<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 333-33807
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 25, 1997
$560,162,291
(approximate)
[LOGO] CHEVY CHASE BANK
Seller and Servicer
Chevy Chase Bank, F.S.B.
Mortgage-Backed Pass-Through Certificates, Series 1998-CCB1
$355,425,133 Class A-I Adjustable Rate Certificates
$204,737,158 Class A-II Adjustable Rate Certificates
Credit Suisse First Boston Mortgage Securities Corp.
Depositor
-----------
The Chevy Chase Bank, F.S.B. Mortgage-Backed Pass-Through Certificates, Series
1998-CCB1 (the "CERTIFICATES") will consist of the Class A-I Certificates and
Class A-II Certificates (collectively, the Class A "CLASS A CERTIFICATES"),
the Class S Certificates and the Class R Certificates. Only the Class A
Certificates are offered hereby. It is a condition to their issuance that
the Class A Certificates be rated "AAA" by Standard & Poor's Ratings
Services ("S&P") and "Aaa" by Moody's Investors Service ("MOODY'S"). The
Certificates will evidence in the aggregate the entire beneficial
ownership interest in a trust fund (the "TRUST FUND"), to be created by
Credit Suisse First Boston Mortgage Securities Corp. (the
"DEPOSITOR"), consisting primarily of a pool (the "MORTGAGE POOL") of
conventional, fully-amortizing, adjustable-rate mortgage loans (some
of which may have conversion options, as more fully described
herein) (the "MORTGAGE LOANS") secured by first liens on one- to
four-family, residential real properties and certain other
collateral and other property held in trust for the benefit of
the holders of the Certificates (the "CERTIFICATEHOLDERS"). The
Mortgage Pool consists of two groups of Mortgage Loans ("LOAN
GROUP I" and "LOAN GROUP II"; each, a "LOAN GROUP"), designated
as the "GROUP I LOANS" and "GROUP II LOANS". The Class A-I
Certificates will correspond to the Group I Loans and the
Class A-II Certificates will correspond to the Group II
Loans. The Mortgage Loans were originated by or acquired by
Chevy Chase Bank, F.S.B. ("CHEVY CHASE") or its wholly
owned subsidiary B.F. Saul Mortgage Company, and will be
sold to the Depositor by Chevy Chase (in such capacity,
the "SELLER"). The Mortgage Loans are more fully
described under "Description of the Mortgage Loans"
herein.
On or before the date of issuance of the Certificates, the Depositor will
obtain from MBIA Insurance Corporation (the "INSURER") a certificate
guaranty insurance policy (the "POLICY"), which will, subject
to its terms, protect the holders of the Class A
Certificates against (i) certain shortfalls in the
amount available to pay the Class A-I Interest
Distribution Amount or the Class A-II
Interest Distribution Amount, and
(ii) any Collateralization Deficit
(as defined herein). See
"Description of the Certificates--
Certificate Guaranty Insurance
Policy" herein.
[LOGO] MBIA (continued on next page.)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" HEREIN ON PAGE S-16 AND IN THE PROSPECTUS ON PAGE 18.
THE CERTIFICATES WILL NOT EVIDENCE A SAVINGS ACCOUNT OR DEPOSIT WITH, OR
OTHER OBLIGATION OF, OR INTEREST IN, AND ARE NOT GUARANTEED BY, CREDIT
SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP., CHEVY CHASE BANK,
F.S.B., THE TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The Class A Certificates will be offered by Credit Suisse First Boston
Corporation (the "UNDERWRITER") from time to time in negotiated transactions,
or otherwise, at prices to be determined at the time of sale. The Class A
Certificates are being offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
conditions. For further information with respect to the plan of distribution
and any discounts, commissions and profits on resale that may be deemed
underwriting discounts or commissions, see "Plan of Distribution" herein. It
is expected that the delivery of the Class A Certificates will be made in
book-entry form through the facilities of The Depository Trust Company on or
about March 27, 1998.
CREDIT SUISSE FIRST BOSTON
Prospectus Supplement dated March 27, 1998
<PAGE>
(continued from previous page)
Interest and principal, in the amounts set forth herein, will be distributed
to Certificateholders on the twenty-fifth day of each month (or, if such day
is not a business day, on the following business day), commencing in April,
1998 (each, a "DISTRIBUTION DATE"). On each Distribution Date, payments on the
Class S Certificates will be subordinate to the payment of principal and
interest, in the manner described herein, on the Class A Certificates.
THE YIELD TO INVESTORS IN THE CLASS A CERTIFICATES WILL DEPEND, AMONG OTHER
THINGS, ON THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS IN THE APPLICABLE LOAN GROUP.
SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN.
There is currently no secondary market for the Class A Certificates. Credit
Suisse First Boston Corporation may make a secondary market in the Class A
Certificates, but has no obligation to do so. There can be no assurance that
any secondary market for the Class A Certificates will develop, or if it does
develop, that it will continue.
An election will be made to treat certain assets in the Trust Fund as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. The Class A Certificates and the Class S Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute the sole class of "residual interests" in the REMIC. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
The Class A Certificates will be available to investors only in book-entry
form through the facilities of The Depository Trust Company ("DTC").
Beneficial interests in the Class A Certificates will be shown on, and
transfers thereof will be effected only through, records maintained by DTC and
its participants. Physical certificates for the Class A Certificates will be
available only under certain limited circumstances described herein. See
"Description of Certificates--Book-Entry Registration" herein.
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR FROM
TIME TO TIME PURSUANT TO ITS PROSPECTUS DATED SEPTEMBER 25, 1997, WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT AND OF WHICH THIS PROSPECTUS SUPPLEMENT
FORMS A PART. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS
A CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
----------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
S-2
<PAGE>
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement (the "REGISTRATION STATEMENT") under
the Securities Act of 1933, as amended, with respect to the Class A
Certificates. This Prospectus Supplement and the related Prospectus, which
form a part of the Registration Statement, omit certain information contained
in such Registration Statement pursuant to the Rules and Regulations of the
Commission. The Registration Statement can be inspected and copied at the
Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
D.C. and the Commission's regional offices at 7 World Trade Center, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's web site (http:\\www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued (which will occur under
the limited circumstances described herein), unaudited monthly and unaudited
annual reports concerning the Trust will be sent by the Trustee to Cede & Co.,
as the nominee of DTC and registered holder of the Class A Certificates. So
long as the Class A Certificates are in book-entry form, DTC will supply such
reports to Beneficial Owners (as defined herein) in accordance with its normal
procedures. Such reports will not contain financial information that has been
examined and reported upon by an independent or certified public accountant.
See "Description of the Certificates--Reports to Certificateholders" in the
Prospectus.
This Prospectus Supplement contains a number of defined terms, the meanings
of which are necessary for potential investors to understand in order for them
to evaluate an investment in the Class A Certificates. See the "Index of
Principal Definitions" in this Prospectus Supplement for the locations of the
definitions of certain capitalized terms. See the "Index of Terms" in the
Prospectus for the locations of the definitions of capitalized terms not
otherwise defined in this Prospectus Supplement.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used in this Prospectus
Supplement and not defined herein have the meanings ascribed to them in the
Prospectus.
Description of the The Chevy Chase Bank, F.S.B. Mortgage-Backed
Certificates................ Pass-Through Certificates, Series 1998-CCB1.
The Certificates will be issued pursuant to a
Pooling and Servicing Agreement dated as of
March 1, 1998 (the "POOLING AND SERVICING
AGREEMENT") and will evidence interests in a
trust fund (the "TRUST FUND"), the primary
assets of which will consist of residential
mortgage loans. The Trust Fund will also
include (i) the Reserve Fund, (ii) the
Trust's rights under the Policy and (iii) any
property that secured a Mortgage Loan and is
acquired by foreclosure or deed in lieu of
foreclosure, and certain other related
property, as more fully described herein and
in the Prospectus.
Certificates Offered........ $355,425,133 (approximate) Certificate
Principal Balance (as defined herein) of
Class A-I Certificates. The Certificate
Principal Balance of the Class A-I
Certificates will initially equal the
aggregate Principal Balance (as defined
herein) of the Group I Loans as of the Cut-
off Date. The Class A-I Certificates are
"Senior Certificates" as described in the
Prospectus.
$204,737,158 (approximate) Certificate
Principal Balance (as defined herein) of
Class A-II Certificates. The Certificate
Principal Balance of the Class A-II
Certificates will initially equal the
aggregate Principal Balance (as defined
herein) of the Group II Loans as of the Cut-
off Date. The Class A-II Certificates are
"Senior Certificates" as described in the
Prospectus.
Other Classes of In addition to the Class A Certificates, the
Certificates................ Certificates will include the Class S
Certificates and the Class R Certificates,
which are not offered hereby. The Class S
Certificates will have no principal balance
and will be entitled, subject to the priority
of payments and to the Reserve Fund
provisions described herein, to receive each
month interest at a rate equal to one-twelfth
of 0.80% of the aggregate Principal Balance
of the Mortgage Loans as of the Due Date
immediately preceding the related Due Period.
The Class S Certificates are "Subordinated
Certificates" as described in the Prospectus.
The Class R Certificates will have no
principal balance.
Depositor................... Credit Suisse First Boston Mortgage
Securities Corp., a Delaware corporation.
Seller and Servicer......... Chevy Chase Bank, F.S.B. See "Chevy Chase
Bank, F.S.B." herein.
Trustee..................... U.S. Bank National Association, a national
banking association.
S-4
<PAGE>
Insurer..................... MBIA Insurance Corporation. See "The Insurer"
herein.
Cut-off Date................ March 1, 1998.
Delivery Date............... On or about March 27, 1998.
Available Distribution The "AVAILABLE DISTRIBUTION AMOUNT" with
Amount...................... respect to the Mortgage Loans in a Loan Group
for any Distribution Date will equal (a) the
sum of (i) scheduled payments of principal
and interest (net of the Servicing Fee and
the Trustee Fee) due on the Mortgage Loans in
the applicable Loan Group on the related Due
Date (as defined herein) and received on or
prior to the related Determination Date (as
defined herein), (ii) principal prepayments
and other unscheduled collections of
principal received during the related
Prepayment Period (as defined herein) on the
Mortgage Loans in the applicable Loan Group,
(iii) any Advances (as defined herein) with
respect to the Mortgage Loans in the
applicable Loan Group made by the Servicer
for such Distribution Date, (iv) amounts
transferred from the Reserve Fund equal to
certain shortfalls in the amount available to
pay the Class A-I Interest Distribution
Amount or the Class A-II Interest
Distribution Amount together with any
Collateralization Deficit (as defined herein)
which remain outstanding after the
application of amounts otherwise payable to
the Class S Certificates and (v) any Insured
Payments (as defined herein) payable pursuant
to the Policy and related to the Mortgage
Loans in the applicable Loan Group, less (b)
the Insurer Premium Amount (as defined
herein) and amounts representing
reimbursements for previously unreimbursed
Insured Payments by the Insurer,
Nonrecoverable Advances by the Servicer and
certain expenses incurred by the Servicer.
All amounts listed in clauses (a) and (b) of
the preceding sentence shall be as related to
the applicable Loan Group; however, because
amounts on deposit in the Reserve Fund and
amounts otherwise payable to the Class S
Certificates are available as credit
enhancement for either the Class A-I
Certificates or the Class A-II Certificates,
as necessary, it is possible that interest
from one Loan Group otherwise payable to the
Class S Certificates or deposited in the
Reserve Fund will be applied towards payments
of interest and principal with respect to the
class of Class A Certificates that relates to
the other Loan Group.
The "DUE DATE" for each Mortgage Loan is the
first day of each month. The "DUE PERIOD"
with respect to any Distribution Date
commences on the second day of the month
preceding the month in which such
Distribution Date occurs and ends on the Due
Date in the month in which such Distribution
Date occurs. The "PREPAYMENT PERIOD" with
respect to any Distribution Date is the
calendar month preceding the month in which
such Distribution Date occurs. The
"DETERMINATION DATE" with respect to any
S-5
<PAGE>
Distribution Date is the 15th day of the
month in which such Distribution Date occurs
(or, if such day is not a business day, the
preceding business day).
Interest Distributions...... Interest on the Certificates will be
calculated and payable on the basis of a 360-
day year divided into twelve 30-day months.
Interest will be passed through to
Certificateholders on the twenty-fifth day of
each month (or, if such day is not a business
day, on the following business day),
commencing in April, 1998 (each, a
"DISTRIBUTION DATE").
On each Distribution Date, holders of the
Class A-I Certificates will be entitled to
receive, to the extent of the corresponding
Available Distribution Amount, distributions
allocable to one month's interest in an
amount (the "CLASS A-I INTEREST DISTRIBUTION
AMOUNT") equal to (i) one-twelfth of the
product of the Certificate Principal Balance
of the Class A-I Certificates immediately
preceding such Distribution Date multiplied
by a rate (the "GROUP I CERTIFICATE RATE")
equal to the weighted average of the Net
Mortgage Rates (as defined herein) of the
Group I Loans, weighted by the aggregate
Principal Balance of the Group I Loans as of
the Due Date immediately preceding the
related Due Period, minus (ii) the sum of (a)
the related Insurer Premium Amount, (b)
Prepayment Interest Shortfalls, if any,
relating to Loan Group I and (c) Civil Relief
Act Shortfalls, if any, relating to Loan
Group I during the related Due Period.
Neither the Servicer, nor the Insurer nor any
other entity will be required to pay any
compensating interest with respect to such
Prepayment Interest Shortfalls or Civil
Relief Act Shortfalls.
On each Distribution Date, holders of the
Class A-II Certificates will be entitled to
receive, to the extent of the corresponding
Available Distribution Amount, distributions
allocable to one month's interest in an
amount (the "CLASS A-II INTEREST DISTRIBUTION
AMOUNT") equal to (i) one-twelfth of the
product of the Certificate Principal Balance
of the Class A-II Certificates immediately
preceding such Distribution Date multiplied
by a rate (the "GROUP II CERTIFICATE RATE")
equal to the weighted average of the Net
Mortgage Rates (as defined herein) of the
Group II Loans, weighted by the aggregate
Principal Balance of the Group II Loans as of
the Due Date immediately preceding the
related Due Period, minus (ii) the sum of (a)
the related Insurer Premium Amount, (b)
Prepayment Interest Shortfalls, if any,
relating to Loan Group II and (c) Civil
Relief Act Shortfalls, if any, relating to
Loan Group II during the related Due Period.
Neither the Servicer, nor the Insurer nor any
other entity will be required to pay any
compensating interest with respect to such
Prepayment Interest Shortfalls or Civil
Relief Act Shortfalls.
To the extent that any portion of the
interest due on any class of the Class A
Certificates is not paid on a Distribution
Date, such interest
S-6
<PAGE>
will be payable on future Distribution Dates
to the extent of available funds, but no
additional interest will be paid on such
unpaid interest.
See "Description of the Certificates--
Distributions in Respect of Interest and
Principal" herein.
Principal Distributions..... Holders of the Class A-I Certificates will be
entitled to receive a distribution of
principal on each Distribution Date, in the
amount and priority set forth herein, to the
extent of the portion of the related
Available Distribution Amount remaining after
the Class A-I Interest Distribution Amount
has been distributed to the Class A-I
Certificates.
Holders of the Class A-II Certificates will
be entitled to receive a distribution of
principal on each Distribution Date, in the
amount and priority set forth herein, to the
extent of the portion of the related
Available Distribution Amount remaining after
the Class A-II Interest Distribution Amount
has been distributed to the Class A-II
Certificates.
See "Description of Certificates--
Distributions in Respect of Interest and
Principal" herein.
Certificate Guaranty The Insurer will issue the Policy as a means
Insurance Policy............ of providing additional credit enhancement
for each class of the Class A Certificates.
Under the Policy, the Insurer will, subject
to the terms of the Policy, pay to the
Trustee, for the benefit of the holders of
each class of the Class A Certificates, on
each Distribution Date, as further described
herein, an amount that will equal the sum of
(i) any shortfall in the related Available
Distribution Amount to pay the Class A-I
Interest Distribution Amount or the Class A-
II Interest Distribution Amount, as
applicable, and (ii) the related
Collateralization Deficit. The Policy does
not guarantee the Class A Certificates any
specified rate of prepayments or the payment
of the amount of any Realized Loss with
respect to a Mortgage Loan on the
Distribution Date which immediately follows
such Realized Loss unless and only to the
extent such loss results in a
Collateralization Deficit and there is a
shortfall in the Available Distribution
Amount to pay such Collateralization Deficit.
A "COLLATERALIZATION DEFICIT" with respect to
a Distribution Date and a Loan Group is the
amount, if any, by which (x) the Certificate
Principal Balance of the related class of
Class A Certificates, after giving effect to
all distributions to be made on such
Distribution Date, exceeds (y) the aggregate
Principal Balance of the Mortgage Loans in
such Loan Group as of the close of business
on the related Due Date. A payment by the
Insurer under the Policy is referred to
herein as an "INSURED PAYMENT". See
"Description of the Certificates--Certificate
Guaranty Insurance Policy" and "The Insurer"
herein.
S-7
<PAGE>
The Mortgage Loans.......... The Mortgage Loans are conventional, fully-
amortizing, adjustable-rate Mortgage Loans
secured by first liens on one- to four-
family, residential real properties.
All percentages of the Group I Loans, Group
II Loans or Mortgage Loans described herein
are approximate percentages (except as
otherwise indicated) of the aggregate
Principal Balance of the Group I Loans, Group
II Loans or Mortgage Loans (except as
otherwise indicated), as applicable, as of
the Cut-off Date.
The Group I Loans consist of 1,687
adjustable-rate Mortgage Loans with an
aggregate Principal Balance as of the Cut-off
Date of approximately $355,425,134. The Group
I Loans have individual Principal Balances as
of the Cut-off Date of at least $17,911 but
not more than $999,096, with an average
Principal Balance as of the Cut-off Date of
approximately $210,685, and original terms to
stated maturity of not more than 30 years
(except for 19 Group I Loans with original
terms to stated maturity of not more than 40
years), and a weighted average remaining term
to stated maturity of approximately 353
months as of the Cut-off Date. As of the Cut-
off Date, the Group I Loans bore interest at
Mortgage Rates of at least 4.50% per annum
but no more than 11.38% per annum, with a
weighted average Mortgage Rate of
approximately 6.83% per annum. 0.16% of the
Group I Loans are CD Pledge Loans (as defined
herein), in connection with each of which
funds were deposited into a certificate of
deposit account at Chevy Chase which was
pledged as additional security for the
Mortgage Loan in lieu of the cash downpayment
which would otherwise have been required. The
amounts so pledged, as percentages of the
original principal balances of the Group I
Loans, ranged from 5.00% to 10.01%. The
original Loan-to-Value Ratio of each of the
Group I Loans was not more than 96.6%, with a
weighted average original Loan-to-Value Ratio
of approximately 76.9%. "LOAN-TO-VALUE
RATIO", as used in this Prospectus
Supplement, is calculated as the original
Mortgage Loan amount (less, in the case of a
CD Pledge Loan, the amount of cash held in
the related CD Account), divided by the
lesser of (i) the appraised value of the
related Mortgaged Property at origination and
(ii) if the Mortgage Loan is a purchase money
loan, the sales price of the related
Mortgaged Property. The Group I Loans will
have different Adjustment Dates, Note Margins
and limitations on the Mortgage Rate
adjustments, as described herein.
The Group II Loans consist of 1,054
adjustable-rate Mortgage Loans with an
aggregate Principal Balance as of the Cut-off
Date of approximately $204,737,159. The Group
II Loans have individual Principal Balances
as of the Cut-off Date of at least $20,299
but not more than $1,518,198, with an average
Principal Balance as of the Cut-off Date of
approximately $194,248, and original terms to
stated maturity of not more than 30 years
(except for 8 Group II Loans
S-8
<PAGE>
with original terms to stated maturity of not
more than 40 years), and a weighted average
remaining term to stated maturity of
approximately 346 months as of the Cut-off
Date. As of the Cut-off Date, the Group II
Loans bore interest at Mortgage Rates of at
least 5.50% per annum but no more than 10.25%
per annum, with a weighted average Mortgage
Rate of approximately 7.26% per annum. 1.96%
of the Group II Loans are CD Pledge Loans, in
connection with each of which funds were
deposited into a certificate of deposit
account at Chevy Chase which was pledged as
additional security for the Mortgage Loan in
lieu of the cash downpayment which would
otherwise have been required. The amounts so
pledged, as percentages of the original
principal balances of the Group II Loans,
ranged from 2.50% to 10.00%. The original
Loan-to-Value Ratio of each of the Group II
Loans was not more than 95.3%, with a
weighted average original Loan-to-Value Ratio
of approximately 79.0%. The Group II Loans
will have different Adjustment Dates, Note
Margins and limitations on the Mortgage Rate
adjustments, as described herein.
The Mortgage Rate on 100% of the Group I
Loans and 96.04% of the Group II Loans will
adjust annually, commencing in some cases
after an initial period of years following
origination during which the interest rate
accruing thereon is fixed, on the Adjustment
Date specified in the related Mortgage Note
to a rate equal to the sum of the weekly
average yield on U.S. Treasury securities
adjusted to a constant maturity of one year
(the "ONE-YEAR INDEX"), as further described
herein, and the fixed percentage set forth in
the related Mortgage Note (the "NOTE
MARGIN"), subject to the limitations
described herein. The Mortgage Rate on 3.38%
of the Group II Loans will adjust every three
years, commencing after an initial period of
three years following origination during
which the interest rate accruing thereon is
fixed, on the Adjustment Date specified in
the related Mortgage Note to a rate equal to
the sum of the weekly average yield on U.S.
Treasury securities adjusted to a constant
maturity of three years (the "THREE-YEAR
INDEX"), as further described herein, and the
Note Margin, subject to the limitations
described herein. The Mortgage Rate on 0.58%
of the Group II Loans will adjust every five
years, commencing after an initial period of
five years following origination during which
the interest rate accruing thereon is fixed,
on the Adjustment Date specified in the
related Mortgage Note to a rate equal to the
sum of the weekly average yield on U.S.
Treasury securities adjusted to a constant
maturity of five years (the "FIVE-YEAR
INDEX"), as further described herein, and the
Note Margin, subject to the limitations
described herein. Each of the One-Year Index,
Three-Year Index and Five-Year Index is
referred to as an "INDEX."
The Mortgage Rate on 92.97% of the Group I
Loans (the "THREE/ONE GROUP I LOANS") will be
fixed for a period of three years after the
origination thereof, and thereafter will
adjust annually in accordance with the One-
Year Index. The Mortgage Rate on the
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<PAGE>
remaining 7.03% of the Group I Loans (the
"ONE/ONE GROUP I LOANS") will adjust annually
in accordance with the One-Year Index, but at
origination such Mortgage Loans bore an
initial annual interest rate which was lower
than the applicable rate based on the One-
Year Index and Note Margin; because of
Periodic Rate Caps (as defined herein), some
of these Mortgage Loans continue to bear
interest at rates which are lower than the
applicable rate based on the One-Year Index
and Note Margin.
The Mortgage Rate on 77.05% of the Group II
Loans (the "FIVE/ONE GROUP II LOANS") will be
fixed for a period of five years after the
origination thereof, and thereafter will
adjust annually in accordance with the One-
Year Index. The Mortgage Rate on 18.99% of
the Group II Loans (the "SEVEN/ONE GROUP II
LOANS") will be fixed for a period of seven
years after the origination thereof, and
thereafter will adjust annually in accordance
with the One-Year Index. The Mortgage Rate on
3.38% of the Group II Loans (the "THREE/THREE
GROUP II LOANS") will be fixed for a period
of three years after the origination thereof,
and thereafter will adjust every three years
in accordance with the Three-Year Index. The
Mortgage Rate on 0.58% of the Group II Loans
(the "FIVE/FIVE GROUP II LOANS") will be
fixed for a period of five years after the
origination thereof, and thereafter will
adjust every five years in accordance with
the Five-Year Index.
The Mortgage Rate effective on any Adjustment
Date shall not exceed the maximum rate set
forth in the related Mortgage Note and the
amount of any increase or decrease on any
Adjustment Date shall not exceed the Periodic
Rate Cap set forth in the related Mortgage
Note, so the Mortgage Rate on any Adjustment
Date may not equal the applicable rate based
on the related Index and Note Margin. The
monthly payment on each Mortgage Loan will be
adjusted on the Due Date in the month
following the month in which any Adjustment
Date occurs to the amount necessary to pay
interest at the then applicable Mortgage Rate
and to fully amortize the outstanding
Principal Balance of the Mortgage Loan over
its then remaining term to stated maturity.
None of the Mortgage Loans will be guaranteed
by any governmental agency or
instrumentality, the Depositor, Chevy Chase,
or any of their respective affiliates or any
other person. For a further description of
the Mortgage Loans, see "Description of the
Mortgage Loans" herein.
Conversion of Mortgage Approximately 99.00% of the Group I Loans and
Loans....................... approximately 5.58% of the Group II Loans
provided at origination that, at the option
of the related Mortgagors, the adjustable
interest rate thereon may be converted to a
fixed interest rate, provided that certain
conditions have been satisfied. The Seller
will have the right to purchase any Mortgage
Loan that has converted if the Seller so
elects, but none of the Servicer, the Seller,
the Depositor, the Trustee
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or any other party will be obligated to
purchase any converting Mortgage Loan.
Therefore, if the Mortgage Rate on any
Mortgage Loan converts to a fixed interest
rate and the Seller does not elect to
purchase such Mortgage Loan the related Loan
Group will then include both fixed-rate and
adjustable-rate Mortgage Loans. See "Certain
Yield and Prepayment Considerations" herein.
Credit Enhancement.......... The credit enhancement provided for the
benefit of the holders of each class of the
Class A Certificates primarily consists of
the subordination provided by the Class S
Certificates, the Reserve Fund and the
Policy, in each case in the manner and to the
extent described herein.
Subordination and the Reserve Fund: On each
Distribution Date, payments on the Class S
Certificates will be subordinate to the
payment of principal and interest, in the
amounts described herein, on the Class A
Certificates. In addition, certain payments
otherwise distributable to the Class S
Certificates will be deposited in a reserve
fund (the "RESERVE FUND") to be held by the
Trustee for the benefit of the Insurer and
the Certificateholders. The Reserve Fund will
initially have a zero balance, and will be
funded from such payments on the Class S
Certificates to the extent of the Required
Reserve (as defined herein). Once the amounts
on deposit in the Reserve Fund equal the
Required Reserve, the retention of amounts
otherwise distributable to the Class S
Certificates will cease, unless necessary to
maintain the Required Reserve.
Pursuant to the Pooling and Servicing
Agreement, the Required Reserve may, subject
to certain triggers and a minimum amount,
decrease from time to time. In addition,
certain triggers or conditions may cause the
Required Reserve to be increased. Funds on
deposit in the Reserve Fund may be withdrawn
to make payments of interest and principal on
the Class A Certificates. Amounts on deposit
in the Reserve Fund will be invested in
certain eligible investments, as set forth in
the Pooling and Servicing Agreement. See
"Description of the Certificates--Reserve
Fund" herein and "Credit Support--Reserve
Fund" in the Prospectus.
The Certificate Guaranty Insurance Policy:
Each class of the Class A Certificates will
be entitled to the benefit of the Policy to
be issued by the Insurer, which, subject to
its terms, will protect the holders of each
class of the Class A Certificates against (i)
any shortfall in the related Available
Distribution Amount to pay the Class A-I
Interest Distribution Amount or the Class A-
II Interest Distribution Amount, and (ii) any
related Collateralization Deficit. See
"Description of the Certificates--Certificate
Guaranty Insurance Policy" herein.
Yield and Maturity The yield to maturity on the Class A
Considerations.............. Certificates will be sensitive to the rate
and timing of principal payments (including
prepayments,
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defaults and liquidations) on the Mortgage
Loans in the applicable Loan Group, and may
fluctuate significantly from time to time.
Since the Mortgage Rates on the Mortgage
Notes will be based on the related Index
(which may not rise and fall consistently
with prevailing mortgage rates) plus the
related Note Margin (which may be different
from the prevailing margins on other mortgage
loans), and may be limited by the Maximum
Mortgage Rate, Minimum Mortgage Rate and
Periodic Rate Caps, the Mortgage Rates on the
Mortgage Loans at any time may not equal the
prevailing rates for other adjustable rate
mortgage loans and the rate of prepayment may
be lower or higher than would otherwise be
anticipated. In addition, to the extent that
the Mortgage Rate on a Mortgage Loan is
converted by the related Mortgagor to a fixed
rate and the Seller does not elect to
purchase such Mortgage Loan, the yield to
investors may be adversely affected to the
extent such Mortgage Rate reduces the
interest rate on the applicable Class A
Certificates from the level that would
otherwise be in effect. In addition, to the
extent that Prepayment Interest Shortfalls or
Civil Relief Act Shortfalls occur, such
shortfalls will adversely affect the yield to
investors in the applicable Class A
Certificates.
In general, if a Class A Certificate is
purchased at a premium and principal
distributions thereon occur at a rate faster
than anticipated at the time of purchase, the
investor's actual yield to maturity will be
lower than that assumed at the time of
purchase. Conversely, if a Class A
Certificate is purchased at a discount and
principal distributions thereon occur at a
rate slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase. See "Certain Yield and
Prepayment Considerations" herein and "Yield
Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The yield on each class of the Class A
Certificates will be less than the yield that
would otherwise be produced by the applicable
Certificate Rate minus the applicable Insurer
Premium Amount and the applicable purchase
price because distributions of interest in
respect of any month will be made on the
twenty-fifth day of the following month or,
if such day is not a Business Day, then the
next succeeding Business Day. See "Yield
Considerations" in the Prospectus.
Servicing Fee............... The Servicer will be entitled to receive each
month a servicing fee (the "SERVICING FEE")
equal to (i) one-twelfth of 0.375% per annum
(the "SERVICING FEE RATE") plus (ii) in the
case of Lender-Paid MI Loans (as defined
herein), one-twelfth of the additional
interest rate thereon attributable to the
payment of primary mortgage insurance premium
by the Servicer, which additional rate ranges
from 0.20% to 0.65%, on the Principal Balance
of each Mortgage Loan as compensation for
servicing the Mortgage Loans.
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Trustee Fee................. The Trustee will be entitled to receive each
month a fee (the "TRUSTEE FEE") equal to one-
twelfth of 0.005% per annum (the "TRUSTEE FEE
RATE") on the Principal Balance of each
Mortgage Loan as compensation for acting as
trustee of the Trust Fund under the Pooling
and Servicing Agreement.
Advances.................... The Servicer will be obligated to advance
delinquent installments of principal and
interest on each Mortgage Loan (net of the
related Servicing Fee) at any time prior to
the commencement of foreclosure proceedings
with respect to such Mortgage Loan, but only
to the extent the Servicer believes that the
amount advanced will be recoverable from
subsequent payments or collections (including
insurance proceeds and liquidation proceeds
net of liquidation expenses) in respect of
the related Mortgage Loan. See "Servicing--
Advances" herein.
Prepayment Interest In the event of a prepayment in full of a
Shortfalls.................. Mortgage Loan on any day other than the last
day of a Prepayment Period, the related
Mortgagor will be required to pay interest on
the amount prepaid only to the date of such
prepayment and not thereafter. In the event
of a prepayment in part of a Mortgage Loan,
any such partial prepayment will be applied
to the Principal Balance of such Mortgage
Loan as of the first day of the month of
receipt, will be passed through to
Certificateholders in the following month,
and will reduce the aggregate amount of
interest distributable on the Certificates in
such following month in an amount equal to 30
days of interest on the amount of such
partial prepayment. Neither the Servicer, nor
the Insurer nor any other entity will be
required to pay any amounts in excess of the
amount of interest paid by the Mortgagor, if
any, in connection with such prepayments. The
amount by which one month's interest exceeds
the amount of interest paid by the Mortgagor
in connection with such prepayment (the
"PREPAYMENT INTEREST SHORTFALL") will not be
covered by the Policy and will be allocated
to the Class A Certificates as described
above under "--Interest Distributions."
Civil Relief Act The Soldiers' and Sailors' Civil Relief Act
Shortfalls.................. of 1940, as amended (the "CIVIL RELIEF ACT")
limits the amount of interest that may be
charged to a Mortgagor who enters military
service after the origination of such
Mortgagor's Mortgage Loan. For each Loan
Group, shortfalls in the collection of
interest due to the application of the Civil
Relief Act (the "CIVIL RELIEF ACT
SHORTFALLS") will not be covered by the
Policy and will be allocated to the related
class of Class A Certificates as described
above under "--Interest Distributions". See
"Certain Legal Aspects of the Mortgage Loans
and Contracts--Soldiers' and Sailors' Relief
Act" in the Prospectus.
Record Date................. The Record Date for each distribution of
principal and interest on the Certificates is
the last business day of the month preceding
the month in which the applicable
Distribution Date occurs.
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Certificate Registration.... Each class of the Class A Certificates will
be represented by one or more certificates
registered in the name of Cede & Co., as
nominee of DTC. No beneficial owner will be
entitled to receive a Class A Certificate in
fully registered, certificated form (a
"DEFINITIVE CERTIFICATE"), except under the
limited circumstances described herein. See
"Description of the Certificates--Book-Entry
Registration" herein.
Optional Termination........ The Trust Fund may be terminated and the
Certificates retired on any Distribution Date
on or after the date on which the aggregate
Principal Balance of the Mortgage Loans has
been reduced to or below 5% of the aggregate
Principal Balance of the Mortgage Loans as of
the Cut-off Date pursuant to procedures
described herein. See "Description of the
Certificates--Optional Termination" herein.
Representations and Chevy Chase will have made certain limited
Warranties.................. representations and warranties as to the
status of the mortgages securing the Mortgage
Loans, the payment status of the Mortgage
Loans and certain other information described
herein. In the event that any such
representation or warranty is breached in
respect of any Mortgage Loan in a manner that
materially and adversely affects the
interests of Certificateholders or the
Insurer and is not thereafter cured, Chevy
Chase will be required to purchase such
Mortgage Loan from the Trust Fund, or, during
certain specified periods after the date of
issuance of the Certificates, at its option
and subject to certain conditions, to
substitute a qualifying mortgage loan or
loans in place of the affected Mortgage Loan.
See "Description of Certificates--Repurchase
or Substitution of Mortgage Loans" herein.
Certain Federal Income Tax
Consequences...............
A REMIC election will be made with respect to
certain assets in the Trust Fund for federal
income tax purposes. Upon the issuance of the
Certificates, Orrick, Herrington & Sutcliffe
LLP, counsel to the Depositor, will deliver
its opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
federal income tax purposes, certain assets
in the Trust Fund will qualify as a REMIC
under Sections 860A through 860G of the Code.
For federal income tax purposes, (i) the
Class A-I, Class A-II and Class S
Certificates will be the "regular interests"
in, and generally will be treated as debt
obligations of, the REMIC, and (ii) the Class
R Certificates will be the sole class of
"residual interests" in the REMIC.
For further information regarding the federal
income tax consequences of investing in the
Class A Certificates, see "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
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<PAGE>
Legal Investment............ Upon issuance, the Class A Certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long
as they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating agency.
Accordingly, the Class A Certificates will be
legal investments for certain entities to the
extent provided in SMMEA. See "Legal
Investment" in the Prospectus.
ERISA Considerations........ Any Plan fiduciary or other investor that
proposes to use Plan Assets to effect the
purchase and holding of the Class A
Certificates should consult with its legal
counsel with respect to the potential
applicability to such investment of the
fiduciary responsibility and prohibited
transaction provisions of ERISA and Section
4975 of the Code. See "ERISA Considerations"
herein and in the Prospectus. The United
States Department of Labor has issued an
individual prohibited transaction exemption
to Credit Suisse First Boston Corporation,
which generally exempts from the application
of certain of the prohibited transaction
provisions of Section 406 of the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes and
civil penalties imposed on such prohibited
transactions by Section 4975(a) and (b) of
the Code and Section 502(i) and (l) of ERISA,
transactions relating to the purchase, sale
and holding of certificates underwritten by
the Underwriter, such as the Class A
Certificates, and the servicing and operation
of asset pools such as the Mortgage Pool,
provided that certain conditions are
satisfied. See "ERISA Considerations" herein
and in the Prospectus.
Ratings..................... It is a condition to their issuance that the
Class A Certificates be rated "AAA" by S&P
and "Aaa" by Moody's. Such ratings are based
upon the claims paying ability of the
Insurer. A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning
rating agency. In addition, a security rating
does not address the frequency of prepayments
of Mortgage Loans, or the corresponding
effect on yield to investors. See "Certain
Yield and Payment Considerations" herein.
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<PAGE>
RISK FACTORS
Prospective investors should consider, in addition to the factors described
in the accompanying Prospectus, the following additional risk factors in
connection with a purchase of the Class A Certificates.
YIELD AND PREPAYMENT RISKS
The weighted average life of each class of the Class A Certificates will be
affected by the rate of principal payments (including prepayments) of the
Mortgage Loans in the related Loan Group. All of the Mortgage Loans may be
prepaid in whole or in part at any time. Certain of the Mortgage Notes contain
terms requiring payment of a penalty by the Mortgagor in the event the related
Mortgage Loan is prepaid in full. The prepayment experience on the Mortgage
Loans may be affected by a wide variety of factors, including general economic
conditions, interest rates, the availability of alternative financing and
homeowner mobility. In addition, a substantial portion of the Mortgage Loans
contain due-on-sale provisions; the Servicer generally will enforce such
provisions unless such enforcement is not permitted by applicable law, the
permissibility of enforcement is in doubt, or such enforcement would
materially and adversely affect the interests of Certificateholders or the
Insurer. See "Certain Legal Aspects of the Mortgage Loans and Contracts--
Enforcement of "Due-on-Sale" Clauses; Realization on Defaulted Contracts" in
the Prospectus. In addition, prepayments may result from liquidations due to
default, the receipt of Insurance Proceeds, repurchases by the Seller as a
result of certain breaches of representations and warranties made by the
Seller in the Pooling and Servicing Agreement or the exercise by the Seller of
its option to repurchase any Convertible Mortgage Loan upon its conversion to
a fixed-rate loan or the Servicer's option to purchase all of the outstanding
Mortgage Loans in the Mortgage Pool pursuant to the optional termination
provision in the Pooling and Servicing Agreement.
As a result of the interaction of the foregoing factors, it may be difficult
to predict the weighted average life of, and the resulting yield to maturity
on, each class of the Class A Certificates. None of the Depositor, the Seller,
the Servicer, the Trustee, the Insurer or the Underwriter makes any
representation as to the weighted average life of, or yield to maturity on,
the Class A Certificates.
INSOLVENCY-RELATED MATTERS
Transfer of Mortgage Loans. The Seller intends that the transfer of all of
the Seller's right, title and interest in the Mortgage Loans to the Depositor
be treated as a sale by the Seller to the Depositor and, accordingly, that
such Mortgage Loans neither be included in the assets of the Seller in the
event of the appointment of a receiver or conservator for the Seller nor be
available to the creditors of the Seller. In the event of an insolvency of the
Seller, however, it is possible that a receiver or a conservator for, or a
creditor of, the Seller may assert that the transaction between the Seller and
the Depositor was a pledge of each such Mortgage Loan in connection with a
borrowing by the Seller, rather than a sale. The Seller will cause the
Mortgage Loans to be assigned to the Depositor, and by the Depositor to the
Trustee for the benefit of the Certificateholders and the Insurer. In
addition, the Seller will deliver or cause to be delivered to the Depositor,
and by the Depositor to the Trustee, each Mortgage Note endorsed to the order
of the Trustee, each Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in
which case the Seller will deliver a copy of such Mortgage together with a
certificate to the effect that the original of such Mortgage was delivered to
such recording office) and an assignment of the Mortgage in recordable form.
Assignments of the Mortgage Loans by the Seller to the Depositor, and by the
Depositor to the Trustee, will be recorded in the appropriate public office
for real property records. If the transfer by the Seller to the Depositor of
the Mortgage Loans is deemed to be a grant to the Depositor of a security
interest in the Mortgage Loans, the Depositor should have a perfected security
interest in the Mortgage Loans. If a receiver or conservator were appointed
for the Seller, certain administrative expenses of the receiver or conservator
may have priority over the Depositor's (and therefore, the
Certificateholders') right, title and interest in the Mortgage Loans. For so
long as the Seller is the Servicer, cash collections on the Mortgage Loans may
be held by the Seller and commingled with its funds until transferred to the
Custodial Account or Certificate Account, and in an insolvency proceeding or
receivership or conservatorship of the Seller, or in certain circumstances,
the lapse of certain time periods, the Depositor (and therefore, the
Certificateholders) may not have a perfected interest in such commingled
collections.
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<PAGE>
Transfer of CD Collateral. With respect to 0.16% of the Group I Loans and
1.96% of the Group II Loans, the related Mortgagors have pledged to Chevy
Chase certain collateral (the "CD COLLATERAL") in connection with the
origination of such Mortgage Loans, in lieu of the cash downpayment otherwise
payable, as security for such Mortgagors' obligations under such Mortgage
Loans. With respect to each such Mortgage Loan, the CD Collateral includes,
without limitation, the related pledge and guaranty agreement, the related
certificate of deposit and all right, title and interest in and to the related
certificate of deposit account (the "CD ACCOUNT") established by the Mortgagor
at Chevy Chase, and all proceeds thereof. The certificate of deposit and the
pledge and guaranty agreement will be held by the Trustee as part of each
mortgage file. As of the Cut-off Date, Chevy Chase will have taken certain
actions as are required or reasonably appropriate under applicable state law
to perfect Chevy Chase's security interest against the related Mortgagor in
the CD Collateral. The perfection of a security interest in the CD Collateral
may not be governed by the Uniform Commercial Code as in effect in the
Commonwealth of Virginia, the State of Maryland or such other applicable
jurisdiction (the "UCC"), and existing case-law from such jurisdictions does
not definitively establish what steps are necessary to perfect such an
interest. This uncertainty exists both with respect to the grant of a security
interest in the CD Collateral by Mortgagors to Chevy Chase and with respect to
the grant of a security interest in Chevy Chase's interest in the CD
Collateral by Chevy Chase to the Depositor and from the Depositor to the
Trustee. While the matter is not free from doubt, a state court properly
presented with the issue should determine that Chevy Chase has taken
sufficient action and has adequately divested the Mortgagors of control over
the CD Collateral so as to perfect a security interest therein. Chevy Chase
will represent and warrant in the Pooling and Servicing Agreement that
following the transfer of Chevy Chase's interest in the CD Collateral, if any,
to the Trustee, the Trustee will have a security interest in such CD
Collateral. Chevy Chase will take certain actions that it believes are
required under applicable state law to perfect the Trustee's interest in the
CD Collateral, if any.
Although Chevy Chase has taken steps it believes appropriate to perfect
interests given to the Trustee, and on the basis of this belief has made the
related representations and warranties, the legal uncertainty in these areas
is such that no definitive assurance can be given that a security interest in
Chevy Chase's interest in the CD Collateral will exist for the benefit of the
Trustee. Moreover, even if the transfer of Chevy Chase's interest in the CD
Collateral, if any, to the Trustee is deemed to create a security interest
therein, a tax or governmental lien or other nonconsensual lien arising before
Chevy Chase's interest in such CD Collateral comes into existence, or through
fraud or negligence of Chevy Chase, a subsequent transferee of the CD
Collateral, may have priority over the Trustee's interest in such CD
Collateral.
Moreover, if a Mortgagor becomes a debtor in a bankruptcy case under the
United States Bankruptcy Code, as amended (Title 11, U.S.C.) (the "BANKRUPTCY
CODE"), the automatic stay provisions of the Bankruptcy Code will prevent
Chevy Chase, and therefore the Trustee, from, among other things, realizing on
the CD Collateral absent bankruptcy court consent. Accordingly, Chevy Chase,
and therefore the Certificateholders, may suffer a loss of all or part of its
interest in the CD Collateral if such Mortgagor becomes a debtor under the
Bankruptcy Code.
Chevy Chase as Servicer. In addition, while Chevy Chase is the Servicer,
cash collections held by Chevy Chase may, subject to certain conditions, be
commingled and used for the benefit of Chevy Chase prior to the date on which
such collections are required to be deposited in the Custodial Account as
described under "Description of the Certificates--Custodial and Certificate
Account". In the event of the conservatorship, receivership or insolvency of
Chevy Chase or, in certain circumstances, the lapse of certain time periods,
the Trustee may not have a perfected interest in such collections and, in such
event, may suffer a loss of all or part of such collections which may result
in a loss to Certificateholders.
Certain Matters Related to Receivership. To the extent that the Seller's
transfer of the Mortgage Loans and the CD Collateral to the Depositor is
deemed to constitute the creation of a security interest in the Mortgage Loans
and the CD Collateral in favor of the Depositor, and to the extent such
security interest was validly perfected before the Seller's insolvency and was
not taken in contemplation of insolvency of the Seller, or with the intent to
hinder, delay or defraud the Seller or the creditors of the Seller, the
Federal Deposit Insurance Act
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<PAGE>
("FDIA"), as amended by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, as amended ("FIRREA"), provides that such security
interest should not be subject to avoidance by the Federal Deposit Insurance
Corporation (the "FDIC"), as receiver or conservator for the Seller. Positions
taken by the FDIC staff prior to the passage of FIRREA do not suggest that the
FDIC, as receiver or conservator for the Seller, would interfere with the
timely transfer to the Depositor of payments collected on the related Mortgage
Loans. If, however, the FDIC were to assert a contrary position, such as
requiring the Depositor or the Trustee to establish its right to those
payments by submitting to and completing the administrative claims procedure
under the FDIA, or the conservator or receiver for the Seller were to request
a stay of proceedings with respect to the Seller, as provided under the FDIA,
delays in payments to the Depositor, and, therefore, on the Certificates and
possible reductions in the amount of those payments could occur. In addition,
the FDIC, if it were appointed as receiver or conservator for the Seller,
would also have the power under the FDIA to repudiate contracts, including the
Seller's obligations under the Pooling and Servicing Agreement to repurchase
certain Mortgage Loans. In addition, in the case of an Event of Default
relating to the receivership, conservatorship or insolvency of the Servicer,
the receiver or conservator may have the power either to terminate the
Servicer and replace it with a successor Servicer or to prevent the
termination of the Servicer and its replacement with a successor Servicer if
no Event of Default exists other than the receivership, conservatorship or
insolvency of the Servicer.
Chevy Chase has established the CD Accounts and maintained or caused to be
maintained records sufficient to afford each Mortgagor federal deposit
insurance up to applicable limits. In the event of the insolvency,
conservatorship or receivership of Chevy Chase, although the CD Accounts will
be SAIF-insured up to applicable limits, such an insolvency, conservatorship
or receivership may result in a delay in the payment of funds on deposit in
the CD Accounts, and possible reduction in amount of payment of such funds, to
the Mortgagor or to the Trustee by the FDIC as conservator or receiver for
Chevy Chase.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Depositor will acquire the Mortgage Loans, and the CD Collateral in the
case of CD Pledge Loans, from Chevy Chase and will cause the Mortgage Loans
and the CD Collateral to be assigned to U.S. Bank National Association, as
trustee (the "TRUSTEE"). Chevy Chase, in its capacity as servicer (the
"SERVICER"), will service the Mortgage Loans pursuant to a Pooling and
Servicing Agreement, dated as of March 1, 1998 (the "POOLING AND SERVICING
AGREEMENT"), among the Depositor, Chevy Chase, as Seller and Servicer, and the
Trustee. See "The Trust Fund--The Mortgage Pools" in the Prospectus.
DESCRIPTION OF THE MORTGAGE LOANS
The description of the Mortgage Loans set forth in this Prospectus
Supplement is based on the characteristics of the Mortgage Loans as of the
Cut-off Date. Unless the context otherwise requires, all percentages used
herein are based on the aggregate Principal Balance of the Group I Loans,
Group II Loans or Mortgage Loans, as applicable, as of the Cut-off Date.
Each Mortgage Loan, at the time of origination, was represented by the
related Mortgagor to be owner-occupied, except for approximately 0.08% of the
Group I Loans, which were represented by the related Mortgagors to be
investment properties. As of the Cut-off Date, none of the Mortgage Loans were
more than 30 days delinquent in scheduled payments of principal and interest.
No Mortgage Loan provides for deferred interest or negative amortization. The
Mortgage Loans were originated by or acquired by Chevy Chase or its wholly
owned subsidiary, B.F. Saul Mortgage Company, in the normal course of its
business and will be purchased by the Depositor from Chevy Chase.
The Group I Loans consist of 1,687 adjustable-rate Mortgage Loans, with an
aggregate Principal Balance as of the Cut-off Date of approximately
$355,425,134 and original terms to stated maturity of not more than 30
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years, except for 19 Group I Loans with original terms to stated maturity of
not more than 40 years. The Group I Loans had individual Principal Balances as
of the Cut-off Date of at least $17,911 but not more than $999,096, with an
average Principal Balance as of the Cut-off Date of approximately $210,685.
The Group I Loans have a weighted average remaining term to stated maturity of
approximately 353 months as of the Cut-off Date. As of the Cut-off Date, the
Group I Loans bore interest at Mortgage Rates of at least 4.50% per annum but
no more than 11.38% per annum, with a weighted average Mortgage Rate of
approximately 6.83% per annum. The original Loan-to-Value Ratio of each of the
Group I Loans was not more than 96.6%, with a weighted average original Loan-
to-Value Ratio of approximately 76.88%. "LOAN-TO-VALUE RATIO", as used in this
Prospectus Supplement, is calculated as the original Mortgage Loan amount
(less, in the case of a CD Pledge Loan, the amount of cash held in the related
CD Account), divided by the lesser of (i) the appraised value of the related
Mortgaged Property at origination and (ii) if the Mortgage Loan is a purchase
money loan, the sales price of the related Mortgaged Property.
The Group II Loans consist of 1,054 adjustable-rate Mortgage Loans, with an
aggregate Principal Balance as of the Cut-off Date of approximately
$204,737,159 and original terms to stated maturity of not more than 30 years,
except for 8 Group II Loans with original terms to stated maturity of not more
than 40 years. The Group II Loans had individual Principal Balances as of the
Cut-off Date of at least $20,299 but not more than $1,518,198, with an average
Principal Balance as of the Cut-off Date of approximately $194,248. The Group
II Loans have a weighted average remaining term to stated maturity of
approximately 346 months as of the Cut-off Date. As of the Cut-off Date, the
Group II Loans bore interest at Mortgage Rates of at least 5.50% per annum but
no more than 10.25% per annum, with a weighted average Mortgage Rate of
approximately 7.26% per annum. The original Loan-to-Value Ratio of each of the
Group II Loans was not more than 95.3%, with a weighted average original Loan-
to-Value Ratio of approximately 79.0%.
As of the Cut-off Date, approximately 1.66% of Group I Loans and 5.15% of
Group II Loans were temporary Buy-Down Loans, where Chevy Chase pays a portion
of the monthly interest payments for up to the first two years after
origination. For the temporary Buy-Down Loans in Loan Group I, the portion of
the interest rate paid by the related Mortgagor will not increase by more than
one percentage point for each one-year period, and no Mortgage Rate may exceed
the "bought down" rate by more than two percentage points. For the temporary
Buy-Down Loans in Loan Group II, the portion of the interest rate paid by the
related Mortgagor will not increase by more than one percentage point for each
one-year period, and no Mortgage Rate may exceed the "bought down" rate by
more than two percentage points.
As of the Cut-off Date, approximately 0.15% of Group I Loans and 1.46% of
Group II Loans were Lender-Paid MI Loans. A "LENDER-PAID MI LOAN" is a
Mortgage Loan with an original Loan-to-Value Ratio greater than 80% where the
interest rate payable by the related Mortgagor is increased by 20 to 65 basis
points relative to the interest rate otherwise applicable for so long as the
Loan-to-Value Ratio exceeds 80%, with the proceeds of such increase used by
the Seller to purchase primary mortgage insurance on such Mortgage Loan. The
Servicing Fee on a Lender-Paid MI Loan has been increased by the amount of the
additional interest rate thereon attributable to the payment of primary
mortgage insurance premium by the Servicer for so long as the related Loan-to-
Value Ratio exceeds 80%; hence, the Net Mortgage Rate for a Lender-Paid MI
Loan will be reduced by the amount of such additional interest rate during
such period.
As of the Cut-off Date, approximately 0.16% of Group I Loans and 1.96% of
Group II Loans were originated pursuant to Chevy Chase's CD Pledge Program
(such Mortgage Loans, the "CD PLEDGE LOANS"). Under Chevy Chase's CD Pledge
Program, a Mortgagor may, subject to certain underwriting criteria, obtain a
Mortgage Loan with a loan-to-value ratio of up to 100% by securing its payment
obligations under such Mortgage Loan with a grant to Chevy Chase of a security
interest in the CD Collateral. For the CD Pledge Loans in Loan Group I, the
amounts on deposit in the related CD Account, as percentages of the original
principal balances of the Group I Loans, ranged from 5.00% to 10.01%. For the
CD Pledge Loans in Loan Group II, the amounts on deposit in the related CD
Account, as percentages of the original principal balances of the Group II
Loans, ranged from 2.50% to 10.00%. The original term of a CD Account must
generally equal the lesser of the
S-19
<PAGE>
initial fixed period of the related Mortgage Loan or 60 months. A Mortgagor
under the CD Pledge Program may, at its option, terminate the grant of the
security interest five years after origination of the related Mortgage Loan if
(i) in the case of Mortgage Loans where the CD Account constituted up to 10%
of the original loan-to-value ratio, a new appraisal indicates a loan-to-value
ratio of no more than 90% for the related Mortgaged Property or (ii) in the
case of Mortgage Loans where the CD Account constituted greater than 10% of
the original loan-to-value ratio, a new appraisal indicates a loan-to-value
ratio of no more than 75% for the related Mortgaged Property.
The Mortgage Rate on 100% of the Group I Loans and 96.04% of the Group II
Loans will adjust annually, commencing in some cases after an initial period
of years following origination during which the interest rate accruing thereon
is fixed, on the Adjustment Date specified in the related Mortgage Note to a
rate equal to the sum (rounded as specified in the related Mortgage Note) of
the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year, as published by the Federal Reserve Board in Statistical
Release H.15 (519) (the "ONE-YEAR INDEX"), and the fixed percentage set forth
in the related Mortgage Note (the "NOTE MARGIN"), subject to the limitation
that the Mortgage Rate will not exceed the maximum Mortgage Rate as specified
in the related Mortgage Note and any increase or decrease on any Adjustment
Date will be limited by the amount set forth in the related Mortgage Note (the
"PERIODIC RATE CAP").
The Mortgage Rate on 3.38% of the Group II Loans will adjust every three
years, commencing after an initial period of three years following origination
during which the interest rate accruing thereon is fixed, on the Adjustment
Date specified in the related Mortgage Note to a rate equal to the sum
(rounded as specified in the related Mortgage Note) of the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of three
years, as published by the Federal Reserve Board in Statistical Release H.15
(519) (the "THREE-YEAR INDEX"), and the Note Margin, subject to the limitation
that the Mortgage Rate will not exceed the maximum Mortgage Rate as specified
in the related Mortgage Note and the Periodic Rate Cap.
The Mortgage Rate on 0.58% of the Group II Loans will adjust every five
years, commencing after an initial period of five years following origination
during which the interest rate accruing thereon is fixed, on the Adjustment
Date specified in the related Mortgage Note to a rate equal to the sum
(rounded as specified in the related Mortgage Note) of the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of five
years, as published by the Federal Reserve Board in Statistical Release H.15
(519) (the "FIVE-YEAR INDEX"), and the Note Margin, subject to the limitation
that the Mortgage Rate will not exceed the maximum Mortgage Rate as specified
in the related Mortgage Note and the Periodic Rate Cap.
With respect to 162 Mortgage Loans, representing approximately 7.03% of the
Group I Loans, the Mortgage Rate will adjust annually in accordance with the
One-Year Index commencing approximately one year after origination (the
"ONE/ONE GROUP I LOANS"). With respect to 1,525 Mortgage Loans, representing
approximately 92.97% of the Group I Loans, the Mortgage Rate will adjust
annually in accordance with the One-Year Index commencing approximately three
years after origination (the "THREE/ONE GROUP I LOANS").
With respect to 818 Mortgage Loans, representing approximately 77.05% of the
Group II Loans, the Mortgage Rate will adjust annually in accordance with the
One-Year Index commencing approximately five years after origination (the
"FIVE/ONE GROUP II LOANS"). With respect to 189 Mortgage Loans, representing
approximately 18.99% of the Group II Loans, the Mortgage Rate will adjust
annually in accordance with the One-Year Index commencing approximately seven
years after origination (the "SEVEN/ONE GROUP II LOANS"). With respect to 32
Mortgage Loans, representing approximately 3.38% of the Group II Loans, the
Mortgage Rate will adjust every three years in accordance with the Three-Year
Index commencing approximately three years after origination (the "THREE/THREE
GROUP II LOANS"). With respect to 15 Mortgage Loans, representing
approximately 0.58% of the Group II Loans, the Mortgage Rate will adjust every
five years in accordance with the Five-Year Index commencing approximately
five years after origination (the "FIVE/FIVE GROUP II LOANS").
The monthly payment on each Mortgage Loan will be adjusted on the Due Date
of the month following the month in which the related Adjustment Date occurs
(subject to the related Periodic Rate Cap, as described in the
S-20
<PAGE>
related Mortgage Note) to equal the amount necessary to pay interest at the
then-applicable Mortgage Rate and to fully amortize the outstanding Principal
Balance of such Mortgage Loan over its then remaining term to stated maturity.
As of the Cut-off Date, less than 4.41% of the Group I Loans and less than
4.43% of the Group II Loans had reached their first Adjustment Date. Due to
application of the Periodic Rate Cap, the Mortgage Rate on a Mortgage Loan may
be less than the sum of the applicable Index and Note Margin, even following
the Adjustment Date for such Mortgage Loan. The Mortgage Loans will have
various Adjustment Dates, Note Margins and limitations on the Mortgage Rate
adjustments, as described below.
The Mortgage Rate on a Mortgage Loan may not exceed the maximum Mortgage
Rate (the "MAXIMUM MORTGAGE RATE") or be less than the minimum Mortgage Rate
(the "MINIMUM MORTGAGE RATE") specified for such Mortgage Loan in the related
Mortgage Note. The Minimum Mortgage Rate for each Mortgage Loan is equal to
the Note Margin. As of the Cut-off Date, the Minimum Mortgage Rates on the
Group I Loans ranged from 2.00% to 5.75%, with a weighted average Minimum
Mortgage Rate of 2.97%, and as of the Cut-off Date, the Maximum Mortgage Rates
on the Group I Loans (other than 2 Group I Loans which have no Maximum
Mortgage Rate) ranged from 9.50% to 24.00%, with a weighted average Maximum
Mortgage Rate of 12.82%. As of the Cut-off Date, the Minimum Mortgage Rates on
the Group II Loans ranged from 2.5% to 4.0%, with a weighted average Minimum
Mortgage Rate of 3.01%, and as of the Cut-off Date, the Maximum Mortgage Rates
on the Group II Loans (other than 12 Group II Loans which have no Maximum
Mortgage Rate) ranged from 9.88% to 27.75%, with a weighted average Maximum
Mortgage Rate of 13.29%.
The tables below set forth certain additional statistical characteristics of
the Mortgage Loans as of the Cut-off Date. Percentages are approximate and are
stated by Principal Balance of the Mortgage Loans as of the Cut-off Date, and
have been rounded in order to add to 100%.
DISTRIBUTION OF CURRENT MORTGAGE RATES FOR GROUP I LOANS
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
4.01%-4.50%................. 3 429,788.90 0.12
4.51%-5.00%................. 11 1,778,111.25 0.50
5.01%-5.50%................. 20 3,023,241.40 0.85
5.51%-6.00%................. 66 13,361,830.96 3.76
6.01%-6.50%................. 327 67,146,936.26 18.89
6.51%-7.00%................. 811 184,890,601.37 52.02
7.01%-7.50%................. 291 64,215,498.88 18.07
7.51%-8.00%................. 47 6,670,137.38 1.88
8.01%-8.50%................. 75 9,704,108.75 2.73
8.51%-9.00%................. 27 3,581,525.37 1.01
9.01%-9.50%................. 7 426,597.18 0.12
9.51%-10.00%................ 1 49,945.20 0.01
11.01%-12.00%................ 1 146,810.71 0.04
----- --------------- ------
Total.................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate on the Group I
Loans was 6.83% per annum.
S-21
<PAGE>
DISTRIBUTION OF MORTGAGE LOAN PRINCIPAL BALANCES FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- --------------------- -------------- --------------- -----------------
<S> <C> <C> <C>
Up to $50,000.00............... 22 859,371.59 0.24
$ 50,000.01-$100,000.00........ 221 18,155,554.82 5.11
$100,000.01-$150,000.00........ 423 53,004,057.74 14.91
$150,000.01-$200,000.00........ 380 66,836,129.25 18.81
$200,000.01-$250,000.00........ 222 49,662,319.44 13.97
$250,000.01-$300,000.00........ 140 38,314,267.24 10.78
$300,000.01-$350,000.00........ 83 27,032,468.33 7.61
$350,000.01-$400,000.00........ 50 18,771,289.26 5.28
$400,000.01-$450,000.00........ 30 12,659,064.12 3.56
$450,000.01-$500,000.00........ 33 15,847,473.06 4.46
$500,000.01-$550,000.00........ 17 8,971,517.64 2.53
$550,000.01-$600,000.00........ 27 15,643,432.59 4.40
$600,000.01-$650,000.00........ 10 6,334,791.51 1.78
$650,000.01-$700,000.00........ 8 5,472,285.20 1.54
$700,000.01-$750,000.00........ 4 2,924,148.10 0.82
Over $750,000.00............... 17 14,936,963.72 4.20
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the average Principal Balance of the Group I Loans
was approximately $210,685.
DISTRIBUTION OF MORTGAGED PROPERTY TYPES FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------------- -------------- --------------- -----------------
<S> <C> <C> <C>
Single-Family Detached......... 1,417 316,735,959.93 89.11
Condominium.................... 121 16,556,338.31 4.66
Townhouse...................... 140 20,442,295.34 5.75
Duplex......................... 9 1,690,540.03 0.48
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF MORTGAGE LOAN PURPOSE FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
PURPOSE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------- -------------- --------------- -----------------
<S> <C> <C> <C>
Refinancing.................... 660 155,386,188.86 43.72
Purchase....................... 740 132,234,807.76 37.20
Cash-Out Refinancing........... 287 67,804,136.99 19.08
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
S-22
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
STATE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ----- -------------- --------------- -----------------
<S> <C> <C> <C>
Arizona........................ 6 464,306.35 0.13
Colorado....................... 3 336,519.32 0.09
Connecticut.................... 52 21,538,621.07 6.06
Delaware....................... 6 875,251.67 0.24
District of Columbia........... 88 21,349,599.46 6.01
Florida........................ 13 1,160,540.80 0.33
Georgia........................ 68 10,802,827.79 3.04
Illinois....................... 20 6,000,237.78 1.69
Maine.......................... 1 158,905.97 0.04
Maryland....................... 480 106,620,271.18 30.00
Massachusetts.................. 35 10,433,729.19 2.93
Michigan....................... 8 1,269,282.40 0.36
Minnesota...................... 1 142,606.50 0.04
Missouri....................... 1 100,781.24 0.03
New Hampshire.................. 3 365,387.63 0.10
New Jersey..................... 118 25,993,299.53 7.31
New York....................... 13 3,368,722.47 0.95
North Carolina................. 311 49,191,484.83 13.84
Ohio........................... 4 598,235.46 0.17
Oregon......................... 2 169,711.35 0.05
Pennsylvania................... 26 4,203,867.64 1.18
Rhode Island................... 6 1,803,495.60 0.51
South Carolina................. 23 4,255,583.84 1.20
Tennessee...................... 1 308,810.75 0.09
Texas.......................... 6 1,023,817.06 0.29
Virginia....................... 389 82,577,379.00 23.23
Washington..................... 1 95,322.90 0.03
Wyoming........................ 2 216,534.83 0.06
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF LOAN TYPE FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
LOAN TYPE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- --------- -------------- --------------- -----------------
<S> <C> <C> <C>
One/One........................ 162 24,984,776.34 7.03
Three/One...................... 1,525 330,440,357.27 92.97
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF PERIODIC RATE CAP FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
PERIODIC RATE CAP MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ----------------- -------------- --------------- -----------------
<S> <C> <C> <C>
0.000%......................... 1 50,774.64 0.01
1.500%......................... 1 44,330.25 0.01
2.000%......................... 1,682 354,305,911.02 99.69
3.000%......................... 3 1,024,117.70 0.29
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
S-23
<PAGE>
DISTRIBUTION OF NOTE MARGINS AND MINIMUM MORTGAGE RATES
FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
RANGE OF NOTE MARGINS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- --------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
1.51%-2.00%................... 5 236,681.75 0.07
2.01%-2.50%................... 1 59,690.15 0.02
2.51%-3.00%................... 1,669 353,829,656.33 99.55
3.01%-3.50%................... 2 439,535.59 0.12
3.51%-4.00%................... 9 712,759.08 0.20
Above 5.00%................... 1 146,810.71 0.04
----- --------------- ------
Total..................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Note Margin and Minimum
Mortgage Rate on the Group I Loans was approximately 2.97% per annum.
DISTRIBUTION OF REMAINING TERM TO STATED MATURITY FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
RANGE OF MONTHS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- --------------- -------------- --------------- -----------------
<S> <C> <C> <C>
0-250........................ 39 3,176,989.21 0.89
251-300........................ 16 1,721,668.16 0.49
301-350........................ 157 21,375,750.31 6.01
351-400........................ 1,471 328,351,534.96 92.38
Above 400...................... 4 799,190.97 0.23
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to stated
maturity for the Group I Loans was approximately 353 months.
DISTRIBUTION OF MAXIMUM MORTGAGE RATES FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
RANGE OF MAXIMUM RATES MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- --------------- -----------------
<S> <C> <C> <C>
Uncapped....................... 2 95,104.89 0.03
9.01%- 9.50%.................. 1 119,782.43 0.03
9.51%-10.00%.................. 3 773,487.94 0.22
10.01%-11.00%.................. 3 362,530.21 0.10
11.01%-12.00%.................. 112 19,758,957.00 5.56
12.01%-13.00%.................. 1,122 249,970,844.09 70.33
13.01%-14.00%.................. 378 77,074,874.42 21.69
14.01%-15.00%.................. 57 6,475,119.89 1.82
15.01%-16.00%.................. 8 647,622.03 0.18
23.01%-24.00%.................. 1 146,810.71 0.04
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group I Loans (other than 2 Group I Loans which have no Maximum Mortgage Rate)
was approximately 12.82% per annum.
S-24
<PAGE>
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS FOR GROUP I LOANS
<TABLE>
<CAPTION>
AGGREGATE
RANGE OF ORIGINAL NUMBER OF PRINCIPAL % OF AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- -------------------- -------------- --------------- -----------------
<S> <C> <C> <C>
0.00%-50.00%.................. 75 16,536,862.46 4.65
50.01%-55.00%.................. 28 7,165,755.23 2.02
55.01%-60.00%.................. 39 10,887,341.25 3.06
60.01%-65.00%.................. 66 19,979,911.09 5.62
65.01%-70.00%.................. 71 17,619,693.18 4.96
70.01%-75.00%.................. 218 53,174,439.25 14.96
75.01%-80.00%.................. 652 145,906,851.80 41.05
80.01%-85.00%.................. 39 6,526,366.41 1.84
85.01%-90.00%.................. 229 38,577,590.68 10.85
90.01%-95.00%.................. 269 38,911,258.77 10.95
95.01%-100.00%................. 1 139,063.49 0.04
----- --------------- ------
Total...................... 1,687 $355,425,133.61 100.00%
===== =============== ======
</TABLE>
Original Loan-to-Value Ratio is calculated as the original Mortgage Loan
amount (less, in the case of a CD Pledge Loan, the amount of cash held in the
related CD Account), divided by the lesser of (i) the appraised value of the
related Mortgaged Property at origination and (ii) if the Mortgage Loan is a
purchase money loan, the sales price of the related Mortgaged Property.
The weighted average Loan-to-Value Ratio at origination of the Group I Loans
was approximately 76.9%.
DISTRIBUTION OF CURRENT MORTGAGE RATES FOR GROUP II LOANS
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.01%-5.50%................. 1 103,823.08 0.05
5.51%-6.00%................. 10 1,447,207.79 0.71
6.01%-6.50%................. 89 14,661,904.36 7.16
6.51%-7.00%................. 252 44,263,348.34 21.62
7.01%-7.50%................. 511 107,121,456.85 52.32
7.51%-8.00%................. 133 28,161,563.62 13.75
8.01%-8.50%................. 20 3,985,654.86 1.95
8.51%-9.00%................. 19 4,141,193.50 2.02
9.01%-9.50%................. 2 99,925.17 0.05
9.51%-10.00%................ 8 276,620.29 0.14
10.01%-11.00%................ 9 474,460.79 0.23
----- --------------- ------
Total.................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate on the Group II
Loans was 7.26% per annum.
S-25
<PAGE>
DISTRIBUTION OF MORTGAGE LOAN PRINCIPAL BALANCES FOR GROUP II LOANS
<TABLE>
<CAPTION>
RANGE OF CUT-OFF DATE NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Up to $50,000.00............. 15 542,544.01 0.27
$ 50,000.01-$100,000.00...... 146 11,837,101.24 5.78
$100,000.01-$150,000.00...... 273 34,177,399.18 16.69
$150,000.01-$200,000.00...... 293 51,310,574.78 25.06
$200,000.01-$250,000.00...... 108 23,615,400.06 11.53
$250,000.01-$300,000.00...... 94 25,970,234.10 12.69
$300,000.01-$350,000.00...... 28 9,038,519.48 4.42
$350,000.01-$400,000.00...... 31 11,584,521.29 5.66
$400,000.01-$450,000.00...... 22 9,215,021.24 4.50
$450,000.01-$500,000.00...... 10 4,830,956.66 2.36
$500,000.01-$550,000.00...... 5 2,608,998.15 1.27
$550,000.01-$600,000.00...... 13 7,541,256.87 3.68
$600,000.01-$650,000.00...... 8 5,059,709.20 2.47
$650,000.01-$700,000.00...... 2 1,352,949.50 0.66
$700,000.01-$750,000.00...... 2 1,454,567.57 0.71
Over $750,000.00............. 4 4,597,405.32 2.25
----- --------------- ------
Total.................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the average Principal Balance of the Group II Loans
was approximately $194,248.
DISTRIBUTION OF MORTGAGED PROPERTY TYPES FOR GROUP II LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------------- -------------- --------------- -----------------
<S> <C> <C> <C>
Single-Family Detached......... 780 166,579,097.37 81.36
Condominium.................... 114 13,905,582.60 6.79
Townhouse...................... 142 22,050,180.00 10.77
Duplex......................... 18 2,202,298.68 1.08
----- --------------- ------
Total...................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF MORTGAGE LOAN PURPOSE FOR GROUP II LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
PURPOSE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------- -------------- --------------- -----------------
<S> <C> <C> <C>
Refinancing.................... 291 56,609,975.06 27.65
Purchase....................... 624 120,414,906.16 58.81
Cash-Out Refinancing........... 139 27,712,277.43 13.54
----- --------------- ------
Total...................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
S-26
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arkansas..................... 1 63,447.95 0.03
California................... 3 672,500.63 0.33
Connecticut.................. 20 5,685,181.06 2.78
Delaware..................... 4 429,482.16 0.21
District of Columbia......... 98 21,636,925.89 10.57
Florida...................... 5 784,602.31 0.38
Georgia...................... 21 2,931,614.84 1.43
Illinois..................... 7 1,455,484.30 0.71
Maryland..................... 331 64,330,072.82 31.42
Massachusetts................ 24 6,284,782.76 3.07
Minnesota.................... 1 150,928.96 0.07
New Jersey................... 93 21,165,360.87 10.34
New York..................... 19 7,514,469.96 3.67
North Carolina............... 72 10,703,684.70 5.23
Ohio......................... 1 195,551.03 0.10
Oregon....................... 2 215,118.54 0.10
Pennsylvania................. 15 2,896,098.06 1.41
Rhode Island................. 1 181,839.67 0.09
South Carolina............... 9 1,283,812.55 0.63
Texas........................ 7 944,960.32 0.46
Utah......................... 1 100,661.73 0.05
Virginia..................... 316 54,757,270.86 26.75
Washington................... 2 269,281.59 0.13
Wyoming...................... 1 84,025.09 0.04
----- --------------- ------
Total.................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF LOAN TYPE FOR GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Five/One..................... 818 157,756,212.89 77.05
Seven/One.................... 189 38,877,245.39 18.99
Three/Three.................. 32 6,913,420.30 3.38
Five/Five.................... 15 1,190,280.07 0.58
----- --------------- ------
Total.................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF PERIODIC RATE CAP FOR GROUP II LOANS
<TABLE>
<CAPTION>
PERIODIC NUMBER OF AGGREGATE % OF AGGREGATE
RATE CAP MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.000%....................... 12 552,429.88 0.27
2.000%....................... 241 35,914,452.08 17.54
3.000%....................... 801 168,270,276.69 82.19
----- --------------- ------
Total.................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
S-27
<PAGE>
DISTRIBUTION OF NOTE MARGINS AND MINIMUM MORTGAGE RATES
FOR GROUP II LOANS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
NOTE MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
2.01%-2.50%.................. 1 315,986.93 0.15
2.51%-3.00%.................. 969 193,438,263.74 94.48
3.01%-3.50%.................. 58 8,386,267.53 4.10
3.51%-4.00%.................. 26 2,596,640.45 1.27
----- --------------- ------
Total.................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Note Margin and Minimum
Mortgage Rate on the Group II Loans was approximately 3.01% per annum.
DISTRIBUTION OF REMAINING TERM TO STATED MATURITY FOR GROUP II LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
RANGE OF MONTHS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- --------------- -------------- --------------- -----------------
<S> <C> <C> <C>
0-250........................ 28 4,184,003.65 2.04
251-300........................ 32 3,926,709.21 1.92
301-350........................ 198 29,632,008.92 14.47
351-400........................ 796 166,994,436.87 81.57
----- --------------- ------
Total...................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to stated
maturity for the Group II Loans was approximately 346 months.
DISTRIBUTION OF MAXIMUM MORTGAGE RATES FOR GROUP II LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL % OF AGGREGATE
RANGE OF MAXIMUM RATES MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- --------------- -----------------
<S> <C> <C> <C>
Uncapped....................... 12 552,429.88 0.27
9.51%-10.00%.................. 1 149,102.59 0.07
11.01%-12.00%.................. 7 1,044,269.88 0.51
12.01%-13.00%.................. 328 56,996,176.44 27.84
13.01%-14.00%.................. 655 137,274,637.27 67.05
14.01%-15.00%.................. 33 5,473,702.45 2.67
15.01%-16.00%.................. 16 3,060,507.46 1.50
21.01%-22.00%.................. 1 88,160.82 0.04
Above 24.00%................... 1 98,171.86 0.05
----- --------------- ------
Total...................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans (other than 12 Group II Loans which have no Maximum Mortgage
Rate) was approximately 13.29% per annum.
S-28
<PAGE>
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS FOR GROUP II LOANS
<TABLE>
<CAPTION>
AGGREGATE
RANGE OF ORIGINAL NUMBER OF PRINCIPAL % OF AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- -------------------- -------------- --------------- -----------------
<S> <C> <C> <C>
0.00-50.00%................... 46 9,583,756.91 4.68
50.01%-55.00%.................. 18 4,104,722.34 2.01
55.01%-60.00%.................. 32 5,284,747.30 2.58
60.01%-65.00%.................. 24 4,881,868.59 2.38
65.01%-70.00%.................. 43 10,799,302.37 5.27
70.01%-75.00%.................. 97 20,165,858.67 9.85
75.01%-80.00%.................. 379 83,450,729.93 40.76
80.01%-85.00%.................. 28 4,214,762.64 2.06
85.01%-90.00%.................. 173 27,781,403.73 13.57
90.01%-95.00%.................. 212 34,104,414.86 16.66
95.01%-100.00%................. 2 365,591.31 0.18
----- --------------- ------
Total...................... 1,054 $204,737,158.65 100.00%
===== =============== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans was approximately 79.0%.
Original Loan-to-Value Ratio is calculated as the original Mortgage Loan
amount (less, in the case of a CD Pledge Loan, the amount of cash held in the
related CD Account), divided by the lesser of (i) the appraised value of the
related Mortgaged Property at origination and (ii) if the Mortgage Loan is a
purchase money loan, the sales price of the related Mortgaged Property.
Approximately 4% of the Group I Loans and none of the Group II Loans contain
terms requiring the payment of a penalty by the Mortgagor in the event such
Mortgage Loan is prepaid prior to its maturity.
THE INDEX
The Mortgage Rate on 100% of the Group I Loans and 96.04% of the Group II
Loans will adjust annually commencing in some cases after an initial period of
years following origination during which the interest rate accruing thereon is
fixed, on the Adjustment Date specified in the related Mortgage Note to a rate
equal to the sum of the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year (the "ONE-YEAR INDEX"), as further
described herein, and the fixed percentage set forth in the related Mortgage
Note (the "NOTE MARGIN"), subject to the limitations described herein. The
Mortgage Rate on 3.38% of the Group II Loans will adjust every three years
commencing after an initial period of three years following origination during
which the interest rate accruing thereon is fixed, on the Adjustment Date
specified in the related Mortgage Note to a rate equal to the sum of the
weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of three years (the "THREE-YEAR INDEX"), as further described herein,
and the Note Margin, subject to the limitations described herein. The Mortgage
Rate on 0.58% of the Group II Loans will adjust every five years commencing
after an initial period of five years following origination during which the
interest rate accruing thereon is fixed, on the Adjustment Date specified in
the related Mortgage Note to a rate equal to the sum of the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of five
years (the "FIVE-YEAR INDEX"), as further described herein, and the Note
Margin, subject to the limitations described herein. Each of the One-Year
Index, Three-Year Index and Five-Year Index is referred to as an "INDEX."
The One-Year Index, Three-Year Index and Five-Year Index are based on weekly
average yields on U.S. Treasury securities adjusted to a constant maturity of
one year, three years and five years, respectively, as published by the
Federal Reserve Board in Statistical Release No. H.15 (519) or any similar
publication, or if not so published, as reported by any Federal Reserve Bank
or by any U.S. Government department or agency and made available to the
Servicer as of a date prior to each Adjustment Date for such Mortgage Loan as
specified in the Mortgage Note. Should the applicable Index not be published
or become otherwise unavailable, the Servicer will select a comparable
alternative index reasonably acceptable to the Trustee.
S-29
<PAGE>
The following table sets forth the monthly averages of the One-Year, Three-
Year and Five-Year Indexes for each of the last five calendar years or
portions thereof, based on information published by the Federal Reserve Board
in Statistical Release No. H.15 (519). Such monthly averages are not
necessarily indicative of the related Index on any given date in the relevant
month since significant week-to-week fluctuations in the related Index may
occur in any month as well as over longer periods. In addition, such monthly
averages do not purport to be a prediction of the value of the related Index
on any Adjustment Date or for the lives of the Mortgage Loans.
ONE-YEAR INDEX
<TABLE>
<CAPTION>
MONTH 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 5.24% 5.61% 5.09% 7.05% 3.54%
February.......................................... 5.31% 5.53% 4.94% 6.70% 3.87%
March............................................. -- 5.80% 5.34% 6.43% 4.32%
April............................................. -- 5.99% 5.54% 6.27% 4.82%
May............................................... -- 5.87% 5.64% 6.00% 5.31%
June.............................................. -- 5.69% 5.81% 5.64% 5.27%
July.............................................. -- 5.54% 5.85% 5.59% 5.48%
August............................................ -- 5.56% 5.67% 5.75% 5.56%
September......................................... -- 5.52% 5.83% 5.62% 5.76%
October........................................... -- 5.46% 5.55% 5.59% 6.11%
November.......................................... -- 5.46% 5.42% 5.43% 6.54%
December.......................................... -- 5.53% 5.47% 5.31% 7.14%
</TABLE>
THREE-YEAR INDEX
<TABLE>
<CAPTION>
MONTH 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 5.43% 6.16% 5.20% 7.66% 4.48%
February.......................................... 5.38% 6.03% 5.14% 7.25% 4.83%
March............................................. -- 6.38% 5.79% 6.89% 5.40%
April............................................. -- 6.61% 6.11% 6.68% 5.99%
May............................................... -- 6.42% 6.27% 6.27% 6.34%
June.............................................. -- 6.24% 6.49% 5.80% 6.27%
July.............................................. -- 6.00% 6.45% 5.89% 6.48%
August............................................ -- 6.06% 6.21% 6.10% 6.50%
September......................................... -- 5.98% 6.41% 5.89% 6.69%
October........................................... -- 5.84% 6.08% 5.77% 7.04%
November.......................................... -- 5.76% 5.82% 5.57% 7.44%
December.......................................... -- 5.74% 5.91% 5.39% 7.71%
</TABLE>
FIVE-YEAR INDEX
<TABLE>
<CAPTION>
MONTH 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 5.42% 6.33% 5.36% 7.76% 5.09%
February.......................................... 5.49% 6.20% 5.38% 7.37% 5.40%
March............................................. -- 6.54% 5.97% 7.05% 5.94%
April............................................. -- 6.76% 6.30% 6.86% 6.52%
May............................................... -- 6.57% 6.48% 6.41% 6.78%
June.............................................. -- 6.38% 6.69% 5.93% 6.70%
July.............................................. -- 6.12% 6.64% 6.01% 6.91%
August............................................ -- 6.16% 6.39% 6.24% 6.88%
September......................................... -- 6.11% 6.60% 6.00% 7.08%
October........................................... -- 5.93% 6.27% 5.86% 7.40%
November.......................................... -- 5.80% 5.97% 5.69% 7.72%
December.......................................... -- 5.77% 6.07% 5.51% 7.78%
</TABLE>
S-30
<PAGE>
The initial Mortgage Rate in effect with respect to a Mortgage Loan
generally will be lower, and may be significantly lower, than the Mortgage
Rate that would have been in effect based on the related Index and Note
Margin. Therefore, unless the related Index declines after origination of a
Mortgage Loan, the related Mortgage Rate will generally increase on the first
Adjustment Date following origination of such Mortgage Loan subject to the
Periodic Rate Cap. The repayment of the Mortgage Loans will be dependent on
the ability of the Mortgagors to make larger monthly payments following
adjustments of the Mortgage Rate. Mortgage Loans that have the same initial
Mortgage Rate may not always bear interest at the same Mortgage Rate because
such Mortgage Loans may have different Adjustment Dates (and the related
Mortgage Rates therefore may reflect different Index values), Note Margins,
Maximum Mortgage Rates and Minimum Mortgage Rates. The Net Mortgage Rate with
respect to each Mortgage Loan as of the Cut-off Date will be set forth in the
Mortgage Loan Schedule attached to the Pooling and Servicing Agreement. The
"NET MORTGAGE RATE" on each Mortgage Loan will be adjusted on each Adjustment
Date to equal the Mortgage Rate thereon, subject to the Periodic Rate Cap,
minus (i) the Servicing Fee Rate, minus (ii) the rate per annum at which the
trustee fee accrues thereon (the "TRUSTEE FEE RATE"), minus (iii) 0.80% per
annum, minus (iv) in the case of a Lender-Paid MI Loan, the additional
interest rate thereon attributable to the payment of primary mortgage
insurance premium by the Servicer; provided, however, that the Net Mortgage
Rate on such Mortgage Loan may not exceed the Maximum Mortgage Rate minus the
sum of the Servicing Fee Rate, Trustee Fee Rate, 0.80% per annum and, if such
Mortgage Loan is a Lender-Paid MI Loan, the additional interest rate thereon
attributable to the payment of primary mortgage insurance premium by the
Servicer (the "MAXIMUM NET MORTGAGE RATE") or be less than the Minimum
Mortgage Rate minus the sum of the Servicing Rate Fee, the Trustee Fee Rate,
0.80% per annum and, if such Mortgage Loan is a Lender-Paid MI Loan, the
additional interest rate thereon attributable to the payment of primary
mortgage insurance premium by the Servicer (the "MINIMUM NET MORTGAGE RATE")
for such Mortgage Loan.
CONVERSION OF MORTGAGE LOANS
Approximately 99.00% of the Group I Loans and 5.58% of the Group II Loans
(the "CONVERTIBLE MORTGAGE LOANS") provided at origination that the adjustable
interest rate on such Mortgage Loan may be converted at the option of the
related Mortgagor to a fixed interest rate. Upon the conversion of a
Convertible Mortgage Loan, the related Mortgage Rate will be converted to a
fixed interest rate determined in accordance with the formula set forth in the
related Mortgage Note which formula is intended to result in a Mortgage Rate
which is not less than the then current market interest rate for similar loans
(subject to applicable usury laws). After any such conversion, monthly
payments of principal and interest on the Mortgage Loan will be adjusted to
provide for full amortization over the remaining term to scheduled maturity.
The Seller will have the option to purchase each Convertible Mortgage Loan
upon its conversion, but neither the Seller nor any other entity will be
obligated to do so. Any Convertible Mortgage Loan which is converted but not
purchased by the Seller will remain in the Mortgage Pool as a fixed-rate
Mortgage Loan and will result in the related Loan Group having both fixed-rate
and adjustable-rate Mortgage Loans. See "Certain Yield and Prepayment
Considerations" herein.
LOAN UNDERWRITING
The Mortgage Loans are "CLOSED LOANS" as described in the Prospectus under
"The Trust Fund--Mortgage Loan Program." All of the Mortgage Loans were
originated or purchased by Chevy Chase or its wholly owned subsidiary, B.F.
Saul Mortgage Company, in the normal course of its business. The
representations and warranties of Chevy Chase in respect of the Mortgage
Loans, which will be assigned to the Trustee in connection with the issuance
of the Certificates, will be made by Chevy Chase as of the Closing Date. See
"The Trust Fund--Mortgage Loan Program--Representations by Unaffiliated
Sellers; Repurchases" in the Prospectus.
S-31
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Chevy Chase Bank, F.S.B. Mortgage-Backed Pass-Through Certificates,
Series 1998-CCB1 (the "CERTIFICATES") will be comprised of the Class A-I
Certificates and Class A-II Certificates (collectively, the "CLASS A
CERTIFICATES"), the Class S Certificates and the Class R Certificates. Only
the Class A Certificates are offered hereby. The Class R Certificates are
sometimes referred to herein as the "RESIDUAL CERTIFICATES."
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Reference is made to the accompanying Prospectus for important
additional information regarding the terms and conditions of the Pooling and
Servicing Agreement and the Certificates. The term "CERTIFICATE PRINCIPAL
BALANCE" is used in the Prospectus Supplement in the same manner as the term
"STATED PRINCIPAL BALANCE" is used in the Prospectus. The following summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
BOOK-ENTRY REGISTRATION
The Class A Certificates will be book-entry certificates (the "BOOK-ENTRY
CERTIFICATES"). Any person acquiring an interest in any Class A Certificate
(each such person, a "BENEFICIAL OWNER") will hold its Class A Certificate
through DTC, if it is a participant in such system, or indirectly through
organizations which are participants in such system. The Book-Entry
Certificates will be issued in one or more certificates the aggregate
Certificate Principal Balance of which will equal the aggregate Certificate
Principal Balance of the Class A Certificates and will initially be registered
in the name of Cede & Co. ("CEDE"), the nominee of DTC. Except as described
below, no person acquiring a Book-Entry Certificate will be entitled to
receive a physical certificate representing such Certificate (a "DEFINITIVE
CERTIFICATE"). Unless and until Definitive Certificates are issued, it is
anticipated that the only Certificateholder of the Class A Certificates will
be Cede & Co., as nominee of DTC. Beneficial Owners will be permitted to
exercise their rights only indirectly through DTC participants and DTC.
A Beneficial Owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC or, if such Financial Intermediary is not a DTC
participant, on the records of the firm that acts as agent for the Financial
Intermediary and whose ownership of such Book-Entry Certificate will in turn
be recorded on the records of DTC.
Beneficial Owners will receive all distributions of principal of and
interest on the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required
to make book-entry transfers among DTC participants on whose behalf it acts
with respect to the Class A Certificates and is required to receive and
transmit distributions of principal of, and interest on, the Class A
Certificates. DTC participants and indirect participants make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates representing their respective interests in the Class A
Certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not DTC participants may
transfer ownership of such
S-32
<PAGE>
Certificates only through DTC participants and indirect participants by
instructing such participants and indirect participants to transfer Class A
Certificates, by book-entry transfer, through DTC for the accounts of the
purchasers of such Certificates, which accounts are maintained with their
respective DTC participants or Financial Intermediaries. Under the Rules and
in accordance with DTC's normal procedures, transfers of the interests in the
Class A Certificates will be executed through DTC and the accounts of the
related DTC participants at DTC will be debited and credited appropriately.
Similarly, the participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Transfers between DTC participants will occur in accordance with the Rules.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC participant in the Book-Entry Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Certificates will be subject to
the Rules, as in effect from time to time.
Distributions on Book-Entry Certificates will be made on each Distribution
Date by the Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the Beneficial Owners of the Book-
Entry Certificates that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Because DTC can only act on behalf
of Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-
Entry Certificates to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-
entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as nominee
of DTC, and may be made available by Cede to Beneficial Owners upon request in
accordance with the Rules and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Beneficial Owners of such Certificateholders are
credited.
DEFINITIVE CERTIFICATES
The Class A Certificates will be issued as Definitive Certificates to
Certificateholders or their nominees, rather than to DTC or its nominee, only
if (i) the Depositor advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee and the Depositor are
unable to locate a qualified successor, (ii) the Depositor, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an event of default under the Pooling and Servicing Agreement,
holders of Book-Entry Certificates evidencing not less than 66% of the
aggregate outstanding Certificate Principal Balance advise the Trustee and DTC
through DTC Participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the best interests
of the holders of such Certificates.
Upon notice of the occurrence of any of the events described in the
preceding paragraph, DTC is required to notify all DTC Participants of the
availability of Definitive Certificates. Upon surrender of the global
certificate for the Class A Certificates and receipt from DTC of instructions
for re-registration, the Trustee will issue such Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders under the Pooling and
Servicing Agreement.
S-33
<PAGE>
DISTRIBUTIONS IN RESPECT OF INTEREST AND PRINCIPAL
On each Distribution Date, payments on the Class S Certificates will be
subordinate to the payment of principal and interest, in the amounts described
herein, on the Class A Certificates.
Distributions on each class of the Class A Certificates in respect of
interest and principal on each Distribution Date will be made from the
Available Distribution Amount with respect to the corresponding Loan Group.
The "AVAILABLE DISTRIBUTION AMOUNT" with respect to the Mortgage Loans in a
Loan Group for any Distribution Date will equal (a) the sum of (i) scheduled
payments of principal and interest (net of the Servicing Fee and the Trustee
Fee) due on the Mortgage Loans in the applicable Loan Group on the related Due
Date (as defined herein) and received on or prior to the related Determination
Date, (ii) principal prepayments and other unscheduled collections of
principal received during the related Prepayment Period on the Mortgage Loans
in the applicable Loan Group, (iii) any Advances with respect to the Mortgage
Loans in the applicable Loan Group made by the Servicer for such Distribution
Date, (iv) amounts transferred from the Reserve Fund equal to certain
shortfalls in the amount available to pay the Class A-I Interest Distribution
Amount or the Class A-II Interest Distribution Amount together with any
Collateralization Deficits which remain outstanding after the application of
amounts otherwise payable to the Class S Certificates for such Distribution
Date, and (v) any Insured Payments payable pursuant to the Policy and related
to the Mortgage Loans in the applicable Loan Group, less (b) the Insurer
Premium Amount and amounts representing reimbursements for previously
unreimbursed Insured Payments by the Insurer, Nonrecoverable Advances by the
Servicer and certain expenses incurred by the Servicer. All amounts listed in
clauses (a) and (b) of the preceding sentence shall be as related to the
applicable Loan Group; however, because amounts on deposit in the Reserve Fund
and amounts otherwise payable to the Class S Certificates are available as
credit enhancement for either the Class A-I Certificates or the Class A-II
Certificates, as necessary, it is possible that interest from one Loan Group
otherwise payable to the Class S Certificates or deposited in the Reserve Fund
will be applied towards payments of interest and principal with respect to the
class of Class A Certificates that relates to the other Loan Group. The
Available Distribution Amount, when used without reference to a particular
Loan Group, refers to the sum of the Available Distribution Amounts for both
Loan Groups.
The "DUE DATE" for each Mortgage Loan is the first day of each month. The
"DUE PERIOD" with respect to any Distribution Date commences on the second day
of the month preceding the month in which such Distribution Date occurs and
ends on the Due Date in the month in which such Distribution Date occurs. The
"PREPAYMENT PERIOD" with respect to any Distribution Date is the calendar
month preceding the month in which such Distribution Date occurs. The
"DETERMINATION DATE" with respect to any Distribution Date is the 15th day of
the month in which such Distribution Date occurs (or, if such day is not a
business day, the preceding business day).
The "PRINCIPAL BALANCE" of any Mortgage Loan as of any date of determination
is equal to the principal balance thereof as of the Cut-off Date, minus all
amounts allocated to principal that have been distributed to
Certificateholders with respect to such Mortgage Loan on or before such date
of determination as further reduced to the extent any Realized Loss thereon
has been allocated to one or more classes of Certificates on or before such
date of determination.
The "INSURER PREMIUM AMOUNT" with respect to any Distribution Date and Loan
Group is the amount payable on such Distribution Date to the Insurer as a
premium on the Policy with respect to the Mortgage Loans in such Loan Group.
Interest Distribution Amounts
On each Distribution Date, holders of the Class A-I Certificates will be
entitled to receive a distribution allocable to one-month's interest in an
amount (the "CLASS A-I INTEREST DISTRIBUTION AMOUNT"), equal to (i)
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one-twelfth of the product of the Certificate Principal Balance of the Class
A-I Certificates immediately preceding such Distribution Date multiplied by a
rate (the "GROUP I CERTIFICATE RATE") equal to the weighted average of the Net
Mortgage Rates of the Group I Loans, weighted by the aggregate Principal
Balance of the Group I Loans as of the Due Date immediately preceding the
related Due Period minus (ii) the sum of (a) the related Insurer Premium
Amount, (b) any related Prepayment Interest Shortfalls occurring during the
related Prepayment Period and (c) any related Civil Relief Act Shortfalls
occurring during the related Due Period.
On each Distribution Date, holders of the Class A-II Certificates will be
entitled to receive a distribution allocable to one-month's interest in an
amount (the "CLASS A-II INTEREST DISTRIBUTION AMOUNT") equal to (i) one-
twelfth of the product of the Certificate Principal Balance of the Class A-II
Certificates immediately preceding such Distribution Date multiplied by a rate
(the "GROUP II CERTIFICATE RATE") equal to the weighted average of the Net
Mortgage Rates of the Group II Loans, weighted by the aggregate Principal
Balance of the Group II Loans as of the Due Date immediately preceding the
related Due Period minus (ii) the sum of (a) the related Insurer Premium
Amount, (b) any related Prepayment Interest Shortfalls occurring during the
related Prepayment Period and (c) any related Civil Relief Act Shortfalls
occurring during the related Due Period.
The "CLASS S INTEREST DISTRIBUTION AMOUNT" with respect to any Distribution
Date will equal one-twelfth of 0.80% multiplied by the aggregate Principal
Balance of the Mortgage Loans as of the Due Date immediately preceding the
related Due Period. On any Distribution Date with respect to which there are
Realized Losses, the Class S Interest Distribution Amount, to the extent of
such Realized Losses, shall be allocated between the Class A-I and Class A-II
Certificates in proportion to the Realized Losses on the related Loan Group
for the related Distribution Date.
Interest on the Certificates will be calculated and payable on the basis of
a 360-day year divided into twelve 30-day months.
Principal Distribution Amounts
On each Distribution Date, the holders of the Class A-I Certificates will be
entitled to receive the "CLASS A-I PRINCIPAL DISTRIBUTION AMOUNT", which is
equal to the sum of (i) the portion of the Available Distribution Amount
related to Loan Group I that is attributable to scheduled payments of
principal of the Mortgage Loans in Loan Group I received by the Trustee, (ii)
the portion of the Available Distribution Amount related to Loan Group I that
is attributable to unscheduled payments of principal of the Mortgage Loans in
the Loan Group I received by the Servicer, (iii) that portion, if any, of the
Class S Interest Distribution Amount for such Distribution Date allocated to
the Class A-I Certificates (as provided in the definition of Class S Interest
Distribution Amount) in respect of the principal portion of Realized Losses on
Group I Loans in the related Prepayment Period, (iv) draws on the Reserve Fund
in respect of the principal portion of Realized Losses on Group I Loans (to
the extent such Realized Losses exceed the amount paid pursuant to clause
(iii)) and (v) any amounts paid in respect of a Collateralization Deficit with
respect to Loan Group I pursuant to the Policy.
On each Distribution Date, the holders of the Class A-II Certificates will
be entitled to receive the "CLASS A-II PRINCIPAL DISTRIBUTION AMOUNT", which
is equal to the sum of (i) the portion of the Available Distribution Amount
related to Loan Group II that is attributable to scheduled payments of
principal of the Mortgage Loans in Loan Group II received by the Trustee, (ii)
the portion of the Available Distribution Amount related to Loan Group II that
is attributable to unscheduled payments of principal of the Mortgage Loans in
the Loan Group II received by the Servicer, (iii) that portion, if any, of the
Class S Interest Distribution Amount for such Distribution Date allocated to
the Class A-II Certificates (as provided in the definition of Class S Interest
Distribution Amount) in respect of the principal portion of Realized Losses on
Group II Loans in the related Prepayment Period, (iv) draws on the Reserve
Fund in respect of the principal portion of Realized Losses on Group II Loans
(to the extent such Realized Losses exceed the amount paid pursuant to clause
(iii)) and (v) any amounts paid in respect of a Collateralization Deficit with
respect to Loan Group II pursuant to the Policy.
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Insured Payments relating to payments of principal are not made in respect
of the principal portion of Realized Losses until such time as the principal
portion of Realized Losses for a Distribution Date exceeds (i) the Class S
Interest Distribution Amount for such Distribution Date plus (ii) amounts then
on deposit in the Reserve Fund, and create a Collateralization Deficit. A
"COLLATERALIZATION DEFICIT" with respect to a Distribution Date and a Loan
Group is the amount, if any, by which (x) the Certificate Principal Balance of
the related class of Class A Certificates, after giving effect to all
distributions to be made on such Distribution Date, exceeds (y) the aggregate
Principal Balance of the Mortgage Loans in such Loan Group as of the close of
business on the related Due Date.
Order of Distributions
On each Distribution Date, amounts in the Certificate Account will be
distributed in the following order of priority:
(a) to the Insurer, the Insurer Premium Amount (with such amount
allocated to each Loan Group pro rata based on the aggregate Principal
Balance of the Mortgage Loans in such Loan Group);
(b) to the Trustee, the Trustee Fee (with such fee allocated to each Loan
Group pro rata based on the aggregate Principal Balance of the Mortgage
Loans in such Loan Group);
(c) to the Servicer, the Servicing Fee (with such fee allocated to each
Loan Group pro rata based on the aggregate Principal Balance of the
Mortgage Loans in such Loan Group);
(d) to the Insurer, the aggregate amount of Insured Payments which have
not been previously reimbursed to the Insurer, together with interest
thereon (with such amount allocated to the related Loan Group);
(e) concurrently,
(i) to the holders of the Class A-I Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-I
Interest Distribution Amount, and any portion of such amount remaining
unpaid from any preceding Distribution Date; and
(ii) to the holders of the Class A-II Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-II
Interest Distribution Amount, and any portion of such amount remaining
unpaid from any preceding Distribution Date;
(f) concurrently,
(i) to the holders of the Class A-I Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-I
Principal Distribution Amount and any portion of such amount remaining
unpaid from any preceding Distribution Date, until the Certificate
Principal Balance thereof has been reduced to zero; and
(ii) to the holders of the Class A-II Certificates, to the extent of
the related Available Distribution Amount remaining, the Class A-II
Principal Distribution Amount and any portion of such amount remaining
unpaid from any preceding Distribution Date, until the Certificate
Principal Balance thereof has been reduced to zero;
(g) to the holders of the Class S Certificates, or to the Reserve Fund to
the extent the Required Reserve has not been satisfied, to the extent of
the Available Distribution Amount remaining, the Class S Interest
Distribution Amount in the following order of priority:
(i) first, to the Reserve Fund, any Reserve Fund Increase Amount (as
defined herein); and
(ii) second, to the holders of the Class S Certificates, the
remaining portion, if any, of the Class S Interest Distribution Amount;
and
(h) to the holder of the Class R Certificates, the balance, if any, of
the Available Distribution Amount remaining.
Within a class of Certificates, distributions of interest or principal will
be made in accordance with the Percentage Interest represented by each
Certificate of such class.
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CUSTODIAL AND CERTIFICATE ACCOUNT
Within two business days of receipt by the Servicer, all payments and
collections in respect of the Mortgage Loans will be deposited in an account
(the "CUSTODIAL ACCOUNT") established and maintained by the Servicer with a
depository institution, which may be the Servicer, and in a manner acceptable
to the Rating Agencies and the Insurer. No later than the second Business Day
prior to each Distribution Date, the Servicer will remit to an account (the
"CERTIFICATE ACCOUNT"), to be maintained by the Trustee, all funds on deposit
in the Custodial Account that are required to be distributed on such
Distribution Date. Such funds, together with the Advances, if any, required to
be deposited in the Certificate Account by the Servicer, will be available to
make distributions of interest on, and in reduction of the Certificate
Principal Balance of, the Certificates on each Distribution Date, to make any
required payments to the Reserve Fund and to pay certain other fees and
expenses. See "Description of the Certificates--Payments on Mortgage Loans" in
the Prospectus.
RESERVE FUND
The Reserve Fund will be a segregated trust account held by the Trustee for
the benefit of the Insurer and the Certificateholders. The required level of
the Reserve Fund on a given Distribution Date (the "REQUIRED RESERVE") may
vary. Withdrawals from the Reserve Fund shall be allocated between the Loan
Groups in proportion to Realized Losses on each Loan Group. The initial
Required Reserve and the subsequent determination thereof are as described in
the Pooling and Servicing Agreement. The Insurer may at its sole discretion
modify certain of the provisions of the Pooling and Servicing Agreement
relating to the Reserve Fund. Such modifications may have the effect of
reducing or eliminating, but not increasing, the Required Reserve.
On any Distribution Date, the excess of the Required Reserve as of such
Distribution Date over the amount on deposit in the Reserve Fund as of such
Distribution Date is a "RESERVE FUND INCREASE AMOUNT."
In the event that the Required Reserve is permitted to decrease or "step
down" on a future Distribution Date, a portion of amounts on deposit in the
Reserve Fund may be withdrawn. As of any Distribution Date, the "RESERVE FUND
DECREASE AMOUNT" is equal to the excess, if any, of the amount on deposit in
the Reserve Fund (after taking into account any withdrawals to be made
therefrom) on such Distribution Date over the Required Reserve as of such
Distribution Date. The Reserve Fund Decrease Amount, on any Distribution Date
on which it is, or after taking into account all other distributions to be
made on such Distribution Date (including payments from the Reserve Fund in
respect of Realized Losses) would be, greater than zero, will be distributed
to the holders of the Class S Certificates on such Distribution Date.
ALLOCATION OF REALIZED LOSSES
Realized Losses in either Loan Group will be allocated first to the Class S
Certificates to the extent of the Class S Interest Distribution Amount for the
applicable period. In the case of Realized Losses in excess of the Class S
Interest Distribution Amount for the applicable period in either Loan Group,
the Trustee will transfer to the Certificate Account from, and to the extent
of, the funds on deposit in the Reserve Fund an amount sufficient to cover
such outstanding Realized Losses. Subject to the terms thereof, the Policy
requires a payment to the holders of each class of the Class A Certificates to
the extent that the related Realized Losses result in a Collateralization
Deficit or shortfall in the related Class A Interest Distribution Amount (to
the extent such Realized Losses are not covered by the Class S Interest
Distribution Amount or amounts on deposit in the Reserve Fund).
Notwithstanding the foregoing, if payments are not made as required under the
Policy, Realized Losses will be allocated to the related class of Class A
Certificates.
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class A
Certificates on each applicable Distribution Date, holders of the Class A
Certificates will have a right to receive distributions of the related
Available Distribution Amount that will be prior to the rights of the holders
of the Class S Certificates to such Available Distribution Amount. In
addition, the Reserve Fund, together with the availability of the Class S
Interest Distribution Amount to cover the interest
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and principal portion of current Realized Losses on the Mortgage Loans, will
also increase the likelihood of distribution of full amounts of interest and
principal to the holders of Class A Certificates on each Distribution Date.
"REALIZED LOSS" means (i) with respect to any Liquidated Loan, the excess of
the Principal Balance of each Liquidated Loan immediately prior to
liquidation, together with accrued and unpaid interest thereon, over the
liquidation proceeds, if any, received in connection with such Liquidated
Loan, less liquidation expenses and any unreimbursed Advances made with
respect thereto, (ii) with respect to any Mortgage Loan whose related
Mortgaged Property has been valued (such valuation, a "DEFICIENT VALUATION")
at less than the then current Principal Balance of such Mortgage Loan by a
court of competent jurisdiction as a result of a proceeding (a "BANKRUPTCY
PROCEEDING") under the Bankruptcy Code, the excess of the Principal Balance of
such Mortgage Loan over the principal amount as reduced in the Deficient
Valuation, or (iii) with respect to any Mortgage Loan as to which the amount
of the scheduled payment has been reduced in a Bankruptcy Proceeding (a "DEBT
SERVICE REDUCTION"), the present value of all monthly Debt Service Reductions
on such Mortgage Loan, assuming that the Mortgagor pays each scheduled payment
on the applicable Due Date and that no principal prepayments are received with
respect to such Mortgage Loan, discounted monthly at the applicable Mortgage
Rate.
"LIQUIDATED LOAN" means a Mortgage Loan that has been liquidated through
deed in lieu of foreclosure, sale in foreclosure, trustee's sale or other
realization as provided by applicable real property law to which the related
Mortgage is subject and any security agreements, or with respect to which
payment under related hazard insurance and/or from any public governmental
authority on account of a taking or condemnation of any such property has been
received and as to which, in the best judgment of the Servicer, no further
proceeds will be received.
CERTIFICATE GUARANTY INSURANCE POLICY
The following information has been supplied by the Insurer for inclusion
herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment will
be received by the Trustee, or its successor, as trustee for the Owners, on
behalf of the Owners from the Insurer, for distribution by the Trustee to each
Owner of each Owner's proportionate share of the Insured Payment. The
Insurer's obligations under the Policy with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the
time set forth in the Policy, and no accelerated Insured Payments shall be
made regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Insurer. The Policy does not cover
Prepayment Interest Shortfalls or Civil Relief Act Shortfalls.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any amounts payable under the Policy no later than
12:00 noon, New York City time, on the later of the Distribution Date on which
the related Deficiency Amount is due or the third Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as the Insurer's fiscal agent or any successor fiscal agent
appointed by the Insurer (the "INSURER'S FISCAL AGENT") of a Notice; provided,
that if such Notice is received after 12:00 noon New York City time on such
Business Day, it will be deemed to be received on the following Business Day.
If any such Notice received by the Insurer's Fiscal Agent is not in proper
form or is otherwise insufficient for the purpose of making a claim under the
Policy it shall be deemed not to have been received by the Insurer's Fiscal
Agent for purposes of this paragraph, and the Insurer or the Insurer's Fiscal
Agent, as the case may be, shall promptly so advise the Trustee and the
Trustee may submit an amended Notice.
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Insured Payments due under the Policy, unless otherwise stated therein, will
be disbursed by the Insurer's Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment.
The Insurer's Fiscal Agent is the agent of the Insurer only and the
Insurer's Fiscal Agent shall in no event be liable to the Owners for any acts
of the Insurer's Fiscal Agent or any failure of the Insurer to deposit, or
cause to be deposited, sufficient funds to make payments due under the Policy.
As used in this section and in the Policy, the following terms shall have
the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement, dated as of March 1,
1998, among the Depositor, Chevy Chase, as Seller and Servicer, and the
Trustee, as trustee for the Owners, without regard to any amendment or
supplement thereto unless such amendment or supplement has been approved in
writing by the Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee or the Servicer under the Agreement or
the Insurer is located are authorized or obligated by law or executive order
to close.
"DEFICIENCY AMOUNT" means, with respect to each class of the Class A
Certificates for any Distribution Date, (i) any shortfall in the related
Available Distribution Amount to pay the Class A-I Interest Distribution
Amount or Class A-II Interest Distribution Amount, as applicable, and (ii) the
related Collateralization Deficit.
"INSURED PAYMENT" means, as of any Distribution Date, any Deficiency Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by fax substantially in the form of Exhibit A attached to the Policy,
the original of which is subsequently delivered by registered or certified
mail from the Trustee specifying the Insured Payment which shall be due and
owing on the applicable Distribution Date.
"OWNER" means each Holder (as defined in the Agreement) of any Class A
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the Class A Certificates to payment thereunder.
Capitalized terms used in the Policy and not otherwise defined in the Policy
shall have the respective meanings set forth in the Agreement as of the date
of execution of the Policy, without giving effect to any subsequent amendment
to or modification of the Agreement unless such amendment or modification has
been approved in writing by the Insurer.
Any notice under the Policy or service of process on the Insurer's Fiscal
Agent may be made at the address listed below for the Insurer's Fiscal Agent
or such other address as the Insurer shall specify to the Trustee in writing.
The notice address of the Insurer's Fiscal Agent is 61 Broadway, 15th Floor,
New York, New York 10006, Attention: Municipal Registrar and Paying Agency, or
such other address as the Insurer's Fiscal Agent shall specify in writing to
the Trustee.
The Policy is being issued under and pursuant to and shall be construed
under the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
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OPTIONAL TERMINATION
On any Distribution Date on or after the date on which the aggregate
Principal Balance of the Mortgage Loans has been reduced to or below 5% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date, the
Servicer will have the right to purchase, in whole, but not in part, all of
the Mortgage Loans and any property acquired in respect of the Mortgage Loans
at a purchase price equal to the sum of (a) the greater of (i) the aggregate
principal amount of each Mortgage Loan plus, in each case, interest accrued
thereon at the sum of the applicable Net Mortgage Rate and the Trustee Fee
Rate to the last day of the month of purchase, plus any unreimbursed Advances
made with respect to the Mortgage Loans, and (ii) the fair market value of the
Mortgage Loans as determined by the Servicer; (b) the appraised value of any
property acquired in respect of the Mortgage Loans; and (c) all amounts due to
the Insurer; provided, however, that if such purchase will cause a draw on the
Policy, the consent of the Insurer shall be necessary prior to the exercise of
such option. The proceeds of any such purchase will be treated as a payment of
principal and interest on the Mortgage Loans for purposes of distributions to
Certificateholders and any such purchase will effect an early retirement of
the Certificates and payment to the Insurer of all amounts due to it. Any such
purchase will be made only in connection with a "Qualified Liquidation" of the
REMIC within the meaning of Section 860F(a)(4)(A) of the Code.
THE TRUSTEE
U.S. Bank National Association, a national banking association, will act as
Trustee for the Certificates pursuant to the Pooling and Servicing Agreement.
The Trustee's principal executive offices are located at 180 East Fifth
Street, St. Paul, MN 55101, Attention: Bondholder Services, and its telephone
number is (800) 934-6802.
The following obligations which are described in the Prospectus as
obligations of the Servicer have been specifically assigned to the Trustee in
the Pooling and Servicing Agreement and will be performed by the Trustee in
the manner and to the extent set forth below. The Trustee will be obligated,
among other things, to establish and maintain the Certificate Account and to
withdraw from the Certificate Account and distribute to Certificateholders of
record on the applicable Record Date the payments on account of principal and
interest required to be so distributed on each Distribution Date. In addition,
the Trustee will undertake reporting responsibilities for federal income tax
purposes.
VOTING RIGHTS
Each Certificate will be allocated voting rights for purposes of certain
actions that may be taken pursuant to the Pooling and Servicing Agreement. 98%
of all voting rights will be allocated to the Class A Certificates in
proportion to their Certificate Principal Balances. 1% of all voting rights
will be allocated to the Class S Certificates in proportion to their
percentage interests. 1.0% of all voting rights will be allocated to the Class
R Certificates.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
Under certain circumstances, Chevy Chase, as an Unaffiliated Seller (as
described in "The Trust Fund--Mortgage Loan Program" in the Prospectus), may
be required to repurchase one or more Mortgage Loans from the Trust Fund.
Generally, the repurchase obligation arises when the documentation with
respect to a Mortgage Loan is discovered to be materially defective or when a
material breach of representation or warranty is discovered, which defect or
breach materially and adversely affects the interests of the
Certificateholders or the Insurer. This repurchase obligation of Chevy Chase
constitutes the sole remedy available to Certificateholders for a breach of
such representation or warranty. See "Description of the Certificates--
Assignment of Mortgage Loans" in the Prospectus.
In the event of a repurchase of a Mortgage Loan, the repurchase price will
generally be equal to the sum of the Principal Balance of such Mortgage Loan
on the date of repurchase plus interest accrued thereon at the sum of the
applicable Net Mortgage Rate and the Trustee Fee Rate to the following Due
Date.
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Within two years from the date of the delivery of the Certificates, Chevy
Chase may, instead of repurchasing a Mortgage Loan required to be repurchased
pursuant to the Pooling and Servicing Agreement, deliver one or more mortgage
loans (each, a "REPLACEMENT MORTGAGE LOAN") in substitution for any Mortgage
Loan that would otherwise have been repurchased (each, a "DELETED MORTGAGE
LOAN"). See "Description of the Certificates--Assignment of Mortgage Loans" in
the Prospectus.
To the extent that Chevy Chase elects to deliver one or more Replacement
Mortgage Loans for a Deleted Mortgage Loan, such Replacement Mortgage Loan or
Loans must, collectively, on the date of substitution: (a) have an outstanding
Principal Balance, after the deduction of payments due in the month of
substitution, not in excess of the Principal Balance of the Deleted Mortgage
Loan; (b) have a Net Mortgage Rate not lower than the Net Mortgage Rate on the
Deleted Mortgage Loan; (c) have a Loan-to-Value Ratio calculated as of such
date no higher than the Loan-to-Value Ratio of the Deleted Mortgage Loan; (d)
have a remaining term to maturity no greater than (and not more than one year
less than) that of the Deleted Mortgage Loan; (e) be of the same or better
credit quality classification as that of the Deleted Mortgage Loan; and (f)
comply with each representation and warranty with respect to the Mortgage
Loans. Upon any such substitution, Chevy Chase will deliver the mortgage file
relating to the Replacement Mortgage Loan to the Trustee and the Trustee will
release the Deleted Mortgage Loan (or any property acquired in respect
thereof) from the Trust Fund.
For any month in which one or more Replacement Mortgage Loans are
substituted for any Deleted Mortgage Loan, the Servicer will determine the
amount, if any, by which the aggregate Principal Balance of all such
Replacement Mortgage Loans as of the date of substitution is less than the
Principal Balance of such Deleted Mortgage Loan (after application of the
scheduled principal portion of the scheduled payments due in such month). The
amount of any such shortage will be deposited by the Servicer from its own
funds into the Custodial Account in the month of substitution, without any
reimbursement therefor, and will be distributed to the Certificateholders on
the Distribution Date in the month following such substitution.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
FACTORS AFFECTING PREPAYMENTS ON THE MORTGAGE LOANS
The yields to maturity of each class of the Class A Certificates and the
aggregate amount of distributions on each class of the Class A Certificates
will be related, among other things, to the rate and timing of payments of
principal on the underlying Mortgage Loans in the related Loan Group. The rate
of principal payments on the Mortgage Loans will be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments thereon. For this purpose, the term "prepayment" includes
prepayments and liquidations due to defaults or other dispositions of the
Mortgage Loans or the Mortgaged Properties, including application of insurance
proceeds or condemnation awards, or the purchase of the Mortgage Loans by the
Servicer under the circumstances described under "Description of the
Certificates--Optional Termination" herein. NO ASSURANCE CAN BE GIVEN AS TO
THE RATE OR TIMING OF PRINCIPAL PAYMENTS OR PREPAYMENTS ON ANY OF THE MORTGAGE
LOANS.
All of the Mortgage Loans may be prepaid in whole or in part at any time.
Certain of the Mortgage Notes contain terms requiring payment of a penalty by
the Mortgagor in the event the Mortgage Loan is prepaid in full. Prepayments,
liquidations and purchases of the Mortgage Loans will result in (a) principal
distributions to Certificateholders that would otherwise be distributed over
the remaining terms of the Mortgage Loans and (b) the termination of ongoing
interest distributions with respect to such Mortgage Loans to the
Certificateholders. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The rate of principal prepayments on mortgage loans is influenced by a
variety of economic, geographic, social and other factors, including the level
of mortgage interest rates and the rate at which mortgagors default on their
mortgages. In general, if prevailing interest rates fall significantly below
the Mortgage Rates on the Mortgage Loans, the Mortgage Loans (and the
applicable Class A Certificates) are likely to be subject to a higher
incidence of prepayment than if prevailing rates remain at or above the
Mortgage Rates on the Mortgage Loans.
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Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates on the Mortgage Loans, the Mortgage Loans (and the applicable Class A
Certificates) are likely to be subject to a lower incidence of prepayment than
if prevailing rates remain at or below the Mortgage Rates on the Mortgage
Loans. The Depositor makes no representation as to the expected rate of
prepayments on the Mortgage Loans. See "Description of the Mortgage Loans"
herein and "Maturity and Prepayment Considerations" in the Prospectus for
additional information about the effect of the rate of prepayments on the
yield on and maturity of the Class A Certificates.
The "CONVERTIBLE MORTGAGE LOANS" provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such
Mortgage Loans to a fixed interest rate. The Depositor is not aware of any
publicly available statistics that set forth principal prepayment, conversion
experience or conversion forecasts of adjustable-rate mortgage loans over an
extended period of time, and its experience with respect to adjustable-rate
mortgages is insufficient to draw any conclusions with respect to the expected
prepayment or conversion rates on the adjustable-rate Mortgage Loans. As is
the case with conventional, fixed-rate mortgage loans originated in a high
interest rate environment which may be subject to a greater rate of principal
prepayments when interest rates decrease, adjustable-rate mortgage loans may
be subject to a greater rate of principal prepayments due to their refinancing
or conversion to fixed interest rate loans in a low interest rate environment.
For example, if prevailing interest rates fall significantly, adjustable-rate
mortgage loans could be subject to higher prepayment and conversion rates than
if prevailing interest rates remain constant because the availability of
fixed-rate or other adjustable-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their adjustable-rate mortgages to
"lock in" a lower fixed interest rate or to take advantage of the availability
of such other adjustable-rate mortgage loans, or, in the case of convertible
adjustable-rate mortgage loans, to exercise their option to convert the
adjustable interest rates to fixed interest rates. The conversion feature may
also be exercised in a rising interest rate environment as mortgagors attempt
to limit their risk of higher rates. Such a rising interest rate environment
may also result in an increase in the rate of defaults on the Mortgage Loans.
If any Mortgagor chooses to convert its Convertible Mortgage Loan to a fixed
interest rate, and the Seller does not elect to purchase such Mortgage Loan,
the related Loan Group will then include fixed-rate Mortgage Loans, which will
have the effect of limiting the extent to which the Class A-I Interest
Distribution Amount or Class A-II Interest Distribution Amount, as applicable,
can increase or decrease in accordance with changes in the Indexes and
accordingly may affect the yield to the Class A-I or Class A-II
Certificateholders, as applicable.
Temporary Buy-Down Loans provide for escalating or variable payments by the
related mortgagor. Such mortgage loans are underwritten on the basis of a
judgment that mortgagors will have the ability to make monthly payments in
later years as scheduled payments become larger. In some instances, however, a
mortgagor's income may not be sufficient to permit continued loan payments as
such payments increase. These types of mortgage loans may also be underwritten
primarily upon the basis of Loan-to-Value Ratios or other favorable
compensating factors. Furthermore, temporary Buy-Down Loans in the Mortgage
Pool may experience a rate of principal prepayments different from the
principal prepayment rate for conventional fixed-rate mortgage loans or from
other adjustable-rate mortgage loans having different characteristics.
The yield to investors on each class of the Class A Certificates will be
sensitive to fluctuations in the Index applicable to each Mortgage Loan in the
related Loan Group and may be adversely affected by the application of the
Maximum Mortgage Rates on the Mortgage Loans. The prepayment of Mortgage Loans
with higher Mortgage Rates and the existence of any Convertible Mortgage Loans
which have been converted into fixed interest rate mortgage loans, may result
in lower Class A-I Interest Distribution Amounts or Class A-II Interest
Distribution Amounts, as applicable, with respect to subsequent Distribution
Dates. Investors in the Class A Certificates should also be aware that
although the Mortgage Rates on the Mortgage Loans will adjust periodically,
such increases and decreases will be limited by the applicable Periodic Rate
Caps, Maximum Mortgage Rates and Minimum Mortgage Rates thereon. In addition,
the initial Mortgage Rates borne by the Mortgage Loans may be lower than the
rate based on the sum of the current applicable Index and the Note Margin. In
addition, the Mortgage Rates on the Mortgage Loans will be based on the
related Index (which may
S-42
<PAGE>
not rise and fall consistently with prevailing mortgage rates) plus the
related Note Margin (which may be different from the prevailing margins on
other mortgage loans). As a result of these factors, the Mortgage Rates on the
Mortgage Loans at any time may not equal the prevailing rates for other
adjustable rate mortgage loans and the rate of prepayment may be lower or
higher than would otherwise be anticipated.
Investors in the Class A Certificates should consider the risk that rapid
rates of prepayments on the Mortgage Loans, and therefore of principal
distributions on the Class A Certificates, may coincide with periods of low
prevailing interest rates. During such periods, the effective interest rates
on securities in which an investor in the Class A Certificates may choose to
reinvest amounts received as principal distributions on the Class A
Certificates may be lower than the interest rate borne by such Certificates.
Conversely, slow rates of prepayments on the Mortgage Loans, and therefore of
principal distributions on the Class A Certificates may coincide with periods
of high prevailing interest rates. During such periods, the amount of
principal distributions available to an investor in the Class A Certificates
for reinvestment at such high prevailing interest rates may be relatively low.
All of the Mortgage Loans will contain "due-on-sale" clauses. The sale of
Mortgaged Properties encumbered by non-assumable Mortgage Loans will result in
the prepayment of such Mortgage Loans and a corresponding decrease in the
weighted average life of the applicable class of Class A Certificates. See
"Maturity and Prepayment Considerations" in the Prospectus.
The assumed final Distribution Date for the Class A-I Certificates and Class
A-II Certificates is October 25, 2032, which is the Distribution Date
occurring in the 12th month following the month in which the latest stated
maturity of any Mortgage Loan in the Mortgage Pool.
No event of default, change in the priorities for distribution among the
classes or other provision under the Pooling and Servicing Agreement will
arise or become applicable solely by reason of the failure to retire the
entire Certificate Principal Balance of any Class A Certificates on or before
its assumed final Distribution Date.
MODELING ASSUMPTIONS
For purposes of preparing the table below, indicating the percentage of
initial Certificate Principal Balance outstanding and the weighted average
life of the Class A Certificates under certain prepayment scenarios, the
following assumptions (the "MODELING ASSUMPTIONS"), among others, have been
made:
(a) the Mortgage Loans consist of six groups with the following
characteristics:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED NEXT
WEIGHTED WEIGHTED WEIGHTED AVERAGE RATE PAYMENT AVERAGE MORTGAGE
AVERAGE AVERAGE NET AVERAGE REMAINING ADJUSTMENT ADJUSTMENT MAXIMUM RATE PERIODIC
LOAN CUT-OFF DATE MORTGAGE MORTGAGE GROSS TERM FREQUENCY FREQUENCY MORTGAGE ADJUSTMENT MORTGAGE
GROUP BALANCE ($) RATE RATE MARGIN INDEX (MONTHS) (MONTHS) (MONTHS) RATE DATE RATE CAP
----- -------------- -------- ----------- -------- -------- --------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I 330,440,357.27 6.836% 6.455% 2.977% 1-yr CMT 355 12 12 12.825% 11/01/00 2.00%
I 24,984,776.34 6.765% 6.385% 2.945% 1-yr CMT 339 12 12 12.698% 11/01/98 2.00%
II 38,877,245.39 7.336% 6.943% 3.008% 1-yr CMT 354 12 12 13.344% 11/01/04 2.00%
II 157,756,212.89 7.189% 6.803% 3.016% 1-yr CMT 348 12 12 13.226% 05/01/02 2.00%
II 1,190,280.07 8.494% 8.114% 2.938% 5-yr CMT 216 60 60 15.070% 10/01/99 2.00%
II 6,913,420.30 8.280% 7.900% 2.967% 3-yr CMT 297 36 36 14.327% 03/01/00 2.00%
</TABLE>
(b) there are no repurchases of the Mortgage Loans;
(c) the Certificates will be purchased on March 27, 1998;
(d) distributions on the Certificates will be made on the 25th day of each
month (or, if such day is not a business day, on the following business
day), commencing in April, 1998;
(e) no Mortgage Loan is delinquent and there are no Realized Losses while
the Certificates are outstanding;
(f) there are no Prepayment Interest Shortfalls or shortfalls of interest
with regard to the Mortgage Loans;
(g) throughout the life of the Mortgage Loans, the One-Year Index is equal
to 5.35%, the Three-Year Index is equal to 5.50% and the Five-Year Index
is equal to 5.55%;
(h) there is no optional termination of the Trust Fund by the Servicer.
S-43
<PAGE>
The Modeling Assumptions have been based on the weighted average
characteristics or aggregate characteristics, as applicable, of the Mortgage
Loans. The actual characteristics of many of the Mortgage Loans may vary
significantly from the Modeling Assumptions.
The prepayment model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of Mortgage Loans prepays at a specified constant annual rate. In
generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume CPR of 18% or any other CPR percentage is to
assume that the stated percentage (in this example 18%) of the outstanding
principal balance of the pool is prepaid over the course of a year. No
representation is made that the Mortgage Loans will prepay at that rate or any
other rate.
The actual characteristics and performance of the Mortgage Loans will differ
from the assumptions used in constructing the tables set forth below, which
are hypothetical in nature and are provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the
same rate until maturity or that all of the Mortgage Loans will prepay at a
constant rate until maturity or that all of the Mortgage Loans could produce
slower or faster principal distributions than indicated in the tables at the
various assumptions specified, even if the weighted average remaining term to
stated maturity of the Mortgage Loans is assumed. Any difference between such
assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment experience, will affect the percentage of initial
Certificate Principal Balance outstanding over time and the weighted average
life of the Class A Certificates.
S-44
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A-I
CERTIFICATES
AT THE INDICATED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 8% 15% 18% 25% 30%
- ----------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................... 100.00 100.00 100.00 100.00 100.00
March 25, 1999............................... 91 84 81 74 69
March 25, 2000............................... 83 71 66 55 48
March 25, 2001............................... 75 59 53 41 33
March 25, 2002............................... 68 50 43 30 23
March 25, 2003............................... 62 42 35 22 16
March 25, 2004............................... 57 35 28 17 11
March 25, 2005............................... 51 29 23 12 8
March 25, 2006............................... 46 25 18 9 5
March 25, 2007............................... 42 21 15 7 4
March 25, 2008............................... 38 17 12 5 2
March 25, 2009............................... 34 14 10 4 2
March 25, 2010............................... 31 12 8 3 1
March 25, 2011............................... 27 10 6 2 1
March 25, 2012............................... 24 8 5 1 1
March 25, 2013............................... 22 7 4 1 *
March 25, 2014............................... 19 5 3 1 *
March 25, 2015............................... 17 4 2 1 *
March 25, 2016............................... 15 4 2 * *
March 25, 2017............................... 13 3 1 * *
March 25, 2018............................... 11 2 1 * *
March 25, 2019............................... 10 2 1 * *
March 25, 2020............................... 8 1 1 * *
March 25, 2021............................... 7 1 * * *
March 25, 2022............................... 5 1 * * *
March 25, 2023............................... 4 1 * * *
March 25, 2024............................... 3 * * * *
March 25, 2025............................... 2 * * * *
March 25, 2026............................... 1 * * * *
March 25, 2027............................... * * * * *
March 25, 2028............................... 0 0 0 0 0
March 25, 2029............................... 0 0 0 0 0
March 25, 2030............................... 0 0 0 0 0
March 25, 2031............................... 0 0 0 0 0
March 25, 2032............................... 0 0 0 0 0
March 25, 2033............................... 0 0 0 0 0
March 25, 2034............................... 0 0 0 0 0
March 25, 2035............................... 0 0 0 0 0
March 25, 2036............................... 0 0 0 0 0
March 25, 2037............................... 0 0 0 0 0
March 25, 2038............................... 0 0 0 0 0
Weighted Average Life (years)**.............. 9.21 5.61 4.72 3.36 2.75
</TABLE>
- --------
* Indicates a number greater than zero but less than 0.50%.
** The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal
Balance by the number of years from the date of issuance of the
Certificate to the related Distribution Date, (ii) adding the results,
and (iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Balance described in (i) above.
This table has been prepared based on the Modeling Assumptions (including
the assumptions regarding the characters and performance of the Mortgage
Loans, which differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
S-45
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A-II
CERTIFICATES
AT THE INDICATED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 8% 15% 18% 25% 30%
- ----------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................... 100.00 100.00 100.00 100.00 100.00
March 25, 1999............................... 91 84 81 74 69
March 25, 2000............................... 83 71 66 55 48
March 25, 2001............................... 75 59 53 41 33
March 25, 2002............................... 68 50 43 30 23
March 25, 2003............................... 62 42 35 22 16
March 25, 2004............................... 56 35 28 16 11
March 25, 2005............................... 51 29 23 12 8
March 25, 2006............................... 46 24 18 9 5
March 25, 2007............................... 42 20 15 7 4
March 25, 2008............................... 37 17 12 5 2
March 25, 2009............................... 34 14 9 4 2
March 25, 2010............................... 30 12 8 3 1
March 25, 2011............................... 27 10 6 2 1
March 25, 2012............................... 24 8 5 1 1
March 25, 2013............................... 21 6 4 1 *
March 25, 2014............................... 19 5 3 1 *
March 25, 2015............................... 17 4 2 1 *
March 25, 2016............................... 14 3 2 * *
March 25, 2017............................... 12 3 1 * *
March 25, 2018............................... 11 2 1 * *
March 25, 2019............................... 9 2 1 * *
March 25, 2020............................... 8 1 1 * *
March 25, 2021............................... 6 1 * * *
March 25, 2022............................... 5 1 * * *
March 25, 2023............................... 4 1 * * *
March 25, 2024............................... 3 * * * *
March 25, 2025............................... 2 * * * *
March 25, 2026............................... 1 * * * *
March 25, 2027............................... * * * * *
March 25, 2028............................... 0 0 0 0 0
March 25, 2029............................... 0 0 0 0 0
March 25, 2030............................... 0 0 0 0 0
March 25, 2031............................... 0 0 0 0 0
March 25, 2032............................... 0 0 0 0 0
March 25, 2033............................... 0 0 0 0 0
March 25, 2034............................... 0 0 0 0 0
March 25, 2035............................... 0 0 0 0 0
March 25, 2036............................... 0 0 0 0 0
March 25, 2037............................... 0 0 0 0 0
March 25, 2038............................... 0 0 0 0 0
Weighted Average Life (years)**.............. 9.10 5.57 4.70 3.35 2.74
</TABLE>
- --------
* Indicates a number greater than zero but less than 0.50%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of Certificate Principal Balance
described in (i) above.
This table has been prepared based on the Modeling Assumptions (including
the assumptions regarding the characters and performance of the Mortgage
Loans, which differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
S-46
<PAGE>
CHEVY CHASE BANK, F.S.B.
GENERAL
The Seller is a federally chartered stock savings bank. The Seller's home
office is located at 7926 Jones Branch Drive, McLean, Virginia 22102, and its
executive offices are located at 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815. The Seller's telephone number is (301) 986-7000. The Seller is
subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision ("OTS") within the Department of the Treasury and the
FDIC. Deposits at the Seller are fully insured up to $100,000 per insured
depositor by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC.
Based on unaudited results, at December 31, 1997, the Seller had
consolidated assets of approximately $6.2 billion, deposits of approximately
$5.0 billion and stockholders' equity of approximately $374.3 million. As a
savings bank chartered under the laws of the United States, the Seller is
subject to certain minimum regulatory capital requirements imposed under
FIRREA. At December 31, 1997, the Seller's tangible, core, tier 1 risk-based
and total risk-based regulatory capital ratios were 6.65%, 6.65%, 6.81% and
13.01%, respectively. As of such date, the Seller's capital ratios exceeded
the requirements under FIRREA as well as the standards established for "well-
capitalized" institutions under the prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991. The OTS has the discretion to treat a "well-capitalized"
institution as an "adequately capitalized" institution for purposes of the
prompt corrective action regulations if, after notice and an opportunity for a
hearing, the OTS determines that the institution (i) is being operated in an
unsafe or unsound condition or (ii) has received and has not corrected a less
than satisfactory examination rating for asset quality, management, earnings
or liquidity.
Legislation passed in 1996 requires the merger of the Bank Insurance Fund
("BIF") and the SAIF into a single Deposit Insurance Fund on January 1, 1999,
but only if the thrift charter is eliminated by that date. Congress is
considering legislation in various forms that would require federal thrifts,
like the Seller, to convert their charters to national or state bank charters.
The House Banking Committee approved a version of such legislation on June 20,
1997 and the House Commerce Committee approved its version of the legislation
on October 30, 1997. While the last session of Congress adjourned without
further action on the bills, the House has resumed consideration of the
legislation in the current session. In the absence of appropriate
"grandfather" provisions, such legislation could have an adverse effect on the
Seller and its parent company, the B.F. Saul Real Estate Investment Trust (the
"REAL ESTATE INVESTMENT TRUST") because, among other things, the Real Estate
Investment Trust engages in activities that are not permissible for bank
holding companies and the regulatory capital and accounting treatment for
banks and thrifts differs in certain significant respects. While the versions
of the bill approved by the House Banking and Commerce Committees both contain
grandfather provisions that address many of these issues, the Seller cannot
determine at this time whether, or in what form, such legislation may
eventually be enacted, and there can be no assurances that any such
legislation that is enacted will contain adequate grandfather rights for the
Seller or the Real Estate Investment Trust.
DELINQUENCY AND FORECLOSURE EXPERIENCE
As of December 31, 1997, the Servicer provided servicing for approximately
$2,063 million aggregate principal amount of residential mortgage loans. The
Mortgage Loans are being serviced in Laurel, Maryland.
The following table sets forth the delinquency and foreclosure experience by
aggregate principal balance of the residential mortgage loans funded and
serviced by Chevy Chase, as a percentage of all such mortgage loans, as of the
dates indicated.
S-47
<PAGE>
CHEVY CHASE RESIDENTIAL LOAN PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------------------------------ --------------------
1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio (1)..... 1,369,570 1,391,694 1,601,483 1,966,879 1,740,079 2,063,320
30-59 Days Past Due (2). 2,509 594 4,964 4,797 7,081 5,538
60-89 Days Past Due (2). 355 1,711 784 1,958 1,530 2,332
90 or more Days Past Due
(2).................... 6,330 5,373 4,859 5,410 5,243 6,078
Total Delinquencies as a
Percentage of Total
Portfolio.............. 0.67% 0.55% 0.66% 0.62% 0.80% 0.68%
Foreclosures Pending
(3).................... 7,343 5,699 6,132 6,665 6,693 6,022
</TABLE>
- --------
(1) Excluding Real Estate Owned.
(2) Contractually past due.
(3) Are included in the appropriate delinquency bucket.
There can be no assurance that delinquency and foreclosure experience on the
Mortgage Loans will be similar. The information should not be considered to
reflect the credit quality of the Mortgage Loans included in the Mortgage
Pool, or as a basis for assessing the likelihood, amount or severity of losses
on the Mortgage Loans. The statistical data in the table is based on all of
the residential mortgage loans in Chevy Chase's servicing portfolio. The
Mortgage Loans may have characteristics which distinguish them from the
majority of the loans in Chevy Chase's servicing portfolio.
SERVICING
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to receive each month a servicing fee (the
"SERVICING FEE") equal to (i) one-twelfth of 0.375% per annum (the "SERVICING
FEE RATE") plus (ii) in the case of Lender-Paid MI Loans, one-twelfth of the
additional interest rate thereon attributable to the payment of primary
mortgage insurance premium by the Servicer, which additional rate ranges from
0.20% to 0.65%, on the Principal Balance of each Mortgage Loan. The Servicing
Fee relating to each Mortgage Loan will be retained by the Servicer from
payments and collections (including insurance proceeds and liquidation
proceeds) in respect of such Mortgage Loan. The Servicer will also be entitled
to retain as additional servicing compensation all investment income earned on
amounts on deposit in the Custodial Account and the Certificate Account, all
default charges and all prepayment, late payment and assumption fees and
certain other fees payable by a Mortgagor pursuant to the related Mortgage
Note.
The Servicer will pay all expenses incurred in connection with its
responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described herein and in the Prospectus), including all fees
and expenses payable to any Servicer and the various expenses discussed in the
Prospectus. See "Description of the Certificates--Servicing by Unaffiliated
Sellers" in the Prospectus.
ADVANCES
On each Distribution Date, the Servicer will be obligated to advance (each,
an "ADVANCE") any scheduled payments of principal and interest (net of the
related Servicing Fee) that are delinquent as of the close of business on the
preceding Determination Date at any time prior to the commencement of
foreclosure proceedings with
S-48
<PAGE>
respect to such Mortgage Loan, but only if the Servicer determines that the
amount so advanced will be recoverable from subsequent payments or collections
(including insurance proceeds and liquidation proceeds net of liquidation
expenses) in respect of the affected Mortgage Loan. Advances will be
reimbursable from recoveries on the affected Mortgage Loan and, to the extent
the Servicer determines that Advances will not be ultimately recoverable from
related recoveries, from any funds on deposit in the Custodial Account and the
Certificate Account. The Servicer will also be obligated to advance certain
taxes and insurance premiums not paid by Mortgagors on a timely basis, but
only to the extent deemed recoverable from the related Mortgage Loans. The
Servicer's right of reimbursement out of such recoveries will be prior to the
rights of the Class A Certificateholders to receive any amounts recovered with
respect to such Mortgage Loans. See "Description of the Certificates--
Advances" in the Prospectus.
THE INSURER
The following information has been supplied by MBIA Insurance Corporation
(the "INSURER") for inclusion in this Prospectus Supplement.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange-listed company. MBIA Inc. is not obligated to pay the debts of
or claims against the Insurer. The Insurer is domiciled in the State of New
York and licensed to do business in and subject to regulation under the laws
of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico,
the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the
United States and the Territory of Guam. The Insurer has two European
branches, one in the Republic of France and the other in the Kingdom of Spain.
New York has laws prescribing minimum capital requirements, limiting classes
and concentrations of investments and requiring the approval of policy rates
and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Insurer,
changes in control and transactions among affiliates. Additionally, the
Insurer is required to maintain contingency reserves on its liabilities in
certain amounts and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding stock
of Capital Markets Assurance Corporation ("CMAC"), a New York domiciled
financial guarantee insurance company, through a merger with its parent,
CapMAC Holdings Inc. MBIA Inc. then contributed the common stock of CMAC to
the Insurer. Pursuant to a reinsurance guarantee, CMAC has ceded all of its
net insured risks, as well as its unearned premiums and contingency reserves,
to the Insurer and the Insurer has reinsured CMAC's net outstanding exposure.
MBIA Inc. is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for the three years ended December 31, 1996, prepared in
accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1996
and the consolidated financial statements of the Insurer and its subsidiaries
as of September 30, 1997 and for the periods ending September 30, 1997 and
September 30, 1996 included in the Quarterly Report on Form 10-Q of MBIA Inc.
for the period ending September 30, 1997 are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated by reference herein shall be
modified or superseded for purposes of this Prospectus Supplement to the
extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchanges Act of 1934, as amended, subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Class A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
S-49
<PAGE>
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP").
<TABLE>
<CAPTION>
SAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................................ $4,476 $5,165
Liabilities.................................... 3,009 3,457
Capital and Surplus............................ 1,467 1,708
<CAPTION>
GAAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets......................................... $5,066 $5,819
Liabilities.................................... 2,262 2,594
Shareholder's Equity........................... 2,804 3,225
</TABLE>
Copies of the financial statements of the Insurer incorporated by reference
herein and copies of the Insurer's 1996 year-end audited financial statements
prepared in accordance with statutory accounting practices are available,
without charge, from the Insurer. The address of the Insurer is 113 King
Street, Armonk, New York 10504. The telephone number of the Insurer is (914)
273-4545.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Insurer set forth under the
headings "Description of the Certificates--Certificate Guaranty Insurance
Policy" and "The Insurer." Additionally, the Insurer makes no representation
regarding the Class A Certificates or the advisability of investing in the
Class A Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Insurer and CMAC "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc., rates the claims paying ability of the Insurer and CMAC "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates the
claims paying ability of the Insurer "AAA." (CMAC has not requested a rating
from Fitch IBCA, Inc.)
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Insurer does not guaranty the market price of the Class A
Certificates nor does it guaranty that the ratings on the Class A Certificates
will not be revised or withdrawn.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
A REMIC election will be made with respect to certain assets in the Trust
Fund for federal income tax purposes. Upon the issuance of the Certificates,
Orrick, Herrington & Sutcliffe LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, for federal income tax purposes,
certain assets in the Trust Fund will qualify as a REMIC under Sections 860A
through 860G of the Code.
S-50
<PAGE>
For federal income tax purposes, (i) the Class A-I, Class A-II and Class S
Certificates will be the "regular interests" in, and generally will be treated
as debt obligations of, the REMIC, and (ii) the Class R Certificates will be
the sole class of "residual interests" in the REMIC.
For federal income tax reporting purposes, the Class A Certificates will not
be treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 18% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
REGULATIONS") under sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Class A Certificates should be aware that Section 1272(a)(6) of the
Code and the OID Regulations do not adequately address certain issues relevant
to, or applicable to, prepayable securities bearing a variable rate of
interest such as the Class A Certificates. In the absence of other authority,
the Servicer intends to be guided by certain principles of the OID Regulations
applicable to variable rate debt instruments in determining whether such
Certificates should be treated as issued with original issue discount and in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders and the
IRS. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules relating to
debt instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the Class A Certificates should be governed by some other method not yet
set forth in regulations or should be treated as having been issued with
original issue discount. Prospective purchasers of the Class A Certificates
are advised to consult their tax advisors concerning the tax treatment of such
Certificates.
The Servicer believes that, if the Class A Certificates were determined to
have been issued with original issue discount, a reasonable application of the
principles of the OID Regulations to the Class A Certificates generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by
assuming that the value of the applicable Index will remain constant for
purposes of determining the original yield to maturity of each such class of
Certificates and projecting future distributions on such Certificates, thereby
treating such Certificates as fixed rate instruments to which the original
issue discount computation rules described in the Prospectus can be applied,
and (ii) by accounting for any positive or negative variation in the actual
value of the applicable Index in any period from its assumed value as a
current adjustment to original issue discount with respect to such period. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" in the Prospectus.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of a Class A Certificate
may be able to select a method for recognizing original issue discount that
differs from that used by the Servicer in preparing reports to the
Certificateholders and the IRS.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such Class
A Certificates are treated as "real estate assets" under Section 856(c)(4)(A)
of the Code. Moreover, the Class A Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code. However, prospective
investors in Class A Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a
S-51
<PAGE>
Certificate pursuant to the right of the Servicer to repurchase such Class A
Certificates may adversely affect any REMIC that holds such Class A
Certificates if such repurchase is made under circumstances giving rise to a
Prohibited Transaction Tax. See "Pooling and Servicing Agreement--Termination"
herein and "Certain Federal Income Tax Consequences--REMICs--Characterization
of Investments in REMIC Certificates" in the Prospectus.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "NEW REGULATIONS")
which make certain modifications to the withholding, backup withholding and
information reporting rules described in the Prospectus. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December
31, 1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMIC Trust Funds" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans and
arrangements that are subject to ERISA or Section 4975 of the Code ("PLANS"),
including, but not limited to, insurance company general or separate accounts,
collective investment funds and other accounts in which "plan assets" of any
Plan are invested, should review carefully the discussion under "ERISA
Considerations" in the Prospectus and should consult with their legal advisers
as to whether the purchase or holding of Class A Certificates could give rise
to a transaction that is prohibited or not otherwise permissible under either
ERISA or Section 4975 of the Code.
Pursuant to Section 401(c) of ERISA, the U.S. Department of Labor was
required to have issued final regulations no later than December 31, 1997
which were to provide guidance for purposes of determining, in cases where
insurance policies or annuity contracts supported by an insurer's general
account are issued to or for the benefit of a Plan on or before December 31,
1998, which general account assets constitute "Plan Assets." Proposed
regulations were published on December 22, 1997, although final regulations
have not yet been issued. See "ERISA Considerations--Insurance Company General
Accounts" in the Prospectus.
The Depositor believes that the Class A Certificates will constitute an
Exempt Series for purposes of applying PTCE 83-1. See "ERISA Considerations--
Prohibited Transactions Class Exemptions" in the Prospectus. In addition, the
purchase or holding of the Class A Certificates by or on behalf of, or with
"plan assets" of, any Plan may be eligible for exemptive relief under the
Underwriter's PTE, as described under "ERISA Considerations--Underwriter's
PTE" in the Prospectus. The Underwriter believes that conditions (a) through
(d) to the availability of the Underwriter's PTE, as described under "ERISA
Considerations--Underwriter's PTE" in the Prospectus, are satisfied with
respect to the Class A Certificates and that condition (i) set forth therein
is likely to be satisfied. Whether or not the other conditions of the
Underwriter's PTE are met will depend upon the particular circumstances at the
time the Class A Certificates are acquired by or on behalf of, or with "plan
assets" of the Plan.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the offering of the Class A
Certificates towards the simultaneous purchase of the Mortgage Loans from the
Seller.
S-52
<PAGE>
PLAN OF DISTRIBUTION
The Depositor has entered into an underwriting agreement (the "UNDERWRITING
AGREEMENT") with Credit Suisse First Boston Corporation, an affiliate of the
Depositor, as underwriter (the "UNDERWRITER"). The Underwriting Agreement
provides that the obligations of the Underwriter are subject to certain
conditions precedent, and that the Underwriter will be obligated to purchase
all of the Class A Certificates if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates from time to time for sale in one or more negotiated
transactions or otherwise at prices to be determined at the time of sale. The
Underwriter may effect such transactions by selling the Class A Certificates
to or through dealers and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter and
any purchasers of the Class A Certificates for whom the Underwriter may act as
agent.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the Class A Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
Class A Certificates by them may be deemed to be underwriting discounts or
commissions, under the Securities Act of 1933, as amended.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or contribute to payments which the Underwriter may be required to
make in respect thereof.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and its
subsidiaries as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996 incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand, L.L.P.,
independent accountants, as set forth in their report thereon, incorporated by
reference herein in reliance upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The legality of the Class A Certificates and the material federal income tax
consequences of the Class A Certificates will be passed upon for the Depositor
by Orrick, Herrington & Sutcliffe LLP, New York, New York. The legality of the
Class A Certificates will be passed upon for the Underwriter by Orrick,
Herrington & Sutcliffe LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" by S&P and "Aaa" by Moody's. Such ratings are based on the claims
paying ability of the Insurer. The ratings on mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of
all distributions on the underlying mortgage loans to which they are entitled.
Such rating opinions address the structural and legal aspects associated with
the certificates, including the nature of the underlying mortgage loans.
Ratings on mortgage pass-through certificates do not represent an assessment
of the likelihood that principal prepayments will be made by mortgagors or the
degree to which such prepayments might differ from those originally
anticipated, and do not address the possibility that certificateholders might
suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organizations. Each security rating should be evaluated independently
of any other security rating. In addition, a security rating does not address
the frequency of prepayments of Mortgage Loans or the corresponding effect on
yield to investors. See "Certain Yield and Prepayment Considerations" herein.
S-53
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Advance.............................................................. S-48
Agreement............................................................ S-39
Available Distribution Amount........................................ S-5, S-34
Bankruptcy Code...................................................... S-17
Bankruptcy Proceeding................................................ S-38
Beneficial Owner..................................................... S-32
BIF.................................................................. S-47
Book-Entry Certificates.............................................. S-32
Business Day......................................................... S-39
CD Account........................................................... S-17
CD Collateral........................................................ S-17
CD Pledge Loans...................................................... S-19
Cede................................................................. S-32
Certificate Account.................................................. S-37
Certificate Principal Balance........................................ S-32
Certificateholders................................................... S-1
Certificates......................................................... S-1, S-32
Chevy Chase.......................................................... S-1
Civil Relief Act..................................................... S-13
Civil Relief Act Shortfalls.......................................... S-14
Class A Certificates................................................. S-1, S-32
Class A-I Interest Distribution Amount............................... S-6, S-34
Class A-I Principal Distribution Amount.............................. S-35
Class A-II Interest Distribution Amount.............................. S-6, S-35
Class A-II Principal Distribution Amount............................. S-35
Class S Interest Distribution Amount................................. S-35
Closed Loans......................................................... S-31
CMAC................................................................. S-49
Collateralization Deficit............................................ S-7, S-36
Commission........................................................... S-3
Convertible Mortgage Loans........................................... S-31
CPR.................................................................. S-44
Custodial Account.................................................... S-37
Debt Service Reduction............................................... S-38
Deficiency Amount.................................................... S-39
Deficient Valuation.................................................. S-38
Definitive Certificate............................................... S-14, S-32
Deleted Mortgage Loan................................................ S-41
Depositor............................................................ S-1
Determination Date................................................... S-5, S-34
Distribution Date.................................................... S-6, S-2
DTC.................................................................. S-2
Due Date............................................................. S-5, S-34
Due Period........................................................... S-5, S-34
ERISA................................................................ S-15
FDIA................................................................. S-18
FDIC................................................................. S-18
Financial Intermediary............................................... S-32
FIRREA............................................................... S-18
</TABLE>
S-54
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
Five-Year Index................................................. S-9, S-20, S-29
Five/Five Group II Loans........................................ S-10, S-20
Five/One Group II Loans......................................... S-10, S-20
GAAP............................................................ S-50
Group I Certificate Rate........................................ S-6, S-35
Group I Loans................................................... S-1
Group II Certificate Rate....................................... S-6, S-35
Group II Loans.................................................. S-1
Index........................................................... S-9, S-29
Insured Payment................................................. S-7, S-39
Insurer......................................................... S-1, S-49
Insurer Premium Amount.......................................... S-34
Insurer's Fiscal Agent.......................................... S-38
IRS............................................................. S-51
Lender-Paid MI Loan............................................. S-19
Liquidated Loan................................................. S-38
Loan Group...................................................... S-1
Loan Group I.................................................... S-1
Loan Group II................................................... S-1
Loan-to-Value Ratio............................................. S-8, S-19
Maximum Mortgage Rate........................................... S-21
Maximum Net Mortgage Rate....................................... S-31
Minimum Mortgage Rate........................................... S-21
Minimum Net Mortgage Rate....................................... S-31
Modeling Assumptions............................................ S-43
Moody's......................................................... S-1
Mortgage Loans.................................................. S-1
Mortgage Pool................................................... S-1
Net Mortgage Rate............................................... S-31
New Regulations................................................. S-52
Note Margin..................................................... S-9, S-20, S-29
Notice.......................................................... S-39
OID Regulations................................................. S-51
One-Year Index.................................................. S-9, S-20, S-29
One/One Group I Loans........................................... S-10, S-20
OTS............................................................. S-47
Owner........................................................... S-39
Periodic Rate Cap............................................... S-20
Plans........................................................... S-52
Policy.......................................................... S-1
Pooling and Servicing Agreement................................. S-4, S-18
Prepayment Interest Shortfall................................... S-13
Prepayment Period............................................... S-5, S-34
Principal Balance............................................... S-34
Real Estate Investment Trust.................................... S-47
Realized Loss................................................... S-38
Registration Statement.......................................... S-3
REMIC........................................................... S-2
Replacement Mortgage Loan....................................... S-41
Required Reserve................................................ S-37
Reserve Fund.................................................... S-11
</TABLE>
S-55
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Reserve Fund Decrease Amount................................... S-37
Reserve Fund Increase Amount................................... S-37
Residual Certificates.......................................... S-32
Rules.......................................................... S-32
S&P............................................................ S-1
SAIF........................................................... S-47
SAP............................................................ S-50
Seller......................................................... S-1
Servicer....................................................... S-18
Servicing Fee.................................................. S-13, S-48
Servicing Fee Rate............................................. S-13, S-31, S-48
Seven/One Group II Loans....................................... S-10, S-20
SMMEA.......................................................... S-15
Stated Principal Balance....................................... S-32
Three-Year Index............................................... S-9, S-20, S-29
Three/One Group I Loans........................................ S-9, S-20
Three/Three Group II Loans..................................... S-10, S-20
Trust Fund..................................................... S-1, S-4
Trustee........................................................ S-18
Trustee Fee.................................................... S-13
Trustee Fee Rate............................................... S-13, S-31
Underwriter.................................................... S-1, S-53
Underwriting Agreement......................................... S-53
</TABLE>
S-56
<PAGE>
PROSPECTUS
CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.
DEPOSITOR
CONDUIT MORTGAGE AND MANUFACTURED HOUSING CONTRACT
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
---------------
The Conduit Mortgage and Manufactured Housing Contract Pass-Through
Certificates (the "Certificates") offered hereby and by the related Prospectus
Supplements will be offered from time to time in series (each, a "Series") in
one or more separate classes (each, a "Class"), which may be divided into one
or more subclasses (each, a "Subclass"), that represent interests in specified
percentages of principal and interest (a "Percentage Interest") with respect
to the related Mortgage Pool or the Contract Pool (each, as defined below), or
that have been assigned a Stated Principal Balance and an Interest Rate (as
such terms are defined herein), as more fully set forth herein, and will
evidence the undivided interest, beneficial interest or notional amount
specified in the related Prospectus Supplement in one of a number of trusts,
each to be created by Credit Suisse First Boston Mortgage Securities Corp.
(the "Depositor") from time to time. The trust property of each trust (the
"Trust Fund") will consist of a pool containing one- to four-family
residential mortgage loans, 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, loans
secured by commercial real estate properties and/or mixed
residential/commercial properties, loans secured by unimproved land, mortgage
participation certificates evidencing participation interests in such loans
that are acceptable to the nationally recognized statistical rating agency or
agencies rating the related Series of Certificates (collectively, the "Rating
Agency") for a rating in one of the four highest rating categories of such
Rating Agency (such loans and participation certificates being referred to
collectively hereinafter as the "Mortgage Loans"), or certain conventional
mortgage pass-through certificates (the "Mortgage Certificates") 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"), or mortgage loans partially guaranteed by the
Veterans Administration (the "VA"), or any combination of the foregoing,
bearing fixed or variable rates of interest. The Contracts may be conventional
contracts, contracts insured by the FHA or partially guaranteed by the VA, or
any combination of the foregoing, bearing fixed or variable rates of interest,
as specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, the rights of the holders of the Certificates
of one or more Classes or Subclasses of a Series to receive distributions with
respect to the related Mortgage Pool or Contract Pool may be subordinated to
such rights of the holders of the Certificates of one or more Classes or
Subclasses of such Series to the extent described herein and in such
Prospectus Supplement. As provided in the applicable Prospectus Supplement,
the timing of payments, whether of principal or of interest, to any one or
more of such Classes or Subclasses may be on a sequential or a pro rata basis.
The Prospectus Supplement with respect to each Series will also set forth
specific information relating to the Trust Fund with respect to the Series in
respect of which the Prospectus is being delivered, together with specific
information regarding the Certificates of such Series.
The Certificates do not represent an obligation of or interest in the
Depositor or any affiliate thereof. Neither the Certificates, the Mortgage
Loans, the Contracts nor the Mortgage Certificates are insured or guaranteed
by any governmental agency or instrumentality, except to the extent provided
herein.
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 CERTIFICATES OF A SERIES IN RESPECT OF WHICH THIS PROSPECTUS IS
BEING DELIVERED.
---------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, which may include Credit
Suisse First Boston Corporation, an affiliate of the Depositor, as more fully
described under "Plan of Distribution" and in the related Prospectus
Supplement. Certain offerings of the Certificates, as specified in the related
Prospectus Supplement, may be made in one or more transactions exempt from the
registration requirements of the Securities Act of 1933, as amended. Such
offerings are not being made pursuant to the Registration Statement of which
this Prospectus forms a part.
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market
will develop as a result of such offering or, if it does develop, that it will
continue.
The Depositor, as specified in the applicable Prospectus Supplement, may
elect to treat the Trust Fund with respect to certain Series of Certificates
as one or more Real Estate Mortgage Investment Conduits (each, a "REMIC"). See
"Certain Federal Income Tax Consequences."
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Certificates of such Series may be subject to early
termination and may receive Special Distributions (as defined herein) in
reduction of Stated Principal Balance (as defined herein) under the
circumstances described herein and in such Prospectus Supplement.
This Prospectus may not be used to consummate sales of the Certificates
offered hereby unless accompanied by a Prospectus Supplement.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is September 25, 1997.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement with respect to each Series of Certificates will,
among other things, set forth with respect to such Series of Certificates: (i)
the identity of each Class or Subclass within such Series; (ii) the undivided
interest, Percentage Interest, Stated Principal Balance or notional amount of
each Class or Subclass of Certificates; (iii) the Pass-Through Rate, Interest
Rate or Annual Rate borne by each Class or Subclass within such Series; (iv)
certain information concerning the Mortgage Loans, the Mortgage Certificates,
the Contracts, if any, and the other assets comprising the Trust Fund for such
Series; (v) the final Distribution Date of each Class or Subclass of
Certificates within such Series; (vi) the identity of each Class or Subclass
of Compound Interest Certificates, if any, within such Series; (vii) the
method used to calculate the amount to be distributed with respect to each
Class or Subclass of Certificates; (viii) the order of application of
distributions to each of the Classes or Subclasses within such Series, whether
sequential, pro rata, or otherwise; (ix) the Distribution Dates with respect
to such Series; (x) information with respect to the terms of the Residual
Certificates or Subordinated Certificates offered hereby, if any 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
Certificates 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 pursuant to which a Series of
Certificates is issued will be provided to each person to whom a Prospectus
and the related Prospectus Supplement are delivered, upon written or oral
request directed to: 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 Certificates offered hereby. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, upon request, a copy of any or all such documents or reports
incorporated
2
<PAGE>
herein by reference, in each case to the extent such documents or reports
relate to one or more of such Classes of such Certificates, other than the
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests to the Depositor should be directed
to: Credit Suisse First Boston Mortgage Securities Corp., 11 Madison Avenue,
New York, New York 10010, telephone number (212) 325-2000.
IF AND TO THE EXTENT REQUIRED BY APPLICABLE LAW OF 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.
3
<PAGE>
SUMMARY OF TERMS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the
related Prospectus Supplement. Certain capitalized terms used and not otherwise
defined herein shall have the meanings given elsewhere in this Prospectus.
Securities Offered.......... Conduit Mortgage and Manufactured Housing
Contract Pass-Through Certificates (the
"Certificates"), issuable in series (each, a
"Series"). The Certificates may be issued in one
or more classes (each, a "Class") and such
Classes may be divided into one or more
subclasses (each, a "Subclass"). One or more of
such Classes or Subclasses of a Series may be
subordinated to one or more Classes or
Subclasses of such Series, as specified in the
related Prospectus Supplement (any such Class or
Subclass to which another Class or Subclass is
subordinated being hereinafter referred to as a
"Senior Class" or a "Senior Subclass,"
respectively, and any such subordinated Class or
Subclass being hereinafter referred to as a
"Subordinated Class" or "Subordinated Subclass,"
respectively). One or more of such Classes or
Subclasses of Certificates of a Series (the
"Residual Certificates") may evidence a residual
interest in the related 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 Certificates") may be assigned a
principal balance (a "Stated Principal Balance"
or a "Certificate Principal Balance") based on
the cash flow from the Mortgage Loans (as
hereinafter defined), Mortgage Certificates (as
hereinafter defined), the Contracts (as
hereinafter defined) 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 such Classes or
Subclasses 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
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
4
<PAGE>
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 Class or Subclass 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 to be
created by the Depositor from time to time. The
trust property of each trust (the "Trust Fund")
will consist of (a) one or more mortgage pools
(each, a "Mortgage Pool") containing (i)
conventional one- to four-family residential
mortgage loans, (ii) loans (the "Cooperative
Loans") made to finance the purchase of certain
rights relating to cooperatively owned
properties secured by the pledge of shares
issued by a cooperative corporation (the
"Cooperative") and the assignment of a
proprietary lease or occupancy agreement
providing the exclusive right to occupy a
particular dwelling unit (a "Cooperative
Dwelling" and, together with one- to four-family
residential properties, "Single Family
Property"), (iii) mortgage loans ("Multifamily
Mortgage Loans") secured by multifamily
residential rental properties consisting of five
or more dwelling units or apartment buildings
owned by cooperative housing corporations
("Multifamily Property"), purchased by the
Depositor either directly or through one or more
affiliates from an affiliate or from
unaffiliated sellers, (iv) mortgage loans
("Commercial Mortgage Loans") secured by
commercial real estate properties ("Commercial
Property"), (v) mortgage loans ("Mixed-Use
Mortgage Loans") secured by mixed
residential/commercial properties ("Mixed-Use
Property"), (vi) loans secured by unimproved
land, (vii) mortgage participation certificates
evidencing participation interests in such loans
that are acceptable to the nationally recognized
rating agency or agencies identified in the
related Prospectus Supplement (collectively, the
"Rating Agency") rating the Certificates of such
Series for a rating in one of the four highest
rating categories of such Rating Agency (such
loans and mortgage participation certificates
being referred to collectively hereinafter as
the "Mortgage Loans"), 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
Certificates will be offered in fully registered
form
5
<PAGE>
only, in one or more Classes, which may be
divided into one or more Subclasses evidencing
the right to receive a share of principal
payments and the percentages of interest
payments on the underlying Mortgage Loans,
Mortgage Certificates or Contracts at the Pass-
Through Rate for the related Mortgage Pool or
Contract Pool. If so specified in the related
Prospectus Supplement, Multi-Class Certificates
of a Series may be issued with the Stated
Principal Balances and the Interest Rates
therein specified. At the time of issuance, each
Certificate offered by means of this Prospectus
and the related Prospectus Supplements will be
rated in one of the four highest rating
categories by at least one Rating Agency. The
minimum undivided interest, percentage interest
or beneficial interest in a 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 Certificates."
Special Servicer............ The entity, if any, named as Special Servicer in
the applicable Prospectus Supplement, which may
be an affiliate of the Depositor. See
"Description of the Certificates."
Interest.................... Interest will be distributed on the days
specified in the Prospectus Supplement with
respect to a Series, or if any such day is not a
business day, the next succeeding business day
(the "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 within such Series,
commencing on the day specified in such
Prospectus Supplement, in the manner specified
in such Prospectus Supplement. See "Yield
Considerations" and "Description of the
Certificates--Payments on Mortgage Loans" and
"--Payments on Contracts."
Principal (including Unless otherwise specified in the related
prepayments)............... Prospectus Supplement, principal on each Trust
Asset underlying a Series of Certificates 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
Certificates, distributions on such Multi-Class
Certificates may be made in reduction of the
Stated Principal Balance, in an amount equal to
the Stated Principal Distribution Amount. Unless
otherwise specified in the related Prospectus
Supplement, the Stated Principal Distribution
Amount
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<PAGE>
will equal the amount by which the Stated
Principal Balance of such Class of Multi-Class
Certificates (before taking into account the
amount of interest accrued and added to the
Stated Principal Balance of any Class or of
Compound Interest Certificates) 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 and Prepayment
Considerations" and "Description of the
Certificates--Payments on Mortgage Loans" and
"--Payments on Contracts." If so specified in
the Prospectus Supplement relating to a Series,
the Multi-Class Certificates of such Series
which have other than monthly Distribution Dates
may receive special distributions in reduction
of 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
Pooling and Servicing Agreement, that the amount
of cash anticipated to be on deposit in the
Certificate Account for such Series on the next
Distribution Date may be less than the sum of
the interest distributions and the amount of
distributions in reduction of Stated Principal
Balance to be made on such Distribution Date.
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
Certificates--Special Distributions."
The Mortgage Pools.......... If so specified in the related Prospectus
Supplement, the Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in the Mortgage Pool or
Pools included in the Trust Fund for such
Series. 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
7
<PAGE>
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 Pools
may be formed from time to time in varying
sizes.
As of the related Cut-off Date, no more than 10%
of the aggregate principal balance of any
Mortgage Pool will consist of Commercial
Mortgage Loans.
Some of the Mortgage Loans will fully amortize
over their remaining terms to maturity and
others will provide for balloon payments at
maturity. If so specified in the related
Prospectus Supplement, some of the Mortgage
Loans may prohibit prepayments entirely or for
certain periods and/or may require payment of
premiums or yield maintenance penalties in
connection with certain prepayments. The
Mortgage Loans will provide for recourse against
only the Mortgaged Properties or provide for
recourse against the other assets of the
Mortgagors thereunder.
Fixed Pass-Through Rate
Mortgage Pools............. Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Mortgage Pool included in the Trust Fund with
respect to a Series bearing a fixed Pass-Through
Rate, the Depositor will be obligated to deliver
Mortgage Loans that (i) have interest rates (the
"Mortgage Rates") at least 3/8 of 1% over the
interest rate (the "Pass-Through Rate") for such
Series, (ii) conform to the eligibility
requirements for such Series set forth in the
related Prospectus Supplement, and (iii) have an
aggregate principal balance equal to the amount
specified in such Prospectus Supplement, subject
to a permitted variance of up to 10%.
Variable Pass-Through Rate
Mortgage Pools............. If so specified in the related Prospectus
Supplement, the Depositor may establish one or
more Mortgage Pools, each of which will have a
variable as opposed to a fixed Pass-Through
Rate. Unless otherwise provided in the
applicable Prospectus Supplement, the variable
Pass-Through Rate will equal the weighted
average of the Mortgage Rates of all of the
Mortgage Loans in the Mortgage Pool minus the
fixed percentage servicing fee for each Mortgage
Loan set forth in the related Prospectus
Supplement or in a Current Report on Form 8-K. A
Mortgage Pool with a variable Pass-Through Rate
may be composed of Mortgage Loans that have
fluctuating Mortgage Rates. The characteristics
of a variable Pass-Through Rate and its effect
on the yield to Certificateholders as well as
the servicing compensation payable to the
related Servicer, Special Servicer, if any, and
the Master Servicer and the amounts, if any,
with respect to such Mortgage Loans payable to
the Depositor or to the person or entity
specified in the related Prospectus Supplement
will be more fully described in such Prospectus
Supplement.
8
<PAGE>
Mortgage Certificates....... If so specified in the related Prospectus
Supplement, the Trust Fund for a Series of
Certificates may include Mortgage Certificates
issued by one or more trusts established by one
or more private entities, with the respective
aggregate principal balances and the
characteristics described in such Prospectus
Supplement. Each Mortgage Certificate included
in a Trust Fund will evidence an interest of the
type specified 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 Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in the Contract Pool or
Pools included in the Trust Fund for such
Series. 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
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<PAGE>
maturity on each Class of the Certificates of a
Series. The yield on any Class of Certificates,
the purchase price of which is greater than the
aggregate amount of the Principal Distributions
to be made to such Class (a "Premium
Certificate"), is likely to be adversely
affected by a higher than anticipated level of
principal prepayments on the Trust Assets
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
Certificate exceeds the aggregate amount of such
Principal Distributions. If the differential is
particularly wide and a high level of
prepayments occurs, it is possible for Holders
of Premium Certificates not only to suffer a
lower than anticipated yield but, in extreme
cases, to fail to recoup fully their initial
investment. Conversely, a lower than anticipated
level of principal prepayments (which can be
anticipated to increase the expected yield to
Holders of Certificates that are Premium
Certificates) will likely result in a lower than
anticipated yield to Holders of Certificates of
a Class the purchase price of which is less than
the aggregate amount of the Principal
Distributions to be made to such Class (a
"Discount Certificate"). The Prospectus
Supplement for each Series of Certificates that
includes an Interest Weighted or a Principal
Weighted Class will set forth certain yield
calculations on each such Class based upon a
range of specified prepayment assumptions on the
Trust Assets included in the related Trust Fund.
The yield to Certificateholders 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 "Yield Considerations."
Credit Support.............. Neither the Certificates 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
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<PAGE>
addition to the foregoing credit support
arrangements if so specified in the related
Prospectus Supplement, the Certificates of a
Series may be issued in one or more Classes or
Subclasses. Payments on the Certificates of one
or more Classes or Subclasses (the "Senior
Certificates") may be supported by a prior right
to receive distributions attributable or
otherwise payable to another Class or Subclass
(the "Subordinated Certificates") to the extent
specified in the related Prospectus Supplement
(the "Subordinated Amount"). In addition, if so
specified in the related Prospectus Supplement,
one or more Classes or Subclasses of
Subordinated Certificates may be subordinated to
another Class or Subclass of Subordinated
Certificates and may be entitled to receive
disproportionate amounts of distributions of
principal. If so specified in the related
Prospectus Supplement, a reserve (the "Reserve
Fund") and certain other accounts or funds may
be established to support payments on the
Certificates. A Prospectus Supplement with
respect to a Series may also provide for
additional or alternative forms of credit
support, including a guarantee or surety bond,
acceptable to the Rating Agency ("Alternative
Credit Support").
A. Letter of Credit......... If so specified in the applicable Prospectus
Supplement, the issuer of one or more Letters of
Credit (the "L/C Bank") will deliver to the
Trustee the Letters of Credit for the Mortgage
Pool or Contract Pool. 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 each Distribution
Date in an amount equal to the amount sufficient
to repurchase each Liquidating Loan that has not
been purchased by the related Servicer or the
Master Servicer pursuant to the terms of the
applicable Servicing Agreement or Pooling and
Servicing Agreement referred to herein. 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 Certificates
11
<PAGE>
of the Series evidencing interests in such
Mortgage Pool or Contract Pool, 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 Pooling and
Servicing Agreement referred to herein. The
duration of coverage and the amount and
frequency of any reduction in coverage provided
by the Letter of Credit with respect to a Series
of Certificates will be in compliance with
requirements established by the Rating Agency
rating such Series and will be set forth in the
related Prospectus Supplement. If so specified
in the related Prospectus Supplement, the Letter
of Credit with respect to a Series of
Certificates may, in addition to or in lieu of
the foregoing, provide coverage with respect to
the unpaid principal or notional amount of the
Certificates of a Class or Classes within such
Series. See "Credit Support--Letter of Credit."
B. Pool Insurance........... If so specified in the applicable Prospectus
Supplement, the Master Servicer will obtain a
Pool Insurance Policy to cover any loss (subject
to the limitations described below) by reason of
default by the Mortgagors on the related
Mortgage Loans to the extent not covered by any
policy of primary mortgage insurance (a "Primary
Mortgage Insurance Policy"). The amount of
coverage provided by the Pool Insurance Policy
for a Mortgage Pool will be specified in the
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 such Mortgage Pool and
to present claims thereunder to the issuer of
such Pool Insurance Policy (the "Pool Insurer")
on behalf of the Trustee and the
Certificateholders. See "Description of the
Certificates--Presentation of Claims."
C. Mortgagor Bankruptcy If so specified in the related Prospectus
Bond....................... Supplement, the Master Servicer, if any, or the
Depositor or the applicable Servicer will obtain
and use its best reasonable efforts to maintain
a Mortgagor Bankruptcy Bond for such Series
covering certain losses resulting
12
<PAGE>
from action that may be taken by a bankruptcy
court in connection with the bankruptcy of a
Mortgagor. The level of coverage provided by
such Mortgagor Bankruptcy Bond will be specified
in the applicable Prospectus Supplement. See
"Description of Insurance--Mortgagor Bankruptcy
Bond."
D. Subordinated If so specified in the related Prospectus
Certificates............... Supplement, the rights of holders of the
Certificates of one or more Subordinated Classes
or Subclasses of a Series to receive
distributions with respect to the Mortgage Loans
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 Certificates of one or more Classes or
Subclasses of such Series to receive such
distributions to the extent described in the
related Prospectus Supplement, and 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 Certificates of
the full amount of scheduled payments of
principal and interest due them and to reduce
the likelihood that the holders of such Senior
Certificates will experience losses. See "Credit
Support--Subordinated Certificates."
E. Shifting Interest........ If so specified in the applicable Prospectus
Supplement, the protection afforded to holders
of Senior Certificates of a Series by the
subordination of certain rights of holders of
Subordinated Certificates of such Series to
distributions on the related Mortgage Loans or
Contracts may be effected by the preferential
right of the holders of the Senior Certificates
to receive, prior to any distribution being made
in respect of the holders of the related
Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of
principal and interest due them on each
Distribution Date out of funds available for
distribution on such date in the related
Certificate Account and by the distribution to
the holders of the Senior Certificates on each
Distribution Date of a greater than pro rata
percentage of certain principal prepayments or
other recoveries of principal specified in the
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
Certificates will have the effect of
accelerating the amortization of the Senior
Certificates while increasing the respective
interest in the Trust Fund evidenced by the
Subordinated Certificates. Increasing the
respective interest of the Subordinated
Certificates relative to that of the Senior
Certificates is intended to preserve the
availability of the benefits of the
subordination provided by the Subordinated
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<PAGE>
Certificates. See "Description of the
Certificates--Distributions of Principal and
Interest" and "--Distributions on Certificates"
and "Credit Support--Shifting Interest."
F. Reserve Fund............. If so specified in the 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, commercial loans, mixed-use
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,
commercial loans, mixed-use 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) 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, commercial
loans, mixed-use 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 taking into account
the amount of the Initial Deposit, if any) at
the related Required Reserve. In no event will
the Required Reserve for any Series ever be
required to exceed the lesser of the
Subordinated Amount for such Series or the
outstanding aggregate principal amount of
Certificates of the Subordinated Classes or
Subclasses of such Series 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
Certificates" and "--Reserve Fund."
G. Other Funds.............. Assets consisting of cash, certificates of
deposit or letters of credit, or any combination
thereof, in the aggregate amount specified in
the related Prospectus Supplement, will be
deposited by the Depositor in one or more
accounts to be established with respect to a
Series of Certificates by the Depositor with the
Trustee on the related Delivery Date if such
assets are required to make timely distributions
in respect of principal of, and interest on, the
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<PAGE>
Certificates of such Series, are otherwise
required as a condition to the rating of such
Certificates in the rating category specified in
the Prospectus Supplement, or are required in
order to provide for certain contingencies or in
order to make certain distributions regarding
Certificates which represent interests in GPM
Loans (a "GPM Fund") or Buy-Down Loans (a "Buy-
Down Fund"). Following each Distribution Date,
amounts may be withdrawn from any such fund and
used and/or distributed in accordance with the
Pooling and Servicing Agreement under the
conditions and to the extent specified in the
related Prospectus Supplement.
H. Swap Agreement........... If so specified in the Prospectus Supplement
relating to a Series of Certificates, the Trust
will enter into or obtain an assignment of a
swap agreement or similar agreement pursuant to
which the Trust will have the right to receive
certain payments of interest (or other payments)
as set forth or determined as described therein.
See "Credit Support--Swap Agreement."
Hazard Insurance and
Special Hazard Insurance Unless otherwise specified in the applicable
Policies................... Prospectus Supplement, all of the Mortgage Loans
(except for the Cooperative Loans) and the
Contracts will be covered by standard hazard
insurance policies insuring against losses due
to various causes, including fire, lightning and
windstorm. In addition, the Depositor will, if
so specified in the applicable Prospectus
Supplement, obtain an insurance policy (the
"Special Hazard Insurance Policy") covering
losses that result from certain other physical
risks that are not otherwise insured against
(including earthquakes and mudflows). The
Special Hazard Insurance Policy will be limited
in scope and will cover losses in an amount
specified in the applicable Prospectus
Supplement. In addition, the Master Servicer
will also require or maintain flood insurance if
the related Mortgaged Property was located at
its time of origination in a federally
designated special flood hazard area. Any hazard
losses not covered by the standard hazard
policies, Special Hazard Insurance Policy or
flood insurance policies will not be insured
against and to the extent that the amount
available under any other method of credit
support available for such Series is exhausted,
will be borne by Certificateholders of such
Series. The hazard insurance policies, Special
Hazard Insurance Policy and flood insurance
policies 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 Certificates, within the
period following the date of issuance of such
Certificates specified in such Prospectus
Supplement, the Depositor or one or more
Servicers will deliver to the Trustee with
respect to such Series Trust Assets in
substitution for any
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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
Pooling and Servicing Agreement. See
"Description of the Certificates--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
Certificates--Advances."
Optional Termination........ If so specified in the Prospectus Supplement with
respect to a Series, the Depositor or such other
persons as may be specified in a Prospectus
Supplement may purchase the Trust Assets 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 (the
"Code"), any such repurchase will be effected
only in compliance with the requirements of
Section 860F(a)(4) of the Code, so as to
constitute a "qualified liquidation" thereunder.
The exercise of the right of repurchase will
effect early retirement of the Certificates of
that Series. See "Maturity and Prepayment
Considerations" and "Description of the
Certificates--Termination."
ERISA Limitations........... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its own
legal advisers whether the purchase or holding
of Certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or Section 4975 of the Code. See "ERISA
Considerations."
Tax Status.................. See "Certain Federal Income Tax Consequences."
Legal Investment............ If so specified in the related Prospectus
Supplement relating to a Series of Certificates,
a Class or Subclass of such certificates will
constitute a "mortgage related security" under
the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") if and for so long as it is rated
in one of the two highest rating categories by
at least one nationally recognized statistical
rating organization. Such Classes or Subclasses,
if any, will be legal investments for certain
types of institutional investors to the
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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
Certificates. If so specified in the related
Prospectus Supplement, the purchase of the Trust
Assets for a Series may be effected by an
exchange of Certificates by the Depositor with
the seller of such Trust Assets. See "Use of
Proceeds."
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RISK FACTORS
In addition to the other information contained in this Prospectus and in the
applicable Prospectus Supplement to be prepared and delivered in connection
with the offering of any Series of Certificates, prospective investors should
carefully consider the following risk factors before investing in any Class or
Classes of Certificates of any such Series.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
the life of the Certificates of any Series. The Prospectus Supplement for any
Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates; however, no
underwriter will be obligated to do so. The Certificates will not be listed on
any securities exchange.
LIMITED OBLIGATIONS
Except for any related insurance policies or credit support described in the
applicable Prospectus Supplement, the Trust Assets included in the related
Trust Fund will be the sole source of payments on the Certificates of a
Series. The Certificates of any Series will not represent an interest in or
obligation of the Depositor, the Master Servicer, any Servicer, any
Unaffiliated Seller, the Trustee or any of their affiliates, except for the
limited obligations of the Depositor, the Master Servicer or any Unaffiliated
Seller with respect to certain breaches of representations and warranties and
the Master Servicer's obligations as Master Servicer. Neither the Certificates
of any Series nor the related Trust Assets will be guaranteed or insured by
any governmental agency or instrumentality (except to the limited extent
described in the related Prospectus Supplement that certain Trust Assets may
be insured or guaranteed, in whole or in part, by the FHA or VA), the
Depositor, the Master Servicer, any Servicer, any Unaffiliated Seller, the
Trustee, any of their affiliates or any other person. Consequently, in the
event that payments on the Trust Assets are insufficient or otherwise
unavailable to make all payments required on the Certificates, there will be
no recourse to the Depositor, the Master Servicer, any Servicer, any
Unaffiliated Seller, the Trustee or, except as specified in the applicable
Prospectus Supplement, any other entity.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT SUPPORT
With respect to each Series of Certificates, credit support may be provided
in limited amounts to cover certain types of losses on the underlying Trust
Assets. Credit support may be provided in one or more of the forms referred to
herein, including, but not limited to: a Letter of Credit; a Pool Insurance
Policy; a Mortgagor Bankruptcy Bond; subordination of other Classes of
Certificates of the same Series; a Reserve Fund; and any combination thereof.
See "Credit Support" herein. Regardless of the form of credit support, if any,
provided, the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or
formula. Furthermore, such credit support may provide only very limited
coverage as to certain types of losses, and may provide no coverage as to
certain other types of losses. All or a portion of the credit support, if any,
for any Series of Certificates will generally be permitted to be reduced,
terminated or substituted for, if each applicable Rating Agency indicates that
the then current rating thereof will not be adversely affected. See "Credit
Support."
RISKS OF THE TRUST ASSETS
General. An investment in securities such as the Certificates of any Series
which generally represent interests in mortgage loans or manufactured housing
conditional sales contracts and installment loan agreements ("contracts"), as
the case may be, may be affected by, among other things, a decline in real
estate values and changes in the mortgagor's or obligor's financial condition.
No assurance can be given that the values of the Mortgaged Properties securing
the Mortgage Loans, the values of the mortgaged properties securing the
mortgage loans underlying the Mortgage Certificates or the values of the
Manufactured Homes securing the Contracts, as the case may be, underlying any
Series of Certificates have remained or will remain at their levels
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on the dates of origination of the related Mortgage Loans, mortgage loans or
Contracts. If the residential or commercial 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.
Moreover, a decline in the value of a Mortgaged Property will increase the
risk of loss particularly with respect to any related junior Mortgage Loan. In
addition, adverse economic conditions generally, in particular geographic
areas or industries, or affecting particular segments of the borrowing
community (such as Mortgagors or Obligors relying on commission income and
self-employed Mortgagors or Obligors) and other factors, may affect the timely
payment by Mortgagors, Obligors or mortgagors of scheduled payments of
principal and interest on the Mortgage Loans, Contracts or Mortgage
Certificates, as the case may be, and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. See
"Yield Considerations" and "Maturity and Prepayment Considerations" herein. To
the extent that such losses are not covered by the applicable credit support,
holders of Certificates of the Series evidencing interests in the related
Trust Fund will bear all risk of loss resulting from default by Mortgagors.
Certificateholders will have to look primarily to the value of the Mortgaged
Properties, mortgaged properties or Manufactured Homes for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans or
Contracts. In addition to the foregoing, certain geographic regions on the
United States from time to time will experience weaker regional economic
conditions and housing markets and, consequently, will experience higher rates
of loss and delinquency on mortgage loans or contracts generally. The Mortgage
Loans, Contracts or mortgage loans underlying the Mortgage Certificates
underlying certain Series of Certificates may be concentrated in these
regions, and such concentration may present risk considerations in addition to
those generally present for similar mortgage-backed or contract-backed
securities without such concentration. See "The Trust Fund--The Mortgage
Pools; --Underwriting Standards; --The Contract Pools; and --Underwriting
Policies."
If applicable, certain legal aspects of the Mortgage Loans for a Series of
Certificates may be described in the related Prospectus Supplement.
Commercial, Multifamily and Mixed-Use Mortgage Loans. Mortgage loans secured
by commercial real estate properties, multifamily properties and mixed
residential/commercial properties may have a greater likelihood of delinquency
and foreclosure, and a greater likelihood of loss in the event thereof, than
similar risks associated with mortgage loans secured by single family
residential properties. The ability of a mortgagor to repay a single family
loan typically depends primarily on the mortgagor's household income rather
than on the capacity of the property to produce income, and (other than in
geographic areas where employment is dependent upon a particular employer or
industry) the mortgagor's income tends not to reflect directly the value of
such property. Accordingly, a decline in the income of a mortgagor on a loan
secured by a single family property may adversely affect the performance of
the loan, but may not affect the liquidation value of such property. In
contrast, the ability of a mortgagor to repay a loan secured by an income-
producing property typically depends primarily on the successful operation of
such property rather than on any independent income or assets of the mortgagor
and thus, in general, the value of the income-producing property also is
directly related to the net operating income derived from such property. As a
result, if the net operating income of the property is reduced (for example,
if rental or occupancy rates decline or real estate tax rates or other
operating expenses increase), the mortgagor's ability to repay the loan may be
impaired, and the liquidation value of the related property also may be
adversely affected.
Further, with respect to a particular Trust Fund that includes Commercial
Mortgage Loans, Multifamily Mortgage Loans and/or Mixed-Use Mortgage Loans,
the concentration of default, foreclosure and loss risks in individual
Mortgagors or Mortgage Loans or the related Mortgaged Properties generally
will be greater than for Mortgage Pools that consist solely of Mortgage Loans
secured by Single Family Properties, because such Trust Fund generally will
consist of a smaller number of higher balance loans than would a Mortgage Pool
of
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comparable aggregate unpaid principal balance comprised solely of Mortgage
Loans secured by Single Family Properties.
If applicable, risks particular to specific types of commercial real estate
properties included in a Trust Fund will be described in the related
Prospectus Supplement.
It is anticipated that a substantial portion of any Mortgage Loans included
in a Trust Fund that are Commercial Mortgage Loans, Multifamily Mortgage Loans
and/or Mixed-Use Mortgage Loans will be nonrecourse loans or loans for which
recourse may be restricted or unenforceable. As to any such Mortgage Loan,
recourse in the event of a Mortgagor's default will be limited to the specific
real property and such other assets, if any, that were pledged to secure the
Mortgage Loan. Even with respect to those Mortgage Loans that provide for
recourse against the Mortgagor and its assets generally, however, there can be
no assurance that enforcement of such recourse provisions will be practicable,
or that the assets of the related Mortgagor will be sufficient to permit a
recovery in respect of a defaulted Mortgage Loan in excess of the liquidation
value of the related Mortgaged Property.
Risks Associated with Leases. The performance of a mortgage loan secured by
an income-producing property that is leased by the mortgagor to tenants, as
well as the liquidation value of such property, may depend on the businesses
operated by such tenants in connection with such property and/or the
creditworthiness of such tenants. The risks associated with such mortgage loan
may be offset to the extent that such property is leased to a relatively
greater number of tenants or such tenants operate more diverse types of
businesses.
If so described in the related Prospectus Supplement, each Mortgagor under a
Commercial Mortgage Loan, Multifamily Mortgage Loan or Mixed-Use Mortgage Loan
may be an entity created by the owner or purchaser of the related Mortgaged
Property solely to own or purchase such Mortgaged Property, in part to isolate
the Mortgaged Property from the debts and liabilities of such owner or
purchaser. Unless otherwise specified in the related Prospectus Supplement,
each such Mortgage Loan will represent a nonrecourse obligation of the related
Mortgagor secured by the lien of the related Mortgage and any related Lease
assignments. Whether or not such loans are recourse or nonrecourse
obligations, it is not expected that such Mortgagors will have any significant
assets other than the Mortgaged Properties and the related Leases, which will
be pledged to the Trustee under the related Pooling and Servicing Agreement.
Accordingly, the payment of amounts due on any such Mortgage Loans and,
consequently, the payment of principal of and interest on the related
Certificates, will depend primarily or solely on rental payments by the
Lessees. Such rental payments will, in turn, depend on continued occupancy by
and/or the creditworthiness of such Lessees, which in either case may be
adversely affected by a general economic downturn or an adverse change in
their financial condition. Moreover, to the extent a Mortgaged Property was
designed for the needs of a specific type of tenant (e.g., a nursing home,
hotel or motel), the value of such Mortgaged Property may be adversely
affected in the event of a default by the Lessee or the early termination of
such Lease, because of difficulty in re-leasing the Mortgaged Property to a
suitable substitute lessee or, if re-leasing to such a substitute is not
possible, because of the cost of altering the property for another, more
marketable, use. As a result, without the benefit of the Lessee's continued
rental payments and absent significant amortization of the related Mortgage
Loan, if such Mortgage Loan is foreclosed on and the Mortgaged Property
liquidated following a Lease default, the net proceeds might be insufficient
to cover the outstanding principal and interest owing on such Mortgage Loan,
thereby increasing the risk that holders of the related Series of Certificates
will suffer loss.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") included in a
Trust Fund as of the related Cut-Off Date may not be fully amortizing over
their terms to maturity and, thus, will require substantial principal payments
(i.e., balloon payments) at their stated maturity. Mortgage loans with balloon
payments involve a greater degree of risk because the ability of a mortgagor
to make a balloon payment typically will depend upon its ability either to
timely refinance the loan or to timely sell the related mortgaged property.
The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
interest rates at the time of sale or refinancing, the mortgagor's equity in
the related
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mortgaged property, the financial condition and operating history of the
mortgagor and the related mortgaged property, tax laws, rent control laws
(with respect to certain multifamily properties and mixed-use properties),
Medicaid and Medicare reimbursement rates (with respect to certain nursing
homes), renewability of operating licenses, prevailing general economic
conditions and the availability of credit for single family properties,
multifamily properties, commercial properties and mixed-use properties, as the
case may be, generally.
JUNIOR MORTGAGE LOANS
To the extent specified in the related Prospectus Supplement, certain of the
Mortgage Loans included in a Trust Fund may be secured primarily by junior
mortgages. In the event of liquidation, mortgage loans secured by junior
mortgages are entitled to satisfaction from proceeds that remain from the sale
of the related mortgaged property after all mortgage loans senior to such
mortgage loans have been satisfied. If there are not sufficient funds to
satisfy any such junior Mortgage Loan in a Trust Fund and the related senior
mortgage loans, such Mortgage Loan would suffer a loss and, accordingly, one
or more classes of Certificates would bear such loss. Therefore, any risks of
deficiencies associated with first Mortgage Loans in a Trust Fund will be
relatively greater with respect to junior Mortgage Loans in such Trust Fund.
OBLIGOR DEFAULT
If so specified in the related Prospectus Supplement, in order to maximize
recoveries on defaulted Mortgage Loans, a Master Servicer (or, with respect to
certain Specially Serviced Commercial Mortgage Loans, a Special Servicer) will
be permitted (within prescribed parameters) to extend and modify Mortgage
Loans that are in default or as to which a payment default is imminent,
including in particular with respect to balloon payments. In addition, a
Master Servicer or a Special Servicer with respect to certain Commercial
Mortgage Loans may receive a workout fee based on receipts from or proceeds of
such Mortgage Loans. While any such entity generally will be required to
determine that any such extension or modification is reasonably likely to
produce a greater recovery on a present value basis than liquidation, there
can be no assurance that such flexibility with respect to extensions or
modifications or payment of a workout fee will increase the present value of
receipts from or proceeds of Mortgage Loans that are in default or as to which
a payment default is imminent.
MORTGAGOR TYPE
Mortgage Loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of Mortgage Loans made to individuals. The mortgagor's sophistication
and form of organization may increase the likelihood of protracted litigation
or bankruptcy in default situations.
ENFORCEABILITY
Mortgage Loans may contain a due-on-sale clause, which in general permits
the lender to accelerate the maturity of the Mortgage Loan if the Mortgagor
sells, transfers or conveys the related Mortgaged Property or its interest in
the Mortgaged Property. Commercial Mortgage Loans may also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary or non-monetary default by the Mortgagor. Such clauses are generally
enforceable subject to certain exceptions. The courts of all states will
enforce clauses providing for acceleration in the event of a material payment
default. The equity courts of any state, however, may refuse the foreclosure
of a mortgage or deed of trust when an acceleration of the indebtedness would
be inequitable or unjust or the circumstances would render the acceleration
unconscionable.
If so specified in the related Prospectus Supplement, any Commercial
Mortgage Loans, Multifamily Mortgage Loans and/or Mixed-Use Mortgage Loans in
a Trust Fund will be secured by an assignment of leases and rents pursuant to
which the Mortgagor typically assigns its right, title and interest as
landlord under the Leases on the related Mortgaged Property and the income
derived therefrom to the lender as further security for the related Mortgage
Loan, while retaining a license to collect rents for so long as there is no
default. In the
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event the Mortgagor defaults, the license terminates and the lender is
entitled to collect rents. Such assignments are typically not perfected as
security interests prior to actual possession of the cash flows. Some state
laws may require that the lender take possession of the Mortgaged Property and
obtain a judicial appointment of a receiver before becoming entitled to
collect the rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the Mortgagor, the lender's ability to collect
the rents may be adversely affected.
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject to
certain environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") a lender may be liable, as
an "owner" or "operator," for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if agents
or employees of the lender have become sufficiently involved in the operations
of the mortgagor, regardless of whether or not the environmental damage or
threat was caused by a prior owner. A lender also risks such liability on
foreclosure of the mortgage. Any such lien arising with respect to a Mortgaged
Property would adversely affect the value of such Mortgaged Property and could
make impracticable the foreclosure on such Mortgaged Property in the event of
a default by the related Mortgagor.
With respect to any Commercial Mortgage Loans or Mixed-Use Mortgage Loans
included in a Trust Fund, the related Pooling and Servicing Agreement will
provide that the Master Servicer (or, if applicable, Special Servicer), acting
on behalf of the Trust Fund, may not acquire title to a Mortgaged Property
securing a Commercial Mortgage Loan or Mixed-Use Mortgage Loan or take over
its operation unless such Master Servicer (or, if applicable, Special
Servicer) has previously determined, based upon a report prepared by a person
who regularly conducts environmental audits, that: (i) the Mortgaged Property
is in compliance with applicable environmental laws or, if not, that taking
such actions as are necessary to bring the Mortgaged Property in compliance
therewith is likely to produce a greater recovery on a present value basis,
after taking into account any risks associated therewith, than not taking such
actions and (ii) there are no circumstances present at the Mortgaged Property
relating to the use, management or disposal of any hazardous substances for
which investigation, testing, monitoring, containment, cleanup or remediation
could be required under any federal, state or local law or regulation, or
that, if any hazardous substances are present for which such action would be
required, taking such actions with respect to the affected Mortgaged Property
is reasonably likely to produce a greater recovery on a present value basis,
after taking into account any risks associated therewith, than not taking such
actions. Any additional restrictions on acquiring title to a Mortgaged
Property may be set forth in the related Prospectus Supplement.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate and timing of principal payments on the Certificates of each Series
will depend, among other things, on the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the related Mortgage
Loans, Mortgage Certificates or Contracts. As is the case with mortgage-backed
securities generally, the Certificates of each Series are subject to
substantial inherent cash-flow uncertainties because the Mortgage Loans and
Contracts may be prepaid at any time. Generally, when prevailing interest
rates increase, prepayment rates on mortgage loans tend to decrease, resulting
in a slower return of principal to investors at a time when reinvestment at
such higher prevailing rates would be desirable. Conversely, when prevailing
interest rates decline, prepayment rates on mortgage loans tend to increase,
resulting in a faster return of principal to investors at a time when
reinvestment at comparable yields may not be possible.
The yield to maturity on each Class of Certificates of each Series will
depend, among other things, on the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the Mortgage Loans,
Mortgage Certificates or Contracts, as applicable, and the allocation thereof
to reduce the Certificate Principal Balance of such Class. The yield to
maturity on each Class of Certificates will also depend on the Pass-Through
Rate and the purchase price for such Certificates. The yield to investors on
any Class of Certificates will be
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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 Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class of Certificates
is purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of purchase.
SUBORDINATION
To the extent specified in the applicable Prospectus Supplement,
distributions of interest and principal on one or more Classes of Certificates
of a Series may be subordinated in priority of payment to interest and
principal due on one or more other Classes of Certificates of such Series.
LIMITATION ON EXERCISE OF RIGHTS DUE TO BOOK-ENTRY REGISTRATION
If so specified in the applicable Prospectus Supplement, one or more Classes
of Certificates of a Series initially will be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), or any other
nominee of The Depository Trust Company ("DTC") set forth in the applicable
Prospectus Supplement, and will not be registered in the names of the holders
of the Certificates of such Series or their nominees. Because of this, unless
and until Certificates in fully registered, certificated form ("Definitive
Certificates") for such Series are issued, holders of such Certificates will
not be recognized by the applicable Trustee as "Certificateholders" (as such
terms are used herein or in the related Pooling and Servicing Agreement or the
related Deposit Trust Agreement, as applicable). Hence, until Definitive
Certificates are issued, holders of such Certificates will be able to exercise
the rights of Certificateholders only indirectly through DTC and its
participating organizations.
THE TRUST FUND
Ownership of the Mortgage or Contract Pool or Pools included in the Trust
Fund (hereinafter defined) for a Series of Certificates may be evidenced by
one or more Classes of Certificates, which may consist of one or more
Subclasses, as specified in the Prospectus Supplement for such Series. Each
Certificate will evidence the undivided interest, beneficial interest or
notional amount specified in the related Prospectus Supplement in one or more
Mortgage Pools containing one or more Mortgage Loans 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 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 Certificates of a Series to the rights of the holders of
the Senior Certificates, which, if so specified in the related Prospectus
Supplement, may include Certificates of a Subordinated Class or Subclass and
the establishment of a Reserve Fund, by the right of one or more Classes or
Subclasses of Certificates to receive a disproportionate amount of certain
distributions of principal or another form or forms of Alternative Credit
Support acceptable to the Rating Agency rating the Certificates of such Series
or by any combination of the foregoing. See "Description of Insurance" and
"Credit Support."
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THE MORTGAGE POOLS
General. 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) Cooperative Loans made to finance the
purchase of certain rights relating to cooperatively owned properties secured
by the pledge of shares issued by a Cooperative and the assignment of a
proprietary lease or occupancy agreement providing the exclusive right to
occupy a particular Cooperative Dwelling, (iii) Mortgage Loans secured by
Multifamily Property, (iv) Mortgage Loans secured by Commercial Property, (v)
Mortgage Loans secured by Mixed-Use Property, (vi) Mortgage Loans secured by
unimproved land, (vii) mortgage participation certificates evidencing
participation interests in such loans that are acceptable to the nationally
recognized Rating Agency rating the Certificates of such Series for a rating
in one of the four highest rating categories of such Rating Agency, or (viii)
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 certificates representing participation
interests in such Contracts. The Mortgage Loans and Contracts will be newly
originated or seasoned, and will be purchased by the Depositor either directly
or through one or more affiliates or Unaffiliated Sellers.
All Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by first or more junior mortgages or first or second deeds of
trust or other similar security instruments creating a first or more junior
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, 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. 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, and Mixed-Use Property will consist of,
mixed commercial and residential buildings. The Mortgaged Properties may
include investment properties and vacation and second homes. Commercial
Property will consist of income-producing commercial real estate. Mortgage
Loans secured by Commercial Property, Multifamily Property and Mixed-Use
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.
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 "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 Pooling
and Servicing Agreement will provide that the Unaffiliated Seller from which
such convertible ARM Loans were acquired will
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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 Certificateholders on the Distribution
Date in the month following the month of the exercise of the conversion
option. The obligation of the Unaffiliated Seller to repurchase Converted
Mortgage Loans may or may not be supported by cash, letters of credit, third
party guarantees or other similar arrangements.
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"). 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.
The Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-
K to be filed with the Commission) for each Series of Certificates the Trust
Fund with respect to which contains Mortgage Loans will contain information as
to the type of Mortgage Loans that will comprise the related Mortgage Pool or
Pools and information as to (i) the aggregate principal balance of the
Mortgage Loans as of the applicable Cut-off Date, (ii) the type of Mortgaged
Properties securing the Mortgage Loans, (iii) the original terms to maturity
of the Mortgage Loans, (iv) the largest in principal balance of the Mortgage
Loans, (v) the earliest origination date and latest maturity date of the
Mortgage Loans, (vi) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, (vii) the interest rate or
range of interest rates borne by the Mortgage Loans, (viii) the average
outstanding principal balance of the Mortgage Loans, (ix) the geographical
distribution of the Mortgage Loans, (x) the number and aggregate principal
balance of Buy-Down Loans or GPM Loans, if applicable, (xi) with respect to
ARM Loans, the adjustment dates, the highest, lowest and weighted average
margin, and the maximum Mortgage Rate variation at the time of any periodic
adjustment and over the life of such ARM Loans, and (xii) with respect to
Mortgage Loans secured by Multifamily Property, Commercial Property, Mixed-Use
Property or such other Mortgage Loans as are specified in the Prospectus
Supplement, the related debt service coverage ratios, whether the Mortgage
Loan provides for an interest only period and whether the principal amount of
such Mortgage Loan is fully amortizing or is amortized on the basis of a
period of time that extends beyond the maturity date of the Mortgage Loan. If
specified in the related Prospectus Supplement, the Depositor may segregate
the Mortgage Loans in a Mortgage Pool into separate "Mortgage Loan Groups" (as
described in the related Prospectus Supplement) as part of the structure of
the payments of principal and
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interest on the Certificates of a Series. In such case, the Depositor will
disclose the above-specified information by Mortgage Loan Group.
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 Certificates of the Series evidencing
interests in the Mortgage Pool.
The Depositor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the applicable Prospectus Supplement,
for the benefit of the holders of the Certificates of such Series (the
"Certificateholders"). The Master Servicer, if any, named in the related
Prospectus Supplement will service the Mortgage Loans, either by itself or
through other mortgage servicing institutions, if any (each, a "Servicer"), or
a special servicer, if any (a "Special Servicer"), pursuant to a Pooling and
Servicing Agreement, as described herein, among the Master Servicer, if any,
the Special Servicer, if any, the Depositor and the Trustee (the "Pooling and
Servicing Agreement") and will receive a fee for such services. See "--
Mortgage Loan Program" and "Description of the Certificates." With respect to
those Mortgage Loans serviced by a Servicer or Special Servicer, such Servicer
or Special Servicer will be required to service the related Mortgage Loans in
accordance with the Seller's Warranty and Servicing Agreement between the
Servicer and the Depositor (a "Servicing Agreement") or the Pooling and
Servicing Agreement, as applicable, and will receive the fee for such services
specified in the related agreement; however, any Master Servicer will remain
liable for its servicing obligations under the Pooling and Servicing Agreement
as if the Master Servicer alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties regarding the
Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will
be without recourse. See "Description of the Certificates--Assignment of
Mortgage Loans." The Master Servicer's obligations with respect to the
Mortgage Loans will consist principally of its contractual servicing
obligations under the Pooling and Servicing Agreement (including its
obligation to enforce certain purchase and other obligations of any Special
Servicer, Servicers and/or Unaffiliated Sellers, as more fully described
herein under "--Mortgage Loan Program--Representations by Unaffiliated
Sellers; Repurchases" and "Description of the Certificates--Assignment of
Mortgage Loans" and "--Servicing by Unaffiliated Sellers") and its obligations
to make Advances in the event of delinquencies in payments on or with respect
to the Mortgage Loans or in connection with prepayments and liquidations of
such Mortgage Loans, in amounts described herein under "Description of the
Certificates--Advances." 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 Certificates--Advances," "Credit
Support" and "Description of Insurance."
Unless otherwise specified in the applicable Prospectus Supplement, each
Mortgage Pool included in the related Trust Fund will be composed of Mortgage
Loans evidencing interests in Mortgage Loans that bear interest at annual
rates that will exceed by at least 3/8 of 1% the fixed or variable Pass-
Through Rate established for the Mortgage Pool. To the extent and in the
manner specified in the related Prospectus Supplement, Certificateholders of a
Series will be entitled to receive distributions based on the payments of
principal on the underlying Mortgage Loans, plus interest on the principal
balance thereof at the Pass-Through Rate. The
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difference between a Mortgage Rate and the related Pass-Through Rate (less any
servicing compensation payable to the Servicers of such Mortgage Loans and the
amount, if any, payable to the Depositor or the person or entity specified in
the applicable Prospectus Supplement) may be retained by the Master Servicer
as servicing compensation to it. See "Description of the Certificates--
Servicing Compensation and Payment of Expenses."
Single Family Mortgage Loans. Unless otherwise specified below or in the
applicable Prospectus Supplement, each Single Family 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 Single Family
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 Single
Family 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 term at origination and a
mortgage interest rate adjusted periodically (with corresponding adjustments
in the amount of monthly payments) to equal the sum (which may be rounded) of
a fixed margin and an index described in such Prospectus Supplement, subject
to any applicable restrictions on such adjustments. The Mortgage Pools may
also include other types of Single Family Mortgage Loans to the extent set
forth in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, no
Single Family 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 Single Family Mortgage
Loan secured by a mortgage on a vacation or second home or an investment
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.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool may
contain Single Family Mortgage Loans pursuant to which the monthly payments
made by the Mortgagor during the early years of such 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 Certificates--Payments on Mortgage
Loans." Buy-Down Loans included in a Mortgage Pool will provide for a
reduction in monthly interest payments by the Mortgagor for a period of up to
the first four years of the term of such Mortgage Loans.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool may
contain Single Family 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
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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.
Commercial, Multifamily and Mixed-Use Mortgage Loans. The Commercial
Mortgage Loans, Multifamily Mortgage Loans and Mixed-Use Mortgage Loans will
consist of mortgage loans secured by first or junior mortgages, deeds of trust
or similar security instruments on, or installment contracts ("Installment
Contracts") for the sale of, fee simple or leasehold interests in commercial
real estate property, multifamily residential property, cooperatively owned
multifamily properties and/or mixed residential/commercial property, and
related property and interests. Commercial Mortgage Loans will not represent
more than 10% of the aggregate principal balance of any Mortgage Pool as of
the related Cut-off Date.
Certain of the Commercial Mortgage Loans, Multifamily Mortgage Loans and
Mixed-Use Mortgage Loans ("Simple Interest Loans") may provide that scheduled
interest and principal payments thereon are applied first to interest accrued
from the last date to which interest has been paid to the date such payment is
received and the balance thereof is applied to principal, and other such
Mortgage Loans may provide for payment of interest in advance rather than in
arrears.
The Commercial Mortgage Loans, Multifamily Mortgage Loans and Mixed-Use
Mortgage Loans may also be secured by one or more assignments of leases and
rents, management agreements or operating agreements relating to the Mortgaged
Property and in some cases by certain letters of credit, personal guarantees
or both. Pursuant to an assignment of leases and rents, the Mortgagor assigns
its right, title and interest as landlord under each Lease and the income
derived therefrom to the related lender, while retaining a license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the related lender is entitled to collect the rents
from tenants to be applied to the monetary obligations of the Mortgagor. State
law may limit or restrict the enforcement of the assignment of leases and
rents by a lender until the lender takes possession of the related Mortgaged
Property and a receiver is appointed. See "Certain Legal Aspects of the
Mortgage Loans and Contracts--Leases and Rents."
The Prospectus Supplement relating to each Series will specify the
Originator or Originators relating to the Commercial Mortgage Loans,
Multifamily Mortgage Loans and Mixed-Use Mortgage Loans, which may include,
among others, commercial banks, savings and loan associations, other financial
institutions, insurance companies or real estate developers and, to the extent
available, the underwriting criteria in connection with originating such
Mortgage Loans.
Commercial, multifamily and mixed-use real estate lending is generally
viewed as exposing the lender to a greater risk of loss than one- to four-
family residential lending. Commercial, multifamily and mixed-use real estate
lending typically involves 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. Commercial, multifamily and mixed-use 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 commercial, multifamily and mixed-use real estate lending.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either directly
or through affiliates, from one or more affiliates or from sellers
unaffiliated with the Depositor ("Unaffiliated Sellers"). Mortgage Loans
acquired by the Depositor will have been originated in accordance with the
underwriting criteria specified below under "Underwriting Standards" or as
otherwise described in a related Prospectus Supplement.
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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.
Single and Multi-Family Mortgage Loans. 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.
An appraisal generally will be required to be made on each residence to be
financed. Such appraisal generally will be made by an appraiser who meets FNMA
requirements as an appraiser of one- to four-family residential properties.
The appraiser is required to inspect the property and verify that it is in
good condition and that, if new, construction has been completed. The
appraisal generally will be based on the appraiser's judgment of value, giving
appropriate weight to both the market value of comparable homes and the cost
of replacing the residence. These underwriting standards also require a search
of the public records relating to a mortgaged property for liens and judgments
against such mortgaged property.
Based on the data provided, certain verifications and the appraisal, a
determination is made by the Originator as to whether the prospective
mortgagor has sufficient monthly income available to meet the prospective
mortgagor's monthly obligations on the proposed loan and other expenses
related to the residence (such as property taxes, hazard and primary mortgage
insurance and, if applicable, maintenance) and other financial 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.
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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 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.
Commercial and Mixed-Use Mortgage Loans. The underwriting procedures and
standards for Commercial Mortgage Loans and Mixed-Use Mortgage Loans included
in a Mortgage Pool will be specified in the related Prospectus Supplement to
the extent such procedures and standards are known or available. Such Mortgage
Loans may be originated in contemplation of the transactions described in this
Prospectus and the related Prospectus Supplement or may have been originated
by third-parties and acquired by the Depositor directly or through its
affiliates in negotiated transactions.
Except as otherwise set forth in the related Prospectus Supplement for a
Series, the Originator of a Commercial Mortgage Loan or Mixed-Use Mortgage
Loan will have applied underwriting procedures intended to evaluate, among
other things, the income derived from the Mortgaged Property, the capabilities
of the management of the project, including a review of management's past
performance record, its management reporting and control procedures (to
determine its ability to recognize and respond to problems) and its accounting
procedures to determine cash management ability, the obligor's credit standing
and repayment ability and the value and adequacy of the Mortgaged Property as
collateral. Any such Mortgage Loan insured by the Federal Housing
Administration ("FHA"), a division of the United States Department of Housing
and Urban Development ("HUD"), will have been originated by a mortgage lender
that is approved by HUD as an FHA mortgagee in the ordinary course of its real
estate lending activities and will comply with the underwriting policies of
FHA.
If so specified in the related Prospectus Supplement, the adequacy of a
Commercial Property or Mixed-Use Property as security for repayment will
generally have been determined by an appraisal by an appraiser selected in
accordance with preestablished guidelines established by or acceptable to the
loan Originator for appraisers. If so specified in the related Prospectus
Supplement, the appraiser must have personally inspected the property and
verified that it was in good condition and that construction, if new, has been
completed. Unless otherwise stated in the applicable Prospectus Supplement,
the appraisal will have been based upon a cash flow analysis and/or a
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market data analysis of recent sales of comparable properties and, when deemed
applicable, a replacement cost analysis based on the current cost of
constructing or purchasing a similar property.
No assurance can be given that values of any Commercial Properties or Mixed-
Use Properties in a Mortgage Pool have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. Further, there is
no assurance that appreciation of real estate values generally will limit loss
experiences on commercial properties or mixed-use properties. If the
commercial real estate market should experience an overall decline in property
values such that the outstanding balances of any Commercial Mortgage Loans
and/or Mixed-Use Mortgage Loans and any additional financing on the related
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 on such Mortgage Loans could be higher than those now
generally experienced in the mortgage lending industry. To the extent that
such losses are not covered by the methods of credit support or the insurance
policies described herein or by Alterative Credit Support, they will be borne
by holders of the Certificates of the Series evidencing interests in the
Mortgage Pool. Even where credit support covers all losses resulting from
defaults and foreclosure, the effect of defaults and foreclosures may be to
increase prepayment experience on the related Mortgage Loans, thus shortening
weighted average life and affecting yield to maturity.
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.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller or any of its affiliates (or the Master Servicer, if the
Unaffiliated Seller is also the Master Servicer under the Pooling and
Servicing Agreement) will have made representations and warranties in respect
of the Mortgage Loans sold by such Unaffiliated Seller to the Depositor or its
affiliates. 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 (or, if
applicable, more junior) 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.
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All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Unaffiliated Seller sold the Mortgage Loan to the Depositor or its affiliate.
A substantial period of time may have elapsed between such date and the date
of initial issuance of the Series of Certificates evidencing an interest in
such Mortgage Loan. Since the representations and warranties of an
Unaffiliated Seller do not address events that may occur following the sale of
a Mortgage Loan by an Unaffiliated Seller, the repurchase obligation described
below will not arise if, during the period commencing on the date of sale of a
Mortgage Loan by the Unaffiliated Seller to or on behalf of the Depositor, the
relevant event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any Series
of Certificates if anything has come to the Depositor's attention that would
cause it to believe that the representations and warranties of an Unaffiliated
Seller will not be accurate and complete in all material respects in respect
of such Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Certificates of a Series in respect of any Mortgage Loan relating
to the period commencing on the date of sale of such Mortgage Loan to the
Depositor or its affiliates will be certain limited representations of the
Depositor and of the Master Servicer described below under "Description of the
Certificates--Assignment of Mortgage Loans." If the Master Servicer is also an
Unaffiliated Seller of Mortgage Loans with respect to a particular Series,
such representations will be in addition to the representations and warranties
made in its capacity as an Unaffiliated Seller.
Unless otherwise set forth or specified in the related Prospectus
Supplement, upon the discovery of the breach of any representation or warranty
made by an Unaffiliated Seller in respect of a Mortgage Loan that materially
and adversely affects the interests of the Certificateholders of the related
Series, such Unaffiliated Seller or the Servicer of such Mortgage Loan will be
obligated to repurchase such Mortgage Loan at a purchase price equal to 100%
of the unpaid principal balance thereof at the date of repurchase or, in the
case of a Series of Certificates as to which the Depositor has elected to
treat the related Trust Fund as 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 Pass-Through Rate for the related Mortgage Pool, to the first
day of the month following such repurchase and the amount of any unreimbursed
Advances made by the Master Servicer or the Servicer, as applicable, in
respect of such Mortgage Loan. The Master Servicer will be required to enforce
this obligation for the benefit of the Trustee and the Certificateholders,
following the practices it would employ in its good faith business judgment
were it the owner of such Mortgage Loan. Unless otherwise specified in the
applicable Prospectus Supplement, and subject to the ability of the Depositor,
the Unaffiliated Seller or the Servicer to substitute for certain Mortgage
Loans as described below, this repurchase obligation constitutes the sole
remedy available to the Certificateholders of such Series for a breach of
representation or warranty by an Unaffiliated Seller.
The obligation of the Master Servicer to purchase a Mortgage Loan if an
Unaffiliated Seller or a Servicer defaults on its obligation to do so is
subject to limitations, and no assurance can be given that Unaffiliated
Sellers will carry out their respective repurchase obligations with respect to
Mortgage Loans. However, to the extent 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
Certificates--Assignment of Mortgage Loans."
CLOSED LOAN PROGRAM
The Depositor may also acquire Closed Loans that have been originated by
Unaffiliated Sellers in accordance with underwriting standards acceptable to
the Depositor. 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
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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 (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 underlying the
Mortgage Certificates, the related pooling and servicing arrangements and the
insurance arrangements in respect of such mortgage loans will be set forth in
the applicable Prospectus Supplement or in the Current Report on Form 8-K
referred to below. Such Prospectus Supplement (or, if such information is not
available in advance of the date of such Prospectus Supplement, a Current
Report on Form 8-K to be filed by the Depositor with the Commission within 15
days of the issuance of the Certificates of such Series) will also set forth
information with respect to the entity or entities forming the related
mortgage pool, the issuer of any credit support with respect to such Mortgage
Certificates, the aggregate outstanding principal balance and the pass-through
rate borne by each Mortgage Certificate included in the Trust Fund, together
with certain additional information with respect to such Mortgage
Certificates. The inclusion of Mortgage Certificates in a Trust Fund with
respect to a Series of Certificates is conditioned upon their characteristics
being in form and substance satisfactory to the Rating Agency rating the
related Series of Certificates. Mortgage Certificates, together with the
Mortgage Loans and Contracts, are referred to herein as the "Trust Assets."
THE CONTRACT POOLS
If so specified in the Prospectus Supplement with respect to a Series, the
Trust Fund for such Series may include a Contract Pool evidencing interests in
manufactured housing conditional sales contracts and installment loan
agreements (the "Contracts") originated by a manufactured housing dealer in
the ordinary course of business and purchased by the Depositor. The Contracts
may be conventional manufactured housing contracts or contracts insured by the
FHA or partially guaranteed by the VA. Each Contract will be secured by a
Manufactured Home, as defined below. 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 to the Trustee named in the related Prospectus Supplement for the
benefit of the related Certificateholder. The Master Servicer specified in the
related Prospectus Supplement will service the Contracts, either by itself or
through other Servicers, pursuant to the Pooling and Servicing Agreement. See
"Description of the Certificates--Servicing by Unaffiliated Sellers." With
respect to those Contracts serviced by the Master Servicer through a Servicer,
the Master Servicer will remain liable for its servicing obligations under the
Agreement as if the Master Servicer
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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 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
Certificate 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 thereof at the Pass-Through Rate, or both. Unless otherwise
stated in the related Prospectus Supplement, the difference between the APR on
a Contract and the related Pass-Through Rate (less sub-servicing
compensation), will be retained by the Master Servicer as servicing
compensation to it. See "Description of the Certificates--Payments on
Contracts."
The 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 Certificateholder 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 Certificateholders or the Trustee for a breach of representation by the
Master Servicer, the Unaffiliated Seller or such other party.
If so specified in the 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
coverage under any applicable insurance policy or hazard insurance policy. See
"Description of Insurance" for information regarding the extent of coverage
under certain of such insurance policies. Upon a breach of the insurability
representation that materially and adversely affects the interests of the
Certificateholders in a Contract, the Master Servicer, the Unaffiliated Seller
or such other party, as appropriate, 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 Certificates, 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 Certificateholders 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
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Certificates, 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
Certificateholders in the month of substitution), (ii) have an APR not less
than (and not more than 1% greater than) the APR of the Deleted Contract,
(iii) have a Pass-Through Rate equal to the Pass-Through Rate of the Deleted
Contract, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Contract and (v) comply with
all the representations and warranties set forth in the Pooling and Servicing
Agreement as of the date of substitution. This repurchase or substitution
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for any such breach.
UNDERWRITING POLICIES
Conventional Contracts will comply with the underwriting policies of the
Originator or Unaffiliated Seller of the Contracts described in the 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, as a wholly-owned subsidiary of First Boston Securities Corporation, the
name of which was subsequently changed to Credit Suisse First Boston
Securities Corporation ("FBSC"). FBSC is a wholly-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.
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 Certificates of any Series.
Trust Assets will be acquired by the Depositor directly or through one or
more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series offered hereby and by the 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, if any, for the Series and to pay costs of structuring and issuing the
Certificates. If so specified in the related Prospectus Supplement,
Certificates may be exchanged by the Depositor for Trust Assets. Unless
otherwise specified in the related Prospectus Supplement, the Trust Assets for
each Series of Certificates 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.
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YIELD CONSIDERATIONS
Each monthly payment on a Mortgage Loan is calculated as one-twelfth of the
applicable Mortgage Rate multiplied by the unpaid principal balance of such
Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, the amount of such interest payment distributed monthly to
Certificateholders with respect to each Mortgage Loan will be similarly
calculated based on the applicable Pass-Through Rate for the related Mortgage
Pool. The Pass-Through Rate for a Mortgage Pool will be either fixed or
variable, as specified in the related Prospectus Supplement.
Each monthly accrual of interest on a Contract is calculated as one-twelfth
of the product of the APR and the principal balance outstanding on the
scheduled payment date for such Contract in the preceding month. Unless
otherwise specified in the related Prospectus Supplement, the Pass-Through
Rate with respect to each Contract will be calculated on a Contract-by-
Contract basis and the Servicing Fee applicable to each Contract from the
applicable APR.
With respect to a Mortgage Pool or a Contract Pool bearing a fixed Pass-
Through Rate, each Mortgage Loan or Contract will have a Mortgage Rate or APR
that exceeds the Pass-Through Rate by at least 3/8 of 1% unless otherwise
specified in the related Prospectus Supplement. The difference between a
Mortgage Rate or APR and the related fixed Pass-Through Rate for the Mortgage
Pool or Contract Pool (less any servicing compensation payable to the related
Servicers and the amounts, if any, payable to the Depositor or the person or
entity specified in the related Prospectus Supplement) will be retained by the
Master Servicer as servicing compensation to it. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses." Although
Mortgage Rates and APRs in a fixed Pass-Through Rate Mortgage Pool or Contract
Pool, respectively, may vary, unless otherwise specified in the related
Prospectus Supplement, disproportionate principal prepayments among Mortgage
Loans bearing different Mortgage Rates or APRs will not affect the return to
Certificateholders since, as set forth above, the Pass-Through Rate may not
exceed any Mortgage Rate or APR.
With respect to Mortgage Pools having a variable Pass-Through Rate, the
Pass-Through Rate will equal the weighted average of the Mortgage Rates on all
the Mortgage Loans in the Mortgage Pool, minus the servicing compensation
payable to the Master Servicer and the Servicer of such Mortgage Loans and the
amounts, if any, retained by the Depositor or an Unaffiliated Seller or paid
to the person or entity specified in the related Prospectus Supplement. The
servicing fee and such other amounts will be fixed as to each Mortgage Loan at
a rate per annum, and may vary among Mortgage Loans. Because the Mortgage
Rates in such a Mortgage Pool will differ and the aggregate servicing
compensation and such other amounts to be retained or distributed with respect
to each Mortgage Loan will be fixed, it is likely that the weighted average of
the Mortgage Rates, and the corresponding variable Pass-Through Rate, will
change as the Mortgage Loans amortize and as a result of prepayments.
If so specified in the 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
certificates of the related Series will be greater than would otherwise be the
case. As a result, the yield on any such Mortgage Loan at any time may be less
than the yields on similar adjustable rate mortgage loans, and the rate of
prepayment may be lower or higher than would otherwise be anticipated.
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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 Pass-
Through Rate that is not so received. Partial prepayments generally are
applied on the first day of the month following receipt, with no resulting
reduction in interest payable for the period in which the partial prepayment
is made. Unless otherwise specified in the related Prospectus Supplement, full
and partial prepayments, together with interest on such full and partial
prepayments at the Pass-Through Rate for the related Mortgage Pool or Contract
Pool to the last day of the month in which such prepayments occur, will be
deposited in the Certificate Account and will be available for distribution to
Certificateholders on the next succeeding Distribution Date in the manner
specified in the related Prospectus Supplement. See "Maturity and Prepayment
Considerations."
Generally, the effective yield to holders of Certificates having a monthly
Distribution Date will be lower than the yield otherwise produced by the Pass-
Through Rate with respect to a Mortgage Pool or Contract Pool or the pass-
through rate borne by a Mortgage Certificate 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 Certificates 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 Certificates succeeds such 25th day. With
respect to the Multi-Class Certificates of a Series having other than monthly
Distribution Dates, the yield to holders of such Certificates will also be
adversely affected by any increase in the period of time from the date to
which interest accrues on such Certificate to the Distribution Date on which
such interest is distributed.
In the event that the Certificates of a Series are divided into two or more
Classes or Subclasses and that a Class or Subclass is an Interest Weighted
Class, in the event that such Series includes a Class of Residual
Certificates, or as otherwise may be appropriate, the Prospectus Supplement
for such Series will indicate the manner in which the yield to
Certificateholders will be affected by different rates of prepayments on the
Mortgage Loans, on the Contracts or on the mortgage loans underlying the
Mortgage Certificates. In general, the yield on Certificates that are offered
at a premium to their principal or notional amount ("Premium Certificates") is
likely to be adversely affected by a higher than anticipated level of
principal prepayments on the Mortgage Loans, on the Contracts or on the
mortgage loans underlying the Mortgage Certificates. This relationship will
become more sensitive as the amount by which the Percentage Interest of such
Class in each Interest Distribution is greater than the corresponding
Percentage Interest of such Class in each Principal Distribution. If the
differential is particularly wide (e.g., the Interest Distribution is
allocated primarily or exclusively to one Class or Subclass and the Principal
Distribution primarily or exclusively to another) and a high level of
prepayments occurs, there is a possibility that Certificateholders of Premium
Certificates will not only suffer a lower than anticipated yield but, in
extreme cases, will fail to recoup fully their initial investment. Conversely,
a lower than anticipated level of principal prepayments (which can be
anticipated to increase the expected yield to holders of Certificates that are
Premium Certificates) will likely result in a lower than anticipated yield to
holders of Certificates that are offered at a discount to their principal
amount ("Discount Certificates"). If so specified in the applicable Prospectus
Supplement, a disproportionately large amount of Principal Prepayments may be
distributed to the holders of the Senior Certificates at the times and under
the circumstances described therein.
In the event that the Certificates of a Series include one or more Classes
or Subclasses of Multi-Class Certificates, the Prospectus Supplement for such
Series will set forth information, measured relative to a 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
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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.
MATURITY AND PREPAYMENT 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, commercial or mixed-use properties.
It is customary in the residential mortgage industry in quoting yields (a)
on a pool of 30-year fixed-rate, level payment mortgages, to compute the yield
as if the pool were a single loan that is amortized according to a 30-year
schedule and is then prepaid in full at the end of the twelfth year and (b) on
a pool of 15-year fixed-rate, level payment mortgages, to compute the yield as
if the pool were a single loan that is amortized according to a 15-year
schedule and then is prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans are also commonly measured
relative to a prepayment standard or model. If so specified in the Prospectus
Supplement relating to a Series of Certificates, the model used in a
Prospectus Supplement will be the Standard Prepayment Assumption ("SPA"). SPA
represents an assumed rate of prepayment relative to the then outstanding
principal balance of a pool of mortgages. A prepayment assumption of 100% of
SPA assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of such mortgages in the first month of the life of the
mortgages and an additional 0.2% per annum in each month thereafter until the
thirtieth month and in each month thereafter during the life of the mortgages,
100% of SPA assumes a constant prepayment rate of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA or
any other rate of assumed prepayment, as applicable, will be set forth in the
Prospectus Supplement with respect to a Series of Certificates. There is,
however, no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates will conform to FHA Experience, mortgage industry
custom, any level of SPA, or any other rate specified in the related
Prospectus Supplement. A number of factors, including homeowner mobility,
economic conditions,
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enforceability of due-on-sale clauses, mortgage market interest rates,
mortgage recording taxes and the availability of mortgage funds, may affect
prepayment experience on residential mortgage loans.
The terms of the Pooling and Servicing Agreement, unless otherwise specified
in the related Prospectus Supplement, will require the Servicer, the Special
Servicer (if applicable) or the Master Servicer to enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or the proposed
conveyance of the underlying Mortgaged Property or Cooperative Dwelling;
provided, however, that any enforcement action that would impair or threaten
to impair any recovery under any related Insurance Policy will not be required
or permitted. See "Description of the Certificates--Enforcement of "Due-On-
Sale" Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain Legal
Aspects of the Mortgage Loans And Contracts--The Mortgage Loans--"Due-On-Sale"
Clauses" for a description of certain provisions of each Pooling and Servicing
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
At the request of the Mortgagor, the Servicer may refinance the Mortgage
Loans in any Mortgage Pool by accepting prepayments thereon and making new
loans secured by a mortgage on the same property. Upon such refinancing, the
new loans will not be included in the Mortgage Pool and the related Servicer
will be required to repurchase the affected Mortgage Loan. A Mortgagor may be
legally entitled to require the Servicer to allow such a refinancing. Any such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Contracts may be influenced
by a variety of economic, geographic, social and other facts, including
repossessions, aging, seasonality and interest rate fluctuations. Other
factors affecting prepayment of mortgage loans or Contracts include changes in
housing needs, job transfers, unemployment and servicing decisions. An
investment in Certificates evidencing interests in Contracts may be affected
by, among other things, a downturn in regional or local economic conditions.
These regional or local economic conditions are often volatile, and
historically have affected the delinquency, loan loss and repossession
experience of the Contracts. To the extent that losses on the Contracts are
not covered by the Subordination Amount, if any, Letters of Credit, applicable
Insurance Policies, if any, or by any Alternative Credit Support, holders of
the Certificates of a Series evidencing interests in such Contracts will bear
all risk of loss resulting from default by Obligors and will have to look
primarily to the value of the Manufactured Homes, which generally depreciate
in value, for recovery of the outstanding principal and unpaid interest of the
defaulted Contracts. See "The Trust Fund--The Contract Pools."
While most Contracts will contain "due-on-sale" provisions permitting the
holder of the Contract to accelerate the maturity of the Contract upon
conveyance by the borrower, the Master Servicer may permit proposed
assumptions of Contracts where the proposed buyer meets the underwriting
standards described above. Such assumption would have the effect of extending
the average life of the Contract. FHA Mortgage Loans and Contracts and VA
Mortgage Loans and Contracts are not permitted to contain "due on sale"
clauses, and are freely assumable.
Mortgage Loans made with respect to Commercial Properties, Multifamily
Properties and Mixed-Use Properties may have provisions that prohibit
prepayment entirely or for certain periods and/or require payment of premium
or yield maintenance penalties, and may provide for payments of interest only
during a certain period followed by amortization of principal on the basis of
a schedule extending beyond the maturity of the related Mortgage Loan.
Prepayments of such Mortgage Loans may be affected by these and other factors,
including changes in interest rates and the relative tax benefits associated
with ownership of Commercial Property, Multifamily Property and Mixed-Use
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 Certificates for which the Depositor has elected
to treat the Trust as a REMIC pursuant to the provisions or the Internal
Revenue Code of 1986, as amended (the "Code"), any such
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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. In addition, the mortgage loans underlying the
Mortgage Certificates may be subject to repurchase under circumstances similar
to those described above. Such repurchases will have the same effect as
prepayments in full. See "The Trust Fund--Mortgage Loan Program--
Representations by Unaffiliated Sellers; Repurchases," "Description of the
Certificates--Assignment of Mortgage Loans," "--Assignment of Mortgage
Certificates," "--Assignment of Contracts" and "--Termination."
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an agreement
consisting of either (a) a Pooling and Servicing Agreement or (b) a Reference
Agreement (the "Reference Agreement") and the Standard Terms and Provisions of
Pooling and Servicing Agreement (such Standard Terms, the "Standard Terms"),
either the Standard Terms together with the Reference Agreement or the Pooling
and Servicing Agreement referred to as the "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer, if any, and the Trustee named in the
applicable Prospectus Supplement or a deposit trust agreement between the
Depositor and the Trustee (the "Deposit Trust Agreement," together with the
Pooling and Servicing Agreement, the "Agreement"). Forms of the Pooling and
Servicing Agreement and the Deposit Trust Agreement have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
following summaries describe certain provisions common to each Pooling and
Servicing Agreement and Deposit Trust 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 Pooling and Servicing Agreement or
Deposit Trust Agreement for the applicable Series and the related Prospectus
Supplement. Wherever defined terms of the Pooling and Servicing Agreement or
Deposit Trust Agreement are referred to, such defined terms are thereby
incorporated herein by reference.
GENERAL
Unless otherwise specified in the Prospectus Supplement with respect to a
Series, each Certificate offered hereby and by means of the related Prospectus
Supplement will be issued in fully registered form and will represent the
undivided interest or beneficial interest attributable to such Class or
Subclass in the Trust Fund. The Trust Fund with respect to a Series will
consist of: (i) such Mortgage Loans, Contracts, 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 Depositor's rights under the
Warranty and Servicing Agreement with respect to the Mortgage Loans or
Contracts, if any, with respect to such Series; and (xi) the GPM and Buy-Down
Funds, if any, with respect to such Series; or, in lieu of some or all of the
foregoing, such Alternative Credit Support as shall be described in the
applicable Prospectus Supplement. Upon the original issuance of a Series of
Certificates, Certificates representing the minimum undivided interest or
beneficial ownership interest in the related Trust Fund or the minimum
notional 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.
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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 Residual Certificates. Distributions of principal and
interest with respect to Multi-Class Certificates may be made on a sequential
or concurrent basis, as specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, one or more of such Classes or
Subclasses may be Compound Interest Certificates.
The Residual Certificates, if any, included in a Series will be designated
by the Depositor as the "residual interest" in the related REMIC for purposes
of Section 860G(a)(2) of the Code, and will represent the right to receive
distributions as specified in the Prospectus Supplement for such Series. All
other Classes of Certificates of such Series will constitute "regular
interests" in the related REMIC, as defined in the Code. If so specified in
the 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 Certificates, 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
Certificates 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 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 Certificates 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 Certificates of a Series may be subordinated to the right of the
holders of Certificates of one or more Classes or Subclasses within such
Series to receive distributions with respect to the Mortgage Loans 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 Certificates 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 Certificates of a Series will evidence the right to receive
distributions with respect to a specific pool of Mortgage Loans or Contracts,
which right will be subordinated to the right of the holders of the Senior
Certificates of such Series to receive distributions with respect to such
specific pool of Mortgage Loans or Contracts, as more fully set forth in such
Prospectus Supplement. If so specified in the related Prospectus Supplement,
the holders of the Senior Certificates may have the right to receive a greater
than pro rata percentage of Principal Prepayments in the manner and under the
circumstances described in the Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Depositor may sell
certain Classes or Subclasses of the Certificates of a Series, including one
or more Classes or Subclasses of Subordinated or Residual Certificates, in
privately negotiated transactions exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"). Such Certificates
will be transferable only pursuant to an effective registration statement or
an applicable exemption under the Securities Act and pursuant to any
applicable state law. Alternatively, if so specified in the 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 Certificates 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
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be made for any transfer or exchange of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge in connection with such transfer or exchange.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the related Prospectus Supplement,
distributions of principal and interest on the Certificates of a Series will
be made by the Master Servicer or Trustee, if so specified in the Prospectus
Supplement, on each Distribution Date to persons in whose name the
Certificates are registered at the close of business on the day specified in
such Prospectus Supplement (the "Record Date"). Such distributions of interest
will be made periodically at the intervals, in the manner and at the per annum
rate specified in the related Prospectus Supplement, which rate may be fixed
or variable. Interest on the Certificates will be calculated on the basis of a
360-day year consisting of twelve 30-day months, unless otherwise specified in
the related Prospectus Supplement. Distributions of principal on the
Certificates 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
Certificates, distributions of interest and principal to a Certificateholder
will be equal to the product of the undivided interest evidenced by such
Certificate and the payments of principal and interest (adjusted to the
related Pass-Through Rate) on or with respect to the Mortgage Loans 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 Certificates of a Series may be based on the Percentage
Interest evidenced by a Certificate of such Class or Subclass in the
distributions (including any Advances thereof) of principal (the "Principal
Distribution") and interest (adjusted to the Pass-Through Rate for the related
Mortgage Pool or Contract Pool) (the "Interest Distribution") on or with
respect to the Mortgage Loans, the Contracts 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 Certificate of such Class or Subclass an amount equal to the
product of the Percentage Interest evidenced by such Certificate and the
interest of such Class or Subclass in the Principal Distribution and the
Interest Distribution. A Certificate of such a Class or Subclass may represent
a right to receive a percentage of both the Principal Distribution and the
Interest Distribution or a percentage of either the Principal Distribution or
the Interest Distribution, as specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the holders of the
Senior Certificates may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled 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 Certificates that includes Multi-Class Certificates, 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 Certificates, distributions of interest on each Class or Subclass of
Compound Interest Certificates of such Series will be made on each
Distribution Date after the Stated Principal Balance of all Certificates of
such Series having a Final Scheduled Distribution Date prior to that of such
Class or Subclass of Compound Interest Certificates has been reduced to zero.
Prior to such time, interest on such Class or Subclass of Compound Interest
Certificates will be added to the Stated Principal Balance thereof on each
Distribution Date for such Series.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates that includes Multi-Class Certificates, distributions in
reduction of the Stated Principal Balance of such Certificates will be made as
described herein. Distributions in reduction of the Stated Principal Balance
of such Certificates will be made on each Distribution Date for such Series to
the holders of the Certificates of the Class or Subclass then entitled to
receive such distributions until the aggregate amount of such distributions
have reduced the Stated
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Principal Balance of such Certificates to zero. Allocation of distributions in
reduction of Stated Principal Balance will be made to each Class or Subclass
of such Certificates 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 Certificate
of a Class or Subclass then entitled to receive such distributions will be
made pro rata among the Certificates of such Class or Subclass.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates that includes Multi-Class Certificates, the maximum amount
which will be distributed in reduction of Stated Principal Balance to holders
of Certificates 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 Certificates 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 Certificates that includes Multi-Class Certificates, the "Stated Principal
Distribution Amount" with respect to a Distribution Date will equal the sum of
the Accrual Distribution Amount, if any, and the amount, if any, by which the
then outstanding Stated Principal Balance of the Multi-Class Certificates of
such Series (before taking into account the amount of interest accrued on any
Class of Compound Interest Certificates of such Series to be added to the
Stated Principal Balance thereof on such Distribution Date) exceeds the Asset
Value of the Trust Assets 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 Certificates 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 Certificates that includes Multi-Class Certificates, Excess Cash Flow
represents the excess of (i) the interest evidenced by such Multi-Class
Certificates 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 Certificates),
together with income from the reinvestment thereof, and, to the extent
specified in such Prospectus Supplement, the amount of cash withdrawn from any
Reserve, GPM or Buy-Down Fund for such Series in the Due Period preceding such
Distribution Date, over (ii) the sum of all interest accrued, whether or not
then distributable, on the Multi-Class Certificates since the preceding
Distribution Date (or since the date specified in the 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 Certificates 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
Certificates) will be made by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register, except that, with
respect to any holder of a Certificate meeting the requirements specified in
the applicable Prospectus Supplement, distributions shall be made by wire
transfer in immediately available funds, provided that the Trustee shall have
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been furnished with appropriate wiring instructions not less than two Business
Days prior to the related Distribution Date. The final distribution in
retirement of Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency designated by the Master Servicer
for such purpose, as specified in the final distribution notice to
Certificateholders.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Certificates that
includes Mortgage Certificates in the related Trust Fund, the Depositor will
cause such Mortgage Certificates to be transferred to the Trustee together
with all principal and interest distributed on such Mortgage Certificates
after the Cut-off Date. Each Mortgage Certificate included in a Trust Fund
will be identified in a schedule appearing as an exhibit to the applicable
Agreement. Such schedule will include information as to the principal balance
of each Mortgage Certificate as of the date of issuance of the Certificates
and its coupon rate, maturity and original principal balance. In addition,
such steps will be taken by the Depositor as are necessary to cause the
Trustee to become the registered owner of each Mortgage Certificate which is
included in a Trust Fund and to provide for all distributions on each such
Mortgage Certificate to be made directly to the Trustee.
In connection with such assignment, the Depositor will make certain
representations and warranties in the Agreement as to, among other things, its
ownership of the Mortgage Certificates. In the event that these
representations and warranties are breached, and such breach or breaches
adversely affect the interests of the Certificateholders in the Mortgage
Certificates, the Depositor will be required to repurchase the affected
Mortgage Certificates at a price equal to the principal balance thereof as of
the date of purchase together with accrued and unpaid interest thereon at the
related pass-through rate to the distribution date for such Mortgage
Certificates. 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
Certificateholders 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 Certificates, the
Depositor may, in lieu of the repurchase obligation set forth above, and in
certain other circumstances, deliver to the Trustee Mortgage Certificates
("Substitute Mortgage Certificates") in substitution for any one or more of
the Mortgage Certificates ("Deleted Mortgage Certificates") initially included
in the Trust Fund. The required characteristics or any such Substitute
Mortgage Certificates and any 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, deliver the Certificates to
the Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement. Such schedule will include information as to the adjusted
principal balance of each Mortgage Loan as of the Cut-off Date, as well as
information respecting the Mortgage Rate, the currently scheduled monthly (or
other periodic) payment of principal and interest, the maturity of the
Mortgage Note and the Loan-to-Value Ratio at origination.
In addition, the Depositor will, as to each Mortgage Loan that is not a
Cooperative Loan, deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) the Mortgage Note endorsed to the order of
the Trustee, the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver a copy of such Mortgage together with its
certificate that the original of such Mortgage was delivered to such recording
office) and an
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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. In addition, with respect to any Commercial Mortgage
Loans, Multifamily Mortgage Loans and Mixed-Use Mortgage Loans, the Depositor
will deliver or cause to be delivered to the Trustee (or the custodian
hereinafter referred to) the assignment of leases, rents and profits (if
separate from the Mortgage) and an executed re-assignment of assignment of
leases, rents and profits.
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, within a
specified number of days after receipt thereof, review and hold such documents
in trust for the benefit of the Certificateholders. Unless otherwise specified
in the related Prospectus Supplement, if any document in the Mortgage Loan
File is found to be defective in any material respect, the Trustee will
promptly notify the Depositor and the Master Servicer. Unless otherwise
specified in the related Prospectus Supplement, if the Master Servicer or
other entity cannot cure such defect within the time period specified in such
Prospectus Supplement, the Master Servicer or such other entity will be
obligated to either substitute the affected Mortgage Loan for a Substitute
Mortgage Loan or Loans, or to repurchase the related Mortgage Loan from the
Trustee within the time period specified in such Prospectus Supplement at a
price equal to the principal balance thereof as of the date of purchase or, in
the case of a Series as to which an election has been made to treat the
related Trust Fund 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 Pass-
Through Rate to the first day of the month following such repurchase, plus the
amount of any unreimbursed Advances made by the Master Servicer in respect of
such Mortgage Loan. The Master Servicer is obligated to enforce the repurchase
obligation of the Servicer, to the extent described above under "The Trust
Fund--Mortgage Loan Program--Representations by Unaffiliated Sellers;
Repurchases." Unless otherwise specified in the applicable Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Certificateholders 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 Certificates, 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 Certificateholders, 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 Certificateholders 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 Certificates, the Depositor, the Master
Servicer, the Unaffiliated Seller 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
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to which a breach of a representation or warranty is discovered, which breach
materially and adversely affects the interests of the Certificateholders. 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
Pooling and Servicing Agreement relating to a Series of Certificates, the
Master Servicer may make certain representations and warranties to the Trustee
in such Pooling and Servicing Agreement with respect to the enforceability of
coverage under any applicable Primary Insurance Policy, Pool Insurance Policy,
Special Hazard Insurance Policy or Mortgagor Bankruptcy Bond. See "Description
of Insurance" for information regarding the extent of coverage under certain
of the aforementioned insurance policies. Upon a breach of any such
representation or warranty that materially and adversely affects the interests
of the Certificateholders of such Series in a Mortgage Loan, the Master
Servicer will be obligated either to cure the breach in all material respects
or to purchase such Mortgage Loan at the price calculated as set forth above.
To the extent described in the 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 Certificates 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 Certificateholders or the Trustee for a breach of the Master Servicer's
insurability representation. The Master Servicer's obligation to purchase
Mortgage Loans upon such a breach is subject to limitations.
The Trustee will be authorized, with the consent of the Depositor and the
Master Servicer, to appoint a custodian pursuant to a custodial agreement to
maintain possession of documents relating to the Mortgage Loans as the agent
of the Trustee.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Servicers, or the Special Servicer (if applicable),
will service and administer the Mortgage Loans assigned to the Trustee as more
fully set forth below. The Special Servicer may also be a party to the Pooling
and Servicing Agreement with respect to a Series of Certificates, in which
case the related Prospectus Supplement shall set forth the duties and
responsibilities of the Special Servicer thereunder.
ASSIGNMENT OF CONTRACTS
The Depositor will cause the Contracts constituting the Contract Pool to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the Cut-off Date, but not including principal
and interest due on or before the Cut-off Date. If the Depositor is unable to
obtain a perfected security interest in a Contract prior to transfer and
assignment to the Trustee, the Unaffiliated Seller will be obligated to
repurchase such Contract. The Trustee, concurrently with such assignment, will
authenticate and deliver the Certificates. Each Contract will be identified in
a schedule appearing as an exhibit to the Agreement (the "Contract Schedule").
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
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Depositor to the Trust Fund. Therefore, if a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the interest of the Certificateholders in the Contracts could be defeated. See
"Certain Legal Aspects of Mortgage Loans and Contracts--The Contracts."
The Trustee (or the Custodian) will review and hold such documents in trust
for the benefit of the Certificateholders. 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 Pass-Through Rate, 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
Certificateholders 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 Policy in the amount required in the Pooling and Servicing Agreement
and that all premiums now due on such insurance have been paid in full.
All of the representations and warranties of a seller in respect of a
Contract will have been made as of the date on which such seller sold the
Contract to the Depositor or its affiliate; the date such representations and
warranties were made may be a date prior to the date of initial issuance of
the related series of Certificates. A substantial period of time may have
elapsed between the date as of which the representations and warranties were
made and the later date of initial issuance of the related Series of
Certificates. Since the representations and warranties referred to in the
preceding paragraph are the only representations and warranties that will be
made by a seller, the seller's repurchase obligation described below will not
arise if, during the period commencing on the date of sale of a Contract by
the seller to the Depositor or its affiliate, the relevant event occurs that
would have given rise to such an obligation had the event occurred prior to
sale of the affected Contract. Nothing, however, has come to the Depositor's
attention that would cause it to believe that the representations and
warranties referred to in the preceding paragraph will not be accurate and
complete in all material respects in respect of Contracts as of the date of
initial issuance of the related series of Certificates.
The only representations and warranties to be made for the benefit of
Certificateholders in respect of any Contract relating to the period
commencing on the date of sale of such Contract to the Depositor or its
affiliate will be certain limited representations of the Depositor and of the
Master Servicer described above under "The Trust Fund--The Contract Pools."
If an Unaffiliated Seller cannot cure a breach of any representation or
warranty made by it in respect of a Contract that materially and adversely
affects the interest of the Certificateholders in such Contract within 90
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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 Pass-Through Rate, plus the amount of any unreimbursed Advances in
respect of such Contract (the "Purchase Price"). The Master Servicer will be
required under the applicable Pooling and Servicing Agreement to enforce this
obligation for the benefit of the Trustee and the Certificateholders,
following the practices it would employ in its good faith business judgment
were it the owner of such Contract. Except as otherwise set forth in the
related Prospectus Supplement, this repurchase obligation will constitute the
sole remedy available to Certificateholders or the Trustee for a breach of
representation by an Unaffiliated Seller.
Neither the Depositor nor the Master Servicer will be obligated to purchase
a Contract if an Unaffiliated Seller defaults on its obligation to do so, and
no assurance can be given that sellers will carry out their respective
repurchase obligations with respect to Contracts. However, to the extent that
a breach of the representations and warranties of an Unaffiliated Seller may
also constitute a breach of a representation made by the Depositor or the
Master Servicer, the Depositor or the Master Servicer may have a purchase
obligation as described above under "The Trust Fund--The Contract Pools."
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 Pooling and Servicing Agreement provides that, if for any
reason the Master Servicer for such Series of Certificates is no longer the
Master Servicer of the related Mortgage Loans or Contracts, the Trustee or any
successor master servicer must recognize the Servicer's rights and obligations
under such Servicing Agreement.
A Servicer may delegate its servicing obligations to third-party servicers,
but continue to act as Servicer under the related Servicing Agreement. The
Servicer will be required to perform the customary functions of a servicer,
including collection of payments from Mortgagors and Obligors and remittance
of such collections to the Master Servicer, maintenance of primary mortgage,
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,
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generally to the same extent that the Master Servicer would be reimbursed
under the applicable Pooling and Servicing Agreement.
Each Servicer will be required to agree to indemnify the Master Servicer for
any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Servicer in its servicing capacity.
Each Servicer will be required to service each Mortgage Loan or Contract
pursuant to the terms of the Servicing Agreement for the entire term of such
Mortgage Loan or Contract, unless the Servicing Agreement is earlier
terminated by the Master Servicer or unless servicing is released to the
Master Servicer. 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 Pooling and Servicing Agreement. Upon termination
of a Servicing Agreement, the Master Servicer may act as servicer of the
related Mortgage Loans or Contracts or enter into one or more new Servicing
Agreements. If the Master Servicer acts as servicer, it will not assume
liability for the representations and warranties of the Servicer that it
replaces. If the Master Servicer enters into a new Servicing Agreement, each
new Servicer must be an Unaffiliated Seller or meet the standards for becoming
an Unaffiliated Seller or have such servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer will make reasonable
efforts to have the new Servicer assume liability for the representations and
warranties of the terminated Servicer, but no assurance can be given that such
an assumption will occur. In the event of such an assumption, the Master
Servicer may, in the exercise of its business judgment, release the terminated
Servicer from liability in respect of such representations and warranties. Any
amendments to a Servicing Agreement or new Servicing Agreements may contain
provisions different from those described above that are in effect in the
original Servicing Agreements. However, the Pooling and Servicing Agreement
with respect to a Series will provide that any such amendment or new agreement
may not be inconsistent with or violate such Pooling and Servicing Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the Prospectus
Supplement with respect to a Series of Certificates, establish and maintain a
separate account or accounts in the name of the Trustee (the "Certificate
Account"), which must be maintained with a depository institution and in a
manner acceptable to the Rating Agency rating the Certificates of a Series.
If so specified in the applicable Prospectus Supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth herein for the Certificate
Account. In such a case, amounts in such Custodial Account, after making the
required deposits and withdrawals specified below, shall be remitted to the
Certificate Account maintained by the Trustee for distribution to
Certificateholders in the manner set forth herein and in such Prospectus
Supplement.
In those cases where a Servicer is servicing a Mortgage Loan pursuant to a
Servicing Agreement, the Servicer will establish and maintain an account (the
"Servicing Account") that will comply with either the standards set forth
above or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository, meeting the requirements of the Rating Agency
rating the Certificates of the related Series, and that is otherwise
acceptable to the Master Servicer. The Servicer will be required to deposit
into the Servicing
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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. Any payments or other amounts collected
by a Special Servicer with respect to any Specially Serviced Mortgage Loans
will be deposited by such Special Servicer as set forth in the related
Prospectus Supplement.
The Certificate Account may be maintained with a depository institution that
is an affiliate of the Master Servicer. The Master Servicer will deposit in
the Certificate Account for each Series of Certificates on a daily basis the
following payments and collections received or made by it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date) in the
manner set forth in the 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
Certificates and any title, hazard or other insurance policy covering any
of the Mortgage Loans included in the related Mortgage Pool (to the extent
such proceeds are not applied to the restoration of the related property or
released to the Mortgagor in accordance with customary servicing
procedures) (collectively, "Insurance Proceeds") or any Alternative Credit
Support established in lieu of any such insurance and described in the
applicable Prospectus Supplement; and (B) all other cash amounts received
and retained in connection with the liquidation of defaulted Mortgage
Loans, by foreclosure or otherwise, other than Insurance Proceeds, payments
under the Letter of Credit or proceeds of any Alternative Credit Support,
if any, with respect to such Series ("Liquidation Proceeds"), net of
expenses of liquidation, unpaid servicing compensation with respect to such
Mortgage Loans and unreimbursed or unrecoverable Advances made by the
Servicers of the related Mortgage Loans;
(iv) all payments under the Letter of Credit, if any, with respect to
such Series;
(v) all amounts required to be deposited therein from the Reserve Fund,
if any, for such Series;
(vi) any Advances made by a Servicer or the Master Servicer (as described
herein under "--Advances");
(vii) any Buy-Down Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account, as described
below; and
(viii) all proceeds of any Mortgage Loan repurchased by the Master
Servicer, the Depositor, any Servicer or any Unaffiliated Seller (as
described under "The Trust Fund--Mortgage Loan Program--Representations by
Unaffiliated Sellers; Repurchases" or "--Assignment of Mortgage Loans"
above or repurchased by the Depositor as described under "--Termination"
below).
With respect to each Buy-Down Loan, if so specified in the 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
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provide sufficient funds to support the full monthly payments due on such Buy-
Down Loan on a level debt service basis. Neither the Master Servicer nor the
Depositor will be obligated to add to the Buy-Down Fund should investment
earnings prove insufficient to maintain the scheduled level of payments on the
Buy-Down Loans. To the extent that any such insufficiency is not recoverable
from the Mortgagor under the terms of the related Mortgage Note, distributions
to Certificateholders will be affected. With respect to each Buy-Down Loan,
the Master Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account on or before each Distribution Date the amount, if any,
for each Buy-Down Loan that, when added to the amount due on that date from
the Mortgagor on such Buy-Down Loan, equals the full monthly payment that
would be due on the Buy-Down Loan if it were not subject to the buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays such loan in its entirety, or
defaults on such loan and the Mortgaged Property is sold in liquidation
thereof, during the period when the Mortgagor is not obligated, on account of
the buy-down plan, to pay the full monthly payment otherwise due on such loan,
the related Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account the amounts remaining in the Buy-Down Fund with respect to
such Buy-Down Loan. In the event of a default with respect to which a claim,
including accrued interest supplemented by amounts in the Buy-Down Fund with
respect to the related Buy-Down Loan, has been made, the Master Servicer or
the related Servicer will pay an amount equal to the remaining amounts in the
Buy-Down Fund with respect to the related Buy-Down Loan, to the extent the
claim includes accrued interest supplemented by amounts in the Buy-Down Fund,
to the related Pool Insurer or the insurer under the related Primary Insurance
Policy (the "Primary Insurer") if the Mortgaged Property is transferred to the
Pool Insurer or the Primary Insurer, as the case may be, which pays 100% of
the related claim (including accrued interest and expenses) in respect of such
default, to the L/C Bank in consideration of such payment under the related
Letter of Credit, or to the guarantor or other person which pays the same
pursuant to Alternative Credit Support described in the applicable Prospectus
Supplement. In the case of any such prepaid or defaulted Buy-Down Loan the
amounts in the Buy-Down Fund in respect of which were supplemented by
investment earnings, the Master Servicer will withdraw from the Buy-Down Fund
and remit to the Depositor or the Mortgagor, depending on the terms of the
related buy-down plan, any investment earnings remaining in the related Buy-
Down Fund.
If so specified in the Prospectus Supplement with respect to a Series, in
lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund
the Buy-Down Fund for such Series, which shall be drawn upon by the Trustee in
the manner and at the times specified in such Prospectus Supplement.
PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under "Description
of the Certificates--Payments on Mortgage Loans" will be established in the
name of the Trustee.
There will be deposited in the Certificate Account on a daily basis the
following payments and collections received or made by it subsequent to the
Cut-off Date (including scheduled payments of principal and interest due after
the Cut-off Date but received by the Master Servicer on or before the Cut-off
Date):
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts,
adjusted to the Pass-Through Rate;
(iii) all Liquidation Proceeds received with respect to Contracts or
property acquired in respect thereof by foreclosure or otherwise;
(iv) all Insurance Proceeds received with respect to any Contract, other
than proceeds to be applied to the restoration or repair of the
Manufactured Home or released to the Obligor;
(v) any Advances made as described under "--Advances" and certain other
amounts required under the Pooling and Servicing Agreement to be deposited
in the Certificate Account;
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(vi) all amounts received from Credit Support provided with respect to a
Series of Certificates;
(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 Certificates will be registered in the name of the Trustee so that
all distributions thereon will be made directly to the Trustee. The Pooling
and Servicing Agreement will require the Trustee, if it has not received a
distribution with respect to any Mortgage Certificate by the second business
day after the date on which such distribution was due and payable pursuant to
the terms of such Mortgage Certificate, to request the issuer or guarantor, if
any, of such Mortgage Certificate to make such payment as promptly as possible
and legally permitted and to take such legal action against such issuer or
guarantor as the Trustee deems appropriate under the circumstances, including
the prosecution of any claims in connection therewith. The reasonable legal
fees and expenses incurred by the Trustee in connection with the prosecution
of any such legal action will be reimbursable to the Trustee out of the
proceeds of any such action and will be retained by the Trustee prior to the
deposit of any remaining proceeds in the Certificate Account pending
distribution thereof to Certificateholders of the affected Series. In the
event that the Trustee has reason to believe that the proceeds of any such
legal action may be insufficient to reimburse it for its projected legal fees
and expenses, the Trustee will notify such Certificateholders that it is not
obligated to pursue any such available remedies unless adequate indemnity for
its legal fees and expenses is provided by such Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
On each Distribution Date with respect to a Series of Certificates as to
which credit support is provided by means other than the creation of a
Subordinated Class or Subclasses and the establishment of a Reserve Fund, the
Master Servicer will withdraw from the applicable Certificate Account funds on
deposit therein and distribute, or, if so specified in the applicable
Prospectus Supplement, will withdraw from the Custodial Account funds on
deposit therein and remit to the Trustee, who will distribute, such funds to
Certificateholders of record on the applicable Record Date. Such distributions
shall occur in the manner described herein under "Description of the
Certificates--Distributions of Principal and Interest" and in the 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
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(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 and,
if applicable, the Special 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 Certificates--Maintenance of Insurance Policies,"
"--Presentation of Claims," "--Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans" and "--Enforcement of Due-on-
Sale Clauses; Realization Upon Defaulted Contracts" or in the applicable
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, no later
than the Business Day immediately preceding the Distribution Date for a Series
of Certificates, the Master Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the next succeeding Distribution
Date on account of principal and interest on the Mortgage Loans or Contracts,
stated separately or the information enabling the Trustee to determine the
amount of distribution to be made on the Certificates and a statement setting
forth certain information with respect to the Mortgage Loans 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 Certificates of the related Series in which the Trustee shall deposit,
as soon as practicable after receipt, each distribution made to the Trustee by
the Master Servicer, as set forth above, with respect to the Mortgage Loans or
Contracts, any distribution received by the Trustee with respect to the
Mortgage Certificates, if any, included in the Trust Fund and deposits from
any Reserve Fund or GPM Fund. If so specified in the applicable Prospectus
Supplement, prior to making any distributions to Certificateholders, any
portion of the distribution on the Mortgage Certificates that represents
servicing compensation, if any, payable to the Trustee shall be deducted and
paid to the Trustee.
Funds on deposit in the Certificate Account may be invested in Eligible
Investments maturing in general not later than the Business Day preceding the
next Distribution Date. 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. The Certificate Account established pursuant
to the Deposit Trust Agreement shall be a non-interest bearing account or
accounts.
The timing and method of distribution of funds in the Certificate Account to
Classes or Subclasses of Certificates having differing terms, whether
subordinated or not, to the extent not described herein, shall be set forth in
the related Prospectus Supplement.
SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a Series of
Certificates, one or more Classes of Multi-Class Certificates that do not
provide for monthly Distribution Dates may receive Special Distributions in
reduction of 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 Pooling and Servicing Agreement, that the amount of cash
anticipated to be on deposit in the Certificate Account on the next
Distribution Date for such Series and available to be distributed to the
holders of the Certificates of such Classes or Subclasses may be less than the
sum of (i) the interest scheduled to be distributed to holders of the
Certificates of such Classes or Subclasses and (ii) the amount to be
distributed in reduction of Stated Principal Balance or such Certificates 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.
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REPORTS TO CERTIFICATEHOLDERS
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 Certificateholders of record of such Series, or within a
reasonable time thereafter, a statement generally setting forth, among other
things, the following information, if applicable (per each Certificate, as to
(i) through (iii) or (iv) through (vi) below, as applicable):
(i) to each holder of a Certificate, other than a Multi-Class Certificate
or Residual Certificate, the amount of such distribution allocable to
principal of the Trust Assets, 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 Certificate, 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 Certificate, 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 Certificateholders to prepare their tax returns;
(iv) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of 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 Certificates outstanding of each Class or Subclass after giving effect
to the distribution in reduction of Stated Principal Balance made on such
Distribution Date and on any Special Distribution Date occurring subsequent
to the last such report and after including in the aggregate Stated
Principal Balance the Stated Principal Balance of the Compound Interest
Certificates, if any, outstanding and the amount of any accrued interest
added to the Compound Value of such Compound Interest Certificates on such
Distribution Date;
(vi) to each holder of a Compound Interest Certificate (but only if such
holder shall not have received a distribution of interest on such
Distribution Date equal to the entire amount of interest accrued on such
Certificate with respect to such Distribution Date):
(a) the information contained in the report delivered pursuant to
clause (v) above;
(b) the interest accrued on such Class or Subclass of Compound
Interest Certificates with respect to such Distribution Date and added
to the Compound Value of such Compound Interest Certificate; and
(c) the Stated Principal Balance of such Class or Subclass of
Compound Interest Certificates after giving effect to the addition
thereto of all interest accrued thereon;
(vii) in the case of a series of Certificates with a variable Pass-
Through Rate, the weighted average Pass-Through Rate applicable to the
distribution in question;
(viii) the amount or the remaining obligations of an L/C Bank with
respect to a Letter of Credit, after giving effect to the declining amount
available and any payments thereunder and other amounts charged thereto on
the applicable Distribution Date, expressed as a percentage of the amount
reported pursuant to (x) below, and the amount of coverage remaining under
the Pool Insurance Policy, Special Hazard Insurance Policy, Mortgagor
Bankruptcy Bond, or Reserve Fund as applicable, in each case, as of the
applicable Determination Date, after giving effect to any amounts with
respect thereto distributed to Certificateholders on the Distribution Date;
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(ix) in the case of a Series of Certificates 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 Certificateholders 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 Certificateholders on the Distribution
Date;
(xi) the book value of any collateral acquired by the Mortgage Pool or
Contract Pool through foreclosure, repossession or otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, or the Trustee, if specified in the
applicable Prospectus Supplement, will cause to be furnished to each
Certificateholder of record at any time during such calendar year a report as
to the aggregate of amounts reported pursuant to (i) through (iii) or (iv)
through (vi) above and such other information as in the judgment of the Master
Servicer or the Trustee, as the case may be, is needed for the
Certificateholder to prepare its tax return, as applicable, for such calendar
year or, in the event such person was a Certificateholder of record during a
portion of such calendar year, for the applicable portion of such year.
ADVANCES
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
(adjusted to the applicable Pass-Through Rate) that were due on the Due Date
with respect to a Mortgage Loan or Contract and that were delinquent
(including any payments that have been deferred by the Servicer or the Master
Servicer) as of the close of business on the date specified in the Pooling and
Servicing Agreement, to be remitted no later than the close of business on the
business day immediately preceding the Distribution Date, subject to (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
Certificateholders, 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, insurance premiums and, if applicable, Property Protection
Expenses not paid by Mortgagors or Obligors on a timely basis and, to the
extent deemed recoverable, foreclosure costs, including reasonable attorney's
fees. "Property Protection Expenses" comprise certain costs and expenses
incurred in connection with defaulted Mortgage Loans, acquiring title or
management of REO Property or the sale of defaulted Mortgage Loans or REO
Properties, as more fully described in the related Prospectus Supplement.
Unless otherwise set forth in the related Prospectus Supplement, 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
Certificateholders 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
(adjusted to the applicable Pass-Through Rate) in
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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 will be responsible for servicing the Mortgage Loans
pursuant to the Agreement for the related Series. If so specified in the
related Prospectus Supplement, the Master Servicer may subcontract the
servicing of all or a portion of the Mortgage Loans to one or more Servicers
and may subcontract the servicing of certain Commercial Mortgage Loans,
Multifamily Mortgage Loans and/or Mixed-Use Mortgage Loans that are in default
or otherwise require special servicing (the "Specially Serviced Mortgage
Loans") to a special servicer (the "Special Servicer"), and certain
information with respect to the Special Servicer will be set forth in such
Prospectus Supplement. Such Servicers and any Special Servicer may be an
affiliate of the Depositor and may have other business relationships with
Depositor and its affiliates.
The Master Servicer, directly or through the Servicers or a Special
Servicer, as the case may be, will make reasonable efforts to collect all
payments called for under the Mortgage Loans or Contracts and will, consistent
with the applicable Pooling and Servicing Agreement and any applicable Letter
of Credit, Pool Insurance Policy, Special Hazard Insurance Policy, Primary
Mortgage Insurance Policy, Mortgagor Bankruptcy Bond, or Alternative Credit
Support, follow such collection procedures as it follows with respect to
mortgage loans or contracts serviced by it that are comparable to the Mortgage
Loans or Contracts, except when, in the case of FHA or VA Loans, applicable
regulations require otherwise. Consistent with the above, the Master Servicer
may, in its discretion, waive any late payment charge or any prepayment charge
or penalty interest in connection with the prepayment of a Mortgage Loan or
Contract or extend the due dates for payments due on a Mortgage Note or
Contract for a period of not greater than 270 days, provided that the
insurance coverage for such Mortgage Loan or Contract or the coverage provided
by any Letter of Credit or any Alternative Credit Support, will not be
adversely affected.
Under the Pooling and Servicing Agreement, the Master Servicer, either
directly or through Servicers or a Special Servicer, 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. The Special Servicer, if
any, will be required to remit amounts received for such purposes on Mortgage
Loans serviced by it for deposit in the Escrow Account, and will be entitled
to direct the Master Servicer to make withdrawals from the Escrow Account as
may be required for servicing of such Mortgage Loans. 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 acceptable to the Rating Agency rating the
related Series of Certificates, covering loss occasioned by the failure to
escrow such amounts.
MAINTENANCE OF INSURANCE POLICIES
To the extent that the applicable Prospectus Supplement does not expressly
provide for a method of credit support described below under "Credit Support"
or for Alternative Credit Support in lieu of some or all of the insurance
coverage set forth below, the following paragraphs on insurance shall apply.
STANDARD HAZARD INSURANCE
To the extent specified in a related Prospectus Supplement, the terms of
each Servicing Agreement will require the Servicer or the Special Servicer (if
applicable) to cause to be maintained for each Mortgage Loan or
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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 of the improvements securing such Mortgage Loan or Contract or the
principal balance of such Mortgage Loan or Contract, whichever is less. Each
Servicer, the Special Servicer (if applicable) 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, the Special
Servicer (if applicable) or the Master Servicer under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) shall be deposited in the related Servicing
Account for deposit in the Certificate Account or, in the case of the Master
Servicer, shall be deposited directly into the Certificate Account. Any cost
incurred in maintaining any such insurance shall not, for the purpose of
calculating monthly distributions to Certificateholders, be added to the
amount owing under the Mortgage Loan or Contract, notwithstanding that the
terms of the Mortgage Loan or Contract may so permit. Such cost shall be
recoverable by the Servicer or the Special Servicer (if applicable) only by
withdrawal of funds from the Servicing Account or by the Master Servicer only
by withdrawal from the Certificate Account, as described in the Pooling and
Servicing Agreement. No earthquake or other additional insurance is to be
required of any borrower or maintained on property acquired in respect of a
Mortgage Loan or Contract, other than pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance. When the Mortgaged Property or Manufactured Home is
located at the time of origination of the Mortgage Loan or Contract in a
federally designated flood area, the related Servicer or the Special Servicer
(if applicable) (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 Pooling and Servicing Agreement will require the Master Servicer to
perform the aforementioned obligations of the Servicer in the event the
Servicer fails to do so. In the event that the Master Servicer obtains and
maintains a blanket policy insuring against hazard losses on all of the
related Mortgage Loans or Contracts, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a Standard Hazard
Insurance Policy for each Mortgage Loan or Contract that it services. This
blanket policy may contain a deductible clause, in which case the Master
Servicer will, in the event that there has been a loss that would have been
covered by such policy absent such deductible, deposit in the Certificate
Account the amount not otherwise payable under the blanket policy because of
the application of such deductible clause.
Since the amount of hazard insurance to be maintained on the improvements
securing the Mortgage Loans or Contracts may decline as the principal balances
owing thereon decrease, and since properties have historically appreciated in
value over time, in the event of partial loss, hazard insurance proceeds may
be insufficient to fully restore the damaged Mortgaged Property or
Manufactured Home. See "Description of Insurance--Special Hazard Insurance
Policies" for a description of the limited protection afforded by a Special
Hazard Insurance Policy against losses occasioned by certain hazards that are
otherwise uninsured against as well as against losses caused by the
application of the coinsurance provisions contained in the Standard Hazard
Insurance Policies.
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With respect to Mortgage Loans secured by Commercial Property, Mixed-Use
Property and Multi-Family Property, certain additional insurance policies may
be required, including, but not limited to, loss of rent endorsements,
business interruption insurance and comprehensive public liability insurance,
and the related Pooling and Servicing Agreement may require the Master
Servicer to maintain public liability insurance with respect to any related
REO Properties. Any cost incurred by the Master Servicer in maintaining any
such insurance policy will be added to the amount owing under the related
Mortgage Loan where the terms of such Mortgage Loan so permit; provided,
however, that the addition of such cost will not be taken into account for
purposes of calculating the distribution to be made to Certificateholders.
Such costs may be recovered by the Master Servicer from the Certificate
Account, with interest thereon, as provided by the Agreement.
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
Certificates in full force and effect, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premium for the Special
Hazard Insurance Policy on a timely basis; provided, however, that the Master
Servicer shall be under no such obligation if coverage under the Pool
Insurance Policy 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 Certificates in effect throughout
the term of the Pooling and Servicing Agreement, unless coverage thereunder
has been exhausted through payment of claims, and will pay the premiums for
such Pool Insurance Policy on a timely basis. In the event that the Pool
Insurer ceases to be a qualified insurer because it is not qualified to
transact a mortgage guaranty insurance business under the laws of the state of
its principal place of business or any other state which has jurisdiction over
the Pool Insurer in connection with the Pool Insurance Policy, or if the Pool
Insurance Policy is cancelled or terminated for any reason (other than the
exhaustion of total policy coverage), the Master Servicer will exercise its
best reasonable efforts to obtain a replacement policy of pool insurance
comparable to the Pool Insurance Policy and may obtain, under the
circumstances described above with respect to the Special Hazard Insurance
Policy, a replacement policy with reduced coverage. In the event the Pool
Insurer ceases to be a qualified insurer because it is not approved as an
insurer by FHLMC, FNMA or any successors thereto, the Master Servicer will
agree to review, not less often than monthly, the financial condition of the
Pool Insurer with a view towards determining whether recoveries under the Pool
Insurance Policy are jeopardized and, if so, will exercise its best reasonable
efforts to obtain from another qualified insurer a replacement insurance
policy under the above-stated limitations. Certain characteristics of the Pool
Insurance Policy are described under "Description of Insurance--Pool Insurance
Policies."
PRIMARY MORTGAGE INSURANCE
To the extent specified in the 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
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with respect to each such Mortgage Loan serviced by it, in each case to the
extent required by the underwriting standards of the Depositor, a Primary
Mortgage Insurance Policy issued by a qualified insurer (the "Primary Mortgage
Insurer") with regard to each Mortgage Loan for which such coverage is
required pursuant to the applicable Servicing Agreement and the Pooling and
Servicing Agreement and to act on behalf of the Trustee (the "Insured") under
each such Primary Mortgage Insurance Policy. Neither the Servicer nor the
Master Servicer will cancel or refuse to renew any such Primary Mortgage
Insurance Policy in effect at the date of the initial issuance of a Series of
Certificates that is required to be kept in force under the Pooling and
Servicing Agreement or applicable Servicing Agreement unless the replacement
Primary Mortgage Insurance Policy for such cancelled or non-renewed policy is
maintained with an insurer whose claims-paying ability is acceptable to the
Rating Agency rating the Certificates. See "Description of Insurance--Primary
Mortgage Insurance Policies."
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 Certificates in full force and effect throughout the term
of the Pooling and Servicing Agreement, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premiums for such
Mortgagor Bankruptcy Bond on a timely basis. At the request of the Depositor,
coverage under a Mortgagor Bankruptcy Bond will be cancelled or reduced by the
Master Servicer to the extent permitted by the Rating Agency rating the
related Series of Certificates, provided that such cancellation or reduction
does not adversely affect the then current rating of such Series. See
"Description of Insurance--Mortgagor Bankruptcy Bond."
PRESENTATION OF CLAIMS
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to HUD, the VA, the Pool Insurer, the
Special Hazard Insurer, the issuer of the Mortgagor Bankruptcy Bond, and each
Primary Mortgage Insurer, as applicable, and take such reasonable steps as are
necessary to permit recovery under such insurance policies or Mortgagor
Bankruptcy Bond, if any, with respect to a Series concerning defaulted
Mortgage Loans or Contracts or Mortgage Loans or Contracts that are the
subject of a bankruptcy proceeding. All collections by the Master Servicer
under any FHA insurance or VA guarantee, any Pool Insurance Policy, any
Primary Mortgage Insurance Policy or any Mortgagor Bankruptcy Bond and, where
the related property has not been restored, any Special Hazard Insurance
Policy, are to be deposited in the Certificate Account, subject to withdrawal
as heretofore described. In those cases in which a Mortgage Loan or Contract
is serviced by a Servicer, the Servicer, on behalf of itself, the Trustee and
the Certificateholders, will present claims to the applicable Primary Mortgage
Insurer and to the FHA and the VA, as applicable, and all collections
thereunder shall be deposited in the Servicing Account, subject to withdrawal,
as set forth above, for deposit in the Certificate Account.
If any property securing a defaulted Mortgage Loan or Contract is damaged
and proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to
expend its own funds to restore the damaged property unless it determines,
and, in the case of a determination by a Servicer, the Master Servicer agrees,
(i) that such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan or Contract after reimbursement of the
expenses incurred by the Servicer or the Master Servicer, as the case may be,
and (ii) that such expenses will be recoverable through proceeds of the sale
of the Mortgaged Property or proceeds of any related Pool Insurance Policy,
any related Primary Mortgage Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary Mortgage
Insurance Policy is not available because the related Servicer or the Master
Servicer has been unable to make the above determinations or otherwise, the
Servicer or the Master Servicer is nevertheless obligated to follow such
normal practices and
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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
Pass-Through Rate, and if coverage under any other method of credit support
with respect to such Series is exhausted, the related Trust Fund will realize
a loss in the amount of such difference plus the aggregate of expenses
incurred by the Servicer or the Master Servicer in connection with such
proceedings and which are reimbursable under the related Servicing Agreement
or the Pooling and Servicing Agreement. In the event that any such proceedings
result in a total recovery that is, after reimbursement to the Servicer or the
Master Servicer of its expenses, in excess of the principal balance of the
related Mortgage Loan or Contract, together with accrued and unpaid interest
thereon at the applicable Pass-Through Rates, the Servicer and the Master
Servicer will be entitled to withdraw amounts representing normal servicing
compensation on such Mortgage Loan or Contract from the Servicing Account or
the Certificate Account, as the case may be.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION
UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the Pooling and Servicing Agreement with
respect to Certificates representing interests in a Mortgage Pool will provide
that, when any Mortgaged Property has been conveyed by the 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, would result in loss of
insurance coverage with respect to such Mortgage Loan or would not be in the
best interest of the related Series of Certificateholders. In any such case,
where the due-on-sale clause will not be exercised, the Servicer or the Master
Servicer is authorized to take or enter into an assumption and modification
agreement from or with the person to whom such Mortgaged Property has been or
is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Note and, unless prohibited by applicable state law, the
Mortgagor remains liable thereon, provided that the Mortgage Loan will
continue to be covered by any Pool Insurance Policy and any related Primary
Mortgage Insurance Policy. In the case of an FHA Loan, such an assumption can
occur only with HUD approval of the substitute Mortgagor. Each Servicer and
the Master Servicer will also be authorized, with the prior approval of the
Insurer under any required insurance policies, to enter into a substitution of
liability agreement with such person, pursuant to which the original Mortgagor
is released from liability and such person is substituted as Mortgagor and
becomes liable under the Mortgage Note.
Under the Servicing Agreements and the Pooling and Servicing Agreement, the
Servicer or the Master Servicer, as the case may be, will foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
related Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer or the
Master Servicer will follow such practices and procedures as are deemed
necessary or advisable and as shall be normal and usual in its general
mortgage servicing activities and in accordance with FNMA guidelines, except
when, in the case of FHA or VA Loans, applicable regulations require
otherwise. However, neither the Servicer nor the Master Servicer will be
required to expend its own funds in connection with any foreclosure or towards
the restoration of any property unless it determines and, in the case of a
determination by a Servicer, the Master Servicer agrees (i) that such
restoration and/or foreclosure will increase the proceeds of liquidation of
the related Mortgage Loan to Certificateholders after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds, Insurance Proceeds, payments under the Letter of
Credit, or amounts in the Reserve Fund, if any, with respect to the related
Series, or otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the
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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 Commercial Property, Multifamily Property or Mixed-
Use Property obtained in foreclosure or by deed in lieu of foreclosure will be
based substantially on the operating income obtained from renting the
commercial or dwelling units. Since a default on a Mortgage Loan secured by
Commercial Property, Multifamily Property or Mixed-Use Property is likely to
have occurred because operating income, net of expenses, is insufficient to
make debt service payments on the related Mortgage Loan, it can be anticipated
that the market value of such property will be less than was anticipated when
such Mortgage Loan was originated. To the extent that the equity in the
property does not absorb the loss in market value and such loss is not covered
by other credit support, a loss may be experienced by the related Trust Fund.
With respect to Multifamily Property consisting of an apartment building owned
by a Cooperative, the Cooperative's ability to meet debt service obligations
on the Mortgage Loan, as well as all other operating expenses, will be
dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial
areas the Cooperative might control. Unanticipated expenditures may in some
cases have to be paid by special assessments of the tenant-stockholders. The
Cooperative's ability to pay the principal amount of the Mortgage Loan at
maturity may depend on its ability to refinance the Mortgage Loan. The
Depositor, the Unaffiliated Seller and the Master Servicer will have no
obligation to provide refinancing for any such Mortgage Loan.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES;
REALIZATION UPON DEFAULTED CONTRACTS
Each Servicing Agreement and Pooling and Servicing Agreement with respect to
Certificates representing interests in a Contract Pool will provide that, when
any Manufactured Home securing a Contract is about to be conveyed by the
Obligor, the Master Servicer, to the extent it has knowledge of such
prospective conveyance and prior to the time of the consummation of such
conveyance, may exercise its rights to accelerate the maturity of such
Contract under the applicable "due-on-sale" clause, if any, unless it is not
exercisable under applicable law. In such case, the Master Servicer is
authorized to take or enter into an assumption agreement from or with the
person to whom such Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Contract and, unless
determined to be materially adverse to the interests of Certificateholders,
with the prior approval of the Pool Insurer, if any, to enter into a
substitution of liability agreement with such person, pursuant to which the
original Obligor is released from liability and such person is substituted as
Obligor and becomes liable under the Contract. Where authorized by the
Contract, the APR may be increased, upon assumption, to the then-prevailing
market rate, but shall not be decreased.
Under the Servicing Agreement or the Pooling and Servicing Agreement, the
Master Servicer will repossess or otherwise comparably convert the ownership
of properties securing such of the related Manufactured Homes as come into and
continue in default and as to which no satisfactory arrangements can be made
for collection of delinquent payments. In connection with such repossession or
other conversion, the Servicer or Master Servicer will follow such practices
and procedures as it shall deem necessary or advisable and as shall be normal
and usual in its general Contract servicing activities. The Servicer or Master
Servicer, however, will not be required to expend its own funds in connection
with any repossession or towards the restoration of any property unless it
determines (i) that such restoration or repossession will increase the
proceeds of liquidation of the related Contract to the Certificateholders
after reimbursement to itself for such expenses and (ii) that such expenses
will be recoverable to it either through liquidation proceeds or through
insurance proceeds.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Under the Pooling and Servicing Agreement for a Series of Certificates, the
Depositor or the person or entity specified in the related Prospectus
Supplement and any Master Servicer will be entitled to receive an amount
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described in such Prospectus Supplement. The Master Servicer's primary
compensation generally will be equal to the difference, with respect to each
interest payment on a Mortgage Loan, between the Mortgage Rate and the Pass-
Through Rate for the related Mortgage Pool and with respect to each interest
payment on a Contract, between the APR and the Pass-Through Rate for the
related Contract (less any servicing compensation payable to the Servicer of
the related Mortgage Loan or Contract, if any, as set forth below, and the
amount, if any, payable to the Depositor or to the person or entity specified
in the applicable Prospectus Supplement). As compensation for its servicing
duties, a Servicer will be entitled to receive a monthly servicing fee in the
amount specified in the related Servicing Agreement. Such servicing
compensation shall be payable by withdrawal from the related Servicing Account
prior to deposit in the Certificate Account. Each Servicer (with respect to
the Mortgage Loans or Contracts serviced by it) and the Master Servicer will
be entitled to servicing compensation out of Insurance Proceeds, Liquidation
Proceeds, or Letter of Credit payments. Additional servicing compensation in
the form of prepayment charges, assumption fees, late payment charges or
otherwise shall be retained by the Servicers and the Master Servicer to the
extent not required to be deposited in the Certificate Account. If the Master
Servicer subcontracts the servicing of Specially Serviced Mortgage Loans to a
Special Servicer, the exact amount and calculation of the fee payable to the
Special Servicer will be set forth in the related Prospectus Supplement and
Pooling and Servicing Agreement.
The Servicers, any Special Servicer 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 and disbursements of the Trustee (and any custodian
selected by the Trustee), the Certificate Register and independent accountants
and payment of expenses incurred in enforcing the obligations of Servicers and
Unaffiliated Sellers. Certain of these expenses may be reimbursable by the
Depositor pursuant to the terms of the Pooling and Servicing Agreement. In
addition, the Master Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of any Special Servicer, Servicers and
Unaffiliated Sellers under certain limited circumstances.
As set forth in the preceding section, the Servicers, any Special Servicer
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, a Special Servicer and
the Master Servicer will be entitled to reimbursement of expenditures incurred
by them in connection with the restoration of a Mortgaged Property,
Cooperative Dwelling or Manufactured Home, such right of reimbursement being
prior to the rights of the Certificateholders to receive any payments under
the Letter of Credit, or from any related Insurance Proceeds, Liquidation
Proceeds, amounts in the Reserve Fund or any proceeds of Alternative Credit
Support.
Under the Deposit 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 Deposit Trust Agreement,
subject to limited reimbursement as provided therein.
EVIDENCE AS TO COMPLIANCE
The Master Servicer will deliver to the Depositor and the Trustee, on or
before the date specified in the Pooling and Servicing Agreement, an Officer's
Certificate stating that (i) a review of the activities of the Master
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Servicer and the Servicers during the preceding calendar year and of its
performance under the Pooling and Servicing Agreement has been made under the
supervision of such officer, and (ii) to the best of such officer's knowledge,
based on such review, the Master Servicer and each Servicer has fulfilled all
its obligations under the Pooling and Servicing Agreement and the applicable
Servicing Agreement throughout such year, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default known to
such officer and the nature and status thereof. Such Officer's Certificate
shall be accompanied by a statement of a firm of independent public
accountants to the effect that, on the basis of an examination of certain
documents and records relating to servicing of the Mortgage Loans or 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 Pooling and Servicing
Agreement and the Servicing Agreements, except for such exceptions as such
firm believes it is required to report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER,
THE DEPOSITOR, THE TRUSTEE AND THE SPECIAL SERVICER
The Master Servicer under each Pooling and Servicing Agreement will be named
in the applicable Prospectus Supplement. The entity acting as Master Servicer
may be an Unaffiliated Seller and have other normal business relationships
with the Depositor and/or affiliates of the Depositor and may be an affiliate
of the Depositor. In the event there is no Master Servicer under a Pooling and
Servicing Agreement, all servicing of Mortgage Loans or Contracts will be
performed by a Servicer pursuant to a Servicing Agreement.
The Master Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement except upon a determination that its duties
thereunder are no longer permissible under applicable law. No such resignation
will become effective until the Trustee or a successor servicer has assumed
the Master Servicer's obligations and duties under the Pooling and Servicing
Agreement.
The Trustee under each Pooling and Servicing Agreement or Deposit Trust
Agreement will be named in the applicable Prospectus Supplement. The
commercial bank or trust company serving as Trustee may have normal banking
relationships with the Depositor and/or its affiliates and with the Master
Servicer and/or its affiliates.
The Trustee may resign from its obligations under the Pooling and Servicing
Agreement at any time, in which event a successor trustee will be appointed.
In addition, the Depositor may remove the Trustee if the Trustee ceases to be
eligible to act as Trustee under the Pooling and Servicing Agreement or if the
Trustee becomes insolvent, at which time the Depositor will become obligated
to appoint a successor Trustee. The Trustee may also be removed at any time by
the holders of Certificates evidencing voting rights aggregating not less than
50% of the voting rights evidenced by the Certificates of such Series. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of such appointment by the
successor Trustee.
The Trustee may resign at any time from its obligations and duties under the
Deposit Trust Agreement by executing an instrument in writing resigning as
Trustee, filing the same with the Depositor, mailing a copy of a notice of
resignation to all Certificateholders then of record, and appointing a
qualified successor trustee. No such resignation will become effective until
the successor trustee has assumed the Trustee's obligations and duties under
the Deposit Trust Agreement.
Each Pooling and Servicing Agreement and Deposit Trust Agreement will also
provide that neither the Depositor nor the Master Servicer nor any director,
officer, employee or agent of the Depositor or the Master Servicer or the
Trustee, or any responsible officers of the Trustee will be under any
liability to the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the 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
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reason of willful misfeasance, bad faith or negligence in the performance of
its duties or by reason of reckless disregard of its obligations and duties
thereunder. Each Pooling and Servicing Agreement and Deposit Trust Agreement
will further provide that the Depositor, the Master Servicer and the Trustee
and any director, officer and employee or agent of the Depositor, the Master
Servicer or the Trustee shall be entitled to indemnification, by the Trust
Fund in the case of the Depositor and Master Servicer and by the Master
Servicer in the case of the Trustee and will be held harmless against any
loss, liability or expense incurred in connection with any legal action
relating to the applicable Agreement or the Certificates and in the case of
the Trustee, resulting from any error in any tax or information return
prepared by the Master Servicer or from the exercise of any power of attorney
granted pursuant to the 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 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
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Master Servicer or the Depositor, as
the case may be, will be entitled to be reimbursed therefor out of the
Certificate Account.
If the Master Servicer subcontracts the servicing of Specially Serviced
Mortgage Loans to a Special Servicer, the standard of care for, and any
indemnification to be provided to, the Special Servicer will be set forth in
the related Prospectus Supplement and Pooling and Servicing Agreement.
DEFICIENCY EVENT
To the extent a deficiency event is specified in the related Prospectus
Supplement, a deficiency event (a "Deficiency Event") with respect to the
Certificates of each Series may be defined in the Pooling and Servicing
Agreement as being the inability of the Trustee to distribute to holders of
one or more Classes of Certificates of such Series, in accordance with the
terms thereof and the Pooling and Servicing Agreement, any distribution of
principal or interest thereon when and as distributable, in each case because
of the insufficiency for such purpose of the funds then held in the related
Trust Fund.
To the extent a deficiency event is specified in the related 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 Certificates in accordance with the priorities as to
distributions of principal and interest set forth in such Certificates will be
sufficient to make distributions of interest at the applicable Interest Rates
and to distribute in full the principal balance of each such Certificate on or
before the latest Final Distribution Date of any outstanding Certificates of
such Series.
To the extent a deficiency event is specified in the related Prospectus
Supplement, the Trustee will obtain and rely upon an opinion or report of a
firm of independent accountants of recognized national reputation as to the
sufficiency of the amounts receivable with respect to such Trust Fund to make
such distributions on the Certificates, which opinion or report will be
conclusive evidence as to such sufficiency. Pending the making of any such
determination, distributions on the Certificates shall continue to be made in
accordance with their terms.
To the extent a deficiency event is specified in the related 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
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Fund (after payment of fees and expenses of the Trustee and accountants for
the Trust Fund) to distributions on the Certificates of such Series in
accordance with their terms, except that such distributions shall be made
monthly and without regard to the amount of principal that would otherwise be
distributable on any Distribution Date. Under certain circumstances following
such positive determination, the Trustee may resume making distributions on
such Certificates expressly in accordance with their terms.
To the extent a deficiency event is specified in the related Prospectus
Supplement, if the Trustee is unable to make the positive determination
described above, the Trustee will apply all amounts received in respect of the
related Trust Fund (after payment of Trustee and accountants' fees and
expenses) to monthly distributions on the Certificates of such series pro
rata, without regard to the priorities as to distribution of principal set
forth in such Certificates, and such Certificates will, to the extent
permitted by applicable law, accrue interest at the highest Interest Rate
borne by any Certificate of such Series, or in the event any Class of such
Series shall accrue interest at a floating rate, at the weighted average
Interest Rate, calculated on the basis of the maximum interest rate applicable
to the Class having such floating interest rate and on the original principal
amount of the Certificates of that Class. In such event, the holders of a
majority in outstanding principal balance of such Certificates may direct the
Trustee to sell the related Trust Fund, any such direction being irrevocable
and binding upon the holders of all Certificates of such Series and upon the
owners of the residual interests in such Trust Fund. In the absence of such a
direction, the Trustee may not sell all or any portion of such Trust Fund.
EVENTS OF DEFAULT
Events of Default under each Pooling and Servicing Agreement, unless
otherwise provided in the applicable Prospectus Supplement, 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 Pooling and Servicing Agreement which
failure shall continue for 60 days (15 days in the case of a failure to pay
the premium for any insurance policy) or any breach of any representation and
warranty made by the Master Servicer or the Servicer, if applicable, which
continues unremedied for 120 days 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 Certificates by the Rating Agency rating such Certificates
because the existing or prospective financial condition or mortgage loan
servicing capability of the Master Servicer is insufficient to maintain such
rating.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default with respect to a Series of Certificates
remains unremedied and unless otherwise set forth in the related Prospectus
Supplement, the Depositor, the Trustee or the holders of Certificates
evidencing not less than 25% of the voting rights evidenced by the
Certificates of such Series may terminate all of the rights and obligations of
the Master Servicer under the Pooling and Servicing Agreement and in and to
the Mortgage Loans and Contracts and the proceeds thereof, whereupon (subject
to applicable law regarding the Trustee's ability to make advances) the
Trustee or, if the Depositor so notifies the Trustee and the Master Servicer,
the Depositor or its designee, will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under such Pooling and Servicing
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but
is unwilling or unable so to act, it may appoint, or petition to a court of
competent jurisdiction for the appointment of, a successor master servicer.
Pending such appointment, the Trustee (unless prohibited by law from so
acting) shall be obligated to act in such capacity. The Trustee and such
successor master servicer may agree upon the servicing compensation to be paid
to such successor, which in no event may be greater than the compensation to
the Master Servicer under the Pooling and Servicing Agreement.
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AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer and the Trustee, without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement
any provision therein that may be inconsistent with any other provision
therein, or (iii) to make any other provisions with respect to matters or
questions arising under such Pooling and Servicing Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of any
Certificateholder of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Master Servicer and the Trustee with
the consent of holders of Certificates evidencing not less than 66 2/3% of the
voting rights evidenced by the Certificates, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of such Pooling and Servicing Agreement or of modifying in any manner the
rights of the Certificateholders; provided, however, that no such amendment
may (i) reduce in any manner the amount of, delay the timing of or change the
manner in which payments received on or with respect to Mortgage Loans and
Contracts are required to be distributed with respect to any Certificate
without the consent of the holder of such Certificate, (ii) adversely affect
in any material respect the interests of the holders of a Class or Subclass of
the Senior Certificates, 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
Certificates 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 Certificates of a Series in a manner other
than that set forth in (i) above without the consent of the holders of
Subordinated Certificates evidencing not less than 66 2/3% of such Class or
Subclass, or (iv) reduce the aforesaid percentage of the Certificates, the
holders of which are required to consent to such amendment, without the
consent of the holders of the Class affected thereby.
The Deposit 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 Deposit Trust
Agreement for each Series may also be amended by the Trustee and the Depositor
with the consent of the Holders of Certificates evidencing Percentage
Interests aggregating not less than 66 2/3% of each Class of the Certificates
of such Series affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement
or modifying in any manner the rights of Certificateholders of that Series;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, or change the manner in which payments
received on Mortgage Certificates are required to be distributed in respect of
any Certificate, without the consent of the Holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates the Holders of which are
required to consent to any such amendment, without the consent of the Holders
of all Certificates of such Series then outstanding.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate upon the earlier of (a) the repurchase of all
Mortgage Loans or Contracts and all property acquired by foreclosure of any
such Mortgage Loan or Contract and (b) the later of (i) the maturity or other
liquidation of the last Mortgage Loan or Contract subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan or Contract and (ii) the payment to the Certificateholders of all amounts
held by the Master Servicer and required to be paid to them pursuant to such
Pooling and Servicing Agreement. The obligations created by the Deposit Trust
Agreement for a Series of Certificates will terminate upon the distribution to
Certificateholders of all amounts required to be distributed to them pursuant
to such Deposit Trust Agreement. In no event, however, will the trust created
by either such Agreement continue beyond the expiration of 21 years from the
death of the last survivor of certain persons identified therein. For each
Series of Certificates, the Master Servicer will give written notice of
termination of the applicable Agreement of each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency specified in the notice of termination.
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If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the Depositor or such other person as may be specified in the
Prospectus Supplement to repurchase from the Trust Fund for such Series all
remaining Mortgage Loans or Contracts subject to the Pooling and Servicing
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 Certificates of that Series, but the right so to repurchase
may be effected only on or after the aggregate principal balance of the
Mortgage Loans 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.
CREDIT SUPPORT
Credit support for a Series of Certificates may be provided by one or more
Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Certificates (which may, if so specified in the related Prospectus Supplement,
be issued in notional amounts) the provision for shifting interest credit
enhancement, the establishment of a Reserve Fund, the method of Alternative
Credit Support specified in the applicable Prospectus Supplement, or any
combination of the foregoing, in addition to, or in lieu of, the insurance
arrangements set forth below under Description of Insurance. The amount and
method of credit support will be set forth in the Prospectus Supplement with
respect to a Series of Certificates.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Certificates will
be issued by the bank or financial institution specified in the 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 Certificates will
be in compliance with the requirements established by the Rating Agency rating
such Series and will be set forth in the Prospectus Supplement relating to
such Series of Certificates. The amount available under the Letter of Credit
in all cases shall be reduced to the extent of the unreimbursed payments
thereunder. The obligations of the L/C Bank under the Letter of Credit for
each Series of Certificates will expire 30 days after the latest of the
scheduled final maturity dates of the Mortgage Loans or Contracts in the
related Mortgage Pool or Contract Pool or the repurchase of all Mortgage Loans
or Contracts in the Mortgage Pool or Contract Pool in the circumstances
specified above. See "Description of the Certificates--Termination."
Unless otherwise specified in the applicable Prospectus Supplement, under
the Pooling and 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 Certificateholders, 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.
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If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of such Liquidating
Loan, and the L/C Bank will thereafter own such Liquidating Loan free of any
further obligation to the Trustee or the Certificateholders with respect
thereto. Payments made to the Certificate Account by the L/C Bank under the
Letter of Credit with respect to such a Liquidating Loan will be reimbursed to
the L/C Bank only from the proceeds (net of liquidation costs) of such
Liquidating Loan. The amount available under the Letter of Credit will be
increased to the extent it is reimbursed for such payments.
To the extent the proceeds of liquidation of a Liquidating Loan acquired by
the L/C Bank in the manner described in the preceding paragraph exceed the
amount of payments made with respect thereto, the L/C Bank will be entitled to
retain such proceeds as additional compensation for issuance of the Letter of
Credit.
Prospective purchasers of Certificates of a Series with respect to which
credit support is provided by a Letter of Credit must look to the credit of
the L/C Bank, to the extent of its obligations under the Letter of Credit, in
the event of default by Mortgagors or Obligors. If the amount available under
the Letter of Credit is exhausted, or the L/C Bank becomes insolvent, and
amounts in the Reserve Fund, if any, with respect to such Series are
insufficient to pay the entire amount of the loss and still be maintained at
the level specified in the related Prospectus Supplement (the "Required
Reserve"), the Certificateholders (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
Certificates is issued with a notional amount, the coverage provided by the
Letter of Credit with respect to such Series, and the terms and conditions of
such coverage, will be set forth in the related Prospectus Supplement.
SUBORDINATED CERTIFICATES
To the extent specified in the Prospectus Supplement with respect to a
Series of Certificates, credit support may be provided by the subordination of
the rights of the holders of one or more Classes or Subclasses of Certificates
to receive distributions with respect to the Mortgage Loans 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
Certificateholders or holders of one or more Classes or Subclasses of
Subordinated Certificates of such Series to receive such distributions, to the
extent of the applicable Subordinated Amount. In such a case, credit support
may also be provided by the establishment of a Reserve Fund, as described
below. The Subordinated Amount, as described below, will be reduced by an
amount equal to Aggregate Losses. Aggregate Losses are defined in the related
Pooling and Servicing Agreement for any given period as the aggregate amount
of delinquencies, losses and other deficiencies in the amounts due to the
holders of the Certificates of one or more classes or Subclasses of such
Series paid or borne by the holders of one or more Classes or Subclasses of
Subordinated Certificates of such Series ("payment deficiencies"), but
excluding any payments of interest on any amounts originally due to the
holders of the Certificates of a Class or Subclass to which the applicable
Class or Subclass of Subordinated Certificates are subordinated on a previous
Distribution Date, but not paid as due, whether by way of withdrawal from the
Reserve Fund (including, prior to the time that the Subordinated Amount is
reduced to zero, any such withdrawal of amounts attributable to the Initial
Deposit, if any), reduction in amounts otherwise distributable to the
Subordinated Certificateholders on any Distribution Date or otherwise, less
the aggregate amount of previous payment deficiencies recovered by the related
Trust Fund during such period in respect of the Mortgage Loans 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 Certificates with
respect to which credit support will be provided by one or more Classes or
Subclasses
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of Subordinated Certificates will set forth the Subordinated Amount for such
Series. 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.
SHIFTING INTEREST
If specified in the Prospectus Supplement for a Series of Certificates for
which credit enhancement is provided by shifting interest as described herein,
the rights of the holders of the Subordinated Certificates of a Series to
receive distributions with respect to the Mortgage Loans or Contracts in the
related Trust Fund or Subsidiary Trust will be subordinated to such right of
the holders of the Senior Certificates of the same Series to the extent
described in such Prospectus Supplement. This subordination feature is
intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the
Senior Certificates against losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series by
the shifting interest subordination feature will be effected by distributing
to the holders of the Senior Certificates a disproportionately greater
percentage (the "Senior Prepayment Percentage") of Principal Prepayments. The
initial Senior Prepayment Percentage will be the percentage specified in the
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 Certificates while
increasing the respective interest of the Subordinated Certificates in the
Mortgage Pool or Contract Pool. Increasing the respective interest of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the benefits of the subordination
provided by the Subordinated Certificates.
SWAP AGREEMENT
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Trust will enter into or obtain an assignment of a swap
agreement or other similar agreement pursuant to which the Trust will have the
right to receive certain payments of interest (or other payments) as set forth
or determined as described therein. The Prospectus Supplement relating to a
Series of Certificates having the benefit of an interest rate swap agreement
will describe the material terms of such agreement and the particular risks
associated with the interest rate swap feature, including market and credit
risk, the effect of counterparty defaults and other risks, if any, addressed
by the rating. The Prospectus Supplement relating to such Series of
Certificates also will set forth certain information relating to the corporate
status, ownership and credit quality of the counterparty or counterparties to
such swap agreement.
RESERVE FUND
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of a
Reserve Fund for such Series. 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. Following the initial issuance of the Certificates of a
Series and until the balance of the Reserve Fund first equals or exceeds the
Required Reserve, the Master Servicer will retain specified distributions on
the Mortgage Loans 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 Subordinated
Certificates and deposit such amounts in the Reserve Fund. After the amounts
in the Reserve Fund for a Series
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first equal or exceed the applicable Required Reserve, the Master Servicer
will retain such distributions and deposit so much of such amounts in the
Reserve Fund as may be necessary, after the application of such distributions
to amounts due and unpaid on the Certificates or on the Certificates of such
Series to which the applicable Class or Subclass of Subordinated Certificates
are subordinated and the reimbursement of unreimbursed Advances and
liquidation expenses, to maintain the Reserve Fund at the Required Reserve.
The balance in the Reserve Fund in excess of the Required Reserve shall be
paid to the applicable Class or Subclass of Subordinated Certificates, or to
another specified person or entity, as set forth in the 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.
Amounts held in the Reserve Fund for a Series from time to time will
continue to be the property of the Subordinated Certificateholders of the
Classes or Subclasses specified in the related Prospectus Supplement until
withdrawn from the Reserve Fund and transferred to the Certificate Account as
described below. If on any Distribution Date the amount in the Certificate
Account available to be applied to distributions on the Senior Certificates of
such Series, after giving effect to any Advances made by the Servicers or the
Master Servicer on such Distribution Date, is less than the amount required to
be distributed to such Senior Certificateholders (the "Required Distribution")
on such Distribution Date, the Master Servicer will withdraw from the Reserve
Fund and deposit into the Certificate Account the lesser of (i) the entire
amount on deposit in the Reserve Fund available for distribution to the Senior
Certificateholders (which amount will not in any event exceed the Required
Reserve) or (ii) the amount necessary to increase the funds in the Certificate
Account eligible for distribution to the Senior Certificateholders on such
Distribution Date to the Required Distribution; provided, however, that in no
event will any amount representing investment earnings on amounts held in the
Reserve Fund be transferred into the Certificate Account or otherwise used in
any manner for the benefit of the Senior Certificateholders. If so specified
in the applicable Prospectus Supplement, the balance, if any, in the Reserve
Fund in excess of the Required Reserve shall be released, to the Subordinated
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, whenever the Reserve Fund is less than the Required Reserve,
holders of the Subordinated Certificates of the applicable Class or Subclass
will not receive any distributions with respect to the Mortgage Loans or
Contracts other than amounts attributable to interest on the Mortgage Loans 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. Whether or not the amount of the Reserve Fund exceeds the
Required Reserve on any Distribution Date, the holders of the Subordinated
Certificates of the applicable Class or Subclass are entitled to receive from
the Certificate Account their share of the proceeds of any Mortgage Loan 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. Amounts in the Reserve Fund
shall be applied in the following order:
(i) to the reimbursement of Advances determined by the Master Servicer
and the Servicers to be otherwise unrecoverable, other than Advances of
interest in connection with prepayments in full, repurchases and
liquidations, and the reimbursement of liquidation expenses incurred by the
Servicers and the Master Servicer if sufficient funds for such
reimbursement are not otherwise available in the related Servicing Accounts
and Certificate Account;
(ii) to the payment to the holders of the Senior Certificates of such
Series of amounts distributable to them on the related Distribution Date in
respect of scheduled payments of principal and interest due on the related
Due Date to the extent that sufficient funds in the Certificate Account are
not available therefor; and
(iii) to the payment to the holders of the Senior Certificates of such
Series of the principal balance or purchase price, as applicable, of
Mortgage Loans 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 Pass-Through Rate,
to the extent that sufficient funds in the Certificate Account are not
available therefor.
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Amounts in the Reserve Fund in excess of the Required Reserve, including any
investment income on amounts therein, as set forth below, shall then be
released to the holders of the Subordinated Certificates, or to such other
person as is specified in the applicable Prospectus Supplement, as set forth
above.
Funds in the Reserve Fund for a Series shall be invested as provided in the
related Pooling and Servicing Agreement in certain types of eligible
investments. The earnings on such investments will be withdrawn and paid to
the holders of the applicable Class or Subclass of Subordinated Certificates
in accordance with their respective interests in the Reserve Fund in the
priority specified in the related Prospectus Supplement. Investment income in
the Reserve Fund is not available for distribution to the holders of the
Senior Certificates of such Series or otherwise subject to any claims or
rights of the holders of the applicable Class or Subclass of Senior
Certificates. Eligible investments for monies deposited in the Reserve Fund
will be specified in the Pooling and Servicing Agreement for a Series of
Certificates for which a Reserve Fund is established and in some instances
will be limited to investments acceptable to the Rating Agency rating the
Certificates of such Series from time to time as being consistent with its
outstanding rating of such Certificates. Such eligible investments will be
limited, however, to obligations or securities that mature at various time
periods up to 30 days according to a schedule in the Pooling and Servicing
Agreement based on the current balance of the Reserve Fund at the time of such
investment or the contractual commitment providing for such investment.
The time necessary for the Reserve Fund of a Series to reach and maintain
the applicable Required Reserve at any time after the initial issuance of the
Certificates of such Series and the availability of amounts in the Reserve
Fund for distributions on such Certificates will be affected by the
delinquency, foreclosure and prepayment experience of the Mortgage Loans or
Contracts in the related Trust Fund and/or in the Subordinated Pool and
therefore cannot be accurately predicted.
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 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 Agreement. In the
event that the outstanding credit rating of the obligor of the Performance
Bond is lowered by the Rating Agency, with the result that the outstanding
rating on the Certificates would be reduced by such Rating Agency, the Master
Servicer will be required to secure a substitute Performance Bond issued by an
entity with a rating sufficient to maintain the outstanding rating on the
Certificates or to deposit and maintain with the Trustee cash in the amount
specified in the applicable Prospectus Supplement.
DESCRIPTION OF INSURANCE
To the extent that the applicable Prospectus Supplement does not expressly
provide for a form of credit support specified above or for Alternative Credit
Support in lieu of some or all of the insurance mentioned below, the following
paragraphs on insurance shall apply with respect to the Mortgage Loans
included in the related Trust Fund. 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
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each Mortgage Loan that is secured by a Single Family Property covered by the
Servicing Agreement requiring such insurance and to act on behalf of the
Insured with respect to all actions required to be taken by the Insured under
each such Primary Mortgage Insurance Policy. Any primary mortgage insurance or
primary credit insurance policies relating to the Contracts underlying a
Series of Certificates will be described in the 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, 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.
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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 Certificates 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 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.
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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
The Standard Hazard Insurance Policies covering the Mortgage Loans in a
Mortgage Pool will provide for coverage at least equal to the applicable state
standard form of fire insurance policy with extended coverage. In general, the
standard form of fire and extended coverage policy will cover physical damage
to, or destruction of, the improvements on the Mortgaged Property caused by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Because the Standard Hazard Insurance Policies relating to such
Mortgage Loans will be underwritten by different insurers and will cover
Mortgaged Properties located in various states, such policies will not contain
identical terms and conditions. The most significant terms thereof, however,
generally will be determined by state law and generally will be similar. Most
such policies typically will not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive.
The Standard Hazard Insurance Policies 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, 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,
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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 Commercial Property, Mixed-Use
Property and Multifamily Property, certain additional insurance policies may
be required; 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, business interruption insurance 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 Commercial Property, Mixed-Use
Property and Multifamily Property and will describe the general terms of such
insurance and conditions to payment thereunder.
STANDARD HAZARD INSURANCE POLICIES ON THE MANUFACTURED HOMES
The terms of the Pooling and Servicing Agreement will require the Master
Servicer to cause to be maintained with respect to each Contract one or more
Standard Hazard Insurance Policies which provide, at a minimum, the same
coverage as a standard form 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
thereunder shall cease to be acceptable to the Master Servicer, the Master
Servicer shall exercise its best reasonable efforts to obtain from another
insurer a replacement policy comparable to such policy.
If the Master Servicer shall have repossessed a Manufactured Home on behalf
of the Trustee, the Master Servicer shall either (i) maintain at its expense
hazard insurance with respect to such Manufactured Home or (ii) indemnify the
Trustee against any damage to such Manufactured Home prior to resale or other
disposition.
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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
Certificates of such Series. Such Pool Insurance Policy will be issued by the
Pool Insurer named in the applicable Prospectus Supplement. Any Pool Insurance
Policy for a Contract Pool underlying a Series of Certificates will be
described in the 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. Any Pool Insurance Policies relating to
the Contracts will be described in the related Prospectus Supplement.
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 Servicer of the related Mortgage
Loan will not be required to expend its own funds to restore the damaged
Mortgaged Property unless it is determined (A) that such restoration will
increase the proceeds to the Certificateholders of the related Series on
liquidation of the Mortgage Loan, after reimbursement of the expenses of the
Master Servicer or the Servicer, as the case may be, and (B) that such
expenses will be recoverable by it through payments under the Letter of
Credit, if any, with respect to such
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Series, Liquidation Proceeds, Insurance Proceeds, amounts in the Reserve Fund,
if any, or payments under any Alternative Credit Support, if any, with respect
to such Series.
No Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies may not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor,
the Unaffiliated Seller, the Originator or other persons involved in the
origination thereof, (ii) the exercise by the Insured of its right to call the
Mortgage Loan, or the term of the Mortgage Loan is shorter than the
amortization period and the defaulted payment is for an amount more than twice
the regular periodic payments of principal and interest for such Mortgage
Loan, or (iii) the exercise by the Insured of a "due-on-sale" clause or other
similar provision in the Mortgage Loan; provided, in either case (ii) or
(iii), such exclusion shall not apply if the Insured offers a renewal or
extension of the Mortgage Loan or a new Mortgage Loan at the market rate in an
amount not less than the then outstanding principal balance with no decrease
in the amortization period. A failure of coverage attributable to one of the
foregoing events might result in a breach of the Master Servicer's
insurability representation described under "Description of the Certificates--
Assignment of Mortgage Loans" above, and in such event, subject to the
limitations described therein, might give rise to an obligation on the part of
the Master Servicer to purchase the defaulted Mortgage Loan if the breach
materially and adversely affects the interests of the Certificateholders of
the related Series and cannot be cured by the Master Servicer. Depending upon
the nature of the event, a breach of representation made by the Depositor or
an Unaffiliated Seller may also have occurred. Such a breach, if it materially
and adversely affects the interests of the Certificateholders of such Series
and cannot be cured, would give rise to a repurchase obligation on the part of
the Unaffiliated Seller as more fully described under "The Trust Fund--
Mortgage Loan Program--Representations by Unaffiliated Sellers; Repurchases"
and "Description of the Certificates--Assignment of Mortgage Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Certificates of the related Series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed Mortgaged
Properties covered thereby. The amount of claims paid will include certain
expenses incurred by the Master Servicer or by the Servicer of the defaulted
Mortgage Loan as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under
a Pool Insurance Policy reach the original policy limit, coverage under the
Pool Insurance Policy will lapse and any further losses will be borne by the
holders of the Certificates of such Series. In addition, unless the Master
Servicer or the related Servicer could determine that an Advance in respect of
a delinquent Mortgage Loan would be recoverable to it from the proceeds of the
liquidation of such Mortgage Loan or otherwise, neither such Servicer nor the
Master Servicer would be obligated to make an Advance respecting any such
delinquency, since the Advance would not be ultimately recoverable to it from
either the Pool Insurance Policy or from any other related source. See
"Description of the Certificates--Advances."
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Master Servicer
shall obtain a Special Hazard Insurance Policy for the Mortgage Pool
underlying a Series of Certificates. Any Special Hazard Insurance Policies for
a Contract Pool underlying a Series of Certificates will be described in the
related Prospectus Supplement. The Special Hazard Insurance Policy for the
Mortgage Pool underlying the Certificates of a Series will be issued by the
Special Hazard Insurer named in the applicable Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to the limitations described
below, protect against loss by reason of damage to Mortgaged Properties caused
by certain hazards (including vandalism and earthquakes and, except where the
Mortgagor is required to obtain flood insurance, floods and mudflows) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located. See
"Description of the Certificates--Maintenance of Insurance Policies" and "--
Standard Hazard Insurance." The Special Hazard Insurance Policy will not cover
losses occasioned by war, certain governmental actions, nuclear reaction and
certain other perils. Coverage under a Special Hazard Insurance Policy will be
at least equal to the amount set forth in the related Prospectus Supplement.
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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 Pooling and Servicing Agreement will require the Master
Servicer to maintain the Special Hazard Insurance Policy in full force and
effect throughout the term of the Pooling and Servicing Agreement. If a Pool
Insurance Policy is required to be maintained pursuant to the Pooling and
Servicing Agreement, the Special Hazard Insurance Policy will be designed to
permit full recoveries under the Pool Insurance Policy in circumstances where
such recoveries would otherwise be unavailable because Mortgaged Property has
been damaged by a cause not insured against by a Standard Hazard Insurance
Policy. In such event the Pooling and Servicing Agreement will provide that,
if the related Pool Insurance Policy shall have terminated or been exhausted
through payment of claims, the Master Servicer will be under no further
obligation to maintain such Special Hazard Insurance Policy.
MORTGAGOR BANKRUPTCY BOND
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court may
establish the value of the related Mortgaged Property or Cooperative Dwelling
at an amount less than the then outstanding principal balance of the related
Mortgage Loan. The amount of the secured debt could be reduced to such value,
and the holder of such Mortgage Loan thus would become an unsecured creditor
to the extent the outstanding principal balance of such Mortgage Loan exceeds
the value so assigned to the Mortgaged Property or Cooperative Dwelling by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. If so specified in the
related Prospectus Supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool with respect to a Series of
Certificates will be covered under a Mortgagor Bankruptcy Bond (or any other
instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency that rated such Series). Any
Mortgagor Bankruptcy Bond will provide for coverage in an amount acceptable to
the Rating Agency rating the Certificates of the related Series, which will be
set forth in the 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 Certificates may be
reduced as long as any such reduction will not result in a reduction of the
outstanding rating of the Certificates 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 or
more junior mortgages or deeds of trust, depending upon the prevailing
practice in the state in which the underlying property is located. The filing
of a mortgage, deed of trust or deed to secure debt creates a lien or title
interest upon the real property covered by such instrument and represents the
security for the repayment of an obligation that is customarily evidenced by a
promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers.
Priority with respect to such instruments depends on their terms, the
knowledge of the parties to the mortgage and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage: the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or bond evidencing the loan and the mortgage. Although
a deed of trust is similar to a mortgage, a deed of trust has three parties:
the borrower-homeowner called the trustor (similar to a mortgagor), a lender
called the beneficiary (similar to a mortgagee) and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale,
to the trustee to secure payment of the loan. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
the express provisions of the deed of trust or mortgage, applicable law and,
in some cases, with respect to the deed of trust, the directions of the
beneficiary.
The real property covered by a mortgage is most often the fee estate in land
and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land or improvements, or
both, and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage to
protect the mortgagee against termination of such interest before the mortgage
is paid. Certain representations and warranties in the related Agreement will
be made with respect to the Mortgage Loans which are secured by an interest in
a leasehold estate.
Installment Contracts
The Commercial Mortgage Loans and Mixed-Use Mortgage Loans included in the
Mortgage Pool for a Series may also consist of Installment Contracts. Under an
Installment Contract the seller (hereinafter referred to in this Section as
the "lender") retains legal title to the property and enters into an agreement
with the purchaser (hereinafter referred to in this Section as the "borrower")
for the payment of the purchase price, plus interest, over the term of such
contract. Only after full performance by the borrower of the contract is the
lender obligated to convey title to the real estate to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is generally responsible for maintaining
the property in good condition and for paying real estate taxes, assessments
and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
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contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the borrower's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the borrower and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the contract may be
reinstated upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the
lender's procedures for obtaining possession and clear title under an
Installment Contract for the sale of real estate in a given state are simpler
and less time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a mortgaged property.
Junior Mortgages; Rights of Senior Mortgagees or Beneficiaries
Some of the Mortgage Loans included in the Mortgage Pool for a Series will
be secured by junior mortgages or deeds of trust which are subordinate to
senior mortgages or deeds of trust held by other lenders or institutional
investors. The rights of the Trust Fund (and therefore the
Certificateholders), as beneficiary under a junior deed of trust or as
mortgagee under a junior mortgage, are subordinate to those of the mortgagee
or beneficiary under the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive rents, hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loan to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
Master Servicer asserts its subordinate interest in a property in foreclosure
litigation or satisfies the defaulted senior loan. As discussed more fully
below, in many states a junior mortgagee or beneficiary may satisfy a
defaulted senior loan in full, or may cure such default and bring the senior
loan current, in either event adding the amounts expended to the balance due
on the junior loan. Absent a provision in the senior mortgage, no notice of
default is required to be given to the junior mortgagee.
The form of the mortgage or deed of trust used by many institutional lenders
confers on the mortgagee or beneficiary the right both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to
any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee or beneficiary may determine. Thus, in the event improvements on
the property are damaged or destroyed by fire or other casualty, or in the
event the property is taken by condemnation, the mortgagee or beneficiary
under the senior mortgage or deed of trust will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgage or deed of trust. Proceeds in
excess of the amount of senior mortgage indebtedness will, in most cases, be
applied to the indebtedness of a junior mortgage or deed of trust. The laws of
certain states may limit the ability of mortgagees or beneficiaries to apply
the proceeds of hazard insurance and partial condemnation awards to the
secured indebtedness. In such states, the mortgagor or trustor must be allowed
to use the proceeds of hazard insurance to repair the damage unless the
security of the mortgagee or beneficiary has been impaired. Similarly, in
certain states, the mortgagee or beneficiary is entitled to the award for a
partial condemnation of the real property security only to the extent that its
security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor
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or trustor by the mortgagee or beneficiary are to be secured by the mortgage
or deed of trust. While such a clause is valid under the laws of most states,
the priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance may be entitled to receive the same priority as amounts initially made
under the mortgage or deed of trust, notwithstanding that there may be
intervening junior mortgages or deeds of trust and other liens between the
date of recording of the mortgage or deed of trust and the date of the future
advance, and notwithstanding that the mortgagee or beneficiary had actual
knowledge of such intervening junior mortgages or deeds of trust and other
liens at the time of the advance. Where the mortgagee or beneficiary is not
obligated to advance the additional amounts and has actual knowledge of the
intervening junior mortgages or deeds of trust and other liens, the advance
may be subordinate to such intervening junior mortgages or deeds of trust and
other liens. Priority of advances under a "future advance" clause rests, in
many other states, on state law giving priority to all advances made under the
loan agreement up to a "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
The form of mortgage or deed of trust used by many institutional lenders
typically requires the mortgagor or trustor to obtain the consent of the
mortgagee or beneficiary in respect of actions affecting the mortgaged
property, including, without limitation, leasing activities (including new
leases and termination or modification of existing leases), alterations and
improvements to buildings forming a part of the mortgaged property and
management and leasing agreements for the mortgaged property. Tenants will
often refuse to execute a lease unless the mortgagee or beneficiary executes a
written agreement with the tenant not to disturb the tenant's possession of
its premises in the event of a foreclosure. A senior mortgagee or beneficiary
may refuse to consent to matters approved by a junior mortgagee or beneficiary
with the result that the value of the security for the junior mortgage or deed
of trust is diminished. For example, a senior mortgagee or beneficiary may
decide not to approve a lease or to refuse to grant to a tenant a non-
disturbance agreement. If, as a result, the lease is not executed, the value
of the mortgaged property may be diminished.
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. If the mortgage covered the tenant's interest in a lease and leasehold
estate, the purchaser will acquire such tenant's interest subject to the
tenant's obligations under the lease to pay rent and perform other covenants
contained therein.
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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
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 to the property subject to the lien of the mortgage or deed of trust and
the redemption rights that may exist (see "--Rights of Redemption" below), and
the fact that the physical condition and financial performance 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, paying operating expenses and real
estate taxes and making such repairs at its own expense as are necessary to
render the property suitable for sale. Frequently, the lender employs a third-
party management company to manage and operate the property. The costs of
operating and maintaining commercial and mixed-use property may be significant
and may be greater than the income derived from that property. The costs of
management and operation of those mortgaged properties that are hotels, motels
or nursing or convalescent homes or hospitals may be particularly significant
because of the expertise, knowledge and, with respect to nursing or
convalescent homes or hospitals, regulatory compliance, required to run such
operations and the effect which foreclosure and a change in ownership may have
on the public's and the industry's (including franchisors') perception of the
quality of such operations. 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.
Under the REMIC provision of the Code and the related Agreement, the Master
Servicer or Special Servicer, if any, may be permitted to hire an independent
contractor to operate any REO Property. The costs of such operation may be
significantly greater than the costs of direct operation by the Master
Servicer or Special Servicer, if any. In the case of a Series in which an
election is made to treat the related Trust Fund as a REMIC, the Master
Servicer or the Special Servicer (as the case may be) shall, on behalf of the
Trust Fund, manage, conserve, protect and operate each REO Property for the
Certificateholders solely for the purpose of its prompt disposition and sale
in a manner which does not cause such REO Property to fail to qualify as
"foreclosure property" within the meaning of Section 860G(a)(8) of the Code
(determined without regard to the exception applicable for purposes of Section
860D(a) of the Code) or result in the receipt by the REMIC of any "income from
nonpermitted assets" within the meaning of Section 860F(a)(2)(B) of the Code
or any "net income from foreclosure property" under Section 860G(c) of the
Code, which is subject to taxation under the REMIC Provisions.
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Cooperative Loans
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced
by promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under
the Code and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the
corporations' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property that it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office.
Such a lien or title interest is not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative under
the Code owns all the real property or some interest therein sufficient to
permit it to own the building and all separate dwelling units therein. The
cooperative is directly responsible for property management and, in most
cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage or mortgages on the cooperative apartment building
and/or underlying land, as is generally the case, or an underlying lease of
the land, as is the case in some instances, the cooperative, as property
mortgagor, is also responsible for meeting these mortgage or rental
obligations. The interest of the occupancy under proprietary leases or
occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and
to the interest of the holder of a land lease. If the cooperative is unable to
meet the payment obligations (i) arising under a blanket mortgage, the
mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the land lease could terminate it
and all subordinate proprietary leases and occupancy agreements. Also, a
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative
to refinance a mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee. Similarly, a land lease
has an expiration date and the inability of the cooperative to extend its term
or, in the alternative, to purchase the land could lead to termination of the
cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. A foreclosure by the holder of a blanket
mortgage could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of
cooperative shares including, in the case of the Cooperative Loans, the
collateral securing the Cooperative Loans. Similarly, the termination of the
land lease by its holder could eliminate or significantly diminish the value
of any collateral held by the lender who financed an individual tenant-
stockholder of the cooperative shares or, in the case of the Cooperative
Loans, the collateral securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally,
a tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured by
a security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement,
and a financing statement covering the proprietary lease or occupancy
agreement and the cooperative shares is filed in the appropriate state and
local offices to perfect the lender's interest in its collateral. Subject to
the limitations discussed below, upon default of the tenant-stockholder, the
lender may sue for judgment on the promissory note, dispose of the collateral
at a public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and
the pledge of cooperative shares. See "--Realizing upon Cooperative Loan
Security" below.
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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 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.
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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
"AntiDeficiency 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 redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has
run.
Borrowers under Installment Contracts generally do not have the benefits of
redemption periods such as exist in the same jurisdiction for mortgage loans.
Where redemption statutes do exist under state laws for Installment Contracts,
the redemption period is usually far shorter than for mortgages.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some of the Mortgage Loans included in the Mortgage Pool for a Series will
be nonrecourse loans as to which, in the event of default by a Mortgagor,
recourse may be had only against the specific property pledged to secure the
related Mortgage Loan and not against the Mortgagor's other assets. Even if
recourse is available pursuant to the terms of the Mortgage Loan against the
Mortgagor's assets in addition to the Mortgaged Property, certain states have
imposed statutory restrictions that limit the remedies of a beneficiary under
a deed of trust or
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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 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.
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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, Mixed-
Use Property or Commercial 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.
Bankruptcy Laws
Numerous statutory provisions, including the Bankruptcy Code and state laws
affording relief to debtors, may interfere with and delay the ability of the
secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of
the bankruptcy petition, and, often, no interest or principal payments are
made during the course of the bankruptcy proceeding. The delay and
consequences thereof caused by such automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in bankruptcy by or on
behalf of a junior lienor, including, without limitation, any junior mortgagee
or beneficiary, may stay the senior lender from taking action to foreclose on
such junior lien. Certain of the Mortgaged Properties may have a junior
"wraparound" mortgage or deed of trust encumbering such Mortgaged Property. In
general terms, a "wraparound" mortgage is a junior mortgage where the full
amount of the mortgage is increased by an amount equal to the principal
balance of the senior mortgage and where the junior lender agrees to pay the
senior mortgage out of the payments received from the mortgagor under the
"wraparound" mortgage. As with other junior mortgages, the filing of a
petition under the Bankruptcy Code by or on behalf of such a "wrap" mortgagee
may stay the senior lender from taking action to foreclose upon such junior
"wrap" mortgage.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage or deed
of trust secured by property of the debtor may be modified under certain
circumstances. The outstanding amount of the loan secured by the real property
may be reduced to the then current value of the property (with a corresponding
partial reduction of the amount of the lender's security interest), thus
leaving the lender a general unsecured creditor for the difference between
such value and the outstanding balance of the loan. Other modifications may
include the reduction in the amount of each monthly payment, which reduction
may result from a reduction in the rate of interest and/or the alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or an extension (or reduction) of the final maturity date.
Some bankruptcy courts have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a mortgage loan default
by paying arrearages over a number of years. Also, under the Bankruptcy Code,
a bankruptcy court may permit a debtor through its plan to de-accelerate a
secured loan and to reinstate the loan even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered in state
court (provided no sale of the property had yet occurred) prior to the filing
of the debtor's petition. This may be done even if the full amount due under
the original loan is never repaid. Other types of significant modifications to
the terms of the mortgage may be acceptable to the bankruptcy court, often
depending on the particular facts and circumstances of the specific case.
A "deficient valuation" with respect to any mortgage loan is the excess of
(a)(i) the then outstanding principal balance of the mortgage loan, plus (ii)
accrued and unpaid interest and expenses reimbursable under the terms of the
related note to the date of the bankruptcy petition (collectively, the
"Outstanding Balance"), over (b) a valuation by a court of competent
jurisdiction of the mortgaged property which reduces the principal
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balance receivable on such mortgage loan to an amount less than the
Outstanding Balance of the mortgage loan, which valuation results from a
proceeding initiated under the Bankruptcy Code. As used herein, "Deficient
Valuation" means, with respect to any Mortgage Loan, the deficient valuation
described in the preceding sentence, without giving effect to clause (a)(ii)
thereof. If the terms of a court order in respect of any retroactive Deficient
Valuation provide for a reduction in the indebtedness of a Mortgage Loan and
the earlier maturity thereof, the term Deficient Valuation includes an
additional amount equal to the excess, if any, of (a) the amount of principal
that would have been due on such Mortgage Loan for each month retroactively
affected (i.e. each month occurring after the effective date of such Deficient
Valuation but before the distribution of amounts in respect of such Deficient
Valuation to Certificateholders pursuant to the related Agreement), based on
the original payment terms and amortization schedule of such Mortgage Loan
over (b) the amount of principal due on such Mortgage Loan for each such
retroactive month (assuming the effect of such retroactive application
according to such Mortgage Loan's revised amortization schedule). A "Debt
Service Reduction," with respect to any Mortgage Loan, is a reduction in the
scheduled monthly payment, as described in the Agreement, for such Mortgage
Loan by a court of competent jurisdiction in a proceeding under the Bankruptcy
Code, except such a reduction resulting from a Deficient Valuation.
Federal bankruptcy law may also interfere with or affect the ability of the
secured mortgage lender to enforce an assignment by a mortgagor of rents and
leases related to the mortgaged property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state
law prior to commencement of the bankruptcy proceeding, (ii) to the extent
such rents are used by the borrower to maintain the mortgaged property, or for
other court authorized expenses, or (iii) to the extent other collateral may
be substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may
be impaired by the commencement of a bankruptcy proceeding relating to a
lessee under such lease. Under the Bankruptcy Code, the filing of a petition
in bankruptcy by or on behalf of a lessee results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for
past due rent, for accelerated rent, for damages or for a summary eviction
order with respect to a default under the lease that occurred prior to the
filing of the lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the
Bankruptcy Code may, subject to approval of the court, (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee or debtor in possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, however, as the lessor may be
forced to continue under the lease with a lessee that is a poor credit risk or
an unfamiliar tenant if the lease was assigned, and any assurances provided to
the lessor may, in fact, be inadequate. Furthermore, there is likely to be a
period of time between the date upon which a lessee files a bankruptcy
petition and the date upon which the lease is assumed or rejected. Although
the lessee is obligated to make all lease payments currently with respect to
the post-petition period, there is a risk that such payments will not be made
due to the lessee's poor financial condition. If the lease is rejected, the
lessor will be treated as an unsecured creditor with respect to its claim for
damages for termination of the lease and the mortgagor must relet the
mortgaged property before the flow of lease payments will recommence. In
addition, pursuant to Section 502(b)(6) of the Bankruptcy Code, a lessor's
damages for lease rejection are limited.
In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction.
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"Due-on-Sale" Clauses
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 Pooling and Servicing
Agreement, late charges and prepayment fees (to the extent permitted by law
and not waived by the Servicers) may be retained by the Servicers, Special
Servicer or Master Servicer as additional servicing compensation.
Some of the Commercial Mortgage Loans, Multifamily Mortgage Loans and Mixed-
Use Mortgage Loans included in the Mortgage Pool for a Series will include a
"debt-acceleration" clause, which permits the lender to accelerate the full
debt upon a monetary or nonmonetary default of the Mortgagor. The courts of
all states will enforce clauses providing for acceleration in the event of a
material payment default after giving effect to any appropriate notices. The
courts of any state, however, may refuse to permit foreclosure of a mortgage
or deed of trust when an acceleration of the indebtedness would be inequitable
or unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the Mortgagor may avoid foreclosure and reinstate
an accelerated loan by paying only the defaulted amounts and the costs and
attorneys' fees incurred by the lender in collecting such defaulted payments.
State courts also are known to apply various legal and equitable principles
to avoid enforcement of the forfeiture provisions of Installment Contracts.
For example, a lender's practice of accepting late payments from the borrower
may be deemed a waiver of the forfeiture clause. State courts also may impose
equitable grace periods for payment of arrearages or otherwise permit
reinstatement of the contract following a default. Not infrequently, if a
borrower under an Installment Contract has significant equity in the property,
equitable principles will be applied to reform or reinstate the contract or to
permit the borrower to share the proceeds upon a foreclosure sale of the
property if the sale price exceeds the debt.
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Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and sometimes expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able
to reinstate the loan. In some cases, courts have substituted their judgment
for the lender's judgment and have required lenders to reinstate loans or
recast payment schedules to accommodate borrowers who are suffering from
temporary financial disability. In some cases, courts have limited the right
of lenders to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain or insure the
property or the borrower executing a second mortgage or deed of trust
affecting the property. In other cases, some courts have been faced with the
issue whether federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under the deeds of
trust receive notices in addition to the statutorily-prescribed minimum
requirements. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the sale by a trustee under a deed of
trust or under a mortgage having a power of sale does not involve sufficient
state action to afford constitutional protections to the borrower.
Environmental Considerations
Real property pledged as security to a lender may be subject to potential
environmental risks. Such environmental risks may give rise to a diminution in
value of property securing any Mortgage Loan or, as more fully described
below, liability for cleanup costs or other remedial actions, which liability
could exceed the value of such property or the principal balance of the
related Mortgage Loan. In certain circumstances, a lender may choose not to
foreclose on contaminated property rather than risk incurring liability for
remedial actions.
Under the laws of certain states where the Mortgaged Properties are located,
the owner's failure to perform remedial actions required under environmental
laws may in certain circumstances give rise to a lien on the Mortgaged
Property to ensure the reimbursement of remedial costs incurred by the state.
In several states such lien has priority over the lien of an existing mortgage
against such property. Because the costs of remedial action could be
substantial, the value of a Mortgaged Property as collateral for a Mortgage
Loan could be adversely affected by the existence of an environmental
condition giving rise to a lien.
Under some circumstances, cleanup costs, or the obligation to take remedial
actions, can be imposed on a secured lender such as the Trust Fund with
respect to each Series. Under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("CERCLA"), current ownership or operation of a property provides a
sufficient basis for imposing liability for the costs of addressing prior or
current releases or threatened releases of hazardous substances on that
property. Under such laws, a secured lender who holds indicia of ownership
primarily to protect its interest in a property may, by virtue of holding such
indicia, fall within the literal terms of the definition of "owner or
operator"; consequently, such laws often specifically exclude such a secured
lender from the definitions of "owner" or "operator", provided that the lender
does not participate in the management of the facility.
Whether actions taken by a secured creditor would constitute such
participation in the management of a facility or property, so that the lender
loses the protection of the secured creditor exclusion, has been a matter of
judicial interpretation of the statutory language, and court decisions have
historically been inconsistent. In 1990, the United States Court of Appeals
for the Eleventh Circuit suggested, in United States v. Fleet Factors Corp.,
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exclusion to the lender, regardless of whether the lender actually
exercised such influence. Other judicial decisions did not interpret the
secured creditor exclusion as narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996
(the "Asset Conservation Act"), which took effect on September 30, 1996. The
Asset Conservation Act provides that in order to be deemed to have
participated in the
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management of a secured property, a lender must actually participate in the
operational affairs of the property or the borrower. The Asset Conservation
Act also provides that participation in the management of the property does
not include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the secured
creditor exclusion only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the secured property.
It should be noted that the secured creditor exclusion does not govern
liability for cleanup costs under federal laws other than CERCLA. CERCLA's
jurisdiction extends to the investigation and remediation of releases of
"hazardous substances." The definition of "hazardous substances" under CERCLA
specifically excludes petroleum products. Under federal law, the operation and
management of underground petroleum storage tanks (excluding heating oil) is
governed by Subtitle I of the Resource Conservation and Recovery Act ("RCRA").
Under the Asset Conservation Act, the protections accorded to lenders under
CERCLA are also accorded to the holders of security interests in underground
storage tanks. However, liability for cleanup of petroleum contamination will
most likely be governed by state law, which may not provide any specific
protection for secured creditors.
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 Certificates, that to the best of its knowledge no Mortgaged
Property secured by Commercial Property, Multifamily Property or Mixed-Use
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
Pooling and 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. With respect to any Mortgage Pool that contains
Commercial Mortgage Loans or Mixed-Use Mortgage Loans, the related Pooling and
Servicing Agreement will provide that the Master Servicer (of, if applicable,
the Special Servicer), acting on behalf of the Trust Fund, may not acquire
title to a Mortgaged Property securing a Commercial Mortgage Loan or Mixed-Use
Mortgage Loan or take over its operation unless such Master Servicer (or, if
applicable, the Special Servicer) has previously determined, based upon a
report prepared by a person who regularly conducts environmental audits, that:
(i) the Mortgaged Property is in compliance with applicable environmental laws
or, if not, that taking such actions as are necessary to bring the Mortgaged
Property in compliance therewith is likely to produce a greater recovery on a
present value basis, after taking into account any risks associated therewith,
than not taking such actions and (ii) there are no circumstances present at
the Mortgaged Property relating to the use, management or disposal of any
hazardous substances for which investigation, testing, monitoring,
containment, cleanup or remediation could be required under any federal, state
or local law or regulation, or that, if any hazardous substances are present
for which such action would be required, taking such actions with respect to
the affected Mortgaged Property is reasonably likely to produce a greater
recovery on a present value basis, after taking into account any risks
associated therewith, than not taking such actions. Such requirements
effectively preclude enforcement of the security for the related Mortgage Note
until a satisfactory environmental assessment is obtained or any required
remedial action is taken, reducing the likelihood that a given Trust Fund will
become liable for any environmental conditions affecting a Mortgaged Property,
but making it more difficult to realize on the security for the Mortgage Loan.
However, there can be no assurance that any environmental assessment obtained
by the Master Servicer will detect all possible environmental conditions or
that the other requirements of the Pooling and Servicing Agreement, even if
fully observed by the Master Servicer will in fact insulate a given Trust Fund
from liability for environmental conditions.
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If a lender is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment-proof. Furthermore, such action against the
Mortgagor may be adversely affected by the limitations on recourse in the loan
documents. Similarly, in some states anti-deficiency legislation and other
statutes requiring the lender to exhaust its security before bringing a
personal action against the borrower-trustor (see "--Anti-Deficiency
Legislation" below) may curtail the lender's ability to recover from its
borrower the environmental clean-up and other related costs and liabilities
incurred by the lender. Shortfalls occurring as the result of imposition of
any clean-up costs will be addressed in the Prospectus Supplement and
Agreement for the related Series.
Soldiers' and Sailors' Relief Act
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who is a
member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not
be charged interest (including fees and charges) above an annual rate of 6%
during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. Any shortfall in interest
collections resulting from the application of the Relief Act, to the extent
not covered by any applicable Enhancements, could result in losses to the
Holders of the Certificates. The Relief Act applies to mortgagors who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to mortgagors who enter military
service (including reservists who are later called to active duty) after
origination of the related Mortgage Loan, no information can be provided as to
the number of Mortgage Loans that may be affected by the Relief Act. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status and, under certain circumstances,
during an additional three months thereafter. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgage Property in a timely fashion.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title
VIII"). Title VIII provides that, notwithstanding any state law to the
contrary, state-chartered banks may originate alternative mortgage instruments
in accordance with regulations promulgated by the Comptroller of the Currency
with respect to origination of alternative mortgage instruments by national
banks, state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration (the "NCUA") with respect to origination of alternative
mortgage instruments by federal credit unions, and all other non-federally
chartered housing creditors, including state-chartered savings and loan
associations, state-chartered savings banks and mortgage banking companies,
may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board (now the Office of
Thrift Supervision) with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII authorized
any state to reject applicability of the provision of Title VIII by adopting,
prior to October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of such provisions. Certain states have taken such
action.
Leases and Rents
Some of the Commercial Mortgage Loans, Multifamily Mortgage Loans and Mixed-
Use Mortgage Loans included in the Mortgage Pool for a Series may be secured
by an assignment of leases (each, a "Lease") and
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rents of one or more lessees (each, a "Lessee"), either through a separate
document of assignment or as incorporated in the mortgage. Under such
assignments, the Mortgagor under the mortgage loan typically assigns its
right, title and interest as landlord under each Lease and the income derived
therefrom to the lender, while retaining a license to collect the rents for so
long as there is no default under the mortgage loan documentation. The manner
of perfecting the lender's interest in rents may depend on whether the
mortgagor's assignment was absolute or one granted as security for the loan.
Failure to properly perfect the lender's interest in rents may result in the
loss of a substantial pool of funds which could otherwise serve as a source of
repayment for the loan. In the event the Mortgagor defaults, the license
terminates and the lender may be entitled to collect rents. Some state laws
may require that to perfect its interest in rents, the lender must take
possession of the property and/or obtain judicial appointment of a receiver
before becoming entitled to collect the rents. Lenders that actually take
possession of the property, however, may incur potentially substantial risks
attendant to being a mortgagee in possession. Such risks include liability for
environmental clean-up costs and other risks inherent to property ownership.
In addition, if bankruptcy or similar proceedings are commenced by or in
respect of the borrower, the lender's ability to collect the rents may be
adversely affected. In the event of borrower default, the amount of rent the
lender is able to collect from the tenants can significantly affect the value
of the lender's security interest.
Secondary Financing; Due-on-Encumbrance Provisions
Some of the Mortgage Loans secured by Commercial Property, Mixed-Use
Property or Multifamily Property included in the Mortgage Pool for a Series
may not restrict secondary financing, thereby permitting the Mortgagor to use
the Mortgaged Property as security for one or more additional loans. Some of
the Mortgage Loans secured by Commercial Property, Mixed-Use Property or
Multifamily Property may preclude secondary financing (often by permitting the
first lender to accelerate the maturity of its loan if the Mortgagor further
encumbers the Mortgaged Property) or may require the consent of the senior
lender to any junior or substitute financing; however, such provisions may be
unenforceable in certain jurisdictions under certain circumstances. The
Pooling and Servicing Agreement for each Series will provide that if any
Mortgage Loan contains a provision in the nature of a "due-on-encumbrance"
clause, which by its terms: (i) provides that such Mortgage Loan shall (or may
at the mortgagee's option) become due and payable upon the creation of any
lien or other encumbrance on the related Mortgaged Property; or (ii) requires
the consent of the related mortgagee to the creation of any such lien or other
encumbrance on the related Mortgaged Property, then for so long as such
Mortgage Loan is included in a given Trust Fund, the Master Servicer or, if
such Mortgage Loan is a Specially Serviced Mortgage Loan, the Special
Servicer, if any, on behalf of such Trust Fund, shall exercise (or decline to
exercise) any right it may have as the mortgagee of record with respect to
such Mortgage Loan (x) to accelerate the payments thereon, or (y) to withhold
its consent to the creation of any such lien or other encumbrance, in a manner
consistent with the servicing standard set forth in the Agreement.
Where the Mortgagor encumbers the Mortgaged Property with one or more junior
liens, the senior lender is subject to additional risk. First, the Mortgagor
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the Mortgagor and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent an existing junior lender is
prejudiced or the Mortgagor is additionally burdened. Third, if the Mortgagor
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with, delay and in certain
circumstances even prevent the taking of action by the senior lender. Fourth,
the bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Certain Laws and Regulations
The Mortgaged Properties will be subject to compliance with various federal,
state and local statutes and regulations. Failure to comply (together with an
inability to remedy any such failure) could result in material
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diminution in the value of a Mortgaged Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(i.e., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon the type and use
of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of
the operation, maintenance, control and financing of health care institutions.
Mortgages on Mortgaged Properties which are owned by the Mortgagor under a
condominium form of ownership are subject to the declaration, by-laws and
other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the
lender in that: (i) hotels and motels are typically operated pursuant to
franchise, management and operating agreements which may be terminable by the
operator; and (ii) the transferability of the hotel's operating, liquor and
other licenses to the entity acquiring the hotel either through purchase or
foreclosure is subject to the vagaries of local law requirements. In addition,
Mortgaged Properties which are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control
laws, which could impact the future cash flows of such properties.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, owners of public accommodations (such as
hotels, restaurants, shopping centers, hospitals, schools and social service
center establishments) must remove architectural and communication barriers
which are structural in nature from existing places of public accommodation to
the extent "readily achievable." In addition, under the ADA, alterations to a
place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, such altered portions are readily accessible
to and usable by disabled individuals. The "readily achievable" standard takes
into account, among other factors, the financial resources of the affected
site, owner, landlord or other applicable Person. In addition to imposing a
possible financial burden on the borrower in its capacity as owner or
landlord, the ADA may also impose such requirements on a foreclosing lender
who succeeds to the interest of the Mortgagor as owner or landlord.
Furthermore, since the "readily achievable" standard may vary depending on the
financial condition of the owner or landlord, a foreclosing lender who is
financially more capable than the Mortgagor of complying with the requirements
of the ADA may be subject to more stringent requirements than those to which
the Mortgagor is subject.
THE CONTRACTS
General
As a result of the Depositor's assignment of the Contracts to the Trustee,
the Certificateholders will succeed collectively to all of the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the 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 Pooling and Servicing Agreement, the Master Servicer or the
Depositor, as the case may be, will transfer physical possession of the
Contracts to the Trustee or its custodian. In addition, the Master Servicer
will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Contracts
will not be stamped or marked
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otherwise to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the Trustee's interest in the
Contracts could be defeated.
Security Interests in the Manufactured Homes
The 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 non-title
states, perfection pursuant to the provisions of the UCC is required. The
lender or Master Servicer may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home
securing a manufactured housing conditional sales contract is registered. In
the event the Master Servicer or the lender fails, due to clerical errors, to
effect such notation or delivery, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the Certificateholders may not have a first
priority security interest in the Manufactured Home securing a Contract. As
manufactured homes have become larger and often have been attached their sites
without any apparent intention to move them, courts in many states have held
that manufactured homes, under certain circumstances, may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law. In order to perfect a security interest in a manufactured home under real
estate laws, the holder of the security interest must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage under the
real estate laws of the state where the manufactured home is located. These
filings must be made in the real estate records office of the county where the
manufactured home is located. Substantially all of the Contracts will contain
provisions prohibiting the borrower from permanently attaching the
Manufactured Home to its site. So long as the Obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by
the certificate of title laws or the UCC, and the notation of the security
interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the seller's security
interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in
the Manufactured Home which is prior to the security interest originally
retained by the Unaffiliated Seller and transferred to the Depositor. With
respect to a Series of Certificates and as described in the 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 Certificateholders would be against the
Unaffiliated Seller pursuant to its repurchase obligation for breach of
warranties. Based on the representations of the Unaffiliated Seller, the
Depositor, however, believes that it has 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. Unless otherwise specified
in the related Prospectus Supplement, neither the Depositor nor the Trustee
will amend the certificates of title to identify the Trustee as the new
secured party. Accordingly, the Depositor or such other entity as may be
specified in the Prospectus Supplement will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to the assignor's rights as the
secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest might not be held effective against creditors of the
assignor.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Depositor on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the
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Certificateholders against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the Depositor and the Certificateholders is not
perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Certificateholders
could be released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured
Home would continue for four months after such relocation and thereafter only
if and after the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not re-
register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee, or the Master Servicer as
custodian for the Trustee, must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, the Trustee
would receive notice of surrender if the security interest in the Manufactured
Home is noted on the certificate of title. Accordingly, the Trustee would have
the opportunity to re-perfect its security interest in the Manufactured Home
in the state of relocation. In states which do not require a certificate of
title for registration of a Manufactured Home, re-registration could defeat
perfection. In the ordinary course of servicing manufactured housing
conditional sales contracts and installment loan agreements, the Master
Servicer takes steps to effect such re-perfection upon receipt of notice of
re-registration or information from the Obligor as to relocation. Similarly,
when an Obligor under a manufactured housing conditional sales contract or
installment loan agreement sells a Manufactured Home, the Trustee, or the
Master Servicer as custodian for the Trustee, must surrender possession of the
certificate of title or will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of
the related manufactured housing conditional sales contract or installment
loan agreement before release of the lien. Under the Pooling and Servicing
Agreement, the Master Servicer, on behalf of the Depositor, is obligated to
take such steps, at the Master Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority even over a perfected security interest. The Depositor will
represent in the Pooling and Servicing Agreement that it has no knowledge of
any such liens with respect to any Manufactured Home securing payment on any
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Certificateholders in the
event such a lien arises and such lien would not give rise to a repurchase
obligation on the part of the party specified in the Pooling and Servicing
Agreement.
Enforcement of Security Interests in Manufactured Homes
The Master Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by
repossession and resale of the Manufactured Homes securing such Defaulted
Contracts. Except in Louisiana, so long as the Manufactured Home has not
become subject to the real estate law, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or, in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number of
days notice, which varies from 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the debtor be given notice of any
sale prior to resale of the unit so that the debtor may redeem at or before
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such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the Obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
against such Obligor. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending pursuant to
the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act,
the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and
the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related Contract.
Transfers of Manufactured Homes, Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Depositor or the Master Servicer
and permit the acceleration of the maturity of the Contracts by the Depositor
or the Master Servicer upon any such sale or transfer that is not consented
to. 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.
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Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels has been included in the Trust
Assets or Fund. The Depositor, or the party specified in the related Pooling
and Servicing Agreement will represent that all of the Contracts comply with
applicable usury laws.
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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
Certificates. Brown & Wood LLP, San Francisco, California, Cadwalader,
Wickersham & Taft, New York, New York, Dewey Ballantine, New York, New York or
Orrick, Herrington & Sutcliffe LLP, counsel to the Depositor, 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 Brown & Wood LLP's,
Cadwalader, Wickersham & Taft's, Dewey Ballantine's or Orrick, Herrington &
Sutcliffe LLP'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 summary is based on the Code as well as Treasury regulations
and administrative and judicial rulings and practice. Legislative, judicial
and administrative changes may occur, possibly with retroactive effect, that
could alter or modify the continued validity of the statements and conclusions
set forth herein. This summary does not purport to address all federal income
tax matters that may be relevant to particular holders. For example, it
generally is addressed only to original purchasers of the Certificates that
are United States investors, deals only with Certificates held as capital
assets within the meaning of Section 1221 of the Code, and does not address
tax consequences to holders that may be relevant to investors subject to
special rules, such as non-U.S. investors, banks, insurance companies, tax-
exempt organizations, electing large partnership, dealers in securities or
currencies, mutual funds, REITs, S corporations, estates and trusts, investors
that hold the Certificates as part of a hedge, straddle, integrated or
conversion transaction, or holders whose "functional currency" is not the
United States dollar. Further, it does not address alternative minimum tax
consequences or the indirect effects on the holders of equity interests in an
entity that is a beneficial owner of the Certificates. Further, this
discussion does not address the state or local tax consequences of the
purchase, ownership and disposition of such Certificates. Investors should
consult their own tax advisers in determining the federal, state, local, or
other tax consequences to them of the purchase, ownership and disposition of
the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Mortgage Pool
("REMIC Mortgage Pool") which the Master Servicer elects to have treated as a
real estate mortgage investment conduit ("REMIC") under Code Sections 860A
through 860G ("REMIC Provisions") and (ii) certificates ("Trust Certificates")
representing certain interests in a Trust Fund which the Master Servicer does
not elect to have treated as a REMIC. 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 1273 and 1275
and in Treasury regulations issued under the original issue discount
provisions of the Code (the "OID Regulations"), and the Treasury regulations
issued under the provisions of the Code relating to REMICs (the "REMIC
Regulations").
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II. REMIC TRUST FUNDS
A. Classification of REMIC Trust Funds
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, Brown & Wood LLP, San Francisco, California, Cadwalader,
Wickersham & Taft, New York, New York, Dewey Ballantine, New York, New York,
or Orrick, Herrington & Sutcliffe LLP, will deliver their opinion generally to
the effect that, assuming that (i) any required REMIC election is made timely
in the required form, (ii) there is ongoing compliance with all provisions of
the related Pooling and Servicing Agreement, (iii) certain representations set
forth in the Pooling and Servicing Agreement are true and (iv) there is
continued compliance with applicable provisions of the Code, as it may be
amended from time to time, and applicable Treasury regulations issued
thereunder, such REMIC Mortgage Pool (or a portion thereof) will qualify as
one or more REMICs and the classes of interests offered will be considered to
be "regular interests" or "residual interests" 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. Taxation of Owners of REMIC Regular Certificates
In general, 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
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method that takes into account the compounding of interest, in advance of the
receipt of the cash attributable to such income. The Master Servicer will
report annually (or more frequently if required) to the Internal Revenue
Service ("IRS") and to Certificateholders such information with respect to the
original issue discount accruing on the REMIC Regular Certificates as may be
required under Code Section 6049 and the regulations thereunder. See
"Reporting and Other Administrative Matters of REMICs" below.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275 and in the OID Regulations. Code Section 1272(a)(6)
provides special original issue discount rules applicable to REMIC Regular
Certificates.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates, and for certain other federal income
tax purposes. The Prepayment Assumption is to be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The Committee Report indicates that the regulations will provide
that the Prepayment Assumption, if any, used with respect to a particular
transaction must be the same as that used by the parties in pricing the
transaction. The Master Servicer will use a Prepayment Assumption in reporting
original issue discount that is consistent with this standard. However,
neither the Depositor nor the Master Servicer makes any representation that
the Mortgage Loans will in fact prepay at the rate reflected in the Prepayment
Assumption or at any other rate. Each investor must make its own decision as
to the appropriate prepayment assumption to be used in deciding whether or not
to purchase any of the REMIC Regular Certificates. The Prospectus Supplement
with respect to a Series of REMIC Certificates will disclose the Prepayment
Assumption to be used in reporting original issue discount, if any, and for
certain other federal income tax purposes.
The total amount of original issue discount on a REMIC Regular Certificate
is the excess of the "stated redemption price at maturity" of the REMIC
Regular Certificate over its "issue price." Except as discussed in the
following two paragraphs, in general, the issue price of a particular class of
REMIC Regular Certificates offered hereunder will be the price at which a
substantial amount of REMIC Regular Certificates of that class are first sold
to the public (excluding bond houses and brokers), and the stated redemption
price at maturity of a REMIC Regular Certificate will be its Stated Principal
Balance.
If a REMIC Regular Certificate is sold with accrued interest that relates to
a period prior to the issue date of such REMIC Regular Certificate, the amount
paid for the accrued interest will be treated instead as increasing the issue
price of the REMIC Regular Certificate. In addition, that portion of the first
interest payment in excess of interest accrued from the date of initial
issuance of the Certificates (the "Closing Date") to the first Distribution
Date will be treated for federal income tax reporting purposes as includible
in the stated redemption price at maturity of the REMIC Regular Certificates,
and as excludible from income when received as a payment of interest on the
first Distribution Date (except to the extent of any 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,
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including (i) interest stated at a fixed rate for an initial period of less
than one year followed by a qualified floating rate if the value of the
floating rate at the Closing Date is intended to approximate the fixed rate,
and (ii) two or more qualified floating rates that can reasonably be expected
to have approximately the same values throughout the term of the Certificate.
A combination of such rates is conclusively presumed to be a single floating
rate if the values of all rates on the Closing Date are within 0.25 percentage
points of each other. A variable rate that is subject to an interest rate cap,
floor, governor or similar restriction on rate adjustment may be a qualified
floating rate only if such restriction is fixed throughout the term of the
instrument, or is not reasonably expected as of the Closing Date to cause the
yield on the debt instrument to differ significantly from the expected yield
absent the restriction. Final regulations issued on June 11, 1996 define an
"objective rate" as a rate determined using a single fixed formula and based
on objective financial information or economic information. However, an
objective rate does not include a rate based on information that is in the
control of the issuer or that is unique to the circumstances of a related
party. A combination of interest stated at a fixed rate for an initial period
of less than one year followed by an objective rate is treated as a single
objective rate if the value of the objective rate at the Closing Date is
intended to approximate the fixed rate; such a combination of rates is
conclusively presumed to be a single objective rate if the objective rate on
the Closing Date does not differ from the fixed rate by more than 0.25
percentage points. The qualified stated interest payable with respect to
certain variable rate debt instruments not bearing stated interest at a Single
Variable Rate is discussed below under "Variable Rate Certificates." Under the
foregoing rules, some of the payments of interest on a Certificate bearing a
fixed rate of interest for an initial period followed by a qualified floating
rate of interest in subsequent periods could be treated as included in the
stated redemption price at maturity if the initial fixed rate were to differ
sufficiently from the rate that would have been set using the formula
applicable to subsequent periods. See "Variable Rate Certificates." REMIC
Regular Certificates offered hereby other than such Certificates providing for
variable rates of interest are not anticipated to have stated interest other
than "qualified stated interest," but if any such REMIC Regular Certificates
are so offered, appropriate disclosures will be made in the Prospectus
Supplement. Some or all of the payments on REMIC Regular Certificates
providing for the 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 "Taxation of Owners of REMIC Regular Certificates--Market Discount
and Premium."
Each holder of a REMIC Regular Certificate must include in gross income the
sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held such REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular
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Certificate, the daily portions of original issue discount will be determined
as follows. A calculation will first be made of the portion of the original
issue discount that accrued during each accrual period, that is generally each
period that ends on a date that corresponds to a Distribution Date on the
REMIC Regular Certificate and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date). For any accrual period such portion will equal
the excess, if any, of (i) the sum of (A) the present value of all of the
distributions remaining to be made on the REMIC Regular Certificate, if any,
as of the end of the accrual period and (B) distributions made on such REMIC
Regular Certificate during the accrual period of amounts included in the
stated redemption price at maturity, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining payments referred to in the preceding sentence
will be calculated based on (i) the yield to maturity of the REMIC Regular
Certificate, calculated as of the settlement date, giving effect to the
Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. The adjusted issue price of a REMIC Regular Certificate at the
beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount with
respect to such REMIC Regular Certificate that accrued in prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
Regular Certificate in prior accrual periods of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will then be allocated ratably to each day during the period to
determine the daily portion of original issue discount for each day. With
respect to an accrual period between the settlement date and the first
Distribution Date on the REMIC Regular Certificate that is shorter than a full
accrual period, the OID Regulations permit the daily portions of original
issue discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on
which it holds such REMIC Regular Certificate, the daily portions of original
issue discount with respect to such REMIC Regular Certificate, but reduced, if
such cost exceeds the "adjusted issue price", by an amount equal to the
product of (i) such daily portions and (ii) a constant fraction, whose
numerator is such excess and whose denominator is the sum of the daily
portions of original issue discount on such REMIC Regular Certificate for all
days on or after the day of purchase. The adjusted issued price of a REMIC
Regular Certificate on any given day is equal to the sum of the adjusted issue
price (or, in the case of the first accrual period, the issue price) of the
REMIC Regular Certificate at the beginning of the accrual period during which
such day occurs and the daily portions of original issue discount for all days
during such accrual period prior to such day, reduced by the aggregate amount
of distributions made during such accrual period prior to such day other than
distributions of qualified stated interest.
Variable Rate Certificates. REMIC Regular Certificates bearing interest at
one or more variable rates are subject to certain special rules. The qualified
stated interest payable with respect to certain variable rate debt instruments
not bearing interest at a Single Variable Rate generally is determined under
the OID Regulations by converting such instruments into fixed rate debt
instruments. Instruments qualifying for such treatment generally include those
providing for stated interest at (i) more than one qualified floating rate, or
(ii) a single fixed rate and (a) one or more qualified floating rates or (b) a
single "qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably
be expected to inversely reflect contemporaneous variations in the cost of
newly borrowed funds (disregarding permissible rate caps, floors, governors
and similar restrictions such as are described above).
Purchasers of REMIC Regular Certificates bearing a variable rate of interest
should be aware that there is uncertainty concerning the application of 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
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Variable Rate to take into account for each period an amount corresponding
approximately to the sum of (i) the qualified stated interest accruing on the
outstanding face amount of the REMIC Regular Certificate as the stated
interest rate for that Certificate varies from time to time and (ii) the
amount of original issue discount that would have been attributable to that
period on the basis of a constant yield to maturity for a bond issued at the
same time and issue price as the REMIC Regular Certificate, having the same
face amount and schedule of payments of principal as such Certificate, subject
to the same Prepayment Assumption, and bearing interest at a fixed rate equal
to the value of the applicable qualified floating rate or qualified inverse
floating rate in the case of a Certificate providing for either such rate, or
equal to the fixed rate that reflects the reasonably expected yield on the
Certificate in the case of a Certificate providing for an objective rate other
than an inverse floating rate, in each case as of the issue date.
Certificateholders holding REMIC Regular Certificates bearing interest at a
Multiple Variable Rate generally will take into account interest and original
issue discount under a similar methodology, except that the amounts of
qualified stated interest and original issue discount attributable to such a
Certificate first will be determined for an "equivalent" debt instrument
bearing fixed rates, the assumed fixed rates for which are (a) for each
qualified floating rate, the value of each such rate as of the Closing Date
(with appropriate adjustment for any differences in intervals between interest
adjustment dates), (b) for a qualified inverse floating rate, the value of the
rate as of the Closing Date, and (c) for any other objective rate, the fixed
rate that reflects the yield that is reasonably expected for the Certificate.
If the interest paid or accrued with respect to a Multiple Variable Rate
Certificate during an accrual period differs from the assumed fixed interest
rate, such difference will be an adjustment (to interest or original issue
discount, as applicable) to the Certificateholder's taxable income for the
taxable period or periods to which such difference relates.
In the case of a Certificate that provides for stated interest at a fixed
rate in one or more accrual periods and either one or more qualified floating
rates or a qualified inverse floating rate in other accrual periods, the fixed
rate is first converted into an assumed variable rate. The assumed variable
rate will be a qualified floating rate or a qualified inverse floating rate
according to the type of actual variable rates provided by the Certificate,
and must be such that the fair market value of the REMIC Regular Certificate
as of issuance is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the assumed variable
rate in lieu of the fixed rate. The REMIC Regular Certificate is then subject
to the determination of the amount and accrual of original issue discount as
described above, by reference to the hypothetical variable rate instrument.
Purchasers of variable rate REMIC Regular Certificates further should be
aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. If such a Certificate is not governed by
the provisions of the OID Regulations applicable to variable rate debt
instruments, it may be subject to provisions of Treasury regulations, issued
in final form on June 11, 1996, applicable to instruments having contingent
payments (the "1996 Contingent Debt Regulations"). The application of those
provisions to instruments such as variable rate REMIC Regular Certificates is
subject to differing interpretations. Prospective purchasers of variable rate
REMIC Regular Certificates are advised to consult their tax advisers
concerning the tax treatment of such Certificates.
2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the REMIC Regular
Certificate's stated redemption price at maturity, or, in the case of a REMIC
Regular Certificate issued with original issue discount, the REMIC Regular
Certificate's adjusted issue price (as defined under "Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount"), will recognize market
discount upon receipt of each payment of principal. In particular, such a
holder will generally be required to allocate each payment of principal on a
REMIC Regular Certificate first to accrued market discount, and to recognize
ordinary income to the extent such principal payment does not exceed the
aggregate amount of accrued market discount on such REMIC Regular Certificate
not previously included in income. Such market discount must be included in
income in addition to any original issue discount includible in income with
respect to such REMIC Regular Certificate.
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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 without the consent of the IRS.
Under a statutory de minimis exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate
multiplied by the number of complete years to maturity remaining after the
date of its purchase. In interpreting a similar de minimis rule with respect
to original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
Regular Certificate would be treated in a manner similar to original issue
discount of a de minimis amount. See "Taxation of Holders of REMIC Regular
Certificates--Original Issue Discount." Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included using the method described above. However, Treasury
regulations implementing the market discount de minimis exception have not
been issued in proposed, temporary or final form, and the precise treatment of
de minimis market discount on obligations payable in more than one installment
therefore remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more than
a de minimis amount on debt instruments, the principal of which is payable in
more than one installment. Until such time as regulations are issued by the
Treasury Department, certain rules described in the Committee Report 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
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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.
3. Treatment of Subordinated Certificates
As described above under "Credit Support--Subordinated Certificates,"
certain Series of Certificates may contain one or more Classes or Subclasses
of Subordinated Certificates. Holders of Subordinated Certificates will be
required to report income with respect to such Certificates on the accrual
method without giving effect to delays and reductions in distributions
attributable to defaults or delinquencies on any Mortgage Loans, except
possibly, in the case of income that constitutes qualified stated interest, to
the extent that it can be established that such amounts are uncollectible. As
a result, the amount of income reported by a Certificateholder of a
Subordinated Certificate in any period could significantly exceed the amount
of cash distributed to such Certificateholder in that period.
Although not entirely clear, it appears that a corporate holder or a holder
who holds a Regular Certificate in the course of a trade or business generally
should be allowed to deduct as an ordinary loss any loss sustained on account
of partial or complete worthlessness of a Subordinated Certificate. Although
similarly unclear, a noncorporate holder who does not hold such Regular
Certificate in the course of a trade or business generally should be allowed
to deduct as a short-term capital loss any loss sustained on account of
complete worthlessness of a Subordinated Certificate. Special rules are
applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Holders of Subordinated Certificates should consult
their own tax advisers regarding the appropriate timing, character and amount
of any loss sustained with respect to Subordinated Certificates.
C. Taxation of Owners of REMIC Residual Certificates
1. General
An owner of a REMIC Residual Certificate ("Residual Owner") generally will
be required to report its daily portion of the taxable income or, subject to
the limitation described below in "Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions," the net loss of the REMIC
Mortgage Pool for each day during a calendar quarter that the Residual Owner
owned such REMIC Residual Certificate. For this purpose, the daily portion
will be determined by allocating to each day in the calendar quarter, using a
30 days per month/90 days per quarter/360 days per year counting convention,
its ratable portion of the taxable income or net loss of the REMIC Mortgage
Pool for such quarter, and by allocating the daily portions among the Residual
Owners (on such day) in accordance with their percentage of ownership
interests on such day. Any amount included in the gross income of, or allowed
as a loss to, any Residual Owner by virtue of the rule referred to in this
paragraph will be treated as ordinary income or loss. Purchasers of REMIC
Residual Certificates should be aware that taxable income from such
Certificates may exceed cash distributions with respect thereto in any taxable
year. For example, if the Mortgage Loans are acquired by a REMIC at a
discount, then the holder of a residual interest may recognize income without
corresponding cash distributions. This result could occur because
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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 purposes.
Although it appears likely that any such payment would be includible in income
immediately upon its receipt, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisers concerning the treatment of such payments for
income tax purposes.
2. Taxable Income or Net Loss of the REMIC Trust Fund
The taxable income or net loss of the REMIC Mortgage Pool will reflect a
netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and the deductions and losses allowed to the REMIC Mortgage Pool. Such taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for an individual having the calendar year as his taxable year and
using the accrual method of accounting, with certain modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including original issue discount) on the REMIC Regular Certificates. Second,
market discount equal to the excess of any Mortgage Loan's adjusted issue
price (as determined under "Taxation of Owners of REMIC Regular Certificates--
Market Discount and Premium") over its fair market value at the time of its
transfer to the REMIC Mortgage Pool generally will be included in income as it
accrues, based on a constant yield method and on the Prepayment Assumption.
For this purpose, the Master Servicer intends to treat the fair market value
of the Mortgage Loans as being equal to the aggregate issue prices of the
REMIC Regular Certificates and REMIC Residual Certificates; if one or more
classes of REMIC Regular Certificates or REMIC Residual Certificates are
retained by the Depositor, the Master Servicer will estimate the value of such
retained interests in order to determine the fair market value of the Mortgage
Loans for this purpose. Third, no item of income, gain, loss or deduction
allocable to a prohibited transaction (see "Prohibited Transactions and Other
Possible REMIC Taxes", below) will be taken into account. Fourth, the REMIC
Mortgage Pool generally may not deduct any item that would not be allowed in
calculating the taxable income of a partnership by virtue of Code Section
703(a)(2). Fifth, the REMIC Regulations provide that the limitation on
miscellaneous itemized deductions imposed on individuals by Code Section 67
will not be applied at the Mortgage Pool level to the servicing fees paid to
the Master Servicer or sub-servicers if any. (See, however, "Pass-Through of
Servicing Fees", below.) If the deductions allowed to the REMIC Mortgage Pool
exceed its gross income for a calendar quarter, such excess will be the net
loss for the REMIC Mortgage Pool for that calendar quarter.
3. Basic Rules and Distributions
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not be
included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC
Residual Certificate. Such distribution will reduce the adjusted basis of such
interest, but not below zero. To the extent a distribution exceeds the
adjusted basis of the REMIC Residual Certificate, it will be treated as gain
from the sale of the REMIC Residual Certificate. (See "Sales of REMIC
Certificates," below.) The adjusted basis of a REMIC Residual Certificate is
equal to the amount paid for such REMIC Residual Certificate, increased by
amounts included in the income of the Residual Owner (see "Taxation of Owners
of REMIC Residual Certificates--Daily Portions" above), and decreased by
distributions and by net losses taken into account with respect to such
interest.
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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 REMIC
because the REMIC's basis in the underlying REMIC Mortgage Pool includes the
fair market value of the REMIC Regular Certificates and REMIC Residual
Certificates.
4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each
day during a calendar quarter its ratable portion of the product of the
"adjusted issue price" of the REMIC Residual Certificate at the beginning of
the calendar quarter and 120 percent of the long-term "applicable federal
rate" (generally, an average of current yields on Treasury securities of
comparable maturity, and hereafter the "AFR") in effect at the time of
issuance of the REMIC Residual Certificate. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any
calendar quarter is the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters and decreased
by any distributions made with respect to such REMIC Residual Certificate
before the beginning of such quarter. The issue price of a REMIC Residual
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the REMIC Residual Certificates
were sold.
For Residual Owners, an excess inclusion cannot be offset by deductions,
losses or loss carryovers from other activities. 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."
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.
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. It is
expected that the REMIC Residual Certificates will be noneconomic.
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6. Tax-Exempt Investors
Tax-exempt organizations (including employee benefit plans) that are subject
to tax on unrelated business taxable income (as defined in Code Section 511)
will be subject to tax on any excess inclusions attributed to them as owners
of Residual Certificates. Excess inclusion income associated with a Residual
Certificate may significantly exceed cash distributions with respect thereto.
See "Excess Inclusions."
Generally, tax-exempt organizations that are not subject to federal income
taxation on "unrelated business taxable income" pursuant to Code Section 511
are treated as "disqualified organizations" under provisions of the "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."
D. 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. Capital Losses may
not, in general, be offset against ordinary income.
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 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
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Certificate, the delivery to the Trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a Residual Certificate
to a disqualified organization void.
In addition, if a "pass-through entity" includes in income excess inclusions
with respect to a REMIC Residual Certificate, and a disqualified organization
is the record holder of an interest in such entity at any time during any
taxable year of such entity, then a tax will be imposed on such entity equal
to the product of (i) the amount of excess inclusions on the REMIC Residual
Certificate for such taxable year that are allocable to the interest in the
pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-
through entity will not be subject to this tax for any period, however, if the
record holder of an interest in such entity furnishes to such entity (i) such
holder's social security number and a statement under penalties of perjury
that such social security number is that of the record holder or (ii) a
statement under penalties of perjury that such record holder is not a
disqualified organization. For these purposes, a "pass-through entity" means
any regulated investment company, real estate investment trust, trust,
partnership or certain other entities described in 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.
E. 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 Regular 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 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.
F. Prohibited Transactions and Other Possible Remic Taxes
The Code imposes a tax on REMIC Mortgage Pools equal to 100 percent of the
net income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an
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asset purchased with the payments on the Mortgage Loans for temporary
investment pending distribution on the REMIC Certificates. The Code also
imposes a 100 percent tax on the value of any contribution of assets to the
REMIC after the "startup day" (the day on which the regular and residual
interests are issued), other than pursuant to specified exceptions, and
subjects "net income from foreclosure property" to tax at the highest
corporate rate. It is not anticipated that a REMIC Mortgage Pool will engage
in any such transactions or receive any such income.
G. 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.
H. 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.
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
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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.
I. 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 percent if
recipients of such payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to
establish an exemption from such tax. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed
by the IRS on a recipient of payments that is required to supply information
but that does not do so in the manner required.
J. Foreign Investors In Remic Certificates
1. Remic Regular Certificates
Except as qualified below, payments made on a REMIC Regular Certificate to a
REMIC Regular Certificateholder that is not a U.S. Person, as hereinafter
defined (a "non-U.S. Person"), or to a person acting on behalf of such a
Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided that (a) the holder of the Certificate is not
subject to U.S. tax as a result of a connection to the United States other
than ownership of such Certificate, (b) the holder of such Certificate signs a
statement under penalties of perjury that certifies that such holder is a Non-
U.S. Person, and provides the name and address of such holder, and (c) the
last U.S. Person in the chain of payment to the holder receives such statement
from such holder or a financial institution holding on its behalf and does not
have actual knowledge that such statement is false. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
withholding tax rate of 30 percent, subject to reduction under 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, regulations provide
otherwise), or an estate or trust defined in Section 7701(a)(30)(D) and (E),
respectively.
Holders of REMIC Regular Certificates should be aware that the IRS may take
the position that exemption from U.S. withholding taxes does not apply to such
a holder that also directly or indirectly owns 10 percent or more of the REMIC
Residual Certificates. Further, the foregoing rules will not apply to exempt a
"United States shareholder" (as such term is defined in Code Section 951) of a
controlled foreign corporation from taxation on such United States
shareholder's allocable portion of the interest or original issue discount
income earned by such controlled foreign corporation.
2. Remic Residual Certificates
Amounts paid to a Residual Owner that is not a "U.S. Person" (as defined
above) (a "non-U.S. Person") generally will be treated as interest for
purposes of applying the withholding tax on non-U.S. Persons with respect to
income on its REMIC Residual Certificate. However, it is unclear whether
distributions on REMIC Residual Certificates will be eligible for the general
exemption from withholding tax that applies to REMIC Regular Certificates as
described above. Treasury Regulations provide that, for purposes of the
portfolio interest exception, payments to the foreign owner of a REMIC
Residual Certificate are to be considered paid on the obligations held by the
REMIC, rather than on the Certificate itself. Such payments 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 percent but is subject to reduction under any tax treaty
applicable to the
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Residual Owner. However, there is no exemption from withholding tax nor may
the rate of such tax be reduced, under a tax treaty or otherwise, with respect
to any distribution of income that is an excess inclusion. Although no
regulations have been proposed or adopted addressing withholding on residual
interests held by non-U.S. Persons, the provisions of the REMIC Regulations,
described below, relating to the transfer of residual interests to non-U.S.
Persons can be read as implying that withholding with respect to excess
inclusion income is to be determined by reference to the amount of the accrued
excess inclusion income rather than to the amount of cash distributions. If
the IRS were successfully to assert such a position, cash distributions on
Residual Certificates held by non-U.S. Persons could be subject to withholding
at rates as high as 100 percent, depending on the relationship of accrued
excess inclusion income to cash distributions with respect to such Residual
Certificates. See "Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions."
Certain restrictions relating to transfers of REMIC Residual Certificates to
and by investors who are non-U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC Residual Certificates to a non-U.S.
Person that have "tax avoidance potential" are disregarded for all federal
income tax purposes. If such transfer is disregarded, the purported transferor
of such a REMIC Residual Certificate to a non-U.S. Person 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 percent of each excess
inclusion, and (2) that such amounts will be distributed at or after the time
at which the excess inclusion accrues and not later than the close of the
calendar year following the calendar year of accrual. This rule does not apply
to transfers if the income from the REMIC Residual Certificate is taxed in the
hands of the transferee as income effectively connected with the conduct of a
U.S. trade or business. Second, if a non-U.S. Person transfers a REMIC
Residual Certificate to a U.S. Person (or to a non-U.S. Person in whose hands
income from the REMIC Residual Certificate would be effectively connected),
and the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, that transfer is disregarded for all federal income
tax purposes and the purported non-U.S. Person transferor continues to be
treated as the owner of the REMIC Residual Certificate. Thus, the REMIC's
liability to withhold 30 percent of the accrued excess inclusions is not
terminated even though the REMIC Residual Certificate is no longer held by a
non-U.S. Person.
Holders of REMIC Regular Certificates and REMIC Residual Certificates should
be aware that proposed Treasury Regulations (the "1996 Proposed Regulations")
were issued on April 15, 1996 which, if adopted in final form, could affect
the United States taxation of foreign investors in REMIC Certificates. The
1996 Proposed Regulations are generally proposed to be effective for payments
after December 31, 1997, regardless of the issue date of the REMIC Certificate
with respect to which such payments are made, subject to certain transition
rules. One of the effects of the 1996 Proposed Regulations would be to provide
certain presumptions with respect to withholding for holders not providing the
required certifications to qualify for the withholding exemption described
above. In addition, the 1996 Proposed Regulations would replace a number of
current tax certification forms with a single, restated form and standardize
the period of time for which withholding agents could rely on such
certifications. The 1996 Proposed Regulations would also provide rules to
determine whether, for purposes of United States federal withholding tax,
interest paid to a non-U.S. Person that is an entity should be treated as paid
to the entity or those holding an interest in that entity.
The discussion under this heading is not intended to be a complete
discussion of the provisions of the 1996 Proposed Regulations, and prospective
investors are urged to consult their tax advisers with respect to the effect
the 1996 Proposed Regulations may have.
K. 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
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in, owning mortgages or property in, or having servicing activity performed in
a state without conforming REMIC provisions in its income or franchise tax
law. Further, REMIC Regular Certificateholders resident in non-conforming
states may have their ownership of REMIC Regular Certificates characterized as
an interest other than debt of the REMIC such as stock or a partnership
interest. Investors are advised to consult their tax advisers concerning the
state and local income tax consequences of their purchase and ownership of
REMIC Regular Certificates.
III. NON-REMIC TRUST FUNDS
A. Classification of Trust Funds
With respect to each series of Trust Certificates for which they are
identified as counsel to the Depositor in the applicable Prospectus
Supplement, Brown & Wood LLP, Cadwalader, Wickersham & Taft, Dewey Ballantine,
or Orrick, Herrington & Sutcliffe LLP, 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. 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 interests
represent interests in "stripped bonds" or "stripped coupons" within the
meaning of Code Section 1286, such interests would be considered to be newly
issued debt instruments, and thus to have no market discount or premium, and
the amount of original issue discount may differ from the amount of original
issue discount on the Mortgage Loans and 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.
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
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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 Fee or
Master Servicing Fee to constitute a retained interest in the Mortgage Loans;
nevertheless, any such expectation generally will be a matter of uncertainty,
and prospective purchasers are advised to consult their own tax advisers with
respect to the existence of a retained interest and any effects on investment
in Trust Fractional Certificates.
1. Application of Stripped Bond Rules
Each Trust Fund will consist of an interest in each of the Mortgage Loans
relating thereto, exclusive of the Depositor's Retained Yield, if any. With
respect to each Series of Certificates for which they are identified as
counsel to the Depositor in the applicable Prospectus Supplement, Brown & Wood
LLP, Cadwalader, Wickersham & Taft, Dewey Ballantine, or Orrick, Herrington &
Sutcliffe LLP 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." See also "Non-
Remic Trust Funds--Prepayments" hereof. 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 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."
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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.
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 unstripped mortgage loans ("Unstripped Mortgage Loans")
will be treated as wholly
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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.
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 one-sixth of one percent times the
number of full years to final maturity or one-fourth of one percent times
weighted average maturity. The OID Regulations treat certain variable rate
mortgage loans as having original issue discount because of an initial rate of
interest that differs from that determined by the mechanism for setting the
interest rate during the remainder of the loan, or because of the use of an
index that does not vary in a manner approved the OID Regulations. For a
description of the general method of calculating the amount of original issue
discount see "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" and "Application of Stripped Bond
Rules--Variable Rate Certificates."
A subsequent purchaser of a Trust Fractional Certificate that purchases such
Certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the Unstripped Mortgage Loans 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 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
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constant yield to maturity basis. This election is made on a bond-by-bond
basis and is irrevocable. In addition, the description of the market discount
rules in "Taxation of Owners of REMIC Regular Certificates--Market Discount
and Premium" with respect to (i) conversion to ordinary income of a portion of
any gain recognized on sale or exchange of a market discount bond, (ii)
deferral of interest expense deductions, (iii) the de minimis exception from
the market discount rules and (iv) the elections to include in income either
market discount or all interest, discount and premium as they accrue, is also
generally applicable to Trust Fractional Certificates. Treasury regulations
implementing the market discount rules, including the 1986 Act amendments
thereto, have not yet been issued and investors therefore should consult their
own tax advisers regarding the application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under existing
law such premium must be allocated to each of the Mortgage Loans (on the basis
of its relative fair market value). The portion of any premium allocated to
Unstripped Mortgage Loans originated after September 27, 1985 can be amortized
and deducted under the provisions of the Code relating to amortizable bond
premium. The portion of such premium allocated to Unstripped Mortgage Loans
originated on or before September 27, 1985 may only be deducted upon the sale
or final distribution in respect of any such Mortgage Loan, as the special
rules of the Code that permit the amortization of such premium apply in the
case of debt instruments other than corporate and governmental obligations,
only to obligations issued after that date. Upon such a sale or final
distribution in respect of such a Mortgage Loan, the premium, if any,
allocable thereto would be recognized as a short-term or long-term capital
loss by a Certificateholder holding the interests in Mortgage Loans
represented by such Certificate as capital assets, depending on how long the
Certificate had been held.
The application of the Stripped Bond Rules to Stripped Mortgage Loans 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.
Such regulations do not, however, apply to instruments that are subject to
Section 1272(a)(6).
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
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Fund at 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.
C. Taxation of Owners of Trust Interest Certificates
With respect to each Series of Certificates for which they are identified as
counsel to the Depositor in the applicable Prospectus Supplement, Brown &
Wood, LLP, Cadwalader, Wickersham & Taft, Dewey Ballantine, or Orrick,
Herrington & Sutcliffe LLP 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 for which they are identified as counsel to the Depositor in the
applicable Prospectus Supplement, Brown & Wood LLP, Cadwalader, Wickersham &
Taft, Dewey Ballantine, or Orrick, Herrington & Sutcliffe LLP 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." See also "Prepayments" below. 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 payment
allocable thereto from each of the Mortgage Loans. See "Aggregate Reporting."
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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.
The tax treatment of the Trust Interest Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Trust Interest Certificate
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect
to a Trust Interest Certificate must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with a constant yield
method that takes into account the compounding of interest and such accrual of
income may be in advance of the receipt of any cash attributable to such
income. In general, the rules for accruing original issue discount set forth
above in "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" apply. See "Prepayments" below. For
purposes of applying the original issue discount provisions of the Code, the
issue price used in reporting original issue discount with respect to a Trust
Interest Certificate will be the purchase price paid by each holder thereof
and the stated redemption price at maturity may include the aggregate amount
of all payments to be made with respect to the Trust Interest Certificate
whether or not denominated as interest. The amount of original issue discount
with respect to a Trust Interest Certificate may be treated as zero under the
original issue discount de minimis rules described above.
Aggregate Reporting. The Trustee intends in reporting information relating
to original issue discount to Certificateholders to provide such information
on an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount
either on a mortgage loan by mortgage loan 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.
D. Prepayments
The Tax Reform Act of 1986 (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. Although the proper
treatment of interests, such as the Trust Fractional Certificates and the
Trust Interest Certificates, in debt instruments that are subject to
prepayment is unclear. Legislation recently enacted has extended (for taxable
years beginning after such enactment) the rules contained in the 1986 Act to
any pool of debt instruments the yield on which may be affected by reason of
prepayments. Accordingly, it appears that Section 1272(a)(6) would apply to
such Certificates. See "Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount." 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.
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E. 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 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. Capital losses may not, in general, be offset
against ordinary income.
F. Trust Reporting
The Master Servicer will furnish to each holder of a Trust Fractional
Certificate with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and
to interest thereon at the Pass-Through Rate. In addition, the Master Servicer
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Trust Certificate who was such a holder at any time during
such year, information regarding the amount of servicing compensation received
by the Master Servicer and 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.
G. Back-Up Withholding
In general, the rules described in "REMIC Trust Funds--Back-up Withholding"
will also apply to Trust Certificates.
H. 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, 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 Mortgages and (ii)
provides required certification as to its non-United States status under
penalty of perjury and then will be free of such tax only to the extent that
the underlying Mortgages were issued after July 18, 1984. This withholding tax
may be reduced or eliminated by an applicable tax treaty. Notwithstanding the
foregoing, if any such payments are effectively connected with a United States
trade or business conducted by the Certificateholder, they will be subject to
regular United States income tax and, in the case of a corporation, to a
possible branch profits tax, but will ordinarily be exempt from United States
withholding tax provided that applicable documentation requirements are met.
Holders of Trust Certificates should be aware that proposed Treasury
Regulations were issued on April 15, 1996 which, if adopted in final form,
could affect the United States taxation of foreign investors in Trust
Certificates. For further discussion of those proposed regulations, see "REMIC
TRUST FUNDS--Foreign Investors in REMIC Certificates" above.
I. State and Local Taxation
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition
of the Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisers with respect to the various state tax
consequences of an investment in the Certificates.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA
("ERISA Plans") and on those persons who are ERISA fiduciaries with respect to
the assets of such ERISA Plans. In accordance with the general fiduciary
standards of ERISA, an ERISA Plan fiduciary should consider whether an
investment in the Certificates is permitted by the documents and instruments
governing the Plan, consistent with the Plan's overall investment policy and
appropriate in view of the composition of its investment portfolio.
Employee benefit plans which are governmental plans and certain church plans
(if no election has been made under Section 410(d) of the Code) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Certificates subject to the provisions of applicable federal
and state law and, in the case of any such plan which is qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of
the Code, the restrictions imposed under Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA and Section 4975
of the Code prohibit a broad range of transactions involving assets of ERISA
Plans and other plans subject to Section 4975 of the Code (together with ERISA
Plans, "Plans") and certain persons ("Parties in Interest") who have certain
specified relationships to the Plans and taxes and/or imposes other penalties
on any such transaction under ERISA and/or Section 4975 of the Code, unless an
exemption applies. If the assets of a Trust Fund are treated for ERISA
purposes as the assets of the Plans that purchase or hold Certificates of the
applicable Series, an investment in Certificates of that Series by or with
"plan assets" of a Plan might constitute or give rise to a prohibited
transaction under ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption applies. Violation of the prohibited transaction
rules could result in the imposition of excise taxes and/or other penalties
under ERISA and/or Section 4975 of the Code.
PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a final regulation
(the "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 Certificateholder 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 Certificateholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Certificates will qualify for this
exemption.
PROHIBITED TRANSACTION CLASS EXEMPTIONS
Prohibited Transaction Class Exemption 83-1 (Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts) ("PTCE 83-1") permits,
subject to certain conditions, certain transactions involving the creation,
maintenance and termination of certain residential mortgage pools and the
acquisition and holding of certain residential mortgage pool pass-through
certificates by Plans, regardless of whether (a) the mortgage pool is exempt
from "plan asset" treatment or (b) the transactions would otherwise be
prohibited
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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, Mortgage Loans secured by unimproved
real 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. PTCE
83-1 will not apply to a Series of Certificates with respect to which the
Trust Assets include Nonexempt Assets (a "Nonexempt Series"). See "The Trust
Fund--The Mortgage Pools" and "--The Contract Pools." Accordingly, it appears
that PTCE 83-1 will not exempt Plans that acquire Certificates of a Nonexempt
Series from the prohibited transaction rules of ERISA and Section 4975 of the
Code. The applicable Prospectus Supplement will state whether a Series of
Certificates is an Exempt Series or a Nonexempt Series.
PTCE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption: (1) the existence of a pool trustee
who is not an affiliate of the pool sponsor; (2) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against
reductions in pass-through payment due to property damage or defaults in loan
payments; and (3) a limitation on the amount of the payment retained by the
pool sponsor, together with other benefits inuring to it, to not more than
adequate consideration for selling the mortgage loans and reasonable
compensation for services provided by the pool sponsor to the mortgage pool.
The Trustee for all Series will be unaffiliated with the Depositor, and,
accordingly, the first general condition will be satisfied. With respect to
the second general condition of PTCE 83-1, the credit support method
represented by the issuance of a Subordinated Class or Subclasses of
Certificates and/or the establishment of a Reserve Fund, with respect to any
Exempt Series for which such a method of Credit Support is provided (see
"Credit Support--Subordinated Certificates" and "--Reserve Fund"), is
substantially similar to a system for protecting Certificateholders against
reductions in pass-through payments which has been reviewed and accepted by
the DOL as an alternative to pool insurance or a letter of credit
indemnification system. This may support a Plan fiduciary's conclusion that
the second general condition is satisfied with respect to any such Exempt
Series although, in the absence of a ruling to this effect, there can be no
assurance that these features will be so viewed by the DOL. In addition, the
Depositor intends to use its best efforts to establish, for each Exempt Series
for which credit support is provided by a Letter of Credit (see "Credit
Support--Letters of Credit") and/or the insurance arrangements set forth above
under "Description of Insurance" (an "Insured Series"), a system that will
adequately protect the Mortgage Pools and 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 or 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), 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.
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If an Exempt Series of Certificates includes a Class of Subordinated
Certificates, PTCE 83-1 will not provide an exemption from the prohibited
transaction rules of ERISA and Section 4975 of the Code for Plans that acquire
such Subordinated Certificates.
If for any reason PTCE 83-1 does not provide an exemption for a particular
Plan Certificateholder, one of five other prohibited transaction class
exemptions issued by the DOL might apply, i.e., PTCE 96-23 (Class Exemption
for Plan Asset Transactions Determined by In-House Asset Managers), PTCE 95-60
(Class Exemption for Certain Transactions Involving Insurance Company General
Accounts), PTCE 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds), PTCE 90-1 (Class Exemption for Certain
Transactions Involving Insurance Company Pooled Separate Accounts) or PTCE 84-
14 (Class Exemption for Plan Asset Transactions Determined by Independent
Qualified Professional Asset Managers). There can be no assurance that any of
these class exemptions will apply with respect to any particular Plan
Certificateholder or, even if it were to apply, that the available exemptive
relief would apply to all transactions involving the applicable Trust Fund.
Any person who is a fiduciary by reason of his or her authority to invest
"plan assets" of any Plan (a "Plan investor") and who is considering the use
of "plan assets" of any Plan to purchase of the offered Certificates should
consult with its counsel with respect to the potential applicability of ERISA
and Section 4975 of the Code to such investments, and should determine on its
own whether PTCE 83-1 or another exemption would be applicable (and whether
all conditions have been satisfied with respect to any such exemptions), and
whether the offered Certificates are an appropriate investment for a Plan.
Moreover, each Plan fiduciary should determine whether, under the general
fiduciary standards of investment prudence and diversification, an investment
in the offered Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
UNDERWRITER'S PTE
Credit Suisse First Boston Corporation ("First Boston") is the recipient of
a final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989),
as amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21, 1997)(the "Underwriter's
PTE" or "Credit Suisse First Boston Corporation's PTE" if specified in the
applicable Prospectus Supplement), which may accord protection from violations
under Sections 406 and 407 of ERISA and Section 4975 of the Code for Plans
that acquire Certificates. The Underwriter's PTE applies to certificates (a)
which represent (1) a beneficial ownership interest in the assets of a trust
and entitle the holder to pass-through payments of principal, interest and/or
other payments made with respect to the assets of the trust, or (2) an
interest in a REMIC if the certificates are issued by and are obligations of a
trust; and (b) with respect to which First Boston or any of its affiliates is
either the sole underwriter, the manager or co-manager of the underwriting
syndicate or a selling or placement agent. The corpus of a trust to which the
Underwriter's PTE applies may consist of (i) obligations which bear interest
or are purchased at a discount and which are secured by (A) single-family
residential, multifamily residential or commercial real property (including
obligations secured by leasehold interests on such real property) or (B)
shares issued by a cooperative housing association; (ii) secured consumer
receivables that bear interest or are purchased at a discount; (iii) secured
credit instruments that bear interest or are purchased at a discount in
transactions by or between business entities; and (iv) "guaranteed
governmental mortgage pool certificates" (as defined in the Plan Assets
Regulation).
Plans acquiring Certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Trust Assets have been included in
other investment pools ("Other Pools");
(b) certificates evidencing interests in Other Pools have been both (1)
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff & Phelps
Inc. or Fitch 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;
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(d) the Trustee is not an affiliate of any member of the Restricted Group
(as defined below);
(e) the applicable Series of Certificates evidences ownership in Trust
Assets which may include non-Subordinated Mortgage Certificates (whether or
not interest and principal payable with respect to the Mortgage
Certificates are guaranteed by the GNMA, FHLMC or FNMA) or Contracts;
(f) the Class of Certificates acquired by the Plan are not subordinated
to other Classes of Certificates of that Series with respect to the right
to receive payment in the event of defaults or delinquencies on the
underlying Trust Assets;
(g) the Plan is an "accredited investor" (as defined in Rule 501(a)(1) of
Regulation D under the Securities Act);
(h) the acquisition of the Certificates by a Plan is on terms (including
the price for the Certificates) that are at least as favorable to the Plan
as they would be in an arm's length transaction with an unrelated party;
and
(i) the sum of all payments made to and retained by the Underwriter or
members of any underwriting syndicate in connection with the distribution
of the Certificates represents not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained
by the Seller pursuant to the sale of the Trust Assets to the Trust
represents not more than the fair market value of such Trust Assets; and
the sum of all payments made to and retained by the Master Servicer and all
Servicers represents not more than reasonable compensation for such
Servicers' services under the Pooling and Servicing Agreement and
reimbursement of such Servicers' reasonable expenses in connection
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
(4) the Plan is not sponsored by the Depositor, any Underwriter, the
Trustee, any Servicer, any Pool, Special Hazard or Primary Mortgage Insurer
or the obligor under any other credit support mechanism, a Mortgagor or
Obligor with respect to obligations constituting more than 5% of the
aggregate unamortized principal balance of the Trust Assets on the date of
the initial issuance of Certificates, or any of their affiliates (the
"Restricted Group").
Each Series of Certificates generally is expected to satisfy condition (a)
unless otherwise specified in the applicable Prospectus Supplement. If a
Series includes a Class of Subordinated Certificates, that Class will not
satisfy condition (f). Additionally, the Prospectus permits the issuance of
Certificates rated in one of the four highest rating categories, so a
particular Class of a Series may not satisfy condition (c).
Whether the other conditions in the Underwriter's PTE will be satisfied as
to Certificates or any particular Class will depend upon the relevant facts
and circumstances existing at the time the Plan acquires Certificates of that
Class. Any Plan investor who proposes to use "plan assets" of a Plan to
acquire Certificates in reliance 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.
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GENERAL CONSIDERATIONS
Any member of the Restricted Group, a Mortgagor or Obligor, or any of their
affiliates might be considered or might become a Party in Interest with
respect to a Plan. In that event, the acquisition or holding of Certificates
of the applicable Series or Class by, on behalf of or with "plan assets" of
such Plan might be viewed as giving rise to a prohibited transaction under
ERISA and Section 4975 of the Code, unless PTCE 83-1, the Underwriter's PTE or
another exemption is available. Accordingly, before a Plan Investor makes the
investment decision to purchase, to commit to purchase or to hold Certificates
of any Series or Class, the Plan Investor should determine (a) whether the
second and third general conditions and the specific conditions (described
briefly above) of PTCE 83-1 have been satisfied; (b) whether the Underwriter's
PTE is applicable and adequate exemptive relief is available; (c) whether any
other prohibited transaction exemption (if required) is available under ERISA
and Section 4975 of the Code; or (d) whether an exemption from "plan asset"
treatment is available to the applicable Trust Fund. The Plan Investor should
also consult the ERISA discussion, if any, in the applicable Prospectus
Supplement for further information regarding the application of ERISA to any
Series or Class of Certificates.
Subordinated Certificates are not available for purchase by or with "plan
assets" of any Plan, other than an insurance company general account which
satisfies the conditions set forth in Sections I and II of PTCE 95-60 or a
governmental or church plan which is not subject to ERISA or Section 4975 of
the Code (as described above), and any acquisition of Subordinated
Certificates by, on behalf of or with "plan assets" of any such Plan will be
treated as null and void for all purposes.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions
of Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the
DOL is required to issue final regulations (the "401(c) Regulations") no later
than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported
by an insurer's general account are issued to or for the benefit of a Plan on
or before December 31, 1998, which general account assets constitute "plan
assets." Section 401(c) of ERISA generally provides that, until the date which
is 18 months after the 401(c) Regulations become final, no person shall be
subject to liability under Part 4 of Title I of ERISA and Section 4975 of the
Code on the basis of a claim that the assets of an insurance company general
account constitute "plan assets," unless (i) as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal
or state criminal law. Any assets of an insurance company general account
which support insurance policies issued to a Plan after December 31, 1998 or
issued to Plans on or before December 31, 1998 for which the insurance company
does not comply with the 401(c) Regulations may be treated as "plan assets."
In addition, because Section 401(c) does not relate to insurance company
separate accounts, separate account assets are still treated as "plan assets"
of any Plan invested in such separate account. Insurance companies
contemplating the investment of general account assets in the Certificates
should consult with their legal counsel with respect to the applicability of
Sections I and III of PTCE 95-60 and Section 401(c) or ERISA, including the
general account's ability to continue to hold the Certificates after the date
which is 18 months after the date the 401(c) Regulations become final.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
CERTIFICATES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH CERTIFICATES.
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LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Certificates will
specify whether a Class or Subclass of such Certificates, as long as it is
rated in one of the two highest rating categories by one or more nationally
recognized statistical rating organizations, will constitute a "mortgage
related security" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Such Class or Subclass, if any, constituting a
"mortgage related security" will be a legal investment for persons, trusts,
corporations, partnerships, associations, business trusts and business
entities (including depository institutions, insurance companies, trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued
by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities.
Pursuant to SMMEA, a number of states enacted legislation, on or prior to
the October 3, 1991 cutoff for such enactments, limiting to varying extents
the ability of certain entities (in particular, insurance companies) to invest
in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Accordingly,
the investors affected by such legislation will be authorized to invest in
Certificates qualifying as "mortgage related securities" only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review NCUA Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, codified as 12 C.F.R. Section
703.5(f)-(k), which prohibit federal credit unions from investing in certain
mortgage related securities (including securities such as certain Series,
Classes or Subclasses of Certificates), except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992, as revised April 15, 1994 (the "Policy Statement") of
the Federal Financial Institutions Examination Council.
The Policy Statement which has been adopted by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, the
FDIC and the Office of Thrift Supervision and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain Series,
Classes or Subclasses of the Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain Series, Classes or Subclasses may be deemed
unsuitable investments, or may otherwise be restricted, under such rules,
policies or guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
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Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Certificates) may adversely
affect the liquidity of the Certificates.
Investors should consult their own legal advisers in determining whether and
to what extent such Certificates constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Each Series of Certificates offered hereby and by means of the 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 Certificates will set forth the terms of the offering of
such Series or Certificates and each Subclass within such Series, including
the name or names of the Underwriters, the proceeds to the Depositor, and
either the initial public offering price, the discounts and commissions to the
Underwriters and any discounts or concessions allowed or reallowed to certain
dealers, or the method by which the price at which the Underwriters will sell
such Certificates will be determined.
Unless otherwise specified in the Prospectus Supplement, the Underwriters
will be obligated to purchase all of the Certificates of a Series described in
the Prospectus Supplement with respect to such Series if any such Certificates
are purchased. The Certificates may be acquired by the Underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
If so indicated in the Prospectus Supplement, the Depositor will authorize
Underwriters or other persons acting as the Depositor's agents to solicit
offers by certain institutions to purchase the Certificates from the Depositor
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Depositor. The obligation of any
purchaser under any such contract will be subject to the condition that the
purchase of the offered Certificates shall not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject. The Underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
The Depositor may also sell the Certificates offered hereby and by means of
the 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 Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Certificates for whom they may act as agents.
The place and time of delivery for each Series of Certificates offered
hereby and by means of the 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
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 sales.
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LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters by Brown & Wood
LLP, San Francisco, California, Cadwalader, Wickersham & Taft, New York, New
York, Dewey Ballantine, New York, New York or Orrick, Herrington & Sutcliffe
LLP.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
1986 Act...................................................... 120
1988 Act...................................................... 109
1996 Contingent Debt Regulations.............................. 104
1996 Proposed Regulations..................................... 113
401(c) Regulations............................................ 126
Accrual Distribution Amount................................... 43
Advances...................................................... 16
AFR........................................................... 108
Agreement..................................................... 40
Alternative Credit Support.................................... 11
appraised value............................................... 35
Approved Sale................................................. 76
APR........................................................... 33
ARM Loans..................................................... 29
Asset Conservation Act........................................ 90
Balloon Mortgage Loans........................................ 20
Borrower...................................................... 79
Buy-Down Fund................................................. 15, 27
Buy-Down Loans................................................ 27
Cede.......................................................... 23
CERCLA........................................................ 22, 90
Certificate Account........................................... 49
Certificate Principal Balance................................. 4
Certificateholders............................................ 23, 26
Certificates.................................................. 1, 4, 114
Class......................................................... 1, 4
Closed Loans.................................................. 29
Closing Date.................................................. 101
Code.......................................................... 16, 39, 114
Commercial Mortgage Loans..................................... 5
Commercial Property........................................... 5
Commission.................................................... 2
Contract Loan-to-Value Ratio.................................. 9
Contract Pool................................................. 1, 5, 99
Contract Schedule............................................. 46
Contracts..................................................... 1, 5, 18, 33
Converted Mortgage Loan....................................... 25
Cooperative................................................... 5
Cooperative Dwelling.......................................... 5
Cooperative Loans............................................. 5
Credit Suisse First Boston Corporation's PTE.................. 124
Current value................................................. 101
Custodial Account............................................. 49
Custodial Agreement........................................... 34
Custodian..................................................... 34
Cut-off Date.................................................. 23
Debt Service Reduction........................................ 88
Deferred Interest............................................. 24
</TABLE>
130
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Deficiency Event.............................................. 64
Deficient Valuation........................................... 87
Definitive Certificates....................................... 23
Deleted Contract.............................................. 35
Deleted Mortgage Certificates................................. 46
Deleted Mortgage Loans........................................ 45
Deposit Trust Agreement....................................... 40
Depositor..................................................... 1
Determination Date............................................ 52
Discount Certificate.......................................... 10
Discount Certificates......................................... 37
Distribution Date............................................. 6
DOL........................................................... 122
DTC........................................................... 23
Due Date...................................................... 27
Due Period.................................................... 43
ERISA......................................................... 16, 122
ERISA Plans................................................... 122
Escrow Account................................................ 56
FBSC.......................................................... 35
FHA........................................................... 1, 25, 30
FHA Experience................................................ 38
FHA Loans..................................................... 25
First Boston.................................................. 124
Garn-St Germain Act........................................... 89
GPM Fund...................................................... 15, 27
GPM Loans..................................................... 27
HUD........................................................... 30
Initial Deposit............................................... 14
Installment Contracts......................................... 28
Insurance Proceeds............................................ 50
Insured....................................................... 59
Insured Series................................................ 123
Interest Coupon............................................... 119
Interest Distribution......................................... 42
Interest Rate................................................. 4
Interest Weighted Class....................................... 4
Interest Weighted Subclass.................................... 4
IRS........................................................... 101
L/C Bank...................................................... 11, 67
L/C Percentage................................................ 12, 67
Lease......................................................... 92
Lender........................................................ 79
Lessee........................................................ 93
Letter of Credit.............................................. 10
Liquidating Loan.............................................. 11
Liquidation Proceeds.......................................... 50
Loan- to-Value Ratio.......................................... 7
Loss.......................................................... 72
</TABLE>
131
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Manufactured Home............................................. 9
Mixed-Use Mortgage Loans...................................... 5
Mixed-Use Property............................................ 5
Mortgage Certificates......................................... 1, 33
Mortgage Loan Groups.......................................... 25
Mortgage Loans................................................ 1, 5, 99
Mortgage Notes................................................ 24
Mortgage Pool................................................. 1, 5, 99
Mortgage Rates................................................ 8
Mortgaged Property............................................ 7
Mortgagor..................................................... 7
Mortgagor Bankruptcy Bond..................................... 10
Multi-Class Certificates...................................... 4
Multifamily Mortgage Loans.................................... 5
Multifamily Property.......................................... 5
Multiple Variable Rate........................................ 103
Non-U.S. Person............................................... 112
Nonexempt Assets.............................................. 123
Nonexempt Series.............................................. 123
Obligor....................................................... 42
OID Regulations............................................... 99
Original Value................................................ 7, 27
Originator.................................................... 29
Other Pools................................................... 124
Outstanding Balance........................................... 87
Parties in Interest........................................... 122
Pass-Through Rate............................................. 8
Payment Deficiencies.......................................... 68
Percentage Interest........................................... 1, 23
Performance Bond.............................................. 34
Plan Assets................................................... 126
Plan Assets Regulation........................................ 122
Plan Investor................................................. 124
Plans......................................................... 122
Policy Statement.............................................. 127
Pool Insurance Policy......................................... 10
Pool Insurer.................................................. 12
Pooling and Servicing Agreement............................... 26, 40
Premium Certificate........................................... 10
Premium Certificates.......................................... 37
Prepayment Assumption......................................... 101
Primary Insurer............................................... 51
Primary Mortgage Insurance Policy............................. 12
Primary Mortgage Insurer...................................... 59
Principal Distribution........................................ 42
Principal Prepayments......................................... 13
Principal Weighted Class...................................... 4
Principal Weighted Subclass................................... 4
Proposed Premium Regulations.................................. 118
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
PTCE 83-1..................................................... 122
Purchase Price................................................ 48
Qualified Floating Rate....................................... 101
Rating Agency................................................. 1, 5
RCRA.......................................................... 91
Record Date................................................... 42
Reference Agreement........................................... 40
REMIC......................................................... 1, 16, 99
REMIC Certificateholders...................................... 100
REMIC Certificates............................................ 99
REMIC Mortgage Pool........................................... 99
REMIC Provisions.............................................. 99
REMIC Regular Certificate..................................... 99
REMIC Regulations............................................. 99
REMIC Residual Certificate.................................... 99
Required Distribution......................................... 70
Required Reserve.............................................. 14, 68
Reserve Fund.................................................. 11
Residual Certificates......................................... 4
Residual Owner................................................ 106
Restricted Group.............................................. 125
Retained Yield................................................ 115
Securities Act................................................ 41
Senior Certificates........................................... 11
Senior Class.................................................. 4
Senior Prepayment Percentage.................................. 69
Senior Subclass............................................... 4
Series........................................................ 1, 4
Servicemen's Readjustment Act................................. 25
Servicer...................................................... 26
Servicing Account............................................. 49
Servicing Agreement........................................... 26
Simple Interest Loans......................................... 28
Single Family Property........................................ 5
Single Variable Rate.......................................... 101
Single-class REMIC............................................ 110
SMMEA......................................................... 16, 127
SPA........................................................... 38
Special Distributions......................................... 53
Special Hazard Insurance Policy............................... 15
Special Servicer.............................................. 26, 56
Specially Serviced Mortgage Loans............................. 56
Standard Hazard Insurance Policy.............................. 57
Standard Terms................................................ 40
Startup day................................................... 111
Stated Principal Balance...................................... 4
Stated Principal Distribution Amount.......................... 43
Stripped Bond Rules........................................... 115
Stripped Interest............................................. 119
</TABLE>
133
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
<S> <C>
Stripped Mortgage Loan........................................ 114
Subclass...................................................... 1, 4
Subordinated Amount........................................... 11
Subordinated Certificates..................................... 11
Subordinated Class............................................ 4
Subordinated Pool............................................. 14
Subordinated Subclass......................................... 4
Substitute Contract........................................... 35
Substitute Mortgage Certificates.............................. 44
Substitute Mortgage Loans..................................... 45
Title V....................................................... 97
Trust Assets.................................................. 5, 33
Trust Certificates............................................ 99
Trust Fractional Certificate.................................. 99
Trust Fractional Certificateholder............................ 114
Trust Fund.................................................... 1, 5
Trust Interest Certificate.................................... 99
Trust Interest Certificateholder.............................. 119
U.S. Person................................................... 112
UCC........................................................... 85
Unaffiliated Sellers.......................................... 28
Underwriter's PTE............................................. 124
Underwriters.................................................. 128
Unstripped Mortgage Loans..................................... 116
VA............................................................ 1, 25
VA Loans...................................................... 25
</TABLE>
134
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR BY
THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURI-
TIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE ANY SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
SINCE SUCH DATE.
-----------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Summary of Terms........................................................... S-4
Risk Factors............................................................... S-16
Description of the Mortgage Loans.......................................... S-18
Description of the Certificates............................................ S-32
Certain Yield and Prepayment Considerations................................ S-41
Chevy Chase Bank, F.S.B.................................................... S-47
Servicing.................................................................. S-48
The Insurer................................................................ S-49
Certain Federal Income Tax Consequences.................................... S-50
ERISA Considerations....................................................... S-52
Use of Proceeds............................................................ S-52
Plan of Distribution....................................................... S-53
Experts.................................................................... S-53
Legal Matters.............................................................. S-53
Ratings.................................................................... S-53
Index of Principal Definitions............................................. S-54
PROSPECTUS
Prospectus Supplement...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Information by Reference.......................... 2
Summary of Terms........................................................... 4
Risk Factors............................................................... 18
The Trust Fund............................................................. 23
The Depositor.............................................................. 35
Use of Proceeds............................................................ 35
Yield Considerations....................................................... 36
Maturity and Prepayment Considerations..................................... 38
Description of the Certificates............................................ 40
Credit Support............................................................. 67
Description of Insurance................................................... 71
Certain Legal Aspects of the Mortgage Loans and Contracts.................. 79
Certain Federal Income Tax Consequences.................................... 99
ERISA Considerations....................................................... 122
Legal Investment........................................................... 127
Plan of Distribution....................................................... 128
Legal Matters.............................................................. 129
Index of Terms............................................................. 130
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$560,162,291
(Approximate)
Chevy Chase Bank, F.S.B.
Mortgage-Backed Pass-Through
Certificates
Series 1998-CCB1
$355,425,133 Class A-I Adjustable Rate Certificates
$204,737,158 Class A-II Adjustable Rate Certificates
Chevy Chase Bank, F.S.B.
Seller and Servicer
Credit Suisse First Boston
Mortgage Securities Corp.
Depositor
PROSPECTUS SUPPLEMENT
CREDIT FIRST
SUISSE BOSTON
- -------------------------------------------------------------------------------
