<PAGE>
Filed pursuant to Rule 424(b)(5)
Registration File No. 333-53115
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 27, 1999)
$265,594,845 (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-1
$84,794,000 CLASS A-1 6.75% CERTIFICATES
$5,162,000 CLASS A-2 6.75% CERTIFICATES
$99,662,000 CLASS A-3 6.75% CERTIFICATES
$25,464,000 CLASS A-4 6.75% CERTIFICATES
$23,953,300 CLASS A-5 6.75% CERTIFICATES
$26,559,445 CLASS A-6 6.75% CERTIFICATES
$100 CLASS R 6.75% CERTIFICATE
CREDIT SUISSE FIRST BOSTON
MORTGAGE SECURITIES CORP.
DEPOSITOR
------------------------
The trust will issue seven classes of certificates. Each class of certificates
identified above is being offered by this prospectus supplement and the
accompanying prospectus.
CONSIDER CAREFULLY THE RISK
FACTORS BEGINNING ON PAGE S-6
IN THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 18 IN THE
PROSPECTUS.
The certificates represent
obligations of the trust only
and do not represent an
interest in or obligation of
Credit Suisse First Boston
Mortgage Securities Corp.,
Credit Suisse First Boston
Corporation or any of their
affiliates.
This prospectus supplement may
be used to offer and sell the
certificates only if
accompanied by the prospectus.
THE CERTIFICATES
o The certificates offered to you represent
ownership interests in assets of the trust.
o The trust assets consist of one class of
previously issued mortgage pass-through
certificates representing a senior ownership
interest in a pool of mortgage loans.
o Distributions on the certificates will be made on
the second business day following the 25th day of
each month.
CREDIT ENHANCEMENT
o The underlying mortgage pass-through certificates
are senior in right of payment to the other
interests issued by the underlying trust.
o Each class of offered certificates will receive
the benefits of the subordination feature
available to the underlying mortgage pass-through
certificates.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The certificates are being offered by Credit Suisse First Boston Corporation
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the depositor with respect to the
certificates are expected to be approximately $254,224,066, before deducting
issuance expenses payable by the depositor, estimated to be $300,000. See
"Method of Distribution" in this prospectus supplement.
Delivery of the certificates will be made in book-entry form through the
facilities of The Depository Trust Company on or about October 29, 1999.
------------------------
CREDIT SUISSE FIRST BOSTON
October 27, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of which
may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your series
of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT DIFFERS
FROM THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined Terms"
beginning on page S-36 in this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms............................... S-3
Risk Factors................................... S-6
Description of the Certificates................ S-8
Description of the Underlying Certificates..... S-16
Description of the Mortgage Loans.............. S-19
The Depositor.................................. S-20
Yield, Prepayment and Maturity
Considerations............................... S-20
Use of Proceeds................................ S-31
Certain Material Federal Income Tax
Consequences................................. S-31
ERISA Considerations........................... S-33
Legal Investment Considerations................ S-34
Method of Distribution......................... S-34
Legal Matters.................................. S-35
Ratings........................................ S-35
Index of Defined Terms......................... S-36
Appendix I..................................... I-1
Exhibit A...................................... A-1
Exhibit B...................................... B-1
<CAPTION>
PAGE
----
<S> <C>
Important Notice About Information............. 2
Summary of Terms............................... 4
Risk Factors................................... 18
The Trust Fund................................. 25
Use of Proceeds................................ 36
The Depositor.................................. 36
Yield Considerations........................... 37
Maturity and Prepayment Considerations......... 38
Description of the Certificates................ 40
Credit Support................................. 66
Description of Insurance....................... 71
Certain Legal Aspects of the Mortgage Loans and
Contracts.................................... 78
Federal Income Tax
Consequences................................. 97
ERISA Considerations........................... 120
Legal Investment............................... 123
Plan of Distribution........................... 125
Legal Matters.................................. 125
Index of Defined Terms......................... 126
</TABLE>
S-2
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THIS OFFERING, READ
CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED BY
THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND OTHER
INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1999-1
<TABLE>
<CAPTION>
INITIAL CERTIFICATE PRINCIPAL
CLASS BALANCE PASS-THROUGH RATE S&P RATING FITCH RATING
- ----------------------------------------- ----------------------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
Class A-1................................ $ 84,794,000 6.75% AAA AAA
Class A-2................................ $ 5,162,000 6.75% AAA AAA
Class A-3................................ $ 99,662,000 6.75% AAA AAA
Class A-4................................ $ 25,464,000 6.75% AAA AAA
Class A-5................................ $ 23,953,300 6.75% AAA AAA
Class A-6................................ $ 26,559,445 6.75% AAA AAA
Class R.................................. $ 100 6.75% AAA AAA
</TABLE>
The initial Certificate Principal Balance is subject to a variance of 5%.
THE CERTIFICATES
On the closing date, the trust will issue seven classes of certificates:
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class R.
The certificates will represent the beneficial ownership interests in the trust
assets and will be issued pursuant to a trust agreement between the depositor
and the trustee. Each of the certificates are offered pursuant to this
prospectus supplement and the accompanying prospectus. The Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 Certificates will be book-
entry securities clearing through Depository Trust Company in minimum
denominations of $25,000 except for the Class A-2 Certificates which will be
issued in minimum denominations of $1,000. The Class R Certificate will be
issued in fully registered certificated form.
See "Description of the Certificates--General" and "--Book-Entry Registration
and Definitive Certificates" in this prospectus supplement.
THE DEPOSITOR
Credit Suisse First Boston
Mortgage Securities Corp.
11 Madison Avenue, New York, New York 10010.
Telephone: (212) 325-2000
THE TRUSTEE
The Bank of New York
THE TRUST ASSETS
The assets of the trust will consist of a portion of Headlands Mortgage
Securities Inc., Mortgage Pass-Through Certificates, Series 1998-2, Class A-1.
The underlying certificates represent a senior ownership interest in the
underlying trust fund. The assets of the underlying trust fund consist primarily
of fixed-rate, fully amortizing mortgage loans secured by mortgages, deeds of
trust or other security instruments creating first liens on one- to four-family
residential properties.
The Class A-1 Certificates of the underlying trust fund had the following
characteristics:
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL PRINCIPAL BALANCE
UNDERLYING BALANCE OF OF UNDERLYING
CERTIFICATE CERTIFICATE* MORTGAGE LOANS*
---------- ------------ -----------------
<S> <C> <C> <C>
Class A-1 $362,172,596 $ 380,910,528
</TABLE>
- ------------------
* Ending balances reported for October 1999.
S-3
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MASTER SERVICER
First Nationwide Mortgage Corporation
CUT-OFF DATE
October 1, 1999
CLOSING DATE
On or about October 29, 1999
DISTRIBUTION DATES
The trustee will make monthly distributions on the certificates on the second
business day following the 25th day of each calendar month beginning on
November 29, 1999. Distributions will be made to the holders of record of the
certificates as of the close of business on the last business day of the month
preceding the month of such distribution.
DISTRIBUTIONS ON THE CERTIFICATES
Interest Distributions
On each distribution date, available funds received in respect of interest will
be distributed to the certificates as described under "Description of the
Certificates--Allocation of Available Funds" in this prospectus supplement. The
pass-through rate for each class of offered certificates is specified on the
cover.
Interest payable on the offered certificates on a distribution date will accrue
at the related pass-through rate during the calendar month preceding the month
in which such distribution date occurs. Interest will be calculated on the basis
of an assumed 360-day year consisting of twelve 30-day months.
Principal Distributions
On each distribution date available funds in the trust remaining after payment
of interest will be paid in the order of priority described under "Description
of the Certificates--Allocation of Available Funds" in this prospectus
supplement.
See "Description of the Certificates" in this prospectus supplement.
ADVANCES WITH RESPECT TO THE UNDERLYING TRUST FUND
The master servicer of the mortgage loans will make cash advances with respect
to delinquent payments of principal and interest to the extent such master
servicer reasonably believes that the cash advances are recoverable from future
payments on the related mortgage loans.
See "Description of The Underlying Certificates--Advances" in this prospectus
supplement.
OPTIONAL TERMINATION OF THE TRUST
The holder of the Class R Certificate may purchase all of the remaining assets
of the trust after the combined principal balance of the certificates is 10% or
less of the combined principal balance of the certificates at issuance.
See "Description of The Certificates--Termination of the Trust" in this
prospectus supplement.
OPTIONAL TERMINATION OF THE UNDERLYING TRUST FUND
The master servicer of the mortgage loans may terminate the underlying trust
fund on and after the distribution date for the underlying certificates on which
the aggregate outstanding principal amount of the mortgage loans in such trust
fund is less than 10% of the aggregate principal amount of the mortgage loans on
the date on which the underlying certificates were issued.
See "Description of The Underlying Certificates--Optional Termination of the
Underlying Trust Funds" in this prospectus supplement.
RATINGS
It is a condition of the issuance of the offered certificates that they be
assigned a rating of "AAA" by S&P and Fitch.
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by the rating agencies.
See "Ratings" in this prospectus supplement.
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled distribution date for the certificates, other than the
Class A-4 Certificates, is the distribution date occurring in December 2028. The
last scheduled distribution date for the Class A-4 Certificates is the
distribution date occurring in August 2010.
S-4
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TAX STATUS
An election will be made to treat the trust as a "real estate mortgage
investment conduit" ("REMIC"). The Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 Certificates will represent "regular interests" in the
REMIC. The Class R Certificate will represent the sole class of "residual
interests" in the REMIC. The holder of the Class R Certificate will be subject
to special federal income tax rules that may significantly reduce the after-tax
yield of such certificate.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
"Certain Federal Income Tax Considerations" in the prospectus.
ERISA CONSIDERATIONS
The acquisition of a Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 or
Class A-6 Certificate by certain pension plans and employee benefit plans or by
persons investing plan assets of such plans is subject to certain restrictions
and each plan investor will be deemed to make certain
representations in acquiring such certificates. Plan investors may not purchase
a Class R Certificate.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
Assuming the accuracy of certain representations contained in the agreement
pursuant to which the underlying trust fund was created (which information is
not subject to independent verification) and on the basis of certain assumptions
derived from statements included in the prospectus supplement pursuant to which
the underlying certificates were publicly offered, the offered certificates will
be "mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 as long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization.
See "Legal Investment Considerations" in this prospectus supplement and "Legal
Investment" in the prospectus.
S-5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY PURCHASE
OF THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS. THE INFORMATION BELOW AND IN THE
PROSPECTUS SUMMARIZES ALL MATERIAL RISK FACTORS.
The information about the underlying mortgage pass-through certificates and
the related mortgage loans disclosed in this prospectus supplement has been
obtained from the disclosure documentation prepared in connection with the
initial offering of the underlying certificates as well as from reports and
other information supplied by the master servicer of the mortgage loans and the
trustee of the related underlying trust fund. Neither the master servicer nor
the trustee have made any representation with respect to the accuracy or
completeness of this information. Additionally, the agreement pursuant to which
the underlying certificates were issued and the prospectus pursuant to which the
underlying certificates were publicly offered contain information only as of the
dates of such documents. You should be aware, however, that material changes may
have occurred since the preparation of those documents and the composition of
the underlying mortgage pool may have changed significantly. As a result, there
may be considerable differences between the current mortgage loan
characteristics and the characteristics described in connection with the
issuance of the underlying certificates, and the underlying certificates may not
have performed as originally anticipated.
THE RATE OF PREPAYMENTS MAY AFFECT YOUR YIELD
Borrowers may prepay their mortgage loans in whole or in part at any time.
All of the mortgage loans are subject to a prepayment penalty for five years
after origination on certain prepayments. We cannot predict the rate at which
borrowers will repay their mortgage loans. A prepayment of a mortgage loan may
result in a prepayment on the related underlying certificates, which in turn
would result in a prepayment on the related offered certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the mortgage loans,
those mortgage loans are more likely to prepay than if prevailing rates
remain above the interest rates on such mortgage loans. Conversely, if
prevailing interest rates rise significantly, the prepayments on the
mortgage loans are likely to decrease.
o The seller of the mortgage loans to the underlying trust fund will be
required to purchase such mortgage loan from such trust fund due to
certain breaches of representations and warranties made by such seller
that have not been cured. These purchases will have the same effect on
the certificates as a prepayment of a mortgage loan.
o So long as the subordinate interests in the underlying trust fund are
outstanding, liquidations of defaulted mortgage loans in such trust fund
generally will have the same effect on the certificates as a prepayment
of a mortgage loan.
o If the rate of default and the amount of losses on the mortgage loans in
the underlying trust fund is higher than you expect, then your yield may
be lower than you expect.
CREDIT ENHANCEMENT IS LIMITED TO THE SUBORDINATION TO THE UNDERLYING
CERTIFICATES OF THE RELATED SUBORDINATE INTERESTS
Credit enhancement is provided for the certificates first by the right of
the holders of the underlying certificates to receive certain payments prior to
the related subordinate interests. This form of credit enhancement is provided
solely from collections on the mortgage loans otherwise payable to the holders
of such subordinate interests. Credit enhancement also is provided by the
allocation of realized losses on mortgage loans first to the related subordinate
interests. Accordingly, if the aggregate principal balance of the
S-6
<PAGE>
related subordinate interests were to be reduced to zero, delinquencies and
defaults on mortgage loans would reduce the amount of funds available for
payments to holders of the underlying certificates. This reduction in funds
available for payment to an underlying certificate would in turn reduce the
amount of funds available for distributions on the offered certificates.
A SIGNIFICANT PERCENTAGE OF THE MORTGAGE LOANS ARE SECURED BY PROPERTIES LOCATED
IN CALIFORNIA
Approximately 88.49% of the mortgage loans as of the Cut-off Date are
secured by properties located in California. If the California residential real
estate market should experience an overall decline in property values, the rates
of delinquency, foreclosure, bankruptcy and loss on the mortgage loans may
increase, resulting in losses on the underlying certificates and possibly on the
offered certificates. Also, California is more susceptible to certain types of
uninsurable hazards, such as earthquakes, brush fires, floods, mudslides and
other natural disasters. If any such disasters occur, then rates of delinquency,
foreclosure, bankruptcy and loss on the mortgage loans may increase, resulting
in losses on the underlying certificates and possibly on the offered
certificates.
CERTIFICATEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000
COMPLIANCE
The year 2000 issue is the result of prior computer programs being written
using two digits, rather than four digits, to define the applicable year.
Computer programs may recognize a date using "00" as the year 1900 rather than
year 2000. Major computer system failure or miscalculations may occur as a
result.
If the trustee, the master servicer or any of their suppliers, customers,
brokers or agents do not successfully and timely achieve year 2000 compliance,
delays in processing payments to you could result.
S-7
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
Set forth below are summaries of the specific terms and provisions pursuant
to which the Credit Suisse First Boston Mortgage Securities Corp. Mortgage
Pass-Through Certificates, Series 1999-1 (the "Certificates") will be issued.
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 Trust
Agreement. When particular provisions or terms used in the Trust Agreement are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
The Certificates will be issued pursuant to a trust agreement (the "Trust
Agreement"), dated as of October 29, 1999 between Credit Suisse First Boston
Mortgage Securities Corp. (the "Depositor") and The Bank of New York (the
"Trustee") and will represent the entire beneficial ownership interest in the
trust created thereby (the "Trust"). The assets of the Trust will consist of one
class of previously issued mortgage pass-through certificates (the "Underlying
Certificates") representing the senior ownership interest in an underlying trust
fund. The Certificates will consist of the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Certificates (collectively, the "Class A
Certificates") and the Class R Certificate (the "Class R Certificate" or
"Residual Certificate"). All of the Certificates are offered hereby and are
sometimes referred to as the "Offered Certificates".
The Class A Certificates, other than the Class A-2 Certificates, will be
issuable in denominations of not less than $25,000 principal amount, and the
Class A-2 Certificates will be issuable in denominations of not less than $1,000
principal amount, and in integral multiples of $1,000, or in the case of the
Class A-2 Certificates, $1, in excess thereof, with the exception of one
Certificate of each Class which may be issued in a lesser amount. The Class R
Certificate will be issued in fully registered certificated form. No more than
two Class R Certificates may be outstanding at any time.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
The Certificates (other than the Class R Certificate) initially will be
book-entry certificates (the "Book-Entry Certificates"). Persons acquiring
beneficial ownership interests in the Book-Entry Certificates ("Beneficial
Owners") will hold the Certificates through The Depository Trust Company ("DTC")
if they are participants of DTC, or indirectly through organizations that are
participants of DTC. The Book-Entry Certificates initially will be registered in
the name of Cede & Co., the nominee of DTC. Except as described below, no person
acquiring a Book-Entry Certificate will be entitled to receive a definitive
certificate. Unless and until definitive certificates are issued, it is
anticipated that the only "Certificateholder" will be Cede & Co., as nominee of
DTC. Beneficial Owners will not be Certificateholders as that term is used in
the Trust Agreement. Beneficial Owners are permitted to exercise their rights
only indirectly through DTC and its Participants.
The beneficial 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.
Beneficial Owners will receive all payments of principal of, and interest
on, the Book-Entry Certificates from the Trustee through DTC and its
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "DTC Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
payments of principal of, and interest on, such Certificates. Participants and
indirect participants with whom Beneficial Owners have accounts with respect to
Book-Entry Certificates are similarly required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess certificates,
the DTC Rules provide a mechanism by which Beneficial Owners will receive
payments and will be able to transfer their interests.
S-8
<PAGE>
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until definitive
certificates are issued, Beneficial Owners who are not Participants may transfer
ownership of Book-Entry Certificates only through Participants and indirect
participants by instructing such Participants and indirect participants to
transfer Certificates, by book-entry transfer, through DTC for the account of
the purchasers of such Certificates, which account is maintained with their
respective Participants. Under the DTC Rules and in accordance with DTC's normal
procedures, transfers of ownership of Book-Entry Certificates will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants and indirect participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Beneficial Owners.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants ("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 Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
Payments on the Book-Entry Certificates will be made on each Distribution
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable Participants in accordance with
DTC's normal procedures. Each Participant will be responsible for disbursing
such payments to the Beneficial Owners 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 that it represents.
Under a book-entry format, Beneficial Owners may experience some delay in
their receipt of payments because such payments will be forwarded by the Trustee
to Cede & Co. Because DTC has indicated that it will act only on behalf of
Financial Intermediaries, the ability of Beneficial Owners to pledge
Certificates to persons or entities that do not participate in the depository
system or otherwise take actions in respect of such Certificates may be limited
due to the lack of physical certificates representing such Certificates. In
addition, issuance of the Book-Entry Certificates in book-entry form may reduce
the liquidity of such Certificates in the secondary market because certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
The monthly and annual statements with respect to the Underlying
Certificates as described under "--Statements to Certificateholders" herein will
be provided by the Trustee to Cede & Co., as nominee of DTC and as
Certificateholder, and may be made available by such entity to Beneficial Owners
upon request, in accordance with the DTC Rules, and to the Financial
Intermediaries to whose DTC accounts the related Book-Entry Certificates are
credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Trust Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Certificates. DTC may take actions,
at the direction of the related Participants, with respect to some Certificates
that conflict with actions taken with respect to other Certificates.
Definitive certificates will be issued in registered form to Beneficial
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Depositor
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depositary with respect
to the Certificates and the Depositor is unable to locate a qualified successor
or (ii) the Depositor, at its option, advises the Trustee that it elects to
terminate the book-entry system through DTC. Upon issuance of definitive
certificates to Beneficial Owners, such Certificates will be transferable
directly (and not exclusively on a book-entry basis), and registered holders
will deal directly with the Trustee with respect to transfers, notices and
payments. See "Description of the Certificates--General" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to use its best efforts to
notify all Beneficial Owners of the occurrence of such event and the
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<PAGE>
availability through DTC of definitive certificates. Upon surrender by DTC of
the global certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will deliver definitive
certificates and thereafter the Trustee will recognize the holders of such
definitive certificates as Certificateholders under the Trust Agreement.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfer of Certificates among its participants, DTC is under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
ASSIGNMENT OF THE UNDERLYING CERTIFICATES
The Underlying Certificates are held through DTC. On the Closing Date, the
Depositor will transfer the Underlying Certificates to the Trustee on the
records of DTC. All monthly distributions on each Underlying Remittance Date for
such Underlying Certificate will be made to DTC. DTC will be responsible for
crediting the amount of such payment to the Trustee.
DISTRIBUTIONS
Distributions on the Offered Certificates will be made by the Trustee on
the second business day following the 25th day of each month, beginning in
November 1999 (each a "Distribution Date"), to the persons in whose names such
Certificates are registered at the close of business on the last business day of
the month preceding the month of such Distribution Date (the "Record Date").
DEPOSITS TO THE CERTIFICATE ACCOUNT
The Trustee shall establish and maintain a separate trust account (the
"Certificate Account") for the benefit of the holders of the Certificates. The
Certificate Account will be an Eligible Account (as defined herein). Upon
receipt by the Trustee of amounts in respect of the Underlying Certificates, the
Trustee will deposit such amounts in the Certificate Account. Amounts so
deposited may be invested in Permitted Investments (as described in the Trust
Agreement) maturing no later than one Business Day prior to the Distribution
Date unless such Permitted Investments are invested in investments managed or
advised by the Trustee or an affiliate thereof, in which case such Permitted
Investments may mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's (or
comparable ratings if Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit therein, (ii) an account or accounts
the deposits in which are fully insured by the Federal Deposit Insurance
Corporation (to the limits established by such corporation), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Permitted Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency without
reduction or withdrawal of their then current ratings of the Certificates as
evidenced by a letter from each Rating Agency to the Trustee. Permitted
Investments are specified in the Trust Agreement and are limited to investments
which meet the criteria of the Rating Agencies from time to time as being
consistent with their then current ratings of the Certificates.
WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Trustee is permitted from time to time to withdraw funds from the
Certificate Account for the following purposes:
(i) to make payments to Certificateholders in the amounts and in the
manner as described under "Allocation of Available Funds" below;
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(ii) to reimburse the Depositor for any expenses incurred by and
reimbursable to the Depositor pursuant to the Trust Agreement;
(iii) to pay any taxes imposed on the Trust;
(iv) to clear and terminate the Certificate Account upon termination
of the Trust Agreement; and
(v) to pay to itself any investment income on the Certificate Account
as specified in the Trust Agreement.
ALLOCATION OF AVAILABLE FUNDS
On each Distribution Date, the Trustee will withdraw from the Certificate
Account an amount (the "Available Funds") equal to (i) the aggregate of all
amounts received by the Trustee on and prior to such Distribution Date as
distributions on the Underlying Certificates, reduced by (ii) the sum of
(a) any expenses reimbursable to the Depositor, (b) any taxes imposed upon the
Trust and (c) any indemnity payment described under "--The Trustee". The Trustee
will then distribute such Available Funds (in each case to the extent of the
remaining Available Funds) as described below.
On each Distribution Date, the Available Funds will be distributed as
follows:
(i) to each Class of Certificates, other than the Class A-5
Certificates until the Accretion Termination Date, from amounts received in
respect of interest on the Underlying Certificates, pro rata, interest
accrued on the respective principal balances thereof during the preceding
Interest Accrual Period at the related Pass-Through Rate, together with any
accrued and unpaid interest from prior Distribution Dates;
(ii) to the Class A-4 Certificates in reduction of the Certificate
Principal Balance thereof, the Accrual Distribution Amount, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii) to each Class of Certificates in reduction of the Certificate
Principal Balance thereof, from amounts received in respect of principal on
the Underlying Certificates, sequentially, as follows:
(A) to the Class A-6 Certificates, the Class A-6 Amount,
(B) to the Class R Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
(C) concurrently, as follows:
(i) 47.4406438207%, sequentially to the Class A-1 Certificates
and then to the Class A-2 Certificates, until the respective
Certificate Principal Balances thereof have been reduced to zero;
(ii) 52.5593561793% to the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(D) to the Class A-4 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
(E) to the Class A-5 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
(F) to the Class A-6 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero.
The "Class A-6 Amount" for any Distribution Date is equal to the lesser of
(i) the Certificate Principal Balance of the Class A-6 Certificates and (ii) the
product of (1) the Scheduled Percentage, (2) the Class A-6 Percentage and
(3) the amount received on the Underlying Certificates in respect of principal.
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The "Scheduled Percentage" for any Distribution Date will equal the
percentage set forth below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SCHEDULED PERCENTAGE
- ----------------------------------------------------------------------------------- --------------------
<S> <C>
November 1999 through October 2004................................................. 0%
November 2004 through October 2005................................................. 30%
November 2005 through October 2006................................................. 40%
November 2006 through October 2007................................................. 60%
November 2007 through October 2008................................................. 80%
November 2008 and thereafter....................................................... 100%
</TABLE>
The "Class A-6 Percentage" for any Distribution Date is equal to the
fraction, expressed as a percentage, the numerator of which is equal to the
Certificate Principal Balance of the Class A-6 Certificates and the denominator
of which is equal to the aggregate Certificate Principal Balances of all the
Certificates.
In the event that on any Underlying Remittance Date, the Trustee shall not
have received the cash distribution, if any, required to be made under the
Underlying Agreement, the Trustee shall effect the distribution set forth above
on the business day immediately following the date on which the cash
distribution so required shall have been received by the Trustee.
The "Pass-Through Rate" with respect to each Class and any Distribution
Date is 6.75%.
The "Certificate Principal Balance" with respect to any Certificate and any
date of determination is the initial principal balance of such Certificate
(plus, in the case of the Class A-5 Certificates, any Accrual Distribution
Amounts) reduced by all distributions of principal made on such Certificate on
all Distribution Dates preceding such date of determination and further reduced
by all losses allocated to such Certificate on any such Distribution Date.
Interest shortfalls allocated to the Underlying Certificates will be
allocated to the Certificates, pro rata, based on Certificate Principal Balance.
Such shortfalls may result from prepayments on the Mortgage Loans, reductions
permanent to the Soldiers' and Sailor's Civil Relief Act of 1940 or losses
incurred as a result of fraud, bankruptcy or damage to the mortgaged property.
See "Description of the Certificates--Interest" and "--Allocation of Losses" in
Exhibit A.
On or prior to the Accretion Termination Date (as defined below), interest
shortfalls to be allocated to the Class A-5 Certificates will be allocated by
reducing the amount that is added to the Certificate Principal Balance thereof
in respect of accrued interest on such Distribution Date. This reduction will
correspond to a reduction in the amount available to be distributed in respect
of principal on the applicable Distribution Date to the holders of the
Class A-4 Certificates to the extent such Certificates would have been entitled
to such amounts.
The "Accretion Termination Date" is the Distribution Date on which the
Certificate Principal Balance of the Class A-4 Certificates has been reduced to
zero. On each Distribution Date preceding the Accretion Termination Date, an
amount equal to the amount of accrued interest on the Class A-5 Certificates for
such date will be added to the Certificate Principal Balance thereof, and such
amount will be distributed to the holders of the Class A-4 Certificates in
reduction of the Certificate Principal Balance thereof, until the Certificate
Principal Balance thereof has been reduced to zero. On the Accretion Termination
Date the accrued interest on the Class A-5 Certificates for such date will be
payable to the holders of the Class A-4 Certificates as a distribution of
principal until the Certificate Principal Balance thereof has been reduced to
zero, any such amount will be added to the Certificate Principal Balance of the
Class A-5 Certificates. Any remaining amount of accrued interest will be paid to
the holders of the Class A-5 Certificates as a distribution of interest. The
amount of accrued interest on the Class A-5 Certificates that is added to the
Certificate Principal Balance thereof is referred to herein as the "Accrual
Distribution Amount". Any amount so added to the Certificate Principal Balance
of the Class A-5 Certificates will thereafter accrue interest at a rate of 6.75%
per annum.
ALLOCATION OF LOSSES
Losses on the Mortgage Loans in the Underlying Trust Fund are allocated to
the related Underlying Subordinate Interests before they are allocated to the
Underlying Certificates; provided that losses incurred as a result of fraud,
bankruptcy or damage to the mortgaged property will be allocated pro rata
between the
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Underlying Class A-1 Certificates and the Underlying Subordinate Certificates.
See "Description of the Certificates--Allocation of Losses in Exhibit A. If the
aggregate principal balance of the Underlying Subordinate Interests are reduced
to zero, the amount of all future losses on the Mortgage Loans held in the
Underlying Trust Fund will be allocated to the Underlying Certificates. Any
losses so allocated to the Underlying Certificates will be allocated pro rata to
each Class A Certificate and the Class R Certificate on the basis of their then
outstanding Certificate Principal Balances.
STATEMENTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on a Distribution Date, the Trustee
will forward to the holder of each Certificate a statement generally setting
forth the following information:
(i) the Available Funds for such Distribution Date;
(ii) with respect to such Distribution Date, the aggregate amount of
principal and interest, stated separately, distributed to
holders of each Class of Certificates;
(iii) with respect to such Distribution Date, the amount of any
interest shortfall for each Class of Certificates, together
with the amount of any unpaid interest shortfall for such Class
immediately following such Distribution Date;
(iv) with respect to each Class of Certificates, the losses allocated
to such Class with respect to such Distribution Date;
(v) the Certificate Principal Balance of each Class of Certificates,
after giving effect to distributions of principal of such
Certificates on such Distribution Date; and
(vi) any additional amount distributed to the holder of the Residual
Certificate on such Distribution Date.
In addition, the Trustee will furnish to Certificateholders copies of the
statements received by the Trustee for each Underlying Remittance Date as the
holder of the Underlying Certificates on behalf of the Trust Fund.
Within a reasonable period of time after the end of each calendar year, the
Trustee will prepare and deliver to each person who at any time during the
previous calendar year was a Certificateholder of record a statement containing
the information required to satisfy any requirements of the Code, the REMIC
Provisions and regulations thereunder as from time to time are in force.
REPRESENTATIONS AND WARRANTIES
The Depositor will represent and warrant to the Trustee as of the Closing
Date that (i) the Depositor was the sole owner of the Underlying Certificates
free and clear of any lien, pledge, charge or encumbrance of any kind; (ii) the
Depositor had not assigned any interest in the Underlying Certificates or any
distributions thereon, except as contemplated in the Trust Agreement; and
(iii) the assignment of the Underlying Certificates as contemplated in the Trust
Agreement is sufficient to effect the transfer of such Underlying Certificates
to the Trustee. Upon discovery of a breach of any of the foregoing
representations and warranties which materially and adversely affects the
interests of the Certificateholders in an Underlying Certificate, the Depositor
or the Trustee shall give prompt written notice to the other and to the
Certificateholders. On or prior to the Distribution Date in October 2001, the
Depositor will be obligated to cure such breach in all material respects or, if
such breach cannot be cured, repurchase such Underlying Certificate, at a price
equal to the outstanding principal balance thereof plus any accrued interest, if
so directed in writing by holders of the Majority in Interest of each Class of
Offered Certificates. There can be no assurance that the Depositor will have
funds sufficient to fulfill this repurchase obligation.
TERMINATION OF THE TRUST
The holder of the Class R Certificate may at its option purchase the
Underlying Certificates, in whole but not in part, on and after the Distribution
Date on which the principal balance of the Underlying Certificates is less than
10% of the principal balance thereof as of the October 25, 1999. The purchase
price will be equal to the principal balance of the Underlying Certificates
(after giving effect to all distributions thereon on such Distribution Date)
plus accrued and unpaid interest thereon. The obligations created by the
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Trust Agreement will terminate upon the payment to Certificateholders of all
amounts held by the Trustee and required to be paid to them pursuant to the
Trust Agreement after the final payment or other liquidation of the Underlying
Certificates, including any exercise of the optional purchase described above.
In no event, however, will the Trust continue beyond a date specified in the
Trust Agreement. Written notice of termination of the Trust Agreement will be
given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency as
specified in the notice of termination.
THE TRUSTEE
The Bank of New York, a New York banking corporation, will act as Trustee
for the Certificates pursuant to the Trust Agreement. The Trustee's principal
corporate trust offices are located at 101 Barclay Street, New York, New York
10286.
The Trust Agreement will provide that the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Depositor,
or to the extent such indemmity obligation is not satisfied by the Depositor, by
the Trust Fund, and will be held harmless against any loss, liability or expense
(other than those expenses incurred in the ordinary course of business) incurred
by the Trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Trust Agreement, other
than any loss, liability or expense that is incurred by reason of negligence,
willful misconduct or bad faith in the performance of its obligations under the
Trust Agreement. Any loss, liability or expense incurred by the Trustee and
indemnified by the Trust Fund shall reduce the amount of Available Funds for the
related Distribution Date.
AMENDMENT OF THE TRUST AGREEMENT
The Trust Agreement may be amended by the Depositor and the Trustee,
without the consent of any of the Certificateholders, (i) to cure any error or
ambiguity, (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, (iii) to permit any
other provisions with respect to matters or questions arising under the Trust
Agreement which are not inconsistent with the provisions of the Trust Agreement,
(iv) to comply with the Securities Act of 1933, as amended (the "Securities
Act") or the Investment Company Act of 1940, as amended (the "Investment Company
Act"), (v) to amend any of the exhibits to the Trust Agreement pursuant to the
terms of the Trust Agreement or (vi) if such amendment is reasonably necessary,
as evidenced by an opinion of counsel, to comply with any requirements imposed
by the Internal Revenue Code of 1986 (the "Code") or any successor or amendatory
statute or any temporary or final regulation, revenue ruling, revenue procedure
or other written official announcement or interpretation relating to federal
income tax laws or any proposed such action which, if made effective, would
apply retroactively to the Trust at least from the effective date of such
amendment; provided that such action (except any amendment described in (vi)
above) shall not, as evidenced by an opinion of counsel, which opinion of
counsel shall not be an expense of the Trustee, delivered to the Trustee,
adversely affect in any material respect the interests of any Certificateholder;
provided, further, that any such amendment shall be deemed not to adversely
affect in any material respect the interests of any Certificateholder if the
person requesting the amendment obtains a letter from the Rating Agencies to the
effect that such amendment would not result in a downgrade or withdrawal of the
ratings then assigned to the Offered Certificates. The Trust Agreement may also
be amended by the Depositor and the Trustee with the consent of the holders of
at least 51% of the Percentage Interests (the "Majority in Interest") of each
Class of Certificates affected thereby for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the Trust
Agreement or of modifying in any manner the rights of the holders of
Certificates; provided, however, that no such amendment may (a) reduce in any
manner the amount of, or delay the timing of, distributions required to be made
on any Certificate without the consent of the holder of such Certificate, (b)
adversely affect in any material respect the interest of the holders of the
Certificates of any Class in a manner other than as described in clause (a)
above without the consent of the holders of Certificates of such Class
representing not less than 66% of the Percentage Interests represented by such
Class or (c) reduce the aforesaid percentages of Certificates the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates then outstanding. In no event will the Trustee
consent to any amendment unless the Trustee shall have obtained an opinion of
counsel to
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<PAGE>
the effect that such amendment will not cause the Trust to fail to qualify as a
REMIC at any time that Certificates deemed to be "regular interests" are
outstanding. The "Percentage Interest" for any Class of Offered Certificates
will equal the percentage obtained by dividing the Certificate Principal Balance
of such Certificate by the aggregate Certificate Principal Balance of such Class
of Certificates.
VOTING UNDER THE UNDERLYING AGREEMENT
In the event that there are any matters arising under the Underlying
Agreement which require the vote or direction of the holder of the Underlying
Certificate issued thereunder, the Trustee, as holder of such Underlying
Certificate on behalf of the Trust, will vote the Underlying Certificate in
accordance with instructions received from the holders of a Majority in Interest
of each Class of related Certificates. In the absence of any such instructions,
the Trustee will not vote the Underlying Certificates, provided, however, that,
notwithstanding the absence of such instructions, in the event a required
distribution pursuant to the Underlying Agreement shall not have been made, the
Trustee shall, subject to the provisions of the Trust Agreement, pursue such
remedies as may be available to it as holder of the Underlying Certificates in
accordance with the terms of the Underlying Agreement.
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<PAGE>
DESCRIPTION OF THE UNDERLYING CERTIFICATES
ALL OF THE INFORMATION CONTAINED HEREIN WITH RESPECT TO THE UNDERLYING
CERTIFICATES IS BASED SOLELY ON (I) INFORMATION CONTAINED IN THE UNDERLYING
AGREEMENT AND (II) INFORMATION OBTAINED FROM THE MONTHLY STATEMENT PROVIDED BY
THE UNDERLYING TRUSTEE IN CONNECTION WITH THE OCTOBER 1999 UNDERLYING REMITTANCE
DATE FOR THE UNDERLYING CERTIFICATE. NEITHER THE DEPOSITOR NOR THE TRUSTEE HAS
THE ABILITY INDEPENDENTLY TO VERIFY THE ACCURACY OF THIS INFORMATION.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER THE LIMITED NATURE OF SUCH
AVAILABLE INFORMATION WHEN EVALUATING THE SUITABILITY OF ANY INVESTMENT IN THE
OFFERED CERTIFICATES.
GENERAL
The Trust assets will consist of $265,594,845.53 principal amount of
Headlands Mortgage Securities Inc. Mortgage Pass-Through Certificates, Series
1998-2, Class A-1 (the "Underlying Certificates"). The Underlying Certificates
together with the remaining $96,577,750.03 principal amount of Hedlands Mortgage
Securities Inc. Mortgage Pass-Through Certificates, Series 1998-2, Class A-1
(the "Other Class A-1 Certificates" and together with the Underlying
Certificates, the "Underlying Class A-1 Certificates") and certain other classes
issued pursuant to a pooling and servicing agreement (the "Underlying
Agreement"), dated as October 1, 1998, among Headlands Mortgage Securities,
Inc., as depositor, Headlands Mortgage Company, as seller and master servicer,
and The Bank of New York (the "Underlying Trustee").
Headlands Mortgage Company ("Headlands") is a California corporation which
was organized in 1981. Headlands is a wholly owned subsidiary of Greenpoint
Financial Corp. Greenpoint Financial Corp. is listed on the New York Stock
Exchange under the symbol "GPT". Headlands is engaged in the mortgage banking
business, which consists of the origination, acquisition, sale and servicing of
residential mortgage loans secured by one- to four-unit family residences, and
the purchase and sale of mortgage servicing rights. Headlands is headquartered
in northern California, and has production offices in several states. Loans are
originated primarily on a wholesale basis, through a network of independent
mortgage loan brokers approved by Headlands. In the Underlying Prospectus,
Headlands indicated that it intended to sell its servicing rights and resign as
Master Servicer. First Nationwide Mortgage Corporation replaced Headlands as the
Master Servicer in November 1998 and is currently servicing the Mortgage Loans.
First Nationwide Mortgage Corporation is a wholly-owned subsidiary of
California Federal Bank, FSB, and is a mortgage company engaged in the business
of originating and servicing a variety of loan products including non-conforming
residential mortgage loans. Its executive offices are located at 5280 Corporate
Drive, Frederick, Maryland.
The Underlying Certificates evidence senior interests in a trust fund (the
"Underlying Trust Fund") created by the Underlying Agreement and were issued
together with certain subordinate interests (the "Underlying Subordinate
Interests") and certain residual interests. The Underlying Trust Fund consists
primarily of a pool of conventional, fixed-rate mortgage loans (the "Mortgage
Loans") secured by first liens on one- to four-family residential properties.
The aggregate outstanding principal balance of the Mortgage Loans (the "Mortgage
Pool Principal Balance") as of the Underlying Remittance Date in October 1999
was approximately $380,910,528.
The Master Servicer is required to deposit, or cause to be deposited, in
the account maintained for receipt of payments on the Mortgage Loans (the
"Underlying Certificate Account") on a daily basis the payments and collections
on the Mortgage Loans, except that the Master Servicer will deduct its servicing
fee and any expenses of liquidating defaulted Mortgage Loans or property
acquired in respect thereof.
The Underlying Subordinate Interests are subordinate to the Underlying
Certificates with respect to the right to receive distributions from the
Underlying Trust Fund and, accordingly, no distributions will be made on the
Underlying Subordinate Interests on any Underlying Remittance Date until all
required distributions have been made on the Underlying Certificates for such
date. In addition, all losses on the Mortgage Loans will be borne first by the
Underlying Subordinate Interests before being borne by the Underlying
Certificates.
Based solely on the monthly statements provided by the Underlying Trustee
in connection with the October 25, 1999 Underlying Remittance Date for the
Underlying Certificates, which statements have not
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been independently verified for accuracy, the Underlying Class A-1 Certificates
had an aggregate principal balance of approximately $362,172,595, after giving
effect to the October 1999 distributions thereon, representing approximately
95.08% of the Mortgage Pool Principal Balance.
OTHER SENIOR CERTIFICATES
The Headlands Mortgage Securities Inc. Mortgage Pass-through Certificates,
Series 1998-2 include two classes of senior certificates in addition to the
Underlying Class A-1 Certificates. The class designated as Class PO (the
"Underlying Class PO Certificates") is only entitled to principal payments based
on the PO Percentage of principal payments on the Discount Mortgage Loans (each
as defined under "Description of the Certificates--Principal" in Exhibit A).
Scheduled and unscheduled principal amounts due on Discount Mortgage Loans will
be allocated between the Underlying Class PO Certificates and the Underlying
Class A-1 Certificates based on the related Non-PO Percentage and PO Percentage
as described therein.
DISTRIBUTIONS ON THE UNDERLYING CERTIFICATES
Distributions of principal and interest on the Underlying Certificates will
be made on the 25th day of each month or, if such day is not an Underlying
Business Day, the next succeeding Underlying Business Day (each, an "Underlying
Remittance Date"). As used herein, an "Underlying Business Day" with respect to
the Underlying Certificates is any day other than (a) a Saturday or Sunday or
(b) a legal holiday in the State of New York or the State of California or
(c) a day on which banking institutions in the State of New York or the State of
California are authorized or obligated by law or executive order to be closed.
Scheduled principal received on the Mortgage Loans held in the Underlying
Trust Fund will be passed through monthly on the Underlying Remittance Date
occurring in the month in which the related Due Date occurs. Principal
prepayments received during the period from the 16th day of the preceding month
to the 15th day of such month will be passed through on the Underlying
Remittance Date occurring in such month. As used herein, the "Due Date" is the
first day of each calendar month, being the day of the month on which a payment
of interest and principal is due for each Mortgage Loan, exclusive of any days
of grace.
Interest received on each Mortgage Loan will be passed through monthly on
the Underlying Remittance Date occurring in the month in which the Due Date
occurs, at the pass-through rate for such Mortgage Loan. The Underlying
Certificates bear interest at 6.75% per annum (the "Underlying Pass-Through
Rate").
On each Underlying Remittance Date there will be a distribution from
available funds in the Underlying Trust Fund to the Underlying Certificates, an
amount which would reduce their current principal balances. For a further
description of the distribution of principal on the Underlying Certificates, see
"Description of the Certificates--Distributions" in the excerpts from the
Underlying Prospectus attached hereto as Exhibit A.
SUBORDINATED INTERESTS
The Underlying Certificates, which represent senior interests in the
Underlying Trust Fund, evidence the right of the holders thereof to receive
distributions on the related Mortgage Loans before any distributions have been
made to holders of the Underlying Subordinate Interests. This subordination is
intended to enhance the likelihood of regular receipt by holders of the
Underlying Certificates of the full amount of monthly distributions due them and
to protect holders of such Underlying Certificates against losses and other cash
flow shortfalls. If, on any Underlying Remittance Date, holders of the
Underlying Certificates are paid less than the amount due to them on such date,
the interest of the holders of such Underlying Certificates in the Underlying
Trust Fund will vary so as to preserve the entitlement of such Underlying
Certificates to unpaid principal of the Mortgage Loans and interest thereon.
This subordination is subject to certain limitations described under
"Description of the Certificates--Interest" and "--Allocation of Losses" in
Exhibit A.
Amounts with respect to principal (other than scheduled monthly
distributions of principal) will be disproportionately allocated to the
Underlying Certificates under certain conditions specified in the Underlying
Agreement. This will have the effect of accelerating the amortization of the
Underlying Certificates and reducing their proportionate share in the Underlying
Trust Fund while increasing the proportionate share of the Underlying
Subordinate Interests in the Underlying Trust Fund. Increasing the interest of
the Underlying Subordinate Interests in the Underlying Trust Fund relative to
that of the
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Underlying Certificates is intended to preserve the availability of the benefits
of the subordination provided by such Underlying Subordinate Interests. See
"Description of the Certificates--Principal" in Exhibit A.
If at any time the Underlying Subordinate Interests have been extinguished,
all future losses or shortfalls due to delinquent payments on the related
Mortgage Loans for which no advance is made by the Master Servicer will be borne
by the Underlying Certificates, the Other Class A-1 Certificates and the
Underlying PO Certificates. Amounts actually paid at any time to the holder of
an Underlying Certificate in accordance with the terms of the related Underlying
Agreement will not be subsequently recoverable from such holder.
ADJUSTMENT TO SERVICING FEES IN THE UNDERLYING TRUST FUND IN CONNECTION WITH
PREPAID MORTGAGE LOANS
When a mortgagor makes a full or partial principal prepayment of a Mortgage
Loan between Due Dates, the mortgagor may be required to pay interest on the
principal balance thereof only to the date of prepayment. In order to minimize
any resulting shortfall in interest, the amount of the servicing fee owed to the
Master Servicer will be reduced to the extent necessary to include an amount in
payments in respect of the related Underlying Certificates equal to a full
month's interest payment at the applicable Underlying Pass-Through Rate with
respect to such prepaid Mortgage Loan. Such reductions will be made only to the
extent that the aggregate amount of such interest shortfalls does not exceed the
lesser of (i) the aggregate amount of the related Servicing Fee on such
Underlying Remittance Date and (ii) 1/12 of 0.125% of the aggregate principal
balance of the Mortgage Loans for such Underlying Remittance Date.
ADVANCES
The Master Servicer is obligated to make advances of cash each month for
distribution on the Underlying Certificates equal to the difference between the
amount due on the Underlying Certificates and the amount in the Underlying
Certificate Account to be distributed to them pursuant to the Underlying
Agreement, but only to the extent such difference is attributable to delinquent
monthly payments due during the immediately preceding Due Period. The Master
Servicer is not under any obligation to make an advance with respect to any
Mortgage Loan if the Master Servicer determines, in its sole discretion, that
such advance will not be recoverable from future payments and collections on
such Mortgage Loan. Advances are intended to maintain a regular flow of
scheduled interest and principal payments on the Underlying Certificates, not to
guarantee or insure against losses. Accordingly, any funds so advanced are
recoverable by the Master Servicer out of amounts received on the related
Mortgage Loans.
OPTIONAL TERMINATION OF THE UNDERLYING TRUST FUND
The Master Servicer may, on any Underlying Remittance Date, purchase from
the Underlying Trust Fund all Mortgage Loans remaining outstanding at such time
as the aggregate unpaid principal balance of such Mortgage Loans is less than
10% of the aggregate unpaid principal balance of the Mortgage Loans as of the
date on which the Underlying Certificates were issued. The purchase price will
be distributed on the Underlying Certificates in the month following the month
of such purchase.
FOR ADDITIONAL INFORMATION ON THE UNDERLYING CERTIFICATES, INVESTORS SHOULD
CAREFULLY REVIEW (I) THE EXCERPTS FROM THE PROSPECTUS RELATED TO THE UNDERLYING
CERTIFICATES (THE "UNDERLYING PROSPECTUS") ATTACHED HERETO AS EXHIBITS A, AND
(II) THE STATEMENTS FOR THE UNDERLYING CERTIFICATES FOR THE OCTOBER 1999
UNDERLYING REMITTANCE DATE (THE "UNDERLYING REMITTANCE DATE STATEMENT") ATTACHED
HERETO AS EXHIBIT B. INFORMATION REGARDING THE UNDERLYING CERTIFICATES, AS OF
THE RESPECTIVE DATES OF ISSUANCE THEREOF, INCLUDING BUT NOT LIMITED TO
INFORMATION REGARDING RELATED PAYMENT PRIORITIES AND ALLOCATION OF LOSSES IS SET
FORTH IN THE ATTACHED EXHIBITS. ANY INFORMATION SET FORTH IN THIS PROSPECTUS
SUPPLEMENT (INCLUDING APPENDIX I AND THE EXHIBITS HERETO) WITH RESPECT TO THE
UNDERLYING CERTIFICATES OR THE RELATED MORTGAGE LOANS HAS BEEN OBTAINED BY THE
DEPOSITOR FROM THE UNDERLYING PROSPECTUS OR UNDERLYING REMITTANCE DATE STATEMENT
PROVIDED BY THE UNDERLYING TRUSTEE OR THE MASTER SERVICER, AND HAS NOT BEEN
INDEPENDENTLY VERIFIED BY THE DEPOSITOR OR THE UNDERWRITER. THE UNDERLYING
PROSPECTUS AND ALL OTHER OFFERING MATERIALS DESCRIBED ABOVE FOR THE UNDERLYING
CERTIFICATES WERE PREPARED BY THE ISSUER OF THE UNDERLYING CERTIFICATES.
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DESCRIPTION OF THE MORTGAGE LOANS
ALL OF THE INFORMATION CONTAINED HEREIN WITH RESPECT TO THE MORTGAGE LOANS
IS BASED SOLELY ON (I) INFORMATION CONTAINED IN THE UNDERLYING PROSPECTUS AND
(II) INFORMATION OBTAINED FROM THE UNDERLYING TRUSTEE IN CONNECTION WITH THE
UNDERLYING REMITTANCE DATE STATEMENT. NEITHER THE DEPOSITOR NOR THE TRUSTEE HAS
THE ABILITY INDEPENDENTLY TO VERIFY THE ACCURACY OF THIS INFORMATION.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER THE LIMITED NATURE OF SUCH
AVAILABLE INFORMATION WHEN EVALUATING THE SUITABILITY OF ANY INVESTMENT IN THE
OFFERED CERTIFICATES.
Origination and Underwriting. The Mortgage Loans were originated or
acquired by Headlands Mortgage Company. For a complete description of the
underwriting policies applied to the Mortgage Loans, see "The Mortgage
Pool--General", and "--Servicing of the Mortgage Loans--Underwriting Standards"
in the excerpts from the Underlying Prospectus attached hereto as Exhibit A.
Selected Mortgage Loan Data. The tables on pages I-1 through I-4 summarize
certain characteristics of the Mortgage Loans as such Mortgage Loans were
constituted as of October 25, 1999. It is expected that the information set
forth herein will be representative of the characteristics of the Mortgage Loans
as of the date hereof, although prior to issuance of the Offered Certificates,
certain of the Mortgage Loans may be (or may have been) prepaid in full or in
part or may be repurchased as described herein. THE INFORMATION CONTAINED HEREIN
WITH RESPECT TO THE MORTGAGE LOANS HAS BEEN OBTAINED FROM REPORTS AND OTHER
INFORMATION PREPARED BY THE MASTER SERVICER AND HAS NOT BEEN INDEPENDENTLY
REPRESENTED TO THE TRUST AS BEING ACCURATE AND COMPLETE.
Servicing of the Mortgage Loans. First Nationwide Mortgage Corporation
acts as master servicer and provides customary servicing functions with respect
to the Mortgage Loans. First Nationwide Mortgage Corporation is entitled to a
servicing fee for its servicing activities.
The following table sets forth certain delinquency information with respect
to the Mortgage Loans, all of which has been obtained from the monthly statement
provided by the Underlying Trustee in connection with the October 1999
Underlying Remittance Date for the Underlying Certificates. The information
contained in the following table may not be indicative of future delinquent
payment rates of the Mortgage Loans or reductions in the principal balance of
the Underlying Certificates.
UNDERLYING CERTIFICATES
MORTGAGE LOAN DELINQUENCY INFORMATION AS REPORTED ON OCTOBER 25, 1999
<TABLE>
<CAPTION>
MORTGAGE POOL
PRINCIPAL
BALANCE MORTGAGE POOL
AS OF PRINCIPAL
ORIGINAL BALANCE AS OF 30-59 DAYS 60-89 DAYS 90+ DAYS
ISSUE OCTOBER 25, DELINQUENT DELINQUENT DELINQUENT
DATE(1) 1999(1) # BALANCE(1) %(2) # BALANCE(1) %(2) # BALANCE(1)
- ------------- ------------- ---- ----------- ---- --- ----------- --------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$400,143,355 $380,910,528 $ 0 0% $ 141,474 0.037141% $0
<CAPTION>
MORTGAGE POOL
PRINCIPAL
BALANCE
AS OF
ORIGINAL IN
ISSUE FORECLOSURE R.E.O. CUMULATIVE
DATE(1) %(2) # BALANCE(1) %(2) # BALANCE(1) %(2) LOSSES(1)
- ------------- ---- --- ----------- ---- --- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$400,143,355 0% $ 0 0% $0 % $0
</TABLE>
- ------------------
(1) As compiled from the monthly statement provided by the Underlying Trustee in
connection with the October 1999 Underlying Remittance Date for the
Underlying Certificates. Reflects the application of payments on the
Mortgage Loans due on or before October 1, 1999.
(2) Delinquency, Foreclosure and Real Estate Owned ("R.E.O.") percentages are
represented as percentages of the aggregate principal balance of the
Mortgage Loans as of October 1, 1999.
S-19
<PAGE>
THE DEPOSITOR
Credit Suisse First Boston Mortgage Securities Corporation, the Depositor,
is a Delaware corporation organized on December 31, 1985 and is a wholly-owned
subsidiary of Credit Suisse First Boston Securities Corporation. The Depositor
is an affiliate of the Underwriter. See "The Depositor" in the Prospectus.
Neither the Depositor nor any of its affiliates will ensure or guarantee
distributions on the Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
If the purchaser of an Offered Certificate offered at a discount calculates
the anticipated yield to maturity of such Offered Certificate based on an
assumed rate of payment of principal that is faster than that actually received
on the related Mortgage Loans and, in turn, on the Underlying Certificates, the
actual yield to maturity will be lower than that so calculated. If the purchaser
of an Offered Certificate offered at a premium calculates the anticipated yield
to maturity of such Offered Certificate based on an assumed rate of payment of
principal that is slower than that actually received on the Mortgage Loans and,
in turn, on the Underlying Certificates, the actual yield to maturity will be
lower than that so calculated.
The yield to maturity of the Offered Certificates and the aggregate amount
of distributions on the Offered Certificates will be related to the timing and
amount of principal payments on the Underlying Certificates, which will be
related to the rate of payment of principal (including prepayments) on the
Mortgage Loans and the allocation of such principal payments in accordance with
the priorities discussed in the excerpts from the Underlying Prospectus
contained in Exhibit A hereto. The rate of principal payments on the Mortgage
Loans will be affected by the amortization schedules of the Mortgage Loans and
by the timing and amount of principal prepayments thereon (for this purpose, the
term "prepayment" also includes payments resulting from refinancings and
liquidations of the Mortgage Loans due to defaults, casualties, condemnations
and purchases of the Mortgage Loans).
The model used in this Prospectus Supplement (the "PSA") represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of mortgage loans for the life of such mortgage loans. The PSA
does not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. A 100% PSA assumes constant prepayment rates of
0.2% per annum of the then outstanding principal balance of the Mortgage Loans
in the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter until the thirtieth month. Beginning in the
thirtieth month and in each month thereafter during the life of such Mortgage
Loans, 100% PSA assumes a constant prepayment rate of 6% per annum each month.
As used in the table below, 0% PSA assumes prepayment rates equal to 0% of the
100% PSA i.e., no prepayments. Correspondingly, 200% PSA assumes prepayment
rates equal to 200% of the 100% PSA, and so forth.
The decrement tables on the following pages (the "DEC Tables") indicate the
weighted average lives of the Offered Certificates and set forth the percentage
of the principal amount of the Offered Certificates (after giving effect to
distributions in reduction of the principal amount of such Offered Certificates
on the October 1999 Underlying Remittance Date at each of the indicated
percentages of PSA) that would be outstanding after each of the Distribution
Dates shown at various percentages of PSA assuming that there is no optional
termination of the related Underlying Trust Fund. See "Yield and Prepayment
Considerations" in the Prospectus.
Variations in actual prepayment experience (including prepayments resulting
from defaults) for the Mortgage Loans will increase or decrease the percentages
of principal amounts (and weighted average lives) shown in the DEC Tables. There
is no assurance that payments of the Mortgage Loans will conform to any of the
percentages of PSA described in the DEC Tables. Among other things, the DEC
Tables assumed that the Mortgage Loans prepay at the indicated constant rates,
notwithstanding the fact that such Mortgage Loans may vary substantially as to
geography, interest rate and remaining terms.
S-20
<PAGE>
FACTORS AFFECTING PREPAYMENTS ON THE MORTGAGE LOANS
All of the Mortgage Loans in the Underlying Trust Fund are fixed-rate
mortgage loans. The rate of payments (including prepayments) on pools of
mortgage loans are influenced by a variety of economic, geographic, social, tax,
legal and other factors. If prevailing mortgage rates fall significantly below
the then current fixed rate on the Mortgage Loans, the rate of prepayment
resulting from refinancing would be expected to increase, particularly because
the availability of fixed or adjustable rate mortgage loans at competitive
interest rates may encourage borrowers to prepay their Mortgage Loans.
Conversely, if prevailing mortgage rates rise significantly above the then
current fixed rates on the Mortgage Loans, the rate of prepayments on the
Mortgage Loans would be expected to decrease. Other factors affecting prepayment
of mortgage loans include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity in the mortgaged premises and servicing
decisions. The Mortgage Loans may be prepaid at any time by borrowers. All of
the Mortgage Loans are subject to a prepayment penalty during the first five
years following origination on certain prepayments. NO ASSURANCE CAN BE GIVEN AS
TO THE RATE OF PRINCIPAL PAYMENTS OR PREPAYMENTS ON THE MORTGAGE LOANS OR,
CONSEQUENTLY, ON THE OFFERED CERTIFICATES. INVESTORS ARE CAUTIONED THAT PAST
PREPAYMENT RATES ARE UNLIKELY TO BE INDICATIVE OF FUTURE PREPAYMENT RATES.
The DEC Tables have been prepared based on the Modeling Assumptions
described below and should be read in conjunction therewith.
ACCRETION DIRECTED CERTIFICATES AND ACCRUAL CERTIFICATES
On and prior to the Accretion Termination Date, holders of the Class A-4
Certificates will receive as monthly principal distributions the Accrual
Distribution Amount. On or prior to the Accretion Termination Date, interest
shortfalls allocated to the Class A-5 Certificates will reduce the amount added
to the Certificate Principal Balance of such Certificates in respect of interest
accrued thereon and will result in a corresponding reduction of the amount
available for distributions in respect of principal on the Class A-4
Certificates. Furthermore, because such interest shortfalls will result in the
Certificate Principal Balance of the Class A-5 Certificates being less than it
otherwise would be, the amount of interest that will accrue in the future on the
Class A-5 Certificates and be available for distributions in respect of
principal in respect of the Class A-4 Certificates will be reduced. Accordingly,
the weighted average lives of the Class A-4 Certificates would be extended.
In addition, investors in the Class A-5 Certificates should also be aware
that the Accretion Termination Date may be later (or earlier) than otherwise
anticipated if prepayments occur slower (or faster) than anticipated. Investors
in the Class A-5 Certificates should be aware that the Accretion Termination
Date could be different from that assumed at the time of purchase. Because the
Class A-5 Certificates are not entitled to receive any distributions of interest
(other than as described herein) until the occurence of the Accretion
Termination Date, such Certificates will likely experience greater price and
yield volatility than would mortgage pass-through certificates that are
otherwise similar but which are entitled to current distributions of interest.
Investors should consider whether such volatility is suitable to their
investment needs.
ASSUMED FINAL DISTRIBUTION DATE
The assumed final Distribution Date with respect to each class of Offered
Certificates, other than the Class A-4 Certificates, occurs in December 2028,
which date is the Distribution Date immediately following the assumed final
distribution date for the Underlying Certificates. The assumed final
Distribution Date with respect to the Class A-4 Certificates occurs in August
2010, which is calculated based on the modeling assumptions described below and
a 0% PSA. No event of default, change in the priorities for distribution among
the various classes or other provisions under the Trust Agreement will arise or
become applicable solely by reason of the failure to retire the entire
Certificate Principal Balance of any class of Certficates on or before its
assumed final Distribution Date.
S-21
<PAGE>
EARLY TERMINATION OF UNDERLYING TRUST FUND
As noted in "Description Of The Underlying Certificates--Optional
Termination of the Underlying Trust Fund" herein, the Master Servicer may
purchase the Mortgage Loans thereby effecting an early retirement of the
Underlying Certificates (and therefore the Certificates) on or after any
Underlying Remittance Date on which, after taking into account payments of
principal and allocations of realized losses, if any, to be made on that date,
the aggregate outstanding principal amount of the Mortgage Loans is less than
10% of their aggregate initial principal amount. In such event, the Underlying
Trust Fund may be terminated. THE HOLDER OF THE CLASS R CERTIFICATES BEING
OFFERED HEREBY MAY PURCHASE THE UNDERLYING CERTIFICATES THEREBY EFFECTING AN
EARLY RETIREMENT OF THE CERTIFICATES ON OR AFTER THE DISTRIBUTION DATE OR WHICH
THE PRINCIPAL BALANCE OF THE UNDERLYING CERTIFICATES IS LESS THAN 10% OF THE
PRINCIPAL BALANCE THEREOF, AS OF THE CUT-OFF DATE. IN THE CASE OF AN OFFERED
CERTIFICATE, THE TERMINATION OF THE TRUST OR THE UNDERLYING TRUST FUND WILL
RESULT IN THE RECEIPT BY THE RELATED CERTIFICATEHOLDER OF PRINCIPAL PAYMENTS
THAT COULD AFFECT THE YIELD TO MATURITY ON SUCH CERTIFICATE AND HAVE THE EFFECT
OF SHORTENING THE WEIGHTED AVERAGE LIFE OF SUCH CERTIFICATE.
WEIGHTED AVERAGE LIVES OF THE CERTIFICATES
Weighted average life refers to the average amount of time that will elapse
from the date of delivery of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of each Class
of Offered Certificates will be influenced by the (i) rate at which principal of
the Mortgage Loans is paid, which may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes payments
resulting from refinancings, liquidations of the Mortgage Loans due to defaults,
casualties, indemnifications and purchases by or on behalf of the Master
Servicer), (ii) optional termination with respect to the Underlying Trust Fund
and (iii) any purchase of the Underlying Certificates by the holder of the
Class R Certificate at its option or any required repurchase by the Depositor of
either the Underlying Certificates as a result of a breach of certain
representations and warranties.
MODELING ASSUMPTIONS
The DEC Tables have been prepared on the basis of the characteristics of
the Mortgage Loans and the outstanding principal amount of each Class of
Certificates, in each case as of the October 1999 Underlying Remittance Date, as
described herein and the following additional assumptions:
(i) all scheduled payments on the Mortgage Loans are timely received
on the first day of each month, commencing in November 1999;
(ii) the Mortgage Loans will prepay monthly at the specified
percentages of PSA;
(iii) all principal prepayments constitute prepayments in full of the
Mortgage Loans, are received on the last day of each month, commencing in
November 1999 and include 30 days' interest thereon;
(iv) there are no defaults, losses or interest shortfalls on the
Mortgage Loans prior to or after the Closing Date;
(v) the Closing Date is October 29, 1999, and cash distributions are
received by the Certificateholders on the second business day following the
25th day of each month, commencing in November 1999 (distributions will not
include any distributions received on the Underlying Certificates on or
before the November 1999 Underlying Remittance Date);
(vi) the Mortgage Loans have been amortized using the respective
scheduled payment, outstanding principal balance (prior to giving effect to
prepayments received during the related prepayment period), and interest
rate;
(vii) no optional termination of the Trust or Underlying Trust Fund
occurs;
(viii) the Classes of Offered Certificates have the initial principal
amounts reflected on the cover page hereof;
S-22
<PAGE>
(ix) payments of principal on the Underlying Trust Fund are made in
accordance with the methodologies and priorities set forth in the
Underlying Prospectus; and
(x) the Underlying Certificates have the characteristics set forth
in the table below.
UNDERLYING CERTIFICATES
<TABLE>
<CAPTION>
CURRENT WEIGHTED NET WEIGHTED AVERAGE WEIGHTED
PRINCIPAL AVERAGE PASS-THROUGH REMAINING TERM TO AVERAGE
CLASS BALANCE COUPON RATE MATURITY SEASONING
- -------- --------------- --------- ------------ ----------------- ---------
<S> <C> <C> <C> <C> <C>
A-1 $362,172,595.56 7.259575% 6.75% 343 months 13 months
</TABLE>
S-23
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS A-1 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 98 92 86 77 68
October 2001............................................................... 97 82 68 49 31
October 2002............................................................... 95 72 52 26 4
October 2003............................................................... 93 63 38 8 0
October 2004............................................................... 91 54 26 0 0
October 2005............................................................... 88 47 16 0 0
October 2006............................................................... 86 40 8 0 0
October 2007............................................................... 84 34 1 0 0
October 2008............................................................... 81 28 0 0 0
October 2009............................................................... 78 23 0 0 0
October 2010............................................................... 75 18 0 0 0
October 2011............................................................... 72 13 0 0 0
October 2012............................................................... 69 9 0 0 0
October 2013............................................................... 65 5 0 0 0
October 2014............................................................... 61 1 0 0 0
October 2015............................................................... 57 0 0 0 0
October 2016............................................................... 52 0 0 0 0
October 2017............................................................... 47 0 0 0 0
October 2018............................................................... 42 0 0 0 0
October 2019............................................................... 36 0 0 0 0
October 2020............................................................... 30 0 0 0 0
October 2021............................................................... 24 0 0 0 0
October 2022............................................................... 17 0 0 0 0
October 2023............................................................... 9 0 0 0 0
October 2024............................................................... 1 0 0 0 0
October 2025............................................................... 0 0 0 0 0
October 2026............................................................... 0 0 0 0 0
October 2027............................................................... 0 0 0 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 16.0 6.4 3.5 2.1 1.6
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-24
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS A-2 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 100 100 100 100 100
October 2001............................................................... 100 100 100 100 100
October 2002............................................................... 100 100 100 100 100
October 2003............................................................... 100 100 100 100 0
October 2004............................................................... 100 100 100 10 0
October 2005............................................................... 100 100 100 0 0
October 2006............................................................... 100 100 100 0 0
October 2007............................................................... 100 100 100 0 0
October 2008............................................................... 100 100 37 0 0
October 2009............................................................... 100 100 0 0 0
October 2010............................................................... 100 100 0 0 0
October 2011............................................................... 100 100 0 0 0
October 2012............................................................... 100 100 0 0 0
October 2013............................................................... 100 100 0 0 0
October 2014............................................................... 100 100 0 0 0
October 2015............................................................... 100 64 0 0 0
October 2016............................................................... 100 8 0 0 0
October 2017............................................................... 100 0 0 0 0
October 2018............................................................... 100 0 0 0 0
October 2019............................................................... 100 0 0 0 0
October 2020............................................................... 100 0 0 0 0
October 2021............................................................... 100 0 0 0 0
October 2022............................................................... 100 0 0 0 0
October 2023............................................................... 100 0 0 0 0
October 2024............................................................... 100 0 0 0 0
October 2025............................................................... 0 0 0 0 0
October 2026............................................................... 0 0 0 0 0
October 2027............................................................... 0 0 0 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 25.5 16.3 8.9 4.8 3.4
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-25
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS A-3 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 98 93 87 79 70
October 2001............................................................... 97 83 70 52 35
October 2002............................................................... 95 74 55 30 10
October 2003............................................................... 93 65 42 13 0
October 2004............................................................... 91 57 30 1 0
October 2005............................................................... 89 50 21 0 0
October 2006............................................................... 87 43 13 0 0
October 2007............................................................... 84 37 7 0 0
October 2008............................................................... 82 32 2 0 0
October 2009............................................................... 79 27 0 0 0
October 2010............................................................... 77 23 0 0 0
October 2011............................................................... 74 18 0 0 0
October 2012............................................................... 70 14 0 0 0
October 2013............................................................... 67 11 0 0 0
October 2014............................................................... 63 7 0 0 0
October 2015............................................................... 59 4 0 0 0
October 2016............................................................... 55 0 0 0 0
October 2017............................................................... 50 0 0 0 0
October 2018............................................................... 45 0 0 0 0
October 2019............................................................... 40 0 0 0 0
October 2020............................................................... 34 0 0 0 0
October 2021............................................................... 28 0 0 0 0
October 2022............................................................... 21 0 0 0 0
October 2023............................................................... 14 0 0 0 0
October 2024............................................................... 7 0 0 0 0
October 2025............................................................... 0 0 0 0 0
October 2026............................................................... 0 0 0 0 0
October 2027............................................................... 0 0 0 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 16.6 6.9 3.8 2.3 1.7
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-26
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS A-4 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 93 93 93 93 93
October 2001............................................................... 86 86 86 86 86
October 2002............................................................... 79 79 79 79 79
October 2003............................................................... 71 71 71 71 14
October 2004............................................................... 62 62 62 62 0
October 2005............................................................... 53 53 53 0 0
October 2006............................................................... 43 43 43 0 0
October 2007............................................................... 33 33 33 0 0
October 2008............................................................... 22 22 22 0 0
October 2009............................................................... 10 10 0 0 0
October 2010............................................................... 0 0 0 0 0
October 2011............................................................... 0 0 0 0 0
October 2012............................................................... 0 0 0 0 0
October 2013............................................................... 0 0 0 0 0
October 2014............................................................... 0 0 0 0 0
October 2015............................................................... 0 0 0 0 0
October 2016............................................................... 0 0 0 0 0
October 2017............................................................... 0 0 0 0 0
October 2018............................................................... 0 0 0 0 0
October 2019............................................................... 0 0 0 0 0
October 2020............................................................... 0 0 0 0 0
October 2021............................................................... 0 0 0 0 0
October 2022............................................................... 0 0 0 0 0
October 2023............................................................... 0 0 0 0 0
October 2024............................................................... 0 0 0 0 0
October 2025............................................................... 0 0 0 0 0
October 2026............................................................... 0 0 0 0 0
October 2027............................................................... 0 0 0 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 6.1 6.1 6.0 4.4 3.4
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-27
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS A-5 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 107 107 107 107 107
October 2001............................................................... 114 114 114 114 114
October 2002............................................................... 122 122 122 122 122
October 2003............................................................... 131 131 131 131 131
October 2004............................................................... 140 140 140 140 56
October 2005............................................................... 150 150 150 142 10
October 2006............................................................... 160 160 160 94 0
October 2007............................................................... 171 171 171 64 0
October 2008............................................................... 183 183 183 47 0
October 2009............................................................... 196 196 192 36 0
October 2010............................................................... 206 206 164 28 0
October 2011............................................................... 206 206 140 21 0
October 2012............................................................... 206 206 119 16 0
October 2013............................................................... 206 206 101 12 0
October 2014............................................................... 206 206 86 9 0
October 2015............................................................... 206 206 72 7 0
October 2016............................................................... 206 206 60 5 0
October 2017............................................................... 206 186 50 4 0
October 2018............................................................... 206 164 41 3 0
October 2019............................................................... 206 142 33 2 0
October 2020............................................................... 206 122 27 2 0
October 2021............................................................... 206 103 21 1 0
October 2022............................................................... 206 85 16 1 0
October 2023............................................................... 206 68 12 1 0
October 2024............................................................... 206 52 9 0 0
October 2025............................................................... 194 36 6 0 0
October 2026............................................................... 123 22 3 0 0
October 2027............................................................... 48 8 1 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 27.3 22.3 15.5 8.9 5.0
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-28
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS A-6 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 100 100 100 100 100
October 2001............................................................... 100 100 100 100 100
October 2002............................................................... 100 100 100 100 100
October 2003............................................................... 100 100 100 100 100
October 2004............................................................... 100 100 100 100 100
October 2005............................................................... 99 98 96 92 88
October 2006............................................................... 99 94 90 83 63
October 2007............................................................... 98 90 82 71 42
October 2008............................................................... 96 84 73 57 29
October 2009............................................................... 94 77 63 44 19
October 2010............................................................... 91 71 54 34 13
October 2011............................................................... 88 64 46 26 9
October 2012............................................................... 86 59 39 20 6
October 2013............................................................... 83 53 33 15 4
October 2014............................................................... 79 48 28 12 3
October 2015............................................................... 76 43 24 9 2
October 2016............................................................... 72 38 20 7 1
October 2017............................................................... 68 34 16 5 1
October 2018............................................................... 63 30 13 4 1
October 2019............................................................... 59 26 11 3 0
October 2020............................................................... 54 22 9 2 0
October 2021............................................................... 48 19 7 1 0
October 2022............................................................... 42 16 5 1 0
October 2023............................................................... 36 12 4 1 0
October 2024............................................................... 29 9 3 0 0
October 2025............................................................... 22 7 2 0 0
October 2026............................................................... 14 4 1 0 0
October 2027............................................................... 5 1 0 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 20.5 15.5 12.7 10.4 8.3
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-29
<PAGE>
PERCENT OF PRINCIPAL BALANCE OUTSTANDING OF THE
CLASS R CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 200% 350% 500%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100% 100% 100% 100% 100%
October 2000............................................................... 0 0 0 0 0
October 2001............................................................... 0 0 0 0 0
October 2002............................................................... 0 0 0 0 0
October 2003............................................................... 0 0 0 0 0
October 2004............................................................... 0 0 0 0 0
October 2005............................................................... 0 0 0 0 0
October 2006............................................................... 0 0 0 0 0
October 2007............................................................... 0 0 0 0 0
October 2008............................................................... 0 0 0 0 0
October 2009............................................................... 0 0 0 0 0
October 2010............................................................... 0 0 0 0 0
October 2011............................................................... 0 0 0 0 0
October 2012............................................................... 0 0 0 0 0
October 2013............................................................... 0 0 0 0 0
October 2014............................................................... 0 0 0 0 0
October 2015............................................................... 0 0 0 0 0
October 2016............................................................... 0 0 0 0 0
October 2017............................................................... 0 0 0 0 0
October 2018............................................................... 0 0 0 0 0
October 2019............................................................... 0 0 0 0 0
October 2020............................................................... 0 0 0 0 0
October 2021............................................................... 0 0 0 0 0
October 2022............................................................... 0 0 0 0 0
October 2023............................................................... 0 0 0 0 0
October 2024............................................................... 0 0 0 0 0
October 2025............................................................... 0 0 0 0 0
October 2026............................................................... 0 0 0 0 0
October 2027............................................................... 0 0 0 0 0
October 2028............................................................... 0 0 0 0 0
October 2029............................................................... 0 0 0 0 0
October 2030............................................................... 0 0 0 0 0
Weighted Average Life in Years(1).......................................... 0.1 0.1 0.1 0.1 0.1
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each net distribution of 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 distributions described
in (i) above.
S-30
<PAGE>
USE OF PROCEEDS
The Depositor will apply the proceeds of the sale of the Offered
Certificates towards the purchase price of the Underlying Certificates, the
payment of expenses related to such purchase and other corporate purposes.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Brown & Wood LLP, counsel to the
Depositor, delivered its opinion generally to the effect that, assuming
compliance with all provisions of the Trust Agreement, for federal income tax
purposes, the Trust qualifies as a REMIC under the Code.
The Class A Certificates will represent "regular interests" in the REMIC
and the Class R Certificate will constitute the sole class of "residual
interests" in the REMIC. As REMIC regular interests, such certificates will
generally be treated as debt for federal income tax purposes. Certificateholders
will be required to include in income all interest and original issue discount
on such certificates in accordance with the accrual method of accounting
regardless of the Certificateholders' usual methods of accounting.
SPECIAL TAX ATTRIBUTES OF THE OFFERED CERTIFICATES
As is described more fully under "Federal Income Tax Consequences" in the
Prospectus, the Offered Certificates (other than the Class R Certificate) will
represent qualifying assets under Section 856(c)(4)(A) and 7701(a)(19)(C)(v) of
the Code, and net interest income attributable to such Certificates will be
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
Trust Fund are assets described in such sections. The Offered Certificates
(other than the Class R Certificate) will represent qualifying assets under
Section 860G(a)(3) if acquired by a REMIC within the prescribed time periods of
the Code.
ORIGINAL ISSUE DISCOUNT
The Class A-5 Certificates will be issued and the other Offered
Certificates may be issued with original issue discount for federal income tax
purposes. For purposes of determining the amount and rate of accrual of original
issue discount and market discount, the Depositor intends to assume that there
will be prepayments on the Mortgage Loans at a rate equal to 200% PSA. See
"Yield, Prepayment and Maturity Considerations" herein and "Federal Income Tax
Consequences" in the Prospectus.
The Offered Certificates may be treated as being issued at a premium. In
such case, the Certificateholders may elect under Section 171 of the Code to
amortize such premium under the constant interest method and to treat such
amortizable premium as an offset to interest income on the Certificates.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, such holder will be permitted to offset such amounts only
against the respective future income, if any, from such Certificate. Although
the tax treatment is uncertain, a Certificateholder may be permitted to deduct a
loss to the extent that such holder's respective remaining basis in such
Certificate exceeds the maximum amount of future payments to which such holder
is entitled, assuming no further principal prepayments of the Mortgage Loans are
received. Although the matter is not free from doubt, any such loss might be
treated as a capital loss.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
S-31
<PAGE>
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also be
subject to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. "Net income from foreclosure property" generally means
gain from the sale of a foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the Trust will recognize net income from foreclosure property
subject to federal income tax.
In the event that any Prohibited Transactions Tax, Contributions Tax, tax
on net income from foreclosure property or state or local income or franchise
tax is imposed on the Trust Fund, such tax will be paid with amounts otherwise
distributable to the holders of the Certificates. Pursuant to the Trust
Agreement, each holder of the Class R Certificate is obligated to indemnify the
Trust for the amount of any such tax. There can be no assurance that the holder
of the Class R Certificate will have sufficient resources to pay any such
indemnity to the Trust. It is not anticipated that any material state or local
income or franchise tax will be imposed on the Trust.
THE RESIDUAL CERTIFICATE
The holder of the Class R Certificate must include the taxable income of
the REMIC in its federal taxable income. The resulting tax liability of such
holder may exceed cash distributions to such holder during certain periods. All
or a portion of the taxable income from the Class R Certificate recognized by a
holder may be treated as "excess inclusion" income, which, with limited
exceptions, is subject to U.S. federal income tax.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a REMIC residual certificateholder. First, alternative minimum
taxable income for such residual holder is determined without regard to the
special rule that taxable income cannot be less than excess inclusions. Second,
a residual holder's alternative minimum taxable income for a tax year cannot be
less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual holder elects to have such
rules apply only to tax years beginning after August 20, 1996.
Furthermore, the Small Business Job Protection Act of 1996, as part of the
repeal of the bad debt reserve method for thrift institutions, repealed the
application of Section 593(d) of the Code to any taxable year beginning after
December 31, 1995.
Also, purchasers of the Class R Certificate should consider carefully the
tax consequences of an investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Federal Income Tax Consequences--II. REMIC Trust Funds--
C. Taxation of the Owners of REMIC Residual Certificates" in the Prospectus.
Specifically, prospective holders of the Class R Certificate should consult
their tax advisors regarding whether, at the time of acquisition, the Class R
Certificate will be treated as a "non-economic" residual interest, a
"non-significant value" residual interest and a "tax avoidance potential"
residential interest. See "Federal Income Tax Consequences--II. REMIC Trust
Funds--C. Taxation of the Owners of REMIC Residual Certificates--Noneconomic
REMIC Residual Certificates" in the Prospectus. Additionally, for information
regarding prohibited transactions and treatment of Realized Losses, see "Federal
Income Tax Consequences--
S-32
<PAGE>
II. REMIC Trust Funds--F. Prohibited Transactions and Other Possible REMIC
Taxes" and "--II. REMIC Trust Funds--C. Taxation of the Owners of REMIC Residual
Certificates--G. Termination of a REMIC Trust Fund" in the Prospectus.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMIC CERTIFICATES" IN THE PROSPECTUS.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), prohibit pension, profit sharing or other employee benefit
or other plans (such as individual retirement accounts) that are subject to
Title I of ERISA or to Section 4975 of the Code (collectively, "Plans") from
engaging in certain transactions involving "plan assets" with any person that is
a "party in interest" under ERISA or "disqualified person" under the Code with
respect to the Plans. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code for such
persons.
ERISA also imposes certain duties on persons who are fiduciaries of Plans
subject to ERISA, including the requirements of investment prudence and
diversification, and the requirement that such a Plan's investments be made in
accordance with the documents governing the Plan. Under ERISA, any person who
exercises any authority or control with respect to the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan.
Pursuant to Department of Labor Regulation Section 2510.3-101 (the "Plan
Assets Regulation"), in general, when a Plan acquires an equity interest in an
entity such as the Trust, then, unless certain exceptions apply, the Plan's
assets include both the equity interest and an undivided interest in each of the
underlying assets of the entity. In general, an "equity interest" is defined
under the Plan Assets Regulation as any interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and which
has no substantial equity features. It is anticipated that the Certificates will
be considered equity interests in the Trust for purposes of the Plan Assets
Regulation, and that the assets of the Trust may therefore constitute plan
assets if Certificates are acquired by Plans. In such event, the fiduciary and
prohibited transaction restrictions of ERISA and section 4975 of the Code would
apply to transactions involving the assets of the Trust. In addition, Plan
fiduciaries must determine whether the acquisition and holding of Certificates
would result in prohibited transactions if Plans that acquired the Certificates
were deemed to own an interest in the underlying assets of the Trust under the
rules discussed above. There may also be a delegation of the responsibility to
manage plan assets if Plans that purchase the Certificates are deemed to own an
interest in the underlying assets of the Trust; such delegation may be
impermissible if it is not in accordance with the Plan's governing instrument or
any investment management agreement with the Plan. In this regard, until there
has been a default on the Underlying Certificates, the Trustee will have only
limited custodial and ministerial authority with respect to the assets.
A Plan fiduciary considering an investment in the Trust should consider
whether the Trustee or any of its affiliates is a party in interest or
disqualified person with respect to the Plan. Depending on the relevant facts
and circumstances, certain prohibited transaction exemptions may apply to the
acquisition or holding of the Certificates--for example, Prohibited Transaction
Class Exemption ("PTE") 96-23, which exempts certain transactions effected on
behalf of a Plan by an "in-house asset manager"; PTE 95-60, which exempts
certain transactions between insurance company general accounts and parties in
interest; PTE 91-38, which exempts certain transactions between bank collective
investment funds and parties in interest; PTE 90-1, which exempts certain
transactions between insurance company pooled separate accounts and parties in
interest; and PTE 84-14, which exempts certain transactions effected on behalf
of a Plan by a "qualified professional asset manager". There can be no assurance
that any of these exemptions will apply with respect to any Plan's acquisition
of the Certificates, or that such an exemption, if it did apply, would apply to
all prohibited transactions that may occur in connection with such investment,
including, for example, transactions involving plan assets arising in the
operations of the Trust.
S-33
<PAGE>
Because it is likely that the assets of the Trust will constitute assets of
Plans that invest directly or indirectly in the Trust, the purchase of a
Certificate by or on behalf of a Plan may give rise to a prohibited transaction
unless an exemption applies to the acquisition by the Plan of the Underlying
Certificates held by the Trust. The Underlying Certificates were issued under
conditions that make them eligible for the underwriter's exemption that was
granted to the underwriter or placement agent for the Underlying Certificates.
The underwriter's exemption generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA and from the excise
taxes imposed on prohibited transactions by Section 4975(a) and (b) of the
Internal Revenue Code certain transactions relating to the servicing and
operation of mortgage pools of certain secured obligations, including mortgage
loans, which are held in a trust, and the purchase, sale and holding of
pass-through certificates issued by that trust when certain conditions are met.
Among these conditions are the requirement that an investing Plan be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933. Plan
fiduciaries considering an investment in the Certificates are urged to read the
"ERISA Considerations" section of the prospectus.
Each purchaser of a Class A Certificate, by its acceptance of the Class A
Certificate, will be deemed to represent either (i) that is not a Plan or a
person investing on behalf of or with assets of a Plan, or (ii) that its
purchase of the Class A Certificate is covered by PTE 84-14, PTE 90-1, PTE
91-38, PTE 95-60, or PTE 96-23 or a similar exemption and that it satisfies the
conditions for application of the underwriter's exemption with respect to the
Underlying Certificates.
Each purchaser of a Class R Certificate, by its acceptance of the Class R
Certificate, will be required to represent that it is not a Plan or a person
investing on behalf of or with assets of a Plan.
LEGAL INVESTMENT CONSIDERATIONS
Assuming the accuracy of certain representations contained in the
Underlying Agreement (which information is not subject to independent
certification) and on the basis of certain assumptions derived from statements
included in the Underlying Prospectus Supplement, the Offered Certificates will
constitute "mortgage related securities" for the purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in
one of the two highest rating categories by at least one nationally recognized
statistical rating organization and, as such, are legal investments for certain
entities to the extent provided for in SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors. See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and Credit Suisse First Boston Corporation (the
"Underwriter"), which is an affiliate of the Depositor, the Depositor has agreed
to sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, the Offered Certificates.
Distribution of the Offered Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The Underwriter may effect such transactions
by selling Offered Certificates to or through dealers and such dealers may
receive from the Underwriter, for which they act as agent, compensation in the
form of underwriting discounts, concessions or commissions. The Underwriter and
any dealers that participate with the Underwriter in the distribution of such
Offered Certificates may be deemed to be underwriters, and any discounts,
commissions or concessions received by them, and any profits on resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "1933 Act").
S-34
<PAGE>
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the 1933 Act.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and the Underwriter by Brown
& Wood LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that they be
rated "AAA" by S&P and Fitch (the "Rating Agencies").
The ratings assigned by the Rating Agencies to mortgage pass-through
certificates address the likelihood of the receipt of all distributions by the
related certificateholders under the agreements pursuant to which such
certificates are issued. The ratings by the Rating Agencies take into
consideration the credit quality of the related mortgage pool, including any
credit support providers, structural and legal aspects associated with such
certificates, and the extent to which the payment stream on the mortgage pool is
adequate to make the payments required by such certificates. The ratings by the
Rating Agencies on such certificates do not, however, constitute a statement
regarding frequency of prepayments of the mortgage loans.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to such Certificates
by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Certificates by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Offered Certificates.
S-35
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
1933 Act............................................................................................. S-34
Accretion Termination Date........................................................................... S-12
Accrual Distribution Amount.......................................................................... S-12
Available Funds...................................................................................... S-11
Beneficial Owners.................................................................................... S-8
Book-Entry Certificates.............................................................................. S-8
Certificate Account.................................................................................. S-10
Certificateholder.................................................................................... S-8
Certificate Principal Balance........................................................................ S-12
Certificates......................................................................................... S-8
Class A Certificates................................................................................. S-8
Class A-6 Amount..................................................................................... S-11
Class A-6 Percentage................................................................................. S-12
Class R Certificate.................................................................................. S-8
Code................................................................................................. S-14, S-33
Contributions Tax.................................................................................... S-32
DEC Tables........................................................................................... S-20
Depositor............................................................................................ S-8
DTC.................................................................................................. S-8
DTC Rules............................................................................................ S-8
Due Date............................................................................................. S-17
Eligible Account..................................................................................... S-10
ERISA................................................................................................ S-33
Financial Intermediary............................................................................... S-8
GPT.................................................................................................. S-16
Headlands............................................................................................ S-16
Investment Company Act............................................................................... S-14
Majority in Interest................................................................................. S-14
Mortgage Loans....................................................................................... S-16
Mortgage Pool Principal Balance...................................................................... S-16
Offered Certificates................................................................................. S-8
Other Class A-1 Certificates......................................................................... S-16
Participants......................................................................................... S-9
Pass-Through Rate.................................................................................... S-12
Percentage Interest.................................................................................. S-15
Plan Asset Regulation................................................................................ S-33
Plans................................................................................................ S-33
Prohibited Transactions Tax.......................................................................... S-31
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------------------------- ----------
PSA.................................................................................................. S-20
<S> <C>
PTE.................................................................................................. S-33
Rating Agencies...................................................................................... S-35
Record Date.......................................................................................... S-10
REMIC................................................................................................ S-5
R.E.O................................................................................................ S-19
Residual Certificate................................................................................. S-8
Scheduled Percentage................................................................................. S-12
Securities Act....................................................................................... S-14
SMMEA................................................................................................ S-34
thrift institutions.................................................................................. S-32
Trust................................................................................................ S-8
Trustee.............................................................................................. S-8
Trust Agreement...................................................................................... S-8
Underlying Agreement................................................................................. S-16
Underlying Business Day.............................................................................. S-17
Underlying Certificate Account....................................................................... S-16
Underlying Certificates.............................................................................. S-8, S-16
Underlying Class A-1 Certificates.................................................................... S-15
Underlying Class PO Certificates..................................................................... S-17
Underlying Pass-Through Rate......................................................................... S-17
Underlying Prospectuses.............................................................................. S-18
Underlying Remittance Date........................................................................... S-17
Underlying Remittance Date Statements................................................................ S-18
Underlying Subordinate Interests..................................................................... S-16
Underlying Trust Fund................................................................................ S-16
Underlying Trustee................................................................................... S-16
Underwriter.......................................................................................... S-34
</TABLE>
S-37
<PAGE>
APPENDIX I
THE FOLLOWING TABLES SET FORTH INFORMATION WITH RESPECT
TO THE MORTGAGE LOAN AS OF THE CLOSE OF BUSINESS ON OCTOBER 1, 1999.
MORTGAGE LOAN CHARACTERISTICS OF THE MORTGAGE LOANS
YEAR OF FIRST PAYMENT
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
YEAR OF FIRST PAYMENT LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
1998.................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
TYPES OF MORTGAGED PROPERTIES SECURING THE MORTGAGE LOAN
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
Single Family Detached................................................ 968 $ 288,689,077 75.79%
Planned Unit Development.............................................. 202 63,745,063 16.73
Condominium........................................................... 103 22,151,500 5.82
Two-to-Four Family.................................................... 25 6,324,889 1.66
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING THE MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
Primary Residence..................................................... 1,288 $ 377,570,513 99.12%
Second Home........................................................... 10 3,340,015 0.88
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
Based on representations of the Mortgagor at the time of origination of the
related Mortgage Loan.
I-1
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES SECURING THE MORTGAGE
LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
GEOGRAPHIC DISTRIBUTION BY BALANCE LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
Arizona............................................................... 29 $ 6,479,367 1.70%
California............................................................ 1,095 337,075,155 88.49
Colorado.............................................................. 15 3,880,692 1.02
Connecticut........................................................... 2 650,281 0.17
Florida............................................................... 11 1,654,612 0.43
Georgia............................................................... 4 998,812 0.26
Idaho................................................................. 4 664,644 0.17
Maryland.............................................................. 3 430,811 0.11
Massachusetts......................................................... 1 269,526 0.07
Montana............................................................... 3 761,238 0.20
Nevada................................................................ 11 2,239,374 0.59
Oregon................................................................ 22 4,702,492 1.23
South Carolina........................................................ 3 498,940 0.13
Utah.................................................................. 19 3,501,680 0.92
Virginia.............................................................. 8 1,538,651 0.40
Washington............................................................ 68 15,564,254 4.09
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
Number of States Represented: 16
</TABLE>
LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
LOAN PURPOSE LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
Refinance--Rate Term.................................................. 606 $ 173,281,603 45.49%
Purchase.............................................................. 524 155,852,665 40.92
Refinance--Cashout.................................................... 168 51,776,261 13.59
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
I-2
<PAGE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
CURRENT MORTGAGE LOAN PRINCIPAL PRINCIPAL BALANCE ($) LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
0.01--50,000.00....................................................... 3 $ 142,493 0.04%
50,000.01--100,000.00................................................. 54 4,231,119 1.11
100,000.01--150,000.00................................................ 159 20,207,884 5.31
150,000.01--200,000.00................................................ 130 22,928,287 6.02
200,000.01--250,000.00................................................ 190 43,578,095 11.44
250,000.01--300,000.00................................................ 260 71,412,155 18.75
300,000.01--350,000.00................................................ 162 52,262,265 13.72
350,000.01--400,000.00................................................ 115 43,150,213 11.33
400,000.01--500,000.00................................................ 105 46,833,350 12.30
500,000.01--600,000.00................................................ 67 36,296,843 9.53
600,000.01--700,000.00................................................ 28 17,813,899 4.68
700,000.01--800,000.00................................................ 7 5,276,698 1.39
800,000.01--900,000.00................................................ 7 6,019,670 1.58
900,000.01--1,000,000.00.............................................. 10 9,751,615 2.56
1,000,000.01 >=....................................................... 1 1,005,942 0.26
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
As of October 1, 1999, the average current principal balance of the Mortgage
Loans is approximately $293,460.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIO (%) LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
0.01--50.00........................................................... 55 $ 16,914,928 4.44%
50.01--55.00.......................................................... 37 9,279,435 2.44
55.01--60.00.......................................................... 40 12,307,856 3.23
60.01--65.00.......................................................... 86 33,617,743 8.83
65.01--70.00.......................................................... 99 28,635,559 7.52
70.01--75.00.......................................................... 275 79,271,908 20.81
75.01--80.00.......................................................... 650 187,906,078 49.33
80.01--85.00.......................................................... 8 2,061,519 0.54
85.01--90.00.......................................................... 11 3,225,227 0.85
90.01--95.00.......................................................... 37 7,690,275 2.02
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
As of October 1, 1999, the weighted average original loan-to-value ratio is
approximately 73.29%.
I-3
<PAGE>
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MORTGAGE RATE (%) LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
6.500................................................................. 2 $ 321,946 0.08%
6.625................................................................. 7 2,077,153 0.55
6.750................................................................. 21 6,611,946 1.74
6.875................................................................. 76 23,339,930 6.13
7.000................................................................. 154 48,042,828 12.61
7.125................................................................. 167 53,920,570 14.16
7.250................................................................. 319 96,469,843 25.33
7.375................................................................. 222 67,335,613 17.68
7.500................................................................. 174 46,122,458 12.11
7.625................................................................. 98 23,835,924 6.26
7.750................................................................. 34 7,833,489 2.06
7.875................................................................. 19 4,445,891 1.17
8.000................................................................. 5 552,936 0.15
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
As of October 1, 1999, the weighted average mortgage rate is approximately
7.2596%.
ORIGINAL TERMS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
180................................................................... 29 $ 6,917,009 1.82%
360................................................................... 1,269 373,993,519 98.18
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
As of October 1, 1999, the weighted average stated remaining term is
approximately 344 months.
DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION LEVEL LOANS AS OF CUT-OFF DATE LOANS
- ---------------------------------------------------------------------- --------- ------------------- --------
<S> <C> <C> <C>
Full Documentation.................................................... 636 $ 194,222,885 50.99%
Limited Documentation................................................. 662 186,687,643 49.01
----- ------------- ------
Total................................................................. 1,298 $ 380,910,528 100.00%
----- ------------- ------
----- ------------- ------
</TABLE>
I-4
<PAGE>
EXHIBIT A
THE INFORMATION ABOUT THE UNDERLYING CERTIFICATES AND THE MORTGAGE LOANS
CONTAINED IN THIS EXHIBIT A HAS BEEN OBTAINED FROM THE UNDERLYING PROSPECTUS,
WHICH WAS PREPARED IN CONNECTION WITH THE INITIAL OFFERING OF THE UNDERLYING
CERTIFICATES. THE UNDERLYING CERTIFICATES ARE PART OF THE CLASS OF CERTIFICATES
REFERRED TO IN THE UNDERLYING PROSPECTUS AS THE CLASS A-1 CERTIFICATES.
REFERENCES IN THE UNDERLYING PROSPECTUS TO THE SENIOR CERTIFICATES, INCLUDES
SUCH CLASS A-1 CERTIFICATES. SUCH INFORMATION HAS NOT BEEN INDEPENDENTLY
REPRESENTED TO THE TRUST AS BEING ACCURATE AND COMPLETE. ADDITIONALLY THE
UNDERLYING PROSPECTUS CONTAINS INFORMATION ONLY AS OF THE DATE OF SUCH DOCUMENT.
YOU SHOULD BE AWARE, HOWEVER, THAT MATERIAL CHANGES MAY HAVE OCCURRED SINCE THE
PREPARATION OF THE UNDERLYING PROSPECTUS AND THE COMPOSITION OF THE RELATED
MORTGAGE POOLS MAY HAVE CHANGED SIGNIFICANTLY. THERE MAY BE CONSIDERABLE
DIFFERENCES BETWEEN THE CURRENT MORTGAGE LOAN CHARACTERISTICS AND THE
CHARACTERISTICS DESCRIBED IN CONNECTION WITH THE ISSUANCE OF THE UNDERLYING
CERTIFICATES. ALL CAPITALIZED TERMS CONTAINED IN THE FOLLOWING EXCERPTS FROM THE
UNDERLYING PROSPECTUS HAVE THE MEANINGS SOLELY AS SPECIFIED IN SUCH EXCERPTS.
EXCERPTS FROM THE UNDERLYING PROSPECTUS
* * *
THE MORTGAGE POOL
GENERAL
Certain information with respect to the mortgage loans ("Mortgage Loans")
included in the mortgage pool ("Mortgage Pool") is set forth below. Prior to the
Closing Date, Mortgage Loans may be removed from the Mortgage Pool and other
Mortgage Loans may be substituted therefor. The Sponsor believes that the
information set forth herein with respect to the Mortgage Pool as presently
constituted is representative of the characteristics of the Mortgage Pool as it
will be constituted at the Closing Date, although the range of the Mortgage
Rates (as defined below) and the maturities and certain other characteristics of
the Mortgage Loans in the Mortgage Pool may vary. In no event will more than 5%
of the Cut-off Date Pool Principal Balance of the Mortgage Pool deviate from the
characteristics of the Mortgage Loans described herein.
As of the Cut-off Date, the aggregate of the Scheduled Principal Balances
of the Mortgage Loans is approximately $400,143,355 (the "Cut-off Date Pool
Principal Balance"). The Mortgage Pool consists of 1,350 Mortgage Loans having
original terms to stated maturity (based on the date of origination or any later
modification) of 30 years, except for 29 Mortgage Loans which have original
terms to stated maturity of 15 years (based on the date of origination or any
later modification). The Mortgage Loans provide for the amortization of the
amount financed over a series of monthly payments. All of the Mortgage Loans
provide for payments due as of the first day of each month (each, a "Due Date").
The Mortgage Loans included in the Mortgage Pool were originated or acquired by
the Seller in the normal course of its mortgage banking business substantially
in accordance with the underwriting criteria specified herein. Monthly payments
made by the mortgagors ("Mortgagors") on the Mortgage Loans either earlier or
later than the related Due Date will not affect the amortization schedule or the
relative application of such payments to principal and interest. The Mortgage
Loans may be prepaid at any time. All of the Mortgage Loans are subject to a
prepayment penalty. During the first five years after origination, if a
Mortgagor makes prepayments in any twelve-month period which in the aggregate
exceeds 20% of the original principal amount (other than as a result of a sale
of the Mortgaged Property), the borrower will be subject to a prepayment penalty
equal to six months of interest, calculated at the applicable Mortgage Rate, on
the aggregate amount of such prepayments.
Each Mortgage Loan accrues interest at a fixed-rate (the "Mortgage Rate")
specified in the related Mortgage Note.
The latest date on which any Mortgage Loan matures is November 1, 2028. The
earliest stated maturity date of any Mortgage Loan is July 1, 2013.
None of the Mortgage Loans are assumable. None of the Mortgage Loans are 30
or more days delinquent in payment as of the Closing Date.
A-1
<PAGE>
None of the Mortgage Loans are subject to a buydown agreement.
None of the Mortgage Loans have a Loan-to-Value Ratio (as defined below) at
origination of more than 95.00%. As of the Cut-off Date, the weighted average of
the Loan-to-Value Ratios at origination of the Mortgage Loans was approximately
73.29%. All of the Mortgage Loans with Loan-to-Value Ratios at origination of
greater than 80% are covered by a primary mortgage insurance policy issued by a
mortgage insurance company approved by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which policy
provides coverage in an amount equal at least to the excess of the original
principal balance of the related Mortgage Loan plus accrued interest thereon and
related foreclosure expenses over 75% of the value of the related mortgaged
property ("Mortgaged Property"). No such primary mortgage insurance policy will
be required with respect to any such Mortgage Loan after the date on which the
related Loan-to-Value Ratio is less than 80%.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is the lesser of the selling price of the related Mortgaged
Property and its appraised value determined in an appraisal at origination, or
in the case of refinancings, the value set forth in an appraisal at the time of
such refinancing. No assurance can be given that the value of any Mortgaged
Property has remained or will remain at the level that existed on the appraisal
or sales date. If residential real estate values generally or in a particular
geographic area decline, the Loan-to-Value Ratios might not be a reliable
indicator of the rates of delinquencies, foreclosures and losses that could
occur with respect to such Mortgage Loans.
Approximately 88.54% (by Cut-off Date Pool Principal Balance) will be
secured by Mortgaged Properties located in California. Except as indicated in
the preceding sentence no more than approximately 4.04% (by Cut-off Date Pool
Principal Balance) of the Mortgage Loans will be secured by Mortgaged Properties
located in any one state.
* * *
SERVICING OF MORTGAGE LOANS
* * *
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by Headlands.
Headlands originates and purchases "conventional non-conforming mortgage loans"
(i.e., loans which are not insured by the Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans Administration ("VA") or which do not
qualify for sale to FNMA or FHLMC) secured by first liens on one- to four-family
residential properties. These loans typically differ from those underwritten to
the guidelines established by FNMA, FHLMC and the Government National Mortgage
Association ("GNMA") primarily with respect to original principal balances,
loan-to-value ratios, borrower income, required documentation, interest rates,
borrower occupancy of the mortgaged property and/or property types. To the
extent that these programs reflect underwriting standards different from those
of FNMA, FHLMC and GNMA, the performance of loans made thereunder may reflect
higher delinquency rates and/or credit losses.
All mortgage loans originated or acquired by Headlands are generally
underwritten by Headlands according to its credit, appraisal and underwriting
standards. Such underwriting standards (the "Underwriting Standards") are
applied to evaluate the prospective borrower's credit standing and repayment
ability and the value and adequacy of the mortgaged property as collateral.
These standards are applied in accordance with applicable federal and state laws
and regulations. Exceptions to the Underwriting Standards are permitted where
compensating factors are present.
Headlands' Underwriting Standards for purchase money or rate/term refinance
loans secured by one- to two-family primary residences generally allow
Loan-to-Value Ratios at origination of up to 95% for mortgage loans with
original principal balances of up to $300,000, up to 90% for mortgage loans
secured by one- to four-family, primary residences with original principal
balances of up to $400,000, up to 85% for mortgage
A-2
<PAGE>
loans with original principal balances of up to $500,000 and up to 80% for
mortgage loans with original principal balances up to $650,000. Headlands may
acquire mortgage loans with principal balances up to $3,000,000 ("super jumbos")
if the loan is secured by the borrower's primary residence. The Loan-to-Value
Ratio for super jumbos generally may not exceed 60%. For cash-out refinance
loans, the maximum Loan-to-Value Ratio generally is 80%, and the maximum
"cashout" amount permitted is based in part on the original amount of the
related mortgage loan.
Headlands' Underwriting Standards for mortgage loans secured by investment
properties generally allow Loan-to-Value Ratios at origination of up to 90% for
mortgage loans with original principal balances up to $250,000. Headlands'
Underwriting Standards permit mortgage loans secured by investment properties to
have higher original principal balances if they have lower Loan-to-Value Ratios
at origination.
For each mortgage loan with a Loan-to-Value Ratio at origination exceeding
80%, Headlands generally requires a primary mortgage insurance policy insuring a
portion of the balance of the mortgage loan at least equal to the product of the
original principal balance of such mortgage loan and a fraction, the numerator
of which is the excess of the original principal balance of such mortgage loan
over 75% of the lesser of the appraised value and selling price of the related
mortgage property and the denominator of which is the original principal balance
of the related mortgage loan plus accrued interest thereon and related
foreclosure expenses. No such primary mortgage insurance policy will be required
with respect to any such mortgage loan after the date on which the related
Loan-to-Value Ratio decreases to 80% or less or, based upon a new appraisal, the
principal balance of such mortgage loan represents 80% or less of the new
appraised value. All of the insurers which have issued primary mortgage
insurance policies with respect to the Mortgage Loans meet FNMA's or FHLMC's
standards or are acceptable to the Rating Agencies. In certain circumstances,
however, Headlands does not require primary mortgage insurance on mortgage loans
with principal balances up to $250,000 that have Loan-to-Value Ratios exceeding
80% but less than or equal to 90%. All residences except cooperatives and
certain high-rise condominium dwellings are eligible for this program. Each
qualifying mortgage loan will be made at an interest rate that is higher than
the rate would be if the Loan-to-Value Ratio was 80% or less or if primary
mortgage insurance was obtained. Under such circumstances, the
Certificateholders will not have the benefit of primary mortgage insurance
coverage.
In determining whether a prospective borrower has sufficient monthly income
available (i) to meet the borrower's monthly obligation on the proposed mortgage
loan and (ii) to meet monthly housing expenses and other financial obligations
including the borrower's monthly obligations on the proposed mortgage loan,
Headlands generally considers, when required by the applicable documentation
program, the ratio of such amounts to the proposed borrower's acceptable stable
monthly gross income. Such ratios vary depending on a number of underwriting
criteria, including Loan-to-Value Ratios, and are determined on a loan-by-loan
basis.
Headlands also examines a prospective borrower's credit report. Generally,
each credit report provides a credit score for the borrower. Credit scores
generally range from 350 to 850 and are available from three major credit
bureaus: Experian (formerly TRW Information Systems and Services), Equifax and
Trans Union. Headlands attempts to obtain for each borrower a credit score from
each credit bureau. If three credit scores are obtained, Headlands applies the
middle score of the primary wage earner. If two scores are obtained, Headlands
applies the lower score of the primary wage earner. These scores estimate, on a
relative basis, which loans are most likely to default in the future. Lower
scores imply higher default risk relative to a higher score. Credit scores are
empirically derived from historical credit bureau data and represent a numerical
weighing of a borrower's credit characteristics over a two-year period. A credit
score is generated through the statistical analysis of a number of
credit-related characteristics or variables. Common characteristics include
number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indebtedness, types of credit and
length of credit history. Attributes are the specific values of each
characteristic. A scorecard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by summing together the attribute weights for that applicant.
Headlands originates and acquires loans which have been underwritten under
one of five documentation programs: full documentation, alternative
documentation, limited documentation, no ratio loan documentation and no
income/no asset verification.
A-3
<PAGE>
Under full documentation, the prospective borrower's employment, income and
assets are verified through written and telephonic communications. Alternative
documentation provides for alternative methods of employment verification
generally using W-2 forms or pay stubs. Generally, under the full documentation
program, a prospective borrower is required to have a minimum credit score of
620 and under the alternative documentation program, a minimum credit score of
640.
Under the limited documentation program, more emphasis is placed on the
value and adequacy of the mortgaged property as collateral, credit history and
other assets of the borrower than on verified income of the borrower. Mortgage
loans underwritten using the limited documentation program are limited to
borrowers with credit histories that demonstrate an established ability to repay
indebtedness in a timely fashion. Under the limited documentation program, a
prospective borrower is required to have a minimum credit score of 640. Under
the limited documentation program, certain credit underwriting documentation
concerning income or income verification and/or employment verification is
waived. Loans originated and acquired with limited documentation include
cash-out refinance loans, super jumbos and mortgage loans secured by
investor-owned properties. Permitted maximum Loan-to-Value Ratios (including
secondary financing) under the limited documentation program, which range up to
80%, are more restrictive than mortgage loans originated with full documentation
or alternative documentation.
Under the no ratio loan documentation program, income ratios for the
prospective borrower are not calculated. Mortgage loans underwritten using the
no ratio loan documentation program have Loan-to-Value Ratios less than or equal
to 80% and meet the standards for the limited documentation program. A minimum
credit score of 680 is required for this program.
Under the no income/no asset verification program, emphasis is placed on
the value and adequacy of the mortgaged property as collateral and credit
history rather than on verified income and assets of the borrower. Mortgage
loans underwritten under no income/no asset verification are limited to
borrowers with excellent credit histories. A minimum credit score of 680 is
required for this program. Under the no income/no asset verification program,
credit underwriting documentation concerning income, employment verification and
asset verification is waived and income ratios are not calculated. The maximum
permitted Loan-to-Value Ratio under the no income/no asset verification program
is 75%.
Headlands generally performs a pre-funding audit on each mortgage loan.
This audit includes a review for compliance with applicable underwriting program
guidelines and accuracy of the credit report and phone verification of
employment. Headlands performs a post-funding quality control review on a
minimum of 4% of the mortgage loans originated or acquired for complete
re-verification of employment, income and liquid assets used to qualify for such
mortgage loan. Such review also includes procedures intended to detect evidence
of fraudulent documentation and/or imprudent activity during the processing,
funding, servicing or selling of the mortgage loan. Verification of occupancy
and applicable information is made by regular mail.
One- to four-family residential properties are appraised by qualified
independent appraisers who are approved by Headlands. All appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and must be
on forms acceptable to FNMA and FHLMC. As part of Headlands' pre-funding quality
control procedures, either field or desk appraisal reviews are obtained on 10%
of all mortgage loans.
* * *
DESCRIPTION OF THE CERTIFICATES
* * *
DISTRIBUTIONS
General. Distributions on each Distribution Date will be made by check
mailed to the address of the person entitled thereto as it appears on the
applicable certificate register or, in the case of a Certificateholder who holds
100% of a Class of Certificates or who holds Certificates of a Class with an
aggregate initial certificate balance of at least $5,000,000 and who has so
notified the Trustee in writing in accordance with the Pooling Agreement by wire
transfer in immediately available funds to the account of such
A-4
<PAGE>
Certificateholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentment and surrender
of such Certificates at the Corporate Trust Office of the Trustee.
The Trustee will forward with each distribution on a Distribution Date to
each Offered Certificateholder and the Master Servicer a statement or statements
setting forth, among other things, (i) the amount of such distribution allocable
to principal and (ii) the amount of such distribution allocable to interest.
Such amounts will be expressed as a dollar amount per $1,000 of
Class Certificate Balance. See "Description of the Certificates--Reports to
Certificateholders" in the Prospectus for a detailed description of the
information to be included in such statements.
Allocation of Available Funds. Interest and principal on the Certificates
will be distributed monthly on each Distribution Date, commencing in November
1998, in an aggregate amount equal to the Available Funds for such Distribution
Date to holders of record of such Certificates on the last business day of the
month preceding the month of such Distribution Date (the "Record Date").
On each Distribution Date, an amount equal to the Available Funds will be
distributed in the following order of priority among the following Classes of
Certificates:
first, to each Class of interest bearing Senior Certificates, the Interest
Distribution Amount on each such Class for such Distribution Date, and to the
Master Servicer, accrued and unpaid Excess Servicing Fee, any shortfall in
available amounts being allocated among such Classes and the Excess Servicing
Fee in proportion to the amount such Classes and the Master Servicer are
entitled to receive pursuant to this clause for such Distribution Date;
second, to the Senior Certificates in reduction of the Class Certificate
Balances thereof:
(a) the Senior Principal Distribution Amount (as defined herein) for
such Distribution Date, in the following order of priority:
(i) to the Class R Certificates, until the Class Certificate
Balance thereof has been reduced to zero; and
(ii) to the Class A-1 Certificates, until the
Class Certificate Balance thereof has been reduced to zero.
(b) the Class PO Principal Distribution Amount (as defined herein) for
such Distribution Date, to the Class PO Certificates, until the
Class Certificate Balance thereof has been reduced to zero.
If, after distributions have been made pursuant to priority first above on
any Distribution Date, remaining Available Funds are less than the sum of the
Senior Principal Distribution Amount and the Class PO Principal Distribution
Amount for such Distribution Date, such amounts shall be proportionately
reduced, and such remaining Available Funds will be distributed on the Class A
Certificates, Residual Certificates and Class PO Certificates in accordance with
clauses (a) and (b) of priority second above on the basis of such reduced
amounts. Notwithstanding any reduction in principal distributable to the Class
PO Certificates pursuant to this paragraph, the Class Certificate Balance of the
Class PO Certificates shall be reduced not only by principal so distributed but
also by the difference between (i) principal distributable to the Class PO
Certificates in accordance with clause (b) of priority second above and (ii)
principal actually distributed to the Class PO Certificates pursuant to such
clause after giving effect to this paragraph (the "Class PO Cash Shortfall").
Any such Class PO Cash Shortfall with respect to any Distribution Date will be
added to the Class PO Deferred Amount.
third, the Class PO Deferred Amount for such Distribution Date to the Class PO
Certificates; provided that (i) on any Distribution Date, distributions pursuant
to this clause, shall not exceed the excess, if any, of (x) the Available Funds
remaining after giving effect to distributions pursuant to priority second above
over (y) the aggregate of the Interest Distribution Amounts for such
Distribution Date on all Classes of Subordinate Certificates then outstanding,
(ii) such distributions shall not reduce the Class Certificate Balance of the
Class PO Certificates and (iii) no distribution will be made in respect of the
Class PO Deferred Amount after the Distribution Date on which the aggregate
Class Certificate Balances of the Subordinate Certificates have been reduced to
zero (the "Cross-Over Date").
A-5
<PAGE>
fourth, sequentially, to the Class B-1, Class B-2, Class B-3, Class B-4, Class
B-5 and Class B-6 Certificates, in that order, up to an amount equal to and in
the following order: (a) the related Interest Distribution Amount thereon for
such Distribution Date and (b) the Pro Rata Share (as defined herein) for such
Class for such Distribution Date.
fifth, any Available Funds remaining after payment of interest and principal as
described above will be distributed to the Class R Certificates. It is not
anticipated that there will be any significant amounts remaining for such
distribution.
INTEREST
The Pass-Through Rate for each Class of Offered Certificates for each
Distribution Date (each, a "Pass-Through Rate") will be as described on page S-3
hereof.
On each Distribution Date, each Class of interest bearing Offered
Certificates, to the extent of funds available therefore on such Distribution
Date as described above under "--Distributions", will be entitled to receive an
amount allocable to interest (as to each such Class, the "Interest Distribution
Amount") equal to the sum of (i) interest accrued during the applicable Interest
Accrual Period at the applicable Pass-Through Rate on the related Class
Certificate Balance and (ii) the sum of the amounts, if any, by which the amount
described in clause (i) above on each prior Distribution Date exceeded the
amount actually distributed as interest on such prior Distribution Dates and not
subsequently distributed ("Unpaid Interest Shortfall"). Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-day
months.
The Excess Servicing Fee and the interest entitlement described above for
each Class of Certificates will be reduced by "Net Interest Shortfalls" for such
Distribution Date. With respect to any Distribution Date, the "Net Interest
Shortfall" is equal to the sum of (i) the amount of interest that would
otherwise have been received with respect to any Mortgage Loan that was the
subject of (a) a Relief Act Reduction or (b) after the coverage provided by the
Subordinate Certificates is exhausted for such type of loss, a Special Hazard
Loss, Fraud Loss or a Bankruptcy Loss, and (ii) any Net Prepayment Interest
Shortfalls. A "Relief Act Reduction" is a reduction in the amount of monthly
interest payment on a Mortgage Loan pursuant to the Soldiers' and Sailors' Civil
Relief Act of 1940. See "Certain Legal Aspects of Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act" in the Prospectus. "Net Prepayment Interest
Shortfall" is the amount by which the aggregate of Prepayment Interest
Shortfalls experienced by the Mortgage Loans in respect of a Distribution Date
exceeds the aggregate amount of the Compensating Interest Payments for such
Distribution Date. With respect to any Distribution Date, the "Prepayment
Interest Shortfall" is equal to the aggregate shortfall, if any, in collections
of interest (adjusted to the related Net Mortgage Rates) resulting from (a)
prepayments in full received from the 16th day (or, in the case of the first
Distribution Date, from the Cut-off Date) through the last day of the month
preceding such Distribution Date and (b) partial principal prepayments received
during the related Prepayment Period to the extent applied prior to the Due Date
in the month of the Distribution Date. Net Interest Shortfalls on any
Distribution Date will be allocated pro rata among all interest-bearing Classes
and the Excess Servicing Fee, based on (i) in the case of the Certificates, the
amount of interest each such Class of Certificates would otherwise be entitled
to receive on such Distribution Date and (ii) in the case of the Excess
Servicing Fee, based on the amount of the Excess Servicing Fee the Master
Servicer would otherwise be entitled to receive on such Distribution Date, in
each case before taking into account any reduction in such amounts resulting
from such Net Interest Shortfalls.
In the event that, on a particular Distribution Date, Available Funds on
such Distribution Date applied in the order described above under
"--Distributions," are not sufficient to make a full distribution of interest to
holders of the Offered Certificates, interest will be distributed on such Class
or Classes of Offered Certificates of equal priority in proportion to the amount
of interest each such Class or Classes would otherwise have been entitled to
receive in the absence of such shortfall. Any Unpaid Interest Shortfall will be
carried forward and added to the amount holders of each such Class of Offered
Certificates will be entitled to receive on the next Distribution Date. Such a
shortfall could occur, for example, if losses realized on the Mortgage Loans
were exceptionally high or were concentrated in a particular month. Any such
amount so carried forward will not bear interest.
A-6
<PAGE>
With respect to each Distribution Date, the "Interest Accrual Period" for
each Class of interest-bearing Certificates will be the calendar month preceding
the month in which the Distribution Date occurs.
The "Net Mortgage Rate" of a Mortgage Loan is the Mortgage Rate thereof
minus the Expense Rate with respect to such Mortgage Loan.
PRINCIPAL
An amount equal to all amounts payable in respect of principal of the
Mortgage Loans will be allocated between (i) the Senior Certificates (other than
the Class PO Certificates) and the Subordinate Certificates, on the one hand,
and (ii) the Class PO Certificates, on the other, in each case based on the
applicable Non-PO Percentage and the applicable PO Percentage, respectively, of
such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate less than 6.75% per annum (each such Mortgage Loan, a "Discount
Mortgage Loan") will be equal to the Net Mortgage Rate thereof divided by 6.75%.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net Mortgage
Rate equal to or greater than 6.75% (each such Mortgage Loan, a "Non-Discount
Mortgage Loan") will be 100%. The "PO Percentage" with respect to any Discount
Mortgage Loan will be the fraction, expressed as a percentage, equal to 6.75%
minus the Net Mortgage Rate thereof divided by 6.75%. The "PO Percentage" with
respect to any Non-Discount Mortgage Loan will be 0%.
The amount to which the Senior Certificates (other than the Class PO
Certificates) are entitled as principal on any Distribution Date (the "Senior
Principal Distribution Amount") will be an amount equal to the sum of:
(i) the Senior Percentage (as defined below) of the applicable
Non-PO Percentage of all scheduled payments of principal due on each
Mortgage Loan on the first day of the month in which the Distribution Date
occurs, as specified in the amortization schedule at the time applicable
thereto (after adjustment for previous principal prepayments and the
principal portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule
by reason of other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period);
(ii) the Senior Prepayment Percentage (as defined below) of the
applicable Non-PO Percentage of the Scheduled Principal Balance of each
Mortgage Loan which was the subject of prepayment in full received by the
Master Servicer during the applicable Prepayment Period;
(iii) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received on each
Mortgage Loan during the applicable Prepayment Period;
(iv) with respect to each Mortgage Loan that became a Liquidated
Mortgage Loan during the related Prepayment Period, the lesser of (x) the
applicable Senior Percentage of the applicable Non-PO Percentage of the
Scheduled Principal Balance of such Mortgage Loan and (y) either (A) the
applicable Senior Prepayment Percentage or (B) if an Excess Loss was
sustained with respect to such Liquidated Mortgage Loan during such
preceding calendar month, the applicable Senior Percentage of the
applicable Non-PO Percentage of the Liquidation Proceeds and Insurance
Proceeds allocable to principal received with respect to such Mortgage
Loan; and
(v) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan which was repurchased by the Seller in connection with such
Distribution Date, (b) the Substitution Adjustment Amount in connection
with any Mortgage Loan that has been replaced by the Seller with a
substitute Mortgage Loan pursuant to the Pooling Agreement in connection
with such Distribution Date and (c) other unscheduled payments of principal
not otherwise referred to in this definition.
The "Senior Percentage" will initially equal approximately 95.49%. The
Senior Percentage will be recalculated with respect to each Distribution Date to
equal the percentage (carried to six places rounded up) obtained by dividing the
aggregate of the Class Certificate Balances of the Class A Certificates and the
Residual Certificates immediately preceding such Distribution Date by the
aggregate Class Certificate Balance of all the Certificates (other than the
Class PO Certificates) immediately preceding such Distribution Date.
A-7
<PAGE>
The "Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ----------------------------------------------------------------------------- ---------------------------------
<S> <C>
November 25, 1998--October 25, 2003.......................................... 100%
November 25, 2003--October 25, 2004.......................................... applicable Senior Percentage plus
70% of the applicable Subordinate
Percentage
November 25, 2004--October 25, 2005.......................................... applicable Senior Percentage plus
60% of the applicable Subordinate
Percentage
November 25, 2005--October 25, 2006.......................................... applicable Senior Percentage plus
40% of the applicable Subordinate
Percentage
November 25, 2006--October 25, 2007.......................................... applicable Senior Percentage plus
20% of the applicable Subordinate
Percentage
November 25, 2007 and thereafter............................................. applicable Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Distribution Date the Senior
Percentage exceeds the Senior Percentage as of the Cut-off Date, the Senior
Prepayment Percentage for such Distribution Date will equal 100%. Upon reduction
of the Class Certificate Balances of the Class A Certificates and the Residual
Certificates to zero, the related Senior Prepayment Percentage will equal 0%.
In addition, no reduction of the Senior Prepayment Percentage shall occur
on any Distribution Date (such limitation being the "Senior Prepayment
Percentage Stepdown Limitation") unless, as of the last day of the month
preceding such Distribution Date, either (a)(i)(A) the aggregate outstanding
principal balance of Mortgage Loans delinquent 60 days or more (including for
this purpose any Mortgage Loans in foreclosure and Mortgage Loans with respect
to which the related Mortgaged Property has been acquired by the Trust),
averaged over the last six months, as a percentage of the aggregate Class
Certificate Balances of the Subordinate Certificates averaged over the last six
months, does not exceed 50% or (B) the aggregate outstanding principal balance
of the Mortgage Loans delinquent 60 days or more averaged over the last six
months, as a percentage of the aggregate outstanding principal balance of all
Mortgage Loans averaged over the last six months, does not exceed 2% and (ii)
cumulative Realized Losses on the Mortgage Loans do not exceed (A) 30% of the
aggregate Class Certificate Balances of the Subordinate Certificates as of the
Cut-off Date (the "Original Subordinate Principal Balance") if such Distribution
Date occurs between and including November 2003 and October 2004, (B) 35% of the
Original Subordinate Principal Balance if such Distribution Date occurs between
and including November 2004 and October 2005, (C) 40% of the Original
Subordinate Principal Balance if such Distribution Date occurs between and
including November 2005 and October 2006, (D) 45% of the Original Subordinate
Principal Balance if such Distribution Date occurs between and including
November 2006 and October 2007, (E) 50% of the Original Subordinate Principal
Balance if such Distribution Date occurs during or after November 2007 or (b)(i)
the outstanding principal balance of the Mortgage Loans delinquent 60 days or
more averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last six
months, does not exceed 4% and (ii) Realized Losses on the Mortgage Loans to
date for such Distribution Date are less than 10% of the Original Subordinate
Principal Balance.
The "Class PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of
principal due on each Discount Mortgage Loan on the first day of the month
in which the Distribution Date occurs, as specified in the amortization
schedule at the time applicable thereto (after adjustment for previous
principal prepayments and the principal portion of Debt Service Reductions
after the Bankruptcy Coverage Termination Date, but before any adjustment
to such amortization schedule by reason of any other bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period);
A-8
<PAGE>
(ii) the applicable PO Percentage of the Scheduled Principal Balance
of each Discount Mortgage Loan which was the subject of a prepayment in
full received by the Master Servicer during the applicable Prepayment
Period;
(iii) the applicable PO Percentage of all partial prepayments of
principal on each Discount Mortgage Loan received during the applicable
Prepayment Period;
(iv) with respect to each Discount Mortgage Loan that became a
Liquidated Mortgage Loan during the related Prepayment Period, the
applicable PO Percentage of the amount of Liquidation Proceeds and
Insurance Proceeds received during the related Prepayment Period; and
(v) the applicable PO Percentage of the sum of (a) the Scheduled
Principal Balance of each Discount Mortgage Loan which was repurchased by
the Seller in connection with such Distribution Date, (b) the Substitution
Adjustment Amount in connection with any Discount Mortgage Loan that has
been replaced by the Seller with a substitute Discount Mortgage Loan
pursuant to the Pooling Agreement in connection with such Distribution Date
and (c) other unscheduled payments of principal not otherwise referred to
in this definition.
The "Subordination Percentage", which will initially equal approximately
4.51% will be recalculated for each Distribution Date to equal 100% minus the
Senior Percentage for such Distribution Date. The "Subordinate Prepayment
Percentage" will equal 100% minus the related Senior Prepayment Percentage,
except that on any Distribution Date after the Class Certificate Balances of the
Senior Certificates have been reduced to zero, the applicable Subordinate
Prepayment Percentage will equal 100%.
The "Subordinate Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following amounts
(but in no event greater than the aggregate Class Certificate Balances of the
Subordinate Certificates immediately prior to such Distribution Date):
(i) the Subordinate Percentage of the applicable Non-PO Percentage
of all scheduled payments of principal due on each Mortgage Loan on the
first day of the month in which the Distribution Date occurs, as specified
in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal portion of
Debt Service Reductions after the Bankruptcy Coverage Termination Date, but
before any adjustment to such amortization schedule by reason of any other
bankruptcy or similar proceeding or any moratorium or similar waiver or
grace period);
(ii) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the Scheduled Principal Balance of each Mortgage Loan which
was the subject of a prepayment in full received by the Master Servicer
during the applicable Prepayment Period;
(iii) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received on each
Mortgage Loan during the applicable Prepayment Period (plus, on the
Distribution Date on which the Class Certificate Balances of the Senior
Certificates have all been reduced to zero, 100% of any Senior Principal
Distribution Amount remaining undistributed on such date);
(iv) with respect to each Mortgage Loan that became a Liquidated
Mortgage Loan during the related Prepayment Period, the applicable Non-PO
Percentage of the Liquidation Proceeds and Insurance Proceeds allocable to
principal received with respect to such Mortgage Loan during such
Prepayment Period, after application of amounts pursuant to clause (iv) of
the definition of the applicable Senior Principal Distribution Amount, up
to the Subordinate Percentage of the applicable Non-PO Percentage of the
Scheduled Principal Balance of such Mortgage Loan; and
(v) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan which was repurchased by the Seller in connection with such
Distribution Date, (b) the Substitution Adjustment Amount in connection
with any Mortgage Loan that has been replaced by the Seller with a
substitute Mortgage Loan pursuant to the Pooling Agreement in connection
with such Distribution Date and (c) other unscheduled payments of principal
not otherwise referred to in this definition.
A-9
<PAGE>
On any Distribution Date, any reduction in funds available for distribution
to the Classes of Subordinate Certificates resulting from a distribution of the
Class PO Deferred Amount will be allocated to the Classes of Subordinate
Certificates, in reduction of the Pro Rata Shares thereof, in reverse order of
their numerical Class designations.
The "Pro Rata Share" with respect to any Class of Subordinate Certificates
on any Distribution Date will generally equal such Class's pro rata share (based
on the Class Certificate Balances of each Class entitled thereto) of the amount
calculated pursuant to the definition of the Subordinate Principal Distribution
Amount for such Distribution Date.
With respect to each Class of Subordinate Certificates (other than such
Class then outstanding with the lowest numerical Class designation), if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinate Certificates which have higher numerical
Class designations than such Class (the "Applicable Credit Support Percentage"),
is less than the Applicable Credit Support Percentage for such Class on the date
of issuance of the Certificates (the "Original Applicable Credit Support
Percentage"), no distribution of the amount calculated pursuant to clauses (ii),
(iii) and (v) of the definitions of Subordinate Principal Distribution Amount
will be made to any such Classes (the "Restricted Classes") and the amount
otherwise distributable to the Restricted Classes in respect thereof will be
allocated among the remaining Classes of Subordinate Certificates, pro rata,
based upon their respective Class Certificate Balances, and distributed in the
order described above.
The "Class Subordination Percentage" with respect to any Distribution Date
and each Class of Subordinate Certificates will equal the fraction (expressed as
a percentage) the numerator of which is the Class Certificate Balance of such
Class of Subordinate Certificates, immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all Classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinate Certificates on the date of issuance of the Certificates are
expected to be as follows:
<TABLE>
<S> <C>
Class B-1....................................................... 4.50%
Class B-2....................................................... 2.50%
Class B-3....................................................... 1.60%
Class B-4....................................................... 1.00%
Class B-5....................................................... 0.65%
Class B-6....................................................... 0.35%
</TABLE>
"Scheduled Principal Balance" of a Mortgage Loan as of any Due Date is the
unpaid principal balance of such Mortgage Loan as specified in the amortization
schedule at the time relating thereto (before any adjustment to such schedule by
reason of moratorium or similar waive or grace period) for such Due Date, after
giving effect to any previous partial principal prepayments and Liquidation
Proceeds and Insurance Proceeds received and to the payment of principal due on
such Due Date and irrespective of any delinquency in payment by the Mortgagor.
The "Pool Principal Balance" will equal the aggregate of the Scheduled Principal
Balances of all Mortgage Loans. The "Due Date" for a Mortgage Loan is the first
day of each calendar month on which the scheduled installment of principal and
interest with respect thereto is due.
"Principal Prepayment" is any payment or other recovery of principal on a
Mortgage Loan which is received in advance of its scheduled Due Date to the
extent that it is 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, including Insurance Proceeds and amounts received in
connection with the repurchase or substitution of a Mortgage Loan, but excluding
Liquidation Proceeds and Insurance Proceeds received at the time a Mortgage Loan
becomes a Liquidated Mortgage Loan.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class PO Certificates until the Class Certificate Balance thereof is
reduced to zero. The amount of any such Realized Loss, other than an Excess
Loss,
A-10
<PAGE>
allocated on or prior to the Cross-Over Date plus the amount of any Class PO
Class Shortfall will be treated as a Class PO Deferred Amount. To the extent
funds are available therefore on such Distribution Date or on any future
Distribution Date on or prior to the Cross-Over Date as calculated above under
"--Distributions", Class PO Deferred Amounts will be paid on the Class PO
Certificates. Any distribution in respect of unpaid Class PO Deferred Amounts
will not further reduce the Class Certificate Balance of the Class PO
Certificates. The Class PO Deferred Amounts will not bear interest. The Class
Certificate Balance of the Class of Subordinate Certificates then outstanding
with the highest numerical Class designation will be reduced by the amount of
any payments in respect of Class PO Deferred Amounts. After the Cross-Over Date,
no new Class PO Deferred Amounts will be created. In addition, the Class
Certificate Balance of the Class of Subordinate Certificates then outstanding
with the highest numerical Class designation will be reduced if and to the
extent that the aggregate of the Class Certificate Balances of all Classes of
Certificates, following all distributions and the allocation of Realized Losses
on a Distribution Date, exceeds the Pool Principal Balance as of the Due Date
occurring in the month of such Distribution Date.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinate
Certificates, in the reverse order of their numerical Class designations
(beginning with the Class of Subordinate Certificates then outstanding with the
highest numerical Class designation), in each ease until the Class Certificate
Balance of the respective Class of Certificates has been reduced to zero, and
then to the Senior Certificates (other than the Class PO Certificates), pro
rata, based upon their respective Class Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the Classes of Senior Certificates
(other than the Class PO Certificates) and the Subordinate Certificates based
upon their respective Class Certificate Balances.
In general, a "Realized Loss" with respect to a Mortgage Loan is (i) a
Bankruptcy Loss or (ii) as to any Liquidated Mortgage Loan, the amount by which
the remaining unpaid principal balance of the Mortgage Loan exceeds the amount
of liquidation proceeds applied to the principal balance of the Mortgage Loan.
"Excess Losses" are (i) Special Hazard Losses in excess of the Special Hazard
Loss Coverage Amount, (ii) Bankruptcy Losses in excess of the Bankruptcy Loss
Coverage Amount and (iii) Fraud Losses in excess of the Fraud Loss Coverage
Amount. "Bankruptcy Losses" are losses that are incurred as a result of Debt
Service Reductions and Deficient Valuations. A "Fraud Loss" is a Realized Loss
sustained on a Liquidated Mortgage Loan by reason of a default arising from
fraud, dishonesty or misrepresentation. See "Credit Support--Subordinated
Certificates" herein.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Pooling Agreement or any loss due to normal wear
and tear or certain other causes.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received.
A-11
<PAGE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
<TABLE>
<CAPTION>
Certificateholder Monthly Distribution Summary
CERTIFICATE PASS
CLASS RATE BEGINNING THROUGH PRINCIPAL INTEREST
CLASS CUSIP DESCRIPTION TYPE BALANCE RATE(%) DISTRIBUTION DISTRIBUTION
- ------- --------- ----------- ----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
A1 42209EFJ4 Senior Fix-30/360 364,388,981.59 6.750000 2,216,386.03 2,049,688.02
PO 42209EFK1 Strip PO Fix-30/360 918,893.17 0.000000 1,303.39 0.00
R 42209EFL9 Senior Fix-30/360 0.00 6.750000 0.00 0.00
--------- --------- ----------- -------------- --------- ------------ ------------
B1 42209EFM7 Junior Fix-30/360 7,927,253.01 6.750000 7,178.69 44,590.80
B2 42209EFN5 Junior Fix-30/360 3,567,303.48 6.750000 3,230.44 20,066.08
B3 42209EFP0 Junior Fix-30/360 2,378,235.34 6.750000 2,153.66 13,377.57
B4 PRIVATE Junior Fix-30/360 1,387,279.18 6.750000 1,256.28 7,803.45
B5 PRIVATE Junior Fix-30/360 1,189,068.14 6.750000 1,076.78 6,688.51
B6 PRIVATE Junior Fix-30/360 1,387,355.46 6.750000 1,256.35 7,803.87
--------- --------- ----------- -------------- --------- ------------ ------------
Totals 383,144,369.37 2,233,841.62 2,150,018.30
-------------- ------------ ------------
-------------- ------------ ------------
<CAPTION>
CURRENT CUMULATIVE
TOTAL REALIZED ENDING REALIZED
CLASS DISTRIBUTION LOSSES BALANCE LOSSES
- ------- ------------ -------- -------------- ----------
<S> <C> <C> <C> <C>
A1 4,266,074.05 0.00 362,172,595.56 0.00
PO 1,303.39 0.00 917,589.78 0.00
R 0.00 0.00 0.00 0.00
------------ ---- -------------- ----
B1 51,769.48 0.00 7,920,074.33 0.00
B2 23,296.53 0.00 3,564,073.03 0.00
B3 15,531.23 0.00 2,376,081.68 0.00
B4 9,059.72 0.00 1,386,022.90 0.00
B5 7,765.29 0.00 1,187,991.36 0.00
B6 9,060.22 0.00 1,386,099.11 0.00
------------ ---- -------------- ----
Totals 4,383,859.91 0.00 380,910,527.75 0.00
------------ ---- --------------
------------ ---- --------------
</TABLE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
<TABLE>
<CAPTION>
Principal Distribution Detal
ORIGINAL BEGINNING SCHEDULED UNSCHEDULED NET CURRENT
CERTIFICATE CERTIFICATE PRINCIPAL ACCRETION PRINCIPAL PRINCIPAL REALIZED
CLASS CUSIP BALANCE BALANCE DISTRIBUTION PRINCIPAL ADJUSTMENTS DISTRIBUTION LOSSES
- ---------- --------- -------------- -------------- ------------- --------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A1 42209EFJ4 381,205,100.00 364,388,981.59 2,216,386.03 0.00 0.00 2,216,386.03 0.00
PO 42209EFK1 931,678.00 918,893.17 1,303.39 0.00 0.00 1,303.39 0.00
R 42209EFL9 100.00 0.00 0.00 0.00 0.00 0.00 0.00
--------- -------------- -------------- ------------- ----- ----- ------------- ----
B1 42209EFM7 8,002,800.00 7,927,253.01 7,178.69 0.00 0.00 7,178.69 0.00
B2 42209EFN5 3,601,300.00 3,567,303.48 3,230.44 0.00 0.00 3,230.44 0.00
B3 42209EFP0 2,400,900.00 2,378,235.34 2,153.66 0.00 0.00 2,153.66 0.00
B4 PRIVATE 1,400,500.00 1,387,279.18 1,256.28 0.00 0.00 1,256.28 0.00
B5 PRIVATE 1,200,400.00 1,189,068.14 1,076.78 0.00 0.00 1,076.78 0.00
B6 PRIVATE 1,400,577.00 1,387,355.46 1,256.35 0.00 0.00 1,256.35 0.00
-------------- -------------- ------------- ----- ----- ------------- ----
Totals 400,143,355.00 383,144,369.37 2,233,841.62 0.00 0.00 2,233,841.62 0.00
-------------- -------------- ------------- ----- ----- ------------- ----
-------------- -------------- ------------- ----- ----- ------------- ----
<CAPTION>
ENDING ENDING
CERTIFICATE CERTIFICATE
CLASS BALANCE FACTOR
- ---------- -------------- -------------
<S> <C> <C>
A1 362,172,595.56 0.95007279693
PO 917,589.78 0.98487866296
R 0.00 0.00000000000
-------------- -------------
B1 7,920,074.33 0.98966290875
B2 3,564,073.03 0.98966290875
B3 2,376,081.68 0.98966290875
B4 1,386,022.90 0.98966290875
B5 1,187,991.36 0.98966290875
B6 1,386,099.11 0.98966290875
--------------
Totals 380,910,527.75
--------------
--------------
</TABLE>
B-1
<PAGE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
<TABLE>
<CAPTION>
Interest Distribution Detail
NET
BEGINNING PASS ACCRUED CUMULATIVE TOTAL PREPAYMENT
CERTIFICATE THROUGH OPTIMAL UNPAID DEFERRED INTEREST INT
CLASS BALANCE RATE (%) INTEREST INTEREST INTEREST DUE SHORTFALL
- ---------------------- -------------- -------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
A1 364,388,981.59 6.750000 2,049,688.02 0.00 0.00 2,049,688.02 0.00
PO 918,893.17 0.000000 0.00 0.00 0.00 0.00 0.00
R 0.00 6.750000 0.00 0.00 0.00 0.00 0.00
-------------- -------- ------------ ---- ---- ------------ ----
B1 7,927,253.01 6.750000 44,590.80 0.00 0.00 44,590.80 0.00
B2 3,567,303.48 6.750000 20,066.08 0.00 0.00 20,066.08 0.00
B3 2,378,235.34 6.750000 13,377.57 0.00 0.00 13,377.57 0.00
B4 1,387,279.18 6.750000 7,803.45 0.00 0.00 7,803.45 0.00
B5 1,189,068.14 6.750000 6,688.51 0.00 0.00 6,688.51 0.00
B6 1,387,355.46 6.750000 7,803.87 0.00 0.00 7,803.87 0.00
-------------- -------- ------------ ---- ---- ------------ ----
Totals 383,144,369.37 2,150,018.30 0.00 0.00 2,150,018.30 0.00
-------------- ------------ ---- ---- ------------ ----
-------------- ------------ ---- ---- ------------ ----
<CAPTION>
UNSCHEDULED
INTEREST INTEREST
CLASS ADJUSTMENT PAID
- ---------------------- ----------- ------------
<S> <C> <C>
A1 0.00 2,049,688.02
PO 0.00 0.00
R 0.00 0.00
----- ------------
B1 0.00 44,590.80
B2 0.00 20,066.08
B3 0.00 13,377.57
B4 0.00 7,803.45
B5 0.00 6,688.51
B6 0.00 7,803.87
----- ------------
Totals 0.00 2,150,018.30
----- ------------
----- ------------
</TABLE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
<TABLE>
<CAPTION>
Current Payment Information
Factors per $1,000
BEGINNING
ORIGINAL CERT. ENDING CERT.
CERTIFICATE NOTIONAL PRINCIPAL INTEREST NOTIONAL
CLASS CUSIP BALANCE BALANCE DISTRIBUTION DISTRIBUTION BALANCE
- ---------- ---------- -------------- --------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
A1 42209EFJ4 381,205,100.00 955.886953228 5.814156293 5.376864112 950.072796935
PO 42209EFK1 931,678.00 986.277629599 1.398966644 0.000000000 984.878662956
R 42209EFL9 100.00 0.000000000 0.000000000 0.00 0.000000000
---------- -------------- ------------- ------------ ----------------- -------------
B1 42209EFM7 8,002,800.00 990.559930553 0.897021800 5.571899609 989.662908753
B2 42209EFN5 3,601,300.00 990.559930553 0.897021800 5.571899609 989.662908753
B3 42209EFP0 2,400,900.00 990.559930553 0.897021800 5.571899609 989.662908753
B4 PRIVATE 1,400,500.00 990.559930553 0.897021800 5.571899609 989.662908753
B5 PRIVATE 1,200,400.00 990.559930553 0.897021800 5.571899609 989.662908753
B6 PRIVATE 1,400,577.00 990.559930553 0.897021800 5.571899609 989.662908753
---------- -------------- ------------- ------------ ----------------- -------------
Totals 400,143,355.00 957.517761028 5.582603315 5.373120091 951.935157714
-------------- ------------- ------------ ----------------- -------------
-------------- ------------- ------------ ----------------- -------------
<CAPTION>
PASS
THROUGH
CLASS RATE (%)
- ---------- ---------
<S> <C>
A1 6.750000
PO 0.000000
R 6.750000
---------
B1 6.750000
B2 6.750000
B3 6.750000
B4 6.750000
B5 6.750000
B6 6.750000
---------
Totals
</TABLE>
B-2
<PAGE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
<TABLE>
<CAPTION>
POOL LEVEL DATA
- ------------------------------------------------------------------------------------
<S> <C> <C>
Distribution Date 10/25/99
Cut-off Date 10/1/98
Determination Date 10/1/99
Accrual Period Begin 9/1/99
End 10/1/99
Number of Days in Accrual Period 30
</TABLE>
COLLATERAL INFORMATION
<TABLE>
<CAPTION>
GROUP 1
- -----------------------------------------------------------------------------------------------
<S> <C>
Cut-Off Date Balance 400,143,355.36
Beginning Aggregate Pool Stated Principal Balance 383,144,369.73
Ending Aggregate Pool Stated Principal Balance 380,910,528.11
Beginning Aggregate Certificate Stated Principal Balance 383,144,369.37
Ending Aggregate Certificate Stated Principal Balance 380,910,527.75
Beginning Aggregate Loan Count 1304
Loans Paid Off or Otherwise Removed Pursuant to Pooling and Servicing Aggrement 6
Ending Aggregate Loan Count 1298
Beginning Weighted Average Loan Rate (WAC) 7.259225%
Ending Weighted Average Loan Rate (WAC) 7.259575%
Beginning Net Weighted Average Loan Rate 7.000723%
Ending Net Weighted Average Loan Rate 7.001073%
Aggregate Pool Prepayment 1,886,829.88
Pool Prepayment Rate 5.7520 CPR
</TABLE>
CERTIFICATE INFORMATION
<TABLE>
<CAPTION>
GROUP 1
- ------------------------------------------------------------------------------------------------
<S> <C>
Senior Percentage 95.3335149755%
Senior Prepayment Percentage 100.0000000000%
Subordinate Percentage 4.6664850245%
Subordinate Prepayment Percentage 0.0000000000%
PREPAYMENT COMPENSATION
Total Gross Prepayment Interest Shortfall 1,827.52
Compensation for Gross PPIS from Servicing Fees 1,827.52
Other Gross PPIS Compensation 0.00
Excess Servicing Fee 0.00
--------------
TOTAL NET PPIS (NON-SUPPORTED PPIS) 0.00
Master Servicing Fees Paid 163,215.75
Sub Servicing Fees Paid 0.62
Trustee Fees Paid 2,713.94
--------------
TOTAL FEES 165,930.31
</TABLE>
B-3
<PAGE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
DELINQUENCY INFORMATION
<TABLE>
<CAPTION>
GROUP 1
- --------------------------------------
<S> <C> <C> <C> <C> <C>
30--59 60--89
DELINQUENCY DAYS DAYS 90+ DAYS 270+ DAYS TOTALS
- -------------------------------------- -------- ---------- -------- ------------ ------------
Scheduled Principal Balance 0.00 141,473.60 0.00 0.00 141,473.60
Percentage of Total Pool Balance 0.000000% 0.037141% 0.000000% 0.000000% 0.037141%
Number of Loans 0 1 0 1
Percentage of Total Loans 0.000000% 0.077042% 0.000000% 0.077042%
FORECLOSURE
- --------------------------------------
Scheduled Principal Balance 0.00 0.00 0.00 0.00
Percentage of Total Pool Balance 0.000000% 0.000000% 0.000000% 0.000000%
Number of Loans 0 0 0 0
Percentage of Total Loans 0.000000% 0.000000% 0.000000% 0.000000%
BANKRUPTCY
- --------------------------------------
Scheduled Principal Balance 0.00 0.00 0.00 0.00
Percentage of Total Pool Balance 0.000000% 0.000000% 0.000000% 0.000000%
Number of Loans 0 0 0 0
Percentage of Total Loans 0.000000% 0.000000% 0.000000% 0.000000%
REO
- --------------------------------------
Scheduled Principal Balance 0.00 0.00 0.00 0.00
Percentage of Total Pool Balance 0.000000% 0.000000% 0.000000% 0.000000%
Number of Loans 0 0 0 0
Percentage of Total Loans 0.000000% 0.000000% 0.000000% 0.000000%
Book Value of all REO Loans 0.00
Percentage of Total Pool Balance 0.000000%
Current Realized Losses 0.00
Additional Gains (Recoveries)/Losses 0.00
Total Realized Losses 0.00
</TABLE>
SUBORDINATION/CREDIT ENHANCEMENT INFORMATION
<TABLE>
<CAPTION>
PROTECTION ORIGINAL CURRENT
- --------------------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Bankruptcy Loss 140,000.00 140,000.00
Bankruptcy Percentage 0.034987% 0.036754%
Credit/Fraud Loss 4,001,434.00 4,001,434.00
Credit/Fraud Loss Percentage 1.000000% 1.050492%
Special Hazard Loss 4,734,475.00 4,686,429.45
Special Hazard Loss Percentage 1.183195% 1.230323%
</TABLE>
B-4
<PAGE>
HEADLANDS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates, Series 1998-2
Headlands Mortgage Company, Seller
First Nationwide Mortgage Corporation, Master Servicer
<TABLE>
<CAPTION>
CREDIT SUPPORT ORIGINAL CURRENT
- -------------------------------------- -------------- --------------
<S> <C> <C>
Class A 382,136,878.00 363,090,185.35
Class A Percentage 95.499993% 95.321646%
Class B1 8,002,800.00 7,920,074.33
Class B1 Percentage 1.999983% 2.079248%
Class B2 3,601,300.00 3,564,073.03
Class B2 Percentage 0.900002% 0.935672%
Class B3 2,400,900.00 2,376,081.68
Class B3 Percentage 0.600010% 0.623790%
Class B4 1,400,500.00 1,386,022.90
Class B4 Percentage 0.350000% 0.363871%
Class B5 1,200,400.00 1,187,991.36
Class B5 Percentage 0.299992% 0.311882%
Class B6 1,400,577.00 1,386,099.11
Class B6 Percentage 0.350019% 0.363891%
</TABLE>
B-5
<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 to issue a Series of Certificates. 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 THE MOST
SIGNIFICANT RISK 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
"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 OCTOBER 27, 1999.
<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 the related Series of Certificates offered hereby (including
market-making transactions by Credit Suisse First Boston Corporation with
respect to such Series of Certificates, unless such transactions are exempt from
the registration provisions of the Securities Act of 1933, as amended). 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
2
<PAGE>
copy of any or all such documents or reports incorporated herein by reference,
in each case to the extent such documents or reports relate to one or more of
such Classes of such Certificates, other than the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests to the Depositor should be directed to: 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 OR REGULATIONS, THIS
PROSPECTUS AND THE ATTACHED PROSPECTUS SUPPLEMENT WILL ALSO BE USED BY THE
UNDERWRITER 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. An index
indicating where certain terms used herein are defined appears at the end of
this Prospectus on p.132.
<TABLE>
<S> <C>
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" or "Pass-Through
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
receive disproportionate amounts of certain
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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. Each Trust will be formed for the
purpose of issuing a Series of Certificates.
If so specified in the related Prospectus Supplement, each Series of
Certificates will be offered in fully registered form only, in one
or more Classes, which may be divided into one or more
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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 for the related
Mortgage Pool or Contract Pool. If so specified in the related
Prospectus Supplement, one or more Classes of Certificates may be
registered in the name of a depositary or a nominee for a
depositary. 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 prepayments)......... If so specified in the related 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. If so specified in the related Prospectus Supplement, the
Stated Principal Distribution Amount will equal the amount by which
the Stated Principal Balance of such Class of Multi-Class
Certificates (before taking into account the amount of interest
accrued and added to the Stated Principal
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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. If
so 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. The applicable Prospectus
Supplement will specify the types of Mortgaged Properties, the
original principal balances of the Mortgage Loans, the original
maturities of the Mortgage Loans and the ratio of the original or
outstanding principal balance of the Mortgage Loans to the value of
the property securing such Mortgage Loan (the "Mortgaged
Property"), based upon an appraisal of the Mortgaged Property or
the sales price (the "Loan-to-Value Ratio").
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.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
The interest rates on the Mortgage Loans in a Mortgage Pool may have
fixed rates or variable rates as specified in the applicable
Prospectus Supplement. The Mortgage Loans in a Mortgage Pool will
have an aggregate principal balance equal to the amount specified
in such Prospectus Supplement, subject to a permitted variance of
up to 5%.
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, or such other type of Mortgage
Loan or Contract as may be 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. The Contracts will be fixed rate
Contracts or adjustable rate Contracts, as specified in the related
Prospectus Supplement. 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. Contracts that are conventional
Contracts will not be covered by primary mortgage insurance
policies or primary credit insurance policies, except to the extent
specified in the related Prospectus Supplement. 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.
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None of the Contracts will have been originated by the Depositor or
any of its affiliates.
Pre-Funding............................... If so specified in the related Prospectus Supplement, a portion of
the issuance proceeds of the Certificates of a particular Series
(such amount, the "Pre-Funded Amount") will be deposited in an
account (the "Pre-Funding Account") to be established with the
Trustee, which will be used to acquire additional Mortgage Loans or
Contracts from time to time during the period specified in the
related Prospectus Supplement (the "Pre-Funding Period"). Prior to
the investment of the Pre-Funded Amount in additional Mortgage
Loans or Contracts, such Pre-Funded Amount may be invested in one
or more investments as specified in the applicable Pooling and
Servicing Agreement.
During any Pre-Funding Period, the Depositor will be obligated
(subject only to the availability thereof) to transfer to the
related Trust Fund additional Mortgage Loans or Contracts from time
to time during such Pre-Funding Period. Such additional Mortgage
Loans or Contracts will be required to satisfy certain eligibility
criteria more fully set forth in the related Prospectus Supplement,
which eligibility criteria will be consistent with the eligibility
criteria of the Mortgage Loans or Contracts included in the Trust
Fund as of the Closing Date, subject to such exceptions as are
expressly stated in such Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with
respect to any issuance of Certificates will be specified in the
related Prospectus Supplement, it is anticipated that: (a) the
Pre-Funding Period will not exceed 90 days from the related Closing
Date and (b) the additional Mortgage Loans or Contracts to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Mortgage Loans or Contracts
included in the related Trust Fund on the Closing Date (although
additional criteria may also be required to be satisfied, as
described in the related Prospectus Supplement). The Pre-Funded
Amount will not exceed 25% of the initial principal amount of the
Certificates of the related Series. The Pre-Funding Period will not
be longer than one year following the Closing Date. See "The Trust
Fund--Pre-Funding."
Yield Considerations...................... If so specified in the applicable Prospectus Supplement, an assumed
rate of prepayment will be used to calculate the expected yield to
maturity on each Class of the Certificates of a Series. The yield
on any Class of Certificates, the purchase price of which is
greater than the aggregate amount of the Principal Distributions to
be made to such Class (a "Premium Certificate"), is likely to be
adversely affected by a higher than anticipated level of principal
prepayments on the Trust Assets 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
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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 during a specified period, for example during the
month preceding the month in which the related Distribution Date
occurs, but the distribution of such interest will be made after
the end of such period, for example on the 25th day of the
succeeding month. 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 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
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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. To the extent described in the related Prospectus Supplement,
the L/C Bank will be obligated, to the extent of the amount
available thereunder, to make payments to the Certificate Account
on each Distribution Date in an amount equal to the amount
sufficient to repurchase each Liquidating Loan that has not been
purchased by the related Servicer or the Master Servicer pursuant
to the terms of the applicable Servicing Agreement or Pooling and
Servicing Agreement referred to herein. The term "Liquidating Loan"
means: (a) each Mortgage Loan with respect to which foreclosure
proceedings have been commenced (and the Mortgagor's right of
reinstatement has expired), (b) each Mortgage Loan with respect to
which the Servicer or the Master Servicer has agreed to accept a
deed to the property in lieu 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 of the Series evidencing
interests in such Mortgage Pool or Contract Pool, as 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 set forth in the
Prospectus Supplement. 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
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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 Bond............ If so specified in the related Prospectus Supplement, the Master
Servicer, if any, or the Depositor or the applicable Servicer will
obtain and use its best reasonable efforts to maintain a Mortgagor
Bankruptcy Bond for such Series covering certain losses resulting
from action that may be taken by a bankruptcy court in connection
with the bankruptcy of a Mortgagor. The level of coverage provided
by such Mortgagor Bankruptcy Bond will be specified in the
applicable Prospectus Supplement. See "Description of
Insurance--Mortgagor Bankruptcy Bond."
D. Subordinated Certificates............ If so specified in the related Prospectus 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
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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 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. Such Reserve Fund may 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
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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 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 Policies...................... 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, except to the extent specified in the
applicable Prospectus Supplement. 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
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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 Assets.............. If so specified in the Prospectus Supplement 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 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. Any such purchase will not be exercisable
until the aggregate principal balance of the Trust Assets is
reduced to 10% of the initial aggregate principal balance of the
Trust Assets, or such lower percentage as may be specified in the
related 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. Under certain circumstances, the
holders of one or more classes of Certificates may receive less
than the outstanding principal amount of and accrued and unpaid
interest on their Certificates. See "Maturity and
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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................................ The federal income tax consequences of owning the Certificates will
depend on whether an election is made to treat the Trust as a
REMIC. If so, the Certificates will represent "REMIC Regular
Interests" or "REMIC Residual Interests" (each as defined herein);
if not, the Certificates will represent interests in a "grantor
trust" for federal income tax purposes (such non-REMIC
Certificates, "Trust Certificates").
Orrick, Herrington & Sutcliffe LLP, counsel to the Depositor, has
rendered an opinion to the effect that: (1) with respect to each
Series of REMIC Certificates (issued as described in the
Prospectus), the related Mortgage Pool (or portion thereof) will be
classified as one or more "real estate mortgage investment
conduits" ("REMICs") and not an association taxable as a
corporation (or publicly traded partnership treated as a
corporation) and (2) with respect to each other Series of
Certificates (issued as described in the Prospectus), the related
Trust Fund will be a grantor trust for federal income tax purposes
and not an association taxable as a corporation (or publicly traded
partnership treated as a corporation) and each holder of a
Certificate will be treated as holding an equity interest in such
grantor trust. Prospective investors should be aware that counsel
to the Depositor has not rendered any other tax opinions. Further,
if with respect to any Series of Certificates Orrick, Herrington &
Sutcliffe LLP is not counsel to the Depositor, Depositor's then
current counsel will be identified in the related prospectus
supplement and will confirm (or supplement) the aforementioned
opinions. Prospective investors should be further aware that no
rulings have been sought from the Internal Revenue Service (the
"IRS"), and that legal opinions are not binding on the IRS or the
courts. Accordingly, there can be no assurance that the IRS or the
courts will agree with counsel to the Depositor's opinions. If,
contrary to such opinions, the Mortgage Pool or Trust Fund related
to a Series of Certificates is characterized or treated as a
corporation for federal income tax consequences, among other
consequences, the Mortgage Pool or Trust Fund would be subject to
federal income tax (and similar state income or franchise taxes) on
its income and distributions to Certificateholders would be
impaired.
REMIC Regular Interests are generally taxed as debt instruments
issued by the Trust. Investors that are otherwise cash method
taxpayers, however, will be required to account for income on their
REMIC Regular Interest under an accrual method of
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accounting. REMIC Residual Interests are generally subject to tax
on the net income of the REMIC, which in some or all periods will
exceed the amount of cash distributed thereon. The income arising
on a REMIC Residual Interest is subject to tax in all events; for
example, it may not be offset with unrelated losses. REMIC Residual
Interests are subject to significant restrictions on transfer.
The holder of a Trust Certificate will generally be treated as if it
owned its pro rata portion of the Trust's assets. If the Trust
Certificate represents stripped bonds and/or stripped coupons for
tax purposes, the Certificate will be treated as a newly issued
debt instrument for tax purposes every time a it is purchased by a
new holder.
The material (and certain minor and incidental) consequences of
investing in the Certificates are discussed in "Federal Income Tax
Consequences" herein.
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 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."
Ratings................................... At the date of issuance, as to each series, each class of
Certificates offered hereby will be rated, at the request of the
Depositor, in one of the four highest rating categories by one or
more nationally recognized statistical rating agencies . A security
rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the
assigning rating organization. A security rating does not address
the frequency of prepayments of Mortgage Loans, or the
corresponding effect on yield to investors. See "Ratings" in the
related Prospectus Supplement.
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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 discussion and the discussion of material risk
factors in the applicable Prospectus Supplement, which set forth the most
significant factors that make an investment in the Certificates of the
applicable Series speculative or risky, before investing in any Class or Classes
of Certificates of any such Series.
LIQUIDITY OF THE CERTIFICATES MAY BE LIMITED.
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.
WITH LIMITED EXCEPTIONS, THE ONLY SOURCE OF PAYMENT ON THE CERTIFICATES IS THE
TRUST ASSETS.
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. In such event, the
payments to one or more Classes of Certificates of a Series may be temporarily
or permanently reduced.
CREDIT SUPPORT IS LIMITED AND MAY BE REDUCED.
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." If
the credit support for any Series of Certificates is terminated or exhausted,
shortfalls and losses on the Trust Assets may be borne by the holders of one or
more Classes of Certificates, and the yield to maturity on such Classes may be
adversely affected.
LOSSES ON THE TRUST ASSETS MAY CAUSE LOSSES ON THE CERTIFICATES.
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.
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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 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
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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 comparable aggregate unpaid principal balance comprised solely
of Mortgage Loans secured by Single Family Properties. Any reduction in the
value of a Mortgaged Property may increase the likelihood that liquidation
proceeds in the event of foreclosure will not be sufficient to pay unpaid
principal and accrued interest on the related Mortgage Loan and may increase the
risk of losses on the Mortgage Loan.
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.
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. 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, except to the extent set forth in the related
Prospectus Supplement. 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.
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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 mortgaged
property, the financial condition and operating history of the mortgagor and the
related mortgaged property, renewability of operating licenses, prevailing
general economic conditions and the availability of credit generally. The
inability of the Mortgagor to refinance the Mortgage Loan or sell the Mortgaged
Property could increase the likelihood of default on the related Mortgage Loan.
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.
Mortgage Modifications
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. If any such
extension or modification actually decreases the amounts received in respect of
any Mortgage Loan, additional shortfalls or losses could be allocated to one or
more Classes of Certificates.
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, and could increase the risk of loss on the
related Mortgage Loan.
ENFORCEABILITY OF THE MORTGAGE LOANS MAY BE LIMITED, RESULTING IN LOSSES ON THE
CERTIFICATES.
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.
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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
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. If the lender is unable to realize on any collateral for a
Mortgage Loan or such realization is delayed, shortfalls in amounts available to
be distributed to the holders of one or more classes of the Certificates could
result, and losses on the Mortgage Loans could be increased.
ENVIRONMENTAL RISKS ON MORTGAGED PROPERTY MAY PRODUCE LOSSES ON THE MORTGAGE
LOANS.
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. If the Master Servicer is unable to acquire title
to the Mortgaged Property on behalf of the Trust Fund, the amount of proceeds
received by the Trust Fund with respect to such Mortgaged Property may be
substantially reduced.
FACTORS AFFECTING PREPAYMENTS ON THE TRUST ASSETS, WHICH MAY AFFECT THE TIMING
OF RECEIPT OF PRINCIPAL AND AN INVESTOR'S YIELD TO MATURITY.
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
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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 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.
Investors in the certain classes of Certificates that will not receive
payments of principal should be aware that the yield to maturity on such
Certificates will be extremely sensitive to both the timing of receipt of
principal prepayments and the overall rate of principal prepayments and defaults
on the related Mortgage Loans, which rate may fluctuate significantly over time.
Investors in such Certificates should fully consider the risk that a rapid rate
of prepayments on such Mortgage Loans could result in the failure of such
investors to fully recover their investments.
Investors in certain classes of Certificates that are not entitled to
receive distributions of interest should be aware that the yield on such
Certificates will be adversely affected by slower than expected payments of
principal on the related Mortgage Loans.
SUBORDINATION OF CERTIFICATES WILL INCREASE THE RISK THAT LOSSES ON THE MORTGAGE
LOANS WILL BE BORNE BY THE SUBORDINATED CERTIFICATES.
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. Because amounts
available to make distributions of principal and interest on the Certificates of
any Series are applied first to the Classes of Certificates with the highest
payment priority, any shortfalls in amounts available to make such distributions
will reduce the distributions to the most subordinated Classes of Certificates.
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.
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INSOLVENCY OF UNAFFILIATED SELLER OR DEPOSITOR COULD REDUCE DISTRIBUTIONS OF
PRINCIPAL AND INTEREST ON THE CERTIFICATES.
Except as described below, the Depositor intends that the transfer of each
of the Trust Assets to the Depositor by the Unaffiliated Seller and to the Trust
by the Depositor is an absolute transfer by the Unaffiliated Seller or
Depositor, as the case may be, and that the Trust Assets will not be part of the
estate of the Unaffiliated Seller or Depositor in the event the Unaffiliated
Seller or the Depositor, as the case may be, were to become a debtor in a
bankruptcy case or a trustee, conservator or receiver (or similar official) were
to be appointed for the Unaffiliated Seller or Depositor (or a substantial
portion of its property). Nevertheless, in the event of the insolvency of an
Unaffiliated Seller or the Depositor, it is possible that a bankruptcy trustee
(including such Unaffiliated Seller or Depositor as a debtor-in-possession),
conservator or receiver (or similar official) for the Unaffiliated Seller or
Depositor or a creditor of the Unaffiliated Seller or Depositor may argue that
the transfer of Trust Assets by the Unaffiliated Seller to the Depositor or by
the Depositor to the Trust Fund should be characterized as a pledge of the Trust
Assets in connection with a borrowing by such Unaffiliated Seller or Depositor
rather than an absolute transfer. These arguments, if asserted, could prevent
timely payments of amounts due on the Certificates and, if accepted by the
court, may result in reductions in distributions of principal and interest on
such Certificates. Alternatively, if so specified in the applicable Prospectus
Supplement, the Unaffiliated Seller or the Depositor may pledge the Trust Assets
as security for a borrowing and take certain actions as are required under the
UCC to perfect the Trust Fund's interest in the Trust Assets, and such transfer
would be characterized as a secured borrowing and not a true sale.
CERTIFICATE RATINGS ARE LIMITED IN NATURE.
Each class of Certificates will be assigned, at the time of issuance, a
rating from one or more nationally recognized credit rating agencies in one of
the four highest generic rating categories. Such ratings assess the likelihood
of timely payment of interest and the ultimate payments of principal to the
Certificateholders. A security rating does not address the frequency of
prepayments of Mortgage Loans, or the corresponding effect on the yield to
investors. In the event that the ratings initially assigned to a class of
Certificates are subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to such Certificates. To the extent that credit enhancement is no longer
available to cover losses on the Trust Assets of any Series, such losses may be
allocated to one or more Classes of Certificates of such Series.
FLUCTUATIONS IN MARKET INDICES MAY CAUSE SHORTFALLS IN INTEREST PAYABLE TO
CERTIFICATEHOLDERS.
If so specified in the related Prospectus Supplement, the Pass-Through Rate
on one or more classes of Certificates may vary based on one index, while the
interest rates on the Trust Assets may vary based on one or more other indices.
If the index on which the Pass-Through Rate on the Certificates is based
increases faster than the indices on which the interest rates on the Trust
Assets are based, or if the Pass-Through Rate on the Certificates adjusts more
frequently than the interest rates on the Trust Assets, shortfalls in the
amounts available to pay interest on the Certificates may result. If so
specified in the related Prospectus Supplement, such shortfalls may be paid to
the Certificateholders on subsequent Distribution Dates, but only to the extent
of funds available therefor, and may remain unpaid on the final Distribution
Date. Any such shortfalls, even if subsequently paid, may adversely affect the
yield to investors in such Certificates.
REPRESENTATIONS AND WARRANTIES MADE BY THE DEPOSITOR AND EACH UNAFFILIATED
SELLER WILL BE LIMITED.
Each Unaffiliated Seller and, if so specified in the related Prospectus
Supplement, the Depositor will have made certain limited representations and
warranties with respect to the Trust Assets sold by them. If the breach of any
representation or warranty materially and adversely affects the interests of the
holders of the Certificates of the related Series, the Unaffiliated Seller or
the Depositor, as the case may be, will be obligated to repurchase or substitute
for the related Mortgage Loan. If the Unaffiliated Seller or Depositor is unable
or unwilling (due to the insolvency of such entity or otherwise) to repurchase
or substitute for such Mortgage Loan and losses occur with respect to such
Mortgage Loan, such losses may be allocated to the holders of one or more
classes of the Certificates of the related Series. See "The Trust
Fund--Representations by Unaffiliated Sellers; Repurchases" herein.
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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."
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,
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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 adjustable rate Mortgage Loans ("ARM Loans") will be
convertible from an adjustable rate to a fixed rate, at the option of the
Mortgagor under certain circumstances. If so specified in the related Prospectus
Supplement, the Pooling and Servicing Agreement will provide that the
Unaffiliated Seller from which such convertible ARM Loans were acquired will be
obligated to repurchase from the Trust Fund any such ARM Loan as to which the
conversion option has been exercised (a "Converted Mortgage Loan"), at a
purchase price set forth in the 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.
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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 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
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
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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." If so
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."
Single Family Mortgage Loans. The applicable Prospectus Supplement will
specify the types of Mortgaged Properties securing Single Family Mortgage Loans,
the original principal balances of the Single Family Mortgage Loans, the
original maturities of such Mortgage Loans and the Loan-to-Value Ratios of such
Mortgage Loans. Single Family Mortgage Loans may be fully-amortizing Mortgage
Loans or Balloon Mortgage Loans. If so specified in the related Prospectus
Supplement, a Mortgage Pool may also include ARM Loans with 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.
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 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.
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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.
UNDERWRITING STANDARDS
Except in the case of certain Mortgage Loans originated by Unaffiliated
Sellers in accordance with their own underwriting criteria, such other standards
as may be described in the applicable Prospectus Supplement, or where the
underwriting standards are not known or available to the Depositor, all
prospective Mortgage Loans will be subject to the underwriting standards adopted
by the Depositor. 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 unless, as set forth in the related Prospectus Supplement,
the underwriting standards are not known or available to the Depositor. The
following discussion describes the underwriting standards of the Depositor with
respect to any Mortgage Loan that it purchases.
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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.
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.
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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. The appraisal will have been based upon a cash flow analysis and/or a
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, or such other factors that are
described in the applicable Prospectus Supplement.
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
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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
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, or have such other origination or servicing
experience as may be specified in the related Prospectus Supplement.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
If so 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); and
(iv) that there were no delinquent tax or assessment liens against the Mortgaged
Property. With respect to a Cooperative Loan, the Unaffiliated Seller will
represent and warrant that (a) the security interest created by the cooperative
security agreements constituted a valid first lien on the collateral securing
the Cooperative Loan (subject to the right of the related Cooperative to cancel
shares and terminate the proprietary lease for unpaid assessments and to the
lien of the related Cooperative for unpaid assessments representing the
Mortgagor's pro rata share of the Cooperative's payments for its mortgage,
current and future real property taxes, maintenance charges and other
assessments to which like collateral is commonly subject) and (b) the related
cooperative apartment was free from damage and was in good repair.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Unaffiliated Seller sold the Mortgage Loan to the Depositor or its affiliate. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Certificates evidencing an interest in such
Mortgage Loan. Since the representations and warranties of an Unaffiliated
Seller do not address events that may occur following the sale of a Mortgage
Loan by an Unaffiliated Seller, the repurchase obligation described below will
not arise if, during the period commencing on the date of sale of a Mortgage
Loan by the Unaffiliated Seller to or on behalf of the Depositor, the relevant
event occurs that would have given rise to such an obligation had the event
occurred prior to sale of the affected Mortgage Loan. However, the Depositor
will not include any Mortgage Loan in the Trust Fund for any Series of
Certificates if anything has come to the Depositor's attention that would cause
it to believe that the representations and warranties of an Unaffiliated Seller
will not be accurate and complete in all material respects in respect of such
Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Certificates of a Series in respect of any Mortgage Loan relating to
the period commencing on the date of sale of such Mortgage Loan to the Depositor
or its affiliates will be certain limited representations of the Depositor and
of the Master Servicer described below under "Description of the
Certificates--Assignment of Mortgage Loans." If the Master Servicer is also an
Unaffiliated Seller of Mortgage Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
in its capacity as an Unaffiliated Seller.
Upon the discovery of the breach of any representation or warranty made by
an Unaffiliated Seller in respect of a Mortgage Loan that materially and
adversely affects the interests of the Certificateholders of the
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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 on the Mortgage Loans in the related Mortgage Pool, to the first day of
the month following such repurchase and the amount of any unreimbursed Advances
made by the Master Servicer or the Servicer, as applicable, in respect of such
Mortgage Loan. The Master Servicer will be required to enforce this obligation
for the benefit of the Trustee and the Certificateholders, following the
practices it would employ in its good faith business judgment were it the owner
of such Mortgage Loan. Subject to the right, if any, and the ability of the
Depositor, the Unaffiliated Seller or the Servicer to substitute for certain
Mortgage Loans, 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."
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 the entire or
a fractional 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. The Contracts may be fully amortizing or provide for a
balloon payment at maturity, and will bear interest at a fixed annual percentage
rate ("APR") or a variable rate described in the applicable Prospectus
Supplement.
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
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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 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.
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 as to the
payment status of the Contracts as of the Cut-off Date. 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 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.
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If so specified 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
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 remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Contract and (iv) comply with all the representations and warranties set
forth in the 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.
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.
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Certificates of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the Trustee, which will be used to acquire additional
Mortgage Loans or Contracts from time to time during the time period specified
in the related Prospectus Supplement (the "Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in additional Mortgage Loans or Contracts,
such Pre-Funded Amount may be invested in one or more Eligible Investments.
"Eligible Investments" is any of the following, in each case as determined at
the time of the investment or contractual commitment to invest therein:
(i) obligations which have the benefit of full faith and credit of the United
States of America, including depositary receipts issued by a bank as custodian
with respect to any such instrument or security held by the custodian for the
benefit of the holder of such depositary receipt, (ii) demand deposits or time
deposits in, or bankers' acceptances issued by, any depositary institution or
trust company incorporated under the laws of the United States of America or any
state thereof and subject to supervision and examination by Federal or state
banking or depositary institution authorities; provided that at the time of the
Trustee's investment or contractual commitment to invest therein, the
certificates of deposit or short-term deposits (if any) or long-term unsecured
debt obligations (other than such obligations whose rating is based on
collateral or on the credit of a Person other than such institution or trust
company) of such depositary institution or trust company has a credit rating in
the highest rating category from each Rating Agency, (iii) certificates of
deposit having a rating in the highest rating from each Rating Agency,
(iv) investments in money market funds which are (or which are composed of
instruments or other investments which are) rated in the highest category form
each Rating Agency; (v) commercial paper (having original or remaining
maturities of no more than 270 days) having credit rating in the highest rating
category from each Rating Agency; (vi) repurchase agreements involving any
Eligible Investment described in any of clauses(i), (ii) or (iii) above, so long
as the other party to the repurchase agreement has its long-term unsecured debt
obligations rated in the highest rating category from each Rating Agency; and
(f) any other investment with respect to which each Rating Agency rating such
Certificates indicates will not result in the reduction or withdrawal of its
then existing rating of the Certificates, or such other investments that are
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described in the applicable Prospectus Supplement. Except as otherwise provided
in the applicable Pooling and Servicing Agreement, any Eligible Investment must
mature no later than the Business Day prior to the next Distribution Date.
During any Pre-Funding Period, the Depositor will be obligated (subject
only to the availability thereof) to transfer to the related Trust Fund
additional Mortgage Loans or Contracts from time to time during such Pre-Funding
Period. Such additional Mortgage Loans or Contracts will be required to satisfy
certain eligibility criteria more fully set forth in the related Prospectus
Supplement which eligibility criteria will be consistent with the eligibility
criteria of the Mortgage Loans or Contracts included in the Trust Fund as of the
Closing Date subject to such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Certificates will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
90 days from the related Closing Date, and (b) that the additional loans to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Mortgage Loans or Contracts included in
the related Trust Fund on the Closing Date (although additional criteria may
also be required to be satisfied, as described in the related Prospectus
Supplement). The Pre-Funded Amount will not exceed 25% of the initial principal
amount of the Certificates of the related Series. The Pre-Funding Period will
not be longer than one year following the related Closing Date.
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. 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
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.
Generally, when a full prepayment is made on a Mortgage Loan or Contract,
the Mortgagor or the borrower under a Contract (the "Obligor"), is charged
interest for the number of days actually elapsed from the due date of the
preceding monthly payment up to the date of such prepayment, at a daily interest
rate determined by dividing the Mortgage Rate or APR by 365. Full prepayments
will reduce the amount of interest paid by the Mortgagor or the Obligor because
interest on the principal amount of any Mortgage Loan or Contract so prepaid
will be paid only to the date of prepayment instead of for a full month;
however, unless otherwise provided in the applicable Prospectus Supplement, the
Master Servicer with respect to a Series will be required to advance from its
own funds the portion of any interest at the related Mortgage Rate (less the
servicing fee 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. If so specified in the related Prospectus Supplement, full and partial
prepayments, together with interest on such full and partial prepayments at the
related Mortgage Rate (less the servicing fee rate) 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 such Certificates because, while interest will
accrue on each Mortgage Loan or Contract, or mortgage loan underlying a Mortgage
Certificate, to the Due Date for each Mortgage Loan or Contract in the related
Due Period, the distribution of such interest to holders of such Certificates
will be made on a date following such Due Period. 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 Due Date. 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
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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 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
If so specified in the applicable Prospectus Supplement, a Mortgage Loan or
Contract may provide for a prepayment penalty. Mortgage Loans and Contracts with
fixed interest rates generally 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
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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,
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 generally 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.
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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 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 all material terms of the Certificates and the Pooling and
Servicing Agreement or Deposit Trust Agreement that are not described in the
related Prospectus Supplement. 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
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates may be registered in the name of a depositary or a nominee for a
depositary. Each Certificate offered hereby and by means of the related
Prospectus Supplement and not so registered 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
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notional amount allocable to each Class will evidence the undivided interest,
beneficial ownership interest or percentage ownership interest specified in the
related Prospectus Supplement.
If so specified in the related Prospectus Supplement, one or more Servicers
or the Depositor may directly perform some or all of the duties of a Master
Servicer with respect to a Series.
If so specified in the Prospectus Supplement for a Series with respect to
which the Depositor has elected to treat the Trust Fund as a REMIC under the
Code, ownership of the Trust Fund for such Series may be evidenced by
Multi-Class Certificates and 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 "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." If so 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 of 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
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 and may be subordinated to the right of the holders of one or more
other Classes of Subordinated 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
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the Trustee for such purpose set forth in the related Prospectus Supplement. No
service charge will be made for any transfer or exchange of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the 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 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 (as reduced by the servicing fee) (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.
Distributions of interest on each such Class or Subclass of Multi-Class
Certificates will be made on the Distribution Dates, and at the Interest Rates,
specified in such Prospectus Supplement. Distributions of interest on each Class
or Subclass of Compound Interest Certificates of such Series will be made only
after the occurrence of certain events specified in the related Prospectus
Supplement. Prior to such time, interest on such Class or Subclass of Compound
Interest Certificates will be added to the Stated Principal Balance thereof on
each Distribution Date for such Series.
Distributions in reduction of the Stated Principal Balance of Multi-Class
Certificates will be made on each Distribution Date for such Series to the
holders of the Certificates of the Class or Subclass then entitled to receive
such distributions until the aggregate amount of such distributions have reduced
the Stated Principal Balance of such Certificates to zero. Allocation of
distributions in reduction of 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. 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.
The maximum amount which will be distributed in reduction of Stated
Principal Balance to holders of Multi-Class 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
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(iii) to the extent specified in the related Prospectus Supplement, the
applicable percentage of the Excess Cash Flow specified in such Prospectus
Supplement.
If so 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.
If so 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 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 Trustee or 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.
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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, in most cases 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 or in blank, the Mortgage with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Depositor will deliver a copy of such
Mortgage together with its certificate that the original of such Mortgage was
delivered to such recording office) and an assignment of the Mortgage in
recordable form. In most cases, 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 other
cases, the Mortgage Notes and Mortgages may be retained by the Unaffiliated
Seller or the Master Servicer under the circumstances described in the related
Prospectus Supplement, and the assignments of Mortgage into the name of the
Trustee will only be recorded under the circumstances described in the related
Prospectus Supplement. 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 such documents. If so
specified in the applicable Prospectus Supplement, if the Master
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Servicer or another entity specified in the related Prospectus Supplement cannot
cure any material 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." This purchase obligation constitutes the
sole remedy available to the Certificateholders or the Trustee for a material
defect in a constituent document. If so specified in the related Prospectus
Supplement, Mortgage Loans or Contracts will not be required to be repurchased
or substituted for upon the discovery of certain defects in a constituent
document.
If so 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, if
so 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 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. If so specified in the applicable Prospectus
Supplement, 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
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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"). 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, in most cases 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 other cases, the Contract and
such other documents and instruments may be retained by the Unaffiliated Seller
or the Master Servicer under the circumstances described in the related
Prospectus Supplement. In order to give notice of the right, title and interest
of the Certificateholders to the Contracts, the Depositor will cause a UCC-1
financing statement to be executed by the Depositor identifying the Trustee as
the secured party and identifying all Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trust Fund. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the interest of
the Certificateholders in the Contracts could be defeated. See "Certain Legal
Aspects of Mortgage Loans and Contracts--The Contracts."
The Trustee (or the Custodian) will review such documents within a
specified number of days after receipt thereof. 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, plus any
unreimbursed Advances respecting such Contract. The repurchase obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for a material defect in a Contract document.
If so 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,
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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 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 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, plus the amount of
any unreimbursed Advances in respect of such Contract (the "Purchase Price").
The Master Servicer will be required under the applicable Pooling and Servicing
Agreement to enforce this obligation for the benefit of the Trustee and the
Certificateholders, following the practices it would employ in its good faith
business judgment were it the owner of such Contract. This repurchase obligation
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
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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, 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.
If so specified 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
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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 establish and maintain a separate account or
accounts in the name of the Trustee (the "Certificate Account"), which must be
maintained with a depository institution and in a manner acceptable to the
Rating Agency rating the Certificates of a Series.
If so specified in the applicable Prospectus Supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth herein for the Certificate Account.
In such a case, amounts in such Custodial Account, after making the required
deposits and withdrawals specified below, shall be remitted to the Certificate
Account maintained by the Trustee for distribution to Certificateholders in the
manner set forth herein and in such Prospectus Supplement.
In those cases where a Servicer is servicing a Mortgage Loan pursuant to a
Servicing Agreement, the Servicer will establish and maintain an account (the
"Servicing Account") that will comply with either the standards set forth above
or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository, meeting the requirements of the Rating Agency
rating the Certificates of the related Series, and that is otherwise acceptable
to the Master Servicer. The Servicer will be required to deposit into the
Servicing Account on a daily basis all amounts enumerated in the following
paragraph in respect of the Mortgage Loans received by the Servicer, less its
servicing compensation. On the date specified in the Servicing Agreement, the
Servicer shall remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan. The Servicer will also be required
to advance any monthly installment of principal and interest that was not timely
received, less its servicing fee, provided that such requirement shall only
apply to the extent such Servicer determines in good faith any such advance will
be recoverable out of Insurance Proceeds, proceeds of the liquidation of the
related Mortgage Loans or otherwise. 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;
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(iv) all payments under the Letter of Credit, if any, with respect to
such Series;
(v) all amounts required to be deposited therein from the Reserve
Fund, if any, for such Series;
(vi) any Advances made by a Servicer or the Master Servicer (as
described herein under "--Advances");
(vii) any Buy-Down Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account, as described
below; and
(viii) all proceeds of any Mortgage Loan repurchased by the Master
Servicer, the Depositor, any Servicer or any Unaffiliated Seller (as
described under "The Trust Fund--Mortgage Loan Program--Representations by
Unaffiliated Sellers; Repurchases" or "--Assignment of Mortgage Loans"
above or repurchased by the Depositor as described under "--Termination"
below).
With respect to each Buy-Down Loan, if so specified in the related
Prospectus Supplement, the Master Servicer or the related Servicer will deposit
the Buy-Down Funds with respect thereto in a custodial account complying with
the requirements set forth above for the Certificate Account, which may be an
interest-bearing account. The amount of such required deposits, together with
investment earnings thereon at the rate specified in the applicable Prospectus
Supplement, will provide sufficient funds to support the full monthly payments
due on such Buy-Down Loan on a level debt service basis. Neither the Master
Servicer nor the Depositor will be obligated to add to the Buy-Down Fund should
investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans. To the extent that any such insufficiency is not
recoverable from the Mortgagor under the terms of the related Mortgage Note,
distributions to Certificateholders will be affected. With respect to each
Buy-Down Loan, the Master Servicer will withdraw from the Buy-Down Fund and
deposit in the Certificate Account on or before each Distribution Date the
amount, if any, for each Buy-Down Loan that, when added to the amount due on
that date from the Mortgagor on such Buy-Down Loan, equals the full monthly
payment that would be due on the Buy-Down Loan if it were not subject to the
buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays such loan in its entirety, or
defaults on such loan and the Mortgaged Property is sold in liquidation thereof,
during the period when the Mortgagor is not obligated, on account of the
buy-down plan, to pay the full monthly payment otherwise due on such loan, the
related Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account the amounts remaining in the Buy-Down Fund with respect to
such Buy-Down Loan. In the event of a default with respect to which a claim,
including accrued interest supplemented by amounts in the Buy-Down Fund with
respect to the related Buy-Down Loan, has been made, the Master Servicer or the
related Servicer will pay an amount equal to the remaining amounts in the
Buy-Down Fund with respect to the related Buy-Down Loan, to the extent the claim
includes accrued interest supplemented by amounts in the Buy-Down Fund, to the
related Pool Insurer or the insurer under the related Primary Insurance Policy
(the "Primary Insurer") if the Mortgaged Property is transferred to the Pool
Insurer or the Primary Insurer, as the case may be, which pays 100% of the
related claim (including accrued interest and expenses) in respect of such
default, to the L/C Bank in consideration of such payment under the related
Letter of Credit, or to the guarantor or other person which pays the same
pursuant to Alternative Credit Support described in the applicable Prospectus
Supplement. In the case of any such prepaid or defaulted Buy-Down Loan the
amounts in the Buy-Down Fund in respect of which were supplemented by investment
earnings, the Master Servicer will withdraw from the Buy-Down Fund and remit to
the Depositor or the Mortgagor, depending on the terms of the related buy-down
plan, any investment earnings remaining in the related Buy-Down Fund.
If so specified in the Prospectus Supplement with respect to a Series, in
lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund the
Buy-Down Fund for such Series, which shall be drawn upon by the Trustee in the
manner and at the times specified in such Prospectus Supplement.
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PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under "Description
of the Certificates--Payments on Mortgage Loans" will be established in the name
of the Trustee.
There will be deposited in the Certificate Account on a daily basis the
following payments and collections received or made by it subsequent to the
Cut-off Date (including scheduled payments of principal and interest due after
the Cut-off Date but received by the Master Servicer on or before the Cut-off
Date):
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts, net
of the servicing fee;
(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;
(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
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to the 20th day (or if such day is not a business day, the next preceding
business day) of the month of such distribution or such other day as may be
specified in the related Prospectus Supplement (in either case the
"Determination Date"), except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments received during the month of
distribution and all payments of interest representing interest for the
month of distribution or any portion thereof;
(iii) all payments which represent early receipt (other than
prepayments) of scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(iv) amounts received on particular Mortgage Loans or Contracts as
late payments of principal or interest and respecting which the Master
Servicer has made an unreimbursed Advance;
(v) amounts representing reimbursement for other Advances which the
Master Servicer has determined to be otherwise nonrecoverable and amounts
representing reimbursement for certain losses and expenses incurred or
Advances made by the Master Servicer and discussed below; and
(vi) that portion of each collection of interest on a particular
Mortgage Loan in such Mortgage Pool or on a particular Contract in such
Contract Pool that represents (A) servicing compensation to the Master
Servicer 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.
No later than the Business Day immediately preceding the Distribution Date
for a Series of Certificates, or such other date as may be specified in the
related Prospectus Supplement, 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. All income and gain realized from any such investment
will be for the benefit of the Master Servicer, or such other entity as may be
specified in the applicable Prospectus Supplement. 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.
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SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a Series
of Certificates, one or more Classes of Multi-Class Certificates that do not
provide for monthly Distribution Dates may receive Special Distributions in
reduction of 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.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee will include with each distribution to
Certificateholders of record of such Series, or within a reasonable time
thereafter, a statement generally setting forth, among other things, the
following information, if applicable (per each Certificate, as to (i) through
(iii) or (iv) through (vi) below, as applicable):
(i) to each holder of a Certificate, other than a
Multi-Class Certificate or Residual Certificate, the amount of such
distribution allocable to principal of the Trust Assets, 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
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(c) the Stated Principal Balance of such Class or Subclass of
Compound Interest Certificates after giving effect to the addition
thereto of all interest accrued thereon;
(vii) in the case of a series of Certificates with a variable
Pass-Through Rate, the weighted average Pass-Through Rate applicable to the
distribution in question;
(viii) the amount or the remaining obligations of an L/C Bank with
respect to a Letter of Credit, after giving effect to the declining amount
available and any payments thereunder and other amounts charged thereto on
the applicable Distribution Date, expressed as a percentage of the amount
reported pursuant to (x) below, and the amount of coverage remaining under
the Pool Insurance Policy, Special Hazard Insurance Policy, Mortgagor
Bankruptcy Bond, or Reserve Fund as applicable, in each case, as of the
applicable Determination Date, after giving effect to any amounts with
respect thereto distributed to Certificateholders on the Distribution Date;
(ix) in the case of a Series of Certificates benefiting from the
Alternative Credit Support described in the 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;
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two months delinquent; and
(xiii) the remaining balance, if any, in the Pre-Funding Account.
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
If so specified 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 (as reduced by the
servicing fee) that were due on the Due Date with respect to a Mortgage Loan or
Contract and that were delinquent (including any payments that have been
deferred by the Servicer or the Master Servicer) as of the close of business on
the date specified in the Pooling and Servicing Agreement, to be remitted no
later than the close of business on the business day immediately preceding the
Distribution Date, subject to their respective determinations that such advances
are reimbursable under any Letter of Credit, Pool Insurance Policy, Primary
Mortgage Insurance Policy, Mortgagor Bankruptcy Bond, from the proceeds of
Alternative Credit Support, from cash in the Reserve Fund, the Servicing or
Certificate Accounts or otherwise. In making such advances, the Servicers and
Master Servicer will endeavor to maintain a regular flow of scheduled interest
and principal payments to the Certificateholders, rather than to guarantee or
insure against 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
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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. 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. If so
specified 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 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.
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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 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
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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.
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."
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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 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,
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any Pool Insurance Policy, any Primary Mortgage Insurance Policy or any
Mortgagor Bankruptcy Bond and, where the related property has not been restored,
any Special Hazard Insurance Policy, are to be deposited in the Certificate
Account, subject to withdrawal as heretofore described. In those cases in which
a Mortgage Loan or Contract is serviced by a Servicer, the Servicer, on behalf
of itself, the Trustee and the Certificateholders, will present claims to the
applicable Primary Mortgage Insurer and to the FHA and the VA, as applicable,
and all collections thereunder shall be deposited in the Servicing Account,
subject to withdrawal, as set forth above, for deposit in the Certificate
Account.
If any property securing a defaulted Mortgage Loan or Contract is damaged
and proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to expend
its own funds to restore the damaged property unless it determines, and, in the
case of a determination by a Servicer, the Master Servicer agrees, (i) that such
restoration will increase the proceeds to Certificateholders on liquidation of
the Mortgage Loan or Contract after reimbursement of the expenses incurred by
the Servicer or the Master Servicer, as the case may be, and (ii) that such
expenses will be recoverable through proceeds of the sale of the Mortgaged
Property or proceeds of any related Pool Insurance Policy, any related Primary
Mortgage Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary Mortgage
Insurance Policy is not available because the related Servicer or the Master
Servicer has been unable to make the above determinations or otherwise, the
Servicer or the Master Servicer is nevertheless obligated to follow such normal
practices and procedures as are deemed necessary or advisable to realize upon
the defaulted Mortgage Loan. If the proceeds of any liquidation of the Mortgaged
Property or Manufactured Home are less than the principal balance of the
defaulted Mortgage Loan or Contract, respectively, plus interest accrued thereon
at the 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.
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Under the Servicing Agreements and the Pooling and Servicing Agreement, the
Servicer or the Master Servicer, as the case may be, will foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
related Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments. In
connection with such foreclosure or other conversion, the Servicer or the Master
Servicer will follow such practices and procedures as are deemed necessary or
advisable and as shall be normal and usual in its general mortgage servicing
activities and in accordance with FNMA guidelines, except when, in the case of
FHA or VA Loans, applicable regulations require otherwise. However, neither the
Servicer nor the Master Servicer will be required to expend its own funds in
connection with any foreclosure or towards the restoration of any property
unless it determines and, in the case of a determination by a Servicer, the
Master Servicer agrees (i) that such restoration and/or foreclosure will
increase the proceeds of liquidation of the related Mortgage Loan to
Certificateholders after reimbursement to itself for such expenses and
(ii) that such expenses will be recoverable to it either through Liquidation
Proceeds, Insurance Proceeds, payments under the Letter of Credit, or amounts in
the Reserve Fund, if any, with respect to the related Series, or otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans and Contracts--The Mortgage
Loans--Foreclosure" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust Fund's ability to sell and realize the
value of those shares.
The market value of any 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. The Master Servicer or Servicer will treat a defaulted Mortgage
Loan as having been finally liquidated after all liquidation proceeds, insurance
proceeds and other amounts that the Master Servicer or Servicer expects to
receive in connection with the liquidation have been received. Any shortfall
between the unpaid principal balance and accrued interest on the Mortgage Loan,
after application of all liquidation proceeds, insurance proceeds and other
amounts received in connection with the liquidation, net of reimbursable costs
and expenses, including Advances (a "Realized Loss"), will be allocated to the
Certificates in the manner set forth in the related Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, amounts received after
a Realized Loss has been allocated to the Certificates will not be distributed
to the Certificateholders.
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
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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 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 will pay
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 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.
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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 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
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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 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.
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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 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 will include:
(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
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notice of such failure or breach; and (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.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default with respect to a Series of Certificates
remains unremedied, the Depositor, the Trustee or the holders of Certificates
evidencing not less than the percentage of the voting rights evidenced by the
Certificates of such Series specified in the Pooling and Servicing Agreement may
terminate all of the rights and obligations of the Master Servicer under the
Pooling and Servicing Agreement and in and to the Mortgage Loans and Contracts
and the proceeds thereof, whereupon (subject to applicable law regarding the
Trustee's ability to make advances) the Trustee or, if the Depositor so notifies
the Trustee and the Master Servicer, the Depositor or its designee, will succeed
to all the responsibilities, duties and liabilities of the Master Servicer under
such Pooling and Servicing Agreement and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling or unable so to act, it may
appoint, or petition to a court of competent jurisdiction for the appointment
of, a successor master servicer. Pending such appointment, the Trustee (unless
prohibited by law from so acting) shall be obligated to act in such capacity.
The Trustee and such successor master servicer may agree upon the servicing
compensation to be paid to such successor, which in no event may be greater than
the compensation to the Master Servicer under the Pooling and Servicing
Agreement.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer and the Trustee, without the consent of the Certificateholders,
(i) to cure any ambiguity, (ii) to correct or supplement any provision therein
that may be inconsistent with any other provision therein, 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
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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. After termination of the
applicable Agreement, the Certificates will no longer accrue interest, and the
only obligation of the Trust Fund thereafter will be to pay principal and
accrued interest that was available to be paid on the date of termination, upon
surrender of such Certificates. The Trust Fund and the Certificateholders will
have no obligation to the purchaser of the Trust Assets with respect to the
Trust Assets so purchased.
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. If so specified in
the related Prospectus Supplement, the repurchase price will be equal to
(a) the aggregate principal balance of the Mortgage Loans outstanding (including
Mortgage Loans that have been foreclosed upon if the liquidation proceeds have
not yet been distributed), plus accrued and unpaid interest thereon, or (b) the
aggregate outstanding principal balance of and accrued and unpaid interest on
the Mortgage Loans outstanding, plus the fair market value of any Mortgaged
Property acquired in foreclosure or deed-in-lieu of foreclosure if the
liquidation proceeds in respect of such property have not yet been received by
or on behalf of the Trust Fund. The purchase price described in clause (b) above
could result on one or more classes of Certificates receiving less than their
outstanding principal and accrued interest if the fair market value of the
property is less than the outstanding principal and accrued interest on the
related Mortgage Loan. 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 (not greater than 10%) 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.
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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."
If so 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.
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.
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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 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
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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 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
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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.
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.
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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 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.
The amount of a claim for benefits under a Primary Mortgage Insurance
Policy covering a Mortgage Loan in the related Mortgage Pool (herein referred to
as the "Loss") generally will consist of the insured portion of the unpaid
principal amount of the covered Mortgage Loan (as described herein) and accrued
and unpaid interest thereon and reimbursement of certain expenses, less (i) all
rents or other payments collected or received by the Insured (other than the
proceeds of hazard insurance) that are derived from or in any way related to
such Mortgaged Property, (ii) hazard insurance proceeds in excess of the amount
required to restore such Mortgaged Property and which have not been applied to
the payment of such Mortgage Loan, (iii) amounts expended but not approved by
the Primary Mortgage Insurer, (iv) claim payments previously made by the Primary
Mortgage Insurer, and (v) unpaid premiums.
As conditions precedent to the filing of or payment of a claim under a
Primary Mortgage Insurance Policy covering a Mortgage Loan in the related
Mortgage Pool, the Insured generally will be required to, in the event of
default by the Mortgagor: (i) advance or discharge (A) all hazard insurance
premiums and (B) as necessary and approved in advance by the Primary Mortgage
Insurer, (1) real estate property taxes, (2) all expenses required to preserve,
repair and prevent waste to the Mortgaged Property so as to maintain such
Mortgaged Property in at least as good a condition as existed at the effective
date of such Primary Mortgage Insurance Policy, ordinary wear and tear excepted,
(3) property sales expenses, (4) any outstanding liens (as defined in such
Primary Mortgage Insurance Policy) on the Mortgaged Property and
(5) foreclosure costs, including court costs and reasonable attorneys' fees;
(ii) in the event of a physical loss or damage to the Mortgaged Property, have
restored and repaired the Mortgaged Property to at least as good a condition as
existed at the effective date of such Primary Mortgage Insurance Policy,
ordinary wear and tear excepted; and (iii) tender to the Primary Mortgage
Insurer good and merchantable title to and possession of the mortgaged property.
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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.
The Primary Mortgage Insurer generally will be required to pay to the
Insured either: (1) the insured percentage of the Loss; or (2) at its option
under certain of the Primary Mortgage Insurance Policies, the sum of the
delinquent monthly payments plus any advances made by the Insured, both to the
date of the claim payment, and thereafter, monthly payments in the amount that
would have become due under the Mortgage Loan if it had not been discharged plus
any advances made by the Insured until the earlier of (A) the date the Mortgage
Loan would have been discharged in full if the default had not occurred or
(B) an approved sale. Any rents or other payments collected or received by the
Insured which are derived from or are in any way related to the Mortgaged
Property will be deducted from any claim payment.
FHA INSURANCE AND VA GUARANTEES
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the National Housing Act, as
amended, and the United States Housing Act of 1937, as amended. Any FHA
Insurance or VA Guarantees relating to Contracts underlying a Series of
Certificates will be described in the 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
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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.
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
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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, 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.
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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.
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.
The Pool Insurance Policy generally 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
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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 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."
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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.
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
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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.
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
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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
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
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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 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,
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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.
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 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.
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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.
If so 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.
If so 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
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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 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
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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.
"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
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"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.
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
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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
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
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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.
If so 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.
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.
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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 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
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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
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
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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 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
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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 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
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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 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
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amounts paid under a Contract; however, the Obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
against such Obligor. Numerous other federal and state consumer protection laws
impose requirements applicable to the origination and lending pursuant to the
Contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related Contract.
Transfers of Manufactured Homes, Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Depositor or the Master Servicer
and permit the acceleration of the maturity of the Contracts by the Depositor or
the Master Servicer upon any such sale or transfer that is not consented to. The
Depositor or the Master Servicer expects that it will permit most transfers of
Manufactured Homes and not accelerate the maturity of the related Contracts. In
certain cases, the transfer may be made by a delinquent Obligor in order to
avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Depositor
desires to accelerate the maturity of the related Contract, the Depositor's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. In some states the Depositor or
the Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan that is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by
Title V. In any state in which application of Title V was expressly rejected or
a provision limiting discount points or other charges has been adopted, no
Contract which imposes finance charges or provides for discount points or
charges in excess of permitted levels has been included in the Trust Assets or
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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FEDERAL INCOME TAX CONSEQUENCES
I. GENERAL; OPINIONS
The following is a discussion of the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. (In
addition, certain minor and incidental consequences are discussed as well.)
Where appropriate, additional consequences will be discussed in the Prospectus
Supplement relating to a particular Series. This discussion is intended as an
explanatory discussion of the consequences of holding the Certificates generally
and does not purport to furnish information in the level of detail or with the
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, it is recommended that each prospective investor
consult with its own tax advisor regarding the application of United States
federal income tax laws, as well as any state, local, foreign or other tax laws,
to their particular situations. Orrick, Herrington & Sutcliffe LLP, counsel to
the Depositor, rendered an opinion generally that the discussion in this section
is correct in all material respects. In addition, counsel to the Depositor has
rendered an opinion to the effect that: (1) with respect to each Series of REMIC
Certificates (issued as described in the Prospectus), the related Mortgage Pool
(or portion thereof) will be classified as one or more "real estate mortgage
investment conduits" ("REMICs") and not an association taxable as a corporation
(or publicly traded partnership treated as a corporation) and each Class of
Certificates will represent either a "regular" interest or a "residual" interest
in such REMIC and (2) with respect to each other Series of Certificates (issued
as described in the Prospectus), the related Trust Fund will be a grantor trust
for federal income tax purposes and not an association taxable as a corporation
(or publicly traded partnership treated as a corporation) and each holder of a
Certificate will be treated as holding an equity interest in such grantor trust.
Prospective investors should be aware that counsel to the Depositor has not
rendered any other tax opinions. Further, if with respect to any Series of
Certificates Orrick, Herrington & Sutcliffe LLP is not counsel to the Depositor,
Depositor's then current counsel will be identified in the related prospectus
supplement and will confirm (or supplement) the aforementioned opinions.
Prospective investors should be further aware that no rulings have been sought
from the Internal Revenue Service (the "IRS"), and that legal opinions are not
binding on the IRS or the courts. Accordingly, there can be no assurance that
the IRS or the courts will agree with counsel to the Depositor's opinions. If,
contrary to such opinions, the Mortgage Pool or Trust Fund related to a Series
of Certificates is characterized or treated as a corporation for federal income
tax consequences, among other consequences, the Mortgage Pool or Trust Fund
would be subject to federal income tax (and similar state income or franchise
taxes) on its income and distributions to Certificateholders would be impaired.
As used hereinafter in "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. It
is recommended that investors consult their own tax advisors 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
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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." The related Prospectus Supplement
will identify the classes of Certificates of a Series that are "regular"
interests in a REMIC and the class of Certificates that is the "residual"
interest in each REMIC.
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").
II. REMIC TRUST FUNDS
A. Classification of REMIC Trust Funds
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, 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
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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 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
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when received as a payment of interest on the first Distribution Date (except to
the extent of any accrued market discount as of that date). The OID Regulations
suggest, however, that some or all of this pre-issuance accrued interest "may"
be treated as a separate asset (and hence not includible in a REMIC Regular
Certificate's issue price or stated redemption price at maturity), whose cost is
recovered entirely out of interest paid on the first Distribution Date.
The stated redemption price at maturity of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(ii) a current value of a single "qualified floating rate" or "objective rate"
(each, a "Single Variable Rate"). A "current value" is the value of a variable
rate on any day that is no earlier than three months prior to the first day on
which that value is in effect and no later than one year following that day. A
"qualified floating rate" is a rate whose variations can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds in the
currency in which the Certificate is denominated. Such a rate remains qualified
even though it is multiplied by a fixed, positive multiple greater than 0.65 but
not exceeding 1.35, increased or decreased by a fixed rate, or both. Certain
combinations of rates constitute a single qualified floating rate, including
(i) interest stated at a fixed rate for an initial period of less than one year
followed by a qualified floating rate if the value of the floating rate at the
Closing Date is intended to approximate the fixed rate, and (ii) two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Certificate. A combination of such
rates is conclusively presumed to be a single floating rate if the values of all
rates on the Closing Date are within 0.25 percentage points of each other. A
variable rate that is subject to an interest rate cap, floor, governor or
similar restriction on rate adjustment may be a qualified floating rate only if
such restriction is fixed throughout the term of the instrument, or is not
reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. An "objective rate" is defined 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
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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 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
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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 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 applicable to
instruments having contingent payments (the "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.
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2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the REMIC Regular Certificate's
stated redemption price at maturity, or, in the case of a REMIC Regular
Certificate issued with original issue discount, the REMIC Regular Certificate's
adjusted issue price (as defined under "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount"), will recognize market discount upon
receipt of each payment of principal. In particular, such a holder will
generally be required to allocate each payment of principal on a REMIC Regular
Certificate first to accrued market discount, and to recognize ordinary income
to the extent such principal payment does not exceed the aggregate amount of
accrued market discount on such REMIC Regular Certificate not previously
included in income. Such market discount must be included in income in addition
to any original issue discount includible in income with respect to such REMIC
Regular Certificate.
A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount), 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
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discount is to be used in calculating the accrual of market discount under any
of the above methods. Because the regulations referred to in this paragraph have
not been issued, it is not possible to predict what effect such regulations
might have on the tax treatment of a REMIC Regular Certificate purchased at a
discount in the secondary market.
Further, a purchaser generally will be required to treat a portion of any
gain on sale or exchange of a REMIC Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income. Such purchaser also may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry such REMIC Regular Certificate. Any
such deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
A REMIC Regular Certificate purchased at a cost (not including payment for
accrued qualified stated interest) greater than its remaining stated redemption
price at maturity will be considered to be purchased at a premium. The holder of
such a REMIC Regular Certificate may elect to amortize such premium under the
constant yield method. The OID Regulations also permit Certificateholders to
elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made the
election to amortize premium generally, as described above. The Committee Report
indicates a Congressional intent that the same rules that will apply to accrual
of market discount on installment obligations will also apply in amortizing bond
premium under Code Section 171 on installment obligations such as the REMIC
Regular Certificates.
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
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taxable income or net loss of the REMIC Mortgage Pool for such quarter, and by
allocating the daily portions among the Residual Owners (on such day) in
accordance with their percentage of ownership interests on such day. Any amount
included in the gross income of, or allowed as a loss to, any Residual Owner by
virtue of the rule referred to in this paragraph will be treated as ordinary
income or loss. Purchasers of REMIC Residual Certificates should be aware that
taxable income from such Certificates may exceed cash distributions with respect
thereto in any taxable year. For example, if the Mortgage Loans are acquired by
a REMIC at a discount, then the holder of a residual interest may recognize
income without corresponding cash distributions. This result could occur because
a payment produces recognition by the REMIC of discount on the Mortgage Loan
while all or a portion of such payment could be used in whole or in part to make
principal payments on REMIC Regular Certificates issued without substantial
discount. Taxable income may also be greater in earlier years as a result of the
fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of the REMIC Regular Certificates, will increase
over time as the lower yielding sequences of Certificates are paid, whereas
interest income with respect to any given Mortgage Loan will remain constant
over time as a percentage of the outstanding principal amount of that loan.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into account
in determining the income of such holder for federal income tax 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.
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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.
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.
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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.
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
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government or international organization or any agency or instrumentality of any
of the foregoing; any tax-exempt entity (other than a Code Section 521
cooperative) which is not subject to the tax on unrelated business income; and
any rural electrical or telephone cooperative. The anticipated excess inclusions
must be determined as of the date that the REMIC Residual Certificate is
transferred and must be based on events that have occurred up to the time of
such transfer, the Prepayment Assumption, and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. The tax generally is imposed on the transferor of the REMIC Residual
Certificate, except that it is imposed on an agent for a disqualified
organization if the transfer occurs through such agent. The Pooling and
Servicing Agreement requires, as a prerequisite to any transfer of a Residual
Certificate, the delivery to the Trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a Residual Certificate
to a disqualified organization void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity at any time
during any taxable year of such entity, then a tax will be imposed on such
entity equal to the product of (i) the amount of excess inclusions on the REMIC
Residual Certificate for such taxable year that are allocable to the interest in
the pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period, however, if the record
holder of an interest in such entity furnishes to such entity (i) such holder's
social security number and a statement under penalties of perjury that such
social security number is that of the record holder or (ii) a statement under
penalties of perjury that such record holder is not a disqualified organization.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in 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.
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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 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
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Owners will generally be required to report such REMIC Mortgage Pool items
consistently with their treatment on the REMIC Mortgage Pool's federal income
tax information return and may in some circumstances be bound by a settlement
agreement between the Master Servicer, as agent for the tax matters person, and
the IRS concerning any such REMIC Mortgage Pool item. Adjustments made to the
REMIC Mortgage Pool tax return may require a Residual Owner to make
corresponding adjustments on its return, and an audit of the REMIC Mortgage
Pool's tax return, or the adjustments resulting from such an audit, could result
in an audit of a Residual Owner's return.
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.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation or partnership (including an entity
treated as a corporation or partnership for federal income tax purposes) created
or organized in or under the laws of the United States, any state thereof or the
District of Columbia, (unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise), (iii) an estate whose income is
subject to United States federal income tax regardless of its source or (iv) a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons under the United States Internal Revenue Code of 1986, as
amended (the "Code") and applicable Treasury regulations thereunder prior to
such date, that elect to continue to be treated as United States persons under
the Code or applicable Treasury regulations thereunder also will be a U.S.
Holder. Moreover, as used herein, the term "U.S. Holder" includes any holder of
a Note whose income or gain in respect to its investment in a Note is
effectively connected with the conduct of a U.S. trade or business. As used
herein, the term "non-U.S. Holder" means a beneficial owner of a Note that is
not a U.S. Holder.
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
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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.
Prospective investors should be aware that there are no specific
regulations dealing with original issue discount as it applies to REMIC Regular
Certificates and the discussion above is based on regulations that apply to debt
instruments generally. In addition, certain aspects of those regulations are not
entirely clear. It is possible that the total amount of original issue discount
and the rate at which it accrues on any Class of Certificates may vary from that
as described above. For example, it is possible that the IRS will take the
position that all of the interest on a Class of Certificates will be included in
the Class's stated redemption price at maturity. In any event, prospective
investors should be aware that the effect of the OID Regulations, if they apply
to any Class of Certificates, in general, is: (i) to cause income to accrue on
that Class of Certificates at a rate that is different, and may be faster, than
the rate at which interest is paid on the Certificate but (ii) such income will
not accrue faster than the yield to maturity of the Certificate when held by the
holder.
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 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
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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.
Certain non-substantive, procedural aspects of the withholding rules are
scheduled to be amended effective January 1, 2000. It is recommended that
prospective investors consult their tax advisors with respect to the effect
these changes 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 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 no election is
made to treat the Mortgage Pool as a REMIC, 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 grantor trust whose taxation will be
governed by the provisions of subpart E, Part I of subchapter J of the Code and
each holder of a Certificate will be treated as holding an equity interest in
such grantor trust.
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.
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Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Stripped Mortgage Loans
should read the material under the headings "Application of Stripped Bond
Rules," "Market Discount and Premium" and "Allocation of Purchase Price" for a
discussion of particular rules applicable to their Certificates. A "Stripped
Mortgage Loan" means a Mortgage Loan having a Retained Yield (as that term is
defined below) or a Mortgage Loan included in a Trust Fund having either Trust
Interest Certificates or more than one class of Trust Fractional Certificates or
identified in the Prospectus Supplement as related to a Class of Trust
Certificates identified as representing interests in Stripped Mortgage Loans.
Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Unstripped Mortgage Loans
should read the material under the headings "Treatment of Unstripped
Certificates", "Market Discount and Premium", and "Allocation of Purchase Price"
for a discussion of particular rules applicable to their Certificates. However,
the IRS has indicated that under some circumstances it will view a portion of
servicing and related fees and expenses paid to or retained by the Master
Servicer or sub-servicers as an interest in the Mortgage Loans, essentially
equivalent to that portion of interest payable with respect to each Mortgage
Loan that is retained by the Depositor ("Retained Yield"). If such a view were
sustained with respect to a particular Trust Fund, such purchasers would be
subject to the rules set forth under "Application of Stripped Bond Rules" rather
than those under "Treatment of Unstripped Certificates." The Depositor does not
expect any Servicing 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. 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
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of interest on the Stripped Mortgage Loan, including a reasonable Servicing Fee,
is no more than one percentage point less than the unstripped rate of interest.
See "-- Market Discount and Premium." The Trustee intends to apply the foregoing
de minimis and market discount rules on an aggregate poolwide basis, although it
is possible that investors may be required to apply them on a loan by loan
basis. The loan by loan information required for such application of those rules
may not be available. See "Aggregate Reporting."
Subsequent purchasers of the Certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the Certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a Trust Fractional Certificate is acquired, based on the
characteristics of the Mortgage Loans at that time.
Variable Rate Certificates. Purchasers of Trust Fractional Certificates
bearing a variable rate of interest should be aware that there is considerable
uncertainty concerning the application of the OID Regulations to Mortgage Loans
bearing a variable rate of interest. Although such regulations are subject to a
different interpretation, as discussed below, in the absence of other contrary
authority in preparing reports furnished to Certificateholders the Trustee
intends to treat Stripped Mortgage Loans bearing a variable rate of interest
(other than those treated as having market discount pursuant to the regulations
described above) as subject to the provisions therein governing variable rate
debt instruments. The effect of the application of such provisions generally
will be to cause Certificateholders holding Trust Fractional Certificates
bearing interest at a Single Variable Rate or at a Multiple Variable Rate (as
defined above under "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount") to accrue original issue discount and
interest as though the value of each variable rate were a fixed rate, which is
(a) for each qualified floating rate, the value of each such rate as of the
Closing Date (with appropriate adjustment for any differences in intervals
between interest adjustment dates), (b) for a qualified inverse floating rate,
the value of the rate as of Closing Date, and (c) for any other objective rate,
the fixed rate that reflects the yield that is reasonably expected for the Trust
Fractional Certificate. If the interest paid or accrued with respect to such
Variable Rate Trust Fractional Certificate during an accrual period differs from
the assumed fixed interest rate, such difference will be an adjustment (to
interest or original issue discount, as applicable) to the Certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
Prospective purchasers of Trust Fractional Certificates bearing a variable
rate of interest should be aware that the provisions in the OID Regulations
applicable to variable rate debt instruments may not apply to certain adjustable
and variable rate mortgage loans, possibly including the Mortgage Loans, or to
Stripped Certificates representing interests in such Mortgage Loans. If variable
rate Trust Fractional Certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such Certificates may
be subject to the provisions of the 1996 Contingent Debt Regulations. The
application of those provisions to instruments such as the Trust Fractional
Certificates is subject to differing interpretations. Prospective purchasers of
variable rate Trust Fractional Certificates are advised to consult their tax
advisers concerning the tax treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting information relating
to original issue discount to Certificateholders to provide such information on
an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount on a
mortgage loan by mortgage loan basis (or on the basis of the rights to
individual payments) taking account of an allocation of their basis in the
Certificates among the interests in the various mortgage loans represented by
such Certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient mortgage by mortgage information should a computation on that basis
be required by the IRS.
Because the treatment of the Certificates under the OID Regulations is both
complicated and uncertain, Certificateholders should consult their tax advisers
to determine the proper method of reporting amounts received or accrued on
Certificates.
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2. Treatment of Unstripped Certificates
Mortgage Loans in a Trust Fund for which there is neither any Class of
Trust Interest Certificates, nor more than one Class of Trust Fractional
Certificates, nor any Retained Yield otherwise identified in the Prospectus
Supplement as being unstripped mortgage loans ("Unstripped Mortgage Loans") will
be treated as wholly owned by the Trust Fractional Certificateholders of a Trust
Fund. Trust Fractional Certificateholders using the cash method of accounting
must take into account their pro rata shares of original issue discount as it
accrues and qualified stated interest (as described in "REMIC Trust
funds--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount") from Unstripped Mortgage Loans as and when collected by the Trustee.
Trust Fractional Certificateholders using an accrual method of accounting must
take into account their pro rata shares of qualified stated interest from
Unstripped Mortgage Loans as it accrues or is received by the Trustee, whichever
is earlier.
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
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determined on a ratable basis. A Trust Fractional Certificateholder may,
however, elect to determine the amount of accrued market discount on a constant
yield to maturity basis. This election is made on a bond-by-bond basis and is
irrevocable. In addition, the description of the market discount rules in
"Taxation of Owners of REMIC Regular Certificates--Market Discount and Premium"
with respect to (i) conversion to ordinary income of a portion of any gain
recognized on sale or exchange of a market discount bond, (ii) deferral of
interest expense deductions, (iii) the de minimis 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.
If a Certificateholder purchases a Certificate for an amount greater than
its remaining principal amount, such Certificateholder will be considered to
have purchased such Certificate with amortizable bond premium equal in amount to
such excess, and may elect to amortize such premium using a constant yield
method over the remaining term of the Certificate and to offset interest
otherwise required to be included in income in respect of such Certificate by
the premium amortized in such year. If such an election is made, it will apply
to all debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. The OID Regulations also permit Certificateholders to
elect to include all interest, discount and premium in income based on a
constant yield method. The Committee Report states the same rules that apply to
accrual of market discount (which rules may require use of a prepayment
assumption in accruing market discount with respect to Certificates without
regard to whether such Certificates have original issue discount) would also
apply in amortizing bond premium under Code Section 171.
4. Allocation of Purchase Price
As noted above, a purchaser of a Trust Fractional Certificate relating to
Unstripped Mortgage Loans will be required to allocate the purchase price
thereof to the undivided interest it acquires in each of the Mortgage Loans, in
proportion to the respective fair market values of the portions of such Mortgage
Loans included in the Trust Fund at 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
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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, 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 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."
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
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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.
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.
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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.
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. 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,
1999, subject to certain transition rules. It is recommended that prospective
investors consult their tax advisors regarding the New Regulations.
I. State and Local Taxation
In addition to the federal income tax consequences described in "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 imposes taxes and/or other
penalties on any such transaction 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, regulatory 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.
A number of prohibited transaction class exemptions issued by the DOL might
apply to exempt a prohibited transaction arising by virtue of the purchase of a
Certificate by or on behalf of, or with plan assets of a Plan, 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 it were to apply, that the available exemptive relief
would apply to all transactions involving the applicable Trust Fund.
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 exception
from this "plan asset" treatment, and if such an exception 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. As a result,
transactions involving the assets of the Trust Fund will be subject to the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code. The prohibited transaction
exemptions identified above would not generally apply to prohibited transactions
arising in transactions involving "plan assets" held in the Trust Fund.
The Plan Assets Regulation provides an exception 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, foreign and other benefit plans not
subject to ERISA and entities holding assets deemed to be "plan assets").
Because the availability of this exemption to
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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.
UNDERWRITER'S PTE
A number of underwriters have been granted identical administrative
exemptions (the "Underwriter's PTE"), which may accord protection from
violations under Sections 406 and 407 of ERISA and Section 4975 of the Code for
Plans that acquire 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 the
recipient underwriter 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;
(b) certificates evidencing interests in those other pools have been
both (1) rated in one of the three highest generic rating categories by
Standard & Poor's Ratings Services, Moody's Investors Service, Inc., Duff &
Phelps Inc. or Fitch IBCA, Inc., and (2) purchased by investors other than
Plans, for at least one year prior to a Plan's acquisition of certificates
in reliance upon the Underwriter's PTE;
(c) at the time of such acquisition, the class of certificates
acquired by the Plan has received a rating in one of the rating categories
referred to in condition (b) above;
(d) the Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(e) the certificates evidence ownership in Trust Assets which may
include contracts and, in certain circumstances, 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), but
may not include a swap agreement, or, unless certain conditions specified
in the applicable prospectus supplement are satisfied, a Pre-Funding
Account;
(f) the certificates acquired by the Plan are not subordinated to
other classes of certificates of that trust 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.
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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 the
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 interests 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 conditions in the Underwriter's PTE are satisfied as to any
particular certificates depends upon the relevant facts and circumstances
existing at the time the Plan acquires the certificates. Any Plan investor who
proposes to use "plan assets" of a Plan to acquire certificates in reliance upon
the Underwriter's PTE should determine whether the Plan satisfies all of the
applicable conditions and consult with its counsel regarding other factors that
may affect the applicability of the Underwriter's PTE.
GENERAL 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 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 an
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
Underwriter's PTE is applicable and adequate exemptive relief is available;
(b) whether any other prohibited transaction exemption (if required) is
available under ERISA and Section 4975 of the Code; or (c) whether an exception
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 particular Certificate.
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
was required to issue final regulations (the "401(c) Regulations") no later than
December 31, 1997 providing guidance for the
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<PAGE>
purpose of determining, in cases where insurance policies or annuity contracts
supported by an insurer's general account were issued to or for the benefit of a
Plan on or before December 31, 1998, which general account assets constitute
"plan assets." Proposed regulations have been released, but final regulations
have not yet been issued. 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.
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
123
<PAGE>
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.
The Office of Thrift Supervision (the "OTS") has issued Thrift Bulletin
13a, entitled "Management of Interest Rate Risk, Investment Securities, and
Derivatives Activities" ("TB 13a"), which is effective as of December 1, 1998
and applies to thrift institutions regulated by the OTS. One of the primary
purposes of TB 13a is to require thrift institutions, prior to taking any
investment position, to (i) conduct a pre-purchase portfolio sensitivity
analysis for any "significant transaction" involving securities or financial
derivatives, and (ii) conduct a pre-purchase price sensitivity analysis of any
"complex security" or financial derivative. For the purposes of TB 13a, "complex
security" includes among other things any collateralized mortgage obligation or
REMIC security, other than any "plain vanilla" mortgage pass-through security
(that is, securities that are part of a single class of securities in the
related pool that are non-callable and do not have any special features). One or
more classes of the Offered Certificates may be viewed as "complex securities".
The OTS recommends that while a thrift institution should conduct its own
in-house pre-acquisition analysis, it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of "complex securities
with high price sensitivity" be limited to transactions and strategies that
lower a thrift institution's portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
The predecessor to the OTS issued a bulletin entitled "Mortgage Derivative
Products and Mortgage Swaps" applicable to thrift institutions regulated by the
OTS. The bulletin established guidelines for the investment by savings
institutions in certain "high-risk" mortgage derivative securities and
limitations on the use of such securities by insolvent, undercapitalized or
otherwise "troubled" institutions. According to the bulletin, such "high-risk"
mortgage derivative securities include securities such as the Class B
Certificates. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement (the "1998 Policy Statement")
applicable to all depository institutions, setting forth guidelines for
investments in "high-risk mortgage securities." The 1998 Policy Statement has
been adopted by the Federal Reserve Board, the Office of the Comptroller of the
Currency, the FDIC, the National Credit Union Administration (the "NCUA") and
the OTS with an effective date of May 26, 1998. The 1998 Policy Statement
rescinds a 1992 policy statement that had required, prior to purchase, a
depository institution to determine whether a mortgage derivative product that
it is considering acquiring is high-risk, and, if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. The 1998
Policy Statement eliminates former constraints on investing in certain
"high-risk" mortgage derivative products and substitutes broader guidelines for
evaluating and monitoring investment risk.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain Series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Certificates issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and
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<PAGE>
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.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters by Orrick,
Herrington & Sutcliffe LLP, New York, New York or by Brown & Wood LLP, New York,
New York.
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<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ------------------
<S> <C>
1986 Act..............................................118
1988 Act..............................................107
1998 Policy Statement.................................124
401(c) Regulations...................................122
Accrual Distribution Amount............................42
ADA....................................................93
Advances...............................................15
AFR...................................................106
Agreement..............................................40
Alternative Credit Support.............................11
appraised value........................................35
Approved Sale..........................................76
APR....................................................33
ARM Loans..............................................26
Asset Conservation Act.................................89
Balloon Mortgage Loans.................................21
borrower...............................................78
Buy-Down Fund......................................14, 28
Buy-Down Loans.........................................28
Cede...................................................23
CERCLA.............................................22, 89
Certificate Account....................................49
Certificate Principal Balance...........................4
Certificateholders.................................23, 27
Certificates.................................Cover, 4, 98
Class............................................Cover, 4
Closing Date...........................................99
Code..........................................15, 40, 110
Commercial Mortgage Loans...............................5
Commercial Property.....................................5
Commission..............................................2
Contingent Debt Regulations...........................102
Contract Loan-to-Value Ratio............................8
Contract Pool................................Cover, 5, 97
Contract Schedule......................................46
Contracts....................................Cover, 5, 33
Converted Mortgage Loan................................26
Cooperative.............................................5
Cooperative Dwelling....................................5
Cooperative Loans.......................................5
current value.........................................100
Custodial Account......................................49
Custodial Agreement....................................34
Custodian..............................................34
Cut-off Date...........................................25
Debt Service Reduction.................................87
Deferred Interest......................................26
Deficiency Event.......................................64
Deficient Valuation....................................86
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ------------------
<S> <C>
Definitive Certificates................................23
Deleted Contract.......................................35
Deleted Mortgage Certificates..........................44
Deleted Mortgage Loans.................................45
Deposit Trust Agreement................................40
Depositor...........................................Cover
Determination Date.....................................52
Discount Certificate...................................10
Discount Certificates..................................38
Distribution Date.......................................6
DOL...................................................120
DTC....................................................23
Due Period.............................................43
ERISA.............................................16, 120
ERISA Plans...........................................120
Escrow Account.........................................55
FBSC...................................................36
FHA.........................................Cover, 26, 31
FHA Experience.........................................38
FHA Loans..............................................26
First Boston..........................................122
First Boston's PTE....................................122
Garn-St Germain Act....................................87
GPM Fund...........................................14, 28
GPM Loans..............................................28
HUD....................................................31
Initial Deposit........................................13
Installment Contracts..................................28
Insurance Proceeds.....................................49
Insured................................................58
Insured Series........................................121
Interest Coupon.......................................117
Interest Distribution..................................42
Interest Rate...........................................4
Interest Weighted Class.................................4
Interest Weighted Subclass..............................4
IRS............................................16, 97, 99
L/C Bank...........................................11, 67
L/C Percentage.........................................67
Lease..................................................91
lender.................................................78
Lessee.................................................91
Letter of Credit.......................................10
Liquidating Loan.......................................11
Liquidation Proceeds...................................49
Loan-to-Value Ratio.....................................7
Loss...................................................71
Manufactured Home.......................................8
Mixed-Use Mortgage Loans................................5
</TABLE>
126
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ------------------
Mixed-Use Property......................................5
<S> <C>
Mortgage Certificates...........................Cover, 33
Mortgage Loan Groups...................................27
Mortgage Loans...............................Cover, 5, 97
Mortgage Notes.........................................25
Mortgage Pool................................Cover, 5, 97
Mortgaged Property......................................7
Mortgagor Bankruptcy Bond..............................10
Multi-Class Certificates...............................4
Multifamily Mortgage Loans..............................5
Multifamily Property....................................5
Multiple Variable Rate................................102
NCUA..............................................91, 124
New Regulations.......................................119
non-U.S. Person..................................110, 111
Nonexempt Assets......................................121
Nonexempt Series......................................121
non-U.S. Holder.......................................110
Obligor................................................37
OID Regulations........................................98
Originator.............................................30
OTS...................................................124
Outstanding Balance....................................86
Parties in Interest...................................120
Pass-Through Rate.......................................4
payment deficiencies...................................68
Percentage Interest.............................Cover, 25
Performance Bond.......................................34
Plan Assets Regulation................................120
Plans.................................................120
Pool Insurance Policy..................................10
Pool Insurer...........................................12
Pooling and Servicing Agreement....................27, 40
Pre-Funded Amount...................................9, 35
Pre-Funding Account.................................9, 35
Pre-Funding Period..................................9, 35
Premium Certificate.....................................9
Premium Certificates...................................37
Prepayment Assumption..................................99
Primary Insurer........................................50
Primary Mortgage Insurance Policy......................12
Primary Mortgage Insurer...............................58
Principal Distribution.................................42
Principal Prepayments..................................13
Principal Weighted Class................................4
Principal Weighted Subclass.............................4
Purchase Price.........................................47
qualified floating rate...............................100
Rating Agency....................................Cover, 5
RCRA...................................................89
Realized Loss..........................................60
Record Date............................................42
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ------------------
<S> <C>
Reference Agreement....................................40
Relief Act.............................................91
REMIC.......................................Cover, 15, 98
REMIC Certificateholders...............................98
REMIC Certificates.....................................97
REMIC Mortgage Pool....................................97
REMIC Provisions.......................................98
REMIC Regular Certificate..............................98
REMIC Regulations......................................98
REMIC Residual Certificate.............................98
Required Distribution..................................69
Required Reserve...................................13, 67
Reserve Fund...........................................11
Residual Certificates...................................4
Residual Owner........................................104
Restricted Group......................................122
Retained Yield........................................113
Securities Act.........................................41
Senior Certificates....................................10
Senior Class............................................4
Senior Prepayment Percentage...........................68
Senior Subclass.........................................4
Series...........................................Cover, 4
Servicemen's Readjustment Act..........................26
Servicer...............................................27
Servicing Account......................................49
Servicing Agreement....................................27
Simple Interest Loans..................................29
Single Family Property..................................5
Single Variable Rate..................................100
single-class REMIC....................................108
SMMEA.............................................17, 123
SPA....................................................38
Special Distributions...............................7, 53
Special Hazard Insurance Policy........................14
Special Servicer...................................27, 55
Specially Serviced Mortgage Loans......................55
Standard Hazard Insurance Policy.......................56
Standard Terms.........................................40
startup day...........................................109
Stated Principal Balance................................4
Stated Principal Distribution Amount...................43
Stripped Bond Rules...................................113
Stripped Interest.....................................117
Stripped Mortgage Loan................................113
Subclass.........................................Cover, 4
Subordinated Amount....................................10
Subordinated Certificates..............................10
Subordinated Class......................................4
Subordinated Pool......................................13
Subordinated Subclass...................................4
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ------------------
Substitute Contract....................................35
<S> <C>
Substitute Mortgage Certificates.......................44
Substitute Mortgage Loans..............................45
TB 13a................................................124
Title V...............................................96
Title VIII............................................91
Trust Assets........................................5, 33
Trust Certificates.................................16, 98
Trust Fractional Certificate...........................98
Trust Fractional Certificateholder....................112
Trust Fund.......................................Cover, 5
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ------------------
<S> <C>
Trust Interest Certificate.............................98
Trust Interest Certificateholder......................117
U.S. Person......................................110, 111
UCC....................................................84
Unaffiliated Sellers...................................29
Underwriter's PTE.....................................121
Underwriters..........................................125
Unstripped Mortgage Loans.............................115
U.S. Holder...........................................110
VA..............................................Cover, 26
VA Loans...............................................26
</TABLE>
128
<PAGE>
$265,594,845 (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-1
<TABLE>
<S> <C> <C> <C> <C>
$84,794,000 CLASS A-1 6.75% CERTIFICATES
$5,162,000 CLASS A-2 6.75% CERTIFICATES
$99,662,000 CLASS A-3 6.75% CERTIFICATES
$25,464,000 CLASS A-4 6.75% CERTIFICATES
$23,953,300 CLASS A-5 6.75% CERTIFICATES
$26,559,445 CLASS A-6 6.75% CERTIFICATES
</TABLE>
$100 CLASS R 6.75% CERTIFICATE
CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.
(DEPOSITOR)
------------------------
PROSPECTUS SUPPLEMENT
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<TABLE>
<S> <C>
CREDIT FIRST
SUISSE BOSTON
</TABLE>
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YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE OFFERED CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
Until the expiration of 90 days after the date of this prospectus supplement,
all dealers selling the offered certificates, whether or not participating in
this distribution, will deliver a prospectus supplement and the prospectus to
which it relates. This delivery requirement 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 allotment or subscriptions.
October 27, 1999
