements on employee benefit plans and collective investment
funds and separate accounts in which such plans or arrangements are invested to
which it applies and on those persons who are fiduciaries with respect to such
benefit plans. Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA), are not subject to ERISA. In accordance with ERISA's
general fiduciary standards, before investing in a Class A Certificate a benefit
plan fiduciary should determine whether such investment is permitted under the
governing benefit plan instruments, is appropriate for the benefit plan in view
of its overall investment policy and the composition and diversification of its
portfolio and should consider the ERISA provisions regarding the delegation of
fiduciary responsibility with respect to plan assets.
In addition, employee benefit plans (as defined in Section 3(3) of ERISA)
subject to ERISA and individual retirement accounts or certain types of Keogh
plans not subject to ERISA but subject to Section 4975 of the Code (each a
"Plan") are prohibited from engaging in a broad range of transactions involving
Plan assets and persons having certain specified relationships to a Plan
("parties in interest" and "disqualified persons"). Such transactions are
treated as "prohibited transactions". Sections 406 and 407 of ERISA and excise
taxes are imposed upon such persons by Section 4975 of the Code. The Depositor,
the Seller, the Servicer, the Underwriter and the Trustee and certain of their
affiliates might be considered "parties in interest" or "disqualified persons"
with respect to a Plan. If so, the acquisition or holding or transfer of Class A
Certificates by or on behalf of such Plan could be considered to give rise to a
"prohibited transaction" within the meaning of ERISA and the Code unless an
exemption is available. Furthermore, if an investing Plan's assets were deemed
to include an interest in the Mortgage Loans and any other assets of the Trust
Fund and not merely an interest in the Class A Certificates, transactions
occurring in the operation, management and servicing of the Trust Fund and its
assets, including in the servicing of the Mortgage Loans might constitute
prohibited transactions unless an administrative exemption applies. One
exemption which may be applicable to these potential prohibited transactions is
noted below. See "ERISA Considerations" in the Prospectus.
The Department of Labor has granted to Credit Suisse First Boston
Corporation an administrative exemption (Prohibited Transaction Exemption 89-90,
the "Exemption") from certain of the prohibited transaction rules of ERISA
(Sections 406(a), 406(b)(1), 406(b)(2) and 407(a) of ERISA, and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code) with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption which may be applicable to the Class A Certificates if Credit Suisse
First Boston Corporation or any of its affiliates is either the sole underwriter
or the manager or co-manager of the underwriting syndicate, or a selling or
placement agent. For a discussion of the conditions which must be satisfied for
the Exemption to apply to the purchase, holding and transfer of the Class A
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Certificates and the operation, management and servicing of the Trust Fund and
its assets, see "ERISA Considerations" in the Prospectus.
The Underwriter believes that all of the conditions for exemptive relief
under the Exemption generally will be satisfied with respect to the Class A
Certificates, except for those which are dependent on facts unknown to the
Underwriter or which it cannot control, such as those relating to the
circumstances of the Plan investor or the Plan fiduciary in making the
investment decision.
Before purchasing a Class A Certificate in reliance on the Exemption or any
other exemption, a fiduciary of a Plan should confirm that all applicable
requirements would be satisfied. Any Plan fiduciary considering the purchase of
a Class A Certificate should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment. Moreover, each
Plan fiduciary should determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Class A
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. Special caution should be exercised before a Plan purchases a Class A
Certificate in such circumstances. See "ERISA Considerations" in the Prospectus.
The Exemption does not apply to the initial purchase, the holding or the
subsequent resale of the Mezzanine Certificates and Class B Certificates because
such Certificates are subordinate to certain other Classes of Certificates.
Accordingly, Plans may not purchase the Mezzanine Certificates or Class B
Certificates.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" or its equivalent by at least two Rating Agencies; it is a condition
to the issuance of the Class M-1 Certificates that they be rated at least "AA"
or its equivalent by at least two Rating Agencies; it is a condition to the
issuance of the Class M-2 Certificates that they be rated at least "A" or its
equivalent by at least two Rating Agencies; and it is a condition to the
issuance of the Class B Certificates that they be rated at least "BBB" or its
equivalent by at least two Rating Agencies. There is no assurance that such
ratings will continue for any period of time or that such ratings will not be
revised or withdrawn. Any such revision or withdrawal of such ratings may have
an adverse effect on the market price of the Offered Certificates. A security
rating is not a recommendation to buy, sell or hold securities.
The ratings of a Rating Agency on mortgage pass-through certificates
address the likelihood of the receipt by the holders of all distributions to
which such holders are entitled. Such rating opinions address the structural and
legal issues and tax-related aspects associated with mortgage pass-through
certificates, including the nature of the underlying mortgage loans and the
credit enhancement if any. Ratings on mortgage pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may differ
from those originally anticipated.
The ratings of a Rating Agency do not address the possibility that, as a
result of principal prepayments, Certificateholders may receive a lower than
anticipated yield. Also, the ratings assigned by a Rating Agency to the Offered
Certificates do not address the payment of the Available Funds Cap Carry Forward
Amount.
The ratings of the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
LEGAL INVESTMENT CONSIDERATIONS
The Class M-2 Certificates and Class B Certificates will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). The appropriate characterization of the Class
M-2 Certificates and the Class B Certificates under various legal investment
restrictions applicable to the investment activities of certain institutions,
and thus the ability of investors subject to these restrictions to purchase the
Class M-2 Certificates and the Class B Certificates, may be subject to
significant interpretive uncertainties.
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The Class A and Class M-1 Certificates will constitute "mortgage related
securities" for purposes of SMMEA for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, the Class A Certificates and the Class M-1
Certificates will be legal investments for certain entities to the extent
provided in SMMEA, subject to state laws overriding SMMEA. In addition,
institutions whose investment activities are subject to review by federal or
state regulatory authorities may be or may become subject to restrictions, which
may be retroactively imposed by such regulatory authorities, on the investment
by such institutions in certain forms of mortgage related securities.
Furthermore, certain states have enacted legislation overriding the legal
investment provisions of SMMEA. In addition, institutions whose activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities.
All investors whose investment authority is subject to legal restrictions
should consult their own legal advisors to determine whether, and to what
extent, the Offered Certificates will constitute legal investments for them.
The Depositor makes no representation as to the proper characterization of
the Offered Certificates offered hereby for legal investment of financial
institution regulatory purposes, or as to the ability of particular investors to
purchase the Offered 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 Offered Certificates offered hereby) may adversely affect
the liquidity of the Offered Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Offered Certificates (the "Underwriting Agreement"), the
Depositor has agreed to cause the Trust Fund to sell to the Underwriters and
each of the Underwriters has severally agreed to purchase the Offered
Certificates set forth opposite its name below:
CLASS A CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
----------- ------
<S> <C>
Credit Suisse First Boston Corporation
Bear, Stearns & Co. Inc.
Lehman Brothers, Inc.
NationsBanc Montgomery Securities, Inc.
CLASS M-1 CERTIFICATES
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------
Credit Suisse First Boston Corporation
Bear, Stearns & Co. Inc.
Lehman Brothers, Inc.
NationsBanc Montgomery Securities, Inc.
CLASS M-2 CERTIFICATES
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------
Credit Suisse First Boston Corporation
Bear, Stearns & Co. Inc.
Lehman Brothers, Inc.
NationsBanc Montgomery Securities, Inc.
</TABLE>
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CLASS B CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------
<S> <C>
Credit Suisse First Boston Corporation
Bear, Stearns & Co. Inc.
Lehman Brothers, Inc.
NationsBanc Montgomery Securities, Inc.
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Offered
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Offered
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the related Certificate Principal Balance). The Underwriters may
allow and such dealers may reallow a discount not in excess of the respective
amounts set forth in the table below to certain other dealers.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- --------
<S> <C> <C>
A.........................................
M-1.......................................
M-2.......................................
B.........................................
</TABLE>
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Act of 1934. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Offered Certificates in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the Offered Certificates originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short position. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Offered Certificates to
be higher than it would otherwise be in the absence of such transactions.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the civil liabilities under the
Securities Act of 1933, as amended, or contribute to payments which the
Underwriters may be required to make in respect thereof.
The Depositor is an affiliate of one of the Underwriters.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Offered Certificates will be passed upon for the Depositor by Stroock & Stroock
& Lavan LLP, New York, New York. Certain legal matters relating to insolvency
issues and certain federal income tax matters concerning the Offered
Certificates will be passed upon for the Depositor by Stroock & Stroock & Lavan
LLP, New York, New York.
S-83
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered WMC Mortgage
Loan Pass-Through Certificates, Series 1997-2: Class A Adjustable Rate
Certificates, Class M-1 Adjustable Rate Certificates, Class M-2 Adjustable Rate
Certificates and Class B Adjustable Rate Certificates (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of DTC, Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds. Trading between Cedel
and/or Euroclear Participants. Secondary market trading between Cedel
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds. Trading between DTC,
Seller and Cedel or Euroclear Participants. When Global Securities are to be
transferred from the account of a DTC Participant to the account of a Cedel
Participant or a Euroclear Participant, the purchaser will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one Business Day prior to settlement. Cedel or Euroclear will instruct the
Relevant Depositary, as the case may be, to receive the Global Securities
against payment. Payment will
I-1
<PAGE>
include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be back-
valued to, and the interest on the Global Securities will accrue from, the value
date (which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel Participants or
Euroclear Participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Cedel Participant's or Euroclear Participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC Participants can employ their usual procedures for crediting
Global Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a cross-
market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one Business Day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
I-2
<PAGE>
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers" securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for Non-
U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are Non-
U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Holders or their agent. Exemption for U.S.
Persons (Form W-9). U.S. Persons can obtain a complete exemption from the
withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification
Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity organized in or under the laws of the
United States or any political subdivision thereof (unless, in the case of a
partnership, future Treasury regulations provide otherwise), (iii) an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income, or (iv) a trust other than a "foreign trust," as defined in Section
7701(a)(31) of the Code. The term "Non-U.S. Person" means any person who is not
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<S> <C>
2/28 Loans................................................................................................. S-9
3/27 Loans................................................................................................. S-9
Accepted Servicing Practices............................................................................... S-17
Accrual Period............................................................................................. S-11
Additional Mortgage Loans.................................................................................. S-8
Available Funds Cap........................................................................................ S-5
Available Funds Cap Carry Forward Amount................................................................... S-12
Aggregate Certificate Principal Balance.................................................................... S-6
Aggregate Statistical Calculation Date Loan Balance........................................................ S-8
Apollo..................................................................................................... S-30
Applied Realized Loss Amount............................................................................... S-20
Appraised Values........................................................................................... S-37
Beneficial Holders......................................................................................... S-22
BPOs....................................................................................................... S-36
Book-Entry Certificates.................................................................................... S-57
Business Day............................................................................................... S-11
Capitalized Interest Account............................................................................... S-2
Cede....................................................................................................... S-23
Cedel...................................................................................................... S-22
CEDEL Participants......................................................................................... S-58
Certificate Account........................................................................................ S-54
Certificates............................................................................................... S-1
Certificateholder.......................................................................................... S-2
Certificate Principal Balance.............................................................................. S-5
Chase...................................................................................................... S-23
Citibank................................................................................................... S-23
Class...................................................................................................... S-5
Class A Certificates....................................................................................... S-1
Class A Principal Distribution Amount...................................................................... S-14
Class B Applied Realized Loss Amount....................................................................... S-63
Class B Certificates....................................................................................... S-1
Class B Certificate Principal Balance...................................................................... S-63
Class B Principal Distribution Amount...................................................................... S-15
Class B Realized Loss Amortization Amount.................................................................. S-63
Class C Certificates....................................................................................... S-1
Class Distribution Amount.................................................................................. S-11
Class M-1 Applied Realized Loss Amount..................................................................... S-63
Class M-1 Certificate Principal Balance.................................................................... S-63
Class M-1 Certificates..................................................................................... S-1
Class M-1 Principal Distribution Amount.................................................................... S-15
Class M-1 Realized Loss Amortization Amount................................................................ S-63
Class M-2 Applied Realized Loss Amount..................................................................... S-63
Class M-2 Certificate Principal Balance.................................................................... S-63
Class M-2 Certificates..................................................................................... S-1
Class M-2 Principal Distribution Amount.................................................................... S-15
Class M-2 Realized Loss Amortization Amount................................................................ S-64
Class R Certificates....................................................................................... S-2
Class R-1 Certificates..................................................................................... S-1
Class R-2 Certificates..................................................................................... S-1
Clean-Up Call.............................................................................................. S-22
Clean-Up Call Date......................................................................................... S-22
CLTV....................................................................................................... S-31
Closing Date............................................................................................... S-7
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
Code....................................................................................................... S-23
Collection Account......................................................................................... S-67
Commission................................................................................................. S-3
Compensating Interest...................................................................................... S-17
Constant Prepayment Rate................................................................................... S-47
Cooperative................................................................................................ S-59
Coupon Rate................................................................................................ S-9
CPR........................................................................................................ S-47
Current Interest........................................................................................... S-12
Cut-Off Date............................................................................................... S-7
Daily Collections.......................................................................................... S-67
Debt Ratio................................................................................................. S-31
Definitive Certificate..................................................................................... S-57
Delinquency Interest Advances.............................................................................. S-17
Depositor.................................................................................................. S-1
Determination Date......................................................................................... S-7
Distribution Date.......................................................................................... S-7
DTC........................................................................................................ S-22
DTC Participants........................................................................................... S-58
Due Period................................................................................................. S-7
Eligible Investments....................................................................................... S-56
ERISA...................................................................................................... S-80
Equity Services............................................................................................ S-30
Euroclear.................................................................................................. S-22
Euroclear Operator......................................................................................... S-59
Euroclear Participants..................................................................................... S-58
European Depositaries...................................................................................... S-23
Exemption.................................................................................................. S-80
Extra Principal Distribution Amount........................................................................ S-16
FHLMC...................................................................................................... S-27
File....................................................................................................... S-66
Final Certification........................................................................................ S-66
Final Determination........................................................................................ S-74
Final Scheduled Distribution Date.......................................................................... S-46
Financial Intermediary..................................................................................... S-57
FNMA....................................................................................................... S-27
Formula Pass-Through Rate.................................................................................. S-6
Garn-St. Germain Act....................................................................................... S-78
Global Securities.......................................................................................... I-1
Holder..................................................................................................... S-2
Initial Cut-Off Date....................................................................................... S-7
Initial Mortgage Loans..................................................................................... S-8
Initial Pool Balance....................................................................................... S-22
Interest Amount Available.................................................................................. S-11
Interest Carry Forward Amount.............................................................................. S-12
Interest Remittance Amount................................................................................. S-12
LIBOR...................................................................................................... S-25
LIBOR Determination Date................................................................................... S-57
Liquidated Mortgage Loan................................................................................... S-14
Liquidated Loan............................................................................................ S-69
Loan Balance............................................................................................... S-8
Loan Purchase Price........................................................................................ S-65
LTV........................................................................................................ S-31
Mezzanine Certificates..................................................................................... S-1
Monthly Excess Cashflow Amount............................................................................. S-11
Monthly Remittance......................................................................................... S-65
Monthly Excess Interest Amount............................................................................. S-20
Mortgage Loans............................................................................................. S-1
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Mortgaged Properties....................................................................................... S-8
Mortgages.................................................................................................. S-8
Mortgagor.................................................................................................. S-44
Net Liquidation Proceeds................................................................................... S-67
Net REO Proceeds........................................................................................... S-69
NOD........................................................................................................ S-33
Non-Offered Certificates................................................................................... S-1
Notes...................................................................................................... S-8
Offered Certificates....................................................................................... S-1
Original Pre-Funded Amount................................................................................. S-10
Overcollateralization Amount............................................................................... S-15
Overcollateralization Deficiency........................................................................... S-16
Overcollateralization Release Amount....................................................................... S-16
Participants............................................................................................... S-57
Pass-Through Rate.......................................................................................... S-2
Percentage Interest........................................................................................ S-54
Plan....................................................................................................... S-24
Pooling and Servicing Agreement............................................................................ S-7
Pre-Funded Amount.......................................................................................... S-10
Pre-Funding Account........................................................................................ S-2
Pre-Funding Period......................................................................................... S-10
Prepayment Assumption...................................................................................... S-47
Prepayments................................................................................................ S-28
Preservation Expenses...................................................................................... S-68
Principal Distribution Amount.............................................................................. S-14
Principal Remittance Amount................................................................................ S-14
Qualified Replacement Mortgage............................................................................. S-66
Rating Agencies............................................................................................ S-23
Rating Agency Condition.................................................................................... S-44
Realized Loss.............................................................................................. S-19
Record Date................................................................................................ S-7
Reference Banks............................................................................................ S-57
Register................................................................................................... S-54
Registrar.................................................................................................. S-54
Relevant Depositary........................................................................................ S-57
REMIC...................................................................................................... S-2
REMIC I.................................................................................................... S-2
REMIC II................................................................................................... S-2
REMIC Opinion.............................................................................................. S-65
REO Properties............................................................................................. S-72
Riegle Act................................................................................................. S-29
Rules...................................................................................................... S-57
Sale and Purchase Agreement................................................................................ S-64
Seller..................................................................................................... S-1
Senior Enhancement Percentage.............................................................................. S-15
Senior Specified Enhancement Percentage.................................................................... S-16
Servicer................................................................................................... S-1
Servicing Advances......................................................................................... S-17
Servicing Fee.............................................................................................. S-18
Six-Month LIBOR............................................................................................ S-25
Six-Month LIBOR Loans...................................................................................... S-9
SMMEA...................................................................................................... S-81
Statistical Calculation Date............................................................................... S-7
Stepdown Date.............................................................................................. S-14
Sub-Servicer............................................................................................... S-67
Subordinate Certificates................................................................................... S-1
Subordinated Trigger Event................................................................................. S-64
Subsequent Cut-Off Date.................................................................................... S-7
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
Subsequent Mortgage Loans.................................................................................. S-2
Subsequent Transfer Date................................................................................... S-7
Substitution Amount........................................................................................ S-14
Targeted Overcollateralization Amount...................................................................... S-16
Telerate Page 3750......................................................................................... S-57
Terms and Conditions....................................................................................... S-59
Title V.................................................................................................... S-79
Trigger Event.............................................................................................. S-14
Trustee Fee................................................................................................ S-18
Trust Fund................................................................................................. S-1
Trustee.................................................................................................... S-1
Underwriter(s)............................................................................................. S-1
Underwriting Agreement..................................................................................... S-82
Unpaid Realized Loss Amount................................................................................ S-64
Weighted average life...................................................................................... S-46
WMC........................................................................................................ S-30
WMC Guidelines............................................................................................. S-30
</TABLE>
A-4
<PAGE>
P R O S P E C T U S
Credit Suisse First Boston Mortgage Securities Corp.
Depositor
ABS Mortgage and Manufactured Housing Contract
Asset-Backed Certificates and
Asset-Backed Notes
(Issuable in Series)
Credit Suisse First Boston Mortgage Securities Corp. (the "Depositor") may
offer from time to time the ABS Mortgage and Manufactured Housing Contract
Asset-Backed Certificates (the "Certificates") and the ABS Mortgage and
Manufactured Housing Contract Asset-Backed Notes (the "Notes" and, together with
the Certificates, the "Securities") offered hereby and by the related Prospectus
Supplements which may be sold from time to time in one or more series (each, a
"Series") in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in the related Prospectus Supplement. Each Series of
Securities may include one or more separate classes (each, a "Class") of Notes
and/or Certificates, which may be divided into one or more subclasses (each, a
"Subclass"). The Certificates will be issued by a trust (the "Trust") to be
formed by the Depositor with respect to such Series pursuant to either a Trust
Agreement (each, a "Trust Agreement") to be entered into between the Depositor
and the trustee specified in the related Prospectus Supplement (the "Trustee")
or a Pooling and Servicing Agreement (each, a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. If a Series of
Securities includes Notes, such Notes will be issued and secured pursuant to an
Indenture (each, an "Indenture") to be entered into between any of (i) the Trust
or (ii) a partnership, corporation, limited liability company or other entity
formed by the Depositor solely for purpose of issuing Notes of a related Series
and matters incidental thereto, as issuer (the "Issuer") and the indenture
trustee specified in the related Prospectus Supplement (the "Indenture
Trustee"). The related Trust Fund will be serviced by the Master Servicer
pursuant to a Sale and Servicing Agreement (the "Sale and Servicing Agreement")
among the Depositor, the Master Servicer and the Indenture Trustee. The
Certificates represent interests in specified percentages of principal and
interest (a "Percentage Interest") with respect to the related Mortgage Pool or
Contract Pool (each, as defined below), or 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, beneficial interest
or notional amount specified in the related Prospectus Supplement in one of a
number of Trusts, each to be created by the Depositor from time to time. If a
Series of Securities includes Notes, the Notes will represent indebtedness of
the related Trust Fund. The trust property of each Trust (the "Trust Fund") will
consist of a pool containing one- to four-family residential mortgage loans
(including revolving lines of credit), mortgage loans secured by multifamily
residential rental properties consisting of five or more dwelling units or
apartment buildings owned by cooperative housing corporations, loans made to
finance the purchase of certain rights relating to cooperatively owned
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, 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 Securities (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 certain conventional
mortgage pass-through certificates, collateralized mortgage bonds or other
indebtedness secured by mortgage loans or manufactured housing contracts (the
"Mortgage Certificates"), in each case together with certain and related
property (the "Mortgage Pool") or a 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 (the "Contract Pool") conveyed to such trust by
the Depositor. The Mortgage Loans may be conventional mortgage loans,
conventional cooperative loans, mortgage loans insured by the Federal Housing
Administration (the "FHA"), 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 Securities of one or
more Classes or Subclasses of Notes and/or Certificates of a Series to receive
distributions with respect to the related Mortgage Pool or Contract Pool may be
<PAGE>
subordinated to such rights of the holders of the Securities of one or more
Classes or Subclasses of Notes and/or Certificates 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. 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 this Prospectus is being delivered,
together with specific information regarding the Securities of such Series.
The Securities do not represent an obligation of or interest in the Depositor or
any affiliate thereof. Neither the Securities, 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.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE LIMITATIONS DISCUSSED UNDER
"ERISA CONSIDERATIONS" HEREIN AND IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS THAT POTENTIAL INVESTORS SHOULD CONSIDER IN DETERMINING WHETHER TO
INVEST IN THE SECURITIES OF A SERIES IN RESPECT OF WHICH THIS PROSPECTUS IS
BEING DELIVERED.
Offers of the Securities 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 Securities, 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. 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 Securities 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 or certain assets of the Trust Fund with
respect to certain Series of Securities 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, one or more Classes of Notes
of a Series may be subject to optional redemption by the Issuer under the
circumstances described in the Prospectus Supplement. If so specified in
the Prospectus Supplement relating to a Series of Securities, the
Certificates of such Series may be subject to early termination and may
receive Special Distributions (as defined herein) in reduction of 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 Securities
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 November 17, 1997.
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement with respect to each Series of Securities will,
among other things, set forth with respect to such Series of Securities : (i)
the identity of each Class or Subclass of Securities within such Series; (ii)
the undivided interest, Percentage Interest, Stated Principal Balance, principal
balance or notional amount of each Class or Subclass of Securities; (iii) the
Interest Rate borne by each Class or Subclass of Securities within such Series;
(iv) certain information concerning the Mortgage Loans, the Mortgage
Certificates, the Contracts, if any, and the other assets comprising the Trust
Fund for such Series; (v) the final Distribution Date of each Class or Subclass
of Securities within such Series; (vi) the identity of each Class or Subclass of
Compound Interest Securities, if any, within such Series; (vii) the method used
to calculate the amount to be distributed with respect to each Class or Subclass
of Securities within such Series; (viii) the order of application of
distributions to each of the Classes or Subclasses of Securities 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 Securities offered hereby, if any, are
offered; (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 contains, and the Prospectus Supplement for each Series of
Securities will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor 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. Statements
contained in this Prospectus and any Prospectus Supplement as to the contents of
any contract or other document referred to are summaries 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 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such information 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 or of the Trust Agreement,
Indenture and Sale and Servicing Agreement pursuant to which a Series of
Securities is issued, as applicable, will be provided to each person to whom a
Prospectus and the related Prospectus Supplement are delivered, upon written or
oral request directed to: Treasurer, Credit Suisse First Boston Mortgage
Securities Corp., 11 Madison Avenue, New York, New York 10010, (212) 325-2000.
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 Exchange Act prior to the termination
of the offering of Securities 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 or Subclasses
of Securities, 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
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Securities, 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: Credit Suisse First Boston Mortgage Securities
Corp., 11 Madison Avenue, New York, New York 10010, (212) 325-2000.
IF AND TO THE EXTENT REQUIRED BY APPLICABLE LAW OR REGULATIONS, THIS
PROSPECTUS AND THE ATTACHED PROSPECTUS SUPPLEMENT WILL ALSO BE USED BY THE
UNDERWRITER AFTER THE COMPLETION OF THE OFFERING IN CONNECTION WITH OFFERS AND
SALES RELATED TO MARKET-MAKING TRANSACTIONS IN THE OFFERED SECURITIES IN WHICH
THE UNDERWRITER ACTS AS PRINCIPAL. SALES WILL BE MADE AT NEGOTIATED PRICES
DETERMINED AT THE TIME OF SALE.
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 Securities 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........... ABS Mortgage and Manufactured Housing Contract
Asset-Backed Certificates (the "Certificates") and
ABS Mortgage and Manufactured Housing Contract
Asset-Backed Notes (the "Notes" and, together with
the Certificates, the "Securities") issuable in
series (each, a "Series"). The Securities 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 of
such Classes or Subclasses of Certificates of a
Series (the "Residual Certificates") may evidence
a residual interest in the related Trust Fund (as
defined below). If so specified in the related
Prospectus Supplement, one or more Classes or
Subclasses of Certificates within a Series (the
"Multi-Class Securities") 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)
and/or the other assets in the Trust Fund 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
Classes or Subclasses of Notes and/or Certificates
may receive unequal amounts of the distributions
of principal and interest on the Mortgage Loans,
the Contracts and the Mortgage Certificates
included in the related Trust Fund, as specified
in such Prospectus Supplement (any such Class or
Subclass receiving the higher
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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 distributions
of principal, which proportions may change over
time subject to certain conditions. Payments may
be applied to any one or more Classes or
Subclasses on a sequential or pro rata basis, or
otherwise, 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
(each, a "Trust") each to be created by the
Depositor from time to time pursuant to either a
Trust Agreement (each, a "Trust Agreement") to be
entered into between the Depositor and the trustee
specified in the related Prospectus Supplement
(the "Trustee") or a Pooling and Servicing
Agreement (each, a "Pooling and Servicing
Agreement") among the Depositor, the Master
Servicer and the Trustee. If a Series of
Securities includes Notes, such Notes will be
issued and secured pursuant to an Indenture (each,
an "Indenture") to be entered into between any of
(i) the Trust or (ii) a partnership, corporation,
limited liability company or other entity formed
by the Depositor solely for purpose of issuing
Notes of a related Series and matters incidental
thereto, as issuer (the "Issuer") and the
indenture trustee specified in the related
Prospectus Supplement (the "Indenture Trustee"),
and such Notes will represent indebtedness of the
related Trust. 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) closed-end loans
(the "Closed-End Loans") and/or revolving home
equity loans or certain balances thereof (the
"Revolving Credit Line Loans" and, together with
the Closed-End Loans, the "Home Equity Loans")
secured by mortgages or deeds of trust on
residential one-to-four family properties,
including townhouses and individual units in
condominiums and planned unit developments, (iii)
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, "Single Family Property"), (iv)
mortgage loans secured by multifamily
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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 from an affiliate or from unaffiliated
sellers, (v) 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 Securities of such
Series for a rating in one of the four highest
rating categories of such Rating Agency (such
loans and mortgage participation certificates
being referred to collectively hereinafter as the
"Mortgage Loans"), or (vi) 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") purchased by the Depositor either
directly or through one or more affiliates or
Unaffiliated Sellers, and related property
conveyed to such trust by the Depositor. Unless
otherwise specified in the related Prospectus
Supplement, each Series of Securities will be
offered in fully registered form only, in one or
more Classes of Notes and/or Certificates, which
may be divided into one or more Subclasses. If so
specified in the related Prospectus Supplement,
Multi-Class Securities of a Series may be issued
with the Stated Principal Balances and the
Interest Rates therein specified. At the time of
issuance, each Security 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 Mortgage Pool or Contract
Pool, 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.................... Credit Suisse First Boston Mortgage Securities
Corp., 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 Securities."
Interest..................... Interest will be distributed on the days specified
in the Prospectus Supplement with respect to each
Class or Subclass of Notes and/or Certificates of
a Series, or if any such day is not a business
day, the next succeeding business day (the
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"Distribution Date"), at the rate, or pursuant to
the method of determining such rate, specified in
the related Prospectus Supplement for each Class
or Subclass of Notes and/or Certificates within
such Series, commencing on the day specified in
such Prospectus Supplement, in the manner
specified in such Prospectus Supplement. See
"Maturity, Prepayment and Yield Considerations"
and "Description of the Securities -- Payments on
Mortgage Loans" and "-- Payments on Contracts."
Principal (Including
Prepayments)................. Unless otherwise specified in the related
Prospectus Supplement, principal on each Trust
Asset underlying a Series of Securities will be
distributed on each Distribution Date, commencing
on the date specified in the related 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 Securities,
distributions on such Multi-Class Securities may
be made in reduction of the Stated Principal
Balance, in an amount equal to the Stated
Principal Distribution Amount. Unless otherwise
specified in the related Prospectus Supplement,
the Stated Principal Distribution Amount will
equal the amount by which the Stated Principal
Balance of such Class of Multi-Class Securities
(before taking into account the amount of interest
accrued and added to the Stated Principal Balance
of any Class or of Compound Interest Securities)
exceeds the Asset Value (as defined herein) of the
Trust Assets and other property in the related
Trust Fund as of the Business Day prior to the
related Distribution Date. See "Maturity,
Prepayment and Yield Considerations" and
"Description of the Securities -- Payments on
Mortgage Loans" and "-- Payments on Contracts." If
so specified in the Prospectus Supplement relating
to a Series, the Multi-Class Securities of such
Series which have other than monthly Distribution
Dates may receive special distributions in
reduction of 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 included in the related Trust Fund and/or
low reinvestment yields, the Trustee determines,
based on assumptions specified in the related
Agreement (as defined herein), 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.
Unless otherwise specified in the related
Prospectus Supplement, Special Distributions will
be made on such Certificates in the same priority
and manner as distributions in reduction of Stated
Principal Balance would be made on the next
Distribution Date for such Certificates. See
"Description of the Securities -- Special
Distributions." In addition, if so specified in
the related Prospectus Supplement, one or more
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Classes of Notes may be subject to optional
redemption on the terms and conditions specified
in the related Prospectus supplement.
The Mortgage Pools........... If so specified in the related Prospectus
Supplement, the Securities of a Series will
represent the interest specified in such
Prospectus Supplement in, or be secured by, the
Mortgage Pool or Pools included in the Trust Fund
for such Series. Unless otherwise specified in the
applicable Prospectus Supplement, 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 securing such Mortgage Loan (the
"Mortgaged Property"), based upon an appraisal of
the Mortgaged Property considered acceptable to
the originator of such Mortgage Loan or the sales
price, whichever is less (the "Original Value").
Unless otherwise specified in the applicable
Prospectus Supplement, Mortgage Loans secured by
Single Family Property having an original
principal amount exceeding 80% of the Original
Value will be covered by a policy of private
mortgage insurance until the outstanding principal
amount is reduced to the percentage of the
Original Value set forth in the related Prospectus
Supplement as a result of principal payments by
the borrower (the "Mortgagor"). Unless otherwise
specified in the applicable Prospectus Supplement,
the principal balance at origination of each
Mortgage Loan that is secured by Single Family
Property will not exceed $500,000. Mortgage Loans
in a Mortgage Pool will all have original
maturities of 10 to 40 years, unless otherwise
specified in the applicable Prospectus Supplement.
Mortgage Loans in a Mortgage Pool may have
interest rates (the "Mortgage Rates") that are
either fixed or variable. Mortgage Pools may be
formed from time to time in varying sizes.
Mortgage Certificates........ If so specified in the related Prospectus
Supplement, the Trust Fund for a Series of
Securities 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 in the related 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 or by pledges of
shares of cooperative corporations and assignments
of proprietary leases or occupancy agreements on
cooperative dwellings, unless otherwise specified
in such Prospectus Supplement.
The Contract Pools........... If so specified in the related Prospectus
Supplement, the Securities of a Series will
represent the interest specified in such
Prospectus Supplement in, or be secured by, the
Contract
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Pool or Pools included in the Trust Fund for such
Series. Unless otherwise specified in the
applicable Prospectus Supplement, the Contracts
will be fixed rate Contracts. Such Contracts, as
specified in the related 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 related 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. Unless
otherwise specified in the related Prospectus
Supplement, 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 related
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.
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 Securities of a Series. The
yield on any Class of Securities, the purchase
price of which is greater than the aggregate
amount of the Principal Distributions to be made
to such Class (a "Premium Security"), is likely to
be adversely affected by a higher than anticipated
level of principal prepayments on the Trust Assets
included in the related Trust Fund. This effect on
yield will intensify with any increase in the
amount by which the purchase price of such
Security 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
Securities 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
Securities that are Premium Securities) will
likely result in a lower than anticipated yield to
Holders of Securities 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 Security"). The Prospectus
Supplement for each
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Series of Securities 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 included in the
related Trust Fund. The yield to Securityholders
will also be adversely affected because interest
will accrue on the Mortgage Loans, the Contracts
or the mortgage loans underlying the Mortgage
Certificates 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
unless otherwise provided 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, or the Mortgage Certificates are
received by the Master Servicer or the Trustee.
See "Maturity, Prepayment and Yield
Considerations."
Pre-Funding.................. If so specified in the related Prospectus
Supplement, a portion of the issuance proceeds of
the Securities 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, Contracts or
Mortgage Certificates, 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, Contracts or Mortgage
Certificates, 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 Securities -- 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, Contracts or
Mortgage Certificates from time to time during
such Pre-Funding Period. Such additional Mortgage
Loans, Contracts or Mortgage Certificates 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, Contracts or Mortgage Certificates
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 Securities will be
specified in the related Prospectus Supplement, it
is anticipated that: (a) the Pre-Funding Period
will not exceed 120 days from the related Closing
Date, (b) that the additional Mortgage Loans,
Contracts or Mortgage Certificates to be acquired
during the Pre-Funding Period will be subject to
the same representations
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and warranties as the Mortgage Loans, Contracts or
Mortgage Certificates 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% of the principal amount of the
Securities issued pursuant to a particular
offering.
Credit Support............... Neither the Securities nor the Trust Assets are
insured or guaranteed by any governmental agency,
except to the extent of any FHA insurance or VA
guarantee. 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 as specified in the applicable
Prospectus Supplement. In lieu or in addition to
the foregoing credit support arrangements if so
specified in the related Prospectus Supplement,
the Securities of a Series may be issued in one or
more Classes or Subclasses. Payments on the
Securities of one or more Classes or Subclasses
(the "Senior Securities") may be supported by a
prior right to receive distributions attributable
or otherwise payable to another Class or Subclass
(the "Subordinated Securities") to the extent
specified in the related Prospectus Supplement
(the "Subordinated Amount"). In addition, if so
specified in the related Prospectus Supplement,
one or more Classes or Subclasses of Subordinated
Securities may be subordinated to another Class or
Subclass of Subordinated Securities and may be
entitled to receive disproportionate amounts of
distributions of principal. If so specified in
the related Prospectus Supplement, if a Series of
Securities includes Notes, all Classes of
Certificates will be subordinated to the Classes
of Notes and one more Classes or Subclasses of
Notes may be subordinated to another Class or
Subclasses of Notes and may be entitled to receive
disproportionate amounts of distributions of
principal. If so specified in the related
Prospectus Supplement, a reserve (the "Reserve
Fund") and certain other accounts or funds may be
established to support payments on one or more
Classes of Securities. 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. Unless otherwise specified
in the related Prospectus Supplement, to the
extent described herein, 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
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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,
Pooling and Servicing Agreement or Sale and
Servicing Agreement referred to herein. Unless
otherwise provided in the related Prospectus
Supplement, 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 of
foreclosure, (c) each Cooperative Loan as to which
the shares of the related Cooperative 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. 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 holder of Securities of the Series,
as specified in the related Prospectus Supplement.
Unless otherwise specified in the related
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% 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 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 Securities will be in
compliance with requirements established by the
Rating Agency rating such Series and will be set
forth in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
the Letter of Credit with respect to a Series of
Securities or one or more Classes of Series of
Securities may, in addition to or in lieu of the
foregoing, provide coverage with respect to the
unpaid principal or notional amount of the
Securities 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
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amount of coverage provided by the Pool Insurance
Policy for a Mortgage Pool will be specified in
the related 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 Insurance Policy for each
related 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 Securityholders. See "Description
of the Securities --Presentation of Claims."
C. Mortgagor Bankruptcy
Bond...................... If so specified in the related Prospectus
Supplement, the Master Servicer, if any, the
Depositor or the applicable Servicer will obtain
and use its best reasonable efforts to maintain a
Mortgagor Bankruptcy Bond for one or more Classes
of Securities of 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 Securities... If so specified in the related Prospectus
Supplement, the rights of holders of the
Securities of one or more Subordinated Classes or
Subclasses of a Series to receive distributions
with respect to the Mortgage Loans in the Mortgage
Pool or Contracts in the Contract Pool for such
Series, or with respect to a Subordinated Pool (as
defined herein), will be subordinated to the
rights of the holders of the Securities of one or
more Classes or Subclasses of such Series to
receive such distributions to the extent described
in the related Prospectus Supplement, and may be
limited to the Subordinated Amount set forth in
the related Prospectus Supplement. This
subordination will be intended to enhance the
likelihood of regular receipt by holders of the
Senior Securities of the full amount of scheduled
payments of principal and interest due them and to
reduce the likelihood that the holders of such
Senior Securities will experience losses. See
"Credit Support -- Subordinated Securities."
E. Shifting Interest......... If so specified in the applicable Prospectus
Supplement, the protection afforded to holders of
Senior Securities of a Series by the subordination
of certain rights of holders of Subordinated
Securities of such Series to distributions on the
related Mortgage Loans or Contracts may be
effected by the preferential right of the holders
of the Senior Securities to receive, prior to any
distribution being made in respect of the holders
of the related Subordinated Securities, current
distributions on the related Mortgage Loans or
Contracts of
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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 Securities on each
Distribution Date of a greater than pro rata
percentage of certain principal prepayments or
other recoveries of principal specified in the
related Prospectus Supplement on a Mortgage Loan
or Contract 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 Securities will have the effect of
accelerating the amortization of the Senior
Securities while increasing the respective
interest in the Trust Fund evidenced by the
Subordinated Securities. Increasing the respective
interest of the Subordinated Securities relative
to that of the Senior Securities is intended to
preserve the availability of the benefits of the
subordination provided by the Subordinated
Securities. See "Description of the Securities --
Distributions of Principal and Interest" and "--
Distributions on Securities" and "Credit Support
-- Shifting Interest."
F. Reserve Fund.............. If so specified in the related Prospectus
Supplement, a Reserve Fund may be established for
such Series. Unless otherwise 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 related
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 or manufactured housing
conditional sales contracts and installment loan
agreements (the "Subordinated Pool"), with the
aggregate principal balance specified in the
related Prospectus Supplement, or by the deposit
of cash in the amount specified in the related
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/or on
the mortgage loans, cooperative loans or
manufactured housing conditional sales contracts
and installment loan agreements in the
Subordinated Pool, until the Reserve Fund (without
taking into account the amount of any Initial
Deposit, except as otherwise provided in the
related Prospectus Supplement), reaches an amount
(the "Required Reserve") set forth in the related
Prospectus Supplement. Thereafter, specified
distributions on the Trust Assets of the related
Mortgage Pool or Contract Pool, and/or
on the mortgage loans, cooperative loans or
manufactured housing conditional sales contracts
and installment loan agreements in the
Subordinated Pool, will be retained to the extent
necessary to maintain such Reserve Fund (without,
except as otherwise provided in the related
Prospectus Supplement, taking into account the
amount of the Initial Deposit, if any) at the
related Required Reserve. Except as otherwise
provided in the related Prospectus Supplement, in
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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
Securities of the Subordinated Classes or
Subclasses of such Series specified in the related
Prospectus Supplement. If so specified in the
related 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 Securities" 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 related
Prospectus Supplement, will be deposited by the
Depositor in one or more accounts to be
established with respect to a Series of Securities
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 Securities of such Series,
are otherwise required as a condition to the
rating of such Securities 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 Securities 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 Agreement under the conditions
and to the extent specified in the related
Prospectus Supplement.
H. Swap Agreement............ If so specified in the Prospectus Supplement
relating to a Series of Securities, the related
Issuer will enter into or obtain an assignment of
a swap agreement or similar agreement pursuant to
which such Issuer 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."
I. Security Guarantee
Insurance................. If so specified in the related Prospectus
Supplement, credit enhancement for a Series may be
provided by an insurance policy (the "Security
Guarantee Insurance") issued by one or more
insurance companies. Such Security Guarantee
Insurance may guarantee timely distributions of
interest and full distributions of principal on
the basis of a schedule of principal distributions
set forth in or determined in the manner specified
in the related Prospectus Supplement.
Hazard Issuance and Special
Hazard Insurance Policies.... Unless otherwise 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
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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 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 Securityholders 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 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 Securities, within
the period following the date of issuance of such
Securities specified in such Prospectus
Supplement, the Depositor or one or more Servicers
will deliver to the Trustee with respect to such
Series Trust Assets in substitution for any one or
more of the Trust Assets 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
Agreement. See "Description of the Securities --
Assignment of Mortgage Loans," "-- Assignment of
Contracts" and "-- Assignment of Mortgage
Certificates."
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 Securities -- 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 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 as a Real Estate Mortgage
Investment Conduit (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
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Certificates of that Series. See "Maturity,
Prepayment and Yield Considerations" and
"Description of the Securities --Termination."
ERISA Considerations......... A fiduciary of any employee benefit plan or
retirement arrangement 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 Securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or Section
4975 of the Code. See "ERISA Considerations."
Tax Status................... See "Certain Federal Income Tax Consequences."
Legal Investment............. If so specified in the related Prospectus
Supplement relating to a Series of Securities, a
Class or Subclass of such Securities 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, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such
Trust Assets, (iii) to establish any reserve funds
described in the related Prospectus Supplement and
(iv) to pay costs of structuring, guaranteeing and
issuing such Securities. If so specified in the
related Prospectus Supplement, the purchase of the
Trust Assets for a Series may be effected by an
exchange of Securities by the Depositor with the
seller of such Trust Assets. 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 Securities, prospective investors should
carefully consider the following risk factors before investing in any Class or
Classes of Securities of any such Series.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities
of any Series will develop or, if it does develop, that it will provide
Securityholders with liquidity of investment or that it will continue for the
life of the Securities of any Series. The Prospectus Supplement for any Series
of Securities may indicate that an underwriter specified therein intends to
establish a secondary market in such Securities; however, no underwriter will be
obligated to do so. The Securities 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 included in the
related Trust Fund will be the sole source of payments on the Securities of a
Series. The Securities 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 Securities 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 Securities, 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 Securities, 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 or
Subclasses of Securities of the same Series; a Reserve Fund; and any combination
thereof. See "Credit Support." 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
Securities 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 Securities of any Series which
generally represent interests in, or are secured by, 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 mortgage loans underlying the Mortgage Certificates or the values
of the Manufactured Homes securing the Contracts, as the
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case may be, underlying any Series of Securities have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans, mortgage
loans, Mortgage Certificates 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
"Maturity, Prepayment and Yield Considerations." To the extent that such losses
are not covered by the applicable credit support, holders of Securities of the
Series evidencing interests in, or secured by, 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
Securities 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," "-- Mortgage Loan Program," "--
Underwriting Standards," "-- The Contract Pools," and "--
Underwriting Policies."
PREPAYMENT AND YIELD CONSIDERATIONS
The rate and timing of principal payments on the Securities 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. As is the case with
mortgage-backed securities generally, each Series of Securities 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 Securities 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, as applicable, and the allocation thereof to
reduce the Certificate Principal Balance of such Class. The yield to maturity on
each Class of Securities will also depend on the Mortgage Rates and the purchase
price for such Securities. The yield to investors on any Class of Securities
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.
In general, if a Class of Securities 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 Securities 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.
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SUBORDINATION
To the extent specified in the applicable Prospectus Supplement,
distributions of interest and principal on one or more Classes or Subclasses of
Securities of a Series may be subordinated in priority of payment to interest
and principal due on one or more other Classes or Subclasses of Securities 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 Securities 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
Securities of such Series or their nominees. Because of this, unless and until
Securities in fully registered, certificated form ("Definitive Securities") for
such Series are issued, holders of such Securities will not be recognized by the
applicable Trustee as "Securityholders" (as such terms are used herein or in the
related Agreement, as applicable). Hence, until Definitive Securities are
issued, holders of such Securities will be able to exercise the rights of
Securityholders only indirectly through DTC and its participating organizations.
THE TRUST FUND
Ownership of the Mortgage or Contract Pool or Pools included in the
Trust Fund (hereinafter defined) for a Series of Securities 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 related Prospectus Supplement in one or more
Mortgage Pools containing one or more Mortgage Loans or Mortgage Certificates or
Contract Pools containing Contracts, 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"), unless otherwise specified in the applicable
Prospectus Supplement. If so specified in the related 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 or Mortgage Certificates in the
related Mortgage Pool or Pools or on the Contracts in the related Contract Pool
or Pools (a "Percentage Interest"). To the extent specified in the related
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 Securities of a Series to the
rights of the holders of the Senior Securities, which, if so specified in the
related Prospectus Supplement, may include Securities of a Subordinated Class or
Subclass and the establishment of a Reserve Fund, by the right of one or more
Classes or Subclasses of Securities to receive a disproportionate amount of
certain distributions of principal, by Security Guarantee Insurance or another
form or forms of Alternative Credit Support acceptable to the Rating Agency
rating the Securities of such Series or by any combination of the foregoing. See
"Description of Insurance" and "Credit Support."
THE MORTGAGE POOLS
If so specified in the Prospectus Supplement with respect to a Series, the
Trust Fund for such Series may include (a) one or more Mortgage Pools containing
(i) conventional one-to four-family residential, first and/or second mortgage
loans, (ii) closed-end loans (the "Closed-End Loans") and/or revolving home
equity loans or certain balances thereof (the "Revolving Credit Line Loans" and,
together with the Closed-End Loans, the "Home Equity Loans") secured by
mortgages or deeds of trust on residential one-to-four family properties,
including townhouses and individual units in condominiums and planned unit
developments, (iii) 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, (iv) mortgage loans secured by Multifamily Property, (v)
mortgage participation Securities evidencing participation interests in such
loans that are acceptable to the nationally recognized Rating Agency rating the
Securities of such Series for a rating in one of the four highest rating
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categories of such Rating Agency or (vi) certain conventional Mortgage
Certificates issued by one or more trusts established by one or more private
entities or (b) one or more Contract Pools containing manufactured housing
conditional sales contracts and installment loan agreements or participation
Securities representing participation interests in such Contracts purchased by
the Depositor either directly or through one or more affiliates or Unaffiliated
Sellers, and related property conveyed to such trust by the Depositor.
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 or other evidence of indebtedness (the
"Mortgage Notes") secured by first mortgages or first or second deeds of trust
or other similar security instruments creating a first lien or second lien, as
applicable, on the Mortgaged Properties (as defined below). Single Family
Property and Multifamily Property will consist of single family detached homes,
attached homes (single family units having a common wall), individual units
located in condominiums, townhouses, planned unit developments, multifamily
residential rental properties, apartment buildings owned by cooperative housing
corporations and such other type of homes or units as are set forth in the
related Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, 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 related Prospectus Supplement.
Unless otherwise specified below or 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. Unless otherwise specified in the
related 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 related Prospectus
Supplement, a Mortgage Pool may also include fully amortizing, adjustable rate
Mortgage Loans ("ARM Loans") with (unless otherwise specified in the applicable
Prospectus Supplement) a 30-year terms at origination and mortgage interest
rates 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.
Unless otherwise 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"). Unless otherwise specified in the related
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 the Mortgage Loan may not exceed $250,000.
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If so specified in the related 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 "Maturity, Prepayment and 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 related 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.
Unless otherwise specified in the related Prospectus Supplement, the 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 related Prospectus Supplement. The
amount of such purchase price will be required to be deposited in the
Certificate Account and will be distributed to the Securityholders 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 related Prospectus Supplement,
with the Trustee. In lieu of a cash deposit, if so specified in the related
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
Securities --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 Note 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 related Prospectus Supplement, the
resulting difference in payment shall be compensated for from an amount
contributed 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.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool
may contain Mortgage Loans which are Home Equity Loans pursuant to which the
full principal amount of such Mortgage Loan is advanced at origination of the
loan and generally is repayable in equal (or substantially equal) installments
of an amount sufficient to fully amortize such loan at its stated maturity.
Interest on each Home Equity Loan may be calculated on the basis of the
outstanding principal balance of such loan multiplied by the Mortgage Rate
thereon and further multiplied by a fraction, the numerator of which is the
number of days in the period elapsed since the preceding payment of interest was
made and the denominator is the number of days in the annual period for which
interest accrues on such loan. Under certain circumstances, under a Home Equity
Loan, a borrower may choose an interest
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only payment option and is obligated to pay only the amount of interest which
accrues on the loan during the billing cycle. Generally, an interest only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding balance of the loan.
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 VA under this program
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.
Unless otherwise specified in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of such Loan. Principal amounts on a
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. To the extent and accordingly to the terms provided in the related
Prospectus Supplement, the Trust Fund may include amounts borrowed under a
Revolving Credit Line Loan after the Cut-off Date. The full amount of a Closed-
End Loan is advanced at the inception of the Loan and generally is repayable in
equal (or substantially equal) installments of an amount to fully amortize such
Loan at its stated maturity. Except to the extent provided in the related
Prospectus Supplement, the original terms to stated maturity of Closed-End Loans
will not exceed 360 months. Under certain circumstances, under either a
Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose an
interest only payment option and is obligated to pay only the amount of interest
which accrues on the Loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the Loan.
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 Securities 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 number and aggregate principal balance of Buy-Down Loans or GPM Loans,
if applicable, (xi) with respect to ARM Loans, the
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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
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 Securities of the Series evidencing interests in, or
secured by, 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") and, if a Series of Securities includes Notes, the
Depositor will cause the Mortgage Loans constituting the Mortgage Pool to be
pledged to the Indenture Trustee, for the benefit of the holders of the Notes of
such Series (the "Noteholders" and, together with the Certificateholders, the
"Securityholders"). The Master Servicer, if any, named in the related 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 or a Sale and Servicing Agreement, as described
herein, and will receive a fee for such services. See "--Mortgage Loan Program"
and "Description of the Securities." As used herein, "Agreement" means, with
respect to a Series that only includes Certificates, the Pooling and Servicing
Agreement, and with respect to a Series that includes Notes, the Indenture, the
Trust Agreement and the Sale and Servicing Agreement, as the context requires.
Unless otherwise specified in the applicable Prospectus Supplement, 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 Pooling and
Servicing Agreement, Sale and Servicing Agreement or Seller's Warranty and
Servicing Agreement between the Servicer and the Depositor (each, a "Servicing
Agreement"), as applicable, 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 applicable 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 Securities --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
Servicing Agreement (including its obligation to
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enforce certain purchase and other obligations of Servicers and/or Unaffiliated
Sellers, as more fully described herein under "-- Mortgage Loan Program" and "--
Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities -- 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 Securities -- Advances." Unless otherwise specified in
the related Prospectus Supplement, 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 Securities --
Advances," "Credit Support" and "Description of Insurance."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either
directly or through affiliates or by the Trust formed by the Depositor, 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 a related 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 amount 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.
Unless otherwise specified in the applicable Prospectus Supplement, 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
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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 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 related Prospectus Supplement, the Depositor
may purchase or cause the Trust to 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 related 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 related 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 related Prospectus Supplement.
QUALIFICATIONS OF UNAFFILIATED SELLERS
Unless otherwise specified in the applicable Prospectus Supplement with
respect to an Unaffiliated Seller of Closed Loans secured by residential
properties, each Unaffiliated Seller 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 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.
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REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller (or the Master Servicer, if the Unaffiliated Seller is also
the Master Servicer under the 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 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 (unless otherwise specified in the
related 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 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 Securities evidencing an interest in, or
secured by, 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
Securities 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 Securities 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 Securities --
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 Securityholders 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 Securities as to which the Depositor has elected to treat the related Trust
Fund as a REMIC, 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 Mortgage Rate for
the related Mortgage Loan, 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 Securityholders, following the practices it would employ in
its good faith business judgment were it the owner of such Mortgage Loan. Unless
otherwise specified in the applicable Prospectus Supplement, and subject to the
ability of the Depositor, the
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Unaffiliated Seller or the Servicer to substitute for certain Mortgage Loans as
described below, this repurchase obligation constitutes the sole remedy
available to the Securityholders 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 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 the limited purchase
obligation, in each case as described below under "Description of the
Securities--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. Unless otherwise specified in the applicable Prospectus Supplement,
Closed Loans for which 11 or fewer monthly payments have been received will be
further subject to the Depositor's customary underwriting standards. Unless
otherwise specified in the applicable Prospectus Supplement, Closed Loans for
which 12 to 60 monthly payments have been received 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. Unless otherwise specified in the applicable Prospectus Supplement,
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.
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, collateralized mortgage bonds or other indebtedness
secured by mortgage loans or manufactured housing contracts (the "Mortgage
Certificates") issued by one or more trusts established by one or more private
entities and evidencing, unless otherwise specified in such Prospectus
Supplement, the entire interest in a pool of mortgage loans. A description of
the mortgage loans and/or manufactured housing contracts 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 Securities of such Series) will also set forth information with
respect to the entity or entities 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 Securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related Series of Securities. Mortgage
Certificates, together with the Mortgage Loans and Contracts, are referred to
herein as the "Trust Assets."
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
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defined below. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will be fully amortizing and will bear interest at a fixed annual
percentage rate ("APR").
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The Depositor will cause the Contracts constituting each Contract Pool to
be assigned and/or pledged to the related Trustee named in the related
Prospectus Supplement for the benefit of the related Securityholder. The Master
Servicer specified in the related Prospectus Supplement will service the
Contracts, either by itself or through other Servicers, pursuant to the
Agreement. See "Description of the Securities -- 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 related
Prospectus Supplement, may be held for the benefit of the Trustee by a Custodian
(the "Custodian") appointed pursuant to the related Pooling and Servicing
Agreement or a Custodial Agreement (the "Custodial Agreement") among the
Depositor, the Trustee and the Custodian.
Unless otherwise specified in the related Prospectus Supplement, each
Contract Pool will be composed of Contracts bearing interest at the annual fixed
APRs specified in the Prospectus Supplement. Each registered holder of a
Security will be entitled to receive periodic distributions, which will be
monthly unless otherwise specified in the related Prospectus Supplement, of all
or a portion of principal on the underlying Contracts or interest on the
principal balance of the Security at the Interest Rate, or both. See
"Description of the Securities -- Payments on Contracts."
The related 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 related Prospectus
Supplement, will make or cause to be made representations and 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, unless otherwise specified in the Prospectus Supplement no
Contract was more than 30 days delinquent as to payment of principal and
interest. Upon a breach of any representation that materially and adversely
affects the interest of the Securityholder 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 purchase the Contract
or, if so specified in the related Prospectus Supplement, to substitute another
Contract as described below. This repurchase or substitution obligation
constitutes the sole remedy available to the Securityholders or the Trustee for
a breach of representation by the Master Servicer, the Unaffiliated Seller or
such other party.
If so specified in the related 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
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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
Securityholders 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, unless otherwise specified in the related Prospectus
Supplement, to purchase such Contract at a price equal to the principal balance
thereof as of the date of purchase plus accrued interest at the related Pass-
Through-Rate to the first day of the month following the month of purchase. The
Master Servicer, if required by the rating agency or agencies rating the
Securities, will procure a surety bond, guaranty, letter of credit or other
instrument (the "Performance Bond") acceptable to such rating agency to support
this purchase obligation. See "Credit Support -- Performance Bond." The purchase
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for a breach of the Master Servicer's or seller's insurability
representation.
Unless otherwise provided in the related Prospectus Supplement, 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 the related Prospectus Supplement of the date of the initial
issuance of the Securities, the Depositor 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 Securityholders 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 remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Contract and (iv) comply with all the representations and warranties set
forth in the Agreement as of the date of substitution. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders 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 related
Prospectus Supplement. Except as described below or in the related 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 Manufactured Homes and, when deemed applicable, a replacement cost
analysis based on the current cost of a similar Manufactured Home. Unless
otherwise specified in the related Prospectus Supplement, 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.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on December 31,
1985, and is a wholly-owned subsidiary of Credit Suisse First Boston Management
Corporation. Credit Suisse First Boston Mangement Corporation is a sholly-owned
subsidiary of Credit Suisse First Boston, Inc. Credit Suisse First Boston
Corporation, which may act as an underwriter in offerings made hereby, as
described in "Plan of Distribution" below, is also a wholly owned subsidiary of
Credit Suisse First Boston, Inc. The principal executive offices of the
Depositor are located at 11 Madison Avenue, New York, N.Y. 10010. Its telephone
number is (212) 325- 2000.
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The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. Neither the Depositor, its parent nor
any of the Depositor's affiliates will ensure or guarantee distributions on the
Securities of any Series.
Trust Assets will be acquired by the Depositor directly or through one or
more affiliates.
USE OF PROCEEDS
Except as otherwise provided in the related Prospectus Supplement, the
Depositor will apply all or substantially all of the net proceeds from the sale
of each Series offered hereby and by the related Prospectus Supplement to
purchase the Trust Assets, to repay indebtedness which has been incurred to
obtain funds to acquire the Trust Assets, to establish the Reserve Funds or Pre-
Funding Accounts, if any, for the Series and to pay costs of structuring and
issuing the Securities. If so specified in the related Prospectus Supplement,
Securities may be exchanged by the Depositor for Trust Assets. Unless otherwise
specified in the related Prospectus Supplement, the Trust Assets for each Series
of Securities will be acquired by the Depositor either directly, or through one
or more affiliates which will have acquired such Trust Assets from time to time
either in the open market or in privately negotiated transactions.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, 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, but such Mortgage Loans (or
such underlying mortgage loans) or Contracts may be prepaid in full or in part
at any time. Unless otherwise 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 Securities, the model used in a Prospectus
Supplement will be the Standard Prepayment Assumption ("SPA"). SPA represents an
assumed rate of
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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 Securities. There is, however,
no assurance that prepayment of the Mortgage Loans underlying a Series of
Securities will conform to FHA Experience, mortgage industry custom, any level
of SPA, or any other rate specified in the related 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 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 Securities --
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
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
Securities evidencing interests in, or secured by, 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
Subordination Amount, if any, Letters of Credit, applicable Insurance Policies,
if any, or by any Alternative Credit Support, holders of the Securities of a
Series evidencing interests in, or secured by, 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, to the extent provided in the related Prospectus
Supplement 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.
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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
included in the related Trust Fund under the conditions stated in such
Prospectus Supplement. For any Series of Securities for which the Depositor has
elected to treat the Trust Fund or certain assets of the Trust Fund as a REMIC
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. The Master Servicer and Unaffiliated Sellers will also have
certain repurchase obligations, as more fully described herein and in the
related Prospectus Supplement. 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" and "--
Representations by Unaffiliated Sellers; Repurchases" "Description of the
Securities -- Assignment of Mortgage Loans," "-- Assignment of Mortgage
Certificates," "-- Assignment of Contracts" and "-- Termination."
If so specified in the related 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 Securities 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 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, unless otherwise provided in the applicable Prospectus Supplement, the
Master Servicer with respect to a Series will be required to advance from its
own funds the portion of any interest at the related Mortgage 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. Unless otherwise specified in
the related Prospectus Supplement, full and partial prepayments, together with
interest on such full and partial prepayments at the Mortgage Rate or APR for
the related Mortgage Loan or Contract to the last day of the month in which such
prepayments occur, will be deposited in the Certificate Account and will be
available for distribution to Securityholders on the next succeeding
Distribution Date in the manner specified in the related Prospectus Supplement.
Generally, the effective yield to holders of Securities having a monthly
Distribution Date will be lower than the yield otherwise produced because, while
interest will accrue on each Mortgage Loan or Contract, or mortgage loan
underlying a Mortgage Certificate, to the first day of the month, the
distribution of such interest to holders of such Securities will be made no
earlier than the 25th day of the month following the month of the accrual
(unless otherwise provided 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 Securities succeeds such 25th
day. With respect to the Multi-Class Securities of a Series having other than
monthly Distribution Dates,
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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 Securities 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 Securityholders will be affected
by different rates of prepayments on the Mortgage Loans, on the Contracts or on
the mortgage loans underlying the Mortgage Certificates. In general, the yield
on Securities that are offered at a premium to their principal or notional
amount ("Premium Securities") 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 Securityholders of Premium
Securities 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 Securities that are Premium
Securities) will likely result in a lower than anticipated yield to holders of
Securities that are offered at a discount to their principal amount ("Discount
Securities"). If so specified in the applicable Prospectus Supplement, a
disproportionately large amount of Principal Prepayments may be distributed to
the holders of the Senior Securities at the times and under the circumstances
described therein.
In the event that the Securities of a Series include one or more Classes or
Subclasses of Multi-Class Securities, the Prospectus Supplement for such Series
will set forth information, measured relative to a 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 or Contracts 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.
DESCRIPTION OF THE SECURITIES
Each Series of Securities will be issued pursuant to either (a) an
agreement consisting of either (i) a Pooling and Servicing Agreement or (ii) 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 (b) if a Series of
Securities includes Notes, a deposit trust agreement or trust agreement between
the Depositor and the Trustee. Forms of the Pooling and Servicing Agreement and
the Trust Agreement have been filed as exhibits to the Registration Statement of
which this Prospectus is a part. If a Series of Securities includes Notes, such
Notes will be issued and secured pursuant to an Indenture (each, an "Indenture")
to be entered into between the related Issuer and the indenture trustee
specified in the related Prospectus Supplement (the "Indenture Trustee"), and
the related Trust Fund will be serviced by the Master Servicer pursuant to a
Sale and Servicing Agreement (the "Sale and Servicing Agreement") among the
Depositor, the Master Servicer or Servicer and the Indenture Trustee. Forms of
the Indenture and the Sale and Servicing Agreement have been filed as exhibits
to the Registration Statement of which this Prospectus is a part. In addition, a
Series of Securities may include a Warranty and Servicing Agreement between the
Master Servicer and the Servicer (the "Warranty and Servicing Agreement"). As
used herein, "Agreement" means, with respect to a Series that only includes
Certificates, the Pooling and Servicing Agreement and, if applicable, the
Warranty and Servicing Agreement, and with respect to a Series that includes
Notes, the Indenture, the Trust Agreement and the Sale and Servicing Agreement
and, if applicable, the Warranty and Servicing Agreement, as the context
requires.
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The following summaries describe certain provisions common to each
Agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for the applicable Series and the related Prospectus Supplement.
Wherever defined terms of the Agreement are referred to, such defined terms are
thereby incorporated herein by reference.
GENERAL
Unless otherwise specified in the Prospectus Supplement with respect to a
Series, each Security offered hereby and by means of the related Prospectus
Supplement will be issued in fully registered. Securities will represent the
undivided interest or beneficial interest attributable to such Class or Subclass
in, and Notes will be secured by, the Trust Fund. The Trust Fund with respect to
a Series will consist of: (i) such Mortgage Loans, Contracts and Mortgage
Certificates 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 Security Guarantee Insurance, if any, with
respect to such Series; (xi) the Depositor's rights under the Servicing
Agreement with respect to the Mortgage Loans or Contracts, if any, with respect
to such Series; and (xii) 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 Securities, Certificates representing
the minimum undivided interest or beneficial ownership interest in the related
Trust Fund or the minimum notional amount allocable to each Class will evidence
the undivided interest, beneficial ownership interest or percentage ownership
interest specified in the related Prospectus Supplement.
If so specified in the related 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 as a REMIC under the
Code, ownership of the Trust Fund for such Series may be evidenced by Multi-
Class Certificates and/or Notes and Residual Certificates. Distributions of
principal and interest with respect to Multi-Class Securities may be made on a
sequential or concurrent basis, as specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, one or more of
such Classes or Subclasses may be Compound Interest Securities.
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 Securities of such Series will constitute "regular interests"
in the related REMIC, as defined in the Code. If so specified in the related
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 Securities, each Trust Asset in the related Trust Fund will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, the Asset Value of each Trust Asset in the related Trust
Fund will be the Stated Principal Balance of each Class or Classes of Securities
of such Series that, based upon certain assumptions, can be supported by
distributions on such Trust Assets allocable to such Class or Subclass, together
with reinvestment income thereon, to the extent specified in the related
Prospectus Supplement, and amounts available to be withdrawn from
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any Buy-Down, GPM Fund or Reserve Fund for such Series. The method of
determining the Asset Value of the Trust Assets in the Trust Fund for such a
Series that includes Multi-Class Securities will be specified in the related
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
related Prospectus Supplement, one or more Classes or Subclasses or Subordinated
Securities of a Series may be subordinated to the right of the holders of
Securities of one or more Classes or Subclasses within such Series to receive
distributions with respect to the Mortgage Loans, Mortgage Certificates or
Contracts in the related Trust Fund, in the manner and to the extent specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the holders of each Subclass of Senior Securities will be entitled
to the Percentage Interests in the principal and/or interest payments on the
underlying Mortgage Loans or Contracts specified in such Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Subordinated
Securities of a Series will evidence the right to receive distributions with
respect to a specific pool of Mortgage Loans, Mortgage Certificates or
Contracts, which right will be subordinated to the right of the holders of the
Senior Securities of such Series to receive distributions with respect to such
specific pool of Mortgage Loans, Mortgage Certificates or Contracts, as more
fully set forth in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the holders of the Senior Securities 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. If so
specified in the related Prospectus Supplement, if a Series of Securities
includes Notes, one more Classes or Subclasses of Notes may be subordinated to
another Class or Subclasses of Notes in the manner and under the circumstances
described in the Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Depositor may
sell certain Classes or Subclasses of the Securities 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 of 1933, as amended (the "Securities Act"). Such Securities 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 related 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 Securities of a Series offered hereby and by means of the related
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee for such purpose set forth in the related
Prospectus Supplement, unless such Prospectus Supplement provides otherwise. No
service charge will be made for any transfer or exchange of Securities, 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 related Prospectus Supplement,
distributions of principal and interest on the Securities 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 Securities
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 related Prospectus Supplement, which rate may be fixed or variable.
Interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months, unless otherwise specified in the related
Prospectus Supplement. Distributions of principal on the Securities will be made
in the priority and manner and in the amounts specified in the related
Prospectus Supplement.
If so specified in the Prospectus Supplement with respect to a Series of
Securities, 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 as set forth in the
Prospectus Supplement) on or with
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respect to the Mortgage Loans or Contracts (including any Advances thereof) or
the Mortgage Certificates included in the Trust Fund with respect to such
Series.
If so specified in the related Prospectus Supplement, distributions on a
Class or Subclass of Securities of a Series may be based on the Percentage
Interest evidenced by a Security of such Class or Subclass in the distributions
(including any Advances thereof) of principal (the "Principal Distribution") and
interest (adjusted as set forth in the Prospectus Supplement) (the "Interest
Distribution") on or with respect to the Mortgage Loans, the Contracts or the
Mortgage Certificates in the related Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, on each Distribution Date, the Trustee will
distribute to each holder of a Security of such Class or Subclass an amount
equal to the product of the Percentage Interest evidenced by such Security and
the interest of such Class or Subclass in the Principal Distribution and the
Interest Distribution. A Security 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 related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the holders of the
Senior Securities may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled payment
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.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, 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. Unless
otherwise specified in the Prospectus Supplement relating to such a Series of
Securities, distributions of interest on each Class or Subclass of Compound
Interest Securities of such Series will be made on each Distribution Date after
the Stated Principal Balance of all Certificates and/or Notes of such Series
having a Final Scheduled Distribution Date prior to that of such Class or
Subclass of Compound Interest Securities has been reduced to zero. Prior to such
time, interest on such Class or Subclass of Compound Interest Securities will be
added to the Stated Principal Balance thereof on each Distribution Date for such
Series.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, distributions in
reduction of the Stated Principal Balance of such Securities will be made as
described herein. Distributions in reduction of the Stated Principal Balance of
such Securities will be made on each Distribution Date for such Series to the
holders of the Securities 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 Securities to zero. Allocation of distributions
in reduction of Stated Principal Balance will be made to each Class or Subclass
of such Securities in the order specified in the related Prospectus Supplement,
which, if so specified in such Prospectus Supplement, may be concurrently.
Unless otherwise specified in the related Prospectus Supplement, distributions
in reduction of the Stated Principal Balance of each Security of a Class or
Subclass then entitled to receive such distributions will be made pro rata among
the Securities of such Class or Subclass.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, the maximum amount
which will be distributed in reduction of Stated Principal Balance to holders of
Securities of a Class or Subclass then entitled thereto on any Distribution Date
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 Securities of such Series since the prior
Distribution Date (or since the date specified in the related 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 related Prospectus Supplement, the applicable
percentage of the Excess Cash Flow specified in such Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, 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
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Principal Balance of the Multi-Class Securities of such Series (before taking
into account the amount of interest accrued on any Class of Compound Interest
Securities of such Series to be added to the Stated Principal Balance thereof on
such Distribution Date) exceeds the Asset Value of the Trust Assets in the Trust
Fund underlying such Series as of the end of a period (a "Due Period") specified
in the related Prospectus Supplement. For purposes of determining the Stated
Principal Distribution Amount with respect to a Distribution Date, the Asset
Value of the Trust Assets will be reduced to take into account the interest
evidenced by such Classes or Subclasses of Securities in the principal
distributions on or with respect of such Trust Assets received by the Trustee
during the preceding Due Period.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, Excess Cash Flow
represents the excess of (i) the interest evidenced by such Multi-Class
Securities in the distributions received on the Mortgage Loans or Contracts
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 Securities),
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 Securities since the preceding
Distribution Date (or since the date specified in the related Prospectus
Supplement in the case of the first Distribution Date), the Stated Principal
Distribution Amount for the then current Distribution Date and, if applicable,
any payments made on any Securities of such Class or Subclass pursuant to any
special distributions in reduction of Stated Principal Balance during such Due
Period.
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 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 related Prospectus Supplement.
Distributions (other than the final distribution in retirement of the
Securities) will be made by check mailed to the address of the person entitled
thereto as it appears on the registers maintained for holders of Notes (the
"Note Register") or holders of Certificates (the "Certificate Register"), as
applicable, except that, with respect to any holder of a Security meeting the
requirements specified in the applicable Prospectus Supplement, except as
otherwise provided in such 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 Securities will be made only upon presentation and surrender of
the Securities at the office or agency designated by the Master Servicer for
such purpose, as specified in the final distribution notice to Securityholders.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Securities 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 Agreement.
Such schedule will include information as to the principal balance of each
Mortgage Certificate as of the date of issuance of the Securities 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 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
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Securityholders 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 as a REMIC, 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 related Prospectus Supplement. Any amounts
received in respect of such repurchases will be distributed to Securityholders
on the immediately succeeding Distribution Date.
If so specified in the related Prospectus Supplement, within the specified
period following the date of issuance of a Series of Securities, 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 additional restrictions relating to the substitution of Mortgage
Certificates will be set forth in the related 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, either deliver the Securities to the
Depositor in exchange for the Mortgage Loans or apply the proceeds from the sale
of such Securities to the purchase price for the Mortgage Loans. If a Series of
Securities includes Notes, the Trust Fund will be pledged by the Issuer to the
Indenture Trustee as security for the Notes. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related 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 respecting 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,
unless otherwise specified in the related Prospectus Supplement, 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 Securityholders. Unless otherwise specified in the
applicable Prospectus Supplement, 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
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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 as
a REMIC, 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 Mortgage 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" and "-- Representations by Unaffiliated Sellers;
Repurchases." Unless otherwise specified in the applicable Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for a material defect in a constituent
document.
Unless otherwise specified in the applicable Prospectus Supplement, 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, unless otherwise specified in the related Prospectus Supplement, the
Depositor will represent and warrant that, as of the Cut-off Date for the
related Series of Securities, no Mortgage Loan is more than 30 days delinquent
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 Securityholders, the Depositor will be obligated either to cure the breach
in all material respects or to purchase the Mortgage Loan at the purchase price
set forth above. Unless otherwise specified in the applicable Prospectus
Supplement and 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 constitutes the sole remedy
available to the Securityholders or the Trustee for a breach of representation
or warranty by the Depositor.
Within the period specified in the related Prospectus Supplement, following
the date of issuance of a Series of Securities, 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 related 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 Securityholders. 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 Contract Pools" with respect to the substitution of Contracts.
In addition to making certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under the
Agreement relating to a Series of Securities, the Master Servicer may make
certain representations and warranties to the Trustee in such 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.
Unless otherwise specified in the applicable Prospectus Supplement, upon a
breach of any such representation or warranty that materially and adversely
affects the interests of the Securityholders 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 related 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 Securities to support, among other things, this purchase obligation. Unless
otherwise stated in the applicable Prospectus Supplement, the aforementioned
purchase obligation constitutes the sole remedy available to the Securityholders
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.
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Pursuant to each 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 Securities. If a Series of Securities includes Notes, the Trust fund
will be pledged by the Issuer to the Indenture Trustee as security for the
Notes. Each Contract will be identified in a schedule appearing as an exhibit to
the Agreement (the "Contract Schedule"). Unless otherwise specified in the
related Prospectus Supplement, the Contract Schedule 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 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, as specified in the related 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. Unless otherwise specified in the related Prospectus Supplement, the
Contracts 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 Securityholders. Unless otherwise provided in the related
Prospectus Supplement, 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 related Prospectus Supplement the
Unaffiliated Seller, not later than 90 days or within such other period
specified in the related 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 as a REMIC, 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 APR,
plus any unreimbursed Advances respecting such Contract. Unless otherwise
specified in the related Prospectus Supplement, the repurchase obligation
constitutes the sole remedy available to the Securityholders or the Trustee for
a material defect in a Contract document.
Unless otherwise specified in the related Prospectus Supplement, 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
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Policy in the amount required in the Agreement and that all premiums now due on
such insurance have been paid in full.
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 Securities. 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 Securities. 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 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 Securities.
The only representations and warranties to be made for the benefit of
Securityholders 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 Securityholders in such Contract within 90 days (or
such other period specified in the related Prospectus Supplement) after notice
from the Master Servicer, such Unaffiliated Seller will be obligated to
repurchase such Contract at a price equal to, unless otherwise specified in the
related Prospectus Supplement, the principal balance thereof as of the date of
the repurchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund as a REMIC, 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 APR, plus the
amount of any unreimbursed Advances in respect of such Contract (the "Purchase
Price"). The Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the Securityholders,
following the practices it would employ in its good faith business judgment were
it the owner of such Contract. Except as otherwise set forth in the related
Prospectus Supplement, this repurchase obligation will constitute the sole
remedy available to Securityholders 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."
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Securities 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, Contracts or Mortgage Certificates 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, Contracts or Mortgage Certificates, such Pre-Funded Amount may
be invested in one or more Eligible Investments. Except as otherwise provided
in the applicable Agreement, an "Eligible Investment" 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
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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 the full faith and credit of the United
States of America, including depository 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 depository 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 Securities
indicates will not result in the reduction or withdrawal of its then existing
rating of the Securities. 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, Contracts and/or Mortgage Certificates 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 Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
120 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, Contracts and/or Mortgage
Certificates 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% of the principal amount of the Securities issued pursuant to a
particular offering.
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 description does not purport to be
complete and is qualified in its entirety by reference to the form of Servicing
Agreement and by the discretion of the Master Servicer or Depositor to modify
the Servicing Agreement and to enter into different Servicing Agreements. The
Agreement provides that, if for any reason the Master Servicer for such Series
of Securities 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
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Master Servicer, maintenance of primary mortgage, 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 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.
Unless otherwise set forth in the Prospectus Supplement, the Master Servicer may
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 Agreement. Upon termination of a Servicing Agreement,
the Master Servicer or Trustee may act as servicer of the related Mortgage Loans
or Contracts or the Master Servicer may 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 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 related Agreement with respect to a
Series will provide that any such amendment or new agreement may not be
inconsistent with or violate such Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the Prospectus
Supplement with respect to a Series of Securities, establish and maintain a
separate account or accounts in the name of the applicable Trustee (the
"Certificate Account"), which must be maintained with a depository institution
and in a manner acceptable to the Rating Agency rating the Securities of a
Series. If a Series of Securities includes Notes, the Master Servicer may
establish and maintain a separate account or accounts in the name of the
applicable Trustee (the "Collection
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Account") into which amounts received in respect of the Trust Assets are
required to be deposited and a separate account or accounts in the name of the
applicable Trustee from which distributions in respect of the Notes (the "Note
Distribution Account") and/or the Certificates (the "Certificate Distribution
Account") may be made. The Collection Account, Note Distribution Account and
Certificate Distribution Account must be established with a depositary
institution and in a manner acceptable to the Rating Agencies rating the
Securities of such Series. For ease of reference, references in this Prospectus
to the Certificate Account shall be deemed to refer to the Collection Account,
Note Distribution Account and Certificate Distribution Account, as applicable.
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 Securityholders 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 Securities of the related Series, and that is otherwise acceptable to
the Master Servicer. Unless otherwise specified in the related Prospectus
Supplement, 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, unless otherwise specified in the related
Prospectus Supplement, 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. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will deposit in the
Certificate Account for each Series of Securities 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 related 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
Securities 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 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;
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(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 related
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, unless
otherwise specified in the related Prospectus Supplement, 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 Securityholders 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 Securities -- Payments on Mortgage Loans" will be
established in the name of the Trustee.
Except as otherwise provided in the related Prospectus Supplement, 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;
(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 related Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from Credit Support provided with respect
to a Series of Securities;
(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.
COLLECTION OF PAYMENTS ON MORTGAGE CERTIFICATES
The Mortgage Certificates included in the Trust Fund with respect to a
Series of Securities will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The related
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
Securityholders 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 Securityholders that it is not obligated to pursue any such available
remedies unless adequate indemnity for its legal fees and expenses is provided
by such Securityholders.
DISTRIBUTIONS ON SECURITIES
On each Distribution Date with respect to a Series of Securities 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
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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 Securityholders of record on the applicable Record
Date. Such distributions shall occur in the manner described herein under "--
Description of the Securities --Distributions of Principal and Interest" and in
the related 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 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 related Prospectus
Supplement (in either case the "Determination Date"), except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments received during the month of
distribution and all payments of interest representing interest for the
month of distribution or any portion thereof;
(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 respecting 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 in such Mortgage Pool 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, (D) amounts 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
Securities -- 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.
Except as otherwise specified in the related Prospectus Supplement, no
later than the Business Day immediately preceding the Distribution Date for a
Series of Securities, 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 or
Contracts, stated separately or the information enabling the Trustee to
determine the amount of distribution to be made on the Securities and a
statement setting forth certain information with respect to the Mortgage Loans
or Contracts.
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 Securities 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, 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 Securityholders, any portion of the distribution
on the Mortgage Certificates that represents servicing compensation, if any,
payable to the Trustee shall be deducted and paid to the Trustee.
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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. Unless otherwise 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. Unless otherwise provided in the Prospectus Supplement, the
Certificate Account established pursuant to the 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 Securities having differing terms, whether
subordinated or not, to the extent not described herein, shall be set forth in
the related Prospectus Supplement.
SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a Series
of Securities, one or more Classes of Multi-Class Securities that do not provide
for monthly Distribution Dates may receive Special Distributions in reduction of
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 in the related Trust Fund and/or low
reinvestment yields, the Trustee determines, based on assumptions specified in
the related 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 Securities of such Classes or
Subclasses may be less than the sum of (i) the interest scheduled to be
distributed to holders of the Securities of such Classes or Subclasses and (ii)
the amount to be distributed in reduction of Stated Principal Balance or such
Securities on such Distribution Date. Any such Special Distributions will be
made in the same priority and manner as distributions in reduction of Stated
Principal Balance would be made on the next Distribution Date.
REPORTS TO SECURITYHOLDERS
Unless otherwise specified or modified in the related Prospectus Supplement
for each Series, the Master Servicer or the Trustee will include with each
distribution to Securityholders 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 Security, as to (i) through (iii)
or (iv) through (vi) below, as applicable):
(i) to each holder of a Security, other than a Multi-Class
Certificate or Residual Certificate, the amount of such distribution
allocable to principal of the Trust Assets, separately identifying the
aggregate amount of any Principal Prepayments included therein, and the
portion, if any, advanced by a Servicer or the Master Servicer;
(ii) to each holder of a Security, other than a Multi-Class
Certificate or Residual Certificate, the amount of such distribution
allocable to interest on the related Trust Assets and the portion, if any,
advanced by a Servicer or the Master Servicer;
(iii) to each holder of a Security, the amount of servicing
compensation with respect to the related Trust Assets and such other
customary information as the Master Servicer deems necessary or desirable
to enable Securityholders 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 Stated Principal Balance
are then being made, the amount of such interest distribution and
distribution in reduction of Stated Principal Balance, and the Stated
Principal Balance of each Class after giving effect to the distribution in
reduction of 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 Securities outstanding of each Class or Subclass after
giving effect to the distribution in reduction of Stated Principal Balance
made on such Distribution Date
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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 Securities, if any,
outstanding and the amount of any accrued interest added to the Compound
Value of such Compound Interest Securities on such Distribution Date;
(vi) to each holder of a Compound Interest Security (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):
(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 Securities with respect to such Distribution
Date and added to the Compound Value of such Compound Interest
Security; and
(c) the Stated Principal Balance of such Class or Subclass
of Compound Interest Securities after giving effect to the
addition thereto of all interest accrued thereon;
(vii) in the case of a series of Securities with a variable Interest
Rate, the Interest 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 Securityholders on the Distribution Date;
(ix) in the case of a Series of Securities benefiting from the
Alternative Credit Support described in the related 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 Securityholders on the
Distribution Date;
(x) the aggregate scheduled principal balance of the Trust Assets
as of a date not earlier than such Distribution Date after giving effect to
payments of principal distributed to Securityholders 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 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
Securityholder 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 Securityholder to prepare
its tax return, as applicable, for such calendar year or, in the event such
person was a Securityholder of record during a portion of such calendar year,
for the applicable portion of such year.
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ADVANCES
Unless otherwise stated in the related Prospectus Supplement, 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 to advance funds in an amount equal to the
aggregate scheduled installments of payments of principal and interest 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
related Servicing Agreement, to be remitted no later than the close of business
on the business day immediately preceding the Distribution Date, subject to
(unless otherwise provided in the applicable Prospectus Supplement) 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
Securityholders, rather than to guarantee or insure against losses. Any such
Advances are reimbursable to the Servicer or Master Servicer out of related
recoveries on the Mortgage Loans respecting 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. This right of reimbursement for any Advance will be
prior to the rights of the Securityholders to receive any amounts recovered with
respect to such Mortgage Loans or Contracts. Unless otherwise provided in the
applicable Prospectus Supplement, the Servicers and the Master Servicer will
also be required to advance an amount necessary to provide a full month's
interest 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 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, if so provided in the related Prospectus Supplement 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 applicable 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 Mortgages 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 obliged 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
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acceptable to the Rating Agency rating the related Series of Securities,
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 a related 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 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 Securityholders, 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 applicable
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
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 applicable 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.
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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.
SPECIAL HAZARD INSURANCE
If so specified in the related 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 Securities 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 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 a related Prospectus Supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Pool Insurance
Policy with respect to a Series of Securities in effect throughout the term of
the applicable 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 related 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
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Servicing Agreement and 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 Securities that is required to be kept in force under the applicable
Agreement or 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 Securities. See "Description of Insurance --Primary Mortgage Insurance
Policies."
MORTGAGOR BANKRUPTCY BOND
If so specified in the related Prospectus Supplement, the Master Servicer
will exercise its best reasonable efforts to maintain a Mortgagor Bankruptcy
Bond for a Series of Securities in full force and effect throughout the term of
the applicable 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 Securities,
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
Securityholders, 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
Securityholders, 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 Securityholders 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 Mortgage 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
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Agreement or 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
Mortgage Rate or APR, as the case may be, 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.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the applicable Agreement with respect to
Securities representing interests in or secured by a Mortgage Pool will provide
that, when any Mortgaged Property has been conveyed by the borrower, 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 applicable 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
Securityholders 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
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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 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 applicable Agreement and Servicing Agreement with respect to
Securities representing interests in or secured by 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 Securityholders, 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 applicable 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 applicable Agreement for a Series of Securities, the Depositor or
the person or entity specified in the related Prospectus Supplement and any
Master Servicer will be entitled to receive an amount described in such
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, unless otherwise specified in the
related Prospectus Supplement, will pay from their servicing compensation
certain expenses incurred 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
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and disbursements of the Trustee (and any custodian selected by the Trustee),
the Note Register, 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 applicable 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 Securityholders 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.
Under the Trust Agreement, the Trustee will be entitled to deduct, from
distributions of interest with respect to the Mortgage Certificates, a specified
percentage of the unpaid principal balance of each Mortgage Certificate as
servicing compensation. The Trustee shall be required to pay all expenses,
except as expressly provided in the 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 applicable Agreement or 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 such Agreement or 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 such Agreement or 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 Contract, conducted in accordance
with generally accepted accounting principles in the mortgage banking industry,
the servicing of the Mortgage Loans or Contract was conducted in compliance with
the provisions of the Agreement and/or 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 AND
THE INDENTURE TRUSTEE
The Master Servicer under each 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
Depositor. In the event there is no Master Servicer under an 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 applicable Agreement except upon a determination that its duties thereunder
are no longer permissible under applicable law. No such resignation
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will become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under such Agreement.
The Trustee under each Pooling and Servicing Agreement or 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 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 Trust Agreement.
The Indenture Trustee under the Indenture will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Depositor and/or its
affiliates and with the Master Servicer and/or its affiliates.
The Indenture Trustee may resign from its obligations under the Indenture
at any time, in which event a successor trustee will be appointed. In addition,
the Depositor may remove the Indenture Trustee if the Indenture Trustee ceases
to be eligible to act as Indenture Trustee under the Indenture or if the
Indenture Trustee becomes insolvent, at which time the Depositor will become
obligated to appoint a successor Indenture Trustee. Unless otherwise specified
in the related Prospectus Supplement, the Indenture Trustee may also be removed
at any time by the holders of Notes evidencing voting rights aggregating not
less than 50% of the voting rights evidenced by the Notes 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.
Each Pooling and Servicing Agreement and 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 Pooling and Servicing
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
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
Pooling and Servicing Agreement, other than any loss, liability or expense
related to any specific Mortgage Loan, Contract or Mortgage Certificate (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
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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 interests of the Securityholders
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 Prospectus Supplement,
a deficiency event (a "Deficiency Event") with respect to the Securities of each
Series may be defined in the applicable Agreement as being the inability of the
Trustee to distribute to holders of one or more Classes of Securities of such
Series, in accordance with the terms thereof and the 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.
Except as otherwise provided in the related Prospectus Supplement, to the
extent a deficiency event is specified in such 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 and Mortgage Certificates included in the related Trust Fund
and other amount receivable with respect to such Trust Fund towards payments on
such Securities in accordance with the priorities as to distributions of
principal and interest set forth in such Securities will be sufficient to make
distributions of interest at the applicable Interest Rates and to distribute in
full the principal balance of each such Security on or before the latest Final
Distribution Date of any outstanding Securities of such Series.
Except as otherwise provided in the related Prospectus Supplement, to the
extent a deficiency event is specified in such 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 Securities, which opinion or report will be conclusive evidence as to such
sufficiency. Pending the making of any such determination, distributions on the
Securities shall continue to be made in accordance with their terms.
Except as otherwise provided in the related Prospectus Supplement, to the
extent a deficiency event is specified in such 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 Securities of such Series in accordance with their terms, except that
such distributions shall be made on each Distribution Date or such other more
frequent dates specified in the related Prospectus Supplement and without regard
to the amount of principal that would otherwise be distributable on the related
Distribution Date. Under certain circumstances following such positive
determination, the Trustee may resume making distributions on such Securities
expressly in accordance with their terms.
Except as otherwise provided in the related Prospectus Supplement, to the
extent a deficiency event is specified in such Prospectus Supplement, if the
Trustee is unable to make the positive determination described above, the
applicable 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 Securities of such Series or on all Senior Securities
of such Series pro rata, without regard to the priorities as to distribution of
principal set forth in such Securities, and such Securities will, to the extent
permitted by applicable law and specified in the related Prospectus Statement,
accrue interest at the highest Interest Rate borne by any Security or Securities
with the same credit rating by the Rating Agencies of such Series, or in the
event any Class of such Series shall accrue interest at a floating rate,
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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 Securities of that Class. In such event,
the holders of a majority in outstanding principal balance of such Securities
may direct the Trustee to sell the related Trust Fund, any such direction being
irrevocable and binding upon the holders of all Securities 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
Except as otherwise provided in the related Prospectus Supplement, Events
of Default under the related Pooling and Servicing Agreement or Sale and
Servicing 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 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 applicable Agreement which failure
shall continue for the number of days specified in the related Prospectus
Supplement or any breach of any representation and warranty made by the Master
Servicer or the Servicer, if applicable, which continues unremedied for the
number of days specified in the related Prospectus Supplement after the giving
of written notice of such failure or breach; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Master Servicer or a Servicer, as applicable; and (iv)
any lowering, withdrawal or notice of an intended or potential lowering, of the
outstanding rating of the Securities by the Rating Agency rating such Securities
because the existing or prospective financial condition or mortgage loan
servicing capability of the Master Servicer is insufficient to maintain such
rating.
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Indenture for each Series of Notes include: (i) a default of
five days or more in the payment of any principal of or interest on any Note of
such Series; (ii) failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture which continues for a period of thirty days after
notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Noteholders of a majority of the then aggregate outstanding amount of the Notes
of such Series may declare the principal amount of all the Notes of such Series
to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the Noteholders of a majority in
aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an Event of Default other
than a default in the payment of any principal or interest on any Note of such
Series for thirty days or more, unless (a) the Noteholders of 100% of the then
aggregate outstanding amount of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest due and unpaid on the outstanding Notes of
such Series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and
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payable, and the Indenture Trustee obtains the consent of the Holders of 66 2/3%
of the then aggregate outstanding amount of the Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty days or more
in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result,
upon the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders may be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Noteholders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Except as otherwise provided in the related Prospectus Supplement, so long
as an Event of Default with respect to a Series of Securities remains
unremedied, the Depositor, the Trustee or the holders of Notes of such Series
(or, if no Notes are issued as part of such Series, Certificate) evidencing not
less than 25% of the principal amount of such Securities of such Series may
terminate all of the rights and obligations of the Master Servicer under the
applicable Agreement and/or 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 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 applicable Agreement.
AMENDMENT
Except as otherwise provided in the related Prospectus Supplement, the
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
for each Series of Securities may be amended by the Depositor, the Master
Servicer and the Trustee, without the consent of the Securityholders, (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 under such 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
Securityholder of the related Series. Except as otherwise provided in the
related Prospectus Supplement, the Pooling and Servicing Agreement or Sale and
Servicing Agreement, as applicable, for each Series of Securities may also be
amended by the Depositor, the Master Servicer and the Trustee with the consent
of holders of Securities evidencing not less than 66 2/3% of the aggregate
outstanding principal amount of the Securities of such Series, for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or of modifying in any manner the rights of the
Securityholders; 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 Security without the consent of the holder of
such Security, (ii) adversely affect in any material respect the interests of
the holders of a Class or Subclass of the Senior Securities, if any, of a Series
in a manner other than that set forth in (i) above without the consent of the
holders of the Senior Securities of such Subclass evidencing not less than 66
2/3% of such Class or Subclass, (iii) adversely affect in any material respect
the interests of the holders of the Subordinated Securities of a Series in a
manner other than that set forth in (i) above without the consent of the holders
of Subordinated Securities evidencing not less than 66 2/3% of such Class or
Subclass or (iv) reduce the
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aforesaid percentage of the Securities, the holders of which are required to
consent to such amendment, without the consent of the holders of the Class
affected thereby.
The Trust Agreement for a Series may be amended by the Trustee and the
Depositor without Certificateholder consent, to cure any ambiguity, to correct
or supplement any provision therein that may be inconsistent with any other
provision therein, or 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 Trust Agreement for each Series may also be
amended by the Trustee and the Depositor with the consent of the Holders of
Securities evidencing Percentage Interests aggregating not less than 66 2/3% of
each Class of the Securities 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 Securities the
Holders of which are required to consent to any such amendment, without the
consent of the Holders of all Securities of such Series then outstanding.
TERMINATION
Except as otherwise provided in the related Prospectus Supplement, the
obligations created by the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, for a Series of Securities 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
Securityholders of all amounts held by the Master Servicer and required to be
paid to them pursuant to the applicable Agreement. The obligations created by
the 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 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 Securities, the Master Servicer will give written notice of
termination of the applicable Agreement of each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement or Sale and Servicing Agreement for each Series of
Securities 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 or Contracts subject to the
applicable Agreement at a price specified in such Prospectus Supplement. In the
event that the Depositor elects to treat the related Trust Fund as a REMIC 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" thereunder. The exercise of any such right will effect
early retirement of the Securities of that Series, but the right so to
repurchase may be effected only on or after the aggregate principal balance of
the Mortgage Loans or Contracts 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 related
Prospectus Supplement.
The Indenture will be discharged with respect to a Series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes of such Series.
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CREDIT SUPPORT
Credit support for a Series of Securities may be provided by one or more
Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Securities (which may, if so specified in the related Prospectus Supplement, be
issued in notional amounts), the issuance of subordinated Classes or Subclasses
of Notes, 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
Securities.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Securities will
be issued by the bank or financial institution specified in the related
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 Securities 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 Securities. 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
Securities will expire a specified number of 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 Securities -- Termination."
Unless otherwise specified in the applicable Prospectus Supplement, under
the applicable Agreement and/or Servicing Agreement, the Master Servicer 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 Securityholders, in the
manner specified in the related 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 Securityholders with respect thereto.
Payments made to the Certificate Account by the L/C 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.
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Prospective purchasers of Securities 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 related Prospectus Supplement (the "Required Reserve"), the Securityholders
(in the priority specified in the related 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
Securities 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 related Prospectus Supplement.
SUBORDINATED SECURITIES
To the extent specified in the Prospectus Supplement with respect to a
Series of Securities, credit support may be provided by the subordination of the
rights of the holders of one or more Classes or Subclasses of Securities to
receive distributions with respect to the Mortgage Loans or Mortgage
Certificates in the Mortgage Pool or Contracts in the Contract Pool underlying
such Series, or with respect to a Subordinated Pool of mortgage loans or
manufactured housing conditional sales contracts and installment loan
agreements, to the rights of the Senior Securityholders or holders of one or
more Classes or Subclasses of Subordinated Securities of such Series to receive
such distributions, to the extent of the applicable Subordinated Amount or as
otherwise specified in the related Prospectus Supplement. In such a case, credit
support may also be provided by the establishment of a Reserve Fund, as
described below. Except as otherwise provided in the related Prospectus
Supplement, the Subordinated Amount, as described below, will be reduced by an
amount equal to Aggregate Losses. Aggregate Losses are defined in the related
Agreement for any given period as the aggregate amount of delinquencies, losses
and other deficiencies in the amounts due to the holders of the Securities 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 Securities of such Series
("payment deficiencies"), but excluding any payments of interest on any amounts
originally due to the holders of the Securities of a Class or Subclass to which
the applicable Class or Subclass of Subordinated Securities are subordinated on
a previous Distribution Date, but not paid as due, whether by way of withdrawal
from the Reserve Fund (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 Securityholders 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 or Contracts 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 Mortgage Loans or Contracts). The
Prospectus Supplement for each Series of Securities with respect to which credit
support will be provided by one or more Classes or Subclasses of Subordinated
Securities will set forth the Subordinated Amount for such Series and/or the
manner by which one or more Classes or Subclasses of Securities may be
subordinated to other Classes or Subclasses or Securities. If specified in the
related Prospectus Supplement, the Subordinated Amount will decline over time in
accordance with a schedule which will also be set forth in the related
Prospectus Supplement.
In addition, if so specified in the related Prospectus Supplement, if a
Series of Securities includes Notes, one more Classes or Subclasses of Notes may
be subordinated to another Class or Subclasses of Notes and may be entitled to
receive disproportionate amounts of distributions in respect of principal and
all the Certificates of such Series will be subordinated to all the Notes.
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SHIFTING INTEREST
If specified in the Prospectus Supplement for a Series of Securities for
which credit enhancement is provided by shifting interest as described herein,
the rights of the holders of the Subordinated Securities of a Series to receive
distributions with respect to the Mortgage Loans, Mortgage Certificates or
Contracts in the related Trust Fund or Subsidiary Trust will be subordinated to
such right of the holders of the Senior Securities 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
Securities 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
Securities against losses due to mortgagor defaults.
The protection afforded to the holders of Senior Securities of a Series by
the shifting interest subordination feature will be effected by distributing to
the holders of the Senior Securities a disproportionately greater percentage
(the "Senior Prepayment Percentage") of Principal Prepayments. The initial
Senior Prepayment Percentage will be the percentage specified in the related
Prospectus Supplement and will decrease in accordance with the schedule and
subject to the conditions set forth in the Prospectus Supplement. This
disproportionate distribution of Principal Prepayments will have the effect of
accelerating the amortization of the Senior Securities while increasing the
respective interest of the Subordinated Securities in the Mortgage Pool or
Contract Pool. Increasing the respective interest of the Subordinated Securities
relative to that of the Senior Securities is intended to preserve the
availability of the benefits of the subordination provided by the Subordinated
Securities.
SWAP AGREEMENT
If so specified in the Prospectus Supplement relating to a Series of
Securities, the related 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 Securities having the benefit of an interest rate or currency rate
swap, cap or floor 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 Securities also will set forth certain information relating to
the corporate status, ownership and credit quality of the counterparty or
counterparties to such swap agreement in accordance with applicable rules and
regulations of the Commission.
RESERVE FUND
If so specified in the related Prospectus Supplement, credit support with
respect to one or more Classes or Subclasses of Securities of a Series may be
provided by the establishment and maintenance with the Trustee for such Series
of Securities, in trust, of a Reserve Fund for such Series. Unless otherwise
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 or
Contracts, by the deposit with the Trustee, in escrow, by the Depositor of a
Subordinated Pool of mortgage loans or manufactured housing conditional sales
contracts and installment loan agreements with the aggregate principal balance,
as of the related Cut-off Date, set forth in the related Prospectus Supplement,
by any combination of the foregoing, or in another manner specified in the
related Prospectus Supplement. Except as otherwise provided in the related
Prospectus Supplement, following the initial issuance of the Securities 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 or Contracts and/or on the mortgage loans or manufactured housing
conditional sales contracts and installment loan agreements in the Subordinated
Pool otherwise distributable to the holders of the applicable Class or
Subclasses of Subordinated Securities 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 Securities or on the Securities of such Series to which the applicable
Class or Subclass of Subordinated Securities are subordinated and the
reimbursement of unreimbursed Advances and
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liquidation expenses, to maintain the Reserve Fund at the Required Reserve.
Except as otherwise provided in the related Prospectus Supplement, the balance
in the Reserve Fund in excess of the Required Reserve shall be paid to the
applicable Class or Subclass of Subordinated Securities, or to another specified
person or entity, as set forth in the related Prospectus Supplement, and shall
be unavailable thereafter for future distribution to Certificateholders of
either 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 related Prospectus Supplement.
Except as otherwise provided in the related Prospectus Supplement, amounts
held in the Reserve Fund for a Series from time to time will continue to be the
property of the Subordinated Securityholders of the Classes or Subclasses
specified in the related Prospectus Supplement until withdrawn from the Reserve
Fund and transferred to the Certificate Account as described below. Except as
otherwise provided in the related Prospectus Supplement, if on any Distribution
Date the amount in the Certificate Account available to be applied to
distributions on the applicable Senior Securities 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 Securityholders (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 such Senior Securityholders (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 Securityholders on such Distribution Date to the
Required Distribution; provided, however, that unless specified in the related
Prospectus Supplement no 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 Securityholders. 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
applicable Subordinated Securityholders. Unless otherwise specified in the
related Prospectus Supplement, whenever the Reserve Fund is less than the
Required Reserve, holders of the Subordinated Securities of the applicable Class
or Subclass will not receive any distributions with respect to the Mortgage
Loans, Mortgage Certificates or Contracts other than amounts attributable to
interest on the Mortgage Loans, Mortgage Certificates or Contracts after the
initial Required Reserve has been attained and amounts attributable to any
income resulting from investment of the Reserve Fund as described below. Except
as otherwise provided in the related Prospectus Supplement, whether or not the
amount of the Reserve Fund exceeds the Required Reserve on any Distribution
Date, the holders of the Subordinated Securities of the applicable Class or
Subclass are entitled to receive from the Certificate Account their share of the
proceeds of any Mortgage Loan, Mortgage Certificates or Contract, 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. Except as otherwise provided in the related
Prospectus Supplement, 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 applicable Senior
Securities 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
(iii) to the payment to the holders of the Senior Securities of such
Series of the principal balance or purchase price, as applicable, of
Mortgage Loans or Contracts 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 Mortgage Rate or
APR, as applicable, to the extent that sufficient funds in the Certificate
Account are not available therefor.
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Except as otherwise provided in the related Prospectus Supplement, 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 Securities, 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 Agreement and/or Indenture 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 Securities in accordance with
their respective interests in the Reserve Fund in the priority specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, investment income in the Reserve Fund is not available
for distribution to the holders of the Senior Securities of such Series or
otherwise subject to any claims or rights of the holders of the applicable Class
or Subclass of Senior Securities. Eligible investments for monies deposited in
the Reserve Fund will be specified in the applicable Agreement and/or Indenture
for a Series of Securities for which a Reserve Fund is established and in some
instances will be limited to investments acceptable to the Rating Agency rating
the Securities of such Series from time to time as being consistent with its
outstanding rating of such Securities. 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 applicable 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
Securities of such Series and the availability of amounts in the Reserve Fund
for distributions on such Securities will be affected by the delinquency,
foreclosure and prepayment experience of the Mortgage Loans or Contracts in the
related Trust Fund and/or in the Subordinated Pool and therefore cannot be
accurately predicted.
SECURITY GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, Security Guarantee
Insurance, if any, with respect to a Series of Securities may be provided by one
or more insurance companies. Such Security Guarantee Insurance will guarantee,
with respect to one or more Classes of Securities of the related Series, timely
distributions of interest and full distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. If so specified, in the related
Prospectus Supplement, the Security Guarantee Insurance will also guarantee
against any payment made to a Securities which is subsequently recovered as a
"voidable preference" payment under the Bankruptcy Code. A copy of the Security
Guarantee Insurance for a Series, if any, will be filed with the Commission as
an exhibit to a Current Report on Form 8-K to be filed with the Commission
within 15 days of issuance of the Securities of the related Series.
PERFORMANCE BOND
If so specified in the related 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 applicable Agreement and/or Servicing Agreement, including its obligation to
advance delinquent installments of principal and interest on Mortgage Loans or
Contracts and its obligation to repurchase Mortgage Loans or Contracts in the
event of a breach by the Master Servicer of a representation or warranty
contained in the applicable 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 any Class or Subclass of
Securities 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 such Securities or to
deposit and maintain with the Trustee cash in the amount specified in the
applicable Prospectus Supplement.
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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. Unless otherwise specified in the related Prospectus
Supplement, 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 related Prospectus Supplement. Any material 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 related 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
Securities will be described in the related Prospectus Supplement.
Unless otherwise specified in the related 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")
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.
Unless otherwise specified in the related Prospectus Supplement, 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 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.
Unless otherwise specified in the related Prospectus Supplement, 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,
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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 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.
Unless otherwise specified in the related Prospectus Supplement, the
Primary Mortgage Insurer 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
Securities will be described in the related 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
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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 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 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
Unless otherwise specified in the related Prospectus Supplement, any
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 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
proportion of the loss,
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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 related 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 applicable Pooling and Servicing Agreement or Sale and
Servicing Agreement for each Series 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 file 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 such flood insurance to be
maintained, which coverage shall be at least equal to the minimum amount
specified in the preceding sentence or such lesser amount as may be available
under the federal flood insurance program. 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 Contracts. If the insurer
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thereunder shall cease to be acceptable to the Master Servicer, the Master
Servicer shall use 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 related Prospectus Supplement, the Master Servicer
will obtain a Pool Insurance Policy for a Mortgage Pool underlying Securities 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 Securities will be described in the related
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 related 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. The Prospectus Supplement will contain such financial information
regarding the Pool Insurer as may be required by the rules and regulations of
the Commission.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that as a condition precedent to the payment of
any claim the Insured 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 restore the
Mortgaged Property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Master Servicer or the
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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 Securityholders 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 of clause (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 Securities -- Assignment of Mortgage Loans," 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
Securityholders 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
Securityholders 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" and "--
Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities -- Assignment of Mortgage Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Securities 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 Securities 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 Securities -- Advances."
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Master Servicer
shall obtain a Special Hazard Insurance Policy for the Mortgage Pool underlying
a Series of Securities. Any Special Hazard Insurance Policies for a Contract
Pool underlying a Series of Securities will be described in the related
Prospectus Supplement. The Special Hazard Insurance Policy for the Mortgage
Pool underlying the Securities 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 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 Securities
- --
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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 related Prospectus Supplement.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
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 applicable Agreement and/or Servicing Agreement will
require the Master Servicer to maintain the Special Hazard Insurance Policy in
full force and effect throughout the term of the Agreement. If a Pool Insurance
Policy is required to be maintained pursuant to the 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 Agreement
and/or 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 related Prospectus Supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool with respect to a Series of
Securities will be covered under a Mortgagor Bankruptcy Bond (or any other
instrument that will not result in a downgrading of the rating of the Securities
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 Securities of the related Series, which will be set forth in
the related 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 Securities may be reduced as long as any such
reduction will not result in a reduction of the outstanding rating of the
Securities of such Series by the Rating Agency rating such Series.
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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
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 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
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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
Securities, 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 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.
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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. 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
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typically provides that if the proprietary lease or occupancy agreement is
terminated, the cooperative will recognize the lender's lien against proceeds
from a sale of the cooperative apartment subject, however, to the cooperative's
right to sums due under such proprietary lease or occupancy agreement 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.
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
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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 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
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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.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan secured by Multifamily Property will be a non-recourse loan to the
Mortgagor. 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.
Unless otherwise specified in the related Prospectus Supplement, the
mortgage securing each Mortgage Loan relating to Multifamily Property will
contain an assignment of rents and an assignment of leases, 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.
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 applicable 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
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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, 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 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 Securityholders 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 related Prospectus Supplement, each
Unaffiliated Seller will represent, as of the date of delivery of the related
Series of Securities, 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
applicable Agreement and/or Servicing 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.
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 Uniform
Commercial Code 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 applicable Agreement and/or Servicing Agreement, the Master
Servicer or the Depositor, as the case may be, will transfer physical possession
of the Contracts to the Trustee or Indenture Trustee, or their respective
custodian, as the case may be. 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 or the Indenture
Trustee's security interest in the Contracts, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, the Contracts will
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not be stamped or marked otherwise to reflect their assignment from the
Depositor to the Trustee or their pledge to the Indenture Trustee. Therefore, if
a subsequent purchaser were able to take physical possession of the Contracts
without notice of such assignment or pledge, the respective Trustees' interest
in the Contracts 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 Securityholders 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 Securities and as described in the
related 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 Securityholders 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 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 and, if a Series of
Securities includes Notes, such security interest will be pledged to the
Indenture Trustee on behalf of the Noteholders. Unless otherwise specified in
the related Prospectus Supplement, neither the Depositor nor the Trustee or
Indenture Trustee will amend the certificates of title to identify the Trustee
or the Indenture Trustee, as applicable, 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 Securityholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who
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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 and pledged to the Noteholders, if any, 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 applicable
Securityholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Securityholders 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 Indenture Trustee, or the
Master Servicer as custodian for the Trustee and/or Indenture 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 applicable Trustee would receive notice of surrender
if the security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Trustee and Indenture 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 Indenture Trustee, or the Master
Servicer as custodian for the Trustee or Indenture 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 applicable
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 even over a perfected security interest. The
Depositor will represent in the applicable 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, Indenture Trustee or
Securityholders 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
applicable Agreement.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee or the Indenture Trustee, to
the extent required by the related Agreement and/or Indenture, may take action
to enforce the applicable 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 and/or Indenture 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.
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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.
Unless otherwise specified in the related Prospectus Supplement, 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 "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
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charges in excess of permitted levels has been included in the Trust Assets or
Fund. The Depositor, or the party specified in the related Agreement will
represent that all of the Contracts comply with applicable usury laws.
CERTAIN 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
Securities. Stroock & Stroock & Lavan LLP, New York, New York, or other
counsel, to the Depositor specified in the related Prospectus Supplement, is
delivering its opinion regarding certain federal income tax matters discussed
below. The opinion 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 Stroock & Stroock &
Lavan LLP's, or such other counsel'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 are
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 Securities. 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 Securities offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates and/or notes ("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 and/or
notes ("Trust Certificates") representing certain interests in a Trust Fund
which the Master Servicer does not elect to have treated as a REMIC. 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 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
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 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").
II. REMIC TRUST FUNDS
A. CLASSIFICATION OF REMIC TRUST FUNDS
With respect to each Series of REMIC Certificates relating to a REMIC
Mortgage Pool, Stroock & Stroock & Lavan LLP, New York, New York, or such other
counsel specified in the related Prospectus Supplement 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)
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certain representations set forth in the Pooling and Servicing Agreement are
true and (iv) there is continued compliance with applicable provisions of the
Code 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 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 of the
REMIC Mortgage Pool underlying such Certificates ("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 ("REIT") 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, for both purposes, the
Assets and income of the REMIC would be treated as "interests in real property"
as defined in Code Section 856(c)(6)(C) (or, as provided in the Committee
Report, as "real estate assets" as defined in Code Section 856(c)(6)(B)) and as
"interest on obligations secured by mortgages on real property or on interests
in real property", respectively. See, in this regard, "-- Non-REMIC Trust Funds
- -- 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 Section 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
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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 Code Section 860G(a)(3) or Section 860G(a)(4) 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, Stroock & Stroock & Lavan LLP, or such other counsel specified
in the related Prospectus Supplement will deliver its opinion generally to the
effect that, assuming 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 Code Section 856(c)(4)(A), and assets
described in Code Section 7701(a)(19)(C), and whether the income on such
Certificates is interest described in Code Section 856(c)(3)(B), 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.
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Rules governing original issue discount are set forth in Code Sections 1271
through 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 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 REMIC Regular 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 accrued
market discount 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 greater than 0.65 but
not exceeding 1.35, 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
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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 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 REMIC Regular 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
accretion of interest will be included in the stated redemption price at
maturity of such Certificates.
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 are 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 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 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 -- 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
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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.
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 qualified
floating rate (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
Code Section 1272(a)(6) 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 Code Section 1272(a)(6) 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
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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.
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. Since the Treasury regulations, issued in
final form on June 11, 1996, applicable to instruments having contingent
payments (the "1996 Contingent Debt Regulations") are not applicable to
instruments that are subject to Code Section 1272(a)(6), 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 "-- 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), reduced by any
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 is 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, unless the IRS consents of the
revocation.
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
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discount is de minimis. It appears that de minimis market discount on a REMIC
Regular 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 Tax Reform Act of 1986 (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 might 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 June 27, 1996, the IRS published in the Federal Register proposed
regulations (the "Proposed Premium Regulations") on the amortization of bond
premium. The Proposed 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 Proposed 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
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Certificateholder will exercise or not exercise its option in a manner that
maximizes the Certificateholder's yield. The Proposed Premium Regulations would
not apply to a bond that is subject to Code Section 1272(a)(6). The Proposed
Premium Regulations are proposed to be effective for debt instruments acquired
on or after the date 60 days after the date final regulations are published in
the Federal Register. However, if a Certificateholder elects to amortize bond
premium for the taxable year containing such effective date, the Proposed
Premium Regulations will apply to all the Certificateholder's debt instruments
held on or after the first day of that taxable year. It cannot be predicted at
this time whether the Proposed Premium Regulations will become effective or
what, if any, modifications will be made to them prior to their becoming
effective.
3. TREATMENT OF SUBORDINATED SECURITIES
As described above under "Credit Support -- Subordinated Certificates,"
certain Series of Securities may contain one or more Classes or Subclasses of
Subordinated Securities. Holders of Subordinated Securities will be required to
report income with respect to such Securities 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 Securityholder of a Subordinated Security in any period
could significantly exceed the amount of cash distributed to such Securityholder
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 Security. 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 Security. Special rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts.
Holders of Subordinated Securities should consult their own tax advisers
regarding the appropriate timing, character and amount of any loss sustained
with respect to Subordinated Securities.
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 "-- 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.
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
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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 above 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 sub-
servicers if any. See, however, "-- Pass-Through of Servicing Fees" below.
Sixth, net income from foreclosure property is reduced by the amount of tax on
net income from foreclosure property. 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 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.
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
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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% 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. However, net operating loss
carryovers are determined without regard to excess inclusion income. 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" below. The
Small Business Job Protection Act of 1996 ("SBJPA of 1996") has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to REMIC Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Owner. First, alternative minimum taxable income for a Residual Owner
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Owner's
alternative minimum taxable income for a 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.
In the case of any REMIC Residual Certificates held by a REIT, 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.
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.
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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" above.
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 "Technical and
Miscellaneous Revenue Act of 1988" (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" below.
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 contingencies. Such
interest, if earned directly by a 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% 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. Treasury regulations
provide that, for purposes of this mark-to-market requirement, a REMIC Residual
Certificate acquired on or after January 4, 1995 is not treated as a security
and thus may not be marked to market.
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9. PARTNERSHIP HOLDERS
Special rules for electing partnerships with at least 100 members were
adopted in the Taxpayer Relief Act of 1997 (the "1997 Act"). There are special
rules relating to such electing partnerships that hold REMIC Residual
Certificates. Large partnerships which have or are considering making this
election should consult with their tax advisors concerning the consequences of
holding a REMIC Residual Certificate.
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.
The 1988 Act makes transfers of a REMIC Residual Certificate 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
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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 penalty of perjury that such record holder is not a disqualified
organization. For these purposes, a "pass-through entity" means any regulated
investment company, REIT, trust, partnership or certain other entities described
in Code Section 860E(e)(6). 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.
The 1997 Act provides that for taxable years beginning after December 31,
1997, all partners of certain electing partnerships having 100 or more partners
("electing large partnerships") will be treated as disqualified organizations
for purposes of the tax imposed on pass-through entities if such electing large
partnerships hold residual interests in a REMIC. However, the electing large
partnership would be entitled to exclude the excess inclusion income from gross
income for purposes of determining the taxable income of the partners. When
applicable, the provisions would also disallow 70 percent of an electing large
partnership's miscellaneous itemized deductions, including deductions for
servicing and guaranty fees and any expenses of the REMIC, although the
remaining deductions would generally be allowed at the partnership level and
would not be subject to the 2% floor applicable to individual partners. See "G.
Pass-Through of Servicing Fees," below.
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) will be
allocated to the holders of the REMIC Residual Certificates, and therefore will
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 Residual 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 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
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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% 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% 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.
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.
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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 Code Section 3406 at a rate of 31% 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%, subject to reduction under an applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, 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 or any political subdivision thereof (unless, in
the case of a partnership, future Treasury regulations provide otherwise) an
estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust other than a "foreign trust," as defined in Code Section
7701(a)(31).
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% 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.
2. REMIC RESIDUAL CERTIFICATES
Amounts paid to a Residual Owner that is 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
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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 will thus only qualify for the portfolio
interest exception if the underlying obligations held by the REMIC would so
qualify. Such withholding tax generally is imposed at a rate of 30% but is
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%, 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 continues 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% 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% of the accrued excess
inclusions is not terminated even though the REMIC Residual Certificate is no
longer held by a non-U.S. Person.
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of REMIC Regular Certificates
and REMIC Residual Certificates should consult their tax advisers regarding the
application of the Final Withholding Regulations.
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
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concerning the state and local income tax consequences of their purchase and
ownership of REMIC Regular Certificates.
III. NON-REMIC TRUST FUNDS
The discussion that follows relates only to Non-REMIC Trust Funds that have
not issued Trust Certificates structured as debt for federal income tax purposes
and that are not intended to be treated as partnerships for federal income tax
purposes. For a discussion of Trust Certificates in a Non-REMIC Trust Fund
which have been structured as debt for federal income tax purposes, see below
under "IV. Characterization of the Trust Certificates as Indebtedness." For a
discussion of Trust Certificates and Notes in a Non-REMIC Trust Fund which is
intended to be treated as a partnership for federal income tax purposes, see
below under "V. Tax Characterization as a Partnership."
A. CLASSIFICATION OF TRUST FUNDS
With respect to each series of Trust Certificates Stroock & Stroock & Lavan
LLP, or such other counsel specified in the related Prospectus Supplement 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); (ii) Trust
Fractional Certificates held by a REIT 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)(3)(B); and (iii) Trust Fractional Certificates acquired by a
REMIC in accordance with the requirements of Code Section 860G(a)(3)(A)(i) and
(ii) or Section 860G(a)(4)(B) will be treated as "qualified mortgages" within
the meaning of Code Section 860D(a)(4). 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, Stroock & Stroock & Lavan LLP,
or such other counsel specified in the related Prospectus Supplement 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 Code Section 860G(a)(3) or Section 860G(a)(4) will be treated as owning a
"Qualified Mortgage" within the meaning of Code Section 860(G)(a)(3).
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
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 REIT
which owns a Trust Interest Certificate will be considered to "real estate
assets" within the meaning of code Section 856(c)(4), and interest income
thereon will be considered
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"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) 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.
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 Trust Funds included in a
Mortgage Pool. 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 received directly its
share of the payments on such Mortgage Loans. Because those fractional
interests having differing undivided percentage interests in principal and
interest 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 the amount includible in income on account of
a Trust Fractional Certificate may differ significantly from the amount payable
thereon from payments of interest on the Mortgage Loans. 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 such holder's 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.
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Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Stripped Mortgage Loans
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" means a Mortgage Loan having a Retained Yield (as that
term is defined below) or a Mortgage Loan 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.
Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Unstripped Mortgage Loans
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 sub-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 compensation payable to the Master
Servicer, as described under "Description of the Securities -- Servicing
Compensation and Payment of Expenses," 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
relating thereto, exclusive of the Depositor's Retained Yield, if any. With
respect to each Series of Certificates, Stroock & Stroock & Lavan LLP, or such
other counsel specified in the related Prospectus Supplement 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 (subject to certain exceptions which, if 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 and some or all of the interest payable thereon.
As a consequence, each Stripped Mortgage Loan 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 as original issue
discount on the basis of the yield to maturity of such Stripped Mortgage Loans,
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
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 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
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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 an amount computed using the price at which such
subsequent purchaser purchased the Certificates. 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 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 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 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 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.
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2. TREATMENT OF UNSTRIPPED CERTIFICATES
Mortgage Loans 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 stripped mortgage loans ("Unstripped Mortgage Loans") 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 as it accrues or is received by the Trustee, whichever is
earlier. Under the 1997 Act, gain or loss from the termination of a mortgage
will be treated as capital gain or loss.
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 in income on the basis of a constant yield to
maturity. However, the application of the 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
would 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 approximately 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 by 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 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, but
reduced, if the cost of such subsequent purchaser's interest in such Unstripped
Mortgage Loan 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 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 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 is less than its
allocable share of the "adjusted issue price" of such Mortgage Loan. See "--
Treatment of Unstripped Certificates" and "-- Application of Stripped Bond
Rules." Thus, with respect to such Mortgage Loans, 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 at the time each principal payment is
received or
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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 "-- REMIC Trust Funds -- 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 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 among each of the Mortgage Loans (on the
basis of their relative fair market values). 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 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 June 27, 1996, the IRS published in the Federal Register proposed
regulations (the "Proposed Premium Regulations") on the amortization of bond
premium. The Proposed 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 Proposed 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 Proposed Premium Regulations are
proposed to be effective for debt instruments acquired on or after the date 60
days after the date final regulations are published in the Federal Register.
However, if a Certificateholder elects to amortize bond premium for the taxable
year containing such effective date, the Proposed Premium Regulations would
apply to all the Certificateholder's debt instruments held on or after the first
day of that taxable year. It cannot be predicted at this time whether the
Proposed Premium Regulations will become effective or what, if any,
modifications will be made to them prior to their becoming effective.
4. ALLOCATION OF PURCHASE PRICE
As noted above, a purchaser of a Trust Fractional Certificate relating to
Unstripped Mortgage Loans will be required to allocate the purchase price
thereof to the undivided interest it acquires in each of the Mortgage Loans, in
proportion to the respective fair market values of the portions of such Mortgage
Loans included in the Trust Fund at
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the time the Certificate is purchased. The Depositor believes that it 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, Stroock & Stroock & Lavan LLP,
or such other counsel specified in the related Prospectus Supplement 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. 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, 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, received directly its share of the amounts received with
respect to the Mortgage Loans 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 such
holder's 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. With respect to each Series of
Certificates, Stroock & Stroock & Lavan LLP, or such other counsel specified in
the related Prospectus Supplement 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 (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 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 payment 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 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 will be treated as a single
obligation with payment corresponding to the aggregate of the payments allocable
thereto from each of the Mortgage Loans. See "Aggregate Reporting" below.
Alternatively, Trust Interest Certificateholders may be required by the IRS
to treat 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.
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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; however there is no authority permitting Trust
Interest Certificateholders to take into account the Prepayment Assumption in
computing original issue discount accruals. 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 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 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 1986 Act contains a provision requiring original issue discount on
certain obligations issued after December 31, 1986 to 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. The 1997 Act provides that the prepayment rules of Code
Section 1272(a)(6), discussed above, will also apply to pools of debt
instruments the yield on which may be affected by reason of prepayments. Trust
Fractional Certificateholders and Trust Interest Certificateholders should
consult their tax advisers as to the proper reporting of income from Trust
Fractional Certificates and Trust Interest Certificates, as the case may be, in
the light of the possibility of prepayment and, with respect to the Trust
Interest Certificates, as to the possible application of the 1996 Contingent
Debt Regulations.
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 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 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
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be capital gain or loss if the Certificate was held as a capital asset except to
the extent that code Section 582(c) 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 Interest 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 sub-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 with respect to REMIC Certificates" 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 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 (unless, in the case of a partnership, future Treasury
regulations provide otherwise), 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% or more of, and
is not a controlled foreign corporation (within the meaning of Code Section 957)
related to, each of the issuers of the Mortgage Loans 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 Mortgage
Loans 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.
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of REMIC Regular Certificates
and REMIC Residual Certificates should consult their tax advisers regarding the
application of the Final Withholding Regulations.
J. STATE AND LOCAL TAXATION
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Securities. 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
Securities.
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IV. CHARACTERIZATION OF THE TRUST CERTIFICATES AS INDEBTEDNESS
A. CHARACTERIZATION OF INVESTMENTS IN TRUST CERTIFICATES
With respect to each Series of Trust Certificates that have been structured
as debt for federal income tax purposes, Stroock & Stroock & Lavan LLP or such
other counsel specified in the related Prospectus Supplement will deliver their
opinion to the effect that the Trust Certificates will be treated as debt
instruments for federal income tax purposes as of such date rather than as
ownership interests in the Trust Fund.
The Depositor, each Unaffiliated Seller and the Certificateholders will
express in the Agreement their intent that, for applicable tax purposes, the
Trust Certificates will be indebtedness secured by the Mortgage Loans. The
Depositor, each Unaffiliated Seller and each Certificateholder, by its
acceptance and acquisition of a beneficial interest in a Trust Certificate, will
have agreed to treat the Trust Certificates as indebtedness for federal income
tax purposes. However, because different criteria are used to determine the
non-tax accounting characterization of a securitization transaction, the
transaction will be treated as a sale of an interest in the Mortgage Loans for
financial accounting purposes.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Stroock & Stroock & Lavan LLP has analyzed and relied on
several factors in reaching its opinion that the weight of the benefits and
burdens of ownership of the Mortgage Loans has been retained by the Depositor or
an Unaffiliated Seller and has not been transferred to the Certificateholders.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Stroock & Stroock & Lavan LLP has
advised that the rationale of those cases will not apply to this transaction,
because the form of the transaction as reflected in the operative provisions of
the documents either accords with the characterization of the Trust Certificates
as debt or otherwise makes the rationale of those cases inapplicable to this
situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATEHOLDERS
Assuming that the Certificateholders are holders of debt obligations for
federal income tax purposes, the Trust Certificates generally will be taxable as
debt. The stated interest thereon will be taxable to a Certificateholder as
ordinary interest income when received or accrued in accordance with such
Certificateholder's method of tax accounting. Under the OID Regulations, a
holder of a debt instrument issued with a de minimis amount of original issue
discount must include such original issue discount in income, on a pro rata
basis, as principal payments are made on the debt instrument. A subsequent
purchaser who buys a Trust Certificate for more or less than its principal
amount will generally be subject, respectively, to the premium amortization or
market discount rules of the Code.
A holder of a Trust Certificate that has a fixed maturity date of not
more than one year from the issue date of such Trust Certificate (a "Short-Term
Certificate") may be subject to special rules. An accrual basis holder of a
Short-Term Certificate (and certain cash method holders, including regulated
investment companies, as set forth in Code Section 1281) generally would be
required to report interest income as interest accrues on a straight-line basis
over the term of each interest period. Other cash basis holders of a Short-Term
Certificate would, in general, be required to report interest income as interest
is paid (or, if earlier, upon the taxable disposition of the Short-Term
Certificate). However, a cash basis holder of a Short-Term Certificate reporting
interest income as it is paid may be required to defer a portion of any interest
expense otherwise deductible on indebtedness incurred to purchase or carry the
Short-Term Certificate until the taxable disposition of the Short-Term
Certificate. A cash basis taxpayer may elect under Code Section 1281 to accrue
interest income on all nongovernment debt obligations with a term of one year or
less, in which case the taxpayer would include interest on a Short-Term
Certificate in
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income as it accrues, but would not be subject to the interest expense deferral
rule referred to in the preceding sentence. Certain special rules apply if a
Short-Term Certificate is purchased for more or less than its principal amount.
While it is not anticipated that the Trust Certificates will be issued at a
greater than de minimis discount, it is possible that the Trust Certificates
could nevertheless be deemed to have been issued with original issue discount if
interest with respect to the Trust Certificates were not treated as
"unconditionally payable" under the OID Regulations. In such event, all of the
taxable income to be recognized with respect to the Trust Certificates would be
includible in income of Certificateholders as original issue discount, but would
not be includible again when the interest is actually received.
C. POSSIBLE CLASSIFICATION AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS A
CORPORATION
The opinion of Stroock & Stroock & Lavan LLP is not binding on the courts
or the IRS. It is possible that the IRS could assert that, for federal income
tax purposes, the transaction contemplated with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificateholders and that the proper classification of the legal relationship
between the Depositor, any Unaffiliated Seller and the Certificateholders
resulting from this transaction is that of a partnership, a publicly traded
partnership taxable as a corporation, or an association taxable as a
corporation. Since Stroock & Stroock & Lavan LLP has advised that the Trust
Certificates will be treated as indebtedness in the hands of the
Certificateholders for federal income tax purposes, neither the Depositor nor
any Unaffiliated Seller will attempt to comply with federal income tax reporting
requirements applicable to partnerships or corporations.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to federal income tax at corporate
income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for distribution to the Certificateholders. Cash
distributions to the Certificateholders generally would be treated as dividends
for federal income tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership, the partnership
itself would not be subject to federal income tax (unless it were to be
characterized as a publicly traded partnership taxable as a corporation);
rather, each partner (including each Certificateholder) would be taxed
individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of the Certificateholders could differ if the Certificates
were held to constitute partnership interests rather than indebtedness.
Assuming that all of the provisions of the Agreement, as in effect on the date
of the issuance, are complied with, it is the opinion of Stroock & Stroock &
Lavan LLP that the Trust Fund will not be treated as either an association
taxable as a corporation or a partnership taxable as a corporation.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated federal
income tax return with another corporation. Any entity (or a portion of any
entity) will be a taxable mortgage pool if (i) it is not a REMIC (or, after
September 1, 1997, a FASIT), (ii) substantially all of its assets consist of
debt instruments, more than 50% of which are real estate mortgages, (iii) the
entity is the obligor under debt obligations with two or more maturities, and
(iv) under the terms of the entity's debt obligations (or an underlying
arrangement), payments on such debt obligations bear a relationship to the debt
instruments held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Stroock & Stroock & Lavan LLP is of the
opinion that the arrangement created by the Agreement will not be a taxable
mortgage pool under Section 7701(i) of the Code because only one class of
indebtedness secured by the Mortgage Loans is being issued.
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The opinion of Stroock & Stroock & Lavan LLP is not binding on the courts
or the IRS. If the IRS were to contend successfully (or future regulations were
to provide) that the arrangement created by the Agreement is a taxable mortgage
pool, such arrangement would be subject to federal corporate income tax on its
taxable income generated by ownership of the Mortgage Loans. Such a tax might
reduce amounts available for distributions to Certificateholders. The amount of
such a tax would depend upon whether distributions to Certificateholders would
be deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. Foreign Investors
In general, subject to certain exceptions, interest (including original
issue discount) paid on a Trust Certificate to a nonresident alien individual,
foreign corporation or other non-United States person is not subject to United
States federal income tax, provided that such interest is not effectively
connected with a trade or business of the recipient in the United States and the
Certificateholder provides the required certification of foreign status.
If the interests of the Certificateholders were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest United States rate of tax applicable to
that foreign partner. In addition, such foreign partner, if a corporation or
association taxable as a corporation, could be subject to branch profits tax.
Each non-foreign partner would be required to certify to the partnership that it
is not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's United States federal income tax
liability.
If the Trust Fund were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Certain Certificateholders may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Trust Certificates if the
Certificateholder, upon issuance, fails to supply the Trustee or his broker with
his taxpayer identification number, furnishes an incorrect taxpayer
identification number, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fails to provide the Trustee or his broker with a certificate statement, under
penalties of perjury, that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and original issue
discount accrued, if any) on the Trust Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificateholders and the IRS will receive tax and other
information including the amount of interest paid on the Trust Certificates from
other persons holding Trust Certificates directly or indirectly through DTC,
rather than from the Trustee. (The Trustee, however, will respond to requests
for necessary information to enable such other persons to complete their
reports.) Each non-exempt Certificateholder will be required to provide, under
penalties of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a non-exempt
Certificateholder fail to provide the required certification, 31% of the
interest (and principal) otherwise payable to the Certificateholder will be
required to be withheld and remitted to the IRS as a credit against the
Certificateholder's federal income tax liability.
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G. SALE OR OTHER DISPOSITION
If a Certificateholder sells a Trust Certificate, the holder will recognize
gain or loss in an amount equal to the difference between the amount realized on
the sale and the Certificateholder's adjusted tax basis in the Trust
Certificate. The adjusted tax basis of a Trust Certificate to a particular
Certificateholder will equal the holder's cost for the Trust Certificate,
increased by any market discount, acquisition discount, original issue discount
and gain previously included by such Certificateholder in income with respect to
the Trust Certificate and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Certificateholder with respect to such Trust Certificate. Any such gain
or loss will generally be capital gain or loss if the Trust Certificate was held
as a capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally may
be used only to offset capital gains.
H. STATE AND LOCAL TAXATION
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition. ownership, and disposition of the Trust 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 Trust
Certificates.
V. TAX CHARACTERIZATION AS A PARTNERSHIP
Stroock & Stroock & Lavan LLP, or such other counsel specified in the
related Prospectus Supplement, will deliver its opinion for an Issuer which is
intended to be a partnership for federal income tax purposes, as specified in
the related Prospectus Supplement, generally to the effect that the Issuer will
not be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the Trust Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Issuer
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or such rule is otherwise inapplicable to the Issuer, so
that the Issuer will not be characterized as a publicly traded partnership
taxable as a corporation.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements: (i) the entity is
not a REMIC (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If the Issuer were treated as a taxable mortgage pool, it would be
ineligible to file consolidated returns with any other corporation and could be
liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Stroock & Stroock & Lavan
LLP, or such other counsel specified in the related Prospectus Supplement, will
deliver its opinion for an Issuer which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Issuer will not be a taxable mortgage pool.
This opinion will be based on the assumption that the terms of the Trust
Agreement and related documents will be complied with, and on counsel's
conclusion that either the number of classes of debt obligations issued be the
Issuer, or the nature of the assets held by the Issuer, will exempt the Issuer
from treatment as a taxable mortgage pool.
If the Issuer were taxable as a corporation for federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make
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payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Issuer. In additions, all distributions to the Certificateholders would be
taxable as dividends.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
1. TREATMENT OF THE NOTES AS INDEBTEDNESS
The Issuer will agree, and the Noteholders will agree by their purchase of
Notes, to treat the Notes as debt for federal income tax purposes. Except as
otherwise provided in the related Prospectus Supplement, Stroock & Stroock &
Lavan LLP, or such other counsel specified in the related Prospectus Supplement,
will advise the Depositor that in its opinion the Notes will be classified as
debt for federal income tax purposes.
2. POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES
If, contrary to the opinion of counsel, the IRS successfully asserted that
one or more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Issuer. If so treated, the
Issuer might be taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Issuer might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to foreign holders generally would be subject to
United States federal income tax and United States federal income tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Issuer's
expenses.
3. INTEREST INCOME ON THE NOTES
The stated interest on the Notes will be taxable to a Noteholder as
ordinary income when received or accrued in accordance with such Noteholder's
method of tax accounting. It is not anticipated that the Notes will be issued
with original issue discount within the meaning of Section 1273 of the Code. A
subsequent holder who purchases a Note at a discount that exceeds a statutorily
defined de minimis amount will be subject to the "market discount" rules of the
Code, and a holder who purchases a Note at a premium will be subject to the
premium amortization rules of the Code.
4. SALE OR OTHER DISPOSITION
If a Noteholder sells a Note, the holder will recognize gain or loss in an
amount equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a
particular Noteholder will equal the holder's cost for the Note, increased by
any original issue discount (if any), market discount and gain previously
included by such Noteholder in income with respect to the Note and decreased by
the amount of bond premium (if any) previously amortized and by the amount of
principal payments previously received by such Noteholder with respect to such
Note. Subject to the rules of the Code concerning market discount on the Notes,
any such gain or loss generally will be capital gain or loss if the Note was
held as a capital asset. Capital losses generally may be deducted only to the
extent the Noteholder has capital gains for the taxable year, although under
certain circumstances non-corporate Noteholders can deduct losses in excess of
available capital gains.
5. FOREIGN HOLDERS
If interest paid (or accrued) to a Noteholder who is a nonresident alien,
foreign corporation or other non-United States person (a "foreign person") is
not effectively connected with the conduct of a trade or business within the
United States by the foreign person, the interest generally will be considered
"portfolio interest," and generally will not be subject to United States Federal
income tax and withholding tax, if the foreign person (i) is not actually or
constructively a "10 percent shareholder" of the Trust or the Depositor
(including a holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Depositor is a
"related person" within the meaning of the Code and (ii) provides the person
otherwise required to withhold United States tax with an
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appropriate statement, signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the withholding agent. However, in
that case, the signed statement must be accompanies by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest in not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Proposed Treasury regulations, which would be effective with respect to
payments made after December 31, 1997 if adopted in their current form, would
provide alternative certification requirements and means for obtaining the
exemption from federal income and withholding tax.
6. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trust will be required to report annually to the IRS, and to each
Noteholder of record, the amount of interest paid on the Notes (and the amount
of interest withheld for federal income taxes, if any) for each calendar year,
except as to exempt holders (generally, holders that are corporations, tax-
exempt organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to their
status as nonresidents). Accordingly, each holder (other than exempt holders
who are not subject to the reporting requirements) will be required to provide,
under penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS, as a credit against the holder's federal income tax liability.
B. TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
1. TREATMENT OF THE ISSUER AS A PARTNERSHIP
In the case of an Issuer intended to qualify as a partnership for federal
income tax purposes, the Issuer and the Depositor will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Issuer as a partnership for purposes of United States federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Issuer, the
partners of the partnership being the Certificateholders, and the Notes, if any,
being debt of the partnership. However, the proper characterization of the
arrangement involving the Issuer, the Certificates, the Notes, the Issuer and
the Servicer is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
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A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Issuer. Generally, provided the
Certificates are issued at or close to face value, any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
2. PARTNERSHIP TAXATION
As a partnership, the Issuer will not be subject to federal income tax.
Rather, each Certificateholder will be required to separately take into account
such holder's allocated share of income, gains, losses, deductions and credits
of the Issuer. The Issuer's income will consist primarily of interest and
finance charges earned on the Mortgage Loans (including appropriate adjustments
for market discount, original issue discount and bond premium) and any gain upon
collection or disposition of Mortgage Loans. The Issuer's deductions will
consist primarily of interest and original issue discount accruing with respect
to the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Issuer for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Interest Rate for such month and interest on amounts previously
due on the Certificates but not yet distributed; (ii) any Issuer income
attributable to discount on the Mortgage Loans that corresponds to any excess of
the principal amount of the Certificates over their initial issue price; (iii)
prepayment premium payable to the Certificateholders for such month; and (iv)
any other amounts of income payable to the Certificateholders for such month.
Such allocation will be reduced by any amortization by the Issuer of premium on
Mortgage Loans that corresponds to any excess of the issue price of Certificates
over their principal amount. All remaining taxable income of the Issuer will be
allocated to the Depositor. Based on the economic arrangement of the parties,
this approach for allocating Issuer income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Interest Rate
plus the other items described above even though the Issuer might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on
Issuer income even if they have not received cash from the Issuer to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Issuer.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Issuer (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or
in part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Issuer.
The Issuer intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Issuer might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
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3. DISCOUNT AND PREMIUM
It is believed that the Mortgage Loans were not issued with original issue
discount and, therefore, the Trust should not have original issue discount
income. However, the purchase price paid by the Issuer for the Mortgage Loans
may be greater or less than the remaining principal balance of the Mortgage
Loans at the time of purchase. If so, the Mortgage Loan will have been acquired
at a premium or discount, as the case may be. (As indicated above, the Issuer
will make this calculation on an aggregate basis, but might be required to
recompute it on a Mortgage Loan by Mortgage Loan basis.)
If the Issuer acquires the Mortgage Loans at a market discount or premium,
the Issuer will elect to include any such discount in income currently as it
accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage Loans. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
4. SECTION 708 TERMINATION
Under Section 708 of the Code, the Issuer will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits interests
in the Issuer are sold or exchanged within a 12-month period. If such a
termination occurs, the partnership will be considered to transfer its assets
and liabilities to a new partnership in exchange for interests in that new
partnership, which it would then be treated as transferring to its partners.
The Issuer will not comply with certain technical requirements that might apply
when such a constructive termination occurs. As a result, the Issuer may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Issuer might not
be able to comply due to lack of data.
5. DISPOSITION OF CERTIFICATES
Generally, capital gain or loss will be recognized on a sale of
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Certificates sold. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Issuer income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both the
tax basis in the Certificates and the amount realized on a sale of a Certificate
would include the holder's share of the Notes and other liabilities of the
Issuer. A holder acquiring Certificates at different prices may be required to
maintain a single aggregate adjusted tax basis in such Certificates, and, upon
sale or other disposition of some of the Certificates, allocate a portion of
such aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss on
a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Issuer does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Issuer will elect to include market
discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
6. ALLOCATIONS BETWEEN DEPOSITORS AND TRANSFEREES
In general, the Issuer's taxable income and losses will be determined
monthly and the tax items for a particular calendar month will be apportioned
among the Certificateholders in proportion to the principal amount of
Certificates owned by them as of the close of the last day of such month. As a
result, a holder purchasing Certificates may be allocated tax items (which will
affect its tax liability and tax basis) attributable to periods before the
actual transaction.
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The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Issuer might be
reallocated among the Certificateholders. The Issuer's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
7. SECTION 754 ELECTION
In the event that a Certificateholder sells its Certificates at a profit
(loss), the purchasing Certificateholder will have a higher (lower) basis in the
Certificates than the selling Certificateholder had. The tax basis of the
Issuer's assets will not be adjusted to reflect that higher (or lower) basis
unless the Issuer were to file an election under Section 754 of the Code. In
order to avoid the administrative complexities that would be involved in keeping
accurate accounting records, as well as potentially onerous information
reporting requirements, the Issue currently does not intend to make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Issuer income than would be appropriate based on their own purchase
price for Certificates.
8. ADMINISTRATIVE MATTERS
The Trustee is required to keep or have kept complete and accurate books of
the Issuer. Such books will be maintained for financial reporting and tax
purposes on an accrual basis and the fiscal year of the Issuer will be the
calendar year. The Trustee will file a partnership information return (IRS Form
1065) with the IRS for each taxable year of the Issuer and will report each
Certificateholder's allocable share of items of Issuer income and expense to
holders and the IRS on Schedule K-1. The Issuer will provide the Schedule K-1
information to nominees that fail to provide the Issuer with the information
statement described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed by
the Issuer or be subject to penalties unless the holder notifies the IRS of all
such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Issuer
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold
Certificates through a nominee are required to furnish directly to the Issuer
information as to themselves and their ownership of Certificates. A clearing
agency registered under Section 17A of the Exchange Act is not required to
furnish any such information statement to the Issuer. The information referred
to above for any calendar year must be furnished to the Issuer on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Issuer with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Issuer by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Issuer. An adjustment
could also result in an audit of a Certificateholder's returns and adjustments
of items not related to the income and losses of the Issuer.
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9. TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS
It is not clear and federal tax counsel is unable to opine whether the
Issuer would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-United
States persons because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Issuer would be engaged in a trade or business in the United
States for such purposes, the Issuer will withhold as if it were so engaged in
order to protect the Issuer from possible adverse consequences of a failure to
withhold. The Issuer expects to withhold on the portion of its taxable income
that is allocable to foreign Certificateholders pursuant to Section 1446 of the
Code, as if such income were effectively connected to a United States trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Issuer to change its withholding procedures.
If the trust is engaged in a United States trade or business, each foreign
holder might be required to file a United States individual or corporate income
tax return (including, in the case of a corporation, the branch profits tax) on
its share of the Issuer's income. A foreign holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Issuer taking the position that no taxes were due because the Issuer was not
engaged in a United States trade or business. However, interest payments made
(or accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Issuer, and for that reason or because of
the nature of the assets of the Issuer probably will not be considered
"portfolio interest." As a result, even if the Issuer was not considered to be
engaged in a United States trade or business, Certificateholders will be subject
to United States federal income tax which must be withheld at a rate of 30%,
unless reduced or eliminated pursuant to an applicable treaty. A foreign holder
would be entitled to claim a refund for such withheld tax, taking the position
that the interest was portfolio interest and therefore not subject to United
States tax. However, the IRS may disagree and no assurance can be given as to
the appropriate amount of tax liability. As a result, each potential foreign
Certificateholder should consult its tax advisor as to whether an interest in a
Certificate is an unsuitable investment.
10. BACKUP WITHHOLDING
Distributions made on the Certificates and proceeds from the sale of the
Certificates will be subject to a "backup" withholding tax of 31% if, in
general, the Certificateholder fails to comply with certain identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
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
Securities 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. Fiduciaries should also consider
ERISA's prohibition on improper delegation of control over, or responsibility
for, plan assets.
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 Securities 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 or any entity whose
underlying assets include plan assets by reason of a plan or account investing
in such entity, including
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an insurance company general account (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 Securities of the applicable Series, an investment in
Securities 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.
FINAL PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a final regulation
(the "Plan Assets 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 Plan Assets 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 Securityholder of the applicable Series.
The Plan Assets 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 Securityholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Securities will qualify for this
exemption.
PROHIBITED TRANSACTION CLASS EXEMPTION APPLICABLE TO CERTIFICATES
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 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 (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) no sales commission
is paid to the Depositor as Mortgage Pool sponsor, (iii) the Plan does not
purchase more than 25% of the Certificates of that Series and (iv) 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 Securities 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.
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
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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
Securities" 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 indemnity 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 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 for Plans that acquire such Subordinated
Certificates.
UNDERWRITER'S PROHIBITED TRANSACTION EXEMPTION APPLICABLE TO CERTIFICATES
Credit Suisse First Boston Corporation ("First Boston") is the recipient of
a final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989)
(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 include (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 commercial real property) or (B) shares issued
by a cooperative housing association; (ii) "guaranteed governmental mortgage
pool certificates" (as defined in the Plan Assets Regulation) and (iii)
undivided fractional interests in the above.
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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 Credit Rating Co. or Fitch Investors Service,
L.P., 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;
(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 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;
(f) the Plan is an "accredited investor" (as defined in Rule
501(a)(1) of Regulation D under the Securities Act);
(g) the acquisition of the Certificates by a Plan is on terms
(including the price for the Securities) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party; and
(h) 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 herewith.
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
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(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").
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Underwriter's PTE which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to Certificateholders and having a
principal amount equal to no more than 25% of the total principal amount of the
Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("Pre-Funding Period"), instead of requiring
that all such Loans be either identified or transferred on or before the Closing
Date. The relief, when granted as a final exemption, will be effective for
transactions occurring on or after May 23, 1997, provided that the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding Limit")
must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans") must
meet the same terms and conditions for eligibility as the original Loans used to
create the Trust, which terms and conditions have been approved by the Rating
Agency.
(3) The transfer of such Additional Loans to the Trust during the Pre-
Period must not result in the Certificates receiving a lower credit
rating from the Rating Agency upon termination of the Pre-Funding Period than
the rating that was obtained at the time of the initial issuance of the
Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust at the end of the Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the Loans which were
transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is independent of
the Depositor; or (ii) an independent accountant retained by the Depositor must
provide the Depositor with a letter (with copies provided to the Rating Agency,
the Underwriter and the Trustee) stating whether or not the characteristics of
the Additional Loans conform to the characteristics described in the Prospectus,
Prospectus Supplement, Private Placement Memorandum ("Offering Documents")
and/or Pooling and Servicing Agreement ("Pooling Agreement"). In preparing such
letter, the independent accountant must use the same type of procedures as were
applicable to the Loans which were transferred as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90 days
after the Closing Date or earlier, in certain circumstances, if the amount on
deposit in the Pre-Funding Account is reduced below the minimum level specified
in the Pooling Agreement or an event of default occurs under the Pooling
Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested only in
investments which are permitted by the Rating Agency and (i) are direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Permitted Investments").
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<PAGE>
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust; and (iv) that the
amounts remaining in the Pre-Funding Account at the end of the Pre-Funding
Period will be remitted to Certificateholders as repayments of principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account and, if
not disclosed in the Offering Documents, the terms and conditions for
eligibility of the Additional Loans.
Whether the conditions in the Underwriter's PTE (in addition to, and
including those, relating to pre-funding) 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 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 ERISA CONSIDERATIONS RELATING TO CERTIFICATES
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
conditions (described briefly above) of PTCE 83-1 have been satisfied; (b)
whether the Underwriter's PTE is applicable; (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.
If for any reason neither PTCE 83-1 nor the Underwriter's PTE provide an
exemption for a particular Plan investor, one of five other prohibited
transaction class exemptions issued by the DOL might apply, i.e. 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 84-14 (Class Exemption for Plan Asset
Transactions Determined by Independent Qualified Professional Asset Managers),
PTCE 95-60 (Class Exemption for Certain Transactions Involving Insurance Company
General Accounts) or PTCE 96-23 (Class Exemption for Plan Asset Transactions
Performed by In-house Asset Managers) (collectively, the "Investor Based
Exemptions"). There can be no assurance that any of these Investor Based
Exemptions will apply with respect to any particular Plan investor or, even if
it were to apply, that such 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 and who is considering the use
of "plan assets" of any Plan to purchase of 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, the Underwriter's PTE 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.
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<PAGE>
ERISA CONSIDERATIONS RELATING TO THE NOTES
Under the Plan Assets Regulation, the assets of the Trust would be treated
as plan assets of a Plan for the purposes of ERISA and the Code only if the Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined
under the Plan Assets Regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Assuming that a Class of Notes is treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation, then such Class of Notes will be eligible for purchase by Plans.
However, without regard to whether a Class of Notes is treated as an "equity
interest for such purposes, the acquisition or holding of Notes by or on behalf
of a Plan could be considered to give rise to a prohibited transaction if the
Trust or any of its affiliates is or becomes a party in interest or disqualified
person with respect to such Plan, or in the event that a Note is purchased in
the secondary market and such purchase constitutes a sale or exchange between a
Plan and a party in interest or disqualified person with respect to such Plan.
There can be no assurance that the Trust or any of its affiliates will not be or
become a party in interest or a disqualified person with respect to a Plan that
acquires Notes. However, one or more of the Investor Based Exemptions described
above may apply to any potential prohibited transactions arising as a
consequence of the acquisition, holding and transfer of the Notes.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
SECURITIES 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 SECURITIES.
LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Securities will
specify whether a Class or Subclass of such Securities, 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
Securities qualifying as "mortgage related securities" only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal 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
Securities), except under limited circumstances.
-126-
<PAGE>
All depository institutions considering an investment in the Securities
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 Certificates" (including securities such as certain Series,
Classes or Subclasses of the Securities), 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 Securities,
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 Securities 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 Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Securities for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Securities) may adversely affect the liquidity of the Securities.
Investors should consult their own legal advisers in determining whether
and to what extent such Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Each Series of Securities offered hereby and by means of the related
Prospectus Supplements may be sold directly by the Depositor or may be offered
through Credit Suisse First Boston Corporation, an affiliate of the Depositor,
or underwriting syndicates represented by Credit Suisse First Boston Corporation
(the "Underwriters"). The Prospectus Supplement with respect to each such
Series of Securities will set forth the terms of the offering of such Series or
Class of Securities and each Subclass within such Series, including the name or
names of the Underwriters, the proceeds to the 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 Securities will be
determined.
Unless otherwise specified in the Prospectus Supplement, the Underwriters
will be obligated to purchase all of the Securities of a Series described in the
Prospectus Supplement with respect to such Series if any such Securities are
purchased. The Securities 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
the Underwriters or other persons acting as the Depositor's agents to solicit
offers by certain institutions to purchase the Securities 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
-127-
<PAGE>
purchase of the offered Securities 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 Securities offered hereby and by means of
the related 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 Securities 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 Securities
for whom they may act as agents.
The place and time of delivery for each Series of Securities offered hereby
and by means of the related 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 attached Prospectus Supplement will also be used by the
Underwriters after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Securities in which
the Underwriters act as principal. Sales will be made at negotiated prices
determined at the time of sales.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby will
be passed upon for the Depositor and for the Underwriters by Stroock & Stroock &
Lavan LLP, New York, New York, or such other counsel specified in the related
Prospectus Supplement.
-128-
<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION> Page
<S> <C>
Accrual Distribution Amount.......................................... 38
Advances............................................................. 16
AFR.................................................................. 96
Agreement............................................................ 24
Alternative Credit Support........................................... 12
Approved Sale........................................................ 73
APR.................................................................. 29
ARM Loans............................................................ 21
Asset Value.......................................................... 36
Assets............................................................... 87
Buy-Down Fund........................................................ 15
Buy-Down Loans....................................................... 22
Cede................................................................. 20
Certificate Account.................................................. 45
Certificate Principal Balance........................................ 4
Certificateholders................................................... 24
Securities........................................................... 1
Class................................................................ 1
Cleanup Costs........................................................ 82
Closed-End Loans..................................................... 5
Closed Loans......................................................... 25
Closing Date......................................................... 89
Code................................................................. 17
Collection Account................................................... 45
Contract Loan-to-Value Ratio......................................... 9
Contract Pool........................................................ 1
Contract Schedule.................................................... 41
Contracts............................................................ 1
Converted Mortgage Loan.............................................. 22
Cooperative.......................................................... 5
Cooperative Dwelling................................................. 6
Cooperative Loans.................................................... 5
Credit Suisse First Boston Corporation's PTE......................... 124
Custodial Account.................................................... 45
Custodial Agreement.................................................. 29
Custodian............................................................ 29
Cut-off Date......................................................... 20
Deferred Interest.................................................... 22
Definitive Securities................................................ 20
Deficiency Event..................................................... 59
Deleted Contract..................................................... 30
Deleted Mortgage Certificates........................................ 39
Deleted Mortgage Loans............................................... 40
Depositor............................................................ 1
Determination Date................................................... 48
Discount Security.................................................... 10
Distribution Date.................................................... 7
DOL.................................................................. 123
DTC -- Depository Trust Company...................................... 20
Due Date............................................................. 21
</TABLE>
-129-
<PAGE>
<TABLE>
<S> <C>
Due Period............................................................ 38
Eligible Investment................................................... 43
Escrow Account........................................................ 52
ERISA................................................................. 122
ERISA Plans........................................................... 122
Exempt Series......................................................... 123
FHA................................................................... 1
FHA Experience........................................................ 31
FHA Loans............................................................. 21
First Boston.......................................................... 124
Garn-St Germain Act................................................... 81
GPM Fund.............................................................. 15
GPM Loans............................................................. 22
Home Equity Loans..................................................... 5
Indenture............................................................. 34
Indenture Trustee..................................................... 35
Initial Deposit....................................................... 14
Insurance Proceeds.................................................... 46
Insured............................................................... 54
Insured Series........................................................ 124
Interest Coupon....................................................... 110
Interest Distribution................................................. 37
Interest Rate......................................................... 4
Interest Weighted Class............................................... 5
Interest Weighted Subclass............................................ 5
IRS................................................................... 89
L/C Bank.............................................................. 12
L/C Percentage........................................................ 12
Letter of Credit...................................................... 11
Liquidating Loan...................................................... 12
Liquidation Proceeds.................................................. 46
Loan-to-Value Ratio................................................... 21
Loss.................................................................. 69
Manufactured Home..................................................... 9
Master Servicer....................................................... 1
Mortgage Certificates................................................. 1
Mortgage Loans........................................................ 6
Mortgage Notes........................................................ 21
Mortgage Pool......................................................... 86
Mortgage Rates........................................................ 8
Mortgaged Property.................................................... 8
Mortgagor............................................................. 8
Mortgagor Bankruptcy Bond............................................. 11
Multi-Class Securities................................................ 4
Multifamily Property.................................................. 6
Multiple Variable Rate................................................ 91
1988 Act.............................................................. 98
1986 Act.............................................................. 93
1996 Contingent Debt Regulations...................................... 92
1996 Proposed Regulations............................................. 103
Nonexempt Assets...................................................... 123
Nonexempt Series...................................................... 123
non-U.S. Person....................................................... 101
Notes................................................................. 1
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Noteholders........................................................... 24
Obligor............................................................... 33
OID Regulations....................................................... 86
Original Value........................................................ 8
Originator............................................................ 25
Other Pools........................................................... 124
Parties in Interest................................................... 122
Percentage Interest................................................... 1
Performance Bond...................................................... 30
Plan Assets Regulation................................................ 123
Plans................................................................. 122
Policy Statement...................................................... 129
Pool Insurance Policy................................................. 11
Pool Insurer.......................................................... 13
Pooling and Servicing Agreement....................................... 34
Pre-Funded Amount..................................................... 43
Pre-Funding Account................................................... 43
Pre-Funding Period.................................................... 126
Premium Security...................................................... 9
Prepayment Assumption................................................. 89
Primary Insurer....................................................... 47
Primary Mortgage Insurance Policy..................................... 13
Primary Mortgage Insurer.............................................. 54
Principal Distribution................................................ 37
Principal Prepayments................................................. 14
Principal Weighted Class.............................................. 5
Principal Weighted Subclass........................................... 5
Proposed Premium Regulations.......................................... 94
PTCE 83-1............................................................. 123
Purchase Price........................................................ 42
Rating Agency......................................................... 1
Record Date........................................................... 37
Reference Agreement................................................... 34
REIT.................................................................. 87
REMIC................................................................. 2
REMIC Certificateholders.............................................. 87
REMIC Certificates.................................................... 86
REMIC Mortgage Pool................................................... 86
REMIC Provisions...................................................... 86
REMIC Regulations..................................................... 86
REMIC Regular Certificate............................................. 86
REMIC Residual Certificate............................................ 86
Required Reserve...................................................... 15
Reserve Fund.......................................................... 11
Residual Certificates................................................. 4
Residual Owner........................................................ 94
Restricted Group...................................................... 126
Retained Yield........................................................ 105
Revolving Credit Line Loans........................................... 5
Sale and Servicing Agreement.......................................... 1
Securities............................................................ 4
Securities Act........................................................ 36
Security Guarantee Insurance.......................................... 16
Securityholder........................................................ 20
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Senior Securities..................................................... 11
Senior Class.......................................................... 4
Senior Prepayment Percentage.......................................... 86
Senior Subclass....................................................... 4
Series................................................................ 1
Servicemen's Readjustment Act......................................... 23
Servicer.............................................................. 24
Servicing Account..................................................... 45
Servicing Agreement................................................... 24
Single-Class REMIC.................................................... 100
Single Family Property................................................ 6
Single Variable Rate.................................................. 89
SMMEA................................................................. 128
SBJPA -- of 1996...................................................... 96
SPA................................................................... 32
Special Distributions................................................. 7
Special Hazard Insurance Policy....................................... 16
Standard Hazard Insurance Policy...................................... 52
Standard Terms........................................................ 34
Stated Principal Balance.............................................. 4
Stated Principal Distribution Amount.................................. 38
Stripped Bond Rules................................................... 106
Stripped Interest..................................................... 110
Stripped Mortgage Loan................................................ 105
Subclass.............................................................. 1
Subordinated Amount................................................... 11
Subordinated Securities............................................... 11
Subordinated Class.................................................... 4
Subordinated Pool..................................................... 14
Subordinated Subclass................................................. 4
Substitute Contract................................................... 30
Substitute Mortgage Certificates...................................... 39
Substitute Mortgage Loans............................................. 40
Thrift Institutions................................................... 96
Tiered REMICS......................................................... 88
Title V............................................................... 85
Trust................................................................. 1
Trust Assets.......................................................... 6
Trust Agreement....................................................... 1
Trust Certificates.................................................... 86
Trustee............................................................... 1
Trust Fractional Certificateholder.................................... 105
Trust Fractional Certificate.......................................... 86
Trust Fund............................................................ 115
Trust Interest Certificate............................................ 86
Trust Interest Certificateholder...................................... 110
Unaffiliated Sellers.................................................. 25
Underwriters.......................................................... 129
UCC................................................................... 79
Unstripped Mortgage Loans............................................. 107
U. S. Person.......................................................... 102
VA.................................................................... 1
VA Loans.............................................................. 21
0522857
</TABLE>
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<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
SELLER, THE DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS 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 IN THE AFFAIRS OF THE SELLER OR THE DEPOSITOR
SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Summary of Terms.......................................................... S-5
Risk Factors.............................................................. S-25
The Seller and Servicer................................................... S-30
Use of Proceeds........................................................... S-36
The Depositor............................................................. S-36
The Mortgage Loans........................................................ S-37
Prepayment and Yield Considerations....................................... S-45
Formation of the Trust Fund............................................... S-53
Additional Information.................................................... S-53
Description of the Offered Certificates................................... S-54
Credit Enhancement........................................................ S-60
Description of the Sale and Purchase Agreement and the Pooling and Servic-
ing Agreement............................................................ S-64
The Trustee............................................................... S-74
Certain Legal Aspects of the Mortgage Loans............................... S-75
Certain Federal Income Tax Consequences................................... S-79
ERISA Considerations...................................................... S-80
Ratings................................................................... S-81
Legal Investment Considerations........................................... S-81
Underwriting.............................................................. S-82
Certain Legal Matters..................................................... S-83
Global Clearance, Settlement and Tax Documentation Procedures............. I-1
Index to Location of Principal Defined Terms.............................. A-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Prospectus Supplement....................................................... 3
Additional Information...................................................... 3
Incorporation of Certain Information by Reference........................... 3
Summary of Terms............................................................ 4
Risk Factors................................................................ 18
The Trust Fund.............................................................. 20
The Depositor............................................................... 30
Use of Proceeds............................................................. 31
Maturity, Prepayment and Yield Considerations............................... 31
Description of the Securities............................................... 34
Credit Support.............................................................. 63
Description of the Insurance................................................ 68
Certain Legal Aspects of the Mortgage Loans and Contracts................... 75
Certain Federal Income Tax Consequences..................................... 85
ERISA Considerations........................................................ 120
Legal Investment............................................................ 126
Plan of Distribution........................................................ 127
Legal Matters............................................................... 128
Index to Terms.............................................................. 129
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$400,000,000
WMC Mortgage Loan
Pass-Through Certificates
Series 1997-2
WMC MORTGAGE CORP.
Seller and Servicer
CREDIT SUISSE FIRST BOSTON
MORTGAGE SECURITIES CORP.
Depositor
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES, INC.
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