<PAGE>
PROSPECTUS SUPPLEMENT Rule 424(b)(5)
(TO PROSPECTUS DATED DECEMBER 18, 1995) Registration No. 33-99598
$182,123,198 (APPROXIMATE)
STRUCTURED ASSET SECURITIES CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-1
--------------------
NORWEST MORTGAGE, INC.
ORIGINATOR AND SERVICER
--------------------
The Structured Asset Securities Corporation Mortgage Pass-Through
Certificates, Series 1996-1 (the "Certificates") will consist of the following
Classes: Class A1, Class A2, Class A3, Class A4, Class A5, Class AP and Class AX
(the "Class A Certificates" and, together with the Class R Certificate, the
"Senior Certificates"), Class M, Class B1, Class B2, Class B3, Class B4 and
Class B5 (collectively, the "Subordinate Certificates"), and Class R (the
"Residual Certificate"). Only the Class A1, Class A2, Class A3, Class A4, Class
A5, Class AP, Class AX, Class M, Class B1, Class B2, and Class R Certificates
are being offered hereby and are sometimes referred to herein as the "Offered
Certificates." It is a condition to the issuance of the Class A1, Class A2,
Class A3, Class A5 and Class R Certificates that they be rated "AAA" by each of
Fitch Investors Service, L.P. ("Fitch") and Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P" and, together with Fitch, the
"Rating Agencies"); it is a condition to the issuance of the Class A4, Class AP
and Class AX Certificates that they be rated "AAA" by Fitch and "AAAr" by S&P;
it is a condition to the issuance of the Class M Certificates that they be rated
"AA" by each of Fitch and S&P; it is a condition to the issuance of the Class B1
Certificates that they be rated "A" by Fitch; and it is a condition to the
issuance of the Class B2 Certificates that they be rated "BBB" by Fitch.
The Certificates will evidence, in the aggregate, the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), consisting primarily of
fixed rate, fully amortizing, conventional, first lien residential mortgage
loans (the "Mortgage Loans") to be deposited by Structured Asset Securities
Corporation (the "Depositor") into the Trust Fund for the benefit of the
respective Certificateholders. The Mortgage Loans were originated or acquired by
Norwest Mortgage, Inc. ("Norwest") and will be purchased by Lehman Capital, A
Division of Lehman Brothers Holdings Inc. (the "Seller" or "Lehman Capital"),
and sold by Lehman Capital to the Depositor on the date of the initial issuance
of the Certificates. The Mortgage Loans will be serviced by Norwest. Certain
characteristics of the Mortgage Loans are described herein under "DESCRIPTION OF
THE MORTGAGE POOL."
For a discussion of certain significant factors affecting investments in the
Offered Certificates, see "RISK FACTORS" herein at page S-13 and in the
Prospectus at page 17.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
THE SELLER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES OR BY ANY OTHER
PERSON OR ENTITY EXCEPT AS DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Initial Final Scheduled
Certificate Certificate Distribution CUSIP
Class Principal Amount(1) Interest Rate Date(2) Number
- ----- ------------------- ------------- -------------- ----------
A1 .... $107,145,900 7.25% April 25, 2027 863572 JC8
A2 .... $ 14,641,000 7.25% April 25, 2027 863572 JD6
A3 .... $ 28,693,000 7.50% April 25, 2027 863572 JE4
A4 .... $ 1,307,000 (3) April 25, 2027 863572 JF1
A5 .... $ 20,000,000 7.25% April 25, 2027 863572 JG9
AP .... $ 853,198 (3) April 25, 2027 863572 JH7
AX .... (4) (5) April 25, 2027 863572 JJ3
M ..... $ 4,604,000 7.25% April 25, 2027 863572 JK0
B1 .... $ 3,222,000 7.25% April 25, 2027 863572 JL8
B2 .... $ 1,657,000 7.25% April 25, 2027 863572 JM6
R ..... $ 100 7.25% April 25, 2027 863572 JN4
- ------
(1) Approximate.
(2) Determined as set forth herein.
(3) The Class A4 and Class AP Certificates will be principal-only
Certificates and will not bear interest.
(4) The Class AX Certificates will have no principal amount and will accrue
interest on a Notional Amount (as defined herein) initially equal to
approximately $130,335,908. The Class AX Certificates will be
interest-only Certificates and will not be entitled to distributions of
principal.
(5) The per annum interest rate on the Class AX Certificates with respect to
each Distribution Date will be equal to the excess of (a) the weighted
average of the Net Mortgage Rates (as defined herein) of the Premium
Mortgage Loans (as defined herein) as of the first day of the related
Interest Accrual Period, less the Trustee Fee Rate (as defined herein),
over (b) 7.25%. The initial Certificate Interest Rate on the Class AX
Certificates is expected to be approximately 0.4867% per annum.
The Offered Certificates will be purchased from the Depositor by Lehman
Brothers Inc. (the "Underwriter") and will be offered by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The Class A3 Certificates will also be offered
by Edward D. Jones & Co. (the "Dealer") from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor from the sale of the Offered Certificates will
be approximately 97.92% of the aggregate initial Certificate Principal Amount
thereof, plus accrued interest thereon from the Cut-off Date, before deducting
expenses payable by the Depositor.
The Certificates offered by this Prospectus Supplement and the accompanying
Prospectus are offered by the Underwriter, subject to prior sale, withdrawal,
cancellation or modification of the offer without notice, to delivery to and
acceptance by the Underwriter and certain further conditions. It is expected
that the Class A1, Class A2, Class A3 and Class A5 Certificates will be
delivered in book-entry form through the Same-Day Funds Settlement System of The
Depository Trust Company on or about April 25, 1996. It is expected that the
Class A4, Class AP, Class AX, Class M, Class B1, Class B2 and Class R
Certificates will be delivered in certificated form at the offices of Lehman
Brothers Inc., New York, New York on or about April 25, 1996.
------------------
LEHMAN BROTHERS EDWARD JONES
The date of this Prospectus Supplement is April 16, 1996
<PAGE>
There is currently no secondary market for the Offered Certificates. The
Underwriter intends to make a secondary 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. See "RISK FACTORS -- Limited Liquidity" herein and in the
Prospectus.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day, commencing in May 1996 (each, a "Distribution Date"). As more
fully described herein, interest distributions on the Offered Certificates
(other than the Class A4 and Class AP Certificates) will be calculated on the
basis of the Certificate Principal Amounts (or Notional Amounts) thereof and
the related Certificate Interest Rates.
The Class M, Class B1 and Class B2 Certificates may not be transferred to
a Plan (as defined herein) except as described herein. The Class R
Certificate may not be transferred to a Plan and is subject to additional
transfer restrictions as described herein. See "ERISA CONSIDERATIONS" and
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein and in the accompanying
Prospectus.
As described herein, an election will be made to treat all or a portion of
the assets of the Trust Fund (the "REMIC Pool") as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes. The Offered
Certificates other than the Class R Certificate will be designated as
"regular interests" and the Class R Certificate will be designated as the
sole Class of "residual interest" in the REMIC. See "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" herein and in the accompanying Prospectus.
The yield to maturity of Offered Certificates purchased at a premium or
discount will be especially sensitive to the rate and timing of principal
payments. Investors should consider the risk that in the case of Offered
Certificates purchased at a premium, in particular the Class AX Certificates,
a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield, and, in the case of
Offered Certificates purchased at a discount, in particular the Class A4 and
Class AP Certificates, a slower than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield.
Investors in the Class AX Certificates should carefully consider the risk
that a rapid rate of principal payments on the Premium Mortgage Loans could
result in the failure of such investors to recover their initial investments.
See "YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE" herein.
Distributions of principal on the Class A3 Certificates are subject to the
procedures regarding requests for distribution and random lot distribution
described herein under "DESCRIPTION OF THE CERTIFICATES-- Distributions in
Reduction of the Class A3 Certificates." The allocation of principal
distributions in respect of any particular Class A3 Certificate may result in
a yield to maturity that varies significantly from the anticipated yield, and
such yields will vary among holders of Class A3 Certificates. The Class A3
Certificates may not be an appropriate investment for any investor who
requires a distribution of a particular amount of principal on a
predetermined date or requires an otherwise predictable stream of principal
distributions.
The Class A3 Certificates will have the benefit of an irrevocable
financial guaranty insurance policy (the "Class A3 Policy") to be issued by
Financial Security Assurance Inc. ("Financial Security"), pursuant to which
Financial Security will unconditionally guarantee the payment of Guaranteed
Distributions (as defined herein) on the Class A3 Certificates on each
Distribution Date. See "THE CLASS A3 CERTIFICATE INSURANCE POLICY" herein.
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in
the Prospectus and investors must read both the Prospectus and this
Prospectus Supplement to obtain material information about the offering of
the Offered Certificates. Sales of the Offered Certificates may not be
consummated unless the purchaser has received both the Prospectus and this
Prospectus Supplement.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of
dealers acting as underwriters to deliver a Prospectus Supplement and the
Prospectus with respect to their unsold allotments or subscriptions.
S-2
<PAGE>
The information set forth herein under "NORWEST MORTGAGE, INC." has been
provided by Norwest. The information set forth herein under "THE CLASS A3
CERTIFICATE INSURANCE POLICY -- Financial Security Assurance Inc." has been
provided by Financial Security. No representation is made by the Seller, the
Depositor, the Underwriter, the Trustee or any of their respective affiliates
as to the accuracy or completeness of the information provided by Norwest or
Financial Security.
------
No person is authorized in connection with this offering to give any
information or to make any representation about the Seller, Depositor,
Norwest, Financial Security, the Offered Certificates or any other matter
referred to herein, other than those contained in this Prospectus Supplement
or the Prospectus. If any other information or representation is given or
made, such information or representation may not be relied upon as having
been authorized by the Seller, Depositor, the Underwriter, the Dealer, the
Trustee, Norwest or Financial Security. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell or a solicitation of an offer
to buy securities other than the Offered Certificates, or an offer to sell or
a solicitation of an offer to buy securities in any jurisdiction or to any
person to whom it is unlawful to make such offer in such jurisdiction.
Neither the delivery of this Prospectus Supplement or the Prospectus nor any
sale hereunder or thereunder shall, under any circumstances, create any
implication that the information contained herein or therein is correct as of
any time subsequent to their respective dates.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT
TABLE OF CONTENTS
SUMMARY ............................................................. S-5
RISK FACTORS ........................................................ S-13
Special Yield Considerations for the Class AX, Class A4 and Class
AP Certificates ................................................... S-13
Geographical Concentration of the Mortgage Loans .................... S-13
Limited Liquidity ................................................... S-13
Repurchase Obligations of the Depositor ............................. S-13
DESCRIPTION OF THE CERTIFICATES ..................................... S-13
General ........................................................... S-13
Book-Entry Registration of Certain Classes of Certificates ........ S-15
Priority of Distributions ......................................... S-15
Distributions of Interest ......................................... S-17
Distributions of Principal ........................................ S-18
Available Distribution Amount ..................................... S-22
Distributions in Reduction of the Class A3 Certificates ........... S-23
Example of Distributions .......................................... S-26
The Class R Certificate ........................................... S-26
Allocation of Realized Losses; Subordination ...................... S-27
Final Scheduled Distribution Date ................................. S-28
Optional Termination of the Trust ................................. S-28
The Trustee ....................................................... S-28
DESCRIPTION OF THE MORTGAGE POOL .................................... S-29
General ........................................................... S-29
ADDITIONAL INFORMATION .............................................. S-33
NORWEST MORTGAGE, INC. .............................................. S-34
Mortgage Loan Underwriting ........................................ S-34
Delinquency Experience ............................................ S-35
SERVICING OF MORTGAGE LOANS ......................................... S-36
Insurance Coverage .................................................. S-36
Servicing Compensation and Payment of Expenses ...................... S-36
Prepayment Interest Shortfalls ...................................... S-37
Advances ............................................................ S-37
Collection of Taxes, Assessments and Similar Items .................. S-37
Voting Rights ....................................................... S-37
TRUST AGREEMENT ..................................................... S-37
General ........................................................... S-37
Assignment of Mortgage Loans ...................................... S-38
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE ......................... S-38
General ........................................................... S-38
Sensitivity of the Class AX, Class A4 and Class AP Certificates ... S-40
Weighted Average Life ............................................. S-41
THE CLASS A3 CERTIFICATE INSURANCE POLICY ........................... S-51
The Financial Guaranty Insurance Policy ........................... S-51
Financial Security Assurance Inc. ................................. S-52
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS ........................... S-55
The Residual Certificates ......................................... S-55
LEGAL INVESTMENT CONSIDERATIONS ..................................... S-56
USE OF PROCEEDS ..................................................... S-57
UNDERWRITING ........................................................ S-57
ERISA CONSIDERATIONS ................................................ S-57
EXPERTS ............................................................. S-57
LEGAL MATTERS ....................................................... S-57
RATINGS ............................................................. S-58
GLOSSARY ............................................................ S-59
S-4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and
the accompanying Prospectus. Capitalized terms used and not otherwise defined
have the respective meanings assigned to them in the Prospectus.
Title of Securities............ Mortgage Pass-Through Certificates, Series
1996-1.
Depositor...................... Structured Asset Securities Corporation (the
"Depositor"). The Depositor's principal
offices are located at 200 Vesey Street, New
York, New York 10285, telephone (212)
526-5594. See "The Issuer" in the
Prospectus.
Seller......................... Lehman Capital, A Division of Lehman
Brothers Holdings Inc. The Seller's
principal offices are located at 200 Vesey
Street, New York, New York 10285, telephone
(212) 526-3305.
Servicer....................... Norwest Mortgage, Inc. ("Norwest" or the
"Servicer"), whose principal offices are
located at 405 S.W. 5th Street, Des Moines,
Iowa 50328. Norwest will serve as Servicer
with respect to the Mortgage Loans under a
servicing agreement with the Depositor (the
"Servicing Agreement"). The Depositor will
assign its rights under the Servicing
Agreement to the Trustee. The Servicer will
receive a monthly servicing fee (the
"Servicing Fee") with respect to each
Mortgage Loan. See "SERVICING OF MORTGAGE
LOANS -- Servicing Compensation and Payment
of Expenses" herein.
Certain Mortgage Loans will be subserviced
by various subservicers as described herein.
Trustee........................ The Chase Manhattan Bank, N.A., a national
banking association. See "DESCRIPTION OF THE
CERTIFICATES -- The Trustee" herein.
Norwest Bank Minnesota, N.A., a national
banking association ("Norwest Bank"), will
act as custodian of the Mortgage Loans and
will perform certain securities
administration and REMIC tax administration
duties on behalf of the Trustee. Norwest
Bank is an affiliate of the Servicer.
Cut-off Date................... April 1, 1996.
Closing Date................... On or about April 25, 1996 (the "Closing
Date").
Distribution Date.............. The distribution date (the "Distribution
Date") will be the 25th day of each month
or, if such day is not a business day, then
on the next succeeding business day,
commencing in May 1996.
Record Date.................... The record date (the "Record Date") for each
Distribution Date will be the close of
business on the last Business Day of the
month immediately preceding the month in
which such Distribution Date occurs.
The Offered Certificates....... The Offered Certificates will be issued
pursuant to a Trust Agreement, to be dated
as of April 1, 1996, between the Depositor
and the Trustee (the "Trust Agreement"). The
Senior Certificates and the Subordinated
Certificates will have initial aggregate
S-5
<PAGE>
Certificate Principal Amounts equal to
approximately 93.75% and 6.25%, respectively,
of the aggregate outstanding principal balance
of the Mortgage Loans as of the Cut-off Date.
The Class A1, Class A2, Class A3, Class A4 and
Class R Certificates are sometimes referred to
herein as the "Group 1 Senior Certificates."
The Class A5 Certificates are sometimes
referred to herein as the "Group 2 Senior
Certificates." See "DESCRIPTION OF THE
CERTIFICATES" herein.
Distributions of Interest and
Principal.................... Interest accrued during the calendar month
(each, an "Interest Accrual Period")
preceding the Distribution Date on each
Class of the Offered Certificates (other
than the Class A4 and Class AP Certificates)
at the applicable per annum rate set forth
or described on the cover page hereof will
be distributable on each Distribution Date
to the extent described herein. The Class A4
and Class AP Certificates will be
principal-only Certificates and will not
bear interest. See "DESCRIPTION OF THE
CERTIFICATES -- Distributions of Interest"
herein.
The approximate aggregate initial
Certificate Principal Amount (or Notional
Amount) of each Class of Offered
Certificates is set forth on the cover page
hereof. On each Distribution Date, an amount
equal to the Principal Distribution Amount
for the Mortgage Loans for the related Due
Period will be applied, as more fully
described herein, to make distributions of
principal on the Certificates. The Class AX
Certificates will be interest-only
Certificates and will not be entitled to
distributions of principal. See "DESCRIPTION
OF THE CERTIFICATES -- Distributions of
Principal" herein.
Distributions of Principal on the Class A3
Certificates will be made pursuant to
requests for distributions or by random lot,
as described under "DESCRIPTION OF THE
CERTIFICATES -- Distributions in Reduction
of the Class A3 Certificates" herein.
Allocation of Prepayments Among
Senior Certificates.......... The entire amount of the applicable Non-AP
Percentage (as defined herein) of principal
prepayments on the Mortgage Loans will be
allocated to the Group 1 Senior Certificates
during the first five years following the
Closing Date (except under the circumstances
described herein). This allocation will have
the effect of accelerating the amortization
of the Group 1 Senior Certificates and
slowing the amortization of the Group 2
Senior Certificates. See "DESCRIPTION OF THE
CERTIFICATES" herein.
The Mortgage Pool.............. The Mortgage Pool will consist of
approximately 612 conventional, fixed rate,
fully amortizing, monthly payment mortgage
loans (the "Mortgage Loans") having an
aggregate Scheduled Principal Balance as of
the Cut-off Date of approximately
$184,149,832. The Mortgage Loans are secured
by first liens on one- to four-family
residential real properties (each, a
"Mortgaged Property") and have original
terms to maturity from the first due date of
the scheduled monthly payment of principal
S-6
<PAGE>
and interest (each such payment, a "Scheduled
Payment") of not more than 30 years. Each
Mortgage Loan bears interest at a fixed rate
(each, a "Mortgage Rate"). See "DESCRIPTION OF
THE MORTGAGE POOL" herein.
Advances....................... The Servicer is required to make advances
("Advances") in respect of Scheduled
Payments on the Mortgage Loans at the
related Net Mortgage Rate (as defined
herein), subject to the limitations
described herein. The Trustee will be
obligated to make any such Advance if the
Servicer fails in its obligation to do so,
to the extent provided in the Trust
Agreement. See "SERVICING OF MORTGAGE LOANS
-- Advances" herein.
Allocation of Losses;
Subordination................ The Class M, Class B1, Class B2, Class B3,
Class B4 and Class B5 Certificates
(collectively, the "Subordinate
Certificates") are subordinate to the Class
A1, Class A2, Class A3, Class A4, Class A5,
Class AP, Class AX and Class R Certificates
(collectively, the "Senior Certificates").
Each Class of Subordinate Certificates is
subordinate to the Class or Classes of
Subordinate Certificates having a higher
priority (i.e. the Class B5 Certificates are
subordinate to the Class B4 Certificates,
the Class B4 Certificates are subordinate to
the Class B3 Certificates, and so forth) to
the extent described herein.
The limited protection afforded to the
holders of the Senior Certificates by means
of the subordination feature described above
will be accomplished by (i) the preferential
right of such holders to receive, prior to
any distribution being made on a
Distribution Date in respect of the
Subordinate Certificates, the amount due
them on each Distribution Date from the
Available Distribution Amount and, if
necessary, by the right of such holders to
receive future distributions with respect to
the Mortgage Loans that would otherwise have
been payable to the Subordinate Certificates
and (ii) the allocation of Realized Losses
on the Mortgage Loans in the following
manner. Subject to the limitations described
below, the applicable Non-AP Percentage of
the principal portion of Realized Losses (as
defined herein) on the Mortgage Loans will
be allocated first, to the Class B5, Class
B4, Class B3, Class B2, Class B1 and Class M
Certificates in that order, until the
Certificate Principal Amounts thereof have
been reduced to zero, and then to the Senior
Certificates other than the Class AP
Certificates, pro rata in proportion to
their outstanding Certificate Principal
Amounts. Any such losses allocable to the
Class A3 Certificates will be covered by the
Class A3 Policy. The protection provided to
the Senior Certificates by the subordination
of the Subordinated Certificates will be
limited in the case of Special Hazard
Losses, Bankruptcy Losses and Fraud Losses,
as described herein. See "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Realized
Losses; Subordination" herein.
The subordination of each Class of
Subordinate Certificates relative to each
Class of Subordinate Certificates having a
higher ranking is intended to confer a
similar benefit on such higher ranking
S-7
<PAGE>
Classes of Subordinate Certificates.
However, the degree of protection afforded
any Class of Subordinate Certificates by
such subordination, relative to
delinquencies and losses that might occur on
the Mortgage Pool, is less than the
protection afforded to the Senior
Certificates by virtue of the subordination
of the Subordinate Certificates.
Class A3 Certificate
Insurance Policy............. In addition to the limited protection
provided by the subordination feature
described above, the Class A3 Certificates
will also have the benefit of the Class A3
Policy, pursuant to which Financial Security
will guarantee the payment of Guaranteed
Distributions on the Class A3 Certificates.
See "THE CLASS A3 CERTIFICATE INSURANCE
POLICY" herein.
Final Scheduled
Distribution Date............ Scheduled distributions on the Mortgage
Loans, assuming no defaults or losses that
are not covered by the credit support
described elsewhere herein, will be
sufficient to make timely distributions of
interest and reduce the Certificate
Principal Amount of the Offered Certificates
to zero not later than the Final Scheduled
Distribution Date set forth on the cover
page hereof. The actual final Distribution
Date for the Offered Certificates may be
earlier or later, and could be substantially
earlier, than their Final Scheduled
Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES -- Final Scheduled Distribution
Date" and "YIELD, PREPAYMENT AND WEIGHTED
AVERAGE LIFE" herein.
Optional Termination........... On any Distribution Date after the aggregate
Scheduled Principal Balance of the Mortgage
Loans is less than 5% of the aggregate
Scheduled Principal Balance of the Mortgage
Loans on the Cut- off Date (the "Cut-off
Date Balance"), the Depositor (subject to
the terms of the Trust Agreement), will have
the option to cause the sale of the assets
of the Trust Fund, consisting of the
Mortgage Loans, any REO Property, and any
other property remaining in the Trust Fund,
and thereby effect the termination of the
Trust Fund. The proceeds of such a sale will
be treated as a prepayment of the Mortgage
Loans for purposes of distributions to
Certificateholders. See "DESCRIPTION OF THE
CERTIFICATES -- Optional Termination of the
Trust" herein.
Denominations.................. Each Class of Class A1, Class A2 and Class
A5 Certificates will be issued, maintained
and transferred on the book-entry records of
the Depository Trust Company ("DTC") and its
Participants in minimum denominations of
$100,000 and integral multiples of $1 in
excess thereof. The Class A3 Certificates
will be issued, maintained and transferred
on the book-entry records of DTC and its
Participants in minimum denominations of
$1,000 and integral multiples of $1,000 in
excess thereof. The Class A4 and Class AP
Certificates will be issued in definitive,
fully registered form in minimum
denominations of $100,000 and integral
multiples of $1,000 in excess thereof. The
Class AX Certificates will be issued in
definitive, fully registered form in minimum
denominations in Notional Amount of
$5,000,000 and integral multiples of
S-8
<PAGE>
$1,000,000 in excess thereof. Each Class of
Subordinate Certificates offered hereby will
be issued in definitive, fully registered
form in minimum denominations of $250,000
and integral multiples of $1,000 in excess
thereof. However, one Certificate of each
such Class of Certificates may be issued in
any amount above the minimum denominations.
The Class R Certificate will be issued as a
single Certificate and maintained in
definitive, fully registered form,
representing the entire Certificate
Principal Amount of such Class.
Book-Entry Certificates........ Each Class of Class A1, Class A2, Class A3
and Class A5 Certificates (the "Book-Entry
Certificates") will be represented by one or
more Certificates registered in the name of
Cede & Co., as nominee of DTC. No person
acquiring a beneficial interest in a
Book-Entry Certificate (each, a "Beneficial
Owner") will be entitled to receive a
Certificate of such Class in certificated
form, except under the limited circumstances
described herein. For each Book-Entry
Certificate, DTC will effect payments to and
transfers of the Book-Entry Certificates
among the respective Beneficial Owners by
means of its electronic recordkeeping
services, acting through organizations that
participate in DTC. This arrangement may
result in certain delays in receipt of
distributions by Beneficial Owners and may
restrict a Beneficial Owner's ability to
pledge the Book-Entry Certificates
beneficially owned by it. All references in
this Prospectus Supplement to the Book-Entry
Certificates reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations so long as such Certificates
are held by DTC. See "DESCRIPTION OF THE
CERTIFICATES -- Book-Entry Registration" in
the Prospectus.
Use of Proceeds................ The Depositor will apply the net proceeds
from the sale of the Offered Certificates
toward the purchase of the Mortgage Loans.
See "Use of Proceeds" herein.
Prepayment Considerations...... The rate of principal payments on the
Offered Certificates will depend on, among
other things, the rate and timing of
principal payments (including prepayments,
repurchases, defaults and liquidations) on
the Mortgage Loans. As is the case with
mortgage- backed securities generally, the
Offered Certificates are subject to
substantial inherent cash flow uncertainties
because the Mortgage Loans may be prepaid at
any time. Generally, when prevailing
interest rates increase, prepayment rates on
mortgage loans tend to decrease in
subsequent periods, resulting in a reduced
rate of 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 in subsequent periods,
resulting in an accelerated rate of return
of principal to investors at a time when
reinvestment at comparable yields may not be
possible. See "DESCRIPTION OF THE MORTGAGE
POOL" and "YIELD, PREPAYMENT AND WEIGHTED
AVERAGE LIFE" herein.
S-9
<PAGE>
The entire amount of the applicable Non-AP
Percentage of principal prepayments on the
Mortgage Loans will be allocated to the
Group 1 Senior Certificates during the first
five years following the Closing Date
(except under the circumstance described
herein). See "DESCRIPTION OF THE
CERTIFICATES" herein.
Yield Considerations........... The yields to maturity on the Offered
Certificates will depend on, among other
things, the rate and timing of principal
payments (including prepayments,
repurchases, defaults and liquidations) on
the Mortgage Loans and the allocation
thereof to reduce the Certificate Principal
Amounts thereof. The yields to maturity on
the Offered Certificates will also depend on
other factors, such as the applicable
Certificate Interest Rate and purchase price
for such Certificates. The yields on the
Offered Certificates will be adversely
affected by the allocation thereto of any
Net Prepayment Interest Shortfalls (as
defined herein) on the Mortgage Loans. Any
Net Prepayment Interest Shortfalls allocable
to the Class A3 Certificates will be covered
by the Class A3 Policy.
In general, in the Case of the Class AX
Certificates, and any other Offered
Certificates purchased at a premium, if
principal payments on the Mortgage Loans
occur at a rate faster than anticipated at
the time of purchase, the investor's actual
yield to maturity may be lower than that
originally anticipated. Conversely, in the
case of the Class A4 and Class AP
Certificates, and any other Offered
Certificates purchased at a discount, if
principal payments on the Mortgage Loans
occur at a rate slower than that assumed at
the time of purchase, the investor's actual
yield to maturity may be lower than that
originally anticipated. Investors in the
Class AX Certificates should consider the
risk that a rapid rate of principal payments
on the Premium Mortgage Loans could result
in the failure of such investors to recover
their initial investments. See "YIELD,
PREPAYMENT AND WEIGHTED AVERAGE LIFE"
herein.
Federal Income Tax
Considerations............... An election will be made to treat all or a
portion of the Trust Fund (the "REMIC Pool")
as a real estate mortgage investment conduit
(the "REMIC") for federal income tax
purposes. Each Class of Offered Certificates
other than the Class R Certificate will be
designated as a Class of "regular interests"
and the Class R Certificate will be
designated as the sole Class of "residual
interest" in the REMIC.
The holders of the Offered Certificates
(other than the Class R Certificate) must
include interest income derived therefrom in
income as it accrues, regardless of the
holders' usual methods of accounting. The
Class A4, Class AP and Class AX Certificates
will be, and the other Classes of Offered
Certificates may be, issued with original
issue discount for federal income tax
purposes. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Regular
Interest Certificates -- Interest and
Acquisition Discount" in the Prospectus. The
prepayment assumption that will be used in
determining the rate of accrual of original
issue discount, market discount and premium,
S-10
<PAGE>
if any, for federal income tax purposes will be
a rate equal to 225% PSA (as defined herein).
No representation is made that the Mortgage
Loans will prepay at these rates or at any
other rates. Original issue discount must be
included in income as it accrues on a constant
yield method, regardless or whether a holder
receives concurrently the cash attributable to
such original issue discount.
The Residual Certificateholder generally
will be required to report as federal
taxable income its pro rata share of the
REMIC's net income, without regard to the
timing or amount of cash distributions. The
tax liability may exceed the amount of cash
distributed to the Residual
Certificateholder in many or all taxable
years. As the residual interest in the
REMIC, the Residual Certificate will be
taxable as described in the Prospectus under
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
-- Taxation of Holders of Residual Interest
Certificates."
All or a portion of the income derived from
a Residual Certificate will be "excess
inclusion" income, which is treated as
unrelated business taxable income to holders
that are tax-exempt entities and is not
subject to exemption from or reduction in
withholding in the case of
Certificateholders that are foreign persons.
Holders of Residual Certificates, including
thrift institutions, will not be entitled to
use other deductions or losses, including
net operating losses, to offset such income.
Ownership of a Residual Certificate by a
pass-through entity could cause an annual
tax to be imposed on such pass-through
entity if any interest therein is held by a
"disqualified organization" within the
meaning of the Internal Revenue Code of
1986, as amended (the "Code"), including a
government entity or any other tax- exempt
organization that is not subject to tax on
unrelated business taxable income.
For further information regarding the
federal income tax consequences of investing
in the Offered Certificates, see "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" herein
and in the Prospectus.
Transfer Restrictions on
Residual Certificates........ A Residual Certificate may not be
transferred, sold, pledged or otherwise
assigned unless, prior to such transfer, the
proposed transferee delivers to the Trustee
an affidavit or, at the option of the
Trustee, an opinion to the effect that,
among other things, such transferee is not a
"disqualified organization," within the
meaning of the Code. If, notwithstanding
such restrictions, a Residual Certificate is
transferred to a "disqualified
organization," a substantial tax may be
imposed on the transferor. In the case of a
transfer to or from a non-U.S. person,
certain additional conditions must be
satisfied prior to transfer of a Residual
Certificate. In addition to the foregoing,
regulations permit certain transfers of
Residual Certificates to be disregarded with
the result that the transferor will continue
to be treated as the owner of the Residual
Certificate. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" herein and in the
Prospectus.
S-11
<PAGE>
Ratings........................ It is a condition to the issuance of the
Class A1, Class A2, Class A3, Class A5 and
Class R Certificates that they be rated
"AAA" by each of Fitch and S&P. It is a
condition to the issuance of the Class A4,
Class AP and Class AX Certificates that they
be rated "AAA" by Fitch and "AAAr" by S&P.
It is a condition to the issuance of the
Class M Certificates that they be rated "AA"
by each of Fitch and S&P; it is a condition
to the issuance of the Class B1 Certificates
that they be rated "A" by Fitch; and it is a
condition to the issuance of the Class B2
Certificates that they be rated "BBB" by
Fitch. See "RATINGS" herein.
ERISA Considerations........... A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code, should carefully review with
its legal advisors whether the purchase or
holding of the Offered Certificates could
give rise to a transaction prohibited or not
otherwise permissible under ERISA or the
Code. The Subordinate Certificates may not
be purchased by Plans (as defined herein),
except as described herein, and transfer
thereof will be restricted as provided in
the Trust Agreement. See "ERISA
CONSIDERATIONS" herein and in the
Prospectus.
Legal Investment............... The Senior Certificates and the Class M
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated
as described herein and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. SMMEA, however,
provides for state limitation on the
authority of such entities to invest in
"mortgage related securities" to the extent
described herein and in the Prospectus.
The Depositor makes no representations as to
the proper characterization of the Offered
Certificates for legal investment or other
purposes, or as to the ability of particular
investors to purchase the Offered
Certificates under applicable legal
investment restrictions. These uncertainties
may adversely affect the liquidity of the
Offered Certificates. Accordingly, all
institutions whose investment activities are
subject to legal investment laws and
regulations, regulatory capital requirements
or review by regulatory authorities should
consult with their own legal advisors in
determining whether and to what extent the
Offered Certificates constitutes a legal
investment or is subject to investment,
capital or other restrictions. Institutions
whose investment activities are subject to
review by federal or state regulatory
authorities should consult with their
counsel or the applicable authorities in
order to determine whether an investment in
the Offered Certificates complies with
applicable guidelines, policy statements or
restrictions. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL
INVESTMENT" in the Prospectus.
S-12
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the accompanying Prospectus, prospective investors should
carefully consider the following factors before deciding to invest in the
Offered Certificates.
SPECIAL YIELD CONSIDERATIONS FOR THE CLASS AX, CLASS A4 AND CLASS AP
CERTIFICATES
The yield to maturity of the Class AX Certificates will be extremely
sensitive, and the yields to maturity of the Class A4 and Class AP
Certificates will also be very sensitive, to the rate and timing of principal
prepayments on the Mortgage Loans.
Investors in the Class AX Certificates should carefully consider the risk
that a faster than anticipated rate of prepayments on the Premium Mortgage
Loans, which have Mortgage Rates that are higher than those of the other
Mortgage Loans and may therefore be more likely to prepay, could result in an
actual yield that is lower than the anticipated yield, and could result in
the failure of such investors to recover their initial investments.
Investors in the Class A4 and Class AP Certificates should consider the
risk that a slower than anticipated rate of prepayments on the Mortgage Loans
could result in actual yields that are lower than the anticipated yields. See
"YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE" herein.
GEOGRAPHICAL CONCENTRATION OF THE MORTGAGE LOANS
Almost half (approximately 46.9%) of the Mortgage Loans (by Scheduled
Principal Balance as of the Cut- off Date) are secured by Mortgaged
Properties located in the state of California. The economy of California may
be adversely affected to a greater degree than the economies of other areas
of the country by certain developments affecting industries concentrated in
California. In recent periods, several regions of the United States
(including California) have experienced significant downturns in the market
value of real estate. In addition, Mortgaged Properties located in California
may be more susceptible to certain types of special hazards not covered by
insurance (such as earthquakes) than properties located in other parts of the
country.
For additional information regarding the geographic distribution of the
Mortgage Loans, see "DESCRIPTION OF THE MORTGAGE POOL" herein.
LIMITED LIQUIDITY
There is currently no secondary market for the Offered Certificates. The
Underwriter intends to make a secondary 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.
REPURCHASE OBLIGATIONS OF THE DEPOSITOR
No person other than the Depositor is obligated with respect to the
representations and warranties made by it in the Trust Agreement respecting
the Mortgage Loans and the remedies for any breach thereof that are granted
to the Trustee for the benefit of the Certificateholders. Therefore,
prospective investors in the Offered Certificates should consider the
possibility that the Depositor will not have sufficient assets with which to
satisfy its repurchase obligations in the event that a substantial amount of
Mortgage Loans (or other mortgage loans with respect to which the Depositor
may have repurchase obligations) are required to be repurchased due to
breaches of representations and warranties.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1996-1 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following Classes: (i) the Class A1, Class A2, Class A3,
Class A4, Class A5, Class AP and Class AX Certificates (the "Class A
Certificates" and together with the Class R Certificate, the "Senior
S-13
<PAGE>
Certificates"), (ii) the Class M, Class B1, Class B2, Class B3, Class B4 and
Class B5 Certificates (the "Subordinate Certificates"), and (iii) the Class R
Certificate (the "Residual Certificate"). The Senior Certificates and the Class
M, Class B1 and Class B2 Certificates are sometimes referred to herein as the
"Offered Certificates." Only the Offered Certificates are offered hereby.
The Class A1, Class A2, Class A3, Class A4 and Class R Certificates are
sometimes referred to herein as the "Group 1 Senior Certificates." The Class
A5 Certificates are sometimes referred to herein as the "Group 2 Senior
Certificates."
Each Class of Offered Certificates will have the respective initial
Certificate Principal Amount (or Notional Amount) set forth on the cover page
hereof.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will generally consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in various accounts established by the Trustee
for the collection of payments on the Mortgage Loans (the "Collection
Account") and in the Certificate Account and belonging to the Trust Fund,
(iii) property acquired by foreclosure of such Mortgage Loans or deed in lieu
of foreclosure, (iv) any applicable hazard insurance policies and all
proceeds thereof, and (v) the Class A3 Policy.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in May 1996, to
Certificateholders of record on the immediately preceding Record Date. The
record date (the "Record Date") for each Distribution Date will be the close
of business on the last business day of the month immediately preceding the
month in which such Distribution Date occurs.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (i) by check mailed to the address of such
Certificateholder as it appears on the books of the Trustee, or (ii) at the
request, submitted to the Trustee in writing at least five business days
prior to the related Record Date, of any holder of an Offered Certificate
having an initial Certificate Principal Amount of not less than $2,500,000,
by wire transfer (at the expense of such holder) in immediately available
funds; provided that the final distribution in respect of any Offered
Certificate will be made only upon presentation and surrender of such
Certificate at the Corporate Trust Office of the Trustee. See "-- The
Trustee" herein.
Each Class of Class A1, Class A2, Class A3 and Class A5 Certificates (the
"Book-Entry Certificates") will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company ("DTC") and its
Participants. The Book-Entry Certificates other than the Class A3
Certificates will be issued in minimum denominations of $100,000 and integral
multiples of $1 in excess thereof. The Class A3 Certificates will be issued
in minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof.
Each Class of Book-Entry Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Depositor has
been informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No
person acquiring an interest in a Book-Entry Certificate (each, a "Beneficial
Owner") will be entitled to receive a certificate representing such person's
interest (a "Definitive Certificate"), except as set forth below under "--
Book-Entry Registration of Certain Classes of Certificates -- Definitive
Certificates." Unless and until Definitive Certificates are issued for the
Book-Entry Certificates under the limited circumstances described herein, all
references to actions by Certificateholders with respect to the DTC
Registered Certificates shall refer to actions taken by DTC upon instructions
from its Participants, and all references herein to distributions, notices,
reports and statements to Certificateholders with respect to the Book-Entry
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, for
distribution to Beneficial Owners by DTC in accordance with DTC procedures.
The Class A4 and Class AP Certificates will be issued in definitive, fully
registered form in minimum denominations of $100,000 and integral multiples
of $1,000 in excess thereof. The Class AX Certificates will be issued in
definitive, fully registered form in minimum denominations in Notional Amount
of $5,000,000 and integral multiples of $1,000,000 in excess thereof. One
Certificate of each such Class may be issued in any denomination in excess of
the minimum denomination. Each Class of Subordinate Certificates will be
issued in fully registered, certificated form in minimum denominations of
S-14
<PAGE>
$250,000 and integral multiples of $1,000 in excess thereof, except that one
certificate of each Class of Subordinate Certificates may be issued in any
denomination in excess of the minimum denomination. The Class R Certificate will
be issued as a single Certificate and maintained in physical, fully registered
form.
BOOK-ENTRY REGISTRATION OF CERTAIN CLASSES OF CERTIFICATES
General. Beneficial Owners that are not brokerage firms, banks, thrift
institutions or other financial intermediaries (each, a "Financial
Intermediary") or participating firms that act as agent for a Financial
Intermediary (each, a "Participant") but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, the related
Book-Entry Certificates may do so only through Participants and Financial
Intermediaries. In addition, Beneficial Owners will receive all distributions
of principal and interest on the related Book-Entry Certificates through DTC
and its Participants. Accordingly, Beneficial Owners may experience delays in
their receipt of payments. Unless and until Definitive Certificates are
issued for the related Book-Entry Certificates, it is anticipated that the
only registered Certificateholder of such Book-Entry Certificates will be
Cede, as nominee of DTC. Beneficial Owners will not be recognized by the
Depositor or the Trustee as Certificateholders, as such term is used in the
Trust Agreement, and Beneficial Owners will be permitted to receive
information furnished to Certificateholders and to exercise the rights of
Certificateholders only indirectly through DTC, its Participants and
Financial Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal and interest on such Book-Entry Certificates.
Participants and Financial Intermediaries with which Beneficial Owners have
accounts with respect to such Book-Entry Certificates similarly are required
to make book-entry transfers and receive and transmit such distributions on
behalf of their respective Beneficial Owners. Accordingly, although
Beneficial Owners will not possess physical certificates evidencing their
interests in the Book-Entry Certificates, the Rules provide a mechanism by
which Beneficial Owners, through their Participants and Financial
Intermediaries, will receive distributions and will be able to transfer their
interests in the Book-Entry Certificates.
Neither the Depositor nor the Trustee or any of their respective
affiliates will have any liability for any actions taken by DTC or its
nominee including, without limitation, actions for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Book-Entry Certificates held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"-- Book-Entry Registration."
Upon the occurrence of an event described in the Prospectus in clauses
(i), (ii) or (iii) of the last paragraph under "-- Book-Entry Registration"
therein, the Trustee (through DTC) is required to notify Participants who
have ownership of Book-Entry Certificates as indicated on the records of DTC
of the availability of Definitive Certificates for their Book-Entry
Certificates. Upon surrender by DTC of the Definitive Certificates
representing the Book-Entry Certificates and upon receipt of instructions
from DTC for re-registration, the Trustee will re-issue the Book-Entry
Certificates as Definitive Certificates in the respective principal amounts
owned by individual Beneficial Owners, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Trust Agreement.
For additional information regarding DTC and the Book-Entry Certificates,
see "DESCRIPTION OF THE CERTIFICATES -- Book-Entry Registration" in the
Prospectus.
PRIORITY OF DISTRIBUTIONS
Distributions will be made on each Distribution Date from the Available
Distribution Amount (as defined below) in the following order of priority:
(i) to payment of the monthly premium for the Class A3 Policy;
S-15
<PAGE>
(ii) to payment of Accrued Certificate Interest (reduced by any Net
Prepayment Interest Shortfalls allocated to such Class of Certificates on
such Distribution Date) on each Class of the Senior Certificates (other
than the the Class A4 and Class AP Certificates), pro rata in proportion
to Accrued Certificate Interest (as so reduced) on each such Class;
(iii) to the payment of any outstanding Interest Shortfalls (as defined
herein) on each Class of the Senior Certificates (other than the the Class
A4 and Class AP Certificates), pro rata in proportion to any outstanding
Interest Shortfalls;
(iv) to the payment of principal on the Senior Certificates (other than
the Class AX Certificates), concurrently as follows:
(A) to the Class A5 Certificates (the "Group 2 Senior
Certificates"), the Group 2 Senior Principal Distribution Amount for
such Distribution Date, until the Certificate Principal Amount thereof
has been reduced to zero;
(B) to the Class A1, Class A2, Class A3, Class A4 and Class R
Certificates (the "Group 1 Senior Certificates"), the Group 1 Senior
Principal Distribution Amount for such Distribution Date, in the
following order of priority:
first, if such Distribution occurs on or after May 25, 1999, to
the Class A3 and Class A4 Certificates, pro rata in proportion to
their respective Certificate Principal Amounts, an aggregate amount
on such Distribution Date equal to up to $30,000, until the
Certificate Principal Amounts thereof have each been reduced to
zero;
second, to the Class A1 Certificates, until the Certificate
Principal Amount thereof has been reduced to zero;
third, to the Class A2 Certificates, until the Certificate
Principal Amount thereof has been reduced to zero;
fourth, pro rata, to the Class A3 and Class A4 Certificates,
until the Certificate Principal Amounts thereof have each been
reduced to zero; and
fifth, to the Class R Certificate, until the Certificate
Principal Amount thereof has been reduced to zero; and
(C) to the Class AP Certificates, the Class AP Principal
Distribution Amount for such Distribution Date, until the Certificate
Principal Amount thereof has been reduced to zero;
(v) to the Class AP Certificates, the Class AP Deferred Amount (as
defined herein) for such Distribution Date, until the Certificate
Principal Amount thereof has been reduced to zero; provided, that
distributions pursuant to this priority (v) shall not exceed the
Subordinate Principal Distribution Amount for such Distribution Date, and
such distributions shall not reduce the Certificate Principal Amount of
the Class AP Certificates; and
(vi) to the payment of the Class M, Class B1, Class B2, Class B3, Class
B4 and Class B5 Certificates, in that order, of the following amounts, in
each case in the following order of priority: (x) Accrued Certificate
Interest (reduced by any Net Prepayment Interest Shortfalls allocated to
such Class of Certificates on such Distribution Date), (y) any outstanding
Interest Shortfalls previously allocated to each such Class and (z) each
such Class's Subordinate Class Percentage (as defined herein) of the
Subordinate Principal Distribution Amount for such Distribution Date,
except as provided below.
With respect to each Class of Subordinate Certificates other than the
Class B5 Certificates, if on any Distribution Date the sum of the related
Class Percentages (as defined herein) of all Classes of Subordinate
Certificates (computed before taking account of distributions for such
Distribution Date) of lower priority than such Class (the "Credit Support
Percentage") is less than the Credit Support Percentage for such Class on the
date of issuance of the Certificates (the "Original Credit Support
Percentage"), no distributions in respect of clauses (ii) and (iii) of the
definition of Subordinate Principal Distribution Amount will be made to any
S-16
<PAGE>
such Classes of lower priority (the "Restricted Classes") and the amount
otherwise distributable to the Restricted Classes in respect of such payments
will be allocated among the remaining Classes of Subordinate Certificates, pro
rata, based upon their respective Certificate Principal Amounts.
The approximate Original Credit Support Percentages for the Subordinate
Certificates (other than the Class B5 Certificates) on the date of issuance
of the Certificates are expected to be as follows:
Class M ...................................................... 3.75%
Class B1 ...................................................... 2.00%
Class B2 ...................................................... 1.10%
Class B3 ...................................................... 0.65%
Class B4 ...................................................... 0.45%
On and after the Distribution Date on which the aggregate Certificate
Principal Amount of the Subordinate Certificates is reduced to zero (the
"Credit Support Depletion Date"), distributions of principal on the Senior
Certificates remaining outstanding (other than the Class AP Certificates)
will be made pro rata, in proportion to their respective Certificate
Principal Amounts, until the Certificate Principal Amounts thereof have been
reduced to zero, regardless of the priorities and allocations set forth
above.
Distributions of principal on the Class A3 Certificates are subject to the
procedures for principal distribution requests and random lot distribution
described under "-- Distributions in Reduction of the Class A3 Certificates"
herein.
DISTRIBUTIONS OF INTEREST
Distributions of interest on the Certificates (other than the Class A4 and
Class AP Certificates) will be made on each Distribution Date, consisting of
interest accrued at the applicable Certificate Interest Rate during the
calendar month preceding the month in which the Distribution Date occurs
(each, an "Interest Accrual Period") on the outstanding Certificate Principal
Amount (or Notional Amount) of such Certificate immediately prior to such
Distribution Date ("Accrued Certificate Interest"), reduced by any Net
Prepayment Interest Shortfalls allocated to such Certificate. Such interest
will be distributed, except to the extent described below, from the Available
Distribution Amount (as defined below) on each Distribution Date. Accrued
Certificate Interest not distributed on the Distribution Date related to the
calendar month in which it accrued, other than any Net Prepayment Interest
Shortfalls, shall be an "Interest Shortfall." Interest will not accrue on
Interest Shortfalls. Interest will accrue on the Certificates on the basis of
a 360-day year consisting of twelve 30-day months.
The "Certificate Interest Rate" for each Class of Certificates shall be
the applicable per annum rate set forth or described on the cover page
hereof. (The Certificate Interest Rate for the Class AX Certificates could
also be expressed as a fixed rate of 7.50% per annum, accrued on a calculated
notional amount equal to the product of (x) the fraction, the numerator of
which is the excess of the weighted average of the Net Mortgage Rates on the
Premium Mortgage Loans (as defined below), less the Trustee Fee Rate, over
7.25% and the denominator of which is 7.50%, and (y) the aggregate Scheduled
Principal Balance of the Premium Mortgage Loans as of the first day of the
related Interest Accrual Period. A "Premium Mortgage Loan" is any Mortgage
Loan with a Net Mortgage Rate in excess of 7.25% per annum.) The "Notional
Amount" of the Class AX Certificates for any Distribution Date shall be equal
to the aggregate Scheduled Principal Balance of the Premium Mortgage Loans as
of the first day of the related Interest Accrual Period. The "Net Mortgage
Rate" for any Mortgage Loan at any time equals the Mortgage Rate thereof
minus the related Servicing Fee Rate (as defined herein).
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date in the
immediately preceding monthly payment up to the date of such prepayment,
instead of for a full month, with a resulting reduction in interest payable
for the month during which the partial prepayment is made. Full or partial
prepayments (or proceeds of other liquidations) received in any calendar
month will be distributed to Certificateholders on the Distribution Date in
the month following the month of receipt. To the extent that, as a result of
a full or partial prepayment, a mortgagor is not required to pay a full
month's interest on the amount prepaid, a shortfall in the amount available
to make payment of interest on the Certificates (a "Prepayment Interest
S-17
<PAGE>
Shortfall") could result. With respect to prepayments in full or in part, the
Servicer is obligated to reduce its Servicing Fees, in the aggregate, to the
extent necessary to fund any resulting Prepayment Interest Shortfalls (adjusted
to the related Net Mortgage Rate). See "SERVICING OF THE MORTGAGE LOANS --
Prepayment Interest Shortfalls". Any Prepayment Interest Shortfalls not funded
by the Servicer ("Net Prepayment Interest Shortfalls") will be allocated among
the Classes of Certificates, pro rata in proportion to Accrued Certificate
Interest thereon for such Distribution Date. Any Net Prepayment Interest
Shortfalls allocable to the Class A3 Certificates will be covered by the Class
A3 Policy.
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Certificates will be made on each
Distribution Date as described herein in an aggregate amount equal to the
Principal Distribution Amount, to the extent of the Available Distribution
Amount available to make such payments in accordance with the priorities set
forth under "--Priority of Distributions" above. The "Principal Distribution
Amount" for any Distribution Date will equal the sum of the Senior Principal
Distribution Amount, the Class AP Principal Distribution Amount and the
Subordinate Principal Distribution Amount for such date.
The "Senior Principal Distribution Amount" for each Distribution Date is
equal to the sum of:
(i) the Senior Percentage of the applicable Non-AP Percentage
multiplied by the principal portion of each Scheduled Payment on a
Mortgage Loan due during the related Due Period;
(ii) the product of (a) the Senior Prepayment Percentage and (b) the
applicable Non-AP Percentage of each of the following amounts: (1) the
principal portion of each full and partial principal prepayment made by a
mortgagor on a Mortgage Loan during the related Prepayment Period (as
defined herein), (2) each other unscheduled collection, including
Insurance Proceeds and net Liquidation Proceeds (other than with respect
to any Mortgage Loan that was finally liquidated during the related
Prepayment Period) representing or allocable to recoveries of principal of
such Mortgage Loans received during the related Prepayment Period, and (3)
the principal portion of all proceeds of the purchase (or, in the case of
a permitted substitution, amounts representing a principal adjustment) of
any Mortgage Loan actually received by the Trustee during the related
Prepayment Period;
(iii) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan that was finally liquidated during the related
Prepayment Period, the lesser of (a) the applicable Non-AP Percentage of
the related net Liquidation Proceeds allocable to principal and (b) the
Senior Prepayment Percentage of the applicable Non-AP Percentage
multiplied by the remaining Scheduled Principal Balance of the related
Mortgage Loan at the time of liquidation; and
(iv) any amounts described in clauses (i) through (iii) for any
previous Distribution Date that remain unpaid;
provided, that on each Distribution Date after the date on which the
aggregate Certificate Principal Amount of the Group 1 Senior Cetificates is
reduced to zero (the "Group 1 Final Distribution Date"), the calculation of
the Senior Principal Distribution Amount will be modified as described under
"-- Reallocation of Principal Payments" below.
The "Group 1 Senior Principal Distribution Amount" for each Distribution
Date is equal to sum of (a) the amount determined pursuant to clause (i) of
the definition of Senior Principal Distribution Amount, multiplied by the
Group 1 Senior Percentage, (b) the amount determined pursuant to clause (ii)
(b) of the definition of Senior Principal Distribution Amount multiplied by
the Group 1 Senior Prepayment Percentage, (c) the amount determined pursuant
to clause (iii) of the definition of Senior Principal Distribution Amount
multiplied by the Group 1 Senior Prepayment Percentage and (d) any amounts
described in clauses (a) through (c) for any previous Distribution Date that
remain unpaid; provided, that on the Group 1 Final Distribution Date, the
Group 1 Senior Principal Distribution Amount shall be reduced by any amount
by which the sum of the amounts calculated pursuant to clauses (a) through
(d) above exceeds the aggregate Certificate Principal Amount of the Group 1
Senior Certificates immediately prior to such Distribution Date (such amount,
the "Group 1 Diversion Amount").
The "Group 2 Senior Principal Distribution Amount" for each Distribution
Date is equal to sum of (a) the amount determined pursuant to clause (i) of
the definition of Senior Principal Distribution Amount, multiplied by the
Group 2 Senior Percentage, (b) the amount determined pursuant to clause (ii)
S-18
<PAGE>
of the definition of Senior Principal Distribution Amount less the amount
determined pursuant to clause (ii) of the definition of Group 1 Senior Principal
Distribution Amount, (c) the amount determined pursuant to clause (iii) of the
definition of Senior Principal Distribution Amount less the amount determined
pursuant to clause (iii) of the definition of Group 1 Senior Principal
Distribution Amount and (d) any amounts described in clauses (a) through (c) for
any previous Distribution Date that remain unpaid; provided, that on the Group 1
Final Distribution Date, the Group 2 Senior Principal Distribution Amount shall
be equal to the sum of (i) the Group 1 Diversion Amount and (ii) an amount equal
to the product of (x) the fraction, the numerator of which is equal to the
Certificate Principal Amount of the Group 2 Certificates immediately prior to
such Distribution Date less the Group 1 Diversion Amount, and the denominator of
which is equal to the sum of such numerator and the aggregate of the Certificate
Principal Amounts of the Subordinate Certificates immediately prior to such
Distribution Date, and (y) an amount equal to the Principal Distribution Amount
for such date less the Class AP Principal Distribution Amount and the Group 1
Senior Principal Distribution Amount for such date.
The "Non-AP Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate less than 7.25% per annum (each such Mortgage Loan, a "Discount
Mortgage Loan") will be the percentage equivalent of the fraction, the
numerator of which is the applicable Net Mortgage Rate and the denominator of
which is 7.25%. The Non-AP Percentage with respect to any Mortgage Loan with
a Net Mortgage Rate equal to or greater than 7.25% will be 100%. The "AP
Percentage" with respect to any Discount Mortgage Loan will be the percentage
equivalent of the fraction, the numerator of which is 7.25% minus the
applicable Net Mortgage Rate and the denominator of which is 7.25%. The AP
Percentage with respect to any Mortgage Loan with a Net Mortgage Rate equal
to or greater than 7.25% will be zero.
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the scheduled principal balance thereof as of the
Cut-off Date, reduced by (i) the principal portion of all Scheduled Payments
due on or before such date of determination, whether or not received, and
(ii) all amounts allocable to unscheduled principal payments received on or
before the last day of the Prepayment Period preceding such date of
determination.
The "Class Percentage" for each Class of Certificates for each
Distribution Date will be equal to the percentage obtained by dividing the
Certificate Principal Amount of such Class immediately prior to such
Distribution Date by the aggregate Certificate Principal Amount of all
Certificates immediately prior to such date. The "Subordinate Class
Percentage" for each Class of Subordinated Certificates for each Distribution
Date will be equal to the percentage obtained by dividing the Certificate
Principal Amount of such Class immediately prior to such Distribution Date by
the aggregate Certificate Principal Amount of all Subordinated Certificates
immediately prior to such date.
The "Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction, the numerator of which is the aggregate of the
Certificate Principal Amounts of the Senior Certificates (other than the
Class AP Certificates) immediately prior to such date and the denominator of
which is the aggregate of the Certificate Principal Amounts of all Classes of
Certificates (other than the Class AP Certificates) immediately prior to such
date. The "Subordinate Percentage" for any Distribution Date will be the
difference between 100% and the Senior Percentage for such date.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will equal
100%. Thereafter, the Senior Prepayment Percentage will, except as described
below, be subject to gradual reduction as described in the following
paragraph. This disproportionate allocation of certain unscheduled payments
in respect of principal will have the effect of accelerating the amortization
of the Senior Certificates while, in the absence of Realized Losses,
increasing the relative percentage interest in the Mortgage Pool evidenced by
the Subordinate Certificates. Increasing the proportionate interest of the
Subordinate Certificates relative to that of the Senior Certificates is
intended to preserve the limited protection provided to the Senior
Certificates by the subordination of the Subordinate Certificates.
The Senior Prepayment Percentage for any Distribution Date occurring on or
after the fifth anniversary of the first Distribution Date will be as
follows: for any Distribution Date in the first year thereafter, the Senior
Percentage plus 70% of the Subordinate Percentage for such Distribution Date;
for any Distribution Date in the second year thereafter, the Senior
Percentage plus 60% of the Subordinate Percentage for such Distribution Date;
S-19
<PAGE>
for any Distribution Date in the third year thereafter, the Senior Percentage
plus 40% of the Subordinate Percentage for such Distribution Date; for any
Distribution Date in the fourth year thereafter, the Senior Percentage plus
20% of the Subordinate Percentage for such Distribution Date; and for any
Distribution Date thereafter, the Senior Percentage for such Distribution
Date (unless on any of the foregoing Distribution Dates the Senior Percentage
exceeds the initial Senior Percentage, in which case the Senior Prepayment
Percentage for such Distribution Date will once again equal 100%).
Notwithstanding the foregoing, no decrease in the Senior Prepayment
Percentage below the level in effect for the most recent prior period will be
effective unless, as of the last day of the month preceding such Distribution
Date, either:
(A) (i) the aggregate Scheduled Principal Balance of Mortgage Loans
delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund) does not exceed
50% of the aggregate Certificate Principal Amount of the Subordinate
Certificates as of such date and (ii) cumulative Realized Losses do not
exceed (a) 30% of the aggregate Certificate Principal Amount of the
Subordinate Certificates as of the date of issuance of the Certificates
(the "Original Subordinate Principal Amount") if such Distribution Date
occurs between and including May 2001 and April 2002, (b) 35% of the
Original Subordinate Principal Amount if such Distribution Date occurs
between and including May 2002 and April 2003, (c) 40% of the Original
Subordinate Principal Amount if such Distribution Date occurs between and
including May 2003 and April 2004, (d) 45% of the Original Subordinate
Principal Amount if such Distribution Date occurs between and including
May 2004 and April 2005, and (e) 50% of the Original Subordinate Principal
Amount if such Distribution Date occurs during or after May 2005; or
(B) (i) the aggregate Scheduled Principal Balance of Mortgage Loans
delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund), averaged over the
last three months, as a percentage of the aggregate Scheduled Principal
Balance of all Mortgage Loans averaged over the last three months, does
not exceed 4%, and (ii) cumulative Realized Losses do not exceed (a) 10%
of the Original Subordinate Principal Amount if such Distribution Date
occurs between and including May 2001 and April 2002, (b) 15% of the
Original Subordinate Principal Amount if such Distribution Date occurs
between and including May 2002 and April 2003, (c) 20% of the Original
Subordinate Principal Amount if such Distribution Date occurs between and
including May 2003 and April 2004, (d) 25% of the Original Subordinate
Principal Amount if such Distribution Date occurs between and including
May 2004 and April 2005, and (e) 30% of the Original Subordinate Principal
Amount if such Distribution Date occurs during or after May 2005.
Notwithstanding any of the foregoing provisions, on any Distribution Date
after the Group 1 Final Distribution Date, the Senior Prepayment Percentage
shall be equal to the Prepayment Shift Percentage (as defined below).
The "Class AP Principal Distribution Amount" for each Distribution Date is
equal to the sum of:
(i) the applicable AP Percentage multiplied by the principal portion of
each Scheduled Payment on a Mortgage Loan due during the related Due
Period;
(ii) the product of (a) the applicable AP Percentage and (b) each of the
following amounts: (1) the principal portion of each full and partial
principal prepayment made by a mortgagor on a Mortgage Loan during the
related Prepayment Period (as defined herein), (2) each other unscheduled
collection, including Insurance Proceeds and net Liquidation Proceeds (other
than with respect to any Mortgage Loan that was finally liquidated during the
related Prepayment Period) representing or allocable to recoveries of
principal of such Mortgage Loan received during the related Prepayment
Period, and (3) the principal portion of all proceeds of the purchase (or, in
the case of a permitted substitution, amounts representing a principal
adjustment) of any Mortgage Loan actually received by the Trustee during the
related Prepayment Period;
(iii) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan that was finally liquidated during the related Prepayment
Period, the applicable AP Percentage of the related net Liquidation Proceeds
allocable to principal; and
(iv) any amounts described in clauses (i) through (iii) for any previous
Distribution Date that remain unpaid.
The "Group 1 Senior Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is the aggregate
of the Certificate Principal Amounts of the Group 1 Senior Certificates
S-20
<PAGE>
immediately prior to such date and the denominator of which is the aggregate
of the Certificate Principal Amounts of all Classes of Senior Certificates
(other than the Class AP Certificates) immediately prior to such date. The
"Group 2 Senior Percentage" for any Distribution Date will be the difference
between 100% and the Group 1 Senior Percentage for such date.
The "Group 1 Senior Prepayment Percentage" for any Distribution Date
occurring during the five years beginning on the first Distribution Date will
equal 100%. Thereafter, the Group 1 Senior Prepayment Percentage for each
Distribution Date will be determined according to the following formula: (a)
the product of the Group 1 Senior Percentage for such date and the Senior
Percentage for such date, plus (b) the product of (i) the applicable
Prepayment Shift Percentage (as defined below) and (ii) the sum of (x) the
product of the Group 2 Senior Percentage for such date and the Senior
Percentage for such date and (y) the Subordinate Percentage for such date.
The "Prepayment Shift Percentage" for any Distribution Date occurring during
the first five years beginning on the first Distribution Date will equal
100%. Thereafter, the "Prepayment Shift Percentage" for any Distribution Date
occurring on or after the fifth anniversary of the first Distribution Date
will be as follows: for any Distribution Date in the first year thereafter,
70%; for any Distribution Date in the second year thereafter, 60%; for any
Distribution Date in the third year thereafter, 40%; and for any Distribution
Date in the fourth year thereafter, 20% and for any Distribution Date
thereafter, 0%. On any Distribution Date after the Group 1 Final Distribution
Date, the Group 1 Senior Prepayment Percentage shall be zero.
The Subordinate Prepayment Percentage for any Distribution Date will be
the difference between 100% and the Senior Prepayment Percentage for such
date.
The "Subordinate Principal Distribution Amount" for each Distribution Date
is equal to the sum of:
(i) the Subordinate Percentage of the applicable Non-AP Percentage
multiplied by the principal portion of each Scheduled Payment on a
Mortgage Loan due during the related Due Period;
(ii) the product of (a) the Subordinate Prepayment Percentage of the
applicable Non-AP Percentage and (b) each of the following amounts: (1)
the principal portion of each full and partial principal prepayment made
by a mortgagor on a Mortgage Loan during the related Prepayment Period,
(2) each other unscheduled collection, including Insurance Proceeds and
net Liquidation Proceeds (other than with respect to any Mortgage Loan
that was finally liquidated during the related Prepayment Period),
representing or allocable to recoveries of principal of such Mortgage
Loans received during the related Prepayment Period, and (3) the principal
portion of all proceeds of the purchase (or, in the case of a permitted
substitution, amounts representing a principal adjustment) of any Mortgage
Loan actually received by the Trustee during the related Prepayment
Period;
(iii) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan that was finally liquidated during the related
Prepayment Period, the applicable Non-AP Percentage of the related net
Liquidation Proceeds allocable to principal, to the extent not distributed
pursuant to subsection (iii) of the definition of "Senior Principal
Distribution Amount"); and
(iv) any amounts described in clauses (i) through (iii) for any
previous Distribution Date that remain unpaid;
provided, that on the Group 1 Final Distribution Date, the Subordinate
Principal Distribution Amount shall be reduced by the fraction described in
clause (x) of the definition of Group 2 Senior Principal Distribution Amount
and provided, further, that on each Distribution Date after the Group 1 Final
Distribution Date, the calculation of the Subordinate Principal Distribution
Amount will be modified as described under "-- Reallocation of Principal
Payments" below.
Reallocation of Principal Payments. On each Distribution Date following
the Group 1 Final Distribution Date, the allocation of principal payments to
the Group 2 Senior Certificates shall be determined in accordance with the
calculation of the Senior Principal Distribution Amount for such date, and
the allocation of principal will be modified as follows:
The Senior Principal Distribution Amount for each such Distribution Date
shall be decreased on each such Distribution Date by any amount calculated
pursuant to clause (i) of the definition thereof and increased on each
S-21
<PAGE>
such date by an amount equal to the product of (x) the fraction, the
numerator of which is equal to the Certificate Principal Amount of the Group
2 Senior Certificates immediately prior to such Distribution Date less the
sum of amounts calculated for such date pursuant to clauses (ii) and (iii) of
the definition of Senior Principal Distribution Amount, and the denominator
of which is equal to the sum of such numerator and the aggregate of the
Certificate Principal Amounts of the Subordinate Certificates immediately
prior to such Distribution Date, and (y) the sum of amounts calculated for
such date pursuant to clause (i) of the definition of Senior Principal
Distribution Amount and pursuant to the definition of Subordinate Principal
Distribution Amount.
The Subordinate Principal Distribution Amount for each such Distribution
Date shall be equal to the sum of the Senior Principal Distribution Amount
and Subordinate Principal Distribution Amount for such date, calculated in
each case without giving effect to the immediately preceding paragraph, less
the amount calculated pursuant to such paragraph.
AVAILABLE DISTRIBUTION AMOUNT
The due period (the "Due Period") related to each Distribution Date
commences on the second day of the month preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs (the "Due Date"). For each Distribution Date, the
collection period (the "Collection Period") ends on the 15th day (or if such
day is not a business day, then the preceding business day) of the month in
which such Distribution Date occurs. The "Prepayment Period" is the calendar
month preceding the month in which the related Distribution Date occurs. The
deposit date (the "Deposit Date") is the 18th day (or if such date is not a
business day, the next preceding business day) of the month in which the
related Distribution Date occurs.
The "Available Distribution Amount" on each Distribution Date, as more
fully described in the Trust Agreement, will generally equal the sum of the
following amounts:
(1) the total amount of all cash received by the Servicer during the
Collection Period (or during the Prepayment Period, in the case of
Principal Prepayments) and remitted to the Trustee on the related Deposit
Date, which includes (i) Scheduled Payments due on the Mortgage Loans
during the Due Period and collected during the Collection Period or
advanced by the Servicer, (ii) payments allocable to principal on the
Mortgage Loans (other than Liquidation Proceeds and Insurance Proceeds) to
the extent received in advance of their scheduled Due Dates and applied to
reduce the principal balance of the Mortgage Loans ("Principal
Prepayments"), together with accrued interest thereon, if any, identified
as having been received on the Mortgage Loans during the Prepayment
Period, (iii) the proceeds of any repurchase of a Mortgage Loan required
to be repurchased by the Depositor or other party as a result of a breach
of a representation or warranty, and (iv) recoveries through liquidation
of any REO Property with respect to the Mortgage Loans, including
Insurance Proceeds and Liquidation Proceeds, minus:
(a) all Scheduled Payments of principal and interest collected but
due on a date subsequent to the related Due Period;
(b) all Principal Prepayments received or identified after the
related Prepayment Period (together with any interest payments, if any,
received with such prepayments to the extent that they represent (in
accordance with the Servicer's usual application of funds) the payment
of interest accrued on the related Mortgage Loans for the period
subsequent to the related Prepayment Period);
(c) Liquidation Proceeds and Insurance Proceeds received after the
related Prepayment Period with respect to the Mortgage Loans;
(d) all amounts which are due or reimbursable to the Servicer
pursuant to the terms of the Servicing Agreement; and
(e) an amount equal to the Trustee Fee under the Trust Agreement;
and
(2) any other payments required to be made by the Servicer or the
Depositor with respect to such Distribution Date.
S-22
<PAGE>
"Insurance Proceeds" means all proceeds (net of unreimbursed payments of
property taxes, insurance premiums and similar items incurred, and
unreimbursed Advances made, by the Servicer, if any) of hazard insurance
policies, to the extent such proceeds are not applied to the restoration of
the Mortgaged Property or released to the Mortgagor in accordance with the
Servicer's normal servicing procedures.
"Liquidation Proceeds" means all amounts (other than Insurance Proceeds)
net of unreimbursed expenses incurred in connection with liquidation or
foreclosure and unreimbursed Advances, if any, received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure
or otherwise, together with any net proceeds received on a monthly basis with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure.
DISTRIBUTIONS IN REDUCTION OF THE CLASS A3 CERTIFICATES
General. As to distributions of principal among Class A3
Certificateholders, Deceased Holders (as defined below) will be entitled to a
first priority, and beneficial owners other than Deceased Holders ("Living
Holders") will be entitled to a second priority. Beneficial owners of the
Class A3 Certificates have the right to request that distributions of
principal be made with respect to their Class A3 Certificates on each
Distribution Date on which distributions of principal are made with respect
to the Class A3 Certificates. All such requested distributions are subject to
the priorities described below under "--Payments to Requesting Beneficial
Owners" and are further subject to the limitations that they be made (i) only
in lots equal to $1,000 of initial Certificate Principal Amount (each, an
"Individual Class A3 Certificate") and (ii) only to the extent that the
portion of the Senior Principal Distribution Amount allocated to the Class A3
Certificates on the applicable Distribution Date (plus any amounts available
from the Rounding Account) provides sufficient funds for such requested
distributions. To the extent that amounts available for distribution of
principal on the Class A3 Certificates on any Distribution Date exceed the
aggregate requests for principal distributions applicable to such
Distribution Date, such excess amounts will be distributed to the beneficial
owners of Class A3 Certificates by random lot, as described under
"--Mandatory Distributions of Principal on Class A3 Certificates" below.
On each Distribution Date on which amounts are available for distribution
of principal on the Class A3 Certificates, the aggregate amount allocable to
such distribution will be rounded, as necessary, to an amount equal to an
integral multiple of $1,000, except as provided below, in accordance with the
priorities and limitations set forth herein. Such rounding will be
accomplished on the first Distribution Date on which distributions of
principal on the Class A3 Certificates are made by withdrawing, from a
non-interest bearing account to be established on the Closing Date with a
deposit of $999.99 by the Underwriter (the "Rounding Account"), the amount of
funds, if any, needed to round the amount otherwise available for such
distribution upward to the next higher integral multiple of $1,000. On each
succeeding Distribution Date on which distributions of principal on the Class
A3 Certificates are to be made, the aggregate amount allocable to the Class
A3 Certificates will be applied first to repay any funds withdrawn from the
Rounding Account for the Class A3 Certificates on the prior Distribution
Date, and then the remainder of such allocable amount, if any, will be
similarly rounded upward through another withdrawal from the Rounding Account
and distributed as principal on the Class A3 Certificates. This process will
continue on succeeding Distribution Dates until the Certificate Principal
Amount of the Class A3 Certificates has been reduced to zero. Thus, the
aggregate distribution made in reduction of the principal balance of the
Class A3 Certificates on each Distribution Date may be slightly more or less
than would be the case in the absence of such rounding procedures, but such
difference will be no more than $999.99 on any Distribution Date. Under no
circumstances will the sum of all distributions of principal on the Class A3
Certificates through any Distribution Date be less than the amount that would
have resulted in the absence of such rounding procedures.
There can be no assurance that a beneficial owner of a Class A3
Certificate who has submitted a request for a distribution will receive such
distribution at any particular time after such distribution is requested,
because there can be no assurance that funds will be available for making
such distributions on any particular Distribution Date, or, even if funds are
available for making such distributions, that such distribution with respect
to the Class A3 Certificates owned by any particular beneficial owner will be
made. Also, due to the procedure for mandatory distributions described below,
there can be no assurance that on any Distribution Date on which the funds
available for distribution of principal on the Class A3 Certificates exceed
S-23
<PAGE>
the aggregate amount of distri butions requested by beneficial owners of the
Class A3 Certificates, any particular beneficial owner will receive a principal
distribution from such excess funds. Thus, the timing of distributions of
principal with respect to any particular Class A3 Certificate is highly
uncertain, and such distributions may be made earlier or later than the date
that may be desired by a beneficial owner of a Class A3 Certificate.
Accordingly, the allocation of principal distributions in respect of the Class
A3 Certificates may result in actual yields to investors and weighted average
lives that vary significantly from those anticipated, and such yields and
weighted average lives will vary among the holders of the Class A3 Certificates.
Notwithstanding any provisions herein to the contrary, on each
Distribution Date on and after the Credit Support Depletion Date,
distributions of principal on the Class A3 Certificates (including amounts
paid, if any, under the Policy) will be made pro rata among the holders of
the Class A3 Certificates and will not be made in integral multiples of
$1,000 or pursuant to requested distributions or mandatory distributions by
random lot.
Procedure for Requested Distributions. A beneficial owner may request that
distributions of principal on such beneficial owner's Class A3 Certificates
be made on a Distribution Date by delivering a written request therefor to
the Participant or Financial Intermediary that maintains such beneficial
owner's account in the Class A3 Certificates so that the request for such
distribution is received by the Trustee on or before the Record Date for such
Distribution Date. In the case of a request on behalf of a Deceased Holder, a
certified copy of the death certificate and any additional appropriate
evidence of death and any tax waivers are required to be forwarded to the
Trustee under separate cover. Furthermore, such requests of Deceased Holders
that are incomplete may not be honored by the Trustee and, if not honored,
will lose their priority and must be rerequested. The Participant should in
turn make the request of the Depository (or, in the case of an Financial
Intermediary, such firm must notify the related Participant of such request,
which Participant should make the request of the Depository) on a form
required by the Depository and provided to the Participant. Upon receipt of
such request, the Depository will date and time stamp such request and
forward such request to the Trustee. The Depository may establish such
procedures as it deems fair and equitable to establish the order of receipt
of requests for such distributions received by it on the same day. Neither
the Servicer nor the Trustee will be liable for any delay by the Depository,
any Participant or any Financial Intermediary in the delivery of requests for
distributions to the Trustee. Requests for distributions in reduction of
principal balance forwarded to the Trustee from the Depository after the
Record Date for such Distribution Date and requests for distributions
received in a timely manner but not accepted with respect to a particular
Distribution Date will be treated as requests for distributions on the next
succeeding Distribution Date and each succeeding Distribution Date thereafter
until each request is accepted or is withdrawn as described below. Each
request for distributions of principal on a Class A3 Certificate submitted by
a beneficial owner of a Class A3 Certificate will be held by the Trustee
until such request has been accepted or has been withdrawn in writing. Each
Individual Class A3 Certificate covered by such request will continue to bear
interest at the related Certificate Interest Rate through the Record Date for
such Distribution Date.
With respect to Class A3 Certificates as to which beneficial owners have
requested distributions on a particular Distribution Date on which
distributions of principal on the Class A3 Certificates are being made, the
Trustee will notify the Depository prior to such Distribution Date whether,
and the extent to which, such Class A3 Certificates have been accepted for
distributions. Participants and Financial Intermediarys holding Class A3
Certificates should forward such notices to the beneficial owners of such
Certificates. Individual Class A3 Certificates that have been accepted for a
distribution will be due and payable on the applicable Distribution Date and
will cease to bear interest after the Record Date for such Distribution Date.
Any beneficial owner of a Class A3 Certificate that has requested a
distribution may withdraw such request by so notifying in writing the
Participant or Financial Intermediary that maintains such beneficial owner's
account. The Participant should forward the withdrawal, on a form required by
the Depository, to the Trustee. In the event that such account is maintained
by an Financial Intermediary, such Financial Intermediary must notify the
related Participant, which in turn must forward the withdrawal of such
request on such form to the Trustee. If such notice of withdrawal or a
request for distribution has not been received by the Trustee on or before
the Record Date for such Distribution Date, the previously made request for
distribution will be irrevocable with respect to the making of distributions
of principal on the Class A3 Certificates on the applicable Distribution
Date.
Mandatory Distributions of Principal on Class A3 Certificates. To the
extent, if any, that amounts available for distribution in respect of
principal on the Class A3 Certificates on a Distribution Date exceed the dollar
S-24
<PAGE>
amount of requests for distributions that have been received by the applicable
date, additional Class A3 Certificates in lots equal to Individual Class A3
Certificates will be selected to receive principal distributions in accordance
with the then-applicable established random lot procedures of the Depository,
and the then-applicable established procedures of the Participants and Financial
Intermediaries, which may or may not be by random lot. Investors should ask such
Participants or Financial Intermediaries which allocation procedures they use.
Participants and Financial Intermediaries holding Class A3 Certificates selected
for mandatory distributions of principal should provide notice of such mandatory
distributions to the affected beneficial owners.
Payments to Requesting Beneficial Owners. On any Distribution Date on
which principal distributions are made on the Class A3 Certificates, priority
of payment on the Class A3 Certificates will be given to beneficial owners
for whom principal distribution requests are in effect. The Depository will
honor requests in the following order of priority:
First, the Depository will honor requests submitted on behalf of Deceased
Holders in the order of their receipt by the Depository, until such
requests have been honored in an amount up to $100,000 for such requesting
Deceased Holder; and
Second, the Depository will honor requests submitted on behalf of Living
Holders in the order of priority established by the Depository, until such
requests have been honored in an amount up to $10,000 for each requesting
Living Holder.
Thereafter, the Depository will honor requests submitted on behalf of each
Deceased Holder as provided in step First up to a second $100,000 and
requests submitted on behalf of each Living Holder as provided in step Second
up to a second $10,000. This sequence of priorities will be repeated until
all Class A3 Certificate principal distribution requests have been honored to
the extent of amounts available in reduction of the Certificate Principal
Amount of the Class A3 Certificates.
If the amount of principal available for distribution on the Class A3
Certificates on a particular Distribution Date is insufficient to honor all
requests, such requests will be honored on succeeding Distribution Dates as
principal becomes available. In the case of requests on behalf of Living
Holders, the Depository will establish a new order of priority for each
Distribution Date. This order will apply both to previously unsatisfied
payment requests and to newly submitted requests. A Class A3 Certificate
principal payment request submitted on behalf of a Living Holder who later
dies will become entitled to the priority of a newly submitted request on
behalf of a Deceased Holder. Such priority will be effective for each
subsequent Distribution Date if the Depository has received a certified copy
of the death certificate for such Deceased Holder and any additional
appropriate evidence of death and any requested tax waivers by the last
Business Day of the preceding calendar month.
Definition of "Deceased Holder." A "Deceased Holder" is a beneficial owner
of a Class A3 Certificate who was living at the time such interest was
acquired and whose executor or other authorized representative causes to be
furnished to the Trustee a certified copy of the death certificate for such
Deceased Holder and any additional evidence of death satisfactory to the
Trustee and any tax waivers requested by the Trustee. Class A3 Certificates
beneficially owned by tenants by the entirety, joint tenants or tenants in
common will be considered to be beneficially owned by a single owner. The
death of a tenant by the entirety, joint tenant or tenant in common will be
deemed to be the death of the beneficial owner, and the Class A3 Certificates
so beneficially owned will be eligible for priority with respect to
distributions of principal, subject to the limitations stated herein. Class
A3 Certificates beneficially owned by a trust will be considered to be
beneficially owned by each beneficiary of the trust to the extent of such
beneficiary's beneficial interest therein, but in no event will a trust's
beneficiaries collectively be deemed to be beneficial owners of a number of
Individual Class A3 Certificates greater than the number of Individual Class
A3 Certificates of which such trust is the owner. The death of a beneficiary
of a trust will be deemed to be the death of a beneficial owner of the Class
A3 Certificates beneficially owned by the trust to the extent of such
beneficiary's beneficial interest in such trust. The death of an individual
who was a tenant by the entirety, joint tenant or tenant in common in a
tenancy that is the beneficiary of a trust will be deemed to be the death of
the beneficiary of the trust. The death of a person who, during his or her
lifetime, was entitled to substantially all of the beneficial ownership
interest in a Class A3 Certificate will be deemed to be the death of the
beneficial owner of such Class A3 Certificate regardless of the registration
of ownership, if such beneficial ownership interest can be established to the
satisfaction of the Trustee; expenses incurred by the Trustee in an effort to
S-25
<PAGE>
determine the beneficial ownership interest, including without limitation,
attorney's fees, shall be paid by the beneficial owner. Such beneficial interest
will be deemed to exist in typical cases of street name or nominee ownership,
ownership by a trustee, ownership under the Uniform Gifts to Minors Act and
community property or other joint ownership arrangements between a husband and
wife. Beneficial interest shall include the power to sell, transfer or otherwise
dispose of a Class A3 Certificate and the right to receive the proceeds
therefrom, as well as interest and distributions in reduction of principal
balance payable with respect thereto. As used in this Prospectus Supplement, a
request for a distribution of principal of a Class A3 Certificate by a Deceased
Holder shall mean a request by the personal representative, surviving tenant by
the entirety, surviving joint tenant or surviving tenant in common of the
Deceased Holder.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates.
<TABLE>
<CAPTION>
<S> <C> <C>
June 1 through June 30 .... Prepayment Period. Partial principal prepayments and prepayments in full with
interest thereon to the date of such prepayment in full
received at any time during this period will be deposited
into the related Servicer Custodial Account for distribution
to Certificateholders on July 25.
June 28 ................... Record Date. Distributions on July 25 will be made to Certificateholders
of record at the close of business on the last business
day of the month immediately preceding the month of
distribution.
June 16 through July 15 ... Collection Period. Payments due during the related Due Period (June 2 through
July 1) from mortgagors will be deposited in the Servicer
Custodial Account as received and will include scheduled
principal payments plus interest on the June 1 principal
balances of the Mortgage Loans.
July 18 ................... Deposit Date. On the 18th day of each month (or if such day is not a business
day, the preceding business day), the Servicer will remit
to the Trustee the amount of principal and interest to be
distributed to Certificateholders on the related
Distribution Date, including any Advances required to be
made by the Servicer for such Distribution Date.
July 25 ................... Distribution Date. On July 25, the Trustee will distribute or cause to be
distributed to Certificateholders the amounts determined
as of the Determination Date.
</TABLE>
Succeeding months follow the same pattern, except that if the 25th day of the
month is not a business day, the Distribution Date for such month will fall on
the business day immediately following such 25th day of the month.
THE CLASS R CERTIFICATE
On each Distribution Date, any amounts remaining in the Certificate
Account after payment of the expenses of the REMIC Pool and of interest and
required distributions of principal on the Certificates, will be paid to the
Holder of the Class R Certificate. Such amounts, if any, are expected to be
minimal. Notwithstanding the final payment of its Certificate Principal
Amount, the Class R Certificate will remain outstanding until the liquidation
of the REMIC.
Any amounts remaining in the REMIC Pool after payment in full of required
payments to the Certificates and payment of any outstanding expenses of the
REMIC Pool will be distributable to the Holder of the Class R Certificate.
Such remaining amounts are also expected to be minimal.
S-26
<PAGE>
ALLOCATION OF REALIZED LOSSES; SUBORDINATION
On each Distribution Date, subject to the limitations set forth below with
respect to Special Hazard Losses, Fraud Losses and Bankruptcy Losses ("Excess
Losses"), the applicable Non-AP Percentage of the principal portion of any
Realized Losses on the Mortgage Loans will be allocated to and reduce the
Certificate Principal Amount of first the Class B5, Class B4, Class B3, Class
B2, Class B1 and Class M Certificates, in that order, until the Certificate
Principal Amounts of such Certificates have been reduced to zero, and then
the Senior Certificates other than the Class AP Certificates pro rata in
proportion to their Certificate Principal Amounts. Any Realized Loss
allocable to the Class A3 Certificates will be covered by the Class A3
Policy.
Subject to the limitations set forth below with respect to Excess Losses,
the AP Percentage of the principal portion of any Realized Losses on the
Discount Mortgage Loans will be allocated to and reduce the Certificate
Principal Amount of the Class AP Certificates until the Certificate Principal
Amount thereof has been reduced to zero. With respect to any Distribution
Date through the Credit Support Depletion Date, the aggregate of all amounts
so allocable to the Class AP Certificates on such date in respect of Realized
Losses other than Excess Losses and all amounts previously allocated in
respect of such losses to the Class AP Certificates and not distributed on
prior Distribution Dates will be the "Class AP Deferred Amount." To the
extent funds are available therefor on any Distribution Date through the
Credit Support Depletion Date, distributions in respect of the Class AP
Deferred Amount will be made on the Class AP Certificates in accordance with
priority (iv) under "--Distributions of Principal" above. Any distribution in
respect of the Class AP Deferred Amount will not reduce the Certificate
Principal Amount of the Class AP Certificates. No interest will accrue on the
Class AP Deferred Amount. On each Distribution Date through the Credit
Support Depletion Date, the Certificate Principal Amount of the lowest
ranking Class of Subordinate Certificates then outstanding will be reduced by
the amount of any distributions in respect of the Class AP Deferred Amount on
such Distribution Date. After the Credit Support Depletion Date, no
distributions will be made in respect of, and losses allocated to the Class
AP Certificates will not be added to, the Class AP Deferred Amount.
The Certificate Principal Amount of the lowest ranking Class of
Subordinate Certificates then outstanding will also be reduced by the amount,
if any, by which the aggregate Certificate Principal Amount of all the
Certificates on any Distribution Date (after giving effect to distributions
of principal and allocation of Realized Losses and the amount of any
distributions in respect of the Class AP Deferred Amount on such date)
exceeds the aggregate Scheduled Principal Balance of the Mortgage Loans for
the related Distribution Date.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the
Mortgage Loan plus all accrued and unpaid interest thereon and any related
expenses exceeds the amount of Liquidation Proceeds applied to the principal
balance of the related Mortgage Loan. "Realized Losses" also include Excess
Losses. "Bankruptcy Losses" are losses that are incurred as a result of Debt
Service Reductions and Deficient Valuations. "Special Hazard Loss" means, in
general terms, a Realized Loss arising out of certain direct physical loss or
damage to a Mortgaged Property and which is not covered by a standard hazard
insurance policy, but excluding, among other things, faulty design or
workmanship and normal wear and tear. "Fraud Losses" are losses sustained on
a Liquidated Mortgage Loan by reason of a default arising from fraud,
dishonesty or misrepresentations. In determining whether a Realized Loss is a
loss of principal or of interest, Liquidation Proceeds and other recoveries
on a Mortgage Loan will be applied first to outstanding expenses incurred
with respect to such Mortgage Loan, then to accrued, unpaid interest, and
finally to principal. See "Credit Enhancement" herein.
A "Liquidated Mortgage Loan" generally is a defaulted Mortgage Loan as to
which such Mortgage Loan or related REO Property has been disposed of and the
proceeds of such disposition received by the Servicer on behalf of the Trust.
Notwithstanding the foregoing, the principal portion of Special Hazard
Losses, Bankruptcy Losses, and Fraud Losses that exceed the "Special Hazard
Loss Limit," "Bankruptcy Loss Limit," and "Fraud Loss Limit," respectively,
shall be allocated pro rata among the classes of Certificates in proportion
to their respective outstanding Certificate Principal Amounts. Any such loss
allocable to the Class A3 Certificates will be covered by the Class A3
Policy. The "Special Hazard Loss Limit" will initially be approximately
$2,539,768, the "Bankruptcy Loss Limit" will initially be approximately
$100,000, and the "Fraud Loss Limit" will initially be approximately
$3,682,997.
S-27
<PAGE>
The Special Hazard Loss Limit will be reduced, from time to time, to be an
amount equal on any Distribution Date to the lesser of (a) the greatest of
(i) 1% of the aggregate of the Scheduled Principal Balances of the Mortgage
Loans, (ii) twice the Scheduled Principal Balance of the Mortgage Loan having
the highest Scheduled Principal Balance and (iii) the aggregate Scheduled
Principal Balances of the Mortgage Loans secured by Mortgaged Properties
located in the single California postal zip code area having the highest
aggregate Scheduled Principal Balance of any such zip code area and (b) the
Special Hazard Loss Limit as of the Closing Date less the amount, if any, of
Special Hazard Losses incurred since the Closing Date.
The Bankruptcy Loss Limit will be reduced, from time to time, by the
amount of Bankruptcy Losses allocated to the Certificates.
The Fraud Loss Limit will be reduced, from time to time, by the amount of
Fraud Losses allocated to the Certificates. In addition, on each anniversary
of the Cut-off Date, the Fraud Loss Limit will be reduced as follows: (a) on
the first, second, third, and fourth anniversaries of the Cut-off Date, to an
amount equal to the excess of 1% of the Scheduled Principal Balance of the
Mortgage Loans as of the Cut-off Date over the cumulative amount of Fraud
Losses allocated to the Certificates and (b) on the fifth anniversary of the
Cut-off Date, to zero.
FINAL SCHEDULED DISTRIBUTION DATE
Scheduled distributions on the Mortgage Loans included in the Trust Fund,
assuming no defaults or losses that are not covered by the credit support
described elsewhere herein, will be sufficient to make timely distributions
of interest on the Offered Certificates and to reduce the Certificate
Principal Amount of the Offered Certificates to zero not later than their
"Final Scheduled Distribution Date" set forth on the cover page hereof.
The Final Scheduled Distribution Date for the Offered Certificates has
been determined by adding 12 months to the month of scheduled maturity of the
latest maturing Mortgage Loan.
OPTIONAL TERMINATION OF THE TRUST
On any Distribution Date after the date on which the aggregate Scheduled
Principal Balance of the Mortgage Loans is less than 5% of the aggregate
Cut-off Date Balance, the Depositor (subject to the terms of the Trust
Agreement), notwithstanding anything to the contrary in the Prospectus, will
have the option to cause the sale of the Mortgage Loans in the Trust Fund,
any REO Property and any other property remaining in the Trust Fund and
thereby effect the termination of the Trust Fund and the retirement of the
Certificates. The purchase price of the Mortgage Loans must be equal to the
sum of (a) 100% of the aggregate outstanding principal balance of such
Mortgage Loans, plus accrued interest thereon at the applicable Mortgage Rate
and (b) the fair market value of all other property remaining in the Trust
Fund. Such liquidation will be treated as a prepayment of the Mortgage Loans
for purposes of distributions to Certificateholders. Upon such payment in
full to Certificateholders of such amounts, the Trust Fund will be
terminated.
THE TRUSTEE
The Chase Manhattan Bank, N.A. will be the Trustee under the Trust
Agreement. The Trustee will be paid a monthly fee equal to 0.0025% per annum
on the aggregate Scheduled Principal Balance of the Mortgage Loans (the
"Trustee Fee"), and will also be entitled to retain, as additional
compensation, any interest or other income earned on funds deposited in the
Collection Account pending distribution to Certificateholders. The "Trustee
Fee Rate" for any Distribution Date is the percentage equivalent of the
fraction, the numerator of which is the Trustee Fee and the denominator of
which is the aggregate Scheduled Principal Balance of the Premium Loans. The
Trustee's "Corporate Trust Office," with respect to the presentment and
surrender of the Offered Certificates for the final distribution thereon and
for all other purposes is 4 Chase MetroTech Center, 3rd Floor, Brooklyn, New
York 11245, Attention: Global Trust Services, or such address as the Trustee
may designate from time to time by notice to the Certificateholders, the
Depositor and the Servicer.
Norwest Bank Minnesota, N.A., a national banking association ("Norwest
Bank"), will act as custodian of the Mortgage Loans and will perform certain
securities administration and REMIC tax administration duties on behalf of
the Trustee. Norwest Bank is an affiliate of Norwest.
S-28
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately 612 conventional, fixed
rate, fully-amortizing, monthly payment Mortgage Loans with original terms to
maturity of not more than 30 years. The Mortgage Loans had an aggregate
outstanding principal balance as of the Cut-off Date of approximately
$184,149,832. The Mortgage Loans were originated by Norwest generally in
accordance with the underwriting criteria then in effect as described herein.
All of the Mortgage Loans have monthly payments due on the first day of each
month. Interest on the Mortgage Loans accrues on the basis of a 360-day year
consisting of twelve 30-day months.
Pursuant to its terms, each Mortgage Loan, other than a loan secured by a
condominium unit, is required to be covered by a standard hazard insurance
policy in an amount equal to the lower of the original principal loan amount
or the replacement value of the improvements on the Mortgaged Property.
Generally, a condominium association is responsible for maintaining hazard
insurance covering the entire building. See "Description of Mortgage and
Other Insurance -- Hazard Insurance on the Loans -- Standard Hazard Insurance
Policies" in the Prospectus.
The weighted average Loan-to-Value Ratio of the Mortgage Loans at
origination was approximately 76.4%, and no Mortgage Loan had a Loan-to-Value
Ratio at origination exceeding 95.2%. Each Mortgage Loan with a Loan-to-Value
Ratio at origination of greater than 80% is covered by a primary mortgage
guaranty insurance policy issued by a mortgage insurance company acceptable
to the Federal National Mortgage Association ("FNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which policy shall insure 30% of the
principal balance of the Mortgage Loan at origination if the Loan-to Value
Ratio is between 97.00% and 90.01%, 25% of such balance if the Loan-to-Value
Ratio is between 90.00% and 85.01%, and 12% of such balance if the
Loan-to-Value Ratio is between 85.00% and 80.01%. No such primary mortgage
guaranty insurance policy will be required with respect to any such Mortgage
Loan after the date on which the related Loan-to-Value Ratio is 80% or less.
The "Loan-to-Value Ratio" of a Mortgage Loan at any time is the ratio of
the principal balance of such Mortgage Loan at the date of determination to
(a) in the case of a purchase, the lesser of the sale price of the Mortgaged
Property and its appraised value at the time of sale, or (b) in the case of a
refinance or modification, the appraised value of the Mortgaged Property at
the time of such refinance or modification.
The Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date (expressed, where
applicable, as a percentage of the Mortgage Pool). Prior to the issuance of
the Certificates, Mortgage Loans may be removed from the Trust Fund as a
result of incomplete documentation or otherwise, if the Depositor deems such
removal necessary or appropriate. In addition, a limited number of other
mortgage loans may be included in the Trust Fund prior to the issuance of the
Offered Certificates.
Number of Mortgage Loans ............................. 612
Aggregate Stated Principal Balance ................... $184,149,832
Mortgage Rates:
Weighted Average ................................ 7.819%
Range ........................................... 6.250% to 11.000%
Weighted Average Remaining Term to Maturity (in
months) ............................................ 353
All but 51 of the Mortgage Loans had original terms to maturity of 360
months; the remaining 51 Mortgage Loans had original terms to maturity
ranging from 240 months to 346 months.
The Mortgage Loans had an outstanding principal balance of not less
than $49,965 or more than $1,269,885. The Mortgage Loans had an average
outstanding principal balance of approximately $300,898.
S-29
<PAGE>
With respect to approximately 43.9% of the Mortgage Loans, the proceeds
were used to purchase the applicable Mortgaged Property. Approximately
46.6% of the Mortgage Loans were rate and term refinances and
approximately 9.5% of the Mortgage Loans were equity take-out refinances.
No more than approximately 0.9% of the Mortgage Loans were secured by
Mortgaged Properties located in any one zip code area.
Approximately 1.8% of the Mortgage Loans are secured by second homes;
and with respect to approximately 98.2% of the Mortgage Loans, the
mortgagor represented in the documents submitted by such mortgagor for the
closing of the related Mortgage Loan that the Mortgaged Property initially
was owner-occupied.
S-30
<PAGE>
The following tables set forth as of the Cut-off Date the number,
aggregate outstanding principal balance and percentage (by aggregate
outstanding principal balance as of the Cut-off Date) of the Mortgage Loans
having the stated characteristics shown in the charts in each given range.
(The sum of the amounts of the percentages in the following tables may not
equal the totals due to rounding.)
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Range of Original Number of Aggregate Outstanding Aggregate Outstanding
Loan-to-Value Ratios (%) Mortgage Loans Principal Balance Principal Balance
- ------------------------ -------------- --------------------- ---------------------
<S> <C> <C> <C>
20.001 to 30.000 .... 1 $ 49,965.60 0.03%
30.001 to 40.000 .... 4 949,090.74 0.52
40.001 to 50.000 .... 18 6,141,112.47 3.33
50.001 to 60.000 .... 31 9,671,121.07 5.25
60.001 to 70.000 .... 90 28,302,072.36 15.37
70.001 to 80.000 .... 303 96,454,831.29 52.38
80.001 to 90.000 .... 139 36,097,316.56 19.60
90.001 to 100.000 .... 26 6,484,322.15 3.52
--- --------------- ------
Total ................ 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
The weighted average original loan-to-value ratio is approximately 76.43%.
MORTGAGE RATES
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Range of Number of Aggregate Outstanding Aggregate Outstanding
Mortgage Rates (%) Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- --------------------- ---------------------
<S> <C> <C> <C>
6.001 to 6.500 2 $ 590,504.76 0.32%
6.501 to 7.000 5 1,754,175.24 0.95
7.001 to 7.500 170 51,469,244.23 27.95
7.501 to 8.000 296 89,131,427.38 48.40
8.001 to 8.500 104 31,776,311.44 17.26
8.501 to 9.000 25 7,002,748.76 3.80
9.001 to 9.500 2 568,517.54 0.31
9.501 to 10.000 5 1,202,451.52 0.65
10.001 to 10.500 2 441,571.64 0.24
10.501 to 11.000 1 212,879.73 0.12
--- --------------- ------
Total ........... 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 7.819%.
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Range of Number of Aggregate Outstanding Aggregate Outstanding
Maturities(months) Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- --------------------- ---------------------
<S> <C> <C> <C>
181 to 240 ...... 10 $ 2,787,835.82 1.51%
241 to 300 ...... 6 1,343,740.87 0.73
301 to 360 ...... 596 180,018,255.55 97.76
--- -------------- ------
Total ........... 612 $184,149,832.24 100.00%
=== =============== =======
</TABLE>
The weighted average remaining term to maturity is approximately 353 months.
S-31
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Number of Aggregate Outstanding Aggregate Outstanding
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- --------------------- ---------------------
<S> <C> <C> <C>
California .. 281 $ 86,318,639.80 46.87%
Minnesota ... 33 10,137,171.17 5.50
Colorado .... 29 8,706,157.77 4.73
Maryland .... 18 5,223,281.03 2.84
New Jersey .. 19 5,130,718.82 2.79
Florida ..... 18 4,876,880.28 2.65
Texas ....... 15 4,844,179.73 2.63
Washington .. 16 4,727,385.09 2.57
Utah ........ 16 4,556,672.04 2.47
Arizona ..... 15 4,304,916.60 2.34
Other* ...... 152 45,323,829.91 24.61
--- --------------- ------
Total: ...... 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
- ------
* "Other" includes Arkansas, Connecticut, Delaware, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan,
Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
Tennessee, Vermont, Virginia, Wisconsin and Wyoming.
SCHEDULED PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Percentage of
Morgage Loans by
Range of Number of Aggregate Outstanding Aggregate Outstanding
Current Balances ($) Mortgage Loans Principal Balance Principal Balance
- -------------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
0.01 to 50,000.00 ..... 1 $ 49,965.60 0.03%
50,000.01 to 100,000.00 ..... 4 325,776.50 0.18
100,000.01 to 150,000.00 ..... 4 555,341.80 0.30
150,000.01 to 200,000.00 ..... 7 1,343,716.02 0.73
200,000.01 to 250,000.00 ..... 212 48,972,488.37 26.59
250,000.01 to 300,000.00 ..... 169 46,123,064.44 25.05
300,000.01 to 350,000.00 ..... 93 30,290,795.13 16.45
350,000.01 to 400,000.00 ..... 47 17,506,408.69 9.51
400,000.01 to 450,000.00 ..... 25 10,587,905.08 5.75
450,000.01 to 500,000.00 ..... 18 8,626,519.40 4.68
500,000.01 to 550,000.00 ..... 8 4,204,392.73 2.28
550,000.01 to 600,000.00 ..... 11 6,334,582.47 3.44
600,000.01 to 650,000.00 ..... 9 5,743,890.24 3.12
650,000.01 to 700,000.00 ..... 1 698,175.25 0.38
700,000.01 to 750,000.00 ..... 1 749,015.46 0.41
750,000.01 to 800,000.00 ..... 1 767,910.99 0.42
800,000.01 and above ........ 1 1,269,884.07 0.69
--- --------------- ------
Total: ...................... 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
The average Scheduled Principal Balance is approximately $300,898.
S-33
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Number of Aggregate Outstanding Aggregate Outstanding
Property Type Mortgage Loans Principal Balance Principal Balance
------------ -------------- --------------------- ---------------------
<S> <C> <C> <C>
Single-Family Detached .. 435 $129,670,087.17 70.42%
Planned Unit Development 163 50,430,549.27 27.39
Condominium (Low Rise) .. 11 2,840,167.59 1.54
Two- to Four-Family ..... 3 1,209,028.21 0.66
--- --------------- ------
Total: .................. 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
LOAN PURPOSE
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Number of Aggregate Outstanding Aggregate Outstanding
Loan Purpose Mortgage Loans Principal Balance Principal Balance
- ------------ -------------- --------------------- ---------------------
<S> <C> <C> <C>
Purchase ................. 287 $ 80,794,386.35 43.87%
Rate/Term Refinance ...... 267 85,927,322.28 46.66
Equity Take-Out Refinance 58 17,428,123.61 9.46
--- --------------- ------
Total: ................... 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Number of Aggregate Outstanding Aggregate Outstanding
Occupancy Status Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
Primary Residence 601 $180,923,242.32 98.25%
Second Home ...... 11 3,226,589.92 1.75
--- --------------- ------
Total: ........... 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
LOAN DOCUMENTATION
<TABLE>
<CAPTION>
Percentage of
Mortgage Loans by
Number of Aggregate Outstanding Aggregate Outstanding
Loan Documentation Mortgage Loans Principal Balance Principal Balance
- ---------......... -------------- --------------------- ---------------------
<S> <C> <C> <C>
Full ............. 361 $109,333,854.68 59.37%
Alternative ...... 205 62,582,053.64 33.98
Reduced .......... 46 12,233,923.92 6.64
--- --------------- ------
Total: ........... 612 $184,149,832.24 100.00%
=== =============== ======
</TABLE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Trust Fund and the
Mortgaged Properties is based upon the Trust Fund as constituted at the close
of business on the Cut-off Date, as adjusted for Scheduled Payments due on or
before such date. A Current Report on Form 8-K will be available to
purchasers of the Offered Certificates and will be filed, together with the
Trust Agreement, with the Securities and Exchange Commission within fifteen
S-33
<PAGE>
days after the initial issuance of the Offered Certificates. In the event
Mortgage Loans are removed from or added to the Trust Fund as set forth under
"DESCRIPTION OF THE MORTGAGE POOL," such removal or addition will be noted in
the Current Report on Form 8-K.
NORWEST MORTGAGE, INC.
The information set forth in this section has been provided by Norwest,
and neither the Depositor nor the Underwriter makes any representations or
warranties as to the accuracy or completeness of such information.
Norwest is an indirect wholly-owned subsidiary of Norwest Corporation, a
bank holding company. Norwest was originally incorporated as a Minnesota
corporation on July 1, 1983. On August 30, 1995, Norwest and Directors
Mortgage Loan Corporation, a California corporation, completed a statutory
merger. As a result of the merger, Norwest became a California corporation as
of September 1, 1995.
The limited, general purposes of Norwest are to originate, sell and
service mortgage loans and to engage in any acts that are incidental to or
necessary, suitable or convenient to accomplish the foregoing. The executive
offices of Norwest are located at 405 S.W. 5th Street, Des Moines, Iowa
50328, telephone number (515) 221-7300.
MORTGAGE LOAN UNDERWRITING
Norwest's underwriting standards 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 80% for mortgage loans with original principal
balances of up to $650,000, and up to 65% for Mortgage Loans with original
principal balances of up to $2,000,000. With respect to equity take-out
refinance loans, Norwest's underwriting standards generally allow original
principal balances at origination of up to $1,000,000 and Loan-to-Value
Ratios at origination of up to 70%. A refinance mortgage loan is classified
as an equity take-out refinance if the borrower retains more than 1.0% of the
entire amount of the proceeds from the refinancing of the existing mortgage
loans.
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, Norwest generally requires that the monthly housing
payment not exceed 33% of the proposed borrower's acceptable stable monthly
gross income and that all debt obligations of the proposed borrower,
including the monthly housing payment, not exceed 38% of the proposed
borrower's acceptable stable monthly gross income, provided, however, that
with respect to a proposed mortgage loan with a Loan-to-Value Ratio greater
than 90%, ratios of up to 28% and 36%, respectively, will be applied.
Deviations from the underwriting standards described above are permitted by
Norwest in certain circumstances where strong compensating factors are
demonstrated by a proposective borrower.
Norwest also originates or acquires mortgage loans pursuant to alternative
sets of underwriting criteria under alternative documentation programs and
reduced documentation programs. Alternative documentation programs permit a
borrower to provide (i) W-2 Forms, pay check stubs and other similar items
for income verification, (ii) bank statements and other similar items instead
of a verification of deposits, and (iii) alternative methods of employment
verification. Under reduced documentation programs, relatively more emphasis
is placed on the credit report and the appraisal and certain credit
underwriting documentation concerning income, employment and deposit
verification may therefore be waived. Mortgage loans underwritten under
reduced documentation programs are limited to borrowers with credit histories
that demonstrate an established ability to repay the mortgage loans in a
timely fashion. Permitted maximum Loan-to-Value Ratios (including secondary
financing) under reduced documentation programs are more restrictive than
under full documentation programs. Mortgage loans underwritten pursuant to
reduced documentation programs must be secured by owner-occupied primary
residencies.
S-34
<PAGE>
DELINQUENCY EXPERIENCE
Generally, when a mortgagor fails to make a required payment on a mortgage
loan and does not cure the deficiency promptly, the loan is classified as
delinquent. In many cases, delinquencies are cured promptly, but if not,
foreclosure proceedings are generally commenced. The procedural steps
necessary for foreclosure vary from state to state, but generally, if the
loan is not reinstated within certain periods specified by the relevant
mortgage loan documents, the property securing the loan can be acquired by
the lender. If a mortgagee takes title to the mortgaged property through
foreclosure but the mortgaged property had a value lower than the outstanding
amount of the debt, the law in certain states permits such mortgagee to
obtain a deficiency judgment in the amount of the difference. The laws of
certain other states restrict or prohibit such deficiency judgments. It is
anticipated that in most cases the Servicer will not seek deficiency
judgments against defaulted mortgagors.
Loan Servicing Activities. As of December 31, 1995, Norwest's total loan
portfolio contained loans with an aggregate outstanding principal balance of
approximately $107.4 billion. The loans contained in Norwest's servicing
portfolio include fixed and adjustable rate loans, first and second lien
loans and one- to four-family loans, and therefore may differ significantly
from the Mortgage Loans. There can be no assurance, and no representation is
made, that the delinquency experience with respect to the Mortgage Loans will
be similar to that reflected in the table below, nor is any representation
made as to the rate at which losses may be experienced on liquidation of
defaulted Mortgage Loans.
The following table sets forth the delinquency and foreclosure experience
by number of conventional residential mortgage loans funded and serviced by
Norwest and as a percentage of all such mortgage loans, as of the dates
indicated.
DELINQUENCY AND FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------------------------------
1992 1993 1994 1995
----------------------- ----------------------- ----------------------- -----------------------
Delin- Delin- Delin- Delin-
Loans quency % Loans quency % Loans quency % Loans quency %
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio Serviced 146,906 266,346 391,838 555,855
Period of Delinquency
30 to 59 days ........ 1,423 0.97% 2,275 0.86% 5,271 1.34% 8,397 1.51%
60 to 89 days ........ 255 0.17% 355 0.13% 924 0.24% 1,653 0.30%
90 days or more ...... 126 0.09% 209 0.08% 778 0.20% 1,476 0.26%
========= ========== ========= ========== ========= ========== ========= ==========
Total Delinquent Loans . 1,804 1.23% 2,839 1.07% 6,973 1.78% 11,526 2.07%
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Foreclosed Loans ....... 696 0.47% 833 0.31% 1,717 0.44% 2,312 0.42%
</TABLE>
The following table presents, for the portfolio of conventional loans
serviced by Norwest, the net losses by dollar amount and as a percentage of
the principal amount of such portfolio on the disposition of properties
acquired in foreclosure or by deed-in-lieu of foreclosure during the periods
indicated.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------
1992 1993 1994 1995
------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total conventional portfolio principal amount .. $11,644,708 $23,911,322 $35,812,884 $54,275,082
Net losses ..................................... $1,689 $2,647 $2,693 $4,769
Net losses as a percentage of total conventional
portfolio principal amount .................... 0.015% 0.011% 0.008% 0.009%
</TABLE>
S-35
<PAGE>
The above delinquency, foreclosure and loss statistics represent the
recent experience of Norwest. There can be no assurance, however, that the
delinquency experience on the Mortgage Loans will be comparable. In addition,
the foregoing statistics include mortgage loans with a variety of payment and
other characteristics that may not correspond to those of the Mortgage Loans.
Further, the Mortgage Loans were not chosen from Norwest's portfolio on the
basis of any methodology which could or would make them representative of the
total pool of mortgage loans in Norwest's portfolio. The actual loss and
delinquency experience on the Mortgage Loans will depend, among other things,
upon the value of the real estate securing such Mortgage Loans and the
ability of the mortgagors to make required payments. If Norwest undertakes
litigation or retains outside attorneys or investigators the costs thereof
will be borne by the Trust Fund or the Certificateholders. Norwest will not
be required to advance funds for the conduct of such litigation or the hiring
of such outside attorneys or investigators, if it reasonably believes that
such advances will not be promptly reimbursed. See "SERVICING OF THE MORTGAGE
LOANS -- Advances" herein.
The likelihood that a mortgagor will become delinquent in the payment of
his or her mortgage loan and the rate of any subsequent foreclosures may be
affected by a number of factors related to a borrower's personal
circumstances, including, but not limited to, unemployment or change in
employment (or in the case of self- employed mortgagors or mortgagors relying
on commission income, fluctuations in income), marital separation and the
mortgagor's equity in the related mortgaged property. In addition,
delinquency and foreclosure experience may be sensitive to adverse economic
conditions, either nationally or regionally, may exhibit seasonal variations
and may be influenced by the level of interest rates and servicing decisions
on the applicable mortgage loans. Regional economic conditions (including
declining real estate values) may particularly affect delinquency and
foreclosure experience on mortgage loans to the extent that mortgaged
properties are concentrated in certain geographic areas.
SERVICING OF MORTGAGE LOANS
The Mortgage Loans will be serviced by Norwest, as servicer (the
"Servicer"), in accordance with the procedures as described generally in the
Prospectus under the heading "Servicing Of Loans." References in the
Prospectus to the "Master Servicer" generally include the Servicer;
references in the Prospectus to the "Servicer" generally include the
subservicers. Although the Servicer will employ various subservicers to
directly service the Mortgage Loans, the Servicer will remain liable for any
servicing obligations under the Servicing Agreement as if the Servicer alone
were servicing the Mortgage Loans. The Servicer will be required to take all
action necessary to present claims under any insurance policies to the
applicable insurer on behalf of the Trustee and the Certificateholders. The
Servicer may not assign its obligations under the Servicing Agreement.
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a
bond, corporate guaranty or similar form of insurance coverage (which may
provide blanket coverage), or any combination thereof, insuring against loss
occasioned by the errors and omissions of the Servicer's officers and
employees.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly servicing fee with respect to each
Mortgage Loan calculated as a fixed percentage ranging from 0.25% to 0.30%
per annum (the "Servicing Fee Rate") on the Scheduled Principal Balance of
each Mortgage Loan (the "Servicing Fee"). The weighted average of the
Servicing Fee Rates on the Mortgage Loans as of the Cut-off Date was
approximately 0.255% per annum. The Servicing Fee is subject to reduction on
any Distribution Date as described below in "-- Prepayment Interest
Shortfalls."
The Servicer will also be entitled to receive, as additional compensation,
any interest or other income earned on funds it has deposited in a custodial
account pending remittance to the Trustee, as well as certain customary fees
and charges paid by borrowers. See "SERVICING OF LOANS -- Servicing
Compensation and Payment of Expenses" in the Prospectus for information
regarding other possible compensation to the Servicer and for information
regarding expenses payable by the Servicer. The Servicer is obligated to pay
certain ongoing expenses associated with the Mortgage Loans and incurred by
it.
S-36
<PAGE>
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full between Due Dates, the
mortgagor pays interest on the amount prepaid only from the last scheduled
Due Date to the date of prepayment, with a resulting reduction in interest
payable for the month during which the partial prepayment is made. The
difference between the interest required to be paid by the mortgagor upon a
prepayment in full or in part and a full month's interest at the Net Mortgage
Rate will be paid by the Servicer, to the extent that such amount does not
exceed the aggregate of its Servicing Fees on the Mortgage Loans for the
applicable month, through a reduction in the amount of such Servicing Fees.
ADVANCES
The Servicer will be obligated to make Advances with respect to delinquent
payments of principal of and interest on the Mortgage Loans, adjusted to the
related Mortgage Rate less the Servicing Fee Rate, to the extent that such
Advances, in its judgment, are reasonably recoverable from future payments
and collections, insurance payments or proceeds of liquidation of a Mortgage
Loan. The Trustee will be obligated to make any required Advance, if the
Servicer fails in its obligation to do so, to the extent provided in the
Trust Agreement. The Servicer or the Trustee, as applicable, will be entitled
to recover any Advances made with respect to a Mortgage Loan out of late
payments thereon or out of Liquidation Proceeds and Insurance Proceeds or, if
such amounts are insufficient, from collections on other Mortgage Loans. Such
reimbursements may result in Realized Losses.
The purpose of making such Advances is to maintain a regular cash flow to
the Certificateholders, rather than to guarantee or insure against losses.
The Servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on Mortgage Loans due to
reductions made by a bankruptcy court in the amount of a Scheduled Payment
owed by a mortgagor or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended, or similar legislation or regulations. Any
failure by the Servicer to make an Advance as required under the Servicing
Agreement will constitute an Event of Default thereunder (as defined
therein), in which case the Trustee, as successor Servicer, will be obligated
to make any such Advance, in accordance with the terms of the Trust
Agreement.
COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS
The Servicer may require that escrow accounts be maintained for the
collection of hazard insurance premiums and real estate taxes with respect to
the Mortgage Loans. The Servicer shall make advances with respect to
delinquencies in required escrow payments by the related mortgagors.
VOTING RIGHTS
Voting rights under the Trust Agreement will be allocated among the
Certificates in proportion to their respective Certificate Principal Amounts;
voting rights will be allocated to the Class AX Certificates as provided in
the Trust Agreement. Financial Security generally will be entitled to
exercise certain voting rights of Class A3 Certificateholders without their
consent, and such Certificateholders may exercise such rights only with the
prior written consent of Financial Security. See "THE CLASS A3 CERTIFICATE
INSURANCE POLICY" herein.
TRUST AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Trust Agreement (the "Trust
Agreement") dated as of April 1, 1996 between the Depositor and The Chase
Manhattan Bank, N.A., as Trustee. Reference is made to the Prospectus for
important information in addition to that set forth herein regarding the
terms and conditions of the Trust Agreement and the Offered Certificates.
Notwithstanding anything to the contrary in the Prospectus, the Mortgage
Loans will not be assigned Asset Values and the provisions described therein
under "THE TRUST AGREEMENTS -- Deficiency Event" will not apply. Offered
Certificates in certificated form will be transferable and exchangeable at
the corporate trust office of the Trustee, which will serve as Certificate
S-37
<PAGE>
Registrar and Paying Agent. The Depositor will provide to a prospective or
actual Certificateholder, without charge, on written request, a copy (without
exhibits) of the Trust Agreement. Requests should be addressed to John P.
Graham, Lehman Brothers, 3 World Financial Center, New York, New York 10285.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned to the Trustee, together with all
principal and interest due on the Mortgage Loans after the Cut-off Date. The
Trustee will, concurrently with such assignment, authenticate and deliver the
Certificates. Each Mortgage Loan will be identified in a schedule appearing
as an exhibit to the Trust Agreement which will specify with respect to each
Mortgage Loan, among other things, the original principal amount and the
outstanding principal amount as of the close of business on the Cut-off Date,
the Scheduled Payment, and the maturity date.
As to each Mortgage Loan, the following documents are generally required
to be delivered to the Trustee (or its custodian) in accordance with the
Trust Agreement: (i) the related original Mortgage Note endorsed without
recourse to the Trustee, (ii) the original Mortgage with evidence of
recording indicated thereon, (or, if such original recorded Mortgage has not
yet been returned by the recording office, a copy thereof certified by the
Servicer to be a true and complete copy of such Mortgage sent for recording),
(iii) an original assignment of the Mortgage to the Trustee in recordable
form, (iv) the policies of title insurance issued with respect to each
Mortgage Loan, and (v) the originals of any assumption, modification,
extension or guaranty agreements. The assignments to the Trustee in
connection with each Mortgage Loan are required to be submitted for recording
promptly after the Closing Date. The Trustee will review each Mortgage File
within 45 days of the Closing Date, and if any such document is found to be
defective in any material respect and the Depositor does not cure such defect
within 90 days of notice thereof from the Trustee, the Depositor will be
obligated to purchase the related Mortgage Loan from the Trust Fund (or, in
certain circumstances, substitute another mortgage loan) within such 90 days.
Pursuant to the terms of the Trust Agreement, the Depositor will make to
the Trustee for the benefit of the holders of the Certificates certain
representations and warranties concerning the Mortgage Loans. These
representations and warranties with respect to the Mortgage Loans are
generally similar to the representations and warranties summarized in the
Prospectus under the caption "LOAN UNDERWRITING PROCEDURES AND STANDARDS --
Representations and Warranties." Upon discovery by the Depositor or the
Trustee of a breach of any representation, warranty or covenant which
materially and adversely affects the interests of the Certificateholders in a
Mortgage Loan, the Trustee will promptly notify the Depositor or the Trustee,
as applicable. The Depositor will have 90 days from its discovery or its
receipt of such notice to cure such breach or repurchase the Mortgage Loan
from the Trust Fund for a price equal to the unpaid principal balance thereof
plus accrued interest thereon (or, in certain circumstances, substitute
another Mortgage Loan).
Neither the Trustee nor any of its affiliates will make any
representations or warranties with respect to the Mortgage Loans, or have any
obligation to purchase a Mortgage Loan if the Depositor defaults on its
obligation to repurchase a Mortgage Loan either in connection with a breach
of a representation and warranty or in connection with a defective document
as described above, and no assurance can be given that the Depositor will
carry out such obligations with respect to the Mortgage Loans. To the extent
any such Mortgage Loan is not repurchased by the Depositor and Realized
Losses occur on such Mortgage Loan, Holders of Offered Certificates may incur
losses.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
GENERAL
The yields to maturity on the Certificates will be affected by the rate of
principal payments on the Mortgage Loans (including, for this purpose,
prepayments, which may include amounts received by virtue of condemnation,
insurance or foreclosure). The rate of principal payments on the Certificates
will correspond to the rate of principal payments on the Mortgage Loans.
Principal prepayments may be influenced by a variety of economic, geographic,
demographic, social, tax, legal and other factors. In general, if prevailing
interest rates fall significantly below the interest rates on the Mortgage
S-38
<PAGE>
Loans, the Mortgage Loans are likely to be subject to higher prepayments than
if prevailing rates remain at or above the interest rates on such Mortgage
Loans. Conversely, if prevailing interest rates rise above the interest rates on
such Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include changes in borrowers'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties, changes in the value of the mortgaged properties, mortgage
market interest rates and servicing decisions. All the Mortgage Loans may be
prepaid at any time without penalty (except for prepayments during an initial
period, as described herein, in the case of certain loans) and generally have
due-on-sale clauses.
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by, among other things, the rate and
timing of principal payments on the Mortgage Loans as described above and the
amount and timing of mortgagor defaults resulting in Realized Losses,
including Fraud Losses and Bankruptcy Losses. Such yields may be adversely
affected by a higher or lower than anticipated rate of principal payments on
the Mortgage Loans. The rate of principal payments on such Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans,
the rate and timing of prepayments thereon by the mortgagors, liquidations of
defaulted Mortgage Loans and repurchases of Mortgage Loans due to certain
breaches of representations. The timing of changes in the rate of
prepayments, liquidations, accruals and repurchases of the Mortgage Loans
may, and the timing of such Realized Losses will, significantly affect the
yield to an investor, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. Since the
rate and timing of principal payments on the Mortgage Loans will depend on
future events and on a variety of factors (as described more fully herein and
in the Prospectus under "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS"), no
assurance can be given as to such rate or the timing of principal prepayments
on the Offered Certificates.
As described under "DESCRIPTION OF THE CERTIFICATES" herein, the entire
amount of the applicable Non-AP Percentage of principal prepayments on the
Mortgage Loans will be allocated to the Group 1 Senior Certificates during
the first five years following the Closing Date (except under the
circumstance described herein).
The effective yield to holders of the Offered Certificates will be lower
than the yield otherwise produced by the related Certificate Interest Rate
and purchase price because monthly distributions will not be payable to such
holders until the 25th day (or the immediately following business day if such
25th day is not a business day) of the month following the month in which
interest accrues on the Mortgage Loans (without any additional distribution
of interest or earnings thereon in respect of such delay).
The yields on the Certificates will also be reduced to the extent that Net
Prepayment Interest Shortfalls are experienced on the Mortgage Loans.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions to holders of the Certificates of principal amounts
that would otherwise be distributed over the remaining terms of the Mortgage
Loans. The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults
on mortgage loans are expected to occur with greater frequency in their early
years.
If the purchaser of a Certificate offered at a discount from its initial
principal amount, particularly a Class A4 or Class AP Certificate, calculates
its anticipated yield to maturity based on an assumed rate of payment of
principal that is faster than that actually experienced on the related
Mortgage Loans, the actual yield to maturity may be lower than that so
calculated. Conversely, if the purchaser of a Certificate offered at a
premium, particularly a Class AX Certificate, calculates its anticipated
yield to maturity based on an assumed rate of payment of principal that is
slower than that actually experienced on the related Mortgage Loans, the
actual yield to maturity may be lower than that so calculated. Investors in
the Class AX Certificates should consider the risk that a rapid rate of
principal payments on the Mortgage Loans could result in the failure of such
investors to recover their initial investments.
The timing of changes in the rate of prepayments on the related Mortgage
Loans may significantly affect an investor's actual yield to maturity, even
if the average rate of principal payments is consistent with an investor's
expectation. In general, the earlier a prepayment of principal of the related
S-39
<PAGE>
Mortgage Loans, the greater the effect on an investor's yield to maturity.
The effect on an investor's yield of principal payments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificate may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
Distributions of principal on the Class A3 Certificates are subject to the
procedures regarding requests for distribution and random lot distribution
described herein under "DESCRIPTION OF THE CERTIFICATES--Distributions in
Reduction of the Class A3 Certificates." The allocation of principal
distributions in respect of any particular Class A3 Certificate may result in
a yield to maturity that varies significantly from the anticipated yield, and
such yields will vary among holders of Class A3 Certificates. The Class A3
Certificates may not be an appropriate investment for any investor who
requires a distribution of a particular amount of principal on a
predetermined date or requires an otherwise predictable stream of principal
distributions. Investors in the Class A3 Certificates should consider that
there may be no amounts available for distributions of principal on such
Certificates before May of 1999, and that for some period of time after such
date there may be less than $30,000 available for distributions of principal
on the Class A3 Certificates on each Distribution Date.
SENSITIVITY OF THE CLASS AX, CLASS A4 AND CLASS AP CERTIFICATES
The yield to investors in the Class AX Certificates will be highly
sensitive to the rate of principal payments, including prepayments, on the
Premium Mortgage Loans. Investors in the Class AX Certificates should
consider the associated risks, including the risk that rapid rates of
principal payment could result in the failure of such investors to recover
their initial investments. In particular, investors in the Class AX
Certificates should consider that the Premium Mortgage Loans have higher
Mortgage Rates than the other Mortgage Loans, and therefore may prepay at a
faster rate.
The yields to investors in the Class A4 and Class AP Certificates will
also be very sensitive to the rate of principal payments, including
prepayments, on the Mortgage Loans as a group, in the case of the Class A4
Certificates, and on the Discount Mortgage Loans, in the case of the Class AP
Certificates. Investors in the Class A4 and Class AP Certificates should
consider the risk that slower than anticipated rates of principal payment on
the related Mortgage Loans could result in actual yields that are
significantly lower than the anticipated yields. In particular, investors in
the Class AP Certificates should consider that the Discount Mortgage Loans
have lower Mortgage Rates than the other Mortgage Loans, and therefore may
prepay at a slower rate.
To illustrate the significance of prepayments on the yields on the Class
AX, Class A4 and Class AP Certificates, the following tables indicate the
pre-tax yields to maturity (on a corporate bond equivalent basis) and
weighted average lives under the specified assumptions at the constant
percentages of the prepayment assumption ("PSA", as described below) shown.
The yields shown were calculated by determining the monthly discount rates
that, when applied to the assumed streams of cash flows to be paid on the
applicable Class of Certificates, would cause the discounted present value of
such assumed streams of cash flows to equal the assumed aggregate purchase
price of such Class and converting such monthly rates to corporate bond
equivalent rates. Such calculations do not take into account variations that
may occur in the interest rates at which investors may be able to reinvest
funds received by them as distributions on such Certificates and consequently
do not purport to reflect the return on any investment in any such Class of
Certificates when such reinvestment rates are considered. The weighted
average lives shown were determined by (i) multiplying the net reduction, if
any, of the Certificate Principal Amount (or Notional Amount) by the number
of years from the date of issuance of the applicable Class of Certificates to
the related Distribution Date, (ii) adding the results and (iii) dividing the
sum by the aggregate of the net reductions of Certificate Principal Amount
(or Notional Amount) described in clause (i) above. It is unlikely that the
Mortgage Loans will prepay at any of the assumed constant rates shown or at
any other constant rate until maturity. The timing of changes in the rate of
prepayments may significantly affect the actual yields to maturity and
weighted average lives, even if the average rate of principal prepayments is
consistent with an investor's expectation.
Each of the following tables was prepared on the basis of the actual
characteristics of the Mortgage Loans, the assumptions set forth under
"--Weighted Average Life" below and the additional assumptions that (i) the
assumed purchase price, exclusive of accrued interest in the case of the
Class AX Certificates (expressed as a percentage of the applicable
Certificate Principal Balance or Notional Balance) for each Class of
Certificates is as set forth below and (ii) in the case of the Class AX
Certificates, the initial Notional Amount and Certificate Interest Rate of
such Class is as indicated on the cover page hereof.
S-40
<PAGE>
PRE-TAX YIELD* TO MATURITY OF THE CLASS AX CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 1.45997%)
<TABLE>
<CAPTION>
Percentage of PSA
--------------------------------------------------------------------------
0% 100% 175% 225% 300% 450% 600%
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield* ......... 33.48% 28.29% 24.34% 21.68% 17.64% 9.39% 0.92%
Weighted Average
Life in Years . 20.0 11.6 8.4 7.1 5.7 4.1 3.2
</TABLE>
- ------
*Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS A4 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 35.00%)
<TABLE>
<CAPTION>
Percentages of PSA
------------------------------------------------------------------------
0% 100% 175% 225% 300% 450% 600%
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield* ......... 4.51% 5.11% 6.51% 7.97% 11.06% 19.48% 26.31%
Weighted Average
Life in Years . 24.9 21.9 17.3 14.3 10.5 5.7 4.3
</TABLE>
- ------
*Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS AP CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 60.00%)
<TABLE>
<CAPTION>
Percentages of PSA
------------------------------------------------------------------------
0% 100% 175% 225% 300% 450% 600%
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield* ......... 2.81% 5.36% 7.67% 9.29% 11.73% 16.53% 21.23%
Weighted Average
Life in Years . 19.2 11.1 8.1 6.7 5.4 3.8 3.0
</TABLE>
- ------
*Corporate bond equivalent basis
The Mortgage Loans may not have the characteristics assumed for purposes
of the tables above, and there can be no assurance that the Mortgage Loans
will prepay at any of the constant rates assumed, that the actual pre-tax
yields to maturity and weighted average lives for the Class AX, Class A4 and
Class AP Certificates will correspond to any of the calculated yields and
weighted average lives shown herein, or that the purchase prices of such
Certificates will be as assumed. Each investor should make its own
determination as to the appropriate assumptions to be used and factors to be
considered in deciding whether to purchase a Class AX, Class A4 or Class AP
Certificate.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a constant
prepayment standard or model. The model used in this Prospectus Supplement
for the Mortgage Loans ("PSA") represents an assumed standard 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. PSA does not
purport to be either a historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of
prepayment of any mortgage loans, including the Mortgage Loans to be included
in the Trust Fund.
S-41
<PAGE>
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is highly unlikely that the Mortgage Loans will
prepay at a constant rate until maturity or that all of the Mortgage Loans
will prepay at the same rate. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the tables at the various percentages of PSA
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Amounts outstanding over time and the weighted average
lives of the Offered Certificates.
The following tables were prepared based on the actual characteristics of
the Mortgage Loans and further assuming that: (i) the Certificate Principal
Balances and the Certificate Interest Rates are as indicated on the cover of
this Prospectus Supplement; (ii) each Scheduled Payment of principal and
interest is timely received every month on the first day of each month
commencing in May 1996; (iii) principal prepayments are received in full on
the last day of each month commencing in April 1, 1996 and there are no
Prepayment Interest Shortfalls; (iv) there are no defaults or delinquencies
on the Mortgage Loans; (v) there are no repurchases or substitutions of the
Mortgage Loans; (vi) there is no optional termination of the Trust Fund;
(vii) the Certificates are issued on April 25, 1996; (viii) none of the
Mortgage Loans have prepayment penalties and (ix) no amounts are withdrawn
from or deposited into the Rounding Account on any date.
If the actual characteristics of the Mortgage Loans included in the
Mortgage Pool differ from those used in calculating the percentages set forth
in the tables, the actual Certificate Principal Amount of each Class of
Certificates outstanding at any time and the actual weighted average life of
each Class of Certificates will differ (which difference could be material)
from the corresponding information in the tables for each indicated
percentage of PSA.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of the Offered Certificates and set forth
the percentages of the initial Certificate Principal Amount of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of PSA.
S-42
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class A1 Certificates
----------------------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ------------------ -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ................. 100% 100% 100% 100% 100% 100% 100%
April 1997 ......................... 99 96 93 92 90 85 80
April 1998 ......................... 97 88 80 76 69 55 43
April 1999 ......................... 96 77 64 55 43 22 2
April 2000 ......................... 94 67 49 38 23 0 0
April 2001 ......................... 93 58 36 23 6 0 0
April 2002 ......................... 91 50 25 11 0 0 0
April 2003 ......................... 90 43 16 2 0 0 0
April 2004 ......................... 88 36 9 0 0 0 0
April 2005 ......................... 86 30 3 0 0 0 0
April 2006 ......................... 83 25 0 0 0 0 0
April 2007 ......................... 81 20 0 0 0 0 0
April 2008 ......................... 78 15 0 0 0 0 0
April 2009 ......................... 75 11 0 0 0 0 0
April 2010 ......................... 72 7 0 0 0 0 0
April 2011 ......................... 68 3 0 0 0 0 0
April 2012 ......................... 64 0 0 0 0 0 0
April 2013 ......................... 60 0 0 0 0 0 0
April 2014 ......................... 55 0 0 0 0 0 0
April 2015 ......................... 50 0 0 0 0 0 0
April 2016 ......................... 45 0 0 0 0 0 0
April 2017 ......................... 39 0 0 0 0 0 0
April 2018 ......................... 33 0 0 0 0 0 0
April 2019 ......................... 27 0 0 0 0 0 0
April 2020 ......................... 20 0 0 0 0 0 0
April 2021 ......................... 12 0 0 0 0 0 0
April 2022 ......................... 3 0 0 0 0 0 0
April 2023 ......................... 0 0 0 0 0 0 0
April 2024 ......................... 0 0 0 0 0 0 0
April 2025 ......................... 0 0 0 0 0 0 0
April 2026 ......................... 0 0 0 0 0 0 0
---- --- --- --- --- --- ---
Weighted Average Life in Years** ... 17.5 6.8 4.3 3.5 2.8 2.2 1.8
==== === === === === === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-43
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class A2 Certificates
--------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ............. 100% 100% 100% 100% 100% 100% 100%
April 1997 ..................... 100 100 100 100 100 100 100
April 1998 ..................... 100 100 100 100 100 100 100
April 1999 ..................... 100 100 100 100 100 100 100
April 2000 ..................... 100 100 100 100 100 76 0
April 2001 ..................... 100 100 100 100 100 0 0
April 2002 ..................... 100 100 100 100 54 0 0
April 2003 ..................... 100 100 100 100 0 0 0
April 2004 ..................... 100 100 100 60 0 0 0
April 2005 ..................... 100 100 100 20 0 0 0
April 2006 ..................... 100 100 83 0 0 0 0
April 2007 ..................... 100 100 51 0 0 0 0
April 2008 ..................... 100 100 23 0 0 0 0
April 2009 ..................... 100 100 0 0 0 0 0
April 2010 ..................... 100 100 0 0 0 0 0
April 2011 ..................... 100 100 0 0 0 0 0
April 2012 ..................... 100 95 0 0 0 0 0
April 2013 ..................... 100 70 0 0 0 0 0
April 2014 ..................... 100 47 0 0 0 0 0
April 2015 ..................... 100 25 0 0 0 0 0
April 2016 ..................... 100 4 0 0 0 0 0
April 2017 ..................... 100 0 0 0 0 0 0
April 2018 ..................... 100 0 0 0 0 0 0
April 2019 ..................... 100 0 0 0 0 0 0
April 2020 ..................... 100 0 0 0 0 0 0
April 2021 ..................... 100 0 0 0 0 0 0
April 2022 ..................... 100 0 0 0 0 0 0
April 2023 ..................... 61 0 0 0 0 0 0
April 2024 ..................... 0 0 0 0 0 0 0
April 2025 ..................... 0 0 0 0 0 0 0
April 2026 ..................... 0 0 0 0 0 0 0
---- ---- ---- --- --- --- ---
Weighted Average Life in Years** 27.2 18.0 11.1 8.4 6.1 4.2 3.4
==== ==== ==== === === === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-44
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class A3 Certificates***
--------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ............. 100% 100% 100% 100% 100% 100% 100%
April 1997 ..................... 100 100 100 100 100 100 100
April 1998 ..................... 100 100 100 100 100 100 100
April 1999 ..................... 100 100 100 100 100 100 100
April 2000 ..................... 99 99 99 99 99 99 63
April 2001 ..................... 98 98 98 98 98 71 4
April 2002 ..................... 96 96 96 96 96 33 0
April 2003 ..................... 95 95 95 95 90 11 0
April 2004 ..................... 94 94 94 94 67 * 0
April 2005 ..................... 93 93 93 93 51 0 0
April 2006 ..................... 92 92 92 87 41 0 0
April 2007 ..................... 90 90 90 74 33 0 0
April 2008 ..................... 89 89 89 62 26 0 0
April 2009 ..................... 88 88 87 52 21 0 0
April 2010 ..................... 87 87 76 44 17 0 0
April 2011 ..................... 86 86 65 36 13 0 0
April 2012 ..................... 84 84 56 30 10 0 0
April 2013 ..................... 83 83 48 25 8 0 0
April 2014 ..................... 82 82 41 21 6 0 0
April 2015 ..................... 81 81 34 17 5 0 0
April 2016 ..................... 80 80 29 14 4 0 0
April 2017 ..................... 78 71 24 11 3 0 0
April 2018 ..................... 77 61 20 9 2 0 0
April 2019 ..................... 76 52 16 7 2 0 0
April 2020 ..................... 75 43 12 5 1 0 0
April 2021 ..................... 74 34 9 4 1 0 0
April 2022 ..................... 72 26 7 3 1 0 0
April 2023 ..................... 71 19 5 2 * 0 0
April 2024 ..................... 68 12 3 1 * 0 0
April 2025 ..................... 33 5 1 * * 0 0
April 2026 ..................... 0 0 0 0 0 0 0
---- ---- ---- ---- ---- --- ---
Weighted Average Life in Years** 24.9 21.9 17.3 14.3 10.5 5.7 4.3
==== ==== ==== ==== ==== === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal
Amount by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
*** The weighted average lives shown above apply to the Class A3 Certificates
as a whole and, because principal distributions on the Class A3
Certificates will be made on the basis of requests for distributions and
by random lot, such weighted average lives are not likely to reflect the
experience of any particular investor.
S-45
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class A4 Certificates
--------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ............. 100% 100% 100% 100% 100% 100% 100%
April 1997 ..................... 100 100 100 100 100 100 100
April 1998 ..................... 100 100 100 100 100 100 100
April 1999 ..................... 100 100 100 100 100 100 100
April 2000 ..................... 99 99 99 99 99 99 63
April 2001 ..................... 98 98 98 98 98 71 4
April 2002 ..................... 96 96 96 96 96 33 0
April 2003 ..................... 95 95 95 95 90 11 0
April 2004 ..................... 94 94 94 94 67 * 0
April 2005 ..................... 93 93 93 93 51 0 0
April 2006 ..................... 92 92 92 87 41 0 0
April 2007 ..................... 90 90 90 74 33 0 0
April 2008 ..................... 89 89 89 62 26 0 0
April 2009 ..................... 88 88 87 52 21 0 0
April 2010 ..................... 87 87 76 44 17 0 0
April 2011 ..................... 86 86 65 36 13 0 0
April 2012 ..................... 84 84 56 30 10 0 0
April 2013 ..................... 83 83 48 25 8 0 0
April 2014 ..................... 82 82 41 21 6 0 0
April 2015 ..................... 81 81 34 17 5 0 0
April 2016 ..................... 80 80 29 14 4 0 0
April 2017 ..................... 78 71 24 11 3 0 0
April 2018 ..................... 77 61 20 9 2 0 0
April 2019 ..................... 76 52 16 7 2 0 0
April 2020 ..................... 75 43 12 5 1 0 0
April 2021 ..................... 74 34 9 4 1 0 0
April 2022 ..................... 72 26 7 3 1 0 0
April 2023 ..................... 71 19 5 2 * 0 0
April 2024 ..................... 68 12 3 1 * 0 0
April 2025 ..................... 33 5 1 * * 0 0
April 2026 ..................... 0 0 0 0 0 0 0
--- ---- ---- ---- ---- --- ---
Weighted Average Life in Years** 24.9 21.9 17.3 14.3 10.5 5.7 4.3
==== ==== ==== ==== ==== === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-46
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class A5 Certificates
----------------------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ................. 100% 100% 100% 100% 100% 100% 100%
April 1997 ......................... 99 99 99 99 99 99 99
April 1998 ......................... 98 98 98 98 98 98 98
April 1999 ......................... 97 97 97 97 97 97 97
April 2000 ......................... 96 96 96 96 96 96 96
April 2001 ......................... 95 95 95 95 95 95 95
April 2002 ......................... 93 91 90 89 88 85 51
April 2003 ......................... 92 88 85 83 80 74 23
April 2004 ......................... 90 83 78 75 70 60 10
April 2005 ......................... 88 78 70 65 58 42 5
April 2006 ......................... 87 71 61 55 47 30 3
April 2007 ......................... 85 66 54 47 38 21 2
April 2008 ......................... 82 60 47 39 30 15 1
April 2009 ......................... 80 55 41 33 24 11 1
April 2010 ......................... 77 50 35 28 19 8 *
April 2011 ......................... 75 45 30 23 15 5 *
April 2012 ......................... 72 41 26 19 12 4 *
April 2013 ......................... 68 37 22 16 9 3 *
April 2014 ......................... 65 33 19 13 7 2 *
April 2015 ......................... 61 29 16 11 6 1 *
April 2016 ......................... 57 25 13 9 4 1 *
April 2017 ......................... 53 22 11 7 3 1 *
April 2018 ......................... 48 19 9 5 2 * *
April 2019 ......................... 43 16 7 4 2 * *
April 2020 ......................... 38 13 6 3 1 * *
April 2021 ......................... 32 11 4 2 1 * *
April 2022 ......................... 26 8 3 2 1 * *
April 2023 ......................... 20 6 2 1 * * *
April 2024 ......................... 13 4 1 1 * * *
April 2025 ......................... 6 2 1 * * * *
April 2026 ......................... 0 0 0 0 0 0 0
---- ---- ---- ---- ---- --- ---
Weighted Average Life in Years** ... 19.9 14.9 12.7 11.7 10.5 9.0 6.3
==== ==== ==== ==== ==== === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-47
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class AP Certificates
----------------------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ................. 100% 100% 100% 100% 100% 100% 100%
April 1997 ......................... 99 96 94 92 90 86 82
April 1998 ......................... 98 91 85 82 77 68 59
April 1999 ......................... 96 84 76 70 63 49 38
April 2000 ......................... 95 78 67 60 51 35 24
April 2001 ......................... 94 72 59 51 41 25 15
April 2002 ......................... 92 67 52 43 33 18 9
April 2003 ......................... 90 62 45 37 27 13 6
April 2004 ......................... 89 57 40 31 21 9 4
April 2005 ......................... 87 52 35 26 17 7 2
April 2006 ......................... 85 48 31 22 14 5 1
April 2007 ......................... 82 44 27 19 11 3 1
April 2008 ......................... 80 40 23 16 9 2 1
April 2009 ......................... 77 36 20 13 7 2 *
April 2010 ......................... 75 33 17 11 5 1 *
April 2011 ......................... 72 30 15 9 4 1 *
April 2012 ......................... 68 27 13 8 3 1 *
April 2013 ......................... 65 24 11 6 3 * *
April 2014 ......................... 61 21 9 5 2 * *
April 2015 ......................... 57 19 8 4 2 * *
April 2016 ......................... 53 16 6 3 1 * *
April 2017 ......................... 49 14 5 3 1 * *
April 2018 ......................... 44 12 4 2 1 * *
April 2019 ......................... 39 10 3 2 * * *
April 2020 ......................... 34 8 3 1 * * *
April 2021 ......................... 28 6 2 1 * * *
April 2022 ......................... 22 5 1 1 * * *
April 2023 ......................... 16 3 1 * * * *
April 2024 ......................... 10 2 * * * * *
April 2025 ......................... 5 1 * * * * *
April 2026 ......................... 0 0 0 0 0 0 0
---- ---- --- --- --- --- ---
Weighted Average Life in Years** ... 19.2 11.1 8.1 6.7 5.4 3.8 3.0
==== ==== === === === === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-48
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class R Certificate
--------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ............. 100% 100% 100% 100% 100% 100% 100%
April 1997 ..................... 100 100 100 100 100 100 100
April 1998 ..................... 100 100 100 100 100 100 100
April 1999 ..................... 100 100 100 100 100 100 100
April 2000 ..................... 100 100 100 100 100 100 100
April 2001 ..................... 100 100 100 100 100 100 100
April 2002 ..................... 100 100 100 100 100 100 0
April 2003 ..................... 100 100 100 100 100 100 0
April 2004 ..................... 100 100 100 100 100 100 0
April 2005 ..................... 100 100 100 100 100 0 0
April 2006 ..................... 100 100 100 100 100 0 0
April 2007 ..................... 100 100 100 100 100 0 0
April 2008 ..................... 100 100 100 100 100 0 0
April 2009 ..................... 100 100 100 100 100 0 0
April 2010 ..................... 100 100 100 100 100 0 0
April 2011 ..................... 100 100 100 100 100 0 0
April 2012 ..................... 100 100 100 100 100 0 0
April 2013 ..................... 100 100 100 100 100 0 0
April 2014 ..................... 100 100 100 100 100 0 0
April 2015 ..................... 100 100 100 100 100 0 0
April 2016 ..................... 100 100 100 100 100 0 0
April 2017 ..................... 100 100 100 100 100 0 0
April 2018 ..................... 100 100 100 100 100 0 0
April 2019 ..................... 100 100 100 100 100 0 0
April 2020 ..................... 100 100 100 100 100 0 0
April 2021 ..................... 100 100 100 100 100 0 0
April 2022 ..................... 100 100 100 100 100 0 0
April 2023 ..................... 100 100 100 100 100 0 0
April 2024 ..................... 100 100 100 100 100 0 0
April 2025 ..................... 100 100 100 100 100 0 0
April 2026 ..................... 0 0 0 0 0 0 0
---- ---- ---- ---- ---- --- ---
Weighted Average Life in Years** 30.0 30.0 30.0 30.0 30.0 8.1 5.2
==== ==== ==== ==== ==== === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-49
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class M, Class B1, and Class B2 Certificates
----------------------------------------------------------------------------
Distribution Date 0% 100% 175% 225% 300% 450% 600%
- ----------------- -- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ................. 100% 100% 100% 100% 100% 100% 100%
April 1997 ......................... 99 99 99 99 99 99 99
April 1998 ......................... 98 98 98 98 98 98 98
April 1999 ......................... 97 97 97 97 97 97 97
April 2000 ......................... 96 96 96 96 96 96 96
April 2001 ......................... 95 95 95 95 95 95 95
April 2002 ......................... 93 91 90 89 88 85 81
April 2003 ......................... 92 88 85 83 80 74 67
April 2004 ......................... 90 83 78 75 70 60 50
April 2005 ......................... 88 78 70 65 58 46 34
April 2006 ......................... 87 71 61 55 47 33 22
April 2007 ......................... 85 66 54 47 38 23 13
April 2008 ......................... 82 60 47 39 30 17 8
April 2009 ......................... 80 55 41 33 24 12 5
April 2010 ......................... 77 50 35 28 19 8 3
April 2011 ......................... 75 45 30 23 15 6 2
April 2012 ......................... 72 41 26 19 12 4 1
April 2013 ......................... 68 37 22 16 9 3 1
April 2014 ......................... 65 33 19 13 7 2 *
April 2015 ......................... 61 29 16 11 6 1 *
April 2016 ......................... 57 25 13 9 4 1 *
April 2017 ......................... 53 22 11 7 3 1 *
April 2018 ......................... 48 19 9 5 2 * *
April 2019 ......................... 43 16 7 4 2 * *
April 2020 ......................... 38 13 6 3 1 * *
April 2021 ......................... 32 11 4 2 1 * *
April 2022 ......................... 26 8 3 2 1 * *
April 2023 ......................... 20 6 2 1 * * *
April 2024 ......................... 13 4 1 1 * * *
April 2025 ......................... 6 2 1 * * * *
April 2026 ......................... 0 0 0 0 0 0 0
---- ---- ---- ---- ---- --- ---
Weighted Average Life in Years** ... 19.9 14.9 12.7 11.7 10.5 9.1 8.3
==== ==== ==== ==== ==== === ===
</TABLE>
- ------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Certificate Principal Amount
by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate of the net reductions of
Certificate Principal Amount described in (i) above.
S-50
<PAGE>
THE CLASS A3 CERTIFICATE INSURANCE POLICY
THE FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the provisions of the financial guaranty
insurance policy to be issued by Financial Security (the "Class A3 Policy")
does not purport to be complete and is qualified in its entirety by reference
to the Class A3 Policy, a copy of which may be obtained from the Trustee upon
request. Simultaneously with the issuance of the Certificates, Financial
Security will deliver the Class A3 Policy to the Trustee for the benefit of
each holder of the Class A3 Certificates. Under the Class A3 Policy,
Financial Security unconditionally and irrevocably guarantees to the Trustee
for the benefit of each holder of the Class A3 Certificates the full and
complete payment on each Distribution Date of (i) the Accrued Certificate
Interest for the Class A3 Certificates for such Distribution Date including
any Net Prepayment Interest Shortfalls allocable to such Class of
Certificates on such Distribution Date, net of any amounts attributable to
the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended and (ii) the amount of any Realized Loss, including any Excess Loss,
allocated to the Class A3 Certificates on such Distribution Date
(collectively, the "Guaranteed Distributions"). In addition, Guaranteed
Distributions shall include the Class Certificate Balance of the Class A3
Certificates to the extent unpaid on the Last Scheduled Distribution Date or
earlier termination of the Trust Fund pursuant to the terms of the Trust
Agreement. In addition, the Class A3 Policy will cover the amount of any
payment of principal or interest to any holder of a Class A3 Certificate
which payment subsequently is avoided in whole or in part as a preference
payment under applicable law. THE CLASS A3 POLICY WILL NOT PROVIDE CREDIT
ENHANCEMENT FOR ANY CLASS OF CERTIFICATES OTHER THAN THE CLASS A3
CERTIFICATES.
If, by the close of business on the second Business Day before any
Distribution Date, the Trustee determines that funds expected to be in the
Certificate Account on such Distribution Date will be insufficient to make
the Guaranteed Distributions on the Class A3 Certificates for that
Distribution Date, the Trustee is required to make a claim under the Class A3
Policy on such Business Day in the amount of such deficiency. Payment of
claims under the Class A3 Policy will be made by Financial Security following
Receipt (as defined below) by Financial Security of the appropriate notice
for payment on the later to occur of (a) 12:00 noon, New York City time, on
the second Business Day following Receipt of such notice for payment and (b)
12:00 noon, New York City time, on the applicable Distribution Date.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made
under the Class A3 Policy, Financial Security shall cause such payment to be
made on the latter of (a) the date when due to be paid pursuant to the Order
referred to below or (b) the first to occur of (i) the fourth Business Day
following Receipt by Financial Security from the Trustee of (A) a certified
copy of the order (the "Order") of the court or other governmental body which
exercised jurisdiction to the effect that the relevant Class A3
Certificateholders are required to return principal or interest paid with
respect to such Certificates during the Term of the Class A3 Policy because
such payments were avoidable as preference payments under applicable
bankruptcy law, (B) a certificate of each relevant Class A3 Certificateholder
that the Order has been entered and is not subject to any stay and (C) an
assignment duly executed and delivered by each relevant Class A3
Certificateholder, in such form as is reasonably required by Financial
Security and provided to the relevant Certificateholder by Financial
Security, irrevocably assigning to Financial Security all rights and claims
of the Class A3 Certificateholder relating to or arising under the relevant
Class A3 Certificates held by such Certificateholder against the debtor that
made such preference payment or otherwise with respect to such preference
payment or (ii) the date of Receipt by Financial Security from the Trustee of
the items referred to in clauses (A), (B) and (C) of (i) above, if, at least
four Business Days prior to such date of Receipt, Financial Security shall
have Received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-
in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or any Class A3 Certificateholder directly (unless such
Certificateholder has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the
Order, in which case such payment shall be disbursed to the Trustee for
distribution to such Certificateholder upon proof of such payment reasonably
satisfactory to Financial Security). In connection with the foregoing,
Financial Security shall have certain rights of subrogation, as described in
the Trust Agreement.
The terms "Receipt" and "Received," with respect to the Class A3 Policy,
mean actual delivery to Financial Security and to Financial Security's fiscal
agent, if any, prior to 12:00 noon, New York City time, on a Business Day;
S-51
<PAGE>
delivery either on a day that is not a Business Day or after 12:00 noon, New
York City time, shall be deemed to be Received on the next succeeding Business
Day. If any notice or certificate given under the Class A3 Policy by the Trustee
is not in proper form or is not properly completed, executed or delivered, it
shall be deemed not to have been Received, and Financial Security or its fiscal
agent shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the City of New
York, New York are authorized or obligated by law or executive order to be
closed.
"Term of the Policy" means the period from and including the date of
issuance of the Class A3 Policy to and including the date on which (i) the
Class Certificate Balance of the Class A3 Certificates is zero, (ii) the
period during which any payment on the Class A3 Certificates could have been
avoided in whole or in part as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law has expired, and (iii) if
any proceedings requisite to avoidance as a preference payment have been
commenced prior to the occurrence of (i) and (ii), a final and nonappealable
order in resolution of each such proceeding has been entered.
Financial Security's obligations under the Class A3 Policy in respect of
the Guaranteed Distributions shall be discharged to the extent funds are
transferred to the Trustee as provided in the Class A3 Policy whether or not
such funds are properly applied by the Trustee.
Pursuant to the terms of the Trust Agreement, unless Financial Security
fails to make a required payment under the Class A3 Policy or in the event of
certain insolvency events of Financial Security as further described in the
Trust Agreement. Financial Security will be entitled to exercise the voting
rights of the Class A3 Certificateholders without the consent of such
Certificateholders, and such Certificateholders may exercise such rights only
with the prior written consent of Financial Security.
Financial Security shall be subrogated to the rights of each holder of a
Class A3 Certificate to receive distributions on such Certificates to the
extent of any payment by Financial Security under the Class A3 Policy.
To the fullest extent permitted by applicable law, Financial Security
agrees under the Class A3 Policy not to assert, and waives, for the benefit
of each Class A3 Certificateholder, all its rights (whether by counterclaim,
setoff or otherwise) and defenses (including, without limitation, the defense
of fraud), whether acquired by subrogation, assignment or otherwise, to the
extent that such rights and defenses may be available to Financial Security
to avoid payment of its obligations under the Class A3 Policy in accordance
with the express provision of the Class A3 Policy.
Claims under the Class A3 Policy will rank equally with any other
unsecured debt and unsubordinated obligations of Financial Security except
for certain obligations in respect of tax and other payments to which
preference is or may become afforded by statute. Claims against Financial
Security under the Class A3 Policy and claims against Financial Security
under each other financial guaranty insurance policy issued thereby
constitute pari passu claims against the general assets of Financial
Security. The terms of the Class A3 Policy cannot be modified or altered by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Depositor. The Class A3 Policy may not be cancelled or
revoked prior to payment in full of the Class A3 Certificates.
FINANCIAL SECURITY ASSURANCE INC.
General. Financial Security is a monoline insurance company incorporated
in 1984 under the laws of the State of New York. Financial Security is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled
payments of an issuer's securities--thereby enhancing the credit rating of
those securities--in consideration for the payment of a premium to the
insurer. Financial Security and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed
securities are generally supported by residential mortgage loans, consumer or
trade receivables, securities or other assets having an ascertainable cash
S-52
<PAGE>
flow or market value. Collateralized securities include public utility first
mortgage bonds and sale/leaseback obligation bonds. Municipal securities consist
largely of general obligation bonds, special revenue bonds and other special
obligations of state and local governments. Financial Security insures both
newly issued securities sold in the primary market and outstanding securities
sold in the secondary market that satisfy Financial Security's underwriting
criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Holdings is owned approximately 51% by U S WEST Capital Corporation
("U S WEST"), 8% by Fund American Enterprises Holdings, Inc. ("Fund
American"), and 6% by the Tokio Marine and Fire Insurance Co., Ltd. ("Tokio
Marine"). U S WEST is a subsidiary of U S WEST, Inc. which operates
businesses involved in communications, data solutions, marketing services,
and capital assets, including the provision of telephone services in 14
states in the western and midwestern United States. Fund American is a
financial services holding company whose principal operating subsidiary is
one of the nation's largest mortgage servicers. Tokio Marine is a major
Japanese property and casualty insurance company. U S West has announced its
intention to dispose of its remaining interest in Holdings as part of its
strategic plan to withdraw from businesses not directly involved in
telecommunications. Fund American has certain rights to acquire and vote
additional shares of Holdings from U S WEST and Holdings. No shareholder of
Holdings is obligated to pay any debt of Financial Security or any claim
under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100. At December 31, 1995, Financial Security and its
subsidiaries had 187 employees.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or any of its subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
Rating of Claims-Paying Ability. Financial Security's claims-paying
ability is rated Aaa by Moody's Investors Service, Inc. and AAA by S&P,
Nippon Investors Service Inc. and Standard & Poor's (Australia) Pty. Ltd.
Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
Capitalization. The following tables sets forth the capitalization of
Financial Security and its wholly owned subsidiaries on the basis of
generally accepted accounting principles as of December 31, 1995 (in
thousands):
December 31, 1995
-----------------
(audited)
Unearned Premium Reserve
(net of prepaid reinsurance premiums) ..................... $ 330,349
Shareholder's Equity:
Common Stock .......................................... 15,000
Additional Paid-In Capital ............................ 681,470
Unrealized Gain on Investments (net of deferred income
taxes) .............................................. 19,694
Accumulated Earnings .................................. 73,822
----------
Total Shareholder's Equity ................................. 789,986
----------
Total Unearned Premium Reserve and Shareholder's Equity .... $1,120,335
==========
S-53
<PAGE>
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of
New York Insurance Department.
Incorporation of Certain Documents by Reference. In addition to the
documents described in the accompanying Prospectus under "Incorporation of
Certain Documents by Reference," the consolidated financial statements of
Financial Security and Subsidiaries for the year ended December 31, 1995
included as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1995, which has been filed with the Commission by Financial
Security Assurance Holdings Ltd. ("Holdings"), are hereby incorporated by
reference in this Prospectus Supplement.
All financial statements of Financial Security included in documents filed
by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents.
Insurance Regulation. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of
the State of New York, its state of domicile. In addition, Financial Security
and its insurance subsidiaries are subject to regulation by insurance laws of
the various other jurisdictions in which they are licensed to do business. As
a financial guaranty insurance corporation licensed to do business in the
State of New York, Financial Security is subject to Article 69 of the New
York Insurance Law which, among other things, limits the business of each
such insurer to financial guaranty insurance and related lines, requires that
each such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risk") and
the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable
to non-life insurance companies such as Financial Security, regulate, among
other things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liabilities for borrowings.
The Class A3 Policy is not covered by the property/casualty insurance
security fund specified in Article 76 of the New York Insurance Law. The
Class A3 Policy by its terms is governed by the laws of the State of New
York.
Financial Security does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omited herefrom, other than with respect to the accuracy
of information regarding Financial Security under the heading "THE CLASS A3
CERTIFICATE INSURANCE POLICY -- Financial Security Assurance Inc."
S-54
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, the Senior Certificates and the
Subordinated Certificates (the "Regular Certificates") will constitute the
"regular interests" in the REMIC and will be treated as debt instruments of
the REMIC and the Class R Certificate will be the sole class of "residual
interests" in the REMIC. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in
the Prospectus. Although the matter is not free from doubt, the Depositor
intends to report stated interest on the Regular Certificates as "qualified
stated interest," and not as original issue discount. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS -- Taxation of Regular Interest Certificates" in
the Prospectus.
In the opinion of Brown & Wood, assuming compliance with all provisions of
the Agreement, for federal income tax purposes the Trust Fund will qualify as
a REMIC pursuant to Section 860D of the Code, the Offered Certificates other
than the Class R Certificate will be considered to be "regular interests" in
the REMIC within the meaning of the Code, and the Class R Certificate will be
considered to be the sole class of "residual interest" in the REMIC within
the meaning of the Code.
The Class A4, Class AP and Class AX Certificates will be, and the other
Classes of Offered Certificates may be, issued with original issue discount
for federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Regular Interest Certificates -- Interest and
Acquisition Discount" in the Prospectus. The prepayment assumption that will
be used in determining the rate of accrual of original issue discount, market
discount and premium, if any, for federal income tax purposes will be a rate
equal to 225% PSA. No representation is made that the Mortgage Loans will
prepay at these rates or at any other rates. Original issue discount must be
included in income as it accrues on a constant yield method, regardless or
whether a holder receives concurrently the cash attributable to such original
issue discount.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Regular Interest Certificateholders" in the
Prospectus.
THE RESIDUAL CERTIFICATES
Special tax considerations apply to an investment in Residual
Certificates. In certain circumstances, the method of taxation of Residual
Certificates can produce a significantly less favorable after-tax return for
beneficial owners of Residual Certificates than would be the case, if (i)
Residual Certificates were taxable as debt instruments or (ii) no portion of
the taxable income on a Residual Certificate in each period were treated as
"excess inclusion" income.
A Residual Certificateholder will be the holder of a residual interest in
the REMIC and will generally be required to include in gross income a pro
rata share of the net income of the REMIC. This may result in such Residual
Certificateholder being required to recognize "phantom" income, i.e., income
recognized for tax purposes which exceeds economic income attributable to
such Residual Certificate. Acceleration of taxable income arising from timing
differences will result in an after-tax yield on a Residual Certificate that
may be lower than that on a corporate bond with similar cash flow
characteristics and pre-tax yield. The amount and timing of phantom income
are dependent upon the rate of prepayment of the Mortgage Loans, and,
therefore, cannot be predicted.
Residual Certificates will not be treated as "securities" for purposes of
the "mark-to-market" provisions of the Code and consequently dealers in
securities may not account for Residual Certificates by marking them to
market.
Because the value of a Residual Certificate is not "significant," thrift
institutions subject to Section 593 of the Code are subject to the general
rule prohibiting the use of deductions to offset excess inclusion income. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of Holders of Residual
Interest Certificates" in the Prospectus.
Under applicable regulations (the "REMIC Regulations"), if a Residual
Certificate is a "noneconomic residual interest," as described below, a
transfer of such Residual Certificate to a United States person will be
disregarded for all federal tax purposes unless no significant purpose of the
S-55
<PAGE>
transfer was to impede the assessment or collection of tax. A residual interest
is a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on such Residual Certificate
at least equals the product of the present value of the anticipated excess
inclusions (determined as of the date of the transfer) and the highest rate of
tax for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The present
value is calculated based on the Prepayment Assumption, using a discount rate
equal to the "applicable federal rate" at the time of transfer. If a transfer of
a Residual Certificate is disregarded, the transferor would be liable for any
federal income tax imposed upon taxable income derived by the transferee from
the REMIC. A significant purpose to impede the assessment or collection of taxes
exists if the transferor, at the time of transfer, knew or should have known
that the transferee would be unwilling or unable to pay taxes on its share of
the taxable income of the REMIC. A similar type of limitation exists with
respect to certain transfers of Residual Certificates by Nonresidents to United
States persons.
Under the REMIC Regulations, if a Residual Certificate has tax avoidance
potential, a transfer of a Residual Certificate to a Nonresident will be
disregarded for all Federal tax purposes. A Residual Certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion
and that such amounts will be distributed at or after the time at which the
excess inclusion accrues and not later than the calendar year following the
calendar year of accrual. If a transfer of a Residual Certificate to a
Nonresident is disregarded, the transferor would be liable for any federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. If a Nonresident transfers a Residual Certificate to a United States
person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusion income (for example, if the transferor
does not pay all tax liability up to the date of the transfer), then the
transfer is disregarded and the transferor continues to be treated as the
owner of the Residual Certificate for purposes of Sections 871(a), 881, 1441
and 1442 of the Code. As a result of the foregoing provisions, a Nonresident
transferor or transferee would be required to deliver to the Trustee certain
certifications (and satisfy certain other conditions) in connection with such
a transfer of a Residual Certificate.
It is expected that a Residual Certificate will be a "noneconomic residual
interest" and will have "tax avoidance potential" within the meaning of the
proposed regulations.
Residual Certificates may not be transferred, sold, pledged or otherwise
assigned unless, prior to such transfer, the proposed transferee delivers to
the Trustee an affidavit certifying that such transferee is not a
Disqualified Organization and is not purchasing a Residual Certificate on
behalf of a Disqualified Organization and certifying as to such matters as
may be necessary to verify that no significant purpose of such transfer is to
impede the assessment or collection of tax, including the ability of such
transferee to pay applicable taxes. In addition, Residual Certificates may
not be held by a nominee. Each proposed transferee must also sign a
transferee letter which, in the case of a transfer to or from a Nonresident,
generally would require furnishing evidence that such transfer would be
respected for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The Senior Certificates and the Class M Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized
statistical rating agencies, and, as such, are legal investments for certain
entities to the extent provided in SMMEA. Such investments, however, will be
subject to general regulatory considerations governing investment practices
under state and federal laws.
Moreover, institutions whose investment activities are subject to review
by certain regulatory authorities may be or may become subject to
restrictions, which may be retroactively imposed by such regulatory
authorities, on the investment by such institutions in certain mortgage
related securities. In addition, several states have adopted or are
considering regulations that prohibit certain state-chartered institutions
from purchasing or holding similar types of securities.
S-56
<PAGE>
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Certificates may be purchased by
such investors.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be applied by the
Depositor, or an affiliate thereof, towards the purchase of the Mortgage
Loans. The Mortgage Loans will be acquired by the Depositor from the Seller
in a privately negotiated transaction.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement and terms agreement dated the date hereof (collectively, the
"Underwriting Agreement") between the Depositor and the Underwriter (the
"Underwriter"), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, all the Offered
Certificates.
The distribution of the Offered Certificates by the Underwriter and
distribution of the Class A3 Certificates by the Dealer will be effected in
each case from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect such transactions by selling the
Certificates to or through dealers, and such dealers may receive from the
Underwriter, for whom 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 the
Certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profit on the 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
"Act"). The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities
under the Act.
Lehman Brothers Inc. is an affiliate of the Depositor.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its legal advisors
whether the purchase or holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or the Code.
See "ERISA CONSIDERATIONS" in the accompanying Prospectus.
Employee benefit plans ("Plans") that are subject to ERISA, and any person
utilizing the assets of such a Plan, may not purchase the Subordinate
Certificates, except that any insurance company may purchase such
Certificates with assets of its general account if the exemptive relief
granted by the Department of Labor for transactions involving insurance
company general accounts in Prohibited Transaction Exemption 95-60, 60 Fed.
Reg. 35925 (July 12, 1995) is available with respect to such investment. The
Trust Agreement will include certain restrictions on the transfer of the
Subordinate Certificates.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995 incorporated by
reference in this Prospectus Supplement have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Notwithstanding anything to the contrary in the Prospectus, certain legal
matters with respect to the Certificates will be passed upon for the
Depositor and for the Underwriter by Brown & Wood, Washington, D.C.
S-57
<PAGE>
RATINGS
It is a condition to the issuance of the Class A1, Class A2, Class A3,
Class A5 and Class R Certificates that they be rated "AAA" by each of Fitch
and S&P. It is a condition to the issuance of the Class A4, Class AP and
Class AX Certificates that they be rated "AAA" by Fitch and "AAAr" by S&P. It
is a condition to the issuance of the Class M Certificates that they be rated
"AA" by each of Fitch and S&P. It is a condition to the issuance of the Class
B1 Certificates that they be rated "A" by Fitch. It is a condition to the
issuance of the Class B2 Certificates that they be rated "BBB" by Fitch. The
rating of "AAA" is the highest rating that Fitch and S&P, respectively,
assign to securities. A securities 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.
The ratings of S&P on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. S&P rating opinions address the
structural, legal and issuer aspects associated with the certificates,
including the nature of the underlying mortgage loans and the credit quality
of the credit support provider, if any. S&P ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The "r" symbol is appended to the rating by S&P of
those Certificates that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. The absence of the
"r" symbol in the ratings of other Certificates offered hereby should not be
taken as an indication that such Certificates will exhibit no volatility or
variability in total return.
The ratings assigned by Fitch to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage
loans by the related certificateholders under the agreements pursuant to
which such certificates are issued. Fitch's ratings 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 such mortgage pool is adequate
to make payments required by such certificates. Fitch's ratings on such
certificates do not, however, constitute a statement regarding frequency of
prepayments on the related mortgage loans.
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions in the amount of scheduled payments on
the Mortgage Loans. The rating takes into consideration the characteristics
of the Mortgage Loans and the structural, legal and tax aspects associated
with the Offered Certificates. The ratings on the Offered Certificates do not
represent any assessment of the likelihood or rate of principal prepayments.
The ratings do not address the possibility that the Offered
Certificateholders might suffer a lower than anticipated yield due to
prepayments or may fail to recoup their initial investments.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other
rating agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the
Rating Agencies.
S-58
<PAGE>
GLOSSARY
Defined terms Page
- ------------- ----
Accrued Certificate Interest ................... S-17
Act ............................................ S-55
Advances ....................................... S-7
AP Percentage .................................. S-19
Available Distribution Amount .................. S-22
Bankruptcy Loss Limit .......................... S-27
Bankruptcy Losses .............................. S-27
Beneficial Owner ............................... S-9
Book-Entry Certificates ........................ S-9
Business Day ................................... Prospectus
Cede ........................................... S-14
Certificate Principal Amount ................... S-1
Certificate Interest Rate ...................... S-17
Certificates ................................... S-1
Class A Certificates ........................... S-1
Class AP Deferred Amount ....................... S-27
Class AP Principal Distribution Amount ......... S-20
Class A3 Policy ................................ S-2
Class Percentage ............................... S-19
Closing Date ................................... S-5
Code ........................................... S-11
Collection Period .............................. S-22
Collection Account ............................. S-14
Corporate Trust Office ......................... S-28
Credit Support Depletion Date .................. S-17
Credit Support Percentage ...................... S-16
Cut-off Date ................................... S-5
Cut-off Date Balance ........................... S-8
Dealer ......................................... S-1
Deceased Holder ................................ S-25
Definitive Certificate ......................... S-14
Deposit Date ................................... S-22
Depositor ...................................... S-1
Discount Mortgage Loan ......................... S-19
Distribution Date .............................. S-2
DTC ............................................ S-8
Due Date ....................................... S-22
Due Period ..................................... S-22
ERISA .......................................... S-12
Excess Losses .................................. S-27
FHLMC .......................................... S-29
Final Scheduled Distribution Date .............. S-1
Financial Security ............................. S-2
Financial Intermediary ......................... S-15
Fitch .......................................... S-1
FNMA ........................................... S-29
Fraud Loss Limit ............................... S-27
Fraud Losses ................................... S-27
Group 1 Final Distribution Date ................ S-18
Group 1 Senior Certificates .................... S-6
Group 1 Senior Percentage ...................... S-20
Group 1 Senior Prepayment Percentage ........... S-21
Group 1 Senior Principal Distribution Amount ... S-18
Group 2 Senior Certificates .................... S-6
Group 2 Senior Principal Distribution Amount ... S-18
S-59
<PAGE>
Defined terms Page
- ------------- ----
Guaranteed Distributions ....................... S-51
Individual Class A3 Certificates ............... S-23
Insurance Proceeds ............................. S-23
Interest Accrual Period ........................ S-6
Interest Shortfall ............................. S-17
Lehman Capital ................................. S-1
Liquidated Mortgage Loan ....................... S-27
Liquidation Proceeds ........................... S-23
Living Holder .................................. S-23
Loan-to-Value Ratio ............................ S-29
Mortgage ....................................... Prospectus
Mortgage Loans ................................. S-1
Mortgage Rate .................................. Prospectus
Mortgaged Property ............................. S-6
Net Mortgage Rate .............................. S-17
Net Prepayment Interest Shortfalls ............. S-18
Non-AP Percentage .............................. S-19
Nonresident .................................... Prospectus
Norwest ........................................ S-1
Norwest Bank ................................... S-28
Notional Amount ................................ S-17
Offered Certificates ........................... S-1
Order .......................................... S-51
Original Credit Support Percentage ............. S-16
Original Subordinate Principal Amount .......... S-20
Participant .................................... S-15
Plans .......................................... S-57
Premium Mortgage Loan .......................... S-17
Prepayment Interest Shortfall .................. S-18
Prepayment Period .............................. S-22
Prepayment Shift Percentage .................... S-21
Principal Distribution Amount .................. S-18
Principal Prepayments .......................... S-22
Prospectus ..................................... S-1
PSA ............................................ S-41
Rating Agencies ................................ S-1
Realized Loss .................................. S-27
Record Date .................................... S-5
Receipt ........................................ S-51
Received ....................................... S-51
Regular Certificates ........................... S-55
REMIC .......................................... S-2
REMIC Pool ..................................... S-2
REMIC Regulations .............................. S-55
Residual Certificateholders .................... S-55
Residual Certificate ........................... S-1
Restricted Classes ............................. S-17
Rounding Account ............................... S-23
Rules .......................................... S-15
SMMEA .......................................... S-12
Scheduled Payment .............................. S-7
Scheduled Principal Balance .................... S-19
S&P ............................................ S-1
Seller ......................................... S-1
Senior Certificates ............................ S-1
Senior Percentage .............................. S-19
Senior Prepayment Percentage ................... S-19
S-60
<PAGE>
Defined terms Page
- ------------- ----
Senior Principal Distribution Amount ........... S-21
Servicer ....................................... S-36
Servicing Agreement ............................ S-5
Servicing Fee .................................. S-5
Servicing Fee Rate ............................. S-36
Special Hazard Loss Limit ...................... S-27
Special Hazard Losses .......................... S-27
Subordinate Certificates ....................... S-1
Subordinate Class Percentage ................... S-19
Subordinate Percentage ......................... S-19
Subordinate Principal Distribution Amount ...... S-21
Term of the Policy ............................. S-52
Trust Agreement ................................ S-5
Trust Fund ..................................... S-1
Trustee Fee .................................... S-28
Trustee Fee Rate ............................... S-28
Underwriter .................................... S-1
Underwriting Agreement ......................... S-57
S-61
<PAGE>
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION
DEPOSITOR
ASSET TRUST PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Asset Trust Pass-Through Certificates (the
"Certificates") which may be sold from time to time under this Prospectus and
related Prospectus Supplement in one or more series (each a "Series") by
Structured Asset Securities Corporation (the "Depositor"). (Capitalized terms
not otherwise defined herein shall have the meaning specified in the Glossary
attached hereto.)
Each Certificate of a Series will evidence a beneficial ownership interest
in assets deposited into a trust (a "Trust Fund") by the Depositor pursuant
to a Trust Agreement executed by the Depositor, the Trustee and the Master
Servicer for such Series specified in the related Prospectus Supplement. The
Trust Fund will consist of Primary Assets, which may include Mortgage Loans
or participation interests therein, Manufactured Home Loans or participation
interests therein, FHLMC Certificates, GNMA Certificates, FNMA Certificates
(collectively, "Agency Certificates") Private Mortgage-Backed Securities or
any combination of the foregoing and other assets, including any insurance
policies, reserve funds or other credit supports specified in the related
Prospectus Supplement. Manufactured Home Loans and the Mortgage Loans in the
Trust Fund for a Series will have been originated by various financial
institutions and other entities engaged generally in the business of
originating and/or servicing housing loans. The Mortgage Loans and the
Manufactured Home Loans may include (without limitation) fixed rate or
adjustable rate Conventional Loans, FHA Loans or VA Loans and may provide for
graduated equity, graduated payment, "buy-down" or other payment features,
and may call for payments from the obligors other than monthly, as specified
in the related Prospectus Supplement. Mortgage Loans underlying or comprising
the Primary Assets will be secured by property consisting of single family
(one-to-four family) attached or detached residential housing or multifamily
residential rental properties or cooperatively owned properties consisting of
five or more attached or detached dwelling units. Mortgage Loans that are
Cooperative Loans will be secured by assignments of shares and a proprietary
lease or occupancy agreement on a cooperative apartment. Manufactured Home
Loans underlying or comprising the Primary Assets will be secured by property
consisting of a Manufactured Home. See "THE TRUST FUNDS" herein. Manufactured
Home Loans and the Mortgage Loans (or participation interests therein) will
be serviced by various servicers under the supervision of a Master Servicer
or by the Master Servicer directly as specified in the related Prospectus
Supplement. The Master Servicer's and any Servicer's obligations will be
limited to its contractual, supervisory and/or servicing obligations and such
other obligations as are specified in the related Prospectus Supplement. See
"SERVICING OF LOANS" herein.
Each Series of Certificates will consist of one or more Classes, and any
Class may include subclasses. If a Series includes multiple Classes, such
Classes may vary with respect to the amount, percentage and timing of
distributions of principal, interest or both and one or more Classes may be
subordinated to other Classes with respect to distributions of principal,
interest or both as described herein and in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, the Primary
Assets held under the Trust Agreement may be divided into one or more Asset
Groups and the Certificates of each separate Class will evidence beneficial
ownership of each corresponding Asset Group. A Series or Class of
Certificates may be subject to redemption in certain circumstances if so
specified in the related Prospectus Supplement. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Distributions of principal and interest on the Certificates of each Series
will be made on each Distribution Date for a Series. The rate of reduction of
the aggregate principal balance of each Class of a Series will depend
principally upon the rate of payment (including prepayments) with respect to
the Loans comprising or underlying the Primary Assets. A rate of prepayment
lower or higher than anticipated will affect yield on Certificates of a
Series in the manner described herein and in the related Prospectus
Supplement. Under certain limited circumstances described herein and in the
related Prospectus Supplement, the Primary Assets may be purchased by the
entity specified in the related Prospectus Supplement and the related Trust
Fund terminated prior to the maturity of the Primary Assets or the Final
Scheduled Distribution Date of the Certificates of the related Series. If so
specified in the related Prospectus Supplement, Certificates of a Series may
be subject to special distributions in reduction of principal balance under
certain circumstances. See "DESCRIPTION OF THE CERTIFICATES" and "YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
<PAGE>
The Certificates evidence an interest in the related Trust Fund only, and
are not guaranteed by any governmental agency, or by the Depositor, the
Trustee, the Master Servicer, or by any of their respective affiliates or,
unless otherwise specified in the related Prospectus Supplement, by any other
person or entity. The Depositor's only obligations with respect to any Series
will be pursuant to certain representations and warranties set forth in the
related Trust Agreement as described herein or in the related Prospectus
Supplement. See "THE TRUST AGREEMENTS" herein.
If specified in the related Prospectus Supplement, an election may be made
to treat the Trust Fund for a Series as a "Real Estate Mortgage Investment
Conduit" (a "REMIC") for federal income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein.
Certificates of a Series offered hereby and by the related Prospectus
Supplement may be offered through one or more different methods, including
offerings through Lehman Brothers, an affiliate of the Depositor, as more
fully described herein and in the related Prospectus Supplement. See "PLAN OF
DISTRIBUTION" herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Certificates are offered when, as and if delivered to and accepted by
the Underwriters subject to prior sale, withdrawal or modification of the
offer without notice, the approval of counsel and other conditions. Retain
this Prospectus for future reference. This Prospectus may not be used to
consummate sales of the securities offered hereby unless accompanied by a
Prospectus Supplement.
LEHMAN BROTHERS
The date of this Prospectus is December 18, 1995
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to each Series of Certificates will,
among other things, set forth with respect to such Series: (a) the aggregate
initial principal balances, the Pass-Through Rate or Certificate Rate (or
method for determining it in the case of Floating Rate Certificates) and
authorized denominations of each Class of such Series; (b) certain
information concerning the Trust Fund for such Series, including the
principal amount, type and characteristics of Primary Assets included in the
Trust Fund on the date of issue, and, if applicable, the amount of Reserve
Funds, if any, for such Series; (c) where Private Mortgage-Backed Securities
are included in the Trust Fund, information concerning the PMBS Issuer, the
PMBS Trustee, the PMBS Servicer, if any, and the Loans or Agency Certificates
which constitute the underlying assets for such Private Mortgage-Backed
Securities; (d) the circumstances, if any, under which Special Distributions
of principal may be made or a Trust Fund terminated prior to the Final
Scheduled Distribution Date; (e) the Final Scheduled Distribution Date of
each Class of a Multi-Class Series; (f) the method used to calculate the
aggregate amount of principal to be distributed with respect to the
Certificates of such Series on each Distribution Date; (g) the order of the
application of principal distributions to the respective Classes and the
allocation of principal to be so applied; (h) the extent of subordination of
each Class of Subordinate Certificates, if any; (i) the identity of each
Class of Compound Interest Certificates, Floating Rate Certificates,
Principal Weighted Certificates, Interest Weighted Certificates, Subordinate
Certificates and Planned Amortization Certificates ("PACs") included in such
Series, if any; (j) the principal amount of each Class of a Multi-Class
Series that would be outstanding on specified Distribution Dates, if the
Loans or Agency Certificates underlying or comprising the Primary Assets for
such Series were prepaid at various assumed rates; (k) the Distribution Dates
for the respective Classes; (l) the Assumed Reinvestment Rate (if
applicable); (m) the percentage of Excess Cash Flow to be applied to
distributions in reduction of principal balance of Certificates of a
Multi-Class Series; (n) additional information with respect to any pool
insurance policy, special hazard insurance policy, bankruptcy bond or
repurchase bond or other credit support, if any, relating to the Series or
the Primary Assets; and (o) the plan of distribution for such Series.
ADDITIONAL INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a
part of the Registration Statement, omits certain information contained in
such Registration Statement pursuant to the Rules and Regulations of the
Commission. The Registration Statement and the exhibits thereto 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 certain
of its Regional Offices located as follows: Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, New
York, New York 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
Copies of the most recent FNMA Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Director of Investor Relations of FNMA,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115). The
Depositor did not participate in the preparation of FNMA's Prospectus or its
annual or quarterly reports or other financial information and, accordingly,
makes no representation as to the accuracy or completeness of the information
set forth therein.
Copies of the most recent Offering Circular for FHLMC Certificates as well
as FHLMC's most recent Information Statement and Information Statement
Supplement and any quarterly report made available by FHLMC can be obtained
by writing or calling the Investor Relations Department of FHLMC at Post
Office Box 4112, Reston, Virginia 22090 (outside Washington, D.C.
metropolitan area, telephone 800-424-5401, ext. 8160; within Washington, D.C.
metropolitan area, telephone 703-759-8160). The Depositor did not participate
in the preparation of FHLMC's Offering Circular, Information Statement or any
supplement thereto or any quarterly report thereof and, accordingly, makes no
representations as to the accuracy or completeness of the information set
forth therein.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund are required
under the Trust Agreement to be forwarded to Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, such reports will
not be examined and reported on by an independent public accountant. See "THE
TRUST AGREEMENTS -- Reports to Certificateholders" herein.
2
<PAGE>
SUMMARY OF TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the Prospectus
Supplement with respect to the Series offered thereby and to the Trust
Agreement (the "Trust Agreement") executed by the Depositor, the Master
Servicer (the "Master Servicer") and the trustee (the "Trustee") as specified
in the related Prospectus Supplement. All capitalized terms not otherwise
defined in this Prospectus or the related Prospectus Supplement for a Series
have the respective meanings assigned to them in the "GLOSSARY."
Securities Offered............. The Asset Trust Pass-Through Certificates
(the "Certificates") are issuable from time
to time in separate Series pursuant to
separate Trust Agreements. Each Certificate
of a Series will evidence a beneficial
ownership interest in the Trust Fund for
such Series, or in an Asset Group specified
in the related Prospectus Supplement. The
Certificates will be issuable in fully
registered form in the authorized minimum
denominations and multiples thereof
specified in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, the Certificates or
certain Classes of such Certificates offered
thereby may be available in book-entry form
only.
The Certificates of a Series will evidence
interests in the related Trust Fund only and
will not be guaranteed by any governmental
agency, by the Depositor, the Trustee, the
Master Servicer or by any of their
respective affiliates, or unless otherwise
specified in the related Prospectus
Supplement, by any other person or entity.
See "SPECIAL CONSIDERATIONS" and "CREDIT
SUPPORT" herein.
Each Series of Certificates will consist of
one or more Classes. If a Series consists of
multiple Classes, the respective Classes may
differ with respect to the amount,
percentage and timing of distributions of
principal, interest or both. Additionally,
one or more Classes may consist of
Subordinate Certificates which are
subordinated to other Classes of
Certificates with respect to the right to
receive distributions of principal,
interest, or both under the circumstances
and in such amounts as described herein and
in the related Prospectus Supplement. Any
Class of Certificates of a Series will be
offered hereby and by the related Prospectus
Supplement only if rated by at least one
Rating Agency in one of its four highest
rating categories. See "DESCRIPTION OF THE
CERTIFICATES -- General," "CREDIT SUPPORT --
Subordinated Certificates" and "Special
Considerations" herein.
Depositor...................... Structured Asset Securities Corporation, a
Delaware corporation (the "Depositor"), is a
limited purpose corporation organized
primarily for the purpose of acquiring the
Primary Assets for each Trust Fund. The
principal executive offices of the Depositor
are located at 200 Vesey Street, New York,
New York 10285 and its telephone number is
(212) 526-5594. All of the outstanding
capital stock of the Depositor is owned by
Lehman Commercial Paper Incorporated, a
wholly-owned subsidiary of Lehman Brothers
Inc. The Depositor's only obligations with
respect to the Certificates will be pursuant
to certain representations and warranties
described herein under "THE TRUST
AGREEMENTS." Neither the Depositor, its
parent nor any affiliate of the Depositor
will guarantee the Certificates or the
assets included in the Trust Fund for a
Series. See "SPECIAL CONSIDERATIONS" and
"THE DEPOSITOR."
3
<PAGE>
Trustee........................ The Trustee with respect to a Series will be
specified in the related Prospectus
Supplement. See "THE TRUST AGREEMENTS"
herein for a description of the Trustee's
rights and obligations.
Interest Distributions......... Interest distributions on the Certificates
of a Series will be made from amounts
available therefor in the related
Certificate Account on each Distribution
Date at the applicable Pass-Through Rate or
Certificate Rate specified in (or, with
respect to Floating Rate Certificates,
determined in the manner set forth in) the
related Prospectus Supplement. The
Pass-Through Rate on Certificates of a
Series may be variable and change with
changes in the mortgage rates or
pass-through rates of the Primary Assets
included in the related Trust Fund and/or as
prepayments occur with respect to such
Primary Assets.
Principal Weighted Certificates may not be
entitled to receive any interest
distributions or may be entitled to receive
only nominal interest distributions.
Compound Interest Certificates will not
receive distributions of interest but
accrued interest will be added to the
principal balance thereof on each
Distribution Date until the Accrual
Termination Date. Following the Accrual
Termination Date, interest distributions
with respect to such Compound Interest
Certificates will be made on the basis of
their Compound Value.
A Multi-Class Series may include one or more
Classes of Floating Rate Certificates. With
respect to any such Class of Floating Rate
Certificates, the related Prospectus
Supplement will set forth: (a) the initial
Floating Rate (or manner of determining the
initial Floating Rate); (b) the method by
which the Floating Rate will be determined
from time to time; (c) the periodic
intervals at which such determination will
be made; and (d) the Maximum Floating Rate
and the Minimum Floating Rate, if any. See
"DESCRIPTION OF THE CERTIFICATES" and
"YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
Principal Distributions
(Including Prepayments)...... Principal distributions on the Certificates
of a Series will be made from amounts
available therefor in the related
Certificate Account on each Distribution
Date in an aggregate amount determined as
specified in the related Prospectus
Supplement. Principal distributions will be
allocated among the respective Classes of a
Series in the manner and in the priority
(which may, in certain cases, include
allocation by random lot) set forth in the
related Prospectus Supplement.
Interest Weighted Certificates may not be
entitled to any principal distributions or
may be entitled to receive only nominal
principal distributions.
To the extent specified in the related
Prospectus Supplement, Certificates of a
Multi-Class Series having other than monthly
Distribution Dates may, if so specified in
the related Prospectus Supplement, be
subject to Special Distributions of
principal if, as a result of principal
prepayments with respect to the Loans (as
defined below) comprising or underlying the
Primary Assets in the related Trust Fund,
low reinvestment yields or both, it is
determined (based on assumptions specified
4
<PAGE>
in the related Trust Agreement) that the amount
of cash anticipated to be available in the
Certificate Account for such Series on the next
Distribution Date may be less than the
scheduled distributions to be made on such
Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES" and "YIELD, PREPAYMENT AND
MATURITY CONSIDERATIONS" herein.
Final Scheduled Distribution
Date......................... The Final Scheduled Distribution Date for
each Class of a Series is the date after
which no Certificates of such Class will
remain outstanding, assuming timely payments
or distributions are made on the Primary
Assets in the related Trust Fund in
accordance with their terms. The Final
Scheduled Distribution Date of a Class may
equal the maturity date of the Primary Asset
in the related Trust Fund which has the
latest stated maturity or will be determined
as described herein and in the related
Prospectus Supplement.
The actual maturity date of the Certificates
of a Series will depend primarily upon the
level of prepayments with respect to the
Loans comprising or underlying the Primary
Assets in the related Trust Fund. The actual
maturity of any Certificate is likely to
occur earlier and may occur substantially
earlier than its Final Scheduled
Distribution Date as a result of the
application of prepayments to the reduction
of the principal balances of the
Certificates. The rate of prepayments on the
Loans comprising or underlying Primary
Assets in the Trust Fund for a Series will
depend on a variety of factors, including
certain characteristics of such Loans and
the prevailing level of interest rates from
time to time, as well as on a variety of
economic, demographic, tax, legal, social
and other factors. No assurance can be given
as to the actual prepayment experience with
respect to a Series. See "SPECIAL
CONSIDERATIONS" and "YIELD, PREPAYMENT AND
MATURITY CONSIDERATIONS" herein.
Optional Termination ............If so specified in the related Prospectus
Supplement, the Depositor, the Master Servicer,
or such other entity that is specified in the
related Prospectus Supplement, may, at its
option, cause an early termination of the
related Trust Fund by repurchasing all of the
Primary Assets remaining in the Trust Fund on
or after a specified date, or on or after such
time as the Aggregate Asset Principal balance
of the Certificates of any Class of the Series
is less than the amount or percentage specified
in the related Prospectus Supplement. See
"DESCRIPTION OF THE CERTIFICATES -- Optional
Termination."
Repurchases of Certificates .....If so specified in the related Prospectus
Supplement, one or more classes of the
Certificates of such Series may be repurchased,
in whole or in part, at the option of the
Depositor, at such times and under the
circumstances specified in such Prospectus
Supplement and at the repurchase price set
forth therein. See "DESCRIPTION OF THE
CERTIFICATES" herein.
If so specified in the related Prospectus
Supplement, any Class of the Certificates may
be subject to repurchase at the request of the
holders of such Class or to mandatory
repurchase by the Depositor (including by
random lot). See "DESCRIPTION OF THE
CERTIFICATES" herein.
5
<PAGE>
The Trust Fund ..................The Trust Fund for a Series will consist of
Private Mortgage-Backed Securities, Agency
Certificates, Mortgage Loans or participation
interests therein, Manufactured Home Loans or
participation interests therein, or any
combination of the foregoing (the "Primary
Assets"), together with certain accounts,
reserve funds, insurance policies and related
agreements specified in the related Prospectus
Supplement. (Mortgage Loans and Manufactured
Home Loans are referred to herein as "Loans".)
If so specified in the related Prospectus
Supplement, the Primary Assets may be divided
into Asset Groups and the Certificates of
separate Classes will evidence beneficial
interests of a corresponding Asset Group. The
Trust Fund for a Series will also include the
Collection Account, the Certificate Account,
and may include certain policies of insurance
relating to the Primary Assets, and various
credit supports, all as specified in the
related Prospectus. See "THE TRUST FUNDS --
Collection Account and Certificate Account" and
"CREDIT SUPPORT" and "DESCRIPTION OF MORTGAGE
AND OTHER INSURANCE" herein.
a. Primary Assets ............The Primary Assets for a Series of Certificates
may consist of any combination of the
following, to the extent and as specified in
the related Prospectus Supplement (such
Prospectus Supplement may contain information
on an approximate basis as of the Cut-off Date,
in which case a report on Form 8-K containing
additional information will be available to
purchasers of the Certificates at or promptly
after initial issuance):
(1) Agency Certificates and
Private Mortgage-Backed
Securities................Agency Certificates may include:
(A) GNMA Certificates. GNMA's guarantee is
backed by the full faith and credit of
the United States. See "THE TRUST FUNDS
-- GNMA Certificates."
(B) FNMA Certificates. FNMA's guarantee is
not backed by the full faith and credit
of the United States. See "THE TRUST
FUNDS -- FNMA Certificates."
(C) FHLMC Certificates. FHLMC's guarantee is
not backed by the full faith and credit
of the United States. See "THE TRUST
FUNDS -- FHLMC Certificates."
Private Mortgage-Backed Securities may
include (a) mortgage participations or
pass-through certificates representing
beneficial interests in Agency Certificates
or Loans or (b) collateralized mortgage
obligations secured by Agency Certificates
or Loans. Although individual Loans or
Agency Certificates underlying a Private
Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency
or instrumentality thereof, they need not
be, and the Private Mortgage- Backed
Securities themselves will not be so insured
or guaranteed. See "THE TRUST FUNDS --
Private Mortgage-Backed Securities." Unless
otherwise specified in the Prospectus
Supplement relating to a Series of
Certificates, payments on the Private
Mortgage-Backed Securities will be
distributed directly to the Trustee as
6
<PAGE>
registered owner of such Private
Mortgage-Backed Securities. See "THE TRUST
FUNDS -- Private Mortgage-Backed Securities"
herein.
The related Prospectus Supplement for a
Series will specify (such disclosure may be
on an approximate basis, as described
above): to the extent relevant, (i) the
aggregate approximate principal amount and
type of any Agency Certificates and Private
Mortgage-Backed Securities to be included in
the Trust Fund for such Series; (ii) certain
characteristics of the Agency Certificates
or Loans which comprise the underlying
assets for the Private Mortgage-Backed
Securities including, in the case of Loans,
(A) the payment features of such Loans
(i.e., whether they are fixed rate or
adjustable rate and whether they provide for
fixed level payments, negative amortization,
or other payment features), (B) the
approximate aggregate principal amount, if
known, of the underlying Loans which are
insured or guaranteed by a governmental
entity, (C) the servicing fee or range of
servicing fees with respect to the Loans,
and (D) the minimum and maximum stated
maturities of the Loans at origination;
(iii) the maximum original term-to-stated
maturity of the Private Mortgage-Backed
Securities; (iv) the weighted average
term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the
pass-through or certificate rate or ranges
thereof for the Private Mortgage-Backed
Securities; (vi) the weighted average pass-
through or certificate rate of the Private
Mortgage-Backed Securities; (vii) the Issuer
of the Private Mortgage-Backed Securities
(the "PMBS Issuer"), the Servicer of the
Private Mortgage-Backed Securities (the
"PMBS Servicer") and the trustee of the
Private Mortgage-Backed Securities (the
"PMBS Trustee"); (viii) certain
characteristics of credit support, if any,
such as Reserve Funds, Insurance Policies,
letters of credit or guarantees, relating to
the Loans underlying the Private
Mortgage-Backed Securities, or to such
Private Mortgage-Backed Securities
themselves; (ix) the terms on which
underlying Loans for such Private
Mortgage-Backed Securities may, or are
required to, be repurchased prior to stated
maturity; and (x) the terms on which
substitute Loans or Agency Certificates may
be delivered to replace those initially
deposited with the PMBS Trustee. See "THE
TRUST FUNDS" herein.
(2) Mortgage Loans ........... Primary Assets for a Series may consist, in
whole or in part, of Mortgage Loans or
participation interests therein. Participation
interests in Mortgage Loans will be purchased
pursuant to participation agreements. See "THE
TRUST FUNDS -- General" herein. Payments on
Mortgage Loans will be collected by the Master
Servicer (or by a Servicer), as specified in
the related Prospectus Supplement, and such
payments (net of servicing fees and certain
other amounts) will be available to make
distributions on the Certificates of
that Series. See "SERVICING OF LOANS" herein.
Mortgage Loans may, as specified in the related
Prospectus Supplement, include Conventional
Loans, FHA Loans or VA Loans and may have
various payment characteristics and may include
growing equity mortgage loans ("GEM Loans"),
graduated payment mortgage loans ("GPM Loans"),
buy-down mortgage loans ("Buy-Down Loans"),
bi-weekly payment loans ("Bi-Weekly Loans") or
Loans having balloon or other special payment
features. The Mortgage Loans may have fixed or
7
<PAGE>
adjustable interest rates (Mortgage Loans
having such adjustable rates hereinafter
sometimes referred to herein as "Adjustable
Rate Mortgages," or "ARMs"). ARMs will, as
described in the related Prospectus Supplement,
permit or require periodic changes in the
mortgage rate and in the scheduled payments of
principal and interest due from the obligor on
the related mortgage note. The Mortgage Loans
may include Mortgage Loans secured by
mortgages, deeds of trust or other security
instruments creating a first lien on related
Mortgaged Properties. The Mortgage Loans may
include Cooperative Loans secured by an
assignment by the borrower (the
"tenant-stockholder") of a security interest in
shares issued by a private, non-profit,
cooperative housing association (a
"Cooperative") and related proprietary lease or
occupancy agreement on a cooperative dwelling
(the "Cooperative Dwelling"). The Mortgage
Loans may also include Condominium Loans
secured by a Mortgage on the Condominium Unit,
together with such Condominium Unit's
appurtenant interest in the common elements.
The Mortgaged Properties may consist of one to
four-family attached or detached residential
housing (including shares in a Cooperative and
the related proprietary lease or occupancy
agreement) ("Single Family Property") or
multifamily residential rental property or
cooperatively owned multifamily property
consisting of five or more dwelling units
("Multifamily Property"). Single Family
Property may be owner occupied and may include
vacation or second homes or may consist in
whole or in part of non-owner occupied
investment properties, as specified in the
related Prospectus Supplement.
To the extent described herein or in the
related Prospectus Supplement, all Mortgaged
Property will be covered by standard hazard
insurance policies (which may be a blanket
policy) insuring against losses due to various
causes, including fire, lightning and
windstorm. Mortgaged Property located in a
federally designated special hazard flood zone
will be required to be covered by flood
insurance. With respect to a Cooperative
Dwelling, the Cooperative is responsible for
maintaining standard hazard insurance on the
real property owned by the Cooperative, and
standard hazard insurance on the Cooperative
Dwelling securing a Mortgage Loan will not
generally be required. With respect to a
Condominium Unit, the Condominium Association
is responsible for maintaining standard hazard
insurance insuring the entire Condominium
Building (including each individual Condominium
Unit) and separate standard hazard insurance on
the Condominium Unit securing a Mortgage Loan
will not generally be required. Mortgage Loans
that are Conventional Loans secured by Single
Family Property will be required to be covered
by primary mortgage insurance policies to the
extent described herein or in the related
Prospectus Supplement. See "DESCRIPTION OF
MORTGAGE AND OTHER INSURANCE" herein.
The related Prospectus Supplement will describe
the principal characteristics of the Mortgage
Loans included in the Trust Fund (such
information may be on an approximate basis),
including, without limitation, (a) the
aggregate outstanding principal balance of the
Mortgage Loans as of the related Cut-off Date;
(b) the geographical distribution of the
Mortgaged Properties securing the Mortgage
Loans; (c) the weighted average original
8
<PAGE>
and remaining scheduled term-to-stated maturity
of the Mortgage Loans; (d) the relative
percentages (by aggregate outstanding principal
balance) of Mortgage Loans that have fixed
interest rates or are ARMs, Buy-Down Loans, GEM
Loans, Bi-Weekly Loans, GPM Loans or Mortgage
Loans having other special payment
characteristics; (e) the relative percentages
of Mortgage Loans secured by Cooperative
Dwellings; (f) the relative percentages of
Mortgage Loans that are secured by Mortgaged
Properties which are owner-occupied or are
investment properties or vacation and second
homes; (g) the range of Loan-to-Value Ratios
for the Mortgage Loans; (h) the average
outstanding principal balance of the Mortgage
Loans as of the Cut-off Date; (i) any primary
or pool insurance policies, guarantees or other
credit support for such Mortgage Loans; and (j)
the weighted average Mortgage Rate on such
Mortgage Loans. Unless otherwise specified in
the related Prospectus Supplement, each
Mortgage Loan will have a 10- to 40-year term
at origination and a Loan-to-Value Ratio at
origination not exceeding 95%. Unless otherwise
described in the related Prospectus Supplement,
each Mortgage Loan that is a Conventional Loan
secured by a Single Family Property having a
Loan-to-Value Ratio exceeding 80% will be
required to be covered by a primary mortgage
insurance policy as described herein or in the
related Prospectus Supplement.
Mortgage Loans that constitute Primary Assets
will be purchased by the Depositor in the open
market or in privately negotiated transactions,
including transactions with entities affiliated
with the Depositor or with the Master Servicer.
(3) Manufactured Home
Loans................... Primary Assets may consist, in whole or in
part, of manufactured housing conditional
sales contracts and installment loan
agreements with respect to Manufactured
Homes (the "Manufactured Home Loans") or
participation interests therein.
Participation interests in Manufactured Home
Loans will be purchased pursuant to a
participation agreement. See "THE TRUST
FUNDS -- General."
Each Manufactured Home Loan will be secured
by a new or used Manufactured Home.
Manufactured Home Loans may be a
Conventional Loan, FHA Loan or VA Loan.
Unless otherwise specified in the related
Prospectus Supplement, Manufactured Home
Loans that are Conventional Loans will not
be covered by primary mortgage insurance
policies. Each Manufactured Home which
secures a Manufactured Home Loan 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 special hazard flood zone will be
required to be covered by flood insurance.
See "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE" herein.
Unless otherwise specified in a related
Prospectus Supplement, each Manufactured
Home Loan will have a 3- to 25-year term at
origination and a Loan-to-Value Ratio at
origination not in excess of 95%.
9
<PAGE>
The Prospectus Supplement for each Series
will describe the principal characteristics
of the Manufactured Home Loans included in
the Trust Fund for the related Series (such
information may be on an approximate basis),
including, without limitation, the (a)
aggregate outstanding principal balance of
the Manufactured Home Loans, as of the
related Cut-off Date; (b) weighted average
interest rate on the Manufactured Home
Loans; (c) weighted average term-to-maturity
at origination; (d) weighted average
remaining scheduled term-to-maturity as of
the Cut-off Date and the range of
terms-to-maturity; (e) respective
percentages of Manufactured Home Loans
relating to new versus used Manufactured
Homes; (f) average outstanding principal
balance of the Manufactured Home Loans as of
the Cut-off Date; (g) range of Loan-
to-Value Ratios of the Manufactured Home
Loans; (h) hazard insurance required to be
maintained with respect to each Manufactured
Home; (i) amounts, if any, and terms of any
form of credit support to be provided with
respect to all or any Manufactured Home Loan
or Loans; and (j) geographical distribution
of the Manufactured Homes by state.
The Manufactured Home Loans which constitute
Primary Assets will be purchased by the
Depositor in the open market or in privately
negotiated transactions, including
transactions with entities affiliated with
the Depositor.
b. Collection Account and
Certificate Account........ Payments or distributions with respect to
the Primary Assets for a Series will
initially be remitted for deposit in a
Collection Account maintained by the Master
Servicer and then transferred to a
Certificate Account to be established with
the Trustee for such Series. The amounts
remitted may be net of servicing fees,
Retained Interests and other amounts
specified in the related Prospectus
Supplement. Amounts so deposited will be
used to make distributions on the
Certificates of such Series on the
applicable Distribution Date. See "THE TRUST
FUNDS -- Collection Account and Certificate
Account."
c. Determination of Asset
Value...................... Each Primary Asset for a Multi-Class Series
will be assigned an Asset Value. The
aggregate of the Asset Values of the Primary
Assets included in the Trust Fund for a
Multi-Class Series will equal not less than
the initial aggregate principal balances of
the Certificates of such Series. The related
Prospectus Supplement for a Multi-Class
Series will summarize the method or methods
and related assumptions used to determine
Asset Value for the Primary Assets for the
related Multi-Class Series. See
"DESCRIPTION OF THE CERTIFICATES --
Valuation of Trust Assets."
d. Guaranteed Investment
Contracts and Other
Agreements................. The Depositor may obtain and deliver to the
Trustee guaranteed investment contracts or
reinvestment agreements ("Guaranteed
Investment Contracts") pursuant to which
moneys held in one or more of the funds and
accounts established for such Series will be
invested at a specified rate which will
constitute the "Assumed Reinvestment Rate"
for the Series. With respect to any
Multi-Class Series which includes a Class of
Floating Rate Certificates, the Depositor
may obtain and deliver to the Trustee an
interest rate swap contract, interest rate
10
<PAGE>
cap agreement or similar contract issued by a
bank, insurance company, savings bank or
savings and loan association to provide limited
protection against interest rate risks. The
principal terms of any such Guaranteed
Investment Contract or such other agreement,
including, without limitation, provisions
relating to the timing, manner and amount of
payments thereunder and provisions relating to
the termination thereof, together with
information relating to the issuer thereof,
will be described in the related Prospectus
Supplement.
Credit Support.................. Credit support in the form of reserve funds,
subordination, insurance policies, letters of
credit or other types of credit support may be
provided with respect to the Primary Assets or
with respect to one or more Classes of
Certificates of a Series. If the Primary Assets
are divided into separate Asset Groups, the
beneficial ownership of which is evidenced by a
separate Class or Classes of a Series, credit
support may be provided by a cross-support
feature which requires that distributions be
made with respect to Certificates evidencing
beneficial ownership of one Asset Group prior
to distributions to Subordinate Certificates
evidencing a beneficial ownership interest in
another Asset Group within the Trust Fund. If
so specified in the related Prospectus
Supplement, any form of credit support
(including but not limited to insurance,
letters of credit or Certificate guarantee
insurance) may be structured so as to be drawn
upon by more than one Trust Fund to the extent
described therein.
The type, characteristics and amount of credit
support will be determined based on the
characteristics of the Loans underlying or
comprising the Primary Assets and other factors
and will be established on the basis of
requirements of each Rating Agency rating the
Certificates of such Series. The protection
against losses provided by such credit support
will be limited. See "CREDIT SUPPORT" and
"SPECIAL CONSIDERATIONS" herein.
a. Subordinate Certificates;
Subordination Reserve Fund.. A Series of Certificates may include one or
more Classes of Subordinate Certificates.
The rights of Holders of such Subordinate
Certificates to receive distributions on any
Distribution Date will be subordinate in
right and priority to the rights of Holders
of Senior Certificates of the Series, but
only to the extent described in the related
Prospectus Supplement. If so specified in
the related Prospectus Supplement,
subordination may apply only in the event of
(or be limited as to) certain types of
losses not covered by other credit support,
such as hazard losses not covered by the
standard hazard insurance policies, losses
resulting from the bankruptcy of a borrower
due to application of provisions of the
Bankruptcy Code, or losses resulting from
the denial of insurance coverage due to
fraud or misrepresentation in connection
with the origination of a Loan. Unless
otherwise specified in the related
Prospectus Supplement, such subordination
will be in lieu of providing insurance
policies or other credit support with
respect to losses arising from such events.
A Subordination Reserve Fund may be
established at the level specified in the
related Prospectus Supplement. The related
Prospectus Supplement will also set forth
information concerning the amount of
11
<PAGE>
subordination of a Class or Classes of
Subordinate Certificates in a series, the
circumstances in which such subordination
will be applicable, the manner, if any, in
which the amount of subordination will
decrease over time, the manner of funding
the related Subordination Reserve Fund, if
any, and the conditions under which amounts
in any Subordination Reserve Fund will be
used to make distributions to Holders of
Senior Certificates or be released from the
related Trust Fund. If cash flows otherwise
distributable to Holders of Subordinate
Certificates evidencing a beneficial
ownership interest in an Asset Group will be
used as cross support for Senior
Certificates evidencing a beneficial
ownership interest in another Asset Group
within the Trust Fund, the related
Prospectus Supplement will specify the
manner and conditions for applying such a
cross support feature. See "CREDIT SUPPORT
-- Subordinate Certificates; Subordination
Reserve Fund."
b. Insurance.................. If so specified in the related Prospectus
Supplement, certain insurance policies in
addition to any primary mortgage insurance
policies or standard hazard insurance
policies described above under "Primary
Assets" will be required to be maintained
with respect to the Loans included in the
Trust Fund for a Series. Such insurance
policies may include, but are not limited
to, (i) a pool insurance policy insuring
against losses due to defaults or
delinquencies in payment, (ii) a special
hazard insurance policy insuring against
losses which are not covered by the standard
hazard insurance policies, (iii) bankruptcy
bonds or insurance policies insuring losses
due to bankruptcy of a borrower and
application of certain provisions of the
Bankruptcy Code and (iv) repurchase bonds
insuring the repurchase of Loans by the
originator of such Loan in the event of the
loss of other insurance coverage due to
certain misrepresentations in the
origination or sale of any such Loans or in
other circumstances specified in the related
Prospectus Supplement. See "SPECIAL
CONSIDERATIONS," "CREDIT SUPPORT" and
"DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE" herein. The Prospectus Supplement
for a Series will provide information
concerning any such insurance policies,
including (a) the types of coverage provided
by each, (b) the amount of such coverage,
(c) conditions to payment under each and (d)
certain information relating to the issuers
of such insurance policies. To the extent
described in the related Prospectus
Supplement, certain insurance policies to be
maintained with respect to the Loans may be
terminated, reduced or replaced following
the occurrence of certain events affecting
the authority or creditworthiness of the
insurer. Additionally, such insurance
policies may be terminated, reduced or
replaced by the Master Servicer, provided
that no rating assigned to Certificates of
the related Series offered hereby and by the
related Prospectus Supplement is adversely
affected.
c. Letter of Credit........... If so specified in the related Prospectus
Supplement, credit support may be provided
by one or more letters of credit. A letter
of credit may provide limited protection
against certain losses in addition to or in
lieu of other credit support, such as losses
resulting from delinquent payments on the
Loans in the Trust Fund, losses from risks
not covered by standard hazard insurance
policies, losses due to bankruptcy of a
borrower and application of certain
provisions of the Bankruptcy Code, and losses
12
<PAGE>
due to denial of insurance coverage due to
misrepresentations made in connection with the
origination or sale of a Loan. The issuer of
the letter of credit (the "L/C Bank") will be
obligated to honor demands with respect to such
letter of credit, to the extent of the amount
available thereunder, to provide funds under
the circumstances and subject to such
conditions as are specified in the related
Prospectus Supplement. The liability of the L/C
Bank under its letter of credit will be reduced
by the amount of unreimbursed payments
thereunder.
The maximum liability of a L/C Bank under
its letter of credit will be an amount equal
to a percentage specified in the related
Prospectus Supplement of the initial
aggregate outstanding principal balance of
the Loans in the Trust Fund or one or more
Classes of Certificates of the related
Series (the "L/C Percentage"). The maximum
amount available at any time to be paid
under a letter of credit will be determined
in the manner specified therein and in the
related Prospectus Supplement.
d. Certificate Guarantee
Insurance .................If so specified in the related Prospectus
Supplement, credit support for a Series may be
provided by an insurance policy (the
"certificate guarantee insurance") issued by
one or more insurance companies. Such
certificate guarantee insurance will guarantee
timely distributions of interest and full
distributions of principal on the basis of a
schedule of principal distributions set forth
in or determined in the manner specified in the
related Prospectus Supplement.
e. Reserve Funds .............The Depositor may deposit in one or more
reserve funds (collectively the "Reserve
Funds") for any Series cash, Eligible Reserve
Fund Investments, demand notes or a combination
thereof in the aggregate amount, if any,
specified in the related Prospectus Supplement.
Any Reserve Funds for a Series may also be
funded over time through application of a
specified amount of cash flow, to the extent
described in the related Prospectus Supplement.
Such a Reserve Fund may be established to
increase the likelihood of the timely
distributions on the Certificates of such
Series or to reduce the likelihood of a Special
Distribution with respect to any Multi-Class
Series. Reserve Funds may be established to
provide protection against certain losses in
addition to or in lieu of other credit support,
including, without limitation, losses resulting
from delinquent payments on Loans, losses from
risks not covered by standard hazard insurance
policies, losses due to bankruptcy of a
borrower and application of certain provisions
of the Bankruptcy Code, and losses due to
denial of insurance coverage due to
misrepresentations made in connection with the
origination of a Loan. Amounts on deposit in
the Reserve Funds for a Series, together with
(unless otherwise specified in the related
Prospectus Supplement) the reinvestment income
thereon, will be applied for the purposes, in
the manner and to the extent provided by the
related Prospectus Supplement.
On each Distribution Date for a Series, all
amounts on deposit in any Reserve Funds for the
Series in excess of the amounts required to be
maintained therein by the related Trust
Agreement and specified in the related
Prospectus Supplement may be released from the
Reserve Funds and will not be available for
future distributions on the Certificates of
such Series.
13
<PAGE>
Additional information concerning any Reserve
Funds, including whether the Reserve Fund is a
part of the Trust Fund, the circumstances under
which moneys therein will be applied to make
distributions to Certificateholders, the
required balance to be maintained in such
Reserve Funds, the manner in which such
required balance will decrease over time and
the manner of funding the Reserve Fund will be
set forth in the related Prospectus Supplement.
See "CREDIT SUPPORT -- Reserve Funds."
Servicing of Loans........... The Master Servicer identified in the
related Prospectus Supplement will service
the Loans directly or administer and
supervise the performance by Servicers of
their duties and responsibilities under
separate servicing agreements (the
"Servicing Agreements") entered into between
the Master Servicer and such Servicers.
Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer
and each Servicer must be approved by either
FNMA or FHLMC as a seller/servicer of
Mortgage Loans and, in the case of FHA
Loans, approved by HUD as an FHA mortgagee.
Each Servicer will be obligated under its
Servicing Agreement to perform customary
servicing functions. Advances with respect
to delinquent payments of principal or
interest on a Loan will be made by the
Master Servicer or the Servicers only to the
extent described in the related Prospectus
Supplement. Such advances will be intended
to provide liquidity only and, unless
otherwise specified in the related
Prospectus Supplement, will be reimbursable
to the Master Servicer or the Servicer, as
the case may be, from scheduled payments of
principal and interest, late collections, or
from the proceeds of liquidation of the
related Loans, from other recoveries
relating to such Loans (including any
insurance proceeds or payments from other
credit supports). The Master Servicer or the
Servicers will be obligated to repurchase
Mortgage Loans for which insurance coverage
has been denied on the grounds of fraud or
misrepresentation only to the extent
specified in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, the Depositor may (i)
obtain and assign to the Trustee an
agreement with an independent standby
servicer acceptable to each Rating Agency
rating such Certificates, which will provide
that such standby servicer will assume a
Servicer's or the Master Servicer's
obligations in the event of a default by the
Servicer or Master Servicer or (ii) obtain a
performance bond acceptable to each Rating
Agency rating such Certificates that will
guarantee certain of the Servicer's or
Master Servicer's obligations. See
"SERVICING OF LOANS."
Federal Income Tax
Considerations............... If an election is made for treatment as a
REMIC under Sections 860A-G of the Internal
Revenue Code of 1986 (the "Code"), one or
more Classes of Certificates will be treated
as REMIC "Regular Interests." The Holder of
such a Regular Interest will be treated as
holding a debt obligation for federal income
tax purposes and will be required to report
stated interest income on the accrual
method.
Compound Interest Certificates will be, and
certain other Classes of Certificates
constituting Regular Interests may be,
issued with original issue discount that is
not de minimis. In such cases, the
Certificateholder will be required to
include the original issue discount in gross
income as it accrues, which may be prior to
the receipt of cash attributable to such
14
<PAGE>
income. If a Regular Interest Certificate is
issued at a premium, the holder thereof will be
entitled to make an election to amortize such
premium on a constant yield method.
Certificates constituting Regular Interests
will represent "qualifying real property loans"
for mutual savings banks and domestic building
and loan associations, "loans secured by an
interest in real property" for domestic
building and loan associations and "real estate
assets" for real estate investment trusts to
the extent that the underlying loans qualify
for such treatment.
In the case of a REMIC election, a Class of
Certificates will be treated as REMIC
"Residual Interests." Certificates
classified as REMIC Residual Interests will
generally be treated as representing
"qualifying real property loans" for mutual
savings banks and domestic building and loan
associations, "loans secured by an interest
in real property" for domestic building and
loan associations and "real estate assets"
for real estate investment trusts to the
same extent as REMIC Regular Interests.
The holder of a REMIC Residual Interest
Certificate must include in income its pro
rata share of the REMIC's taxable income.
Accordingly, in certain circumstances, the
holder of a REMIC Residual Interest might
(i) have REMIC taxable income or tax
liability attributable to REMIC taxable
income for a particular period or periods in
excess of cash distributions for such period
or periods or (ii) have an after-tax return
on its investment that is less than the
after-tax return on comparable debt
instruments or stripped bonds. In addition,
a portion (or, in some cases, all) of the
income from a REMIC Residual Interest: (i)
except, in certain circumstances, with
respect to a holder classified as a thrift
institution under the Code, may not be
subject to offset by losses from other
activities, (ii) for a holder that is
subject to tax under the Code on unrelated
business taxable income, may be treated as
unrelated business taxable income and (iii)
for a foreign holder, may not qualify for
exemption from withholding under any treaty.
Further, individual holders are subject to
limitations on the deductibility of expenses
of the REMIC. In addition, certain types of
tax-exempt organizations, including
governmental entities, will not be able to
acquire ownership of a Residual Interest
Certificate.
If no REMIC election is made, the Trust Fund
will be treated as a grantor trust and will
not be classified as an association taxable
as a corporation for federal income tax
purposes. The treatment of a particular
Series of Certificates will depend on the
characteristics of such Series of
Certificates. The holders of Certificates
will either be treated as owners of
undivided pro rata interests in the
underlying Loans ("Pass-Through
Certificates"), or as owners of stripped
bonds or stripped coupons ("Stripped
Certificates") under the Code. All income
with respect to a Stripped Certificate will
be accounted for as original issue discount
and, unless otherwise specified in the
related Prospectus Supplement, will be
reported by the Trustee on an accrual basis,
which may be prior to the receipt of cash
associated with such income.
The holder of a Pass-Through Certificate must
include in income its allocable share of all
interest and other income of the Trust and may,
subject to certain limitations for individual
Certificateholders, deduct its allocable share
of all expenses of the Trust. Pass-Through
15
<PAGE>
Certificates will be considered to represent
"qualifying real property loans" for mutual
savings banks and domestic building and loan
associations, "loans secured by an interest in
real property" for domestic building and loan
associations and "real estate assets" for real
estate investment trusts to the extent that the
loans qualify for such treatment. Although
there is no direct authority and the matter is
not free from doubt, Stripped Certificates
should also qualify for such treatment to the
extent that the underlying loans qualify for
such treatment. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS."
ERISA Considerations ..........A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with its own
legal advisors whether the purchase or holding
of Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA CONSIDERATIONS."
Legal Investment ..............Certificates of each Series offered by this
Prospectus and the related Prospectus
Supplement which are rated in one of the two
highest applicable rating categories by at
least one Rating Agency will constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are so rated
and, as such, 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.
Certain Certificates of some Series offered by
this Prospectus and the related Prospectus
Supplement may not be rated in one of the two
highest applicable rating categories by at
least one Rating Agency and, accordingly, will
not constitute "mortgage related securities"
for purposes of SMMEA. Investors should consult
their own legal advisors to determine the
extent to which such Certificates may be
purchased by such 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
Primary Assets, (ii) to repay indebtedness
which has been incurred to obtain funds to
acquire such Primary 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
Primary Assets for a Series may be effected by
an exchange of Certificates with the Depositor
of such Primary Assets. See "USE OF PROCEEDS."
Ratings .......................It will be a requirement for issuance of any
Series that the Certificates offered by this
Prospectus and the related Prospectus
Supplement be rated by at least one Rating
Agency in one of its four highest applicable
rating categories. The rating or ratings
applicable to Certificates of each Series
offered hereby and by the related Prospectus
Supplement will be as set forth in the related
Prospectus Supplement. A securities rating
should be evaluated independently of similar
ratings on different types of securities. A
securities rating does not address the effect
that the rate of prepayments on Loans
comprising or underlying the Primary Assets may
have on the yield to investors in the
Certificates. See "SPECIAL CONSIDERATIONS."
16
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Certificates.
Limited Liquidity. There can be no assurance that a secondary market for
the Certificates of any Series will develop or, if it does develop, that it
will provide Certificateholders with liquidity of investment or will continue
for the life of the Certificates. Lehman Brothers Inc. (through one or more
of its affiliates) intends to make a secondary market in the Certificates,
but has no obligation to do so. In addition, the market value of Certificates
of each Series will fluctuate with changes in prevailing rates of interest,
although in the case of Floating Rate Certificates, such fluctuations may be
less than those which may occur with respect to Certificates that have a
fixed rate of interest. Consequently, sale of the Certificates by a Holder in
any secondary market which may develop may be at a discount from par value or
from their purchase price. Certificateholders have no optional redemption
rights.
Yield, Prepayment and Maturity. The rate at which prepayments (which
include both voluntary prepayments by the Obligors on the Loans and
liquidations due to defaults and foreclosures) occur on the Loans underlying
or comprising the Primary Assets for a Series will be affected by a variety
of factors, including, without limitation, the level of prevailing interest
rates and economic, demographic, tax, social, legal and other factors.
Prepayments on the Loans comprising or underlying the Primary Assets for a
Series generally will result in a faster rate of distributions of principal
on the Certificates. Thus, the prepayment experience on the Loans comprising
or underlying the Primary Assets will affect the average life and yield to
investors of each Class and the extent to which principal on any such Class
is fully paid prior to its Final Scheduled Distribution Date, if at all. A
Series may include an Interest Weighted Class offered at a significant
premium or a Principal Weighted Class offered at a substantial discount.
Yields on such Classes of Certificates will be extremely sensitive to
prepayments on the Loans comprising or underlying the Primary Assets for such
Series. Where the amount of interest allocated with respect to an Interest
Weighted Class is extremely disproportionate to principal, a
Certificateholder purchasing such a Certificate at a significant premium
could, under some prepayment scenarios, fail to recoup its original
investment. If the Certificate Rate or Pass-Through Rate on Certificates of a
Series is based upon a weighted average of the interest rates on the Loans
comprising or underlying the related Primary Assets, interest on such
Certificates may be paid or accrued in the future at a rate lower than the
initial interest rate to the extent that those of such Loans which bear
higher rates of interest are prepaid more quickly than those of such Loans
which bear lower rates of interest. Any rating assigned to the Certificates
by a Rating Agency will reflect only such Rating Agency's assessment of the
likelihood that timely distributions will be made with respect to such
Certificates in accordance with the related Trust Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on
the Loans underlying or comprising the Primary Assets will be made by
borrowers or of the degree to which the rate of such prepayments might differ
from that originally anticipated. As a result, such rating will not address
the possibility that prepayment rates higher or lower than anticipated by an
investor may cause such investor to experience a lower than anticipated
yield, or that an investor purchasing an Interest Weighted Certificate at a
significant premium might fail to recoup its initial investment. See "YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS".
Credit Support Limitations. The amount, type and nature of Insurance
Policies, subordination, Certificate Guarantee Insurance, letters of credit
and other credit support, if any, required with respect to a Series will be
determined on the basis of criteria established by each Rating Agency rating
such Series. Such criteria are necessarily based upon an actuarial analysis
of the behavior of Loans in a larger group. Such actuarial analysis is the
basis upon which each Rating Agency determines (a) required amounts and types
of pool insurance, special hazard insurance, Reserve Funds, subordination or
other credit support and (b) limits on the number and amount of Loans which
have various special payment characteristics, have various Loan-to-Value
Ratios and/or were made for various purposes (e.g., primary residence, second
home, refinancing). There can be no assurance that the historical data
supporting such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of housing loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans.
In addition, if distributions in reduction of the principal balance of
Certificates of a Series of Multi-Class Certificates are made in order of the
respective Final Scheduled Distribution Dates of the Class, any limits with
17
<PAGE>
respect to the aggregate amount of claims under any related pool insurance,
special hazard insurance or other insurance policy, letters of credit or
other credit support may be exhausted before the principal of the later-
maturing Classes has been repaid. As a result, the impact of significant
losses on the Loans may bear primarily upon the Certificates of the
later-maturing Classes.
The Prospectus Supplement for a Series will describe any Reserve Funds,
Insurance Policies, letter of credit or other third-party credit support
relating to the Primary Assets or to the Certificates of such Series. Use of
such Reserve Funds and payments under such Insurance Policies, letter of
credit or other third-party credit support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Reserve Funds, Insurance Policies, letter of credit or other
credit support will not cover all potential losses or risks. Moreover, if a
form of credit support covers more than one Trust Fund (each, a "Covered
Trust"), holders of Certificates issued by any of such Covered Trusts will be
subject to the risk that such credit support will be exhausted by the claims
of other Covered Trusts prior to such Covered Trust receiving any of its
intended share of such coverage. The obligations of the issuers of any credit
support such as a pool insurance policy, special hazard insurance policy,
bankruptcy bond, letter of credit, Certificate Guarantee Insurance,
repurchase bond or other third-party credit support will not be guaranteed or
insured by the United States, or by any agency or instrumentality thereof. A
Series of Certificates may include a Class or multiple Classes of Subordinate
Certificates to the extent described in the related Prospectus Supplement.
Although such subordination is intended to reduce the risk of delinquent
distributions or ultimate losses to Holders of Senior Certificates, the
Subordinated Amount will be limited and will decline under certain
circumstances and the related Subordination Reserve Fund, if any, could be
depleted in certain circumstances. See "DESCRIPTION OF THE CERTIFICATES",
"THE TRUST FUNDS" and "CREDIT SUPPORT".
Certain Loans and Mortgaged Property. Loans such as GPM Loans, GEM Loans,
ARMs, Bi-Weekly Loans and Buy-Down Loans are of recent origin. As a result,
reliable prepayment, loss and foreclosure statistics relating to such Loans
are not available. Such Loans may be underwritten on the basis of an
assessment that the borrower will have the ability to make payments in higher
amounts in later years and, in the case of Loans with adjustable mortgage
rates, after relatively short periods of time. See "LOAN UNDERWRITING
PROCEDURES AND STANDARDS" and "CREDIT SUPPORT". Other Loans may be
underwritten principally on the basis of the initial Loan-to-Value Ratio
thereof. To the extent losses on Loans exceed levels estimated by the Rating
Agency rating the Series in determining required levels of
overcollateralization or other credit support, the Trust Fund may experience
a loss. Furthermore, Loans made with respect to Multifamily Property,
Manufactured Homes or Cooperative Dwellings may entail risks of loss in the
event of delinquency and foreclosure or repossession that are greater than
similar risks associated with traditional single-family property. To the
extent losses on such Loans exceed levels estimated by the Rating Agency in
determining required levels of overcollateralization or other credit support,
the Trust Fund may experience a loss. See "SERVICING OF LOANS -- Maintenance
of Insurance Policies and Other Servicing Procedures" and "CREDIT SUPPORT".
Limited Obligations and Assets of Depositor. Unless otherwise set forth in
the Prospectus Supplement for a Series of Certificates, the Trust Fund for a
Series will be the only available source of funds to make distributions on
the Certificates of such Series. The only obligations, if any, of the
Depositor with respect to the Certificates of any Series will be pursuant to
certain representations and warranties. See "THE TRUST AGREEMENTS --
Assignment of Primary Assets" herein. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet any
obligation to repurchase Primary Assets with respect to which there has been
a breach of any representation or warranty. If, for example, the Depositor
were required to repurchase a Loan which constitutes a Primary Asset, its
only sources of funds to make such repurchase would be from funds obtained
from the enforcement of a corresponding obligation, if any, on the part of
the originator of the Loans, Servicer or Master Servicer, as the case may be,
or from a reserve fund established to provide funds for such repurchases. See
"THE DEPOSITOR".
FNMA and FHLMC Guaranties. Although payments on FNMA and FHLMC Certificates
are guaranteed by FNMA and FHLMC, respectively, in the manner described
herein (and though both FNMA and FHLMC are federally-chartered corporations),
such guaranties are backed by the credit of FNMA or FHLMC, respectively, and
not the full faith and credit of the United States. Neither the United States
18
<PAGE>
nor any agency thereof is obligated to finance the operations of FNMA or FHLMC
or to assist either of them in any other manner. See "ADDITIONAL INFORMATION"
for the availability of certain additional information concerning FNMA and FNMA
Certificates or FHLMC and FHLMC Certificates.
ERISA Considerations. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans.
Due to the complexity of regulations which govern such plans, prospective
investors that are subject to ERISA are urged to consult their own counsel
regarding consequences under ERISA of acquisition, ownership and disposition
of the Certificates of any Series. See "ERISA CONSIDERATIONS".
Certain Federal Tax Considerations Regarding REMIC Residual Interests.
Holders of REMIC Residual Interests will be required to report on their federal
income tax returns as ordinary income their pro rata share of the taxable income
of the REMIC regardless of the amount or timing of their receipt of cash
payments as described in "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Residual
Interests in a REMIC." Accordingly, under certain circumstances, holders of
Certificates which constitute REMIC Residual Interests might have taxable income
and tax liabilities arising from such investment during a taxable year in excess
of the cash received during such period. The requirement that Holders of
Residual Interest Certificates report their pro rata share of the taxable income
and net loss of the REMIC will continue until the principal balances of all
Classes of Certificates of the related Series have been reduced to zero, even
though holders of Residual Interests have received full payment of their stated
interest and principal. A portion (or, in certain circumstances, all) of a
Residual Interest Certificateholder's share of the REMIC taxable income may be
treated as "excess inclusion" income to such holder which (i) except in the case
of certain thrift institutions, will not be subject to offset by losses from
other activities, (ii) for a tax-exempt Holder, will be treated as unrelated
business taxable income and (iii) for a foreign holder, will not qualify for
exemption from withholding tax. Individual Holders of Certificates constituting
Residual Interests may be limited in their ability to deduct servicing fees and
other expenses of the REMIC. Because of the special tax treatment of REMIC
residual interests, the taxable income arising in a given year on a REMIC
residual interest will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Interest Certificates may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in Series pursuant to separate Trust
Agreements between the Depositor and the Trustee for the related Series
identified in the related Prospectus Supplement. The following summaries
describe certain provisions common to each Series. The 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 and the
Prospectus Supplement relating to each Series. When particular provisions or
terms used in the Trust Agreement are referred to, such provisions or terms
shall be as specified in the Trust Agreement.
Each Series will consist of one or more Classes, one or more of which may
consist of Compound Interest Certificates, Floating Rate Certificates,
Interest Weighted Certificates, Principal Weighted Certificates or Planned
Amortization Certificates ("PACs"). A Series may also include one or more
Classes of Subordinate Certificates. A Class of Subordinate Certificates will
be offered hereby or by any Prospectus Supplement only if rated by a Rating
Agency in at least its second highest applicable rating category. If so
specified in the related Prospectus Supplement, the Primary Assets in a Trust
Fund may be divided into multiple Asset Groups and the Certificates of each
separate Class will evidence beneficial ownership of each corresponding Asset
Group.
Each Series will be issued in fully registered form, in the minimum
original principal amount or notional amount for Certificates of each Class
specified in the related Prospectus Supplement. The transfer of the
Certificates may be registered, and the Certificates may be exchanged,
without the payment of any service charge payable in connection with such
registration of transfer or exchange. If specified in the related Prospectus
Supplement, one or more Classes of a Series may be available in book-entry
form only.
19
<PAGE>
VALUATION OF TRUST ASSETS
Each Primary Asset included in the Trust Fund for a Multi-Class Series
will be assigned an initial Asset Value determined in the manner and subject
to the assumptions summarized in the related Prospectus Supplement. The Asset
Value of the Primary Assets will not be less than the initial aggregate
principal amount of the Certificates of the related Multi-Class Series at the
date of issuance thereof.
The Asset Value of Primary Assets represents the principal amount of
Certificates of a Multi-Class Series that, based on certain assumptions, can
be supported by the scheduled principal and interest due on the Primary
Assets irrespective of prepayments thereon, the reinvestment income thereon
at the Assumed Reinvestment Rate (which may be zero) and the moneys available
to be withdrawn from related Reserve Funds, if any, as specified in the
related Prospectus Supplement. Individual Primary Assets for a Series which
share similar characteristics may be aggregated into one or more groups (each
an "Asset Group"), each of which will be assigned a single aggregate Asset
Value. If so specified in the related Prospectus Supplement, the Primary
Assets in a Trust Fund may be divided into multiple Asset Groups and the
Certificates of separate Classes will evidence beneficial ownership of each
corresponding Asset Group. Unless the related Prospectus Supplement provides
otherwise, the aggregate Asset Value of an Asset Group will be calculated as
though the underlying Primary Assets constitute a single Loan having such of
the characteristics of the Primary Assets included in the Asset Group that
would result in the lowest Asset Value being assigned to each Primary Asset
included in such Asset Group.
There are a number of alternative means of determining Asset Value of a
Primary Asset, including determinations based on the discounted present value
of the remaining scheduled payments on such Primary Asset, determinations
based on the relationship between the interest rate borne by such Primary
Asset and the Certificate Rate or Rates for the related Classes of
Certificates, or based upon the aggregate outstanding principal balances of
the Primary Assets. The Prospectus Supplement for a Multi-Class Series will
specify the method or methods and summarize the related assumptions used to
determine the Asset Values of the Primary Assets in the related Trust Fund.
The Assumed Reinvestment Rate, if any, for a Multi-Class Series will be
the highest rate permitted by each Rating Agency rating such Series or a rate
insured, guaranteed or otherwise provided for by means of a surety bond,
interest rate swap agreement, interest rate cap agreement, Guaranteed
Investment Contract, or other arrangement satisfactory to each such Rating
Agency. See "THE TRUST AGREEMENTS -- Investment of Funds".
DISTRIBUTIONS ON THE CERTIFICATES
General. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Certificates will
be made on each Distribution Date to the extent of the "Available
Distribution Amount" as set forth in the related Prospectus Supplement.
Distributions of interest on Certificates which receive interest will be
made periodically at the intervals and at the Pass-Through Rate or
Certificate Rate specified or, with respect to Floating Rate Certificates,
determined in the manner described in the related Prospectus Supplement.
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 each class of
the Certificates of a Series will be made on either a pro rata or random lot
basis among all of the Certificates of such Class, as specified in the
related Prospectus Supplement. Principal payments will be allocated to each
Class of a Series as specified in the related Prospectus Supplement.
If funds in the Certificate Account (together with any amounts transferred
from any Reserve Fund or applicable credit support) are insufficient to make
the full distribution to Certificateholders described above on any
Distribution Date, the funds available for distribution to the
Certificateholders of each Class will be distributed in accordance with their
respective interests therein, except that Subordinate Certificateholders, if
any, will not, subject to the limitations described in the related Prospectus
Supplement, receive any distributions until Senior Certificateholders receive
the amount of present distributions due them and the amount of distributions
owed them which were not timely distributed thereon and to which they are
entitled (in each case calculated as described in the related Prospectus
Supplement). The difference between the amount which the Certificateholders
20
<PAGE>
would have received if there had been sufficient eligible funds available for
distribution and the amount actually distributed, plus interest at the
applicable Pass-Through Rate or Certificate Rate will be included in the
calculation of the amount which the Certificateholders are entitled to receive
on the next Distribution Date. See "THE TRUST AGREEMENTS -- Deficiency Events".
Distributions of principal of and interest on Certificates of a Series
will be made by check mailed to Certificateholders of such Series registered
as such on the close of business on the record date specified in the related
Prospectus Supplement at their addresses appearing on the Certificate
Register, except that (a) distributions may be made by wire transfer (at the
expense of the Certificateholder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b)
the final distribution in retirement of a Certificate will be made only upon
presentation and surrender of such Certificate at the corporate trust office
of the Trustee for such Series or such other office of the Trustee as
specified in the Prospectus Supplement. Notice of the final distribution on a
Certificate will be mailed to the Holder of such Certificate before the
Distribution Date on which such final distribution in retirement of the
Certificate is expected to be made. If specified in the related Prospectus
Supplement, the Certificates of a Series or certain Classes of a Series may
be available only in book-entry form. See "Book-Entry Registration" herein.
With respect to reports to be furnished to Certificateholders concerning a
distribution, see "THE TRUST AGREEMENTS -- Reports to Certificateholders".
Pass-Through Certificates Generally. With respect to a Series other than a
Multi-Class Series, distributions on the Certificates on each Distribution
Date will generally be allocated to each Certificate entitled thereto on the
basis of the undivided percentage interest (the "Percentage Interest")
evidenced by such Certificate in the Trust Fund or on the basis of their
outstanding principal amounts or notional amounts (subject to any
subordination of the rights of any Subordinate Classes to receive current
distributions). See "Subordinate Certificates" below as specified in the
related Prospectus Supplement.
If the Primary Assets for a Series have adjustable or variable interest or
pass-through rates, then the Pass- Through Rate of the Certificates of such
Series may also vary, due to changes in such rates and due to prepayments
with respect to Loans comprising or underlying the related Primary Assets. If
the Primary Assets for a Series have fixed interest or pass-through rates,
then the Pass-Through Rate on Certificates of the related Series may be
fixed, or may vary, to the extent prepayments cause changes in the weighted
average interest rate or pass-through rate of the Primary Assets. If the
Primary Assets have lifetime or periodic adjustment caps on the respective
pass-through rates, then the Pass-Through Rate on the Certificates of the
related Series may also reflect such caps.
If so specified in the related Prospectus Supplement, a Series may include
a Class of Interest Weighted Certificates, a Class of Principal Weighted
Certificates, or both. Unless otherwise specified in the Prospectus
Supplement, payments received from the Primary Assets will be allocated on
the basis of the Percentage Interest of each Class in the principal component
of such distributions, the interest component of such distributions, or both,
and will be further allocated on a pro rata basis among the Certificates
within each Class. The method or formula for determining the Percentage
Interest of a Certificate will be set forth in the related Prospectus
Supplement.
Multi-Class Series. Unless otherwise specified in the Prospectus
Supplement, each Certificate of a Multi- Class Series will have a principal
amount or a notional amount and a specified Certificate Rate (which may be
zero). Interest distributions on a Multi-Class Series will be made on each
Certificate entitled to an interest distribution on each Distribution Date at
the Certificate Rate specified or, with respect to Floating Rate
Certificates, determined as described in the related Prospectus Supplement,
to the extent funds are available in the Certificate Account, subject to any
subordination of the rights of any Subordinate Class to receive current
distributions. See "Subordinate and Other Certificates" below and "CREDIT
SUPPORT".
Distributions of interest on a Class of Compound Interest Certificates
will commence only after the related Accrual Termination Date specified in
the related Prospectus Supplement. On each Distribution Date prior to and
including the Accrual Termination Date, interest on such Class of Compound
Interest Certificates will accrue and the amount of interest accrued on such
Distribution Date (the "Accrual Distribution Amount") will be added to the
principal balance thereof on the related Distribution Date. On each
21
<PAGE>
Distribution Date after the Accrual Termination Date, interest distributions
will be made on Classes of Compound Interest Certificates on the basis of the
current Compound Value of such Class. The Compound Value of a Class of Compound
Interest Certificates equals the initial aggregate principal balance of the
Class, plus accrued and undistributed interest added to such Class through the
immediately preceding Distribution Date, less any principal distributions
previously made in reduction of the aggregate outstanding principal balance of
such Class.
To the extent provided in the related Prospectus Supplement, a Series of
Multi-Class Certificates may include one or more Classes of Floating Rate
Certificates. The Certificate Rate of a Floating Rate Certificate will be a
variable or adjustable rate, subject to a Maximum Floating Rate, Minimum
Floating Rate, or both. For each Class of Floating Rate Certificates, the
related Prospectus Supplement will set forth the initial Floating Rate (or
the method of determining it), the Floating Rate Period, and the formula,
index, or other method by which the Floating Rate for each Floating Rate
Period will be determined.
To the extent provided in the related Prospectus Supplement, a Series of
Multi-Class Certificates may include one or more sequences of Planned
Amortization Certificates ("PACs").
Distributions of principal will be allocated among the Classes of a
Multi-Class Series in the order of priority and amount specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Principal Distribution Amount for a Multi-Class
Series on each Distribution Date will be an amount equal to the sum of (a)
the Accrual Distribution Amount, if any, (b) the Minimum Principal
Distribution Amount and (c) the percentage, if any, of Excess Cash Flow
specified in the related Prospectus Supplement.
Subordinate Certificates. One or more Classes of a Series may consist of
Subordinate Certificates. Subordinate Certificates may be included in a
Series to provide credit support as described herein under "CREDIT SUPPORT"
in lieu of or in addition to other forms of credit support. The extent of
subordination of a Class of Subordinate Certificates may be limited as
described in the related Prospectus Supplement. See "CREDIT SUPPORT". If the
Primary Assets are divided into separate Asset Groups, beneficial ownership
of which is evidenced by separate Classes of a Series, credit support may be
provided by a cross-support feature which requires that distributions be made
to Senior Certificates evidencing beneficial ownership of one Asset Group
prior to making distributions on Subordinate Certificates evidencing a
beneficial ownership interest in another Asset Group within the Trust Fund.
Unless rated in one of the four highest rating categories by at least one
Rating Agency, Subordinate Certificates will not be offered hereby or by the
related Prospectus Supplement.
SPECIAL DISTRIBUTIONS AND OTHER DISTRIBUTIONS
Special Distributions. To the extent specified in the related Prospectus
Supplement, Special Distributions in reduction of Certificate principal
amount may be made with respect to the Certificates of a Multi-Class Series
on the day or days of any month specified therein if, as a result of the
prepayment experience on the Primary Assets for such Series or the low yields
available for reinvestment, or both, it is determined (based on assumptions
specified in the Trust Agreement and after giving effect to the amounts, if
any, available to be withdrawn from any Reserve Fund for such Series) that
the amount anticipated to be available in the Certificate Account on the date
specified in the related Prospectus Supplement for such Series will be
insufficient to make scheduled distributions of principal and interest on the
Certificates of such Series on the next Distribution Date. The amount
distributed in reduction of principal amount will not exceed the Principal
Distribution Amount otherwise required to be paid on the next Distribution
Date. Therefore, the result of such a Special Distribution with respect to
the Certificates of a Multi-Class Series will be to reduce their aggregate
principal amount prior to the next scheduled Distribution Date.
All distributions in reduction of the Certificate principal amount
pursuant to any Special Distribution will be made in the order of priority
and in the manner specified in the related Prospectus Supplement. Notice of
any Special Distribution will be mailed by the Trustee to the
Certificateholders of the related Series prior to the Special Distribution
Date.
Other Distributions. In the event that Primary Assets having an aggregate
Asset Value at least equal to the initial aggregate principal amount of the
Certificates of a Multi-Class Series are not delivered to the Trustee on the
related Closing Date, the Depositor will deposit cash or Eligible Investments
22
<PAGE>
on an interim basis with the Trustee on such Closing Date in lieu of such
undelivered Primary Assets. If Primary Assets are not delivered by the date
specified in the related Prospectus Supplement, the Trustee will make a
distribution from the interim deposit and any reinvestment income thereon in
reduction of principal amount of the Certificates on the next succeeding
Distribution Date. Such a distribution would affect weighted average life and
yield to maturity of the affected Certificates. See "YIELD, PREPAYMENT AND
MATURITY CONSIDERATIONS".
OPTIONAL TERMINATION
If so specified in the related Prospectus Supplement for a Series, the
Depositor, the Master Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of a
Trust Fund by repurchasing all of the Primary Assets from such Trust Fund on
or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates is less than a specified percentage of their initial aggregate
principal amount. In the case of a Trust Fund for which a REMIC election has
been made, the Trustee shall receive a satisfactory opinion of counsel that
the repurchase price will not jeopardize the status of the REMIC and that the
optional termination will be conducted so as to constitute a "qualified
liquidation" under Section 860F of the Code. Such optional termination will
be in addition to terminations which may result from other events. See "THE
TRUST AGREEMENTS -- Deficiency Event" and "-- Termination".
OPTIONAL REPURCHASE OF CERTIFICATES
If so specified in the related Prospectus Supplement for a Series, one or
more Classes of the Certificates of such Series may be repurchased, in whole
or in part, at the option of the Depositor, at such times and under the
circumstances specified in such Prospectus Supplement. Notice of any such
repurchase must be given by the Trustee prior to the optional repurchase
date, as specified in the related Prospectus Supplement. The repurchase price
for any Certificate so repurchased will be set forth in the related
Prospectus Supplement.
OTHER REPURCHASES
If so specified in the related Prospectus Supplement for a Series, any
Class of the Certificates of such Series may be subject to repurchase at the
request of the holders of such Class or to mandatory repurchase by the
Depositor. Any such redemption at the request of holders or mandatory
repurchase with respect to a Class of a Series of the Certificates will be
described in the related Prospectus Supplement and will be on such terms and
conditions as described therein.
The Depositor also may, at its option, obtain for any Series of the
Certificates, one or more guarantees from a company or companies acceptable
to the Rating Agency. Such guarantees may provide for one or more of the
following for any Series of the Certificates: (i) call protection for any
Class of the Certificates of such Series; (ii) a guarantee of a certain
prepayment rate of some or all of the Loans underlying such Series; or (iii)
certain other guarantees, all as specified in the related Prospectus
Supplement.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
will be issued in book-entry form in the minimum denominations specified in
such Prospectus Supplement and integral multiples thereof, and each Class
will be represented by a single Certificate registered in the name of the
nominee of the depository, The Depository Trust Company ("DTC"), a
limited-purpose trust company organized under the laws of the State of New
York. If so specified in the related Prospectus Supplement, no person
acquiring an interest in the Certificates (a "Certificateowner") will be
entitled to receive a Certificate representing such person's interest in the
Certificates except in the event that Definitive Certificates (as defined
herein) are issued under the limited circumstances set forth under
"Definitive Certificates" below. Unless and until Definitive Certificates are
issued, it is anticipated that the only Certificateholder of the Certificates
will be Cede & Co., as nominee of DTC. Certificateowners will not be
"Certificateholders" or "Holders" under the Trust Agreement, and
Certificateowners will only be permitted to exercise the rights of
Certificateholders indirectly through DTC and its Participants.
23
<PAGE>
DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is
available to entities that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participants").
Certificateowners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates may
do so only though Participants and Indirect Participants. Because DTC can
only act on behalf of Participants and Indirect Participants, the ability of
a Certificateowner to pledge such owner's Certificate to persons or entities
that do not participate in the DTC system, or otherwise take actions in
respect of such Certificate, may be limited. In addition, under a book-entry
format, Certificateowners may experience some delay in their receipt of
principal and interest distributions with respect to the Certificates since
such distributions will be forwarded to DTC and DTC will then forward such
distributions to its Participants which in turn will forward them to Indirect
Participants or Certificateowners.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates
and is required to receive and transmit principal and interest distributions
and distributions with respect to the Certificates. Participants and Indirect
Participants with which Certificateowners have accounts with respect to
Certificates similarly are required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective
Certificateowners. Accordingly, although Certificateowners will not possess
certificates, the Rules provide a mechanism by which Certificateowners will
receive distributions and will be able to transfer their interests.
The Depositor understands that DTC will take any action permitted to be
taken by a Certificateholder under the Trust Agreement only at the direction
of one or more Participants to whose account with DTC the Certificates are
credited. Additionally, the Depositor understands that DTC will take such
actions with respect to holders of a certain specified interest in the
Certificates or holders having a certain specified voting interest only at
the direction of and on behalf of Participants whose holdings represent that
specified interest or voting interest. DTC may take conflicting actions with
respect to other Holders of Certificates to the extent that such actions are
taken on behalf of Participants whose holdings represent that specified
interest or voting interest.
If so specified in the related Prospectus Supplement, if Certificates of a
Series are issued initially in book- entry form only, the Certificates will
be issued in fully registered, certified form ("Definitive Certificates") to
Certificateowners, rather than to DTC, only if (i) DTC or the Depositor
advises the Trustee in writing that DTC is no longer willing or able properly
to discharge its responsibilities as depository with respect to the
Certificates, and the Depositor is unable to locate a qualified successor,
(ii) the Depositor, at its sole option, elects to terminate the book-entry
system through DTC, (iii) after the occurrence of an Event of Default under
the Trust Agreement, Certificateowners representing a majority of the
aggregate outstanding principal amount of the Certificates advise DTC through
Participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interests of
Certificateowners or (iv) a Certificateowner provides written evidence that
its corporate investment policies prohibit its holding of investments in
other than certificated form in its own name.
Upon the occurrence of any of the events described in clauses (i), (ii) or
(iii) of the immediately preceding paragraph, DTC is required to notify all
Participants of the availability through DTC of Definitive Certificates. Upon
surrender by DTC of the certificates representing the Certificates and
instructions for registration the Trustee will issue all, but not less than
all of the remaining formerly DTC-held Certificates then outstanding in the
form of Definitive Certificates, and thereafter the Trustee and the Master
Servicer will recognize the holders of such Definitive Certificates as
Certificateholders under the Trust Agreement. Upon the occurrence of the
event described in clause (iv) of the immediately preceding paragraph and the
surrender by DTC of the certificates representing the Certificates a portion
of which a Certificateowner has requested be issued in its name in accordance
with clause (iv) and instructions for registration, a Definitive Certificate
will be issued to such Certificateowner and a replacement certificate
representing the remaining portion of the certificates representing the
Certificates to DTC, and thereafter the Trustee will recognize the holder of
such Definitive Certificate and DTC as holder of the Certificate as
Certificateholders under the Trust Agreement.
24
<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
PAYMENT DELAYS
With respect to any Series, a period of time will elapse between receipt
of payments or distributions on the Primary Assets and the Distribution Date
on which such payments or distributions are passed through to
Certificateholders. Such a delay will effectively reduce the yield that would
otherwise be obtained if payments or distributions were distributed on or
near the date of receipt. The related Prospectus Supplement will set forth an
example of the timing of receipts and the distribution thereof to
Certificateholders so that the impact of such a delay can be understood.
PRINCIPAL PREPAYMENTS
With respect to a Series for which the Primary Assets consist of Loans or
participation interests therein, when a Loan prepays in full, the borrower
will generally be required to pay interest on the amount of prepayment only
to the prepayment date. In addition, the prepayment may not be required to be
passed through to Certificateholders until the month following receipt. The
effect of these provisions is to reduce the aggregate amount of interest
which would otherwise be available for distributions on the Certificates,
thus effectively reducing the yield that would be obtained if interest
continued to accrue on the Loan until the date on which the principal
prepayment was scheduled to be paid. To the extent specified in the related
Prospectus Supplement, this effect on yield may be mitigated by, among other
things, an adjustment to the servicing fee otherwise payable to the Master
Servicer or Servicer with respect to any such prepaid Loans. Further, if the
Certificate Rate or Pass- Through Rate on Certificates of a Series is based
upon a weighted average of the interest rates on the Loans comprising or
underlying the related Primary Assets, interest on such Certificates may be
paid or accrued in the future at a rate lower than the initial interest rate
to the extent that those of such Loans which bear higher rates of interest
initial are prepaid more quickly than those of such Loans which bear lower
rates of interest. See "SERVICING OF LOANS -- Advances and Limitations
Thereon".
TIMING OF REDUCTION OF PRINCIPAL AMOUNT
A Multi-Class Series may provide that, for purposes of calculating
interest distributions, the principal amount of the Certificates is deemed
reduced as of a date prior to the Distribution Date on which principal
thereon is actually distributed. Consequently, the amount of interest accrued
during any Interest Accrual Period will be less than the amount that would
have accrued on the actual principal amount of the Certificate outstanding.
The effect of such provisions is to produce a lower yield on the Certificates
than would be obtained if interest were to accrue on the Certificates on the
actual unpaid principal amount of such Certificates to each Distribution
Date. The related Prospectus Supplement will specify the time at which the
principal amounts of the Certificates are determined or are deemed to reduce
for purposes of calculating interest distributions on Certificates of a
Multi-Class Series.
INTEREST OR PRINCIPAL WEIGHTED CERTIFICATES
If a Class of Certificates consists of Interest Weighted Certificates or
Principal Weighted Certificates, a lower rate of principal prepayments than
anticipated will negatively affect yield to investors in Principal Weighted
Certificates, and a higher rate of principal prepayments than anticipated
will negatively affect yield to investors in Interest Weighted Certificates.
The Prospectus Supplement for a Series including such Certificates will
include a table showing the effect of various levels of prepayment on yields
on such Certificates. Such tables will be intended to illustrate the
sensitivity of yields to various prepayment rates and will not be intended to
predict, or provide information which will enable investors to predict,
yields or prepayment rates.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date of each Class of any Multi-Class
Series will be specified in the related Prospectus Supplement and will be the
date (calculated on the basis of the assumptions applicable to such Series
described therein) on which the entire aggregate principal balance of such
25
<PAGE>
Class will be reduced to zero. Since prepayments on the Loans underlying or
comprising the Primary Assets will be used to make distributions in reduction of
the outstanding principal amount of the Certificates, it is likely that the
actual maturity of any such Class will occur earlier, and may occur substanially
earlier, than its Final Scheduled Distribution Date.
PREPAYMENTS AND WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of the
principal of such security will be repaid to the investor. The weighted
average life of the Certificates of a Series will be influenced by the rate
at which principal on the Loans comprising or underlying the Primary Assets
for such Certificates is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments, in whole or in part, and liquidations due to default).
The rate of principal prepayments on pools of housing loans is influenced
by a variety of economic, demographic, geographic, legal, tax, social and
other factors. The rate of prepayments of conventional housing loans has
fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans
comprising or underlying the Primary Assets for a Series, such Loans are
likely to prepay at rates higher than if prevailing interest rates remain at
or above the interest rates borne by such Loans. In this regard, it should be
noted that the Loans comprising or underlying the Primary Assets for a Series
may have different interest rates, and the stated pass-through or interest
rate of certain Primary Assets or the Certificate Rate or Pass-Through Rate
on the Certificates may be a number of percentage points less than interest
rates on such Loans. In addition, the weighted average life of the
Certificates may be affected by the varying maturities of the Loans
comprising or underlying the Primary Assets. If any Loans comprising or
underlying the Primary Assets for a Series have actual terms-to-stated
maturity of less than those assumed in calculating the Final Scheduled
Distribution Date of the related Certificates, one or more Classes of the
Series may be fully paid prior to their respective Stated Maturities, even in
the absence of prepayments and a reinvestment return higher than the Assumed
Reinvestment Rate.
It is customary in the mortgage industry to compute the yield on a pool of
30-year, fixed rate, level payment mortgages as if the pool were a single
loan amortized according to the 30-year schedule and then prepaid in full at
the end of the twelfth year, and to compute the yield on a pool of 15-year,
fixed rate, level payment mortgages as if the pool were a single loan that is
amortized according to a 15-year schedule and then prepaid in full at the end
of the seventh year. Prepayments on loans are also commonly measured relative
to a prepayment standard or model, such as the Constant Prepayment Rate
("CPR") prepayment model or the Standard Prepayment Assumption ("SPA")
prepayment model or the FHA Prepayment Experience, each as described below.
CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
such loans. SPA represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans. A prepayment
assumption of 100% of SPA assumes prepayment rates of 0.2% per annum of the
then outstanding principal balance of such loans in the first month of the
life of the 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 the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
The FHA, a division of HUD, has compiled statistics relating to fixed
rate, level-payment mortgage loans secured by Single Family Property and
insured by the FHA under the National Housing Act of 1934, as amended (the
"Housing Act"), 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 the FHA, set forth the percentages of
the original number of FHA Loans in pools of fixed rate, 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). Data relating to fixed-rate mortgage loans
with original maturities of 15 to 30 years for the period 1970 to 1983, as
compiled by HUD, indicate, for example, that for a pool of 30-year mortgage
loans having a mortgage rate of 12% per annum, the aggregate principal
balance of the loans outstanding 12 years after origination is expected to be
26
<PAGE>
approximately 46% of the original principal balance. By comparison, 90.87% of
the aggregate principal balance of such mortgage loans would have been
outstanding if such mortgage loans had amortized in accordance with the
applicable repayment schedule, without prepayments. The HUD data also indicate
that for a pool of 15-year mortgage loans having a mortgage rate of 12% per
annum the aggregate principal balance of the loans outstanding seven years after
origination is expected to be approximately 40% of the original principal
balance. By comparison, 73.84% of the aggregate principal balance of such
mortgage loans would have been outstanding if such mortgage loans had amortized
in accordance with the applicable repayment schedule, without prepayments. The
percentage of loans in a pool that remains outstanding, as indicated by the HUD
data, is referred to herein as the "FHA Prepayment Experience."
There may be substantial differences between the portfolio on which the
FHA statistics were based and the Loans comprising or underlying the Primary
Assets for a Series. To the extent that the Loans comprising or underlying
the Primary Assets for such Series have scheduled maturities differing from
those of the mortgage loans in the FHA statistics, the probability of
prepayment of the Loans comprising or underlying the Primary Assets may
differ from that of mortgage loans included in the FHA statistics. There is
also no assurance that the economic and other factors existing during the
period covered by the FHA statistics are applicable today or will be
applicable in the future.
Neither CPR, SPA, or the FHA Prepayment Experience nor any other
prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of loans, including the Loans underlying or comprising the
Primary Assets. Thus, it is likely that prepayment of any Loans comprising or
underlying the Primary Assets for any Series will not conform to the FHA
Prepayment Experience or to any level of CPR or SPA.
The Prospectus Supplement for each Multi-Class Series will describe the
prepayment standard or model used to prepare the illustrative tables setting
forth the weighted average life of each Class of such Series under a given
set of prepayment assumptions. The related Prospectus Supplement will also
describe the percentage of the initial principal balance of each Class of
such Series that would be outstanding on specified Distribution Dates for
such Series based on the assumptions stated in such Prospectus Supplement,
including assumptions that prepayments on the Loans comprising or underlying
the related Primary Assets are made at rates corresponding to various
percentages of the FHA Prepayment Experience, CPR, SPA or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the
Certificates to various prepayment rates and will not be intended to predict
or to provide information which will enable investors to predict the actual
weighted average life of the Certificates or prepayment rates of the Loans
comprising or underlying the related Primary Assets.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Loan. Mortgage Loans made with respect to Multifamily Properties
may have provisions which prevent prepayment for a number of years and may
provide for payments of interest only during a certain period followed by
amortization of principal on the basis of a schedule extending beyond the
maturity of the related mortgage loan. ARMs, Bi-weekly Loans, GEM Loans, GPM
Loans or Buy-Down Loans comprising or underlying the Primary Assets may
experience a rate of principal prepayments which is different from the
principal prepayment rate for ARMs, Bi-weekly Loans, GEM Loans and GPM Loans
included in any other mortgage pool or from Conventional fixed rate Loans or
from other adjustable rate or graduated equity mortgages having different
characteristics. Because ARMs, Bi-weekly Loans, GEM Loans and GPM Loans have
not been originated in large quantities until recently, no statistics exist
which indicate reliably the respective rates of prepayment of such Loans in
either stable or changing interest rate environments, and accordingly no
certainty exists as to what such rates of prepayment might be.
In the case of Negatively Amortizing ARMs, if interest rates rise without
a simultaneous increase in the related Scheduled Payment, Deferred Interest
and Negative Amortization may result. However, borrowers may pay amounts in
addition to their Scheduled Payments in order to avoid such Negative
Amortization and to increase tax deductible interest payments. To the extent
that any of such Mortgage Loans Negatively Amortize over their respective
terms, future interest accruals are computed on the higher outstanding
principal balance of such Mortgage Loan and a smaller portion of the
Scheduled Payment is applied to principal than would be required to amortize
the unpaid principal over its remaining term. Accordingly, the weighted
27
<PAGE>
average life of such Mortgage Loans will increase. During a period of declining
interest rates, the portion of each Scheduled Payment in excess of the scheduled
interest and principal due will be applied to reduce the outstanding principal
balance of the related Mortgage Loan, thereby resulting in accelerated
amortization of such ARM. Any such acceleration in amortization of the principal
balance of any Negatively Amortizing ARM will shorten the weighted average life
of such Mortgage Loan. The application of partial prepayments to reduce the
outstanding principal balance of a Negatively Amortizing ARM will tend to reduce
the weighted average life of the Mortgage Loan and will adversely affect the
yield to Holders who purchased their Certificates at a premium, if any, and
Holders of Interest Weighted Classes. The pooling of Negatively Amortizing ARMs
having Rate Adjustment Dates in different months, together with different
initial Mortgage Rates, Lifetime Mortgage Rate Caps, Minimum Mortgage Rates and
stated maturity dates, could result in some Negatively Amortizing ARMs which
comprise or underlie the Primary Assets experiencing negative amortization while
the amortization of other Negatively Amortizing ARMs may be accelerated.
If the Loans comprising or underlying the Primary Assets for a Series
include ARMs that permit the borrower to convert to a long-term fixed
interest rate loan, the Master Servicer, Servicer, or PMBS Servicer, as
applicable, may, if specified in the related Prospectus Supplement, be
obligated to repurchase any Loan so converted. Any such conversion and
repurchase would reduce the average weighted life of the Certificates of the
related Series.
A GEM Loan provides for scheduled annual increases in the borrower's
Scheduled Payment. Because the additional portion of the Scheduled Payment is
applied to reduce the unpaid principal balance of the GEM Loan, the stated
maturity of a GEM Loan will be significantly shorter than the 25 to 30 year
term used as the basis for calculating the installments of principal and
interest applicable until the first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of
housing loans. Even though some Manufactured Home Loans may be FHA Loans, no
statistics similar to those describing the FHA experience above are available
with respect to Manufactured Home Loans.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Loans comprising or underlying the Primary Assets
which are foreclosed in relation to the number of Loans which are repaid in
accordance with their terms will affect the weighted average life of the
Loans comprising or underlying the Primary Assets and that of the related
Series of Certificates. Servicing decisions made with respect to the Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Loans in bankruptcy proceedings, may also have an impact
upon the payment patterns of particular Loans. In particular, the return to
Holders of Certificates who purchased their Certificates at a premium, if
any, and the return on an Interest Weighted Class may be adversely affected
by servicing policies and decisions relating to foreclosures.
Due on Sale Clauses. The acceleration of repayment as a result of certain
transfers of the Mortgaged Property securing a Loan is another factor
affecting prepayment rates, and is a factor that is not reflected in the FHA
experience. While each of the Mortgage Loans included in the FHA statistics
is assumable by a purchaser of the underlying mortgaged property, the Loans
constituting or underlying the Primary Assets may include "due-on-sale"
clauses. Except as otherwise described in the Prospectus Supplement for a
Series, the PMBS Servicer of Loans underlying Private Mortgage-Backed
Securities and the Master Servicer or the Servicer of Loans constituting the
Primary Assets for a Series will be required, to the extent it knows of any
conveyance or prospective conveyance of the related residence by any
borrower, to enforce any "due-on-sale" clause applicable to the related Loan
under the circumstances and in the manner it enforces such clauses with
respect to other similar loans in its portfolio. FHA Loans and VA Loans are
not permitted to contain "due-on-sale" clauses and are freely assumable by
qualified persons. However, as homeowners move or default on their housing
loans, the Mortgaged Property is generally sold and the loans prepaid, even
though, by their terms, the loans are not "due- on-sale" and could have been
assumed by new buyers.
Optional Termination. If so specified in the related Prospectus
Supplement, the entity specified therein may cause an early termination of
the related Trust Fund by its repurchase of the remaining Primary Assets
therein. See "DESCRIPTION OF THE CERTIFICATES -- Optional Termination".
28
<PAGE>
THE TRUST FUNDS
GENERAL
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of (a) the
Primary Assets; (b) amounts held from time to time in the Collection Account
and the Certificate Account established for such Series; (c) Mortgaged
Property which secured a Loan and which is acquired on behalf of the
Certificateholders by foreclosure, deed in lieu of foreclosure or
repossession; (d) any Reserve Fund for such Series, if specified in the
related Prospectus Supplement; (e) the Servicing Agreements, if any, relating
to Loans in the Trust Fund; (f) any primary mortgage insurance policies
relating to Loans in the Trust Fund; (g) any pool insurance policy, any
special hazard insurance policy, any bankruptcy bond or other credit support
relating to the Series; (h) investments held in any fund or account or any
Guaranteed Investment Contract and, if so specified in the Prospectus
Supplement, income from the reinvestment of such funds; and (i) any other
instrument or agreement relating to the Trust Fund and specified in the
related Prospectus Supplement (which may include an interest rate swap
agreement or an interest rate cap agreement or similar agreement issued by a
bank, insurance company or savings and loan association).
To the extent specified in the related Prospectus Supplement, certain
amounts in respect of Retained Interests which are received with respect to
an Agency Certificate, a Private Mortgage-Backed Security or a Loan
comprising the Primary Assets for a Series will not be included in the Trust
Fund for such Series, but will be payable to the seller of such Agency
Certificate, Private Mortgage-Backed Security or Loan, to the Master
Servicer, if any, to a Servicer or to the Depositor, free and clear of the
interest of Certificateholders under the related Trust Agreement.
Primary Assets in the Trust Fund for a Series may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement: (a) GNMA Certificates (which may be GNMA I
Certificates or GNMA II Certificates), (b) FNMA Certificates, (c) FHLMC
Certificates, (d) Private Mortgage-Backed Securities, (e) Mortgage Loans or
participation interests therein and (f) Manufactured Home Loans or
participation interests therein. Private Mortgage-Backed Securities will
evidence a beneficial ownership interest in underlying assets which will
consist of Agency Certificates or Loans. Participation interests in a Loan
Pool will be purchased by the Depositor, or an affiliate, pursuant to a
participation agreement (a "Participation Agreement"). The interest acquired
by the Depositor under such Participation Agreement will be evidenced by a
Pool Participation Certificate. Unless otherwise specified in the related
Prospectus Supplement, the terms of such Participation Agreement are
substantially the same as the terms of the Trust Agreement and, except as
noted herein, the description of provisions of the Trust Agreement are
equally descriptive of the terms of the Participation Agreement. The Trustee
will be the "certificateholder" with respect to a Pool Participation
Certificate. The executed Participation Agreement will be filed as an exhibit
to a Current Report on Form 8-K within 15 days following the issuance of the
Certificates. Loans which comprise the Primary Assets will be purchased by
the Depositor directly or through an affiliate in the open market or in
privately negotiated transactions. Some, none or all of the Loans may have
been originated by the Depositor or any of its affiliates. See "THE TRUST
AGREEMENTS -- Assignment of Primary Assets."
GNMA CERTIFICATES
General. The GNMA Certificates will be "fully modified pass-through"
mortgage-backed certificates issued and serviced by GNMA-approved issuers of
GNMA certificates (the "GNMA Servicers") under the GNMA I and/or the GNMA II
program. The full and timely payment of principal of and interest on such
GNMA Certificates is guaranteed by GNMA, which obligation is backed by the
full faith and credit of the United States of America. The GNMA Certificates
will be based on and backed by a pool of eligible mortgage loans and will
provide for the payment by or on behalf of the GNMA Servicer to the
registered holder of such GNMA Certificate of monthly payments of principal
and interest equal to the aggregated amount of the monthly constant principal
and interest payments on each such mortgage loan, less servicing and
guarantee fees aggregating the excess of the interest on the mortgage loans
over the GNMA Certificate's pass-through rate. Each repayment to a holder of
a GNMA Certificate will include pass-through payments of any prepayments of
principal of the mortgage loans underlying the GNMA Certificate and the
remaining principal balance in the event of a foreclosure or other
disposition of any such mortgage loan.
29
<PAGE>
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the GNMA Servicer, the Depositor or any affiliate of the
Depositor, and the only recourse of a registered holder, such as the Trustee
or its nominee, is to enforce the guarantee of GNMA.
GNMA approves the issuance of each GNMA Certificate in accordance with a
guaranty agreement (the "Guaranty Agreement") between GNMA and the GNMA
Servicer of such GNMA Certificate. Pursuant to the Guaranty Agreement, the
GNMA Servicer is required to advance its own funds in order to make timely
payments of all amounts due on the GNMA Certificate, whether or not the
payments received by the GNMA Servicer on the underlying mortgage loans equal
the amounts due on such GNMA Certificate. If a GNMA Servicer is unable to
make a payment as it becomes due, it must promptly notify GNMA and request
GNMA to make the payment. Upon notification and request, GNMA will make such
payments directly to the registered holder of the GNMA Certificate. In the
event no payment is made by a GNMA Servicer and the GNMA Servicer fails to
notify and request GNMA to make such payment, the holder of the GNMA
Certificate has recourse only against GNMA to obtain such payment. The
Trustee or its nominee, as registered holder of the GNMA Certificates, may
proceed directly against GNMA under the terms of any GNMA Certificate or the
Guaranty Agreement relating to the GNMA Certificate for any amounts that are
not paid under the GNMA Certificate.
Monthly installment payments on a GNMA Certificate will be comprised of
interest due as specified on the GNMA Certificate plus the scheduled
principal payments on the mortgage loans backing such GNMA Certificate due on
the first day of the month in which the scheduled monthly installment on the
GNMA Certificate is due. The monthly installments on the GNMA Certificate
will be paid each month to the Trustee or its nominee as registered holder.
In addition, any principal prepayments or any other early recovery of
principal on the mortgage loans backing such GNMA Certificate received during
any month will be passed through to the registered holder of the GNMA
Certificate the following month.
With respect to GNMA Certificates issued under the GNMA I program, the
GNMA Servicer must make scheduled monthly payments of principal and interest,
plus pass-throughs of prepayments of principal and proceeds of foreclosures
and other dispositions of the mortgage loans, to registered holders no later
than the fifteenth day of each month. GNMA Certificates issued under the GNMA
II program provide for such payments to be mailed to registered holders by
Chemical Bank, as paying agent, no later than the twentieth day of each
month. A further difference between the two programs is that, under the GNMA
I program single issuer approach, an individual GNMA issuer assembles a pool
of mortgages against which it issues and markets GNMA I Certificates while,
under the GNMA II program, multiple issuer pools may be formed through the
aggregation of loan packages of more than one GNMA issuer. Under this option,
packages submitted by various GNMA issuers for a particular issue date and
interest rate are aggregated into a single pool which backs a single issue of
GNMA II Certificates. However, single issuer pools may be formed under the
GNMA II program as well.
The Underlying Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, mortgage loans underlying the GNMA Certificates
included in the Trust Fund for a Series will consist of FHA Loans or VA
Loans, all of which are assumable by a purchaser. GNMA Certificates securing
a Series may be backed by level payment mortgage loans, GNMA Loans, GEM Loans
or Buy-Down Loans or adjustable rate mortgage loans or other mortgage loans
eligible for inclusion in a GNMA Certificate. The mortgage loans may be
secured by Manufactured Homes, Single Family Property or Multifamily
Property.
All mortgages underlying any GNMA Certificate issued under the GNMA I
program must have the same annual interest rate (except for pools of loans
secured by manufactured homes). The annual interest rate on each such GNMA
Certificate is equal to one-half percentage point less than the annual
interest rate on the mortgage loans backing such GNMA Certificate.
Mortgages underlying a GNMA Certificate issued under the GNMA II program
may have annual interest rates that vary from each other by up to one
percentage point. The annual interest rate on each such GNMA II Certificate
is between one-half percentage point and one and one-half percentage points
less than the highest annual interest rate on the mortgage loans included in
the pool of mortgages backing such GNMA Certificate.
All of the GNMA Certificates in a Trust Fund for a Series will have
original maturities of not more than 30 years and one month (but may have
original maturities of substantially less than 30 years but not less than
30
<PAGE>
15 years). In general, GNMA requires that at least 90% of the original
principal amount of the mortgage pool underlying a GNMA Certificate must be
composed of mortgages with maturities of 20 years or more. However, in
certain circumstances GNMA Certificates may be backed by pools of mortgage
loans in which at least 90% of the original principal amount of the mortgage
loans have original maturities of only 15 years. No mortgage loan underlying
a GNMA Certificate may be originated more than 12 months prior to the date on
which GNMA issues its guarantee commitment for the GNMA Certificate.
The GNMA Certificates included in the Trust Fund for a Series may have
other characteristics and terms different from those described above, so long
as such GNMA Certificates and underlying mortgage loans meet the criteria of
each Rating Agency rating the Certificates of such Series. Such GNMA
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
GNMA. GNMA is a wholly owned corporate instrumentality to the United
States of America. Section 306(g) of Title III of the Housing Act authorizes
GNMA to guarantee the timely payment of the principal of and the interest on
certificates which are based on and backed by a pool of mortgages insured by
the FHA under the Housing Act or Title V of the Housing Act of 1949, or
partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38, United States Code, or by other
eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." To meet its
obligations under such guarantees, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
FNMA CERTIFICATES
General. FNMA Certificates are either Guaranteed Mortgage Pass-Through
Certificates, Stripped Mortgage Backed Securities or Guaranteed REMIC
Pass-Through Certificates. FNMA Certificates represent factional undivided
interests in a pool of mortgage loans formed by FNMA. Unless otherwise
specified in the related Prospectus Supplement, each pool consists of
mortgage loans secured by a first lien on a one- to four-family residential
property. Mortgage loans comprising a pool are either provided by FNMA from
its own portfolio or purchased pursuant to the criteria set forth under the
FNMA purchase program.
FNMA guarantees to each holder of a FNMA certificate that it will
distribute amounts representing scheduled principal and interest (at the rate
provided for by such FNMA Certificate) on the mortgage loans in the pool
represented by such FNMA Certificate, whether or not received, and the
holder's proportionate share of the full principal amount of any foreclosed
or other finally liquidated mortgage loan, whether or not such principal
amount is actually recovered. The obligations of FNMA under its guarantees
are obligations solely of FNMA and are neither backed by nor entitled to the
full faith and credit of the United States of America. If FNMA were unable to
satisfy such obligations, distributions on FNMA Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, delinquencies and defaults would affect monthly distributions on
such FNMA Certificates and could adversely affect the payments on the
Certificates of a Series secured by such FNMA Certificates.
Unless otherwise specified in the related Prospectus Supplement, FNMA
Certificates evidencing interests in pools formed on or after May 1, 1985
(other than FNMA Certificates backed by pools containing GPM Loans or
mortgage loans secured by multifamily projects) will be available in
book-entry form only. Distributions of principal of and interest on each FNMA
Certificate will be made by FNMA on the twenty-fifth day of each month to the
persons in whose name the FNMA Certificates are entered in the books of the
Federal Reserve Bank of New York (or registered on the FNMA Certificate
register in the case of fully registered FNMA Certificates) as of the close
of business on the last day of the preceding month. With respect to FNMA
Certificates issued in book-entry form, distributions will be made by wire;
with respect to FNMA Certificates issued in fully registered form,
distributions will be made by check.
The Underlying Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, mortgage loans underlying FNMA Certificates in the
Trust Fund for a Series will consist of (i) fixed-rate level payment mortgage
31
<PAGE>
loans that are Conventional Loans, (ii) fixed-rate level payment FHA Loans or VA
Loans, (iii) adjustable rate mortgage loans or GEM Loans, Buy-Down Loans or GPM
Loans, and (iv) mortgage loans secured by Single Family Property or by
Multifamily Property. Each mortgage loan must meet the applicable standards set
forth under the FNMA purchase program.
The original maturities of substantially all of the fixed rate level
payment Conventional Mortgage Loans are expected to be between either eight
to 15 years or 20 to 30 years. The original maturities of substantially all
of the fixed rate level payment FHA Loans or VA Loans are expected to be 30
years.
FNMA Stripped Mortgage Backed Securities are issued by FNMA in series of
two or more classes, with each class representing a specified undivided
fractional interest in principal distributions and/or interest distributions
(adjusted to the series pass-through rate) on the underlying pool of mortgage
loans. The fractional interests of each class in principal and interest
distributions are not identical, but the classes in the aggregate represent
100% of the principal distributions and interest distributions (adjusted to
the series pass-through rate) on the respective pool. Because of such
difference between the fractional interests in principal and interest of each
class, the effective rate of interest on the principal of each class of FNMA
Stripped Mortgage Backed Securities may be significantly higher or lower than
the series pass-through rate and/or the weighted average interest rate of the
underlying mortgage loans. The Guaranteed REMIC Pass-Through Certificates are
multiple-class pass-through certificates (representing beneficial interests
in a pool consisting primarily of FNMA or GNMA Certificates) as to which FNMA
has elected REMIC status for federal income tax purposes.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate (and the series pass- through rate
payable with respect to a FNMA Stripped Mortgage Backed Security) is equal to
the lowest interest rate of any mortgage loan in the related pool, less a
specified minimum annual percentage representing servicing compensation and
FNMA's guarantee fee. Under a regular servicing option (pursuant to which the
mortgagee or other servicer assumes the risk of foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate
will be between .50 and 2.50 percentage points greater than the annual
interest rate for the FNMA Certificate (or the series pass-through rate
payable with respect to a FNMA Stripped Mortgage Backed Security), and, under
a special servicing option (pursuant to which the mortgagee or other servicer
is reimbursed by FNMA for foreclosure losses), the annual interest rates on
the mortgage loans underlying a FNMA Certificate will be between .55 and 2.55
percentage points greater than the annual FNMA Certificate interest rate (or
the series pass-through rate payable with respect to a FNMA Stripped Mortgage
Backed Security).
The Trust Fund for a Series may include FNMA Certificates having
characteristics and terms different from those described above, so long as
such FNMA Certificates and underlying mortgage loans meet the criteria of
each Rating Agency rating the Series. Such FNMA Certificates and underlying
mortgage loans will be described in the related Prospectus Supplement.
FNMA. FNMA is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association
Charter Act, as amended (12 U.S.C. sec.1716 et seq.). FNMA was originally
established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase loans from any capital market
investors that may not ordinarily invest in mortgage loans, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital- surplus to capital-short
areas. In addition, FNMA issues mortgage backed securities, primarily in
exchange for pools of mortgage loans from lenders. See "ADDITIONAL
INFORMATION" herein for the availability of further information with respect
to FNMA and FNMA Certificates.
FHLMC CERTIFICATES
General. The FHLMC Certificates represent an undivided interest in a group
of mortgages or participations therein (a "PC Pool") purchased by FHLMC.
FHLMC Certificates are sold under the terms of a Mortgage Participation
32
<PAGE>
Certificate Agreement and may be issued under either FHLMC's "Cash Program" or
"Guarantor Program" or may be Multiclass Mortgage Participation Certificates
(Guaranteed) representing multiple classes of certificates of beneficial
interest in a pool consisting primarily of FHLMC Certificates.
Under FHLMC's Cash Program, with respect to PC Pools formed prior to June
1, 1987 there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through
rate on the FHLMC Certificate; with respect to FHLMC Certificates issued on
or after that date, the maximum interest rate on the mortgage loans
underlying such FHLMC Certificates cannot exceed the pass- through rate on
such FHLMC Certificates by more than two hundred basis points. Under such
program, FHLMC purchases groups of whole mortgage loans from a number of
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which, when applied to the interest rate of
the mortgage loans and participations purchased, results in the yield
(expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated
using the outstanding principal balance of the mortgage loans, an assumed
term and a prepayment period as determined by FHLMC. No loan or participation
is purchased by FHLMC at greater than 100% of the outstanding principal
balance. The range of interest rates on the mortgage loans and participations
in a PC Pool for a FHLMC Certificate issued under the Cash Program will vary
since mortgage loans and participations are purchased and assigned to a PC
Pool based upon their yield to FHLMC rather than on the interest rate on the
underlying mortgage loans. However, beginning with PC Pools formed on or
after June 1, 1987, the range of interest rates on the mortgages in Cash
Program PC Pools will not exceed 100 basis points.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC.
For FHLMC Certificate groups formed under the Guarantor Program, the range
between the lowest and highest annual interest rates on the mortgage loans in
a PC Pool may not exceed two hundred basis points, and beginning with PC
Pools formed in December 1987 under the Guarantor Program, the range of the
interest rates on the mortgage loans in a PC Pools will not exceed 100 basis
points.
The FHLMC Certificates will be guaranteed by FHLMC as to the timely
payment of interest at the applicable FHLMC Certificate rate on the holder's
pro rata share of the unpaid principal balance outstanding on the underlying
mortgage loans, whether or not received. FHLMC also guarantees payment of
principal on the underlying mortgage loans, without any offset or deduction,
to the extent of the registered holder's pro rata share thereof, but does
not, except with respect to "Scheduled Principal" FHLMC Certificates issued
under the Guarantor Program, guarantee the timely payment of scheduled
principal. Pursuant to its guarantee, FHLMC indemnifies holders of FHLMC
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. FHLMC may remit the amount due
on account of its guarantee of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right
of redemption, whichever occurs later, but in any event no later than one
year after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC requires servicers to service
mortgages in substantially the same manner as for mortgages which FHLMC has
purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted servicing
standards which require that the demand be made within any specified period.
Holders of FHLMC Certificates are entitled to receive their pro rata share
of all principal payments on the underlying mortgage loans received by FHLMC,
including any scheduled principal payments, full and partial prepayments of
principal and principal received by FHLMC by virtue of condemnation,
insurance, liquidation or foreclosure, including repayments of principal
resulting from acquisition by FHLMC of the real property securing the
mortgage. FHLMC is required to remit to each holder its pro rata share of
principal payments on the underlying mortgage loans, interest at an
applicable FHLMC Certificate rate and any other sums, such as prepayment
fees, within 60 days of the date on which FHLMC is deemed to receive such
payments.
33
<PAGE>
FHLMC Certificates are not guaranteed by, and do not constitute debts or
obligations of, either the United States of America or any Federal Home Loan
Bank. If FHLMC were unable to satisfy such obligations, distributions on
FHLMC Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans, and, accordingly, delinquencies and defaults
would affect monthly distributions on such FHLMC Certificates and could
adversely affect distributions on the Certificates of such Series.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first
day of that month. With respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, the Federal Reserve Bank of New York maintains
book-entry accounts with respect thereto and makes payments of interest and
principal each month to holders in accordance with the holders' instructions.
The first payment to a holder of an FHLMC Certificate will normally be
received by the holder by the fifteenth day of the second month following the
month in which such person became a holder of the FHLMC Certificate.
Thereafter, payments will normally be received by the fifteenth day of each
month.
The Underlying Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, each PC Pool underlying the FHLMC Certificates in the
Trust Fund for a Series will consist of first lien, fixed-rate, fully
amortizing, conventional residential mortgages or participation interests
therein. Unless otherwise specified in the related Prospectus Supplement, all
of the mortgage loans evidenced by a FHLMC Certificate are conventional
mortgages and therefore do not have the benefit of any guarantee or insurance
by, and are not obligations of, the United States of America. All mortgages
purchased by FHLMC must meet certain standards set forth in the FHLMC Act (as
defined below).
The Trust Fund for a Series may include FHLMC Certificates having other
characteristics and terms different from those described above, so long as
such FHLMC Certificates and the underlying mortgage loans meet the criteria
of each Rating Agency rating the Certificates of such Series. Such FHLMC
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States of
America created pursuant to an Act of Congress (title III of the Emergency
Home Finance Act of 1970, as amended, 12 U.S.C. sec.sec.1451- 1459) on July
24, 1970 (the "FHLMC Act"). FHLMC was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of needed
housing. It provides an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets
for conventional mortgages. The principal activity of FHLMC consists of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans from mortgage lending
institutions and the resale of the whole loans and participations so
purchased in the form of guaranteed mortgage securities, primarily FHLMC
Certificates. In 1981, FHLMC initiated its Guarantor Program under which
FHLMC purchases mortgages from sellers in exchange for FHLMC Certificates
representing interests in the mortgages so purchased. Transactions under the
Guarantor Program have resulted in a significant increase in the volume of
FHLMC's purchases of mortgages and sales of FHLMC Certificates. All mortgage
loans purchased by FHLMC must meet certain standards set forth in the FHLMC
Act. FHLMC is confined to purchasing, so far as practicable, mortgage loans
which it deems to be of such quality, type and class as to meet generally the
purchase standards imposed by private institutional mortgage investors. See
"ADDITIONAL INFORMATION" for the availability of further information with
respect to FHLMC and FHLMC Certificates.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates, evidencing an undivided interest in a pool of
Loans or Agency Certificates, or (b) collateralized mortgage obligations
secured by Loans or Agency Certificates. Private Mortgage-Backed Securities
will have been issued pursuant to a pooling and servicing agreement, a trust
agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying Loans, or the issuer of the collateralized
mortgage obligations, as the case may be, will have entered into the PMBS
Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee").
The PMBS Trustee or its agent, or a custodian, will possess the Loans
underlying such Private Mortgage-Backed Security. Loans underlying a Private
Mortgage-Backed Security will be serviced by a servicer (the "PMBS Servicer")
directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be an FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by HUD as an FHA mortgagee.
34
<PAGE>
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending; a public agency or instrumentality of a state,
local or federal government; or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts, and selling beneficial interests in
such trusts; or one of such trusts. If so specified in the Prospectus
Supplement, the PMBS Issuer may be an affiliate of the Depositor. The
obligations of the PMBS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Mortgage-Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Mortgage-Backed Securities by the PMBS Trustee or the PMBS Servicer.
The PMBS Issuer or the PMBS Servicer may have the right to repurchase assets
underlying the Private Mortgage-Backed Securities after a certain date or
under other circumstances specified in the related Prospectus Supplement.
Underlying Loans. The Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing Loans
or GEM Loans, GPM Loans, Buy-Down Loans, Bi-Weekly Loans, ARMs, or Loans
having balloon or other irregular payment features. Loans may be secured by
Single Family Property, Multifamily Property, Manufactured Homes, or, in the
case of Cooperative Loans, by an assignment of the proprietary lease or
occupancy agreement relating to a Cooperative Dwelling and the shares issued
by the related cooperative. Except as otherwise specified in the related
Prospectus Supplement, (i) no Loan shall have had a Loan-to-Value Ratio at
origination in excess of 95%, (ii) each Mortgage Loan secured by Single
Family Property and having a Loan-to-Value Ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii)
each Loan will have had an original term to stated maturity of not less than
10 years and not more than 40 years, (iv) no Loan that was more than 30 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PMBS Agreement, (v) each Loan
(other than a Cooperative Loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each Loan
(other than a Cooperative Loan or a Loan secured by a Manufactured Home) will
be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of Reserve Funds, subordination of other private mortgage
certificates issued under the PMBS Agreement, letters of credit, Insurance
Policies or other types of credit support may be provided with respect to the
Loans underlying the Private Mortgage-Backed Securities or with respect to
the Private Mortgage-Backed Securities themselves. The type, characteristics
and amount of credit support will be a function of certain characteristics of
the Loans and other factors and will have been established for the Private
Mortgage-Backed Securities on the basis of requirements of the Rating Agency.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify, to
the extent relevant, (i) the aggregate approximate principal amount and type
of the Agency Certificates and Private Mortgage-Backed Securities to be
included in the Trust Fund; (ii) certain characteristics of the Agency
Certificates or Loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including, in the case of Loans, (A) the payment
features of such Loans (i.e., whether they are fixed rate or adjustable rate
and whether they provide for fixed level payments or other payment features),
(B) the approximate aggregate principal balance, if known, of underlying
Loans insured or guaranteed by a governmental entity, (C) the servicing fee
or range of servicing fees with respect to the Loans, and (D) the minimum and
maximum stated maturities of the underlying Loans at origination; (iii) the
maximum original term-to-stated maturity of the Private Mortgage-Backed
Securities; (iv) the weighted average term-to- stated maturity of the Private
Mortgage-Backed Securities; (v) the pass-through or certificate rate or
ranges thereof for the Private Mortgage-Backed Securities; (vi) the weighted
35
<PAGE>
average pass-through or certificate rate of the Private Mortgage-Backed
Securities; (vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS
Issuer) and the PMBS Trustee for such Private Mortgage-Backed Securities; (viii)
certain characteristics of credit support, if any, such as Reserve Funds,
Insurance Policies, letters of credit or guarantees relating to the Loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves; (ix) the terms on which the underlying
Loans for such Private Mortgage-Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the Private
Mortgage-Backed Securities and (x) the terms on which Loans may be substituted
for those originally underlying the Private Mortgage- Backed Securities.
If information of the nature described above representing the Private
Mortgage-Backed Securities or Agency Certificates is not known to the
Depositor at the time the Certificates are initially offered, approximate or
more general information of the nature described above will be provided in
the Prospectus Supplement and the additional information will be set forth in
a Current Report on Form 8-K to be available to investors on the date of
issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Certificates.
THE MORTGAGE LOANS
General. The Trust Fund for a Series may consist of Mortgage Loans or
participation interests therein. Mortgage Loans comprising the Primary Assets
and Mortgage Loans in which participation interests are conveyed to the
Trustee are both referred to herein as the "Mortgage Loans". The Mortgage
Loans will have been originated by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar
institution which is supervised and examined by a Federal or State authority
or by a mortgagee approved by the Secretary of Housing and Urban Development
pursuant to sections 203 and 211 of the National Housing Act. Some, none or
all of the Mortgage Loans may have been originated by the Depositor or an
affiliate thereof. The Mortgage Loans may include Conventional Loans, FHA
Loans or VA Loans. The Mortgage Loans may have fixed interest rates or
adjustable interest rates and may provide for fixed level payments or may be
GPM Loans, GEM Loans, Buy-Down Loans, Bi-Weekly Loans or Mortgage Loans with
other payment characteristics as described below and under "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS" herein and in the related Prospectus Supplement.
The Mortgage Loans may be secured by mortgages or deeds of trust or other
similar security instruments creating a first lien on Mortgaged Property. The
Mortgage Loans may also include Cooperative Loans evidenced by promissory
notes secured by a lien on the shares issued by private, non-profit,
cooperative housing corporations and on the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific Cooperative
Dwellings. The Mortgage Loans may also include Condominium Loans secured by a
Mortgage on a Condominium Unit together with such Condominium Unit's
appurtenant interest in the common elements.
The Mortgaged Properties may include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units, and Cooperative
Dwellings) or Multifamily Property (i.e., multifamily residential rental
properties or cooperatively-owned properties consisting of five or more
dwelling units). The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling
units. Multifamily Property may include mixed commercial and residential
structures. Each Single Family Property and Multifamily Property will be
located on land owned in fee simple by the borrower or on land leased by the
borrower for a term at least two years greater than the term of the related
Mortgage Loan. The fee interest in any leased land will be subject to the
lien securing the related Mortgage Loan. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the
unit is built, with the remaining adjacent land owned in common or dwelling
units subject to a proprietary lease or occupancy agreement in a
cooperatively owned apartment building. The proprietary lease or occupancy
agreement securing a Cooperative Loan is generally subordinate to any blanket
mortgage on the related cooperative apartment building and/or on the
underlying land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement is subject to termination and the
cooperative shares are subject to cancellation by the cooperative if the
tenant- stockholder fails to pay maintenance or other obligations or charges
owed by such tenant-stockholder. See "CERTAIN LEGAL ASPECTS OF LOANS".
The aggregate principal balance of Mortgage Loans which are owner-occupied
will be disclosed in the related Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement, the sole basis for a representation
36
<PAGE>
that a given percentage of the Mortgage Loans are secured by Single-Family
Property that is owner-occupied will be either (i) the making of a
representation by the mortgagor at origination of the Mortgage Loan either that
the underlying Mortgaged Property will be used by the borrower for a period of
at least six months every year or that the borrower intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of the
underlying Mortgaged Property is the borrower's mailing address as reflected in
the Servicer's records. To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes. Mortgage Loans secured by investment
properties and Multifamily Property may also be secured by an assignment of
leases and rents and operating or other cash flow guarantees relating to the
Loans to the extent specified in the related Prospectus Supplement.
The characteristics of the Mortgage Loans comprising or underlying the
Primary Assets for a Series may vary to the extent that credit support is
provided in levels satisfactory to the Rating Agency which assigns a rating
to a Series of Certificates. Unless otherwise specified in the related
Prospectus Supplement for a Series, the following selection criteria shall
apply with respect to the Mortgage Loans comprising the Primary Assets:
(a) no Mortgage Loan shall have had a Loan-to-Value Ratio at
origination in excess of 95%;
(b) no Mortgage Loan that is a Conventional Loan secured by a Single
Family Property may have a Loan-to-Value Ratio in excess of 80%, unless
covered by a primary mortgage insurance policy as described herein;
(c) each Mortgage Loan must have an original term to maturity of not
less than 10 years and not more than 40 years;
(d) no Mortgage Loan may be included which, as of the Cut-off Date, is
more than 30 days delinquent as to payment of principal or interest;
(e) no Mortgage Loan (other than a Cooperative Loan) may be included
unless a title insurance policy or, in lieu thereof, an attorney's opinion
of title, and a standard hazard insurance policy (which may be a blanket
policy) is in effect with respect to the Mortgaged Property securing such
Mortgage Loan.
The initial Loan-to-Value Ratio of any Mortgage Loan represents the ratio
of the principal amount of the Mortgage Loan outstanding at the origination
of such loan divided by the fair market value of the mortgaged property, as
shown in the appraisal prepared in connection with origination of the
Mortgage Loan (the "Appraised Value"). The fair market value of the Mortgaged
Property securing any Mortgage Loan is the lesser of the purchase price paid
by the borrower or the Appraised Value of such Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Buy-Down Loans, during the period (the "Buy-Down Period") when the
borrower is not obligated, on account of the buy-down plan, to pay the full
Scheduled Payment otherwise due on such loan, each of the Buy-Down Loans will
provide for Scheduled Payments based on a hypothetical reduced interest rate
(the "Buy-Down Mortgage Rate") that will not have been more than 3% below the
mortgage rate at origination, and for annual increases in the Buy-Down
Mortgage Rate during the Buy-Down Period that will not exceed 1%. The
Buy-Down Period will not exceed three years. The maximum amount of the
Buy-Down Amounts that may be contributed with respect to a Mortgaged Property
having a Loan-to-Value Ratio (i) of 90% or less at origination is limited to
10% of the Appraised Value of the Mortgaged Property, and (ii) in excess of
90% at origination is limited to 6% of the Appraised Value of the Mortgaged
Property, unless otherwise indicated in the applicable Prospectus Supplement.
Unless specified otherwise in the related Prospectus Supplement, the maximum
amount of Funds ("Buy-Down Amounts") that may be contributed by the Servicer
of the related Mortgaged Loan is limited to 6% of the Appraised Value of the
Mortgaged Property. This limitation does not apply to contributions from
immediate relatives or the employer of the mortgagor. Except as may be
otherwise indicated in the related Prospectus Supplement, the borrower under
each Buy-Down Loan will have been qualified at a mortgage rate which is not
more than 3% per annum below the current mortgage rate at origination.
Accordingly, the repayment of a Buy-Down Loan is dependent on the ability of
the borrower to make larger Scheduled Payments after the Buy-Down Amounts
have been depleted and, for certain Buy-Down Loans, while such Buy-Down
Amounts are being depleted.
37
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Property, (a) no Mortgage Loan will have been
delinquent for more than 30 days within the 12-month period ending with the
Cut-off Date, (b) no more than two payments will have been 30 days or more
delinquent during a three-year period ending on the Cut-off Date, (c)
Mortgage Loans with respect to any single borrower will not exceed 5% of the
aggregate principal balance of the Loans comprising the Primary Assets as of
the Cut-off Date, and (d) the debt service coverage ratio with respect to
each Mortgage Loan (calculated as described in the related Prospectus
Supplement) will not be less than 1.1:1.
Unless otherwise specified in the related Prospectus Supplement, the
Bi-Weekly Loans will consist of fixed-rate, bi-weekly payment, conventional,
fully-amortizing Mortgage Loans payable on every other Friday during the term
thereof and secured by first mortgages on one-to-four family residential
properties.
Unless otherwise specified in the related Prospectus Supplement, the ARMs
will provide for a fixed initial mortgage rate for either the first six or
twelve scheduled Scheduled Payments. Thereafter, the Mortgage Rates are
subject to periodic adjustment based, subject to the applicable limitations,
on changes in the relevant Index described in the applicable Prospectus
Supplement, to a rate equal to the Index plus the Gross Margin, which is a
fixed percentage spread over the Index established contractually for each ARM
at the time of its origination. An ARM may be convertible into a fixed-rate
Mortgage Loan. To the extent specified in the related Prospectus Supplement,
any ARM so converted may be subject to repurchase by the Servicer.
ARMs have features that are relatively new for the residential lending
market in the United States. In particular, adjustable mortgage rates can
cause payment increases that some borrowers may find difficult to make.
However, each of the ARMs provides that its mortgage rate may not be adjusted
to a rate above the applicable lifetime mortgage rate cap (the "Lifetime
Mortgage Rate Cap") or below the applicable lifetime minimum mortgage rate
(the "Minimum Mortgage Rate"), if any, for such ARM. In addition, certain of
the ARMs provide for limitations on the maximum amount by which their
mortgage rates may adjust for any single adjustment period (the "Maximum
Mortgage Rate Adjustment"). Some ARMs are payable in self-amortizing payments
of principal and interest. Other ARMs ("Negatively Amortizing ARMs") instead
provide for limitations on changes in the Scheduled Payment on such ARMs to
protect borrowers from payment increases due to rising interest rates. Such
limitations can result in Scheduled Payments which are greater or less than
the amount necessary to amortize a Negatively Amortizing ARM by its original
maturity at the mortgage rate in effect during any particular adjustment
period. In the event that the Scheduled Payment is not sufficient to pay the
interest accruing on a Negatively-Amortizing ARM, then the Deferred Interest
is added to the principal balance of such ARM causing the negative
amortization thereof, and will be repaid through future Scheduled Payments.
If specified in the related Prospectus Supplement, Negatively-Amortizing ARMs
may provide for the extension of their original stated maturity to
accommodate changes in their mortgage rate. The relevant Prospectus
Supplement will specify whether the ARMs comprising or underlying the Primary
Assets are Negatively Amortizing ARMs.
Unless otherwise specified in the related Prospectus Supplement, the index
applicable to any ARMs comprising the Primary Assets (the "Index") will be
the three-year Treasury Index, the one-year Treasury Index, the Six Month
Treasury Index, the Eleventh District Costs of Funds Index or the National
Monthly Median Cost of Funds Ratio to FSLIC-Insured Institutions. The
Prospectus Supplement for each Series will specify the applicable Index with
respect to any Mortgage Loans underlying such Series.
The related Prospectus Supplement for each Series will provide information
with respect to the Mortgage Loans as of the Cut-off Date, including, among
other things, (a) the aggregate outstanding principal balance of the Mortgage
Loans; (b) the weighted average Mortgage Rate on the Mortgage Loans, and, in
the case of ARMs, the weighted average of the current mortgage rates and the
Lifetime Mortgage Rate Caps, if any; (c) the average outstanding principal
balance of the Mortgage Loans; (d) the weighted average term-to- stated
maturity of the Mortgage Loans and the range of remaining terms-to-stated
maturity; (e) the range of Loan-to-Value Ratios for the Mortgage Loans; (f)
the relative percentage (by outstanding principal balance as of the Cut-off
Date) of Mortgage Loans that are ARMs, Buy-Down Loans, GEM Loans, GPM Loans,
Cooperative Loans, Conventional Loans, Bi-Weekly Loans, FHA Loans and VA
Loans; (g) the percentage of Mortgage Loans (by outstanding principal balance
as of the Cut-off Date) that are covered by primary mortgage insurance
policies; (h) any pool insurance policy, special hazard insurance policy or
bankruptcy bond or other credit support relating to the Mortgage Loans; (i)
the geographic distribution of the Mortgaged Properties securing the Mortgage
38
<PAGE>
Loans and (j) the percentage of Mortgage Loans (by principal balance as of the
Cut-off Date) that are secured by Single Family Property, Multifamily Property,
Cooperative Dwellings, investment property and vacation or second homes. The
related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Mortgage Loans which may comprise or underlie the
Primary Assets for a Series.
If information of the nature described above respecting the Mortgage Loans
is not known to the Depositor at the time the Certificates are initially
offered, approximate or more general information of the nature described
above will be provided in the Prospectus Supplement and additional
information will be set forth in a Current Report on Form 8-K to be available
to investors on the date of issuance of the related Series and to be filed
with the Commission within 15 days after the initial issuance of such
Certificates.
THE MANUFACTURED HOME LOANS
The Manufactured Home Loans comprising or underlying the Primary Assets
for a Series of Certificates will consist of manufactured housing conditional
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business and purchased by the
Depositor. Each Manufactured Home Loan will have been originated by a bank or
savings institution which is a FNMA- or FHLMC-approved seller/servicer or by
any financial institution approved for insurance by the Secretary of Housing
and Urban Development pursuant to Section 2 of the National Housing Act.
The Manufactured Home Loans may be Conventional Loans, FHA Loans or VA
Loans. Each Manufactured Home Loan will be secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Loans will be fully amortizing and will bear interest at a
fixed interest rate.
The Manufactured Homes securing the Manufactured Home Loans consist of
manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "manufactured home" as "a structure, transportable
in one or more sections, which in the traveling mode, is eight body feet or
more in width or forty body feet or more in length, or, when erected on site,
is three hundred twenty or more square feet, and which is built on a
permanent chassis and designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes
the plumbing, heating, air-conditioning, and electrical systems contained
therein; except that such term shall include any structure which meets all
the requirements of [this] paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required
by the Secretary of Housing and Urban Development and complies with the
standards established under [this] chapter."
Unless otherwise specified in the related Prospectus Supplement for a
Series, the following restrictions apply with respect to Manufactured Home
Loans comprising or underlying the Primary Assets for a Series:
(a) no Manufactured Home Loan shall have had a Loan-to-Value Ratio at
origination in excess of 95%;
(b) each Manufactured Home Loan must have an original term to maturity
of not less than three years and not more than 25 years;
(c) no Manufactured Home Loan may be as of the Cut-off Date more than
30 days delinquent as to payment of principal or interest; and
(d) each Manufactured Home Loan must have, as of the Cut-off Date, a
standard hazard insurance policy (which may be a blanket policy) in effect
with respect thereto.
The initial Loan-to-Value Ratio of any Manufactured Home Loan represents
the ratio of the principal amount of the Manufactured Home Loan outstanding
at the origination of such loan divided by the fair market value of the
Manufactured Home, as shown in the appraisal prepared in connection with
origination of the Manufactured Home Loan (the "Appraised Value"). The fair
market value of the Manufactured Home securing any Manufactured Home Loan is
the lesser of the purchase price paid by the borrower or the Appraised Value
of such Manufactured Home. With respect to underwriting of Manufactured Home
Loans, see "LOAN UNDERWRITING PROCEDURES AND STANDARDS". With respect to
servicing of Manufactured Home Loans, see "SERVICING OF LOANS".
39
<PAGE>
The related Prospectus Supplement for each Series will provide information
with respect to the Manufactured Home Loans comprising the Primary Assets as
of the Cut-off Date, including, among other things, (a) the aggregate
outstanding principal balance of the Manufactured Home Loans comprising or
underlying the Primary Assets; (b) the weighted average interest rate on the
Manufactured Home Loans; (c) the average outstanding principal balance of the
Manufactured Home Loans; (d) the weighted average scheduled term to maturity
of the Manufactured Home Loans and the range of remaining scheduled terms to
maturity; (e) the range of Loan-to-Value Ratios of the Manufactured Home
Loans; (f) the relative percentages (by principal balance as of the Cut-off
Date) of Manufactured Home Loans that were made on new Manufactured Homes and
on used Manufactured Homes; (g) any pool insurance policy, special hazard
insurance policy or bankruptcy bond or other credit support relating to the
Manufactured Home Loans; and (h) the distribution by state of Manufactured
Homes securing the Loans. The related Prospectus Supplement will also specify
any other limitations on the types or characteristics of Manufactured Home
Loans which may be included in the Primary Assets for a Series.
If information of the nature specified above respecting the Manufactured
Home Loans is not known to the Depositor at the time the Certificates are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and additional
information will be set forth in a Current Report on Form 8-K to be available
to investors on the date of issuance of the related Series and to be filed
with the Commission within 15 days after the initial issuance of such
Certificates.
COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
A separate Collection Account for each Series will be established by the
Master Servicer in the name of the Trustee for deposit of all distributions
received with respect to the Primary Assets for such Series, the amount of
cash to be initially deposited therein, if any, and reinvestment income
thereon. Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from investments of funds in the Collection
Account will be credited to such Collection Account, and any loss resulting
from such investments will be charged to such Collection Account. Such
reinvestment income may, however, be payable to the Master Servicer or to a
Servicer as additional servicing compensation. See "SERVICING OF LOANS" and
"THE TRUST AGREEMENTS -- Investment of Funds." In such a case, such
reinvestment income would not be included in calculation of the Available
Distribution Amount. See "DESCRIPTION OF THE CERTIFICATES -- Distributions on
the Certificates."
Funds on deposit in the Collection Account will be available for
remittance to the Trustee for deposit into the Certificate Account to the
extent of the Available Distribution Amount and for certain other payments
provided for in the Trust Agreement. Unless otherwise specified in the
Prospectus Supplement, amounts in the Collection Account constituting
reinvestment income which is payable to the Master Servicer as additional
servicing compensation or for the reimbursement of advances or expenses,
amounts in respect of any Excess Servicing Fee, Retained Interest, and
amounts to be deposited into any reserve fund will not be included in
determining amounts to be remitted to the Trustee for deposit into the
Certificate Account.
A separate Certificate Account will be established by the Trustee in the
name of the Trustee for the benefit of the Certificateholders into which all
funds received from the Master Servicer and all required withdrawals from any
reserve funds for such Series will be deposited, pending distribution to the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, any reinvestment income or other gain from investments of funds
in the Certificate Account will be credited to the Certificate Account and
any loss resulting from such investments will be charged to such Certificate
Account. Such reinvestment income, may, however, be payable to the Master
Servicer as additional servicing compensation. On each Distribution Date, all
funds on deposit in the Certificate Account, subject to certain permitted
withdrawals by the Trustee as set forth in the Trust Agreement, will be
available for remittance to the Certificateholders. See also "THE TRUST
AGREEMENTS -- Certificate Account" herein.
OTHER FUNDS OR ACCOUNTS
A Trust Fund may include certain other funds and accounts or a security
interest in certain funds and accounts for the purpose of, among other
things, paying certain administrative fees and expenses of the Trust and
accumulating funds pending their distribution. If so specified in the related
40
<PAGE>
Prospectus Supplement, certain funds may be established with the Trustee with
respect to Buy-Down Loans, GPM Loans, or other Loans having special payment
features included in the Trust Fund in addition to or in lieu of any such
similar funds to be held by the Servicer. See "SERVICING OF LOANS -- Payments on
Loans; Deposits to Custodial Accounts." If Private Mortgage-Backed Securities
are backed by GPM Loans and the Asset Value with respect to a Multi-Class
Series is determined on the basis of the scheduled maximum principal balance of
the GPM Loans, a GPM Fund will be established which will be similar to that
which would be established if GPM Loans constituted the Primary Assets. See
"SERVICING OF LOANS -- Payments on Loans; Deposits to Custodial Accounts"
herein. Other similar accounts may be established as specified in the related
Prospectus Supplement.
41
<PAGE>
LOAN UNDERWRITING PROCEDURES AND STANDARDS
UNDERWRITING STANDARDS
The Depositor expects that all Loans comprising the Primary Assets for a
Series will have been originated in accordance with the underwriting
procedures and standards described herein, except as otherwise set forth in
the related Prospectus Supplement.
The originator of the Loans (or another entity specified in the related
Prospectus Supplement) will make representations and warranties concerning
compliance with such underwriting procedures and standards. Additionally,
unless otherwise specified in the related Prospectus Supplement, all or a
representative sample of the Loans comprising Primary Assets for a Series
will be reviewed by or on behalf of the Depositor to determine compliance
with such underwriting standards and procedures and compliance with other
requirements for inclusion in the Trust Fund.
Mortgage Loans will have been originated by a savings and loan
association, savings bank, commercial bank, credit union, insurance company
or similar institution which is supervised and examined by a federal or state
authority; a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the National Housing Act or a
wholly-owned subsidiary thereof; or by a subsidiary of the Depositor.
Manufactured Home Loans may have been originated by such institutions (other
than a subsidiary of the Depositor) or by a financial institution approved
for insurance by the Secretary of Housing and Urban Development pursuant to
Section 2 of the National Housing Act. Except as otherwise set forth in the
related Prospectus Supplement for a Series of Certificates, the originator of
a Loan will have applied underwriting procedures intended to evaluate the
borrower's credit standing and repayment ability and the value and adequacy
of the related property as collateral. FHA Loans and VA Loans will have been
originated in compliance with the underwriting policies of FHA and VA,
respectively.
Each borrower will have been required to complete an application designed
to provide to the original lender pertinent credit information about the
borrower. As part of the description of the borrower's financial condition,
the borrower will have furnished information with respect to its assets,
liabilities, income, credit history, employment history and personal
information, and furnish an authorization to apply for a credit report which
summarizes the borrower's credit history with local merchants and lenders and
any record of bankruptcy. If the borrower was self-employed, the borrower
will have been required to submit copies of recent tax returns. The borrower
may also have been required to authorize verifications of deposits at
financial institutions where the borrower had demand or savings accounts.
With respect to Multifamily Property, information concerning operating income
and expenses will have been obtained from the borrower showing operating
income and expenses during the preceding three calendar years. Certain
considerations may cause an originator of Loans 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 adequacy of the property financed by the related Loan as security for
repayment of such Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the Loan originator or independent appraisers selected
in accordance with pre-established guidelines established by the Loan
originator. The appraisal procedure guidelines will have required that the
appraiser or an agent on its behalf to personally inspect the property and to
verify that it was in good condition and that construction, if new, had been
completed. The appraisal will have been based upon 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.
Based on the data provided, certain verifications and the appraisal, a
determination will have been made by the original lender that the borrower's
monthly income would be sufficient to enable the borrower to meet its monthly
obligations on the Loan and other expenses related to the property (such as
property taxes, utility costs, standard hazard and primary mortgage insurance
and, if applicable, maintenance fees and other levies assessed by a
Cooperative) and certain other fixed obligations other than housing expenses.
The originating lender's guidelines for Loans secured by Single Family
Property generally will specify that Scheduled Payments plus taxes and
42
<PAGE>
insurance and all Scheduled 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 borrower's gross income.
These guidelines will generally be applied only to the payments to be made
during the first year of the Loan. Except as otherwise specified in the related
Prospectus Supplement, with respect to Mortgage Loans that are Conventional
Loans, underwriting guidelines used to establish the relevant percentages of
gross income will be similar to underwriting guidelines used by FNMA and FHLMC
at the time of origination of the Loan, except that the ratio of Scheduled
Payments and certain other fixed obligations to monthly gross income may exceed
the comparable FNMA or FHLMC limits as specified in the related Prospectus
Supplement.
With respect to FHA Loans and VA Loans, traditional underwriting
guidelines used by the FHA and the VA, as the case may be, which were in
effect at the time of origination of each Loan will generally have been
applied. With respect to Manufactured Home Loans that are Conventional Loans,
the related Prospectus Supplement will specify the required minimum
downpayment, the maximum amount of purchase price eligible for financing, the
maximum original principal amount that may be financed, and the limitations
on ratios of borrower's Scheduled Payment to gross monthly income and monthly
income net of other fixed payment obligations. With respect to Multifamily
Property, the Loan originator will have made an assessment of 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. Income
derived from the Mortgaged Property constituting investment property may have
been considered for underwriting purposes, rather than the income of the
borrower from other sources. With respect to Mortgaged Property consisting of
vacation or second homes, no income derived from the property will have been
considered for underwriting purposes.
Certain types of Loans that may be included in the Primary Assets for a
Series are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, Buy-Down Loans, GEM Loans
and GPM Loans provide for escalating or variable payments by the borrower.
These types of Loans are underwritten on the basis of a judgment that the
borrower will have the ability to make larger Scheduled Payments in
subsequent years. ARMs may involve similar assessments.
To the extent specified in the related Prospectus Supplement, the
Depositor may purchase Loans (or participation interests therein) 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, Loans may be underwritten under a "limited
documentation program," if specified in the Prospectus Supplement. With
respect to such Loans, minimal investigation into the borrowers' credit
history and income profile is undertaken by the originator and such Loans may
be underwritten primarily on the basis of an appraisal of the Mortgaged
Property and Loan-to-Value Ratio on 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 applied.
In addition, Mortgage Loans may have been originated in connection with a
governmental program under which underwriting standards were significantly
less stringent and designed to promote home ownership or the availability of
affordable residential rental property notwithstanding higher risks of
default and losses. The related Prospectus Supplement will specify the
underwriting standards applicable to such Mortgage Loans.
The underwriting standards applied by the Loan originator require that the
underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, and provides
sufficient value to mitigate the effects of adverse shifts in real estate
values. In fact, certain states where the Mortgaged Properties may be located
have "antideficiency" laws requiring, in general, that lenders providing
credit on Single Family Property look solely to the property for repayment in
the event of foreclosure. See "CERTAIN LEGAL ASPECTS OF LOANS" herein.
LOSS EXPERIENCE
The general appreciation of real estate values experienced in the past has
been a factor in limiting the general loss experience on Conventional Loans.
However, there can be no assurance that the past pattern of appreciation in
43
<PAGE>
value of the real property securing such Loans will continue. Further, there is
no assurance that appreciation of real estate values generally will limit loss
experiences on non-traditional housing such as Multifamily Property,
Manufactured Homes or Cooperative Dwellings. Similarly, no assurance can be
given that the value of the Mortgaged Property (including Cooperative Dwellings)
securing a Loan has remained or will remain at the level existing on the date of
origination of such Loan. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Loans and any secondary financing on the Mortgaged Properties
securing such Loans become equal to or greater than the value of such Mortgaged
Properties, then 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 rates with respect to Cooperative Loans, could be adversely affected
if the current favorable tax treatment of cooperative tenant stockholders were
to become less favorable. See "CERTAIN LEGAL ASPECTS OF LOANS" herein.
No assurance can be given that values of Manufactured Homes have or will
remain at the levels existing on the dates of origination of the related
Loan. Manufactured Homes are less likely to experience appreciation in value
and more likely to experience depreciation in value over time than other
types of Mortgaged Property. Additionally, delinquency, loss and foreclosure
experience on Manufactured Home Loans may be adversely affected to a greater
degree by regional and local economic conditions than more traditional
Mortgaged Property. Loans secured by Multifamily Property may also be more
susceptible to losses due to changes in local and regional economic
conditions than Loans secured by Single Family Property. For example,
unemployment resulting from an economic downturn in local industry may
sharply affect occupancy rates. Also, interest rate fluctuations can make
home ownership a more attractive alternative to renting, causing occupancy
rates and market rents to decline. New construction can create an oversupply,
particularly in a market that has experienced low vacancy rates.
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Loans
included in the Primary Assets for a Series of Certificates are not covered
by the methods of credit support or the insurance policies described herein
or in the related Prospectus Supplement, such losses will be borne by Holders
of the Certificates of such Series. Even where credit support covers all
losses resulting from delinquency and foreclosure or repossession, the effect
of foreclosures and repossessions may be to increase prepayment experience on
the Primary Assets, thus reducing average weighted life and affecting yield
to maturity. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS".
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Prospectus Supplement, in the
Trust Agreement, the Depositor, the Master Servicer or another entity will
represent and warrant to the Trustee with respect to the Mortgage Loans
comprising the Primary Assets in a Trust Fund, upon delivery of the Mortgage
Loans to the Trustee hereunder, among other things, that: (i) any required
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 standard hazard and primary mortgage insurance was in
effect as of the date of such representation and warranty; (ii) immediately
prior to the transfer and assignment of the Mortgage Loans the Depositor (or
such other entity) with respect to each Mortgage Loan had good title to and
was sole owner of each such Mortgage Loan; (iii) each Mortgage constituted a
valid first lien on the related Mortgaged Property (subject only to
permissible title insurance exceptions) and that the related Mortgaged
Property was free from damage and was in good repair; (iv) each Mortgage Loan
at the time it was made complied in all material respects with applicable
state and federal laws, including usury, equal credit opportunity and
truth-in-lending or similar disclosure laws; and (v) each Mortgage Loan was
current as to all required payments (i.e., not more than 30 or 60 days
delinquent).
If the Mortgage Loans include Cooperative Loans, no representations or
warranties with respect to title insurance or hazard insurance will be given.
In addition, if the Mortgage Loans include Condominium Loans, no
representation regarding hazard insurance will be given. Generally, the
Cooperative or Condominium Association itself is responsible for the
maintenance of hazard insurance for property owned by the Cooperative and the
Condominium Association is responsible for maintaining standard hazard
insurance, insuring the entire Condominium Building (including each
individual Condominium Unit), and the borrowers of that Cooperative or
44
<PAGE>
Condominium do not maintain separate hazard insurance on their individual
Cooperative Dwellings or Condominium Units. See "SERVICING OF LOANS --
Maintenance of Insurance Policies and Other Servicing Procedures" herein. With
respect to a Cooperative Loan, the Depositor will represent and warrant based,
in part, upon representations and warranties of the originator of such
Cooperative Loan that (i) the security interest created by the cooperative
security agreements is 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 (ii) the
related Cooperative Dwelling is free of material damage and in good repair.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Manufactured Home Loan, the Depositor based upon
representations and warranties of the originator of such Manufactured Home
Loan will represent and warrant, among other things that (i) immediately
prior to the transfer and assignment of the Manufactured Home Loans to the
Trustee, the Depositor had good title to, and was the sole owner of, each
Manufactured Home Loan; (ii) as of the date of such transfer and assignment,
the Manufactured Home Loans are subject to no offsets, defenses or
counterclaims; (iii) each Manufactured Home Loan at the time it was made
complied in all material respects with applicable state and federal laws,
including usury, equal credit opportunity and truth-in-lending or similar
disclosure laws; (iv) as of the date of such transfer and assignment, each
Manufactured Home Loan constitutes 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 representation and warranty, no
Manufactured Home Loan is more than 30 days delinquent and there are no
delinquent tax or assessment liens against the related Manufactured Home; and
(vi) with respect to each Manufactured Home Loan, any required hazard
insurance policy was effective at the origination of each Manufactured Home
Loan and remained in effect on the date of the transfer and assignment of the
Manufactured Home Loan from the Depositor and that all premiums due on such
insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made by
the Depositor, the Master Servicer or another entity in respect of a Loan
that materially and adversely affects the value of such Loan, such entity
will be obligated to cure such breach in all material respects, repurchase
such Loan from the Trustee, or, unless specified otherwise in the related
Prospectus Supplement, deliver a Qualified Substitute Mortgage Loan as
described below under "THE TRUST AGREEMENTS -- Assignment of Primary Assets."
The Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet its obligations to repurchase or
substitute Loans as to which there has been a breach of any representation or
warranty, and its only source of funds to make such a substitution or
repurchase would be from funds obtained from the enforcement of a
corresponding obligation, if any, on the part of the originator or seller of
the Loans. See "Special Considerations -- Limited Obligations and Assets of
the Depositor." The PMBS Trustee (in the case of Private Mortgage-Backed
Securities) or the Trustee, as applicable, will be required to enforce this
obligation following the practices it would employ in its good faith business
judgment were it the owner of such Loan. If so specified in the related
Prospectus Supplement, the Master Servicer may be obligated to enforce such
obligations rather than the Trustee or PMBS Trustee.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans constituting the
Primary Assets in the Trust Fund will be provided by the Master Servicer
directly or through one or more servicers (the "Servicers") subject to
supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicers of their servicing
responsibilities under their servicing agreements ("Servicing Agreements")
with the Master Servicer, (ii) maintain any standard or special hazard
insurance policy, primary mortgage insurance bankruptcy bond or pool
insurance policy required for the related Loans and (iii) advance funds as
described below under "Advances". If the Master Servicer services the Loans
through Servicers as its agents, the Master Servicer will be ultimately
responsible for the performance of all servicing activities, including those
performed by the Servicers, notwithstanding its delegation of certain
responsibilities to such Servicers.
The Master Servicer will be a party to the Trust Agreement for any Series
for which Loans comprise the Primary Assets and may be a party to a
Participation Agreement executed with respect to any Participation Certificates
45
<PAGE>
which constitute the Primary Assets. The Master Servicer may be an affiliate of
the Depositor. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer and each Servicer will be required to be a FNMA- or
FHLMC-approved seller/servicer and, in the case of FHA Loans, approved by HUD as
an FHA mortgagee.
The Master Servicer will be paid a Servicing Fee for the performance of
its services and duties under each Trust Agreement as specified in the
related Prospectus Supplement. Each Servicer, if any, will be entitled to
receive a portion of the Servicing Fee. In addition, the Master Servicer or
Servicer may be entitled to retain late charges, assumption fees and similar
charges to the extent collected from mortgagors. If a Servicer is terminated
by the Master Servicer, the servicing function of the Servicer will be either
transferred to a substitute Servicer or performed by the Master Servicer. The
Master Servicer will be entitled to retain the portion of the Servicing Fee
paid to the Servicer under a terminated Servicing Agreement if the Master
Servicer elects to perform such servicing functions itself.
The Master Servicer, at its election, may pay itself the Servicing Fee for
a Series with respect to each Mortgage Loan either by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to the deposit of
such payment in the Collection Account for such Series, (b) withdrawing the
Servicing Fee from the Collection Account after the entire Scheduled Payment
has been deposited in the Collection Account, or (c) requesting that the
Trustee pay the Servicing Fee out of amounts in the Certificate Account.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Master Servicer will make reasonable efforts to collect all payments
required to be made under the Mortgage Loans and will, consistent with the
Trust Agreement for a Series and any applicable insurance policies and other
credit supports, follow such collection procedures as it follows with respect
to comparable loans held in its own portfolio. Consistent with the above, the
Master Servicer may, in its discretion, (i) waive any assumption fee, late
payment charge, or other charge in connection with a Loan and (ii) arrange
with a mortgagor a schedule for the liquidation of delinquencies by extending
the Due Dates for Scheduled Payments on such Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer, to the extent permitted by law, will establish and maintain
escrow or impound accounts ("Escrow Accounts") in which payments by borrowers
to pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items that are required to be paid to the mortgagee will be
deposited. Mortgage Loans and Manufactured Home Loans may not require such
payments under the loan related documents, in which case the Master Servicer
would not be required to establish any Escrow Account with respect to such
Loans. Withdrawals from the Escrow Accounts are to be made to effect timely
payment of taxes, assessments, mortgage and hazard insurance, to refund to
borrowers amounts determined to be overages, to pay interest to borrowers on
balances in the Escrow Account to the extent required by law, to repair or
otherwise protect the property securing the related Loan and to clear and
terminate such Escrow Account. The Master Servicer will be responsible for
the administration of the Escrow Accounts and generally will make Advances to
such account when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Master Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the
related Prospectus Supplement, the Collection Account will be a non-interest
bearing account maintained (i) at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit therein are
rated within the two highest rating categories by each Rating Agency rating
the Certificates of such Series or (ii) in an account or accounts the
deposits in which are insured to the maximum extent available by the FDIC or
which are secured in a manner meeting requirements established by each Rating
Agency.
If so specified in the related Prospectus Supplement, the Collection
Account may be maintained as an interest-bearing account, or the funds held
therein may be invested, pending remittance to the Trustee, in Eligible
Investments. If so specified in the related Prospectus Supplement, the Master
Servicer will be entitled to receive as additional compensation any interest
or other income earned on funds in the Collection Account.
46
<PAGE>
The Master Servicer will deposit into the Collection Account for each
Series on the Business Day following the Closing Date any amounts
representing Scheduled Payments due after the related Cut-Off Date but
received by the Master Servicer on or before the Closing Date, and
thereafter, after the date of receipt thereof, the following payments and
collections received or made by it (other than in respect of principal of and
interest on the related Loans due on or before such Cut-Off Date):
(i) All payments on account of principal, including prepayments, on
such Loans;
(ii) All payments on account of interest on such Loans after deducting
therefrom, at the discretion of the Master Servicer but only to the extent
of the amount permitted to be withdrawn or withheld from the Collection
Account in accordance with the related Trust Agreement, the Servicing Fee
in respect of such Loans;
(iii) All amounts received by the Master Servicer in connection with
the liquidation of defaulted Loans or property acquired in respect
thereof, whether through foreclosure sale or otherwise, including payments
in connection with such Loans received from the mortgagor, other than
amounts required to be paid to the mortgagor pursuant to the terms of the
applicable Mortgage or otherwise pursuant to law ("Liquidation Proceeds"),
exclusive of, in the discretion of the Master Servicer but only to the
extent of the amount permitted to be withdrawn from the Collection Account
in accordance with the related Trust Agreement, the Servicing Fee, if any,
in respect of the related Loan;
(iv) All proceeds received by the Trust under any title, hazard or
other insurance policy covering any such Loan, other than proceeds to be
applied to the restoration or repair of the Mortgaged Property or released
to the mortgagor in accordance with the related Trust Agreement (which
shall be retained by the Master Servicer and not deposited in the
Collection Account);
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such series pursuant to the related Trust Agreement;
(vi) All Advances for such Series made by the Master Servicer pursuant
to the related Trust Agreement; and
(vii) All proceeds of any such Loans repurchased by the Depositor
pursuant to the related Trust Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Trust Agreement; the Master Servicer's right to
reimburse itself is limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
amounts representing proceeds of insurance policies covering the related
Mortgaged Property) which represent late recoveries of Scheduled Payments
respecting which any such Advance was made;
(ii) to reimburse itself for any Advances for such Series that the
Master Servicer determines in good faith it will be unable to recover from
amounts representing late recoveries of Scheduled Payments respecting
which such Advance was made or from Liquidation Proceeds or the proceeds
of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Mortgaged Property and, to the extent that
Liquidation Proceeds after such reimbursement are in excess of the
outstanding principal balance of the related Loan, together with accrued
and unpaid interest thereon at the applicable Pass-Through Rate to the Due
Date next succeeding the date of its receipt of such Liquidation Proceeds,
to pay to itself out of such excess the amount of any unpaid Servicing Fee
and any assumption fees, late payment charges, or other charges on the
related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of any the interest component of any Scheduled Payment, late payment
or other recovery with respect to a particular Loan prior to the deposit of
47
<PAGE>
such Scheduled Payment, late payment or recovery into the Collection Account,
to pay to itself the Servicing Fee, as adjusted pursuant to the related Trust
Agreement, from any such Scheduled Payment, late payment or such other
recovery, to the extent permitted by such Trust Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Trust Agreement;
(vi) to pay to itself with respect to each Loan or REO Property
acquired in respect thereof that has been repurchased by the Depositor
pursuant to the related Trust Agreement all amounts received thereon and
not distributed as of the date on which the related repurchase price was
determined;
(vii) to reimburse itself for the excess of any unreimbursed Advances
with respect to a particular Loan over the related Liquidation Proceeds;
(viii) to make payments to the Trustee of such Series for deposit into
the Certificate Account, if any, or for remittance to the
Certificateholders of such Series in the amounts and in the manner
provided for in the related Trust Agreement; and
(ix) to clear and terminate the Collection Account pursuant to the
related Trust Agreement.
In addition, if the Master Servicer deposits in the Collection Account for
a series any amount not required to be deposited therein, it may, at any
time, withdraw such amount from such Collection Account.
SERVICING ACCOUNTS
In those cases where a Servicer is servicing a Mortgage Loan, the Servicer
will establish and maintain an account (a "Servicing Account") that will
comply with the standards set forth above, and which is otherwise acceptable
to the Master Servicer. The Servicer is required to deposit into the
Servicing Account all amounts enumerated in the preceding paragraph in
respect of the Mortgage Loans received by the Servicer, less its servicing
compensation. On the date specified in the related Prospectus Supplement, the
Servicer will remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan. The Servicer may, to the extent
described in the related Prospectus Supplement, be required to advance any
monthly installment of principal and interest that was not received, less its
servicing fee, by the date specified in the related Prospectus Supplement.
BUY-DOWN LOANS, GPM LOANS AND OTHER SUBSIDIZED LOANS
With respect to each Buy-Down Loan, if any, included in a Trust Fund the
Master Servicer will deposit all Buy-Down Amounts in a custodial account
(which may be interest-bearing) complying with the requirements set forth
above for the Collection Account (the "Buy-Down Fund"). The amount of such
deposit, together with investment earnings thereon at the rate specified in
the related Prospectus Supplement, will provide sufficient funds to support
the payments on such Buy-Down Loan on a level debt service basis. The Master
Servicer will not be obligated to add to the Buy-Down Fund should amounts
therein and investment earnings prove insufficient to maintain the scheduled
level of payments on the Buy-Down Loans, in which event distributions to the
Certificateholders may be affected. Unless otherwise provided in the related
Prospectus Supplement, a Buy-Down Fund will not be included in or deemed to
be a part of the Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, the terms of all Buy-Down Loans provide for the
contribution of buy-down funds in an amount equal to or exceeding either (i)
the total payments to be made from such funds pursuant to the related buydown
plan or (ii) if such buy-down funds are present valued, that amount of
buy-down funds which, together with investment earnings thereon at a
specified rate, compounded monthly, will support the scheduled level of
payments due under the Buy-Down Loan. Neither the Master Servicer, any
Servicer nor the Depositor will be obligated to add to such buy-down funds
any of its own funds should investment earnings prove insufficient to
maintain the scheduled level of payments on the Buy-Down Loan, in which event
distributions to Certificateholders may be affected. With respect to each
Buy-Down Loan, the Master Servicer will deposit in the Collection Account the
amount, if any, of the buy-down funds (and, if applicable, investment
earnings thereon) for each Buy-Down Loan that, when added to the amount due
from the borrower on such Buy-Down Loan, equals the full monthly payment
which would be due on the Buy-Down Loan if it were not subject to the
buy-down plan.
48
<PAGE>
If the borrower on a Buy-Down Loan prepays such Loan in its entirety
during the Buy-Down Period, the Master Servicer will withdraw from the
Buy-Down Fund and remit to the borrower in accordance with the related
buy-down plan any buy-down funds remaining in the Buy-Down Fund. If a
prepayment by a borrower during the Buy-Down Period together with buy-down
funds will result in a prepayment in full, the Master Servicer will withdraw
from the Buy-Down Fund for deposit in the Collection Account the buy-down
funds and investment earnings thereon, if any, which together with such
prepayment will result in a prepayment in full. If the borrower defaults
during the Buy-Down Period with respect to a Buy-Down Loan and the property
securing the related Loan is sold in liquidation (either by the Master
Servicer of the insurer under any related insurance policy), the Master
Servicer will withdraw from the Buy-Down Fund the buy-down funds and all
investment earnings thereon, if any, for deposit in the Collection Account or
remit the same to the insurer if the mortgaged property is transferred to
such insurer and such insurer pays all of the loss incurred in respect of
such default. In the case of any such prepaid or defaulted Buy-Down Loan the
buy-down funds in respect of which were supplemented by investment earnings,
the Master Servicer will withdraw from the Buy-Down Fund and retain or remit
to the borrower, depending upon the terms of the buy-down plan, any
investment earnings remaining in the related Buy-Down Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the Master Servicer will deposit the
subsidy funds in a custodial account (which may be interest-bearing)
complying with the requirements set forth above for the Collection Account
set forth above (a "Subsidy Fund"). Unless otherwise specified in the related
Prospectus Supplement, the terms of each such Loan will provide for the
contribution of the entire undiscounted amount of subsidy amounts necessary
to maintain the scheduled level of payments due during the early years of
such Loan. Neither the Master Servicer, any Servicer nor the Depositor will
be obligated to add to such Subsidy Fund any of its own funds. Unless
otherwise provided in the related Prospectus Supplement, such Subsidy Fund
will not be included in or deemed to be a part of the Trust Fund.
If the Depositor values any GPM Loans deposited into the Trust Fund for a
Multi-Class Series on the basis of such GPM Loan's scheduled maximum
principal balance, the Master Servicer will, if and to the extent provided in
the related Prospectus Supplement, deposit in a custodial account (which may
be interest bearing) (the "GPM Fund") complying with the requirements set
forth above for the Collection Account an amount which, together with
reinvestment income thereon at the rate set forth in the related Prospectus
Supplement, will be sufficient to cover the amount by which payments of
principal and interest on such GPM Loans assumed in calculating payments due
on the Certificates of such Multi-Class Series exceed the scheduled payments
on such GPM Loans. The Trustee will withdraw amounts from the GPM Fund for a
Series upon a prepayment of such GPM Loan as necessary and apply such amounts
to the payment of principal and interest on the Certificates of such Series.
Neither the Depositor, the Master Servicer nor any Servicer will be obligated
to supplement the GPM Fund should amounts therein and investment earnings
thereon prove insufficient to maintain the scheduled level of payments, in
which event, distributions to the Certificateholders may be affected. Unless
otherwise specified in the related Prospectus Supplement, such GPM Fund will
not be included in or deemed to be part of the Trust Fund.
With respect to any other type of Loan which provides for payments other
than on the basis of level payments, an account may be established as
described in the related Prospectus Supplement on terms similar to those
relating to the Buy-Down Fund, Subsidy Fund or the GPM Fund.
ADVANCES AND LIMITATIONS THEREON
General. The related Prospectus Supplement will describe the circumstances
under which the Master Servicer or Servicer will make Advances with respect
to delinquent payments on Loans. Unless otherwise specified in the related
Prospectus Supplement, neither the Master Servicer nor any Servicer will be
obligated to make Advances, and such obligation may be limited in amount, may
be limited to advances received from the Servicers, if any, or may not be
activated until a certain portion of a specified reserve fund is depleted. If
the Master Servicer is obligated to make Advances, a surety bond or other
credit support may be provided with respect to such obligation as described
in the related Prospectus Supplement. Advances are intended to provide
liquidity and not to guarantee or insure against losses. Accordingly, any
49
<PAGE>
funds advanced are recoverable by the Servicer or the Master Servicer, as the
case may be, out of amounts received on particular Loans which represent late
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of Insurance Policies, or Liquidation Proceeds from the related Loan,
the Servicer or Master Servicer will be entitled to reimbursement from other
funds in the Collection Account or Servicing Account, as the case may be, or
from a specified Reserve Fund as applicable, to the extent specified in the
related Prospectus Supplement.
Advances in Connection With Prepaid Loans. In addition when a borrower
makes a principal prepayment in full between Due Dates on the related Loan,
the borrower will generally be required to pay interest on the principal
amount prepaid only to the date of such prepayment. If and to the extent
provided in the related Prospectus Supplement, in order that one or more
Classes of the Certificateholders of a Series will not be adversely affected
by any resulting shortfall in interest, the Master Servicer may be obligated
to advance moneys from its own funds to the extent necessary to include in
its remittance to the Trustee for deposit into the Certificate Account an
amount equal to a full Scheduled Payment of interest on the related Loan
(adjusted to the applicable Pass-Through Rate). Any such principal
prepayment, together with a full Scheduled Payment of interest thereon at the
applicable Pass-Through Rate (to the extent of such adjustment or advance),
will be distributed to Certificateholders on the related Distribution Date.
If the amount necessary to include a full Scheduled Payment of interest as
described above exceeds the amount which the Master Servicer is obligated to
advance, as applicable, a shortfall may occur as a result of a prepayment in
full. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS".
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Master Servicer will be required to
maintain or to cause the borrower on each Loan to maintain or will use its
best reasonable efforts to cause each Servicer of a Loan to maintain a
standard hazard insurance policy providing coverage of the standard form of
fire insurance with extended coverage for certain other hazards as is
customary in the state in which the property securing the related Loan is
located. See "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein. Unless
otherwise specified in the related Prospectus Supplement, coverage will be in
an amount at least equal to the greater of (i) the amount necessary to avoid
the enforcement of any co-insurance clause contained in the policy or (ii)
the outstanding principal balance of the related Loan. The Master Servicer
will also maintain on REO Property that secured a defaulted Loan and that has
been acquired upon foreclosure, deed in lieu of foreclosure, or repossession,
a standard hazard insurance policy in an amount that is at least equal to the
maximum insurable value of such REO Property. No earthquake or other
additional insurance will be required of any borrower or will be maintained
on REO Property acquired in respect of a defaulted Loan, other than pursuant
to such applicable laws and regulations as shall at any time be in force and
shall require such additional insurance. When, at the time of origination of
a Loan, the property securing that Loan is located in a federally designated
special flood hazard area, the Master Servicer will cause to be maintained or
use its best reasonable efforts to cause the Servicer to maintain with
respect to such property flood insurance as required under the Flood Disaster
Protection Act of 1973, to the extent available, or as described in the
related Prospectus Supplement.
Any amounts collected by the Master Servicer or the Servicer, as the case
may be, under any such policies of insurance (other than amounts to be
applied to the restoration or repair of the Mortgaged Property, released to
the borrower in accordance with normal servicing procedures or used to
reimburse the Master Servicer for amounts to which it is entitled to
reimbursement) will be deposited in the Collection Account. In the event that
the Master Servicer obtains and maintains a blanket policy insuring against
hazard losses on all of the Loans, written by an insurer then acceptable to
each Rating Agency which assigns a rating to such Series, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each Loan or related REO
Property. 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 clause, deposit in
the Collection Account the amount not otherwise payable under the blanket
policy because of the application of such deductible clause.
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 itself is responsible for maintenance of
50
<PAGE>
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. Similarly, the Depositor will not require that a standard hazard or
flood insurance policy be maintained on a Condominium Unit relating to any
Condominium Loan. Generally, the Condominium Association is responsible for
maintenance of hazard insurance insuring the entire Condominium building
(including each individual Condominium Unit), and the owner(s) of an individual
Condominium Unit do not maintain separate hazard insurance policies. To the
extent, however, that a Condominium Association and the related borrower on a
Condominium 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 Condominium Unit or the related
Condominium Building could significantly reduce the value of the collateral
securing such Condominium Loan to the extent not covered by other credit
support.
Special Hazard Insurance Policy. If, and to the extent specified in the
related Prospectus Supplement, the Master Servicer will maintain a special
hazard insurance policy, in the amount set forth in the related Prospectus
Supplement, in full force and effect with respect to the Loans. Unless
otherwise specified in the related Prospectus Supplement, the special hazard
insurance policy will provide for a fixed premium rate based on the declining
aggregate outstanding principal balance of the Loans. The Master Servicer
will agree to pay the premium for any special hazard insurance policy on a
timely basis. If 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 which is equal to the then
existing coverage of the terminated 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 policy will, unless otherwise specified in the related
Prospectus Supplement, be reduced to a level such that the applicable premium
does not exceed 150% of the cost of the special hazard insurance policy that
was replaced. Any amounts collected by the Master Servicer under the special
hazard insurance policy in the nature of insurance proceeds will be deposited
in the Collection Account (net of amounts to be used to repair, restore or
replace the related property securing the Loan or to reimburse the Master
Servicer (or a Servicer) for related amounts owed to it). Certain
characteristics of the special hazard insurance policy are described under
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE -- Hazard Insurance on the
Loans."
Primary Mortgage Insurance. To the extent described in the related
Prospectus Supplement, the Master Servicer will be required to use its best
reasonable efforts to keep, or to cause each Servicer to keep, in full force
and effect, a primary mortgage insurance policy with respect to each
Conventional Loan secured by Single Family Property for which such coverage
is required for as long as the related mortgagor is obligated to maintain
such primary mortgage insurance under the terms of the related Loan. The
Master Servicer will not cancel or refuse to renew any such primary mortgage
insurance policy in effect at the date of the initial issuance of the
Certificates that is required to be kept in force unless a replacement
primary mortgage insurance policy for such cancelled or nonrenewed policy is
maintained with a Qualified Insurer.
Primary insurance policies will be required with respect to Manufactured
Home Loans only to the extent described in the related Prospectus Supplement.
If primary mortgage insurance is to be maintained with respect to
Manufactured Home Loans, the Master Servicer will be required to maintain
such insurance as described above. For further information regarding the
extent of coverage under a primary mortgage insurance policy, see
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE -- Mortgage Insurance on the
Loans."
FHA Insurance and VA Guarantees. To the extent specified in the related
Prospectus Supplement, all or a portion of the Loans may be insured by the
FHA or guaranteed by the VA. The Master Servicer will be required to take
such steps as are reasonably necessary to keep such insurance and guarantees
in full force and effect. See "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE --
Mortgage Insurance on the Loans."
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated to use its best reasonable
efforts to maintain a pool insurance policy with respect to the Loans in the
51
<PAGE>
amount and with the coverage described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the pool
insurance policy will provide for a fixed premium rate on the declining
aggregate outstanding principal balance of the Loans. The Master Servicer
will be obligated to pay the premiums for such pool insurance policy on a
timely basis.
The related Prospectus Supplement will identify the pool insurer for each
Series of Certificates. If the pool insurer ceases to be a Qualified Insurer
because it is not approved as an insurer by FHLMC or FNMA or because its
claims-paying ability is no longer rated in the category required by the
related Prospectus Supplement, the Master Servicer will be obligated to
review, no less often than monthly, the financial condition of the pool
insurer to determine whether recoveries under the pool insurance policy are
jeopardized by reason of the financial condition of the pool insurer. If the
Master Servicer determines that recoveries may be so jeopardized or if the
pool insurer ceases to be qualified under applicable law to transact a
mortgage guaranty insurance business, the Master Servicer will exercise its
best reasonable efforts to obtain from another Qualified Insurer a comparable
replacement pool insurance policy with a total coverage equal to the then
outstanding coverage of the pool insurance policy to be replaced; provided
that, if the premium rate on the replacement policy is greater than that of
the existing pool insurance policy, then the coverage of the replacement
policy will, unless otherwise specified in the related Prospectus Supplement,
be reduced to a level such that its premium rate does not exceed 150% of the
premium rate on the pool insurance policy to be replaced. Payments made under
a pool insurance policy will be deposited into the Collection Account (net of
expenses of the Master Servicer or any related unreimbursed advances or
unpaid Servicing Fee). Certain characteristics of the pool insurance policy
are described under "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE -- Mortgage
Insurance on the Loans."
Bankruptcy Bond. If so specified in the related Prospectus Supplement, the
Master Servicer will be obligated to use its best reasonable efforts to
obtain and thereafter maintain a bankruptcy bond or similar insurance or
guaranty in full force and effect throughout the term of the related Trust
Agreement, unless coverage thereunder has been exhausted through payment of
claims. If so specified in the Prospectus Supplement, the Master Servicer
will be required to pay from its servicing compensation the premiums for the
bankruptcy bond on a timely basis. Coverage under the bankruptcy bond may be
cancelled or reduced by the Master Servicer at any time, provided that such
cancellation or reduction does not adversely affect the then current rating
of the related Series of Certificates. See "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE -- Bankruptcy Bond" herein.
PRESENTATION OF CLAIMS; REALIZATION UPON DEFAULTED LOANS
The Master Servicer, on behalf of the Trustee and the Certificateholders,
will be required to present or cause to be presented, claims with respect to
any standard hazard insurance policy, pool insurance policy, special hazard
insurance policy bankruptcy bond, or primary mortgage insurance policy, and
to the FHA and the VA, if applicable in respect of any FHA insurance or VA
guarantee respecting defaulted Mortgage Loans.
The Master Servicer will use its reasonable best efforts to foreclose
upon, repossess or otherwise comparably convert the ownership of the real
properties securing such of the related 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 Master Servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in
its servicing activities with respect to comparable loans serviced by it.
However, the Master Servicer will not be required to expend its own funds in
connection with any foreclosure or towards the restoration of the property
unless it determines that: (i) such restoration or foreclosure will increase
the Liquidation Proceeds in respect of the related Mortgage Loan available to
the Certificateholders after reimbursement to itself for such expenses and
(ii) that such expenses will be recoverable by it either through Liquidation
Proceeds or the proceeds of insurance. Notwithstanding anything to the
contrary herein, in the case of a Trust Fund for which a REMIC election has
been made, the Master Servicer shall not liquidate any collateral acquired
through foreclosure later than one year after the acquisition of such
collateral. While the holder of Mortgaged Property acquired through
foreclosure can often maximize its recovery by providing financing to a new
purchaser, the Trust Fund will have no ability to do so and neither the
Master Servicer nor any Servicer will be required to do so.
Similarly, if any property securing a defaulted Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy or the
applicable special hazard insurance policy, if any, are insufficient to
52
<PAGE>
restore the damaged property to a condition sufficient to permit recovery under
any pool insurance policy or any primary mortgage insurance policy, FHA
insurance, or VA guarantee, neither the Master Servicer nor any Servicer will be
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the Liquidation Proceeds in
respect of such Loan after reimbursement of the expenses incurred by such
Servicer or the Master Servicer and (ii) that such expenses will be recoverable
by it through proceeds of the sale of the property or proceeds of the related
pool insurance policy or any related primary mortgage insurance policy, FHA
insurance, or VA guarantee.
As to collateral securing a Cooperative Loan, any prospective purchaser
will generally have to obtain the approval of the board of directors of the
relevant cooperative before purchasing the shares and acquiring rights under
the proprietary lease or occupancy agreement securing that Cooperative Loan.
See "CERTAIN LEGAL ASPECTS OF LOANS -- Foreclosure on Shares of Cooperatives"
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.
With respect to a Loan secured by a Multifamily Property, the market value
of any property obtained in foreclosure or by deed in lieu of foreclosure
will be based substantially on the operating income obtained by renting the
dwelling units. As a default on a Loan secured by Multifamily Property is
likely to have occurred because operating income, net of expenses, is
insufficient to make debt service payments on the related Loan, it can be
anticipated that the market value of such property will be less than
anticipated when such Loan was originated. To the extent that equity does not
cushion 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
a defaulted Manufactured Home Loan, the value of the related Manufactured
Home can be expected to be less on resale Manufactured Home than a new
Manufactured Home. To the extent equity does not cushion the loss in market
value, and such loss is not covered by other credit support, a loss may be
experienced by the Trust Fund.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Mortgaged Property is about to be conveyed by the borrower,
the Master Servicer will, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such conveyance,
exercise its rights to accelerate the maturity of such Loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that
such clause is not enforceable under applicable law or if the enforcement of
such clause would result in loss of coverage under any primary mortgage
insurance policy. If such conditions are not met or the Master Servicer
reasonably believes that enforcement of a due-on-sale clause will not be
enforceable, the Master Servicer is authorized to accept from or enter into
an assumption agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Loan and pursuant to which the original borrower is released from liability
and such person is substituted as the borrower and becomes liable under the
Loan. Any fee collected in connection with an assumption will be retained by
the Master Servicer as additional servicing compensation. The terms of a Loan
may not be changed in connection with an assumption except that, if the terms
of the Loan so permit, and subject to certain other conditions, the interest
rate may be increased (but not decreased) to a prevailing market rate. Unless
otherwise specified in the related Prospectus Supplement, Certificateholders
would not benefit from any such increase.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Master Servicer or any Servicer will be entitled to a servicing fee in an
amount to be determined as specified in the related Prospectus Supplement.
The servicing fee may be fixed or variable, as specified in the related
Prospectus Supplement. In addition, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer or any Servicer will be entitled
to servicing compensation in the form of assumption fees, late payment
charges, or excess proceeds following disposition of property in connection
with defaulted Loans.
53
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay the fees of the Servicers, if any, and certain
expenses incurred in connection with the servicing of the Loans, including,
without limitation, the payment of the fees and expenses of the Trustee and
independent accountants, payment of insurance policy premiums and the cost of
credit support, if any, payment of expenses incurred in enforcing the
obligations of Servicers and in preparation of reports to Certificateholders.
Certain of these expenses may be reimbursable pursuant to the terms of the
Trust Agreement from Liquidation Proceeds and the proceeds of insurance
policies and, in the case of enforcement of the obligations of Servicers,
from any recoveries in excess of amounts due with respect to the related
Loans or from specific recoveries of costs.
The Master Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Loans. The
related Trust Fund will suffer no loss by reason of such expenses to the
extent claims are paid under related insurance policies or from the
Liquidation Proceeds. If claims are either not made or paid under the
applicable insurance policies or if coverage thereunder has been exhausted,
the related Trust Fund will suffer a loss to the extent that Liquidation
Proceeds, after reimbursement of the Master Servicer's expenses, are less
than the outstanding principal balance of and unpaid interest on the related
Loan which would be distributable to Certificateholders. In addition, the
Master Servicer will be entitled to reimbursement of expenditures incurred by
it in connection with the restoration of property securing a defaulted Loan,
such right of reimbursement being prior to the rights of the
Certificateholders to receive any related proceeds of insurance policies,
Liquidation Proceeds or amounts derived from other credit supports. The
Master Servicer is also entitled to reimbursement from the Collection Account
for Advances. In addition, when a borrower makes a principal prepayment in
full between Due Dates on the related Loan, the borrower will generally be
required to pay interest on the amount prepaid only to the date of
prepayment. If and to the extent provided in the related Prospectus
Supplement, in order that one or more Classes of the Certificateholders of a
Series will not be adversely affected by any resulting shortfall in interest,
the amount of the Servicing Fee may be reduced to the extent necessary to
include in the Master Servicer's remittance to the Trustee for deposit into
the Certificate Account an amount equal to a full scheduled payment of
interest on the related Loan (adjusted to the applicable Pass-Through Rate).
Any such principal prepayment, together with a full Scheduled Payment of
interest thereon at the applicable Pass-Through Rate (to the extent of such
adjustment or advance), will be distributed to Certificateholders on the
related Distribution Date. If the amount necessary to include a full
Scheduled Payment of interest as described above exceeds the amount of
Servicing Fee, a shortfall to Certificateholders may occur as a result of a
prepayment in full. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS".
The rights of the Master Servicer to receive funds from the Collection
Account for a Series, whether as the Servicing Fee or other compensation, or
for the reimbursement of Advances, expenses or otherwise, are not subordinate
to the rights of Certificateholders of such Series.
EVIDENCE AS TO COMPLIANCE
The Trust Agreement for each Series will provide that each year, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that such firm has examined certain documents and records relating to
the servicing of the Loans by the Master Servicer and that, on the basis of
such examination, such firm is of the opinion that the servicing has been
conducted in compliance with the Trust Agreement except for (i) such
exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement.
The Trust Agreement for each Series will also provide for delivery to the
Trustee for such Series of an annual statement signed by an officer of the
Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Trust Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicer for each Series will be identified in the related
Prospectus Supplement. The Master Servicer may be an affiliate of the
Depositor and may have other business relationships with the Depositor and
its affiliates.
In the event of an Event of Default under the Trust Agreement, the Master
Servicer may be replaced by the Trustee or a successor Master Servicer. See
"THE TRUST AGREEMENTS -- Rights upon Events of Default" herein.
54
<PAGE>
Unless otherwise provided in the Prospectus Supplement, the Master
Servicer has the right to assign its rights and delegate its duties and
obligations under the Trust Agreement for each Series; provided that the
purchaser or transferee accepting such assignment or delegation (i) is
qualified to service mortgage loans for FNMA or FHLMC, (ii) is reasonably
satisfactory to the Trustee for the related Series (iii) has a net worth of
not less than $15,000,000, (iv) each Rating Agency's rating of the
Certificates for such Series in effect immediately prior to such assignment,
sale or transfer is not qualified, downgraded or withdrawn as a result of
such assignment, sale or transfer; and (v) executes and delivers to the
Trustee an agreement, in form and substance reasonably satisfactory to the
Trustee, which contains an assumption by such purchaser or transferee of the
due and punctual performance and observance of each covenant and condition to
be performed or observed by the Master Servicer under the Trust Agreement
from and after the date of such agreement. No such assignment will become
effective until the Trustee or a successor Master Servicer has assumed the
Master Servicer's obligations and duties under the Trust Agreement. To the
extent that the Master Servicer transfers its obligations to a wholly- owned
subsidiary or affiliate, such subsidiary or affiliate need not satisfy the
criteria set forth above, however, in such instance, the assigning Master
Servicer will remain liable for the servicing obligations under the Trust
Agreement. Any entity into which the Master Servicer is merged or
consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Master Servicer's obligations
under the related Trust Agreement, provided that such successor or surviving
entity meets the requirements for a successor Master Servicer set forth in
the preceding paragraph.
Each Trust Agreement will also provide that neither the Master Servicer,
nor any director, officer, employee or agent of the Master Servicer, will be
under any liability to the related Trust Fund or the Certificateholders for
any action taken or for failing to take any action in good faith pursuant to
the Trust Agreement or for errors in judgment; provided, however, that
neither the Master Servicer nor any such person will be protected against any
breach of warranty or representations made under the Trust Agreement or the
failure to perform its obligations in compliance with any standard of care
set forth in the Trust Agreement or liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Trust Agreement will further provide
that the Master Servicer and any director, officer, employee or agent of the
Master Servicer is entitled to indemnification from the related Trust Fund
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Trust Agreement or the
Certificates, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Trust Agreement provides that the Master
Servicer is not under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its servicing responsibilities under
the Trust Agreement which, in its opinion, may involve it in any expense or
liability. The Master Servicer may, in its discretion, undertake any such
action which it may deem necessary or desirable with respect to the Trust
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 will be
entitled to be reimbursed therefor out of the Collection Account.
CREDIT SUPPORT
GENERAL
For any Series, credit support may be provided with respect to one or more
Classes thereof or the related Primary Assets. Credit support may be in the
form of a letter of credit, the subordination of one or more Classes of the
Certificates of such series, the establishment of one or more reserve funds,
use of a pool insurance policy, bankruptcy bond, repurchase bond or special
hazard insurance policy, certificate guarantee insurance, the use of
cross-support features or another method of credit support described in the
related Prospectus Supplement, or any combination of the foregoing, in any
case, in such amounts and having such terms and conditions as are acceptable
to each Rating Agency. If so specified in the related Prospectus Supplement,
any form of credit support (including but not limited to insurance, letters
of credit or Certificate guarantee insurance) may be structured so as to be
drawn upon by more than one Trust Fund to the extent described therein.
55
<PAGE>
Unless otherwise specified in the related Prospectus Supplement for a
Series, the credit support will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon at the Pass-Through Rate or Certificate
Rate, as applicable. If losses occur which exceed the amount covered by
credit support or which are not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. See "THE
TRUST AGREEMENTS -- Deficiency Event." Moreover, if a form of credit support
covers more than one Trust Fund (each, a "Covered Trust"), holders of
Certificates issued by any of such Covered Trusts will be subject to the risk
that such credit support will be exhausted by the claims of other Covered
Trusts prior to such Covered Trust receiving any of its intended share of
such coverage. If credit support is provided with respect to a Series, or the
related Primary Assets, the related Prospectus Supplement will include a
description of (a) the amount payable under such credit support, (b) any
conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount payable under such credit support
may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the issuer of any third-party
credit support, including (a) a brief description of its principal business
activities, (b) its principal place of business, place of incorporation and
the jurisdiction under which it is chartered or licensed to do business, (c)
if applicable, the identity of regulatory agencies which exercise primary
jurisdiction over the conduct of its business and (d) its total assets, and
its stockholders' or policyholders' surplus, if applicable, as of the date
specified in the Prospectus Supplement.
SUBORDINATE CERTIFICATES; SUBORDINATION RESERVE FUND
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the Subordinate Certificateholders to
receive distributions of principal and interest from the Certificate Account
on any Distribution Date will be subordinated to such rights of the Senior
Certificateholders to the extent of the then applicable Subordinated Amount
as defined in the related Prospectus Supplement. The Subordinated Amount will
decrease whenever amounts otherwise payable to the Subordinate
Certificateholders are paid to the Senior Certificateholders (including
amounts withdrawn from the Subordination Reserve Fund, if any, and paid to
the Senior Certificateholders), and will (unless otherwise specified in the
related Prospectus Supplement) increase whenever there is distributed to the
Subordinate Certificateholders amounts in respect of which subordination
payments have previously been paid to the Senior Certificateholders (which
will occur when subordination payments in respect of delinquencies and
certain other deficiencies have been recovered).
A Series may include a Class of Subordinate Certificates entitled to
receive cash flows remaining after distributions are made to all other
Classes. Such right will effectively be subordinate to the rights of other
Certificateholders, but will not be limited to the Subordinated Amount. If so
specified in the related Prospectus Supplement, the subordination of a Class
may apply only in the event of (or may be limited to) certain types of losses
not covered by Insurance Policies or other credit support, such as losses
arising from damage to property securing a Loan not covered by standard
hazard insurance policies, losses resulting from the bankruptcy of a borrower
and application of certain provisions of the Bankruptcy Code, or losses
resulting from the denial of insurance coverage due to fraud or
misrepresentation in connection with the origination of a Loan.
With respect to any Series which includes one or more Classes of
Subordinate Certificates, a Subordination Reserve Fund may be established if
so specified in the related Prospectus Supplement. The Subordination Reserve
Fund, if any, will be funded with cash, a letter of credit, a demand note or
Eligible Reserve Fund Investments, or by the retention of amounts of
principal or interest otherwise payable to Holders of Subordinate
Certificates, or both, as specified in the related Prospectus Supplement. The
Subordination Reserve Fund will not be a part of the Trust Fund, unless
otherwise specified in the related Prospectus Supplement. If the
Subordination Reserve Fund is not a part of the Trust Fund, the Trustee will
have a security interest therein on behalf of the Senior Certificateholders.
Moneys will be withdrawn from the Subordination Reserve Fund to make
distributions of principal of or interest on Senior Certificates under the
circumstances set forth in the related Prospectus Supplement.
Moneys deposited in any Subordinated Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the related
Prospectus Supplement, any reinvestment income or other gain from such
56
<PAGE>
investments will be credited to the Subordinated Reserve Fund for such Series,
and any loss resulting from such investments will be charged to such
Subordinated Reserve Fund. Amounts in any Subordinated Reserve Fund in excess of
the Required Reserve Fund Balance may be periodically released to the
Subordinate Certificateholders under the conditions and to the extent specified
in the related Prospectus Supplement. Additional information concerning any
Subordinated Reserve Fund will be set forth in the related Prospectus
Supplement, including the amount of any initial deposit to such Subordinated
Reserve Fund, the Required Reserve Fund Balance to be maintained therein, the
purposes for which funds in the Subordinated Reserve Fund may be applied to make
distributions to Senior Certificateholders and the employment of reinvestment
earnings on amounts in the Subordinated Reserve Fund, if any.
CROSS-SUPPORT FEATURES
If the Primary Assets for a Series are divided into separate Asset Groups,
the beneficial ownership of which is evidenced by a separate Class or Classes
of a Series, credit support may be provided by a cross-support feature which
requires that distributions be made on Senior Certificates evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Certificates evidencing the beneficial ownership interest in another Asset
Group within the Trust Fund. The related Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
INSURANCE
Credit support with respect to a Series may be provided by various forms
of insurance policies, subject to limits on the aggregate dollar amount of
claims that will be payable under each such insurance policy, with respect to
all Loans comprising or underlying the Primary Assets for a Series, or such
of the Loans as have certain characteristics. Such insurance policies include
primary mortgage insurance and standard hazard insurance and may, if
specified in the related Prospectus Supplement, include a pool insurance
policy covering losses in amounts in excess of coverage of any primary
insurance policy, a special hazard insurance policy covering certain risks
not covered by standard hazard insurance policies, a bankruptcy bond covering
certain losses resulting from the bankruptcy of a borrower and application of
certain provisions of the Bankruptcy Code, a repurchase bond covering the
repurchase of a Loan for which mortgage insurance or hazard insurance
coverage has been denied due to misrepresentations in connection with the
organization of the related Loan, or other insurance covering other risks
associated with the particular type of Loan. See "DESCRIPTION OF MORTGAGE AND
OTHER INSURANCE." Copies of the actual pool insurance policy, special hazard
insurance policy, bankruptcy bond or repurchase bond, if any, relating to the
Loans comprising the Primary Assets for a Series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed within
15 days of issuance of the Certificates of the related Series.
LETTER OF CREDIT
The letter 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"). Under the letter of credit, the L/C
Bank will be obligated to honor drawings thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, equal to the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Loans on the related Cut-off Date or of one or more
Classes of Certificates (the "L/C Percentage"). If so specified in the
related Prospectus Supplement, the letter of credit may permit drawings in
the event of losses not covered by insurance policies or other credit
support, such as losses arising from damage not covered by standard hazard
insurance policies, losses resulting from the bankruptcy of a borrower and
the application of certain provisions of the Bankruptcy Code, or losses
resulting from denial of insurance coverage due to misrepresentations in
connection with the origination of a Loan. The amount available under the
letter of credit will, in all cases, 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 at the earlier
of the date specified in the related Prospectus Supplement or the termination
of the Trust Fund. See "DESCRIPTION OF THE CERTIFICATES -- Optional
Termination" and "THE TRUST AGREEMENTS -- Termination." A copy of the letter
of credit for a Series, if any, will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of
issuance of the Certificates of the related Series.
57
<PAGE>
CERTIFICATE GUARANTEE INSURANCE
Certificate guarantee insurance, if any, with respect to a Series of
Certificates will be provided by one or more insurance companies. Such
certificate guarantee insurance will guarantee, with respect to one or more
Classes of Certificates of the related Series, timely distributions of
interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the certificate guarantee insurance will also guarantee against
any payment made to a Certificateholder which is subsequently recovered as a
"voidable preference" payment under the Bankruptcy Code. A copy of the
certificate guarantee insurance for a Series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Certificates of the related
Series.
RESERVE FUNDS
One or more Reserve Funds may be established with respect to a Series, in
which cash, a letter of credit, Eligible Reserve Fund Investments, a demand
note or a combination thereof, in the amounts, if any, so specified in the
related Prospectus Supplement will be deposited. The Reserve Funds for a
Series may also be funded over time by depositing therein a specified amount
of the distributions received on the related Primary Assets as specified in
the related Prospectus Supplement.
Amounts on deposit in any Reserve Fund for a Series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes,
in the manner, and to the extent specified in the related Prospectus
Supplement. A Reserve Fund may be provided to increase the likelihood of
timely payments of principal of and interest on the Certificates, if required
as a condition to the rating of such Series by each Rating Agency, or to
reduce the likelihood of Special Distributions with respect to any
Multi-Class Series. If so specified in the related Prospectus Supplement,
Reserve Funds may be established to provide limited protection, in an amount
satisfactory to each Rating Agency, against certain types of losses not
covered by Insurance Policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses
resulting from the bankruptcy of a borrower and the application of certain
provisions of the Bankruptcy Code or losses resulting from denial of
insurance coverage due to fraud or misrepresentation in connection with the
origination of a Loan. Following each Distribution Date amounts in such
Reserve Fund in excess of any required Reserve Fund balance may be released
from the Reserve Fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further
application by the Trustee.
Moneys deposited in any Reserve Funds will be invested in Eligible Reserve
Fund Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such Series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or a Servicer as additional servicing
compensation. See "SERVICING OF LOANS" and "THE TRUST AGREEMENTS --
Investment of Funds." The Reserve Fund, if any, for a Series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the required Reserve Fund balance to be maintained, the
purposes for which funds in the Reserve Fund may be applied to make
distributions to Certificateholders and use of investment earnings from the
Reserve Fund, if any.
DESCRIPTION OF MORTGAGE AND OTHER INSURANCE
The following descriptions of primary mortgage insurance policies, pool
insurance policies, special hazard insurance policies, standard hazard
insurance policies, bankruptcy bonds, repurchase bonds and other insurance
and the respective coverages thereunder are general descriptions only and do
not purport to be complete. If so specified in the relevant Prospectus
Supplement, any of such insurance may be structured so as to protect against
losses relating to more than one Trust Fund in the manner described therein.
58
<PAGE>
MORTGAGE INSURANCE ON THE LOANS
General. Unless otherwise specified in the related Prospectus Supplement,
all Mortgage Loans that are Conventional Loans secured by Single Family
Property and which had initial Loan-to-Value Ratios of greater than 80% will
be covered by primary mortgage insurance policies providing coverage on the
amount of each such Mortgage Loan in excess of 75% of the original Appraised
Value of the related Mortgaged Property and remaining in force until the
principal balance of such Mortgage Loan is reduced to 80% of such original
Appraised Value. In addition, each Mortgage Loan that is a Conventional Loan
secured by a vacation or second home and which had a Loan-to-Value Ratio of
more than 70% at origination will be covered by a primary mortgage insurance
policy until the principal balance of such Mortgage Loan is reduced to below
70% of Appraised Value.
A pool insurance policy will be obtained if so specified in the related
Prospectus Supplement to cover any loss (subject to limitations described
herein) occurring as a result of default by the borrowers to the extent not
covered by any primary mortgage insurance policy or FHA Insurance. See "Pool
Insurance Policy" below. Neither the primary mortgage insurance policies nor
any pool insurance policy will insure against certain losses sustained in the
event of a personal bankruptcy of the borrower under a Mortgage Loan. See
"CERTAIN LEGAL ASPECTS OF LOANS" herein. Such losses will be covered to the
extent described in the related Prospectus Supplement by the bankruptcy bond
or other credit support, if any.
To the extent that the primary mortgage insurance policies do not cover
all losses on a defaulted or foreclosed Mortgage Loan, and to the extent such
losses are not covered by the pool insurance policy or other credit support
for such Series, such losses, if any, would affect payments to
Certificateholders. In addition, the pool insurance policy and primary
mortgage insurance policies do not provide coverage against hazard losses.
See "Hazard Insurance on the Loans" below. Certain hazard risks will not be
insured and the occurrence of such hazards could adversely affect payments to
Certificateholders.
Primary Mortgage Insurance. Although the terms and conditions of primary
mortgage insurance vary, the amount of a claim for benefits under a primary
mortgage insurance policy covering a Mortgage Loan (herein referred to as the
"Insured Loss") generally will consist of the insured percentage (typically
ranging from 12% to 25%) of the unpaid principal amount of the covered
Mortgage Loan 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 the Mortgaged Property, (ii) hazard insurance
proceeds in excess of the amount required to restore the mortgaged property
and which have not been applied to the payment of the Mortgage Loan, (iii)
amounts expended but not approved by the mortgage insurer, (iv) claim
payments previously made by the mortgage insurer and (v) unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary mortgage insurance
policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Mortgage Loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Mortgage Loan; (ii) failure to construct
the Mortgaged Property subject to the Mortgage Loan in accordance with
specified plans; (iii) physical damage to the Mortgaged Property; and (d) the
related Servicer not being approved as a servicer by the mortgage insurer.
Primary mortgage insurance policies generally contain provisions
substantially as follows: (i) under the policy, a claim includes unpaid
principal, accrued interest at the applicable loan interest rate to the date
of filing of a claim thereunder and certain advances (with a limitation on
attorneys' fees for foreclosures of 3% of the unpaid principal balance and
accumulated delinquent interest) described below; (ii) when a claim is
presented, the mortgage insurer will have the option of (a) paying the claim
in full and taking title to the property and arranging for the sale thereof
or (b) paying the insured percentage of the claim and allowing the insured to
retain title to the property; (iii) unless earlier directed by the mortgage
insurer, claims must be made within a specified period of time (typically, 60
days) after the insured has acquired good and merchantable title to the
property; and (iv) a claim must be paid within a specific period of time
(typically, 60 days) after the claim is accepted by the mortgage insurer.
As conditions precedent to the filing of or payment of a claim under a
primary mortgage insurance policy covering a Mortgage Loan, the insured will
be required to (i) advance or discharge (a) all hazard insurance policy
59
<PAGE>
premiums and (b) as necessary and approved in advance by the mortgage insurer,
(1) real estate property taxes, (2) all expenses required to
maintain the related 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) Mortgaged 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 any 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 mortgage insurer good and merchantable title to and
possession of the Mortgaged Property.
Other provisions and conditions of each primary mortgage insurance policy
covering a Mortgage Loan will generally include that: (a) no change may be
made in the terms of such Mortgage Loan without the consent of the mortgage
insurer; (b) written notice must be given to the mortgage insurer within 10
days after the insured becomes aware that a borrower is delinquent in the
payment of a sum equal to the aggregate of two Scheduled Payments due under
such Mortgage Loan or that any proceedings affecting the borrower's interest
in the Mortgaged Property securing such Mortgage Loan have been commenced,
and thereafter the insured must report monthly to the 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 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 at the applicable
Mortgage Rate 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 policy with respect to such Mortgage Loan and any
due and unpaid premium with respect to such policy; (d) the insured must
commence proceedings at certain times specified in the policy and diligently
proceed to obtain good and merchantable title to and possession of the
mortgaged property; (e) the insured must notify the mortgage insurer of the
institution of such proceedings, provide it with copies of documents relating
thereto, notify the mortgage insurer of the price amounts 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 mortgage insurer are not thereby impaired or the specified
rights of the mortgage insurer are not thereby adversely affected.
The mortgage insurer will be required to pay to the insured either: (i)
the insured percentage of the loss; or (ii) at its option under certain of
the primary mortgage insurance policies, the sum of the delinquent Scheduled
Payments plus any advances made by the insured, both to the date of the claim
payment, and thereafter, Scheduled 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
Housing Act, as amended, and the United States Housing Act of 1937, as
amended.
The insurance premiums for FHA Loans will be collected by HUD-approved
lenders or by the Master Servicer or Servicer and 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 Mortgage Loan to HUD. With respect to a
defaulted FHA Loan, the Master Servicer or Servicer is limited in its ability
to initiate foreclosure proceedings. When it is determined, by the Master
Servicer or Servicer or HUD, that default was caused by circumstances beyond
the mortgagor's control, the Master Servicer or Servicer is 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 Payments for a specified
60
<PAGE>
period, with such payments to be made up on or before the maturity date of
the Mortgage Note, or the rescheduling or other adjustment of payments due
under the Mortgage Note 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
Master Servicer or the Servicer in partial or full satisfaction of amounts
due under the Mortgage Loan (which payments are to be repaid by the borrower
to HUD) or by accepting assignment of the Mortgage Loan from the Master
Servicer or the Servicer. With certain exceptions, at least three full
installments must be due and unpaid under the Mortgage Loan, and HUD must
have rejected any request for relief from the mortgagor before the Master
Servicer or 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 Master Servicer or the Servicer of each FHA Loan
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 unpaid principal
balance of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or the Servicer for certain costs and expenses
and to deduct certain amounts received or retained by the Master Servicer or
the Servicer after default. When entitlement to insurance benefits results
from foreclosure (or other acquisition of possession) and conveyance to HUD,
the Master Servicer or 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 but 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 Mortgage 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 borrower'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 mortgage rate as the
applicable HUD debenture interest rate as described above.
With respect to a defaulted VA Loan, the Master Servicer or 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 as specified in the VA regulations. Payments
under the guarantee will equal 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.
The maximum guarantee that may be issued by the VA under a VA Loan as of
January 1, 1986 is the lesser of 60% of the original principal amount of the
VA Loan or $27,500. 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 mortgagee of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to maintain a pool insurance
policy and to present or cause the Servicers, if any, to present claims
thereunder on behalf of the Trustee and the Certificateholders. See
"SERVICING OF LOANS -- Maintenance of Insurance Policies and Other Servicing
Procedures." Although the terms and conditions of pool insurance policies
vary to some degree, the following describes material aspects of such
policies generally. The related Prospectus Supplement will describe any
provisions of a pool insurance policy which are materially different from
those described below. It may also be a condition precedent to the payment of
61
<PAGE>
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 in the related Trust Fund that have Loan-to-Value Ratios at the time of
origination in excess of 80% and that a claim under such primary mortgage
insurance policy has been submitted and settled. FHA Insurance and VA Guarantees
may be deemed to be acceptable primary insurance policies under the pool
insurance policy. Assuming satisfaction of these conditions, the pool insurer
will pay to the insured the amount of the loss which will generally be: (i) the
amount of the unpaid principal balance of the defaulted Mortgage Loan
immediately prior to the approved sale of the Mortgaged Property, (ii) the
amount of the accumulated unpaid interest on such Mortgage Loan to the date of
claim settlement at the contractual rate of interest and (iii) advances made by
the insured as described above less certain payments. An "approved sale" is (i)
a sale of the Mortgaged Property acquired by the insured because of a default by
the borrower to which the pool insurer has given prior approval, (ii) a
foreclosure or trustee's sale of the Mortgaged Property at a price exceeding the
maximum amount specified by the pool insurer, (iii) the acquisition of the
Mortgaged Property under the primary mortgage insurance policy by the mortgage
insurer or (iv) the acquisition of the Mortgaged Property by the pool insurer.
As a condition precedent to the payment of any loss, the insured must
provide the pool insurer with good and merchantable title to the Mortgaged
Property. 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, if any, are
insufficient to restore the damaged Mortgaged Property to a condition
sufficient to permit recovery under the pool insurance policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to the Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it through liquidation proceeds or insurance
proceeds.
The original amount of coverage under the mortgage pool insurance policy
will be reduced over the life of the Certificates by the aggregate net dollar
amount of claims paid less the aggregate net dollar amount realized by the
pool insurer upon disposition of all foreclosed mortgaged properties covered
thereby. The amount of claims paid includes certain expenses incurred by the
Master Servicer as well as accrued interest at the applicable interest rate
on delinquent Mortgage Loans to the date of payment of the claim. See
"CERTAIN LEGAL ASPECTS OF LOANS" herein. Accordingly, if aggregate net claims
paid under a mortgage pool insurance policy reach the original policy limit,
coverage under the mortgage pool insurance policy will lapse and any further
losses will be borne by the Trust Fund, and thus will affect adversely
payments on the Certificates. In addition, the exhaustion of coverage under
any mortgage pool insurance policy may affect the Master Servicer's or
Servicer's willingness or obligation to make Advances. If the Master Servicer
or a Servicer determines that an Advance in respect of a delinquent Loan
would not be recoverable from the proceeds of the liquidation of such Loan or
otherwise, it will not be obligated to make an advance respecting any such
delinquency since the Advance would not be ultimately recoverable by it. See
"SERVICING OF LOANS -- Advances and Limitations Thereon."
Mortgage Insurance with Respect to Manufactured Home Loans. A Manufactured
Home Loan may be an FHA Loan or a VA Loan. Any primary mortgage or similar
insurance and any pool insurance policy with respect to Manufactured Home
Loans will be described in the related Prospectus Supplement.
HAZARD INSURANCE ON THE LOANS
Standard Hazard Insurance Policies. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard
form of fire insurance policy with extended coverage for property of the type
securing the related Loans. In general, the standard form of fire and
extended coverage policy will cover physical damage to or destruction of, the
improvements on the 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 the Loans will be underwritten by different
hazard insurers and will cover properties located in various states, such
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
62
<PAGE>
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides, and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit support will adversely affect distributions to
Certificateholders. When a property securing a Loan is located in a flood area
identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Master Servicer will be required to cause flood insurance to be
maintained with respect to such property, to the extent available.
The standard hazard insurance policies covering properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require
the insured at all times to carry hazard 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 hazard
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 on the Mortgaged Property. Since the amount of hazard
insurance to be maintained on the improvements securing the Loans declines as
the principal balances owing thereon decrease, and since the value of
residential real estate in the areas which the Mortgaged Property is located
fluctuates in value over time, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damage to the Mortgaged Property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative 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 either the
Cooperative or the related borrower do not maintain such insurance, or do not
maintain adequate coverage, or do not apply any insurance proceeds to the
restoration of damaged property, then damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value
of the Mortgaged Property securing such Cooperative Loan. Similarly, the
Depositor will not require that a standard hazard or flood insurance policy
be maintained for any Condominium Loan. Generally, the Condominium
Association is responsible for maintenance of hazard insurance for the
Condominium Building (including the individual Condominium Units) and the
owner(s) of an individual Condominium Unit do not maintain separate hazard
insurance policies. To the extent, however, that either the Condominium
Association or the related borrower do not maintain such insurance, or do not
maintain adequate coverage, or do not apply any insurance proceeds to the
restoration of damaged property, then damage to such borrower's Condominium
Unit or such Condominium Building could significantly reduce the value of the
Mortgaged Property securing such Condominium Loan.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that,
where there has been damage to property securing a defaulted or foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the standard hazard insurance policy or any flood
insurance policy, if applicable, required to be maintained with respect to
such property, or in connection with partial loss resulting from the
application of the coinsurance clause in a standard hazard insurance policy,
the special hazard insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
special hazard insurer, the unpaid principal balance of such Loan at the time
of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer or the Servicer with respect
to such property. If the unpaid principal balance plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by such
amount less any net proceeds from the sale of the property. Any amount paid
as the cost of repair of the property will reduce coverage by such amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
reaction, flood (if the mortgaged property is in a federally designated flood
area), chemical contamination and certain other risks.
63
<PAGE>
Restoration of the property with the proceeds described under (i) above is
expected to satisfy the condition under the pool insurance policy that the
property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such
property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Loan under the pool insurance
policy. Therefore, so long as the pool insurance policy remains in effect,
the payment by the special hazard insurer of the cost of repair or of the
unpaid principal balance of the related Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds paid to holders
of the Certificates, but will affect the relative amounts of coverage
remaining under the special hazard insurance policy and pool insurance
policy.
Other Hazard-Related Insurance; Liability Insurance. With respect to Loans
secured by Multifamily Property, certain additional insurance policies may be
required with respect to the Multifamily Property; for example, general
liability insurance for bodily injury or death and property damage occurring
on the property or the adjoining streets and sidewalks, steam boiler coverage
where a steam boiler or other pressure vessel is in operation, interest
coverage insurance, and rent loss insurance to cover operating income losses
following damage or destruction of the mortgaged property. With respect to a
Series for which Loans secured by Multifamily Property are included in the
Trust Fund, the related Prospectus Supplement will specify the required types
and amounts of additional insurance and describe the general terms of such
insurance and conditions to payment thereunder.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Loan at an amount
less than the then outstanding principal balance of such Loan. The amount of
the secured debt could be reduced to such value, and the holder of such Loan
thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the property
by the bankruptcy court. In addition, certain other modifications of the
terms of a Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL
ASPECTS OF LOANS" herein. If so provided in the related Prospectus
Supplement, the Master Servicer will obtain a bankruptcy bond or similar
insurance contract (the "bankruptcy bond") for proceedings with respect to
borrowers under the Bankruptcy Code. The bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments
of principal of and interest on a Loan or a reduction by such court of the
principal amount of a Loan and will cover certain unpaid interest on the
amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the Pool
secured by single unit primary residences. Such amount will be reduced by
payments made under such bankruptcy bond in respect of such Loans, unless
otherwise specified in the related Prospectus Supplement, and will not be
restored.
REPURCHASE BOND
If so specified in the related Prospectus Supplement, the Depositor or
Master Servicer will be obligated to repurchase any Loan (up to an aggregate
dollar amount specified in the related Prospectus Supplement) for which
insurance coverage is denied due to dishonesty, misrepresentation or fraud in
connection with the origination or sale of such Loan. Such obligation may be
secured by a surety bond guaranteeing payment of the amount to be paid by the
Depositor or the Master Servicer.
64
<PAGE>
THE TRUST AGREEMENTS
The following summaries describe certain provisions of the Trust
Agreements. The summaries do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the Trust
Agreements. Where particular provisions or terms used in the Trust Agreements
are referred to, such provisions or terms are as specified in the Trust
Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. The Depositor will transfer, convey and assign to the Trustee all
right, title and interest of the Depositor in the Primary Assets and other
property to be included in the Trust Fund for a Series. Such assignment will
include all principal and interest due on or with respect to the Primary
Assets after the Cut-off Date specified in the related Prospectus Supplement
(except for any Retained Interests). The Trustee will, concurrently with such
assignment, execute and deliver the Certificates.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the
Trustee (or its nominee or correspondent). The Trustee (or its agent or
correspondent) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Mortgage-Backed
Security. See "THE TRUST FUNDS -- Private Mortgage-Backed Securities" herein.
Each Private Mortgage-Backed Security will be identified in a schedule
appearing as an exhibit to the related Trust Agreement (the "Mortgage
Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through
rate or interest rate and maturity date for each Private Mortgage-Backed
Security conveyed to the Trustee. In the Trust Agreement, the Depositor will
represent and warrant to the Trustee regarding the Private Mortgage-Backed
Securities: (i) that the information contained in the Mortgage Certificate
Schedule is true and correct in all material respects; (ii) that, immediately
prior to the conveyance of the Private Mortgage-Backed Securities, the
Depositor had good title thereto, and was the sole owner thereof, (subject to
any Retained Interests); (iii) that there has been no other sale by it of
such Private Mortgage-Backed Securities and (iv) that there is no existing
lien, charge, security interest or other encumbrance (other than any Retained
Interest) on such Private Mortgage-Backed Securities.
Assignment of Mortgage Loans. In addition, the Depositor will, as to each
Mortgage Loan, deliver or cause to be delivered to the Trustee, or, as
specified in the related Prospectus Supplement, the Custodian, the Mortgage
Note endorsed without recourse to the order of the Trustee or in blank, the
original Mortgage with evidence of recording indicated thereon (except for
any Mortgage not returned from the public recording office, in which case a
copy of such Mortgage will be delivered, together with a certificate that the
original of such Mortgage was delivered to such recording office) and an
assignment of the Mortgage in recordable form. The Trustee, or, if so
specified in the related Prospectus Supplement, the Custodian, will hold such
documents in trust for the benefit of the Certificateholders.
If so specified in the related Prospectus Supplement, the Depositor will,
at the time of delivery of the Certificates, cause assignments to the Trustee
of the Mortgage Loans to 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. If specified in the related
Prospectus Supplement, the Depositor will cause such assignments to be so
recorded within the time after delivery of the Certificates as is specified
in the related Prospectus Supplement, in which event, the Trust Agreement
may, as specified in the related Prospectus Supplement, require the Depositor
to repurchase from the Trustee any Mortgage Loan required to be recorded but
not recorded within such time, at the price described below with respect to
repurchase by reason of defective documentation. Unless otherwise provided in
the related Prospectus Supplement, the enforcement of the repurchase
obligation would constitute the sole remedy available to the
Certificateholders or the Trustee for the failure of a Mortgage Loan to be
recorded.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, its agent, or a
custodian, the related original cooperative note endorsed to the order of the
65
<PAGE>
Trustee, the original security agreement, the proprietary lease or occupancy
agreement, the recognition agreement, an executed financing agreement and the
relevant stock certificate and related blank stock powers. The Depositor will
file in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative Loan.
Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Trust Agreement (the "Mortgage Loan Schedule"). Such Mortgage
Loan Schedule will specify the number of Mortgage Loans which are Cooperative
Loans and, with respect to each mortgage loan: the original principal amount
and unpaid principal balance as of the Cut-off Date; the current interest
rate; the current Scheduled Payment of principal and interest; the maturity
date of the related mortgage note; if the Mortgage Loan is an ARM, the
Lifetime Mortgage Rate Cap, if any, and the current Index; and, if the
Mortgage Loan is a GPM Loan, a GEM Loan, a Buy-Down Loan or a Mortgage Loan
with other than fixed Scheduled Payments and level amortization, the terms
thereof.
Assignment of Manufactured Home Loans. The Depositor will cause any
Manufactured Home Loans included in the Primary Assets for a Series of
Certificates to be assigned to the Trustee, together with principal and
interest due on or with respect to the Manufactured Home Loans after the
Cut-off Date specified in the related Prospectus Supplement. Each
Manufactured Home Loan will be identified in a loan schedule (the "Loan
Schedule") appearing as an exhibit to the related Trust Agreement. Such Loan
Schedule will specify, with respect to each Manufactured Home Loan, among
other things: the original principal balance and the outstanding principal
balance as of the close of business on the Cut-off Date; the interest rate;
the current scheduled Payment of principal and interest; and the maturity
date of the Manufactured Home Loan.
In addition, with respect to each Manufactured Home Loan, the Depositor
will deliver or cause to be delivered to the Trustee, or, as specified in the
related Prospectus Supplement, the custodian, the original Manufactured Home
Loan and copies of documents and instruments related to each Manufactured
Home Loan and the security interest in the Manufactured Home securing each
Manufactured Home Loan. To give notice of the right, title and interest of
the Certificateholders to the Manufactured Home Loans, the Depositor will
cause a UCC-1 financing statement to be filed identifying the Trustee as the
secured party and identifying all Manufactured Home Loans as collateral.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Loans will not be stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the
Manufactured Home Loans without notice of such assignment, the interest of
the Certificateholders in the Manufactured Home Loans could be defeated. See
"CERTAIN LEGAL ASPECTS OF LOANS -- Manufactured Home Loans."
The Depositor will provide limited representations and warranties to the
Trustee concerning the Manufactured Home Loans. Such representations and
warranties will include: (i) that the information contained in the Loan
Schedule provides an accurate listing of the Manufactured Home Loans and that
the information respecting such Manufactured Home Loans set forth in such
Loan Schedule is true and correct in all material respects at the date or
dates respecting which such information is furnished; (ii) that, immediately
prior to the conveyance of the Manufactured Home Loans, the Depositor had
good title to, and was sole owner of, each such Manufactured Home Loan
(subject to any Retained Interests); (iii) that there has been no other sale
by it of such Manufactured Home Loans and that the Manufactured Home Loan is
not subject to any lien, charge, security interest or other encumbrance; (iv)
if the Master Servicer will not directly service the Manufactured Home Loans,
each Servicing Agreement entered into with a Servicer with respect to
Manufactured Home Loans comprising the Primary Assets has been assigned and
conveyed to the Trustee and is not subject to any offset, counterclaim,
encumbrance or other charge; and (v) the Depositor has obtained from the
Master Servicer, the Servicer, the originator of the Manufactured Home Loans
or such other entity that is the seller of the Manufactured Home Loans,
representations and warranties relating to certain information respecting the
origination of and current status of the Manufactured Home Loans, and has no
knowledge of any fact which would cause it to believe that such
representations and warranties are inaccurate in any material respect. See
"LOAN UNDERWRITING PROCEDURES AND STANDARDS" herein.
Assignment of Participation Certificates. The Depositor will cause any
Participation Certificates obtained under a participation agreement to be
assigned to the Trustee by delivering to the Trustee such Participation
Certificates, which will be reregistered in the name of the Trustee. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
not be in possession of or be assignee of record with respect to the Loans
66
<PAGE>
represented by any Participation Certificate. Each Participation Certificate
will be identified in a "Participation Certificate Schedule" which will
specify the original principal balance, outstanding principal balance as of
the Cut-off Date, pass-through rate and maturity date for each Participation
Certificate. In the Trust Agreement, the Depositor will represent and warrant
to the Trustee regarding each Participation Certificate: (i) that the
information contained in the Participation Certificate Schedule is true and
correct in all material respects; (ii) that, immediately prior to the
conveyance of the Participation Certificates, the Depositor had good title to
and was sole owner of such Participation Certificates; (iii) that there has
been no other sale by it of such Participation Certificates and (iv) that
such Participation Certificates are not subject to any existing lien, charge,
security interest or other encumbrance (other than any Retained Interests).
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING LOANS
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee is found
by the Trustee within 45 days of the execution of the related Trust Agreement
(or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) to be defective in any material respect and
the Depositor does not cure such defect within 90 days, or within such other
period specified in the related Prospectus Supplement, the Depositor will,
not later than 90 days or within such other period specified in the related
Prospectus Supplement, after the Trustee's notice to the depositor or the
Master Servicer, as the case may be, of the defect, repurchase the related
Mortgage Loan or any property acquired in respect thereof from the Trustee at
a price equal to (a) the lesser of (i) the outstanding principal balance of
such Mortgage Loan (or, in the case of a foreclosed Mortgage Loan, the
outstanding principal balance of such Mortgage Loan immediately prior to
foreclosure) and (ii) the Trust Fund's federal income tax basis in the
Mortgage Loan, and (b), accrued and unpaid interest to the date of the next
scheduled payment on such Mortgage Loan at the related Pass-Through Rate or
Certificate Rate (less any unreimbursed Advances respecting such Mortgage
Loan), provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a
price equal to the outstanding principal balance of such Mortgage Loan will
not result in any prohibited transaction tax under Section 860F(a) of the
Code.
If provided in the related Prospectus Supplement, the Depositor may,
rather than repurchase the Loan as described above, remove such Loan from the
Trust Fund (the "Deleted Loan") and substitute in its place one or more other
Loans (each, a "Qualifying Substitute Mortgage Loan") provided, however, that
(i) with respect to a Trust Fund for which no REMIC election is made, such
substitution must be effected within 120 days of the date of initial issuance
of the Certificates and (ii) with respect to a Trust Fund for which a REMIC
election is made, after a specified time period, the Trustee must have
received a satisfactory opinion of counsel that such substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax.
Any Qualifying Substitute Mortgage Loan will have, on the date of
substitution, (i) 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 Loan (the amount of any
shortfall to be deposited to the Certificate Account in the month of
substitution for distribution to Certificateholders), (ii) an interest rate
not less than (and not more than 2% greater than) the interest rate of the
Deleted Loan, (iii) a remaining term-to-stated maturity not greater than (and
not more than two years less than) that of the Deleted Loan, and will comply
with all of the representations and warranties set forth in the applicable
agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the
sole remedies available to the Certificateholders or the Trustee for a
material defect in a Loan document.
The Depositor or another entity will make representations and warranties
with respect to Loans which comprise the Primary Assets for a Series. See
"LOAN UNDERWRITING PROCEDURES AND STANDARDS -- Representations and
Warranties" above. If the Depositor or such entity cannot cure a breach of
any such representations and warranties in all material respects within 90
days after notification by the Trustee of such breach, and if such breach is
of a nature that materially and adversely affects the value of such Loan, the
Depositor or such entity is obligated to repurchase the affected Loan or, if
provided in the related Prospectus Supplement, provide a Qualifying
Substitute Mortgage Loan therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
67
<PAGE>
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations
of the responsible originator or seller of such Loans. See "SPECIAL
CONSIDERATIONS".
REPORTS TO CERTIFICATEHOLDERS
The Trustee will prepare and forward to each Certificateholder on each
Distribution Date, or as soon thereafter as is practicable, a statement
setting forth, to the extent applicable to any Series, among other things:
(i) (A) with respect to a Series other than a Multi-Class Series, the
amount of such distribution allocable to principal on the Primary Assets,
separately identifying the aggregate amount of any principal prepayments
included therein and the amount, if any, advanced by the Master Servicer
or by a Servicer or (B) with respect to a Multi-Class Series, the amount
of the principal distribution in reduction of stated principal amount (or
Compound Value) of each Class and the aggregate unpaid principal amount
(or Compound Value) of each Class following such distribution;
(ii) (A) with respect to a Series other than a Multi-Class Series, the
amount of such distribution allocable to interest on the Primary Assets
and the amount, if any, advanced by the Master Servicer or a Servicer or
(B) with respect to a Multi-Class Series, the amount of the interest
distribution;
(iii) the amount of servicing compensation with respect to the
Principal Assets and paid during the Due Period commencing on the Due Date
to which such distribution relates and the amount of servicing
compensation during such period attributable to penalties and fees;
(iv) the aggregate outstanding principal balance of the Principal
Assets as of the opening of business on the Due Date, after giving effect
to distributions allocated to principal and reported under (i) above;
(v) the aggregate outstanding principal amount of the Certificates of
such series as of the Due Date, after giving effect to distributions
allocated to principal reported under (i) above;
(vi) with respect to Compound Interest Certificates, prior to the
Accrual Termination Date in addition to the information specified in
(i)(B) above, the amount of interest accrued on such Certificates during
the related Interest Accrual Period and added to the Compound Value
thereof;
(vii) in the case of Floating Rate Certificates, the Floating Rate
applicable to the distribution being made;
(viii) if applicable, the amount of any shortfall (i.e., the difference
between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Certificate Account and the amounts actually distributed);
(ix) if applicable, the number and aggregate principal balances of
Loans delinquent for (A) two consecutive payments and (B) three or more
consecutive payments, as of the close of the business on the Determination
Date to which such distribution relates;
(x) if applicable, the book value of any REO Property acquired on
behalf of Certificateholders through foreclosure, grant of a deed in lieu
of foreclosure or repossession as of the close of the business on the
Business Day preceding the Distribution Date to which such distribution
relates;
(xi) if applicable, the amount of coverage under any pool insurance
policy as of the close of business on the applicable Distribution Date;
(xii) if applicable, the amount of coverage under any special hazard
insurance policy as of the close of business on the applicable
Distribution Date;
(xiii) if applicable, the amount of coverage under any bankruptcy bond
as of the close of business on the applicable Distribution Date;
(xiv) in the case of any other credit support described in the related
Prospectus Supplement, the amount of coverage of such credit support as of
the close of business on the applicable Distribution Date;
68
<PAGE>
(xv) in the case of any Series which includes a Subordinate Class, the
Subordinated Amount, if any, determined as of the related Determination
Date and if the distribution to the Senior Certificateholders is less than
their required distribution, the amount of the shortfall;
(xvi) the amount of any withdrawal from any applicable reserve fund
included in amounts actually distributed to Certificateholders and the
remaining balance of each reserve fund (including any Subordinated Reserve
Fund), if any, on such Distribution Date, after giving effect to
distributions made on such date; and
(xvii) such other information as specified in the related Trust
Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Certificateholder of record at
any time during such calendar year: (a) the aggregate of amounts reported
pursuant to (i) through (iv), (vi), (viii) and (xvi) above for such calendar
year and (b) such information specified in the Trust Agreement to enable
Certificateholders to prepare their tax returns including, without
limitation, the amount of original issue discount accrued on the
Certificates, if applicable. Information in the Distribution Date and annual
reports provided to the Certificateholders will not have been examined and
reported upon by an independent public accountant. However, the Master
Servicer will provide to the Trustee a report by independent public
accountants with respect to the Master Servicer's servicing of the Loans. See
"SERVICING OF LOANS -- Evidence as to Compliance" herein.
INVESTMENT OF FUNDS
The Certificate Account, Collection Account or Custodial Account, if any,
and any other funds and accounts for a Series that may be invested by the
Trustee or by the Master Servicer (or by the Servicer, if any), can be
invested only in Eligible Investments acceptable to each Rating Agency, which
may include, without limitation, (i) direct obligations of, and obligations
fully guaranteed as to timely payment of principal and interest by, the
United States of America, FHLMC, FNMA or any agency or instrumentality of the
United States of America, the obligations of which are backed by the full
faith and credit of the United States of America, (ii) demand and time
deposits, certificates of deposit or bankers' acceptances, (iii) repurchase
obligations pursuant to a written agreement with respect to any security
described in clause (i) above, (iv) securities bearing interest or sold at a
discount issued by any corporation incorporated under the laws of the United
States of America or any state, (v) commercial paper (including both
non-interest-bearing discount obligations and interest-bearing obligations
payable on demand or on a specified date not more than one year after the
date of issuance thereof), (vi) a Guaranteed Investment Contract issued by an
entity having a credit rating acceptable to each Rating Agency and (vii) any
other demand, money market or time deposit or obligation, security or
investment as would not adversely affect the then current rating by the
Rating Agencies.
Funds held in a reserve fund or Subordinated Reserve Fund may be invested
in certain Eligible Reserve Fund Investments which may include Eligible
Investments, mortgage loans, mortgage pass-through or participation
securities, mortgage-backed bonds or notes or other investments to the extent
specified in the related Prospectus Supplement.
Eligible Investments or Eligible Reserve Fund Investments with respect to
a Series will include only obligations or securities that mature on or before
the date on which the amounts in the Collection Account are required to be
remitted to the Trustee and amounts in the Certificate Account, any Reserve
Fund or the Subordinated Reserve Fund for such Series are required or may be
anticipated to be required to be applied for the benefit of
Certificateholders of such Series.
If so provided in the related Prospectus Supplement, the reinvestment
income from the Subordination Reserve Fund, other Reserve Fund, Servicer
Account, Collection Account or the Certificate Account may be property of the
Master Servicer or a Servicer and not available for distributions to
Certificateholders. See "SERVICING OF LOANS" herein.
EVENT OF DEFAULT
Events of Default under the Trust Agreement for each Series include (i)
any failure by the Master Servicer to distribute to Certificateholders of
such Series any required payment which continues unremedied for five days
69
<PAGE>
after the giving of written notice of such failure to the Master Servicer by
the Trustee for such Series, or to the Master Servicer and the Trustee by the
Holders of Certificates of such Series evidencing not less than 25% of the
aggregate outstanding principal amount of the Certificates for such Series,
(ii) any failure by the Master Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Trust
Agreement which continues unremedied for 30 days (or 15 days in the case of a
failure to maintain any insurance policy required to be maintained pursuant
to the Trust Agreement) after the giving of written notice of such failure to
the Master Servicer by the Trustee, or to the Master Servicer and the Trustee
by the Holders of Certificates of such Series evidencing not less than 25% of
the the aggregate outstanding principal amount of the Certificates and (iii)
certain events in insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Trust
Agreement for a Series, the Trustee for such Series or Holders of
Certificates of such Series evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates for such Series may
terminate all of the rights and obligations of the Master Servicer as
servicer under the Trust Agreement and in and to the Mortgage Loans (other
than its right to recovery of other expenses and amounts advanced pursuant to
the terms of the Trust Agreement which rights the Master Servicer will retain
under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the
Trust Agreement and will be entitled to reasonable servicing compensation not
to exceed the applicable servicing fee, together with other servicing
compensation in the form of assumption fees, late payment charges or
otherwise as provided in the Trust Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a housing
and home finance institution, bank or mortgage servicing institution with a
net worth of at least $15,000,000 to act as successor Master Servicer under
the provisions of such Trust Agreement relating to the servicing of the
Mortgage Loans. The successor Master Servicer would be entitled to reasonable
servicing compensation in an amount not to exceed the Servicing Fee as set
forth in the related Prospectus Supplement, together with the other servicing
compensation in the form of assumption fees, late payment charges or
otherwise, as provided in the Trust Agreement.
During the continuance of any Event of Default under the Trust Agreement
for a Series, the Trustee for such Series will have the right to take action
to enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and Holders of
Certificates evidencing not less than 25% of the aggregate outstanding
principal amount of the Certificates for such Series may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred upon that Trustee.
However, the Trustee will not be under any obligation to pursue any such
remedy or to exercise any of such trusts or powers unless such
Certificateholders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the
Trustee therein or thereby. Also, the Trustee may decline to follow any such
direction if the Trustee determines that the action or proceeding so directed
may not lawfully be taken or would involve it in personal liability or be
unjustly prejudicial to the non- assenting Certificateholders.
No Certificateholder of a Series, solely by virtue of such Holder's status
as a Certificateholder, will have any right under the Trust Agreement for
such Series to institute any proceeding with respect to the Trust Agreement,
unless such Holder previously has given to the Trustee for such Series
written notice of default and unless the Holders of Certificates evidencing
not less than 25% of the aggregate outstanding principal amount of the
Certificates for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity, and the Trustee for 60 days has
neglected or refused to institute any such proceeding.
DEFICIENCY EVENT
Unless otherwise defined in the Prospectus Supplement, a "Deficiency
Event" with respect to the Certificates of a Multi-Class Series is defined in
the Trust Agreement as being the inability of the Trustee to distribute to
70
<PAGE>
Holders of one or more Classes of Certificates of such Series (other than any
Class of Subordinate Certificates prior to the time that the Available
Distribution Amount is reduced to zero), in accordance with the terms thereof
and the Trust 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.
Upon the occurrence of a Deficiency Event, the Master Servicer (unless
otherwise specified in the related Prospectus Supplement) 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 Primary Assets included in the related Trust Fund and other amounts
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 Certificate Rates and to
distribute in full the principal amount of each such outstanding Certificate
on or before its respective Stated Maturity.
The Master Servicer (unless otherwise specified in the related Prospectus
Supplement) 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 will continue to be made in
accordance with their terms.
In the event that the Master Servicer (unless otherwise specified in the
related Prospectus Supplement) makes a determination of sufficiency, 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 will 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.
If the Master Servicer (unless otherwise specified in the related
Prospectus Supplement) 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 Certificate Rate borne by any
Certificate of such Series (excluding any Interest Weighted Class or any
Class with a Floating Rate that varies inversely with a current Index) or,
with respect to each Class of Floating Rate Certificates, at the weighted
average Certificate Rate, calculated on the basis of the maximum interest
rate applicable to such Class on the original principal amount of the
Certificates of that Class (excluding any Interest Weighted Class or any
Class with a Floating Rate that varies inversely with a current Index). In
such event, the Holders evidencing not less than at least 66 2/3% or more of
the aggregate outstanding principal amount of the Certificate of such Series
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.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Certificates will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor or the Master Servicer.
In addition, for the purpose of meeting the legal requirements of certain
local jurisdictions, the Trustee will have the power to appoint co-trustees
or separate trustees of all or any part of the Trust Fund relating to a
Series of Certificates. In the event of such appointment, all rights, powers,
duties and obligations conferred or imposed upon the Trustee by the Trust
Agreement relating to such Series will be conferred or imposed upon the
Trustee and each such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who
shall exercise and perform such rights, powers, duties and obligations solely
71
<PAGE>
at the direction of the Trustee. The Trustee may also appoint agents to perform
any of the responsibilities of the Trustee, which agents shall have any or all
of the rights, powers, duties and obligations of the Trustee conferred on them
by such appointment; provided that the Trustee shall continue to be responsible
for its duties and obligations under the Trust Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Trust Agreement, the Certificates or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Trust Agreement)
has occurred, the Trustee is required to perform only those duties
specifically required of it under the Trust Agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the Trustee is required to examine them to determine whether
they are in the form required by the related Trust Agreement, however, the
Trustee will not be responsible for the accuracy or content of any such
documents furnished by it or the Certificateholders to the Master Servicer
under the Trust Agreement.
The Trustee may be held liable for its own grossly negligent action or
failure to act, or for its own willful misconduct; provided, however, that
the Trustee will not be personally liable with respect to any action taken,
suffered or omitted to be taken by it in good faith in accordance with the
direction of the Certificateholders in an Event of Default, see "Rights Upon
Event of Default" above. The Trustee is not required to expend or risk its
own funds or otherwise incur any financial liability in the performance of
any of its duties under a Trust Agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and
has accepted the appointment within 30 days after giving such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) by the Depositor, if the Trustee ceases to be
eligible to continue as such under the Trust Agreement, (ii) if the Trustee
becomes insolvent, (iii) if a tax is imposed or threatened with respect to
the Trust Fund by any state in which the Trustee or the Trust Fund held by
the Trustee pursuant to the Trust Agreement is located, or (iv) by the
Holders of Certificates evidencing over 50% of the aggregate outstanding
principal amount of the Certificates in the Trust Fund upon 30 days' advance
written notice to the Trustee and to the Depositor. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
CERTIFICATE ACCOUNT
The Trustee will establish a separate account (the "Certificate Account")
in its name as Trustee for the Certificateholders. If specified in the
related Prospectus Supplement, the Certificate Account may be maintained as
an interest bearing account or the funds held therein may be invested,
pending disbursement to Certificateholders of the related Series, pursuant to
the terms of the Trust Agreement, in Eligible Investments. If so specified in
the related Prospectus Supplement, the Master Servicer will be entitled to
receive as additional compensation, any interest or other income earned on
funds in the Certificate Account. The Trustee will deposit into the
Certificate Account on the Business Day received all funds received from the
Master Servicer and required withdrawals from any Reserve Funds. Unless
otherwise specified in the related Prospectus Supplement, the Trustee is
permitted from time to time to make withdrawals from the Certificate Account
for each Series to remove amounts deposited therein in error, to pay to the
Master Servicer any reinvestment income on funds held in the Certificate
Account to the extent it is entitled, to remit to the Master Servicer its
Servicing Fee to the extent not previously withdrawn from the Collection
Account, to make deposits to any Reserve Fund, to make regular distributions
to the Certificateholders and to clear and terminate the Certificate Account.
EXPENSE RESERVE FUND
If specified in the Prospectus Supplement relating to a Series, the
Depositor may deposit on the related Closing Date in an account to be
established with the Trustee (the "Expense Reserve Fund") cash or eligible
72
<PAGE>
investments which will be available to pay anticipated fees and expenses of
the Trustee or other agents. The Expense Reserve Fund for a Series may also
be funded over time through the deposit therein of all or a portion of cash
flow, to the extent described in the related Prospectus Supplement. The
Expense Reserve Fund, if any, will not be part of the Trust Fund held for the
benefit of the Holders. Amounts on deposit in any Expense Reserve Fund will
be invested in one or more Eligible Investments.
AMENDMENT OF TRUST AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Trust
Agreement for each Series of Certificates may be amended by the Depositor,
the Master Servicer, and the Trustee with respect to such Series, without
notice to or consent of the Certificateholders (i) to cure any ambiguity,
(ii) to correct or supplement any provision therein which may be inconsistent
with any other provision therein or in the Prospectus Supplement, (iii) to
make any other provisions with respect to matters or questions arising under
such Trust Agreement or (iv) to comply with any requirements imposed by the
Code; provided that any such amendment pursuant to clause (iii) above will
not adversely affect in any material respect the interests of any
Certificateholders of such Series not consenting thereto. Any such amendment
pursuant to clause (iii) of the preceding sentence shall be deemed not to
adversely affect in any material respect the interests of any
Certificateholder if the Trustee receives written confirmation from each
Rating Agency rating such Certificates that such amendment will not cause
such Rating Agency to reduce the then current rating thereof. The Trust
Agreement for each Series may also be amended by the Trustee, the Master
Servicer and the Depositor with respect to such Series with the consent of
the Holders possessing not less than 66 2/3% of the aggregate outstanding
principal amount of the Certificates of each Class 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 Trust Agreement or
modifying in any manner the rights of Certificateholders of such Series;
provided, however, that no such amendment may (a) reduce the amount or delay
the timing of payments on any Certificate without the consent of the Holder
of such Certificate; or (b) reduce the aforesaid percentage of aggregate
outstanding principal amount of Certificates of each Class, the Holders of
which are required to consent to any such amendment without the consent of
the Holders of 100% of the aggregate outstanding principal amount of each
Class of Certificates affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of Voting Rights with respect to a Series, if other than set forth
herein.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more Certificateholders of record of a
Series for purposes of communicating with other Certificateholders with
respect to their rights under the Trust Agreement or under the Certificates
for such Series, which request is accompanied by a copy of the communication
which such Certificateholders propose to transmit, the Trustee will afford
such Certificateholders access during business hours to the most recent list
of Certificateholders of that Series held by the Trustee.
No Trust Agreement will provide for the holding of any annual or other
meeting of Certificateholders.
REMIC ADMINISTRATOR
With respect to any Multi-Class Series, preparation of certain reports and
certain other administrative duties with respect to the Trust Fund may be
performed by a REMIC administrator, who may be an affiliate of the Depositor.
TERMINATION
The obligations created by the Trust Agreement for a Series will terminate
upon the distribution to Certificateholders of all amounts distributable to
them pursuant to such Trust Agreement after (i) the later of the final
payment or other liquidation of the last Mortgage Loan remaining in the Trust
Fund for such Series or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure in respect of any Mortgage Loan
73
<PAGE>
("REO Property") or (ii) the repurchase, as described below, by the Master
Servicer from the Trustee for such Series of all Mortgage Loans at that time
subject to the Trust Agreement and all REO Property. The Trust Agreement for
each Series permits, but does not require, the Master Servicer to repurchase
from the Trust Fund for such Series all remaining Mortgage Loans at a price
equal to 100% of the Aggregate Asset Principal Balance of such Mortgage Loans
plus, with respect to REO Property, if any, the outstanding principal balance
of the related Mortgage Loan, less, in either case, related unreimbursed
Advances (in the case of the Mortgage Loans, only to the extent not already
reflected in the computation of the Aggregate Asset Principal Balance of such
Mortgage Loans) and unreimbursed expenses (that are reimbursable pursuant to
the terms of the Trust Agreement) plus, in either case, accrued interest
thereon at the weighted average Mortgage Loan Pass-Through Rate through the
last day of the Due Period in which such repurchase occurs; provided,
however, that if an election is made for treatment as a REMIC under the Code,
the repurchase price may equal the greater of (a) 100% of the Aggregate Asset
Principal Balance of such Mortgage Loans, plus accrued interest thereon at
the applicable Net Mortgage Rates through the last day of the month of such
repurchase and (b) the aggregate fair market value of such Mortgage Loans;
plus the fair market value of any property acquired in respect of a Mortgage
Loan and remaining in the Trust Fund. The exercise of such right will effect
early retirement of the Certificates of such Series, but the Master
Servicer's right to so purchase is subject to the Aggregate Principal Balance
of the Mortgage Loans at the time of repurchase being less than a fixed
percentage, to be set forth in the related Prospectus Supplement, of the
Cut-off Date Aggregate Asset Principal Balance. In no event, however, will
the trust created by the Trust Agreement continue beyond the expiration of 21
years from the death of the last survivor of certain person identified
therein. For each Series, the Master Servicer or the Trustee, as applicable,
will give written notice of termination of the Trust Agreement to each
Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency
specified in the notice of termination. If so provided in the related
Prospectus Supplement for a Series, the Depositor or another entity may
effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See "DESCRIPTION OF THE CERTIFICATES
- -- Optional Termination of the Trust Fund" herein.
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
housing loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect
the laws of any particular state, nor to encompass the laws of all states in
which the properties securing the housing loans are situated. The summaries
are qualified in their entirety by reference to the applicable federal and
state laws governing the Loans.
MORTGAGES
The Mortgage Loans comprising or underlying the Primary Assets for a
Series will be secured by either mortgages or deeds of trust or deeds to
secure debt, depending upon the prevailing practice in the state in which the
property subject to a Mortgage Loan is located. 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/homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage. In
the case of a land trust, there are three parties because title to the
property is held by a land trustee under a land trust agreement of which the
borrower/homeowner is the beneficiary; at origination of a mortgage loan, the
borrower executes a separate undertaking to make payments on the mortgage
note. A deed of trust transaction normally has three parties, the trustor,
who is the borrower/homeowner; the beneficiary, who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust, generally with a
power of sale, to the trustee to secure payment of the obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a
deed of trust are governed by the law of the state in which the real property
is located, the express provisions of the mortgage or deed of trust, and, in
some cases, in deed of trust transactions, the directions of the beneficiary.
74
<PAGE>
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 which 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.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative apartments relating to the Cooperative Loans are located in the
State of New York. A corporation which 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 occupant 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 or, in the
case of the Mortgage 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 Mortgage Loans, the collateral securing the Cooperative
Loans.
The 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 on Cooperative Loan
Security" below.
Tax Aspects of Cooperative Ownership. 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)
75
<PAGE>
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-stockholders. 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.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In some states, the trustee
must record a notice of default and send a copy to the borrower-trustor and
to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee in some states must provide
notice to any other individual having an interest in the real property,
including any junior lienholders. The trustor, borrower, or any 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. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees,
which may be recovered by a lender. If the deed of trust is not reinstated, a
notice of sale must be posted in a public place and, in most states,
published for a specific 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, recorded and sent to all parties having an interest in the
real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated
by statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may
exercise equitable powers to relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that either the mortgagor's default was
neither willful nor in bad faith or the mortgagee's action established a
waiver, fraud, bad faith, or oppressive or unconscionable conduct such as to
warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from
an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes
requiring up to several years to complete. Moreover, a non-collusive,
regularly conducted foreclosure sale may be challenged as a fraudulent
conveyance, regardless of the parties' intent, if a court determines that the
sale was for less than fair consideration and such sale occurred while the
mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the mortgage note may take several years and,
generally, is a remedy alternative to foreclosure, the mortgagee being
precluded from pursuing both at the same time.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to
76
<PAGE>
purchase the property from the trustee or referee for an amount which may be
equal to the principal amount of the mortgage or deed of trust plus accrued and
unpaid interest and the expenses of foreclosure, in which event the mortgagor's
debt will be extinguished or the lender may purchase for a lesser amount in
order to preserve its right against a borrower to seek a deficiency judgment in
states where such a judgment is available. Thereafter, the lender will assume
the burdens of ownership, including obtaining casualty insurance, paying taxes
and making such repairs at its own expense as are necessary to render the
property suitable for sale. The lender will commonly obtain the services of a
real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of any mortgage guaranty insurance proceeds.
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. Typically, the lender and the
Cooperative 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 which 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 its 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.
In New York, lenders generally have realized 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 New York
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
77
<PAGE>
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of
redemption, which is a nonstatutory right that must be exercised prior to the
foreclosure sale. In some states, redemption may occur only upon payment of
the entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The 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 a right of redemption is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former
borrower following a judicial sale to the excess of the outstanding debt over
the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
Cooperative Loans. Generally, lenders realize on cooperative shares and
the accompanying proprietary lease 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.
Leases and Rents. Multifamily mortgage loan transactions often provide for
an assignment of the leases and rents pursuant to which the borrower
typically assigns its right, title and interest, as landlord under each lease
and the income derived therefrom, to the lender while either obtaining a
license to collect rents for so long as there is no default or providing for
the direct payment to the lender. Local law, however, may require that the
lender take possession of the property and appoint a receiver before becoming
entitled to collect the rents under the lease.
Federal Bankruptcy and Other Laws Affecting Creditors' Rights. In addition
to laws limiting or prohibiting deficiency judgments, numerous other
statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example,
with respect to federal bankruptcy law, the filing of a petition acts as a
stay against the enforcement of remedies for collection of a debt. Moreover,
a court with federal bankruptcy jurisdiction may permit a debtor through a
Chapter 13 under the Bankruptcy Code rehabilitative plan to cure a monetary
default with respect to a loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon his security (provided no sale of the property has
yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
loan default by permitting the obligor to pay arrearages over a number of
years.
78
<PAGE>
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. These courts have suggested
that such modifications may include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule and
reducing the lender's security interest to the value of the residence, thus
leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Federal
bankruptcy law and limited case law indicate that the foregoing modifications
could not be applied to the terms of a loan secured by property that is the
principal residence of the debtor. In all cases, the secured creditor is
entitled to the value of its security plus post-petition interest, attorney's
fees and costs to the extent the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in
amount to the value of the lender's interest in the collateral as of the date
of the bankruptcy. The loan term may be extended, the interest rate may be
adjusted to market rates and the priority of the loan may be subordinated to
bankruptcy court-approved financing. The bankruptcy court can, in effect,
invalidate due-on-sale clauses through confirmed Chapter 11 plans of
reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights
in respect of a defaulted Loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
The laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal laws
impose specific statutory liabilities upon lenders who originate loans and
who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the loans.
Federal Bankruptcy Laws Relating to Mortgage Loans Secured by Multifamily
Property. Section 365(a) of the Bankruptcy Code generally provides that a
trustee or a debtor-in-possession in a bankruptcy or reorganization case
under the Bankruptcy Code has the power to assume or to reject an executory
contract or an unexpired lease of the debtor, in each case subject to the
approval of the bankruptcy court administering such case. If the trustee or
debtor-in-possession rejects an executory contract or an unexpired lease,
such rejection generally constitutes a breach of the executory contract or
unexpired lease immediately before the date of the filing of the petition. As
a consequence, the other party or parties to such executory contract or
unexpired lease, such as the Mortgagor, as lessor under a lease, would have
only an unsecured claim against the debtor for damages resulting from such
breach, which could adversely affect the security for the related Mortgage
Loan. Moreover, under Section 502(b)(6) of the Bankruptcy Code, the claim of
a lessor for such damages from the termination of a lease of real property
will be limited to the sum of (i) the rent reserved by such lease, without
acceleration, for the greater of one year or 15 percent, not to exceed three
years, of the remaining term of such lease, following the earlier of the date
of the filing of the petition and the date on which such lender repossessed,
or the lessee surrendered, the leased property, and (ii) any unpaid rent due
under such lease, without acceleration, on the earlier of such dates.
Under Section 365(h) of the Bankruptcy Code, if a trustee for a lessor, or
a lessor as a debtor-in-possession, rejects an unexpired lease of real
property, the lessee may treat such lease as terminated by such rejection or,
in the alternative, may remain in possession of the leasehold for the balance
of such term and for any renewal or extension of such term that is
enforceable by the lessee under applicable nonbankruptcy law. The Bankruptcy
Code provides that if a lessee elects to remain in possession after such a
rejection of a lease, the lessee may offset against rents reserved under the
lease for the balance of the term after the date of rejection of the lease,
and any such renewal or extension thereof, any damages occurring after such
date caused by the nonperformance of any obligation of the lessor under the
lease after such date.
Under Section 365(f) of the Bankruptcy Code, if a trustee assumes an
executory contract or an unexpired lease of the debtor, the trustee or
debtor-in-possession generally may assign such executory contract or
unexpired lease, notwithstanding any provision therein or in applicable law
that prohibits, restricts or conditions such assignment, provided that the
trustee or debtor-in-possession provides adequate assurance of future
performance by the assignee. In addition, no party to an executory contract
79
<PAGE>
or an unexpired lease may terminate or modify any rights or obligations under an
executory contract or an unexpired lease at any time after the commencement of a
case under the Bankruptcy Code solely because of a provision in the executory
contract or unexpired lease or in applicable law conditioned upon the assignment
of the executory contract or unexpired lease. Thus, an undetermined third party
may assume the obligations of the lessee or a Mortgagor under a lease in the
event of commencement of a proceeding under the Bankruptcy Code with respect to
the lessee or a Mortgagor, as applicable.
Under Sections 363(b) and (f) of the Bankruptcy Code, a trustee for a
lessor, or a lessor as debtor-in- possession, may, despite the provisions of
the related Mortgage Loan to the contrary, sell the Mortgaged Property free
and clear of all liens, which liens would then attach to the proceeds of such
sale.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including mortgage loans and manufactured
home loans) incurred prior to the commencement of military service for the
duration of military service, (ii) may be entitled to a stay of proceedings
on any kind of foreclosure or repossession action in the case of defaults on
such obligations entered into prior to military service and (iii) may have
the maturity of such obligations incurred prior to military service extended,
the payments lowered and the payment schedule readjusted for a period of time
after the completion of military service. However, the benefits of (i), (ii),
or (iii) above are subject to challenge by creditors and if, in the opinion
of the court, the ability of a person to comply with such obligations is not
materially impaired by military service, the court may apply equitable
principles accordingly. If a borrower's obligation to repay amounts otherwise
due on a Mortgage Loan or Manufactured Home Loan included in a Trust for a
Series is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of
1940, neither the Servicer, the Master Servicer nor the Trustee will be
required to advance such amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the holders of the Certificates of such
Series. Any shortfalls in interest collections on Mortgage Loans included in
a Trust for a Series resulting from application of the Soldiers' and Sailors'
Civil Relief Act of 1940 will be allocated to each Class of Certificates of
such Series that is entitled to receive interest in respect of such Mortgage
Loans or Manufactured Home Loans in proportion to the interest that each such
Class of Certificates would have otherwise been entitled to receive in
respect of such Mortgage Loans had such interest shortfall not occurred.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-Sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or
involuntarily, all or part of the real property securing the loan without the
lender's prior written consent. The enforceability of these clauses has been
impaired in various ways in certain states by statutory or decisional law.
The ability of lenders and their assignees and transferees to enforce
due-on-sale clauses was addressed by Congress when it enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"). The
legislation, subject to certain exceptions, provides for federal preemption
of all state restrictions on the enforceability of due-on-sale clauses.
Excluded from the preemption are loans originated or assumed during a "window
period" ("Window Period Loans"). The window period runs from the date the
state restricted the enforcement of the clauses, either by constitution,
statute, or statewide judicial proclamation, to October 15, 1982. All Window
Period Loans are governed by the restrictive state law until October 15,
1985, unless the state acted to extend the effect of the window period by
further regulating such loans. The Garn-St Germain Act further provides that
loans originated by a federal savings bank or a federally chartered savings
and loan association shall be governed by the regulations of the Federal Home
Loan Bank Board. These regulations preempt any state law restrictions and
expressly allow these federal lenders to enforce due-on-sale clauses. Loans
originated by such institutions are not subject to the window period and
therefore due-on-sale clauses in such loans are enforceable regardless of the
date the loans originated.
Although neither the Garn-St Germain Act nor the Federal Home Loan Bank
Board regulations promulgated thereunder actually lists the states with
window periods ("Window Period States"), FHLMC has taken the position, in
prescribing mortgage loan servicing standards with respect to loans which it
80
<PAGE>
has purchased, that the Window Period States are Arizona, Arkansas, California,
Colorado, Florida, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and
Washington. (Despite Florida's status as a Window Period State, Florida case law
indicates that courts no longer require a lender to show an impairment of
security before enforcing a due-on-sale clause.) In regulations issued on
November 8, 1983, as amended on December 9, 1983, the Comptroller of the
Currency indicated that certain loans which were originated by national banks
prior to October 15, 1982 and which were secured by property located in the
states listed above were Window Period Loans. These regulations limit the effect
of state law restrictions on the enforcement of due-on-sale clauses, with
respect to Window Period Loans originated by national banks, by shortening the
window period. On December 3, 1982, the National Credit Union Administration
issued final regulations allowing federal credit unions to enforce due-on-sale
clauses in long term first mortgage loans for transfers occurring on or after
November 18, 1982, notwithstanding state law restrictions.
Under the Garn-St Germain Act, unless a Window Period State took action by
October 15, 1985 to further regulate enforcement of due-on-sale clauses, such
clauses would become enforceable even in Window Period Loans. Five of the
Window Period States (Arizona, Minnesota, Michigan, Washington and Utah) have
acted to restrict the enforceability of due-on-sale clauses in Window Period
Loans beyond October 15, 1985. The actions taken vary among such states. The
Garn-St Germain Act also sets forth nine specific instances in which no
lender covered by the Garn-St Germain Act may exercise its option pursuant to
a due-on-sale clause, notwithstanding the fact that a transfer of the
property may have occurred. The inability to enforce a due-on-sale clause may
result in a 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 Loans related to a Series and the number
of such Loans which may be outstanding until maturity.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also
limit the amounts that a lender may collect from a borrower as an additional
charge if the loan is prepaid. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes 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 that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue
of whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that, in cases involving the sale by a trustee
under a deed of trust or by a mortgagee under a mortgage having a power of
sale, there is insufficient state action to afford constitutional protections
to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale
81
<PAGE>
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to Mortgage Loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of the Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ( "Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The Federal Home Loan Bank Board is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. Title V authorizes any state to reimpose interest rate limits by
adopting, before April 1, 1983, a state law, or by certifying that the voters
of such state have voted in favor of any provision, constitutional or
otherwise, which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V.
The Depositor has been advised by counsel that a court interpreting Title
V would hold that Mortgage Loans related to a Series originated on or after
January 1, 1980 are subject to federal preemption. Therefore, in a state that
has not taken the requisite action to reject application of Title V or to
adopt a provision limiting discount points or other charges prior to
origination of such Mortgage Loans, any such limitation under such state's
usury law would not apply to such Mortgage Loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
Mortgage Loans originated after the date of such state action will be
eligible as Primary Assets if such Mortgage Loans bear interest or provide
for discount points or charges in excess of permitted levels. No Mortgage
Loan originated prior to January 1, 1980 will bear interest or provide for
discount points or charges in excess of permitted levels.
ADJUSTABLE INTEREST RATE LOANS
ARMs originated by non-federally chartered lenders have historically been
subject 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
complied 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" (including ARMs) 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 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; and 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 with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides
that any state may reject applicability of the provisions 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.
The Depositor has been advised by its counsel that it is their opinion
that a court interpreting Title VIII would hold that ARMs which were
originated by state-chartered lenders before the date of enactment of any
state law or constitutional provision rejecting applicability of Title VIII
would not be subject to state laws imposing restrictions or prohibitions on
the ability of state-chartered lenders to originate alternative mortgage
instruments.
MANUFACTURED HOME LOANS
Security Interests in the Manufactured Homes. 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
82
<PAGE>
the secured party's lien on the certificate of title or by delivery of the
required documents and payment of a fee to the state motor vehicle authority,
depending on state law. In some nontitle states, perfection pursuant to the
provisions of the UCC is required. The lender or a 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 Home Loan is registered. In the
event such notation or delivery is not effected or the security interest is not
filed in accordance with the applicable law (for example, is filed under a motor
vehicle title statute rather than under the UCC, in a few states), a first
priority security interest in the Manufactured Home securing a Manufactured Home
Loan may not be obtained. As Manufactured Homes have become larger and often
have been attached to 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 Manufactured 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 home is
located. These filings must be made in the real estate records office of the
county where the home is located. Manufactured Home Loans typically contain
provisions prohibiting the borrower from permanently attaching the Manufactured
Home to its site. So long as the borrower 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 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 lender or its assignee. With
respect to a Series of Certificates evidencing interests in a Trust Fund that
includes Manufactured Home Loans and as described in the related Prospectus
Supplement, the Depositor may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws. If such real estate filings
are not made and if any of the foregoing events were to occur, the only recourse
of the Certificateholders would be against the Depositor pursuant to its
repurchase obligation for breach of warranties. A PMBS Agreement pursuant to
which Private Mortgage-Backed Securities backed by Manufactured Home Loans are
issued will, unless otherwise specified in the related Prospectus Supplement,
have substantially similar requirements for perfection of a security interest.
In general, upon an assignment of a Manufactured Home Loan, the
certificate of title relating to the Manufactured Home will not be amended to
identify the assignee as the new secured party. In most states, an 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.
Relocation of a Manufactured Home. In the event that the owner of a
Manufactured Home moves the home 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
reregisters the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not reregister the
Manufactured Home in such state, and if steps are not taken to reperfect 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 reregister a Manufactured
Home; accordingly, possession of the certificate of title to such
Manufactured Home must be surrendered or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the notice of
surrender must be given to any person whose security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
owner of the Manufactured Home Loan would have the opportunity to reperfect
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, reregistration could defeat perfection. In the ordinary
course of servicing the Manufactured Home Loans, the Master Servicer will be
required to take steps to effect reperfection upon receipt of notice of
reregistration or information from the borrower as to relocation. Similarly,
when a borrower under a Manufactured Home Loan sells the related Manufactured
Home, the Trustee must surrender possession of the certificate of title or
83
<PAGE>
the Trustee will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
Manufactured Home Loan before release of the lien. Under the Trust Agreement,
the Depositor is obligated to take such steps, at the Primary Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes. PMBS Agreements pursuant to which Private Mortgage-Backed
Securities backed by Manufactured Home Loans are issued will impose
substantially similar requirements.
Intervening Liens. 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 that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any
Manufactured Home Loan. However, such liens could arise at any time during
the term of a Manufactured Home Loan. No notice will be given to the Trustee
or Certificateholders in the event such a lien arises. PMBS Agreements
pursuant to which Private Mortgage-Backed Securities backed by Manufactured
Home Loans are issued will contain substantially similar requirements.
Enforcement of Security Interests in Manufactured Homes. So long as the
Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Manufactured Home Loan 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 Manufactured Home Loan 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 holder of a Manufactured Home Loan 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 borrower.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a borrower for any deficiency on repossession and
resale of the Manufactured Home securing such borrower's loan. However, some
states impose prohibitions or limitations on deficiency judgments. See
"Antideficiency Legislation and Other Limitations on Lenders" above.
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. See "Federal Bankruptcy and Other Law Affecting
Creditors' Rights" and "Equitable Limitations on Remedies" above.
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 who 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 borrower thereunder. The effect of
this rule is to subject the assignee of such a contract to all claims and
defenses which the borrower could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Manufactured
Home Loan; however, the borrower also may be able to assert the rule to set
off remaining amounts due as a defense against a claim brought against such
borrower. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
Manufactured Home Loan, 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 Manufactured Home Loan.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. Loans and installment sale contracts relating to a Manufactured Home
Loan typically prohibit the sale or transfer of the related Manufactured
Homes without the consent of the lender and permit the acceleration of the
maturity of the Manufactured Home Loans by the lender upon any such sale or
transfer for which no such consent is granted.
In the case of a transfer of a Manufactured Home, the lender's ability to
accelerate the maturity of the related Manufactured Home Loan will depend on
the enforceability under state law of the "due-on-sale" clause. The Garn-St.
84
<PAGE>
Germain Depositary Institutions Act of 1982 preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. See " 'Due-On-Sale' Clauses in
Mortgage Loans" above. With respect to any Manufactured Home Loan secured by a
Manufactured Home occupied by the borrower, the ability to accelerate will not
apply to those types of transfers discussed in " 'Due-On-Sale' Clauses in
Mortgage Loans" above. FHA Loans and VA Loans are not permitted to contain
"due-on-sale" clauses, and so are freely assumable.
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 which is secured by a first lien on certain kinds
of Manufactured Homes. The Manufactured Home Loans 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. See "Applicability of Usury
Laws" above.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Certificates.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations
(and in particular, proposed regulations governing the treatment of
contingent payment instruments issued in December, 1994 (the "Proposed
Contingent Regulations"), and the judicial and administrative rulings and
decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily
upon investors who will hold Certificates as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the Code,
but much of the discussion is applicable to other investors as well.
Potential purchasers of Certificates are advised to consult their own tax
advisers concerning the federal, state or local tax consequences to them of
the purchase, holding and disposition of the Certificates.
CHARACTERIZATION OF CERTIFICATES
Unless otherwise stated in the applicable Prospectus Supplement, a REMIC
election will be made with respect to each Series of Certificates. In such a
case, special counsel to the Issuer will deliver its opinion to the effect
that under then-current law, the arrangement by which the Certificates of
that Series are issued will be treated as a REMIC as long as all of the
provisions of the applicable Indenture or Trust Agreement, as applicable, are
complied with and the statutory and regulatory requirements are satisfied.
Certificates of such Series will be designated as "regular interests" or
"residual interests" in a REMIC, as specified in the related Prospectus
Supplement. The opinion will assume the accuracy of certain representations
of the Depositor contained in the Trust Agreement.
If the applicable Prospectus Supplement so specifies with respect to a
Series of Certificates, the Certificates of such Series will not be treated
as regular or residual interests in a REMIC for federal income tax purposes
but instead will be treated as (i) indebtedness of the Issuer, (ii) an
undivided beneficial ownership interest in the Mortgage Loans (and the
arrangement pursuant to which the Mortgage Loans will be held and the
Certificates will be issued will be treated as a grantor trust under Subpart
E, part I of subchapter J of the Code and not as an association taxable as a
corporation for federal income tax purposes); (iii) equity interests in an
association that will satisfy the requirements for qualification as a real
estate investment trust; or (iv) interests in an entity that will satisfy the
requirements for qualification as a partnership for federal income tax
purposes. The federal income tax consequences to Bondholders or
Certificateholders of any such Series will be described in the applicable
Prospectus Supplement.
85
<PAGE>
Except to the extent the related Prospectus Supplement specifies
otherwise, if a REMIC election is made with respect to a Series of
Certificates, (i) Certificates held by a mutual savings bank or domestic
building and loan association will represent interests in "qualifying real
property loans" within the meaning of Code Section 593(d) (assuming that at
least 95% of the REMIC's assets are "qualifying real property loans"); (ii)
Certificates held by a domestic building and loan association will constitute
"a regular or a residual interest in a REMIC" within the meaning of Code
Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets
consist of cash, government securities, "loans . . . secured by an interest
in real property," and other types of assets described in Code Section
7701(a)(19)(C); and (iii) Certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(6)(B), and income with respect to the Certificates will be considered
"interest on obligations secured by mortgages on real property or on interest
in real property" within the meaning of Code Section 856(c)(3)(B) (assuming,
for both purposes, that at least 95% of the REMIC's assets are qualifying
assets). If less than 95% of the REMIC's assets consist of assets described
in (i), (ii) or (iii) above, then Certificates will qualify for the tax
treatment described in (i), (ii), or (iii) in the proportion that such REMIC
assets are qualifying assets. In general, Mortgage Loans secured by
non-residential real property will not constitute "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C).
It is possible that various reserves or funds will reduce the proportion
of REMIC assets which qualify under the standards described above.
QUALIFICATION AS A REMIC
In order for a pool of assets (each, a "REMIC Pool") to qualify as a
REMIC, it must comply with certain ongoing requirements set forth in the
Code. First, the REMIC must fulfill an asset test, which requires that
substantially all of the assets of the REMIC as of the close of the third
calendar month beginning after the "Startup Day" (generally the date that the
Certificates or Bonds are issued) and at all times thereafter consist of
"qualified mortgages" and "permitted investments" (generally, temporary
investments of collections on qualified mortgages) as those terms are defined
in the Code. In addition, a REMIC must also establish reasonable arrangements
to insure that residual interests therein are not held by "disqualified
organizations" (in general, entities that are not subject to federal income
tax). The Pooling and Servicing Agreement will require compliance with the
REMIC provisions.
The Code and applicable regulations define a "qualified mortgage" to
include an obligation that is principally secured by interest in real
property as those terms are defined in applicable regulations. In addition to
the foregoing, in order for a mortgage loan to be a "qualified mortgage," the
fair market value of the "interest in real property" (as specifically defined
for this purpose) securing the mortgage loan (reduced by certain items,
including the amount of any senior liens and a pro rata portion of any parity
liens) must equal at least 80% of the adjusted issue price of the mortgage
loan (generally, the proceeds of the loan to the borrower) at either (a) the
time it was originated or, if the Mortgage Loan has been significantly
modified (as described in applicable regulations), the time of such
modification, or (b) the time of contribution to the REMIC. Tax Counsel has
not independently investigated the qualification of the Mortgage Loans as
"qualified mortgages" pursuant to these provisions, but in rendering its
opinion has relied on representations of the Depositor in the Trust
Agreement.
If 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 or for any year
thereafter. In such case, the classification of the REMIC for federal income
tax purposes is uncertain. Some Classes of the Certificates or Bonds may
continue to be treated as debt instruments for federal income tax purposes.
On the other hand, all or a part of the REMIC may be treated as a separate
association taxable as a corporation under Treasury regulations, and the
Certificates or Bonds may be treated as stock interests therein and not as
debt instruments. The Code grants regulatory authority to the Treasury
Department to issue regulations that would grant relief from disqualification
where failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith. Any such relief may be accompanied by
sanctions, however, such as the imposition of a corporate tax on all or a
portion of the REMIC's income for the period of time during which the
requirements for REMIC status were not satisfied.
86
<PAGE>
TAXATION OF REGULAR INTEREST CERTIFICATES
Interest and Acquisition Discount. Certificates that qualify as regular
interests in a REMIC ("Regular Interest Certificates") are generally treated
as indebtedness for federal income tax purposes. Stated interest on a Regular
Interest Security will be taxable as ordinary income using the accrual method
of accounting, regardless of the Bondholder's or Certificateholder's normal
accounting method. Reports will be made annually to the IRS and to holders of
Regular Interest Certificates that are not excepted from the reporting
requirements regarding amounts treated as interest (including accrual of
original issue discount) on Regular Interest Certificates.
Compound Interest Certificates, Interest Weighted Certificates, and Zero
Coupon Certificates will, and other Certificates constituting Regular
Interest Certificates may, be issued with "original issue discount" ("OID")
within the meaning of Code Section 1273. Rules governing original issue
discount are set forth in sections 1271-1275 of the Code and the Treasury
regulations thereunder (the "OID Regulations"). The OID Regulations do not
address the treatment of instruments having contingent payments. However,
Treasury regulations (the "Proposed Contingent Regulations") governing the
treatment of contingent payment obligations have recently been proposed. As
described more fully below, Code Section 1272(a)(6) requires the use of an
income tax accounting methodology that utilizes (i) a single constant yield
to maturity and (ii) the Prepayment Assumption. Under Section 1272(a)(6) of
the Code, special rules apply to the computation of OID on instruments, such
as the Regular Interest Certificates, on which principal is prepaid based on
prepayments of the underlying assets. Neither the OID Regulations nor the
Proposed Contingent Regulations contain rules applicable to instruments
governed by Section 1272(a)(6). Although technically not applicable to
prepayable securities and not yet finalized, the Proposed Contingent
Regulations may represent the likely method to be applied in calculating OID
on certain Classes of Certificates. Until the Treasury issues guidance to the
contrary, the Servicer or other person responsible for computing the amount
of original issue discount to be reported to a Regular Interest
Securityholder each taxable year (the "Tax Administrator") intends to base
its computations on Code Section 1272(a)(6), the OID Regulations and the
Proposed Contingent Regulations as described below. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6), there can
be no assurance that the methodology described below represents the correct
manner of calculating original issue discount on the Regular Interest
Certificates.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Regular Interest Security and its issue
price. A holder of a Regular Interest Security must include such OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included
in income in advance of the receipt of the cash representing that income. The
amount of OID on a Regular Interest Security will be considered to be zero if
it is less than a de minimis amount determined under the Code. However, the
amount of any de minimis OID must be included in income as principal payments
are received on an Offered Certificate, in the proportion that each such
payment bears to the original principal balance of the Certificate.
The issue price of a Regular Interest Security of a Class will generally
be the initial offering price at which a substantial amount of the
Certificates in the Class are sold, and will be treated by the Issuer as
including, in addition, the amount paid by the Bondholder or
Certificateholder for accrued interest that relates to a period prior to the
Closing Date of such Regular Interest Security. Under the OID Regulations,
the stated redemption price at maturity is the sum of all payments on the
Security other than any "qualified stated interest" payments. Qualified
stated interest is defined as any one of a series of payments equal to the
product of the outstanding principal balance of the Security and a single
fixed rate, or certain variable rates of interest that is unconditionally
payable at least annually. See "Variable Rate Certificates" below. In the
case of the Compound Interest Certificates, and certain of the other Regular
Interest Certificates, none of the payments under the instrument will be
considered "qualified stated interest," and thus the aggregate amount of all
payments will be included in the stated redemption price. For example, any
securities upon which interest can be deferred and added to principal
("Deferred Interest Certificates") will not be "qualified stated interest."
In addition, because Certificates Owners are entitled to receive interest
only to the extent that payments are made on the Mortgage Loans, interest on
all Regular Interest Certificates may not be "unconditionally payable." In
that case, all of the yield on a Regular Interest Security will be taxed as
OID, but Interest would not then be includible in income again when received.
Unless otherwise specified in the related Prospectus Supplement, the Issuer
intends to take the position that interest on the Regular Interest
Certificates is "unconditionally payable."
87
<PAGE>
The holder of a Regular Interest Security issued with OID must include in
gross income, for all days during its taxable year on which it holds such
Regular Interest Security, the sum of the "daily portions" of such OID. Such
daily portions are computed by allocating to each day during a taxable year a
pro rata portion of the OID that accrued during the relevant accrual period.
In the case of a debt instrument, subject to Section 1272(a)(6) of the Code,
such as a Regular Interest Security, that is subject to acceleration due to
prepayments on other debt obligations securing such instrument, OID is
computed by taking into account the anticipated rate of prepayments assumed
in pricing the debt instrument (the "Prepayment Assumption"). The amount of
OID that will accrue during an accrual period (generally the period between
interest payments or compounding dates) is the excess (if any) of (i) the sum
of (a) the present value of all payments remaining to be made on the Regular
Interest Security as of the close of the accrual period and (b) the payments
during the accrual period of amounts included in the stated redemption price
of the Regular Interest Security, over (ii) an "adjusted issue price" of the
Regular Interest Security at the beginning of the accrual period. The
adjusted issue price of a Regular Interest Security is the sum of its issue
price plus prior accruals of OID, reduced by the total payments made with
respect to such Regular Interest Security in all prior periods, other than
qualified stated interest payments. The present value of the remaining
payments is determined on the basis of three factors: (i) the original yield
to maturity of the Regular Interest Security (determined on the basis of
compounding at the end of each accrual period and properly adjusted for the
length of the accrual period), (ii) events which have occurred before the end
of the accrual period and (iii) the assumption that the remaining payments
will be made in accordance with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to
be included in income by a Bondholder or Certificateholder to take into
account prepayments with respect to the Mortgage Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any
period) the portions of OID required to be included in income by a Bondholder
or Certificateholder to take into account prepayments with respect to the
Mortgage Loans at a rate that is slower than the Prepayment Assumption.
Although original issue discount will be reported to Bondholders or
Certificateholders based on the Prepayment Assumption, no representation is
made to Bondholders or Certificateholders that Mortgage Loans will be prepaid
at that rate or at any other rate.
The Issuer may adjust the accrual of OID on a Class of Regular Interest
Certificates (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the
Mortgage Assets, although the OID Regulations do not provide for such
adjustments. If the Service challenges the method adopted by the Issuer, the
rate of accrual of OID for a Class of Regular Interest Certificates could
increase.
Certain classes of Regular Interest Certificates may represent more than
one class of REMIC regular interests. Unless the applicable Prospectus
Supplement specifies otherwise, the Trustee intends, based on the OID
Regulations, to calculate OID on such Regular Interest Certificates as if,
solely for the purposes of computing OID, the separate regular interests were
a single debt instrument.
Certain Series of Certificates may be structured to include two or more
REMICs, one or more of which (each, an "Upper Tier REMIC") hold regular
interests ("Lower Tier Interests") in other REMICs (each, a "Lower Tier
REMIC"). Under the OID Regulations, OID on all of the Lower Tier Interests
issued by a single Lower Tier REMIC that are held by a second REMIC will be
calculated by treating all of such Lower Tier Interests as a single debt
instrument.
A holder of a Regular Interest Security, which acquires the Regular
Interest Security for an amount that exceeds its stated redemption price,
will not include any original issue discount in gross income. A subsequent
holder of a Regular Interest Security which acquires the Regular Interest
Security for an amount that is less than its stated redemption price, will be
required to include original issue discount in gross income, but such a
holder who purchases such Regular Interest Security for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder
who pays more than a Regular Interest Security's issue price) to offset such
original issue discount by comparable economic accruals of portions of such
excess.
Interest Weighted Certificates. It is not clear how income should be
accrued with respect to a Regular Interest Certificates the payments on which
consist solely or primarily of a specified portion of the interest payments
88
<PAGE>
on qualified mortgages held by a REMIC ("Interest Weighted Certificates").
Absent guidance to the contrary, the Issuer intends to take the position that
all of the income derived from Interest Weighted Certificates should be treated
as OID and that the amount and rate of accrual of such OID should be calculated
in the same manner as for a Compound Interest Security. However, the Internal
Revenue Service could assert that income derived from an Interest Weighted
Security should be calculated as if the Interest Weighted Security were a bond
purchased at a premium equal to the excess of the price paid by such holder for
the Interest Weighted Security over its stated principal amount, if any. Under
this approach, a holder would be entitled to amortize such premium only if it
has in effect an election under Section 171 of the Code with respect to all
taxable debt instruments held by such holder, as described below. Alternatively,
the Internal Revenue Service could assert that the Interest Weighted Security
should be taxable under rules comparable to those governing bonds issued with
contingent principal payments or otherwise treated as contingent payment
instruments (although the Proposed Contingent Regulations explicitly do not
apply to REMIC regular interests). The OID Regulations do not, at the present
time, include regulations governing instruments that provide for contingent
payments. Under the Proposed Contingent Regulations, if they were finalized, and
were applicable to Interest Weighted Certificates (which, as Section 1272(a)(6)
instruments, are specifically excluded from the scope of the Proposed Contingent
Regulations) income on certain Certificates would be computed under the
"noncontingent bond method." The noncontingent bond method would generally apply
in a manner similar to the method prescribed by the Code under Section
1272(a)(6). See "-- Variable Rate Regular Certificates." Under the noncontingent
bond method, however, if the interest payable for any period is greater or less
than the amount projected, the amount of income included for that period would
be either increased or decreased accordingly. Any reduction in the income
accrual for a period below zero (a "Net Negative Adjustment") would be treated
by a Certificateholder as ordinary loss to the extent that prior income
inclusions exceed the total Net Negative Adjustments previously treated as
ordinary loss by the Certificateholder, and may be carried forward to offset
future interest accruals. At maturity, any remaining Net Negative Adjustment
would be treated as a loss on retirement of the Certificate. The legislative
history of relevant Code provisions indicates, however, that negative amount of
OID on an instrument such as a REMIC regular interest may not give rise to
taxable losses in any accrual period prior to the instrument's disposition or
retirement. Thus, it is not clear whether any losses resulting from a Net
Negative Adjustment may be recognized currently or must be carried forward until
disposition or retirement of the debt obligation.
Variable Rate Regular Certificates. The REMIC regulations (the "REMIC
Regulations") permit REMICs to issue regular interests bearing a variety of
variable rates including rates based on (i) "qualified floating rates" or
(ii) a weighted average of the interest rates on some or all of the qualified
mortgages held by the REMIC (a "Variable Rate Security"). Under the OID
Regulations, the amount and accrual of OID on a Variable Rate Security that
qualifies for treatment under the rules applicable to variable rate debt
instruments (a "VRDI Security") is determined, in general, by converting the
VRDI Security into a hypothetical fixed rate security and applying the rules
applicable to fixed rate securities described above to the hypothetical fixed
rate security. A VRDI Security providing for a qualified floating rate or
rates or a qualified inverse floating rate is converted to a hypothetical
fixed rate security by assuming that each qualified floating rate or the
qualified inverse floating rate will remain at its value as of the issue
date. A VRDI Security providing for an objective rate or rates is converted
to a hypothetical fixed rate security by assuming that each objective rate
will equal a fixed rate that reflects the yield that reasonably is expected
for the instrument. Such hypothetical fixed rate securities are assumed to
have terms identical to those provided under the related VRDI Certificates,
except for the substitution of fixed rates for the qualified floating rates,
objective rates, or qualified inverse floating rate as described above. In
the case of a VRDI Security that does not provide for the payment of interest
at least annually, appropriate adjustments to the OID accruals and the
qualified stated interest payments are made in each accrual period to the
extent that the interest actually accrued or paid during the accrual period
is greater or less than the interest assumed to be accrued or paid under the
hypothetical fixed rate security.
Regular Interest Certificates of certain Series may provide for interest
based on a weighted average of the interest rates on some or all of the
Mortgage Loans of the related Trust ("Weighted Average Certificates"). Under
the OID Regulations, it appears that Weighted Average Certificates relating
to a Trust whose Mortgage Loans are exclusively ARM Loans bear interest at an
"objective rate," since the ARM Loans themselves bear interest at qualified
floating rates. Under the existing OID Regulations, Weighted Average
Certificates relating to a Trust whose Mortgage Loans are not exclusively ARM
Loans ("Non-Objective Weighted Average Certificates") do not bear interest at
an objective or a qualified floating rate and, consequently, are not governed
89
<PAGE>
by the rules applicable to VRDI Certificates described above. Accordingly,
absent additional regulatory guidance, it appears that Non-Objective Weighted
Average Certificates would be taxed under the rules applicable to contingent
payment instruments. As noted above, there currently are no effective
regulations governing such instruments. Under the Proposed Contingent
Regulations, however, which will not be effective until 60 days after published
in final form, it appears that a weighted average of fixed rates would qualify
as an objective rate.
Effect of Defaults and Delinquencies. Each holder of a Regular Interest
Security will be required to accrue interest and original issue discount on
such Security without giving effect to any reductions in distributions
attributable to defaults or delinquencies on the Mortgage Loans, until it can
be established that any such reduction ultimately will not be recoverable. As
a result, the amount of taxable income reported in any period by the holder
of a Regular Interest Security could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a
Regular Interest Security eventually will recognize a loss or reduction in
income attributable to previously accrued and included income that, as a
result of such loss, ultimately will not be paid, the law is unclear with
respect to the timing and character of such losses or reduction in income.
Under Section 166 of the Code, both corporate and noncorporate holders of
Regular Interest Certificates that hold such Certificates in connection with
a trade of business should be allowed to deduct, as ordinary losses, any
losses sustained during a taxable year in which their Regular Interest
Certificates become wholly or partially worthless as the result of one or
more realized losses on the Mortgage Loans. However, it appears that a
noncorporate holder that does not acquire a Regular Interest Security in
connection with a trade or business will not be entitled to deduct a loss
under Section 166 of the Code until such holder's Regular Interest Security
becomes wholly worthless (that is, until its outstanding principal balance
has been reduced to zero) and that the loss will be characterized as a
short-term capital loss.
Market Discount and Premium. A purchaser of a Regular Interest Security
may also be subject to the market discount rules of the Code. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as payments of principal are received on such Regular Interest
Security, or upon sale or exchange of the Regular Interest Security. In
general terms, until regulations are promulgated, market discount may be
treated as accruing, at the election of the holder, either (i) under a
constant yield method, taking into account the Prepayment Assumption, or (ii)
in proportion to accruals of original issue discount (or, if there is no
original issue discount, in proportion to accruals of stated interest). A
holder of a Regular Interest Security having market discount may also be
required to defer a portion of the interest deductions attributable to any
indebtedness incurred or continued to purchase or carry the Regular Interest
Security. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter, in which case the interest
deferral rule will not apply.
A holder who purchases a Regular Interest Security (other than an Interest
Weighted Security, to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an
offset to interest income on such Security (and not as a separate deduction
item) on a constant yield method. Although no regulations addressing the
computation of premium accrual on collateralized mortgage obligations or
REMIC regular interests have been issued, applicable legislative history
indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a Regular
Interest Security will be calculated using the prepayment assumption used in
pricing such Regular Interest Security. If a holder makes an election to
amortize premium on a Security, such election will apply to all taxable debt
instruments (including all REMIC regular interests) held by the holder at the
beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the Internal Revenue Service. Purchasers
who pay a premium for the Regular Interest Security should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
SALE OR EXCHANGE OF REGULAR INTEREST CERTIFICATES
A Regular Bondholder's or Regular Certificateholder's tax basis in its
Regular Interest Certificates is the price such holder pays for a Security,
increased by amounts of original issue discount included in income and
90
<PAGE>
reduced by any payments received (other than qualified periodic interest
payments) and any amortized premium. Gain or loss recognized on a sale,
exchange, or redemption of a Regular Interest Certificates, measured by the
difference between the amount realized and the Regular Interest Security's
basis as so adjusted, will generally be capital gain or loss, assuming that
the Regular Interest Security is held as a capital asset, except to the
extent of (i) accrued market discount and (ii) in the case of a redemption or
prepayment of a Regular Interest Security, any OID, including OID that did
not previously accrue. If, however, a Regular Bondholder or Regular
Certificateholder is a bank, thrift, or similar institution described in
Section 582 of the Code, gain or loss realized on the sale or exchange of a
Regular Interest Security will be taxable as ordinary income or loss. In
addition, gain from the disposition of a Regular Interest Security that might
otherwise be capital gain will be treated as ordinary income to the extent of
the excess, if any, of (i) the amount that would have been includible in the
holder's income if the yield on such Regular Interest Security had equaled
110% of the applicable federal rate as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized
by the holder with respect to such Regular Interest Security.
REMIC EXPENSES
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Certificates or the REMIC
residual interest. In the case of a "single class REMIC," however, the
expenses will be allocated, under temporary Treasury regulations, among the
holders of the Regular Interest Certificates and the holders of the Residual
Interest Certificates on a daily basis in proportion to the relative amounts
of income accruing to each Bondholder or Certificateholder on that day. In
the case of a holder of a Regular Interest Security who is an individual or a
"pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the Bondholder or Certificateholder exceed 2% of such
Bondholder's or Certificateholder's adjusted gross income and will not be
deductible in computing alternative minimum taxable income. In addition, Code
Section 68 provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (for 1995, $114,700, or $57,350 in the case of
a separate return by a married individual within the meaning of Code Section
7703, which amount will be adjusted annually for inflation) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The disallowance of this deduction may have
a significant impact on the yield of the Regular Interest Security to such a
holder. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were
not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is
similar to such a trust and which is structured with the principal purpose of
avoiding the single class REMIC rules.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. The regular interests are generally taxable as debt of
the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income
produced by the REMIC's assets, including stated interest and any original
issue discount or market discount on loans and other assets, and (ii)
deductions, including stated interest and original issue discount accrued on
a Regular Interest Security, amortization of any premium with respect to
loans, and servicing fees and other expenses of the REMIC. A holder of a
Residual Interest Security that is an individual or a "pass-through interest
holder" (including certain pass-through entities, but not including real
estate investment trusts) will be unable to deduct servicing fees payable on
the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with the Residual
Interest Securityholder's other miscellaneous itemized deductions for that
year, do not exceed two percent of such holder's adjusted gross income. In
addition, Code Section 68 provides that the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted gross
91
<PAGE>
income exceeds the applicable amount (for 1995, $114,700, or $57,350 in the case
of a separate return by a married individual within the meaning of Code Section
7703, which amounts will be adjusted annually for inflation) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. See "REMIC Expenses" above.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Start
Up Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The original issue discount provisions of the Code apply to loans of
individuals originated on or after March 2, 1984, and the market discount
provisions apply to all loans. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of original issue discount
on such loans will be equivalent to the method under which holders of Regular
Interest Certificates accrue original issue discount (i.e., under the
constant yield method taking into account the Prepayment Assumption). The
REMIC will deduct original issue discount on the Regular Interest
Certificates in the same manner that the holders of the Certificates include
such discount in income, but without regard to the de minimis rules. See
"Taxation of Regular Interest Certificates" above. However, a REMIC that
acquires loans at a market discount must include such market discount in
income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the
life of the loans (taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding
recovery of premium attributable to loans originated on or before such date,
it is possible that such premium may be recovered in proportion to payments
of loan principal.
Income from Foreclosure Property. To the extent that a REMIC derives
income from Foreclosed Properties that is treated as "net income from
foreclosure property," that income will be subject to taxation at the highest
corporate tax rate. Net income from foreclosure property generally includes
gain from the sale of a foreclosure property that is inventory property and
net income from the property that would not be treated as "rents from real
property" or other certain other qualifying income. In addition, if the
operation of the Foreclosed Property is treated as a trade or business
carried on by the REMIC, then unless the property is operated through an
independent contractor, the income from the foreclosed property will be
subject to tax on "income from nonpermitted assets" at a rate of 100%. A
trust agreement or indenture may permit the Servicer to operate a Foreclosed
Property in a manner that produces income subject to the foregoing taxes if
certain conditions are satisfied.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from other prohibited transactions or any deductions attributable to
any prohibited transaction that resulted in a loss. In general, prohibited
transactions include (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject
to a limited exception, the sale or other disposition of a cash flow
investment; (iii) the receipt of any income from assets not permitted to be
held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or
other compensation for services rendered by the REMIC. It is anticipated that
a REMIC will not engage in any prohibited transactions in which it would
recognize a material amount of net income. In addition, subject to a number
of exceptions, a tax is imposed at the rate of 100% on amounts contributed to
a REMIC after the close of the three-month period beginning on the Start Up
Day. The holders of Residual Interest Certificates will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such Holders or otherwise, however, such taxes will be
paid out of the assets of the REMIC and, unless otherwise specified in the
related Prospectus Supplement, will be allocated pro rata to all outstanding
Classes of Certificates of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST CERTIFICATES
The Holder of a Security representing a REMIC residual interest (a
"Residual Interest Security") will take into account the "daily portion" of
the taxable income or net loss of the REMIC for each day during the taxable
92
<PAGE>
year on which such holder held the Residual Interest Security. The daily
portion is determined by allocating to each day in any calendar quarter its
ratable portion of the taxable income or net loss of the REMIC for such
quarter, and by allocating that amount among the holders (on such day) of the
Residual Interest Certificates in proportion to their respective holdings on
such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The
reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which the loans held by the REMIC
were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on
Regular Interest Certificates issued without any discount or at an
insubstantial discount. (If this occurs, it is likely that cash distributions
will exceed taxable income in later years.) Taxable income may also be
greater in earlier years of certain REMIC issues as a result of the fact that
interest expense deductions, as a percentage of outstanding principal on
Regular Interest Certificates, will typically increase over time as lower
yielding Certificates are paid, whereas interest income with respect to loans
will generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable
income allocated to the holder, and decreased (but not below zero) by the
amount of distributions made and the amount of the REMIC's net loss allocated
to the holder. Any disallowed loss may be carried forward indefinitely, but
may be used only to offset income generated by the same REMIC. The ability of
Residual Bondholders or Residual Certificateholders to deduct net losses may
be subject to additional limitations under the Code, as to which such holders
should consult their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not
result in any additional taxable income or loss to a holder of a Residual
Interest Security. If the amount of such payment exceeds a holder's adjusted
basis in the Residual Interest Security, however, the holder will recognize
gain (treated as gain from the sale of the Residual Interest Security) to the
extent of such excess.
Mark-to-Market Rules. Under proposed regulations that are proposed to be
effective for residual interests acquired on or after January 4, 1995, a
residual interest in a REMIC, or an interest or arrangement that is
determined by the Commissioner to have substantially the same effect, is not
a "security" for purposes of the mark- to-market rules and accordingly is not
eligible to be marked to market.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Bond equal to the
difference, if any, between the amount realized and such Bondholder's or
Certificateholder's adjusted basis in the Residual Interest Security at the
time of such sale or exchange. Except to the extent provided in regulations,
which have not yet been issued, any loss upon disposition of a Residual
Interest Security will be disallowed if the selling Bondholder or
Certificateholder acquires any residual interest in a REMIC or similar
mortgage pool within six months before or after such disposition.
EXCESS INCLUSION INCOME
The portion of a Residual Bondholder's or Residual Certificateholder's
REMIC taxable income consisting of "excess exclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Bondholder's or Certificateholder's federal income tax return. An exception
applies to organizations to which Code Section 593 applies (generally,
certain thrift institutions); however, such exception will not apply if the
aggregate value of the Residual Interest Certificates is not considered to be
93
<PAGE>
"significant," as described below. Further, if the holder of a Residual Interest
Security is an organization subject to the tax on unrelated business income
imposed by Code Section 511, such Residual Bondholder's or Residual
Certificateholder's excess inclusion income will be treated as unrelated
business taxable income of such Bondholder or Certificateholders. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Interest Security is owned
by a foreign person, excess inclusion income is subject to tax at a rate of 30%
which may not be reduced by treaty and is not eligible for treatment as
"portfolio interest." The REMIC Regulations provide that a Residual Interest
Security has significant value only if (i) the aggregate issue price of the
Residual Bonds is at least 2% of the aggregate of the issue prices of all
Regular Interest Certificates and Residual Interest Certificates in the REMIC
and (ii) the anticipated weighted average life (determined as specified in the
REMIC Regulations) of the Residual Interest Certificates is at least 20% of the
anticipated weighted average life of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to
a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Start Up
Day multiplied by (ii) the adjusted issue price of such Residual Interest
Security at the beginning of such quarterly period. The adjusted issue price
of a Residual Interest Security at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest Security), increased
by the aggregate of the daily accruals for prior calendar quarters, and
decreased (but not below zero) by the amount of loss allocated to a holder
and the amount of distributions made on the Residual Interest Security before
the beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Certificates may be disregarded. See "Restrictions on
Ownership and Transfer of Residual Interest Certificates" and "Tax Treatment
of Foreign Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST CERTIFICATES
As a condition to qualification as a REMIC, reasonable arrangements must
be made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of
the foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the Indenture or Trust Agreement, as
applicable, will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Issuer an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a
substantial tax will be imposed on the transferor of such Residual Interest
Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity (including, among
others, a partnership, trust, real estate investment trust, regulated
investment company, or any person holding as nominee), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual
tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is a
"noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
94
<PAGE>
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which the
taxes accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes. The present value is calculated based on the
Prepayment Assumption, using a discount rate equal to the "applicable federal
rate" at the time of transfer. If a transfer of a residual interest is
disregarded, the transferor would be liable for any Federal income tax
imposed upon taxable income derived by the transferee from the REMIC. A
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of transfer, knew or should have known that the
transferee would be unwilling or unable to pay taxes on its share of the
taxable income of the REMIC. A similar limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See "Tax Treatment of Foreign Investors" below.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the
Internal Revenue Service in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. If the applicable Prospectus Supplement so specifies with respect
to a Series of Certificates, the Certificates of such Series will not be
treated as regular or residual interests in a REMIC for federal income tax
purposes but instead will be treated as an undivided beneficial ownership
interest in the Mortgage Loans and the arrangement pursuant to which the
Mortgage Loans will be held and the Certificates will be issued, will be
classified for federal income tax purposes as a grantor trust under Subpart
E, Part 1 of Subchapter J of the Code and not as an association taxable as a
corporation. In such a case, special counsel to the Issuer will deliver its
opinion to the effect that the arrangement by which the Certificates of that
Series are issued will be treated as a grantor trust as long as all of the
provisions of the applicable Trust Agreement are complied with and the
statutory and regulatory requirements are satisfied. In some Series
("Pass-Through Certificates"), there will be no separation of the principal
and interest payments on the Mortgage Loans. In such circumstances, a
Certificateholder will be considered to have purchased an undivided interest
in each of the Mortgage Loans. In other cases ("Stripped Certificates"), sale
of the Certificates will produce a separation in the ownership of the
principal payments and interest payments on the Mortgage Loans.
Each Certificateholder must report on its federal income tax return its
pro rata share of the gross income derived from the Mortgage Loans (not
reduced by the amount payable as fees to the Trustee and the Master Servicer
and similar fees (collectively, the "Servicing Fee"), at the same time and in
the same manner as such items would have been reported under the
Certificateholder's tax accounting method had it held its interest in the
Mortgage Loans directly, received directly its share of the amounts received
with respect to the Mortgage Loans, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Certificates, such gross income
will consist of a pro rata share of all of the income derived from all of the
Mortgage Loans and, in the case of Stripped Certificates, such income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the Certificateholder owns an interest. The holder
of a Certificate will generally be entitled to deduct such Servicing Fees
under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered
by the Trustee and the Master Servicer (and Servicer, if other than the
Master Servicer). In the case of a noncorporate holder, however, Servicing
Fees (to the extent not otherwise disallowed, e.g., because they exceed
reasonable compensation) will be deductible in computing such holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such holder's alternative
minimum tax liability. In addition, Code Section 68 provides that the amount
of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (for
1995, $114,700, or $57,350 in the case of a separate return by a married
individual within the meaning of Code Section 7703, which amounts will be
adjusted annually for inflation) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the applicable amount, or (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable
year.
95
<PAGE>
Discount or Premium on Pass-Through Certificates. The holder's purchase
price of a Pass-Through Certificate is to be allocated among the Mortgage
Loans in proportion to their fair market values, determined as of the time of
purchase of the Certificates. In the typical case, the Trustee believes it is
reasonable for this purpose to treat each Mortgage Loan as having a fair
market value proportional to the share of the aggregate principal balances of
all of the Mortgage Loans that it represents, since the Mortgage Loans,
unless otherwise specified in the applicable Prospectus Supplement, will have
a relatively uniform interest rate and other common characteristics. To the
extent that the portion of the purchase price of a Certificate allocated to a
Mortgage Loan (other than to a right to receive any accrued interest thereon
and any undistributed principal payments) is less than or greater than the
portion of the principal balance of the Mortgage Loan allocable to the
Certificate, the interest in the Mortgage Loan allocable to the Certificate
will be deemed to have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents original issue discount or market discount. In the case of a
Mortgage Loan with original issue discount in excess of a prescribed de
minimis amount, a holder of a Certificate will be required to report as
interest income in each taxable year its share of the amount of original
issue discount that accrues during that year, determined under a constant
yield method by reference to the initial yield to maturity of the Mortgage
Loan, in advance of receipt of the cash attributable to such income and
regardless of the method of federal income tax accounting employed by that
holder. Original issue discount with respect to a Mortgage Loan could arise
for example by virtue of the financing of points by the originator of the
Mortgage Loan, or by virtue of the charging of points by the originator of
the Mortgage Loan in an amount greater than a statutory de minimis exception,
in circumstances under which the points are not currently deductible pursuant
to applicable Code provisions. However, the OID Regulations provide that if a
holder acquires an obligation at a price that exceeds its stated redemption
price, the holder will not include any original issue discount in gross
income. In addition, if a subsequent holder acquires an obligation for an
amount that exceeds its adjusted issue price the subsequent holder will be
entitled to offset the original issue discount with economic accruals of
portions of such excess. Accordingly, if the Mortgage Loans acquired by a
Certificateholder are purchased at a price that exceeds the adjusted issue
price of such Mortgage Loans, any original issue discount will be reduced or
eliminated.
Certificateholders also may be subject to the market discount rules of
Sections 1276-1278 of the Code. A Certificateholder that acquires an interest
in Mortgage Loans with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Mortgage
Loans over the purchaser's purchase price) will be required under Section
1276 of the Code to include accrued market discount in income as ordinary
income in each month, but limited to an amount not exceeding the principal
payments on the Mortgage Loans received in that month and, if the
Certificates are sold, the gain realized. Such market discount would accrue
in a manner to be provided in Treasury regulations. The legislative history
of the 1986 Act indicates that, until such regulations are issued, such
market discount would in general accrue either (i) on the basis of a constant
interest rate or (ii) in the ratio of (a) in the case of Mortgage Loans not
originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Mortgage Loans originally
issued at a discount, original issue discount in the relevant period to total
original issue discount remaining to be paid.
Section 1277 of the Code provides that the excess of interest paid or
accrued to purchase or carry a loan with market discount over interest
received on such loan is allowed as a current deduction only to the extent
such excess is greater than the market discount that accrued during the
taxable year in which such interest expense was incurred. In general, the
deferred portion of any interest expense will be deductible when such market
discount is included in income, including upon the sale, disposition, or
repayment of the loan. A holder may elect to include market discount in
income currently as it accrues, on all market discount obligations acquired
by such holder during the taxable year such election is made and thereafter,
in which case the interest deferral rule discussed above will not apply.
A Certificateholder who purchases a Certificate at a premium generally
will be deemed to have purchased its interest in the underlying Mortgage
Loans at a premium. A Certificateholder who holds a Certificate as a capital
asset may generally elect under Section 171 of the Code to amortize such
premium as an offset to interest income on the Mortgage Loans (and not as a
separate deduction item) on a constant yield method. The legislative history
96
<PAGE>
of the 1986 Act suggests that the same rules that will apply to the accrual of
market discount (described above) will generally also apply in amortizing
premium with respect to Mortgage Loans originated after September 27, 1985. If a
holder makes an election to amortize premium, such election will apply to all
taxable debt instruments held by such holder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
Internal Revenue Service. Purchasers who pay a premium for the Certificates
should consult their tax advisers regarding the election to amortize premium and
the method to be employed. Although the law is somewhat unclear regarding
recovery of premium allocable to Mortgage Loans originated before September 28,
1985, it is possible that such premium may be recovered in proportion to
payments of Mortgage Loan principal.
Discount or Premium on Stripped Certificates. A Stripped Certificate may
represent a right to receive only a portion of the interest payments on the
Mortgage Loans, a right to receive only principal payments on the Mortgage
Loans, or a right to receive certain payments of both interest and principal.
Certain Stripped Certificated ("Ratio Strip Certificates") may represent a
right to receive differing percentages of both the interest and principal on
each Mortgage Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the
principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest
payments. Section 1286 of the Code applies the original issue discount rules
to stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to
such stripped interest. The Code, the OID Regulations, and judicial decisions
provide no direct guidance as to how the interest and original issue discount
rules are to apply to Stripped Certificates. Under the method described above
for REMIC Regular Interest Certificates (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. The 1986 Act prescribed the same method for debt
instruments "secured by" other debt instruments, the maturity of which may be
affected by prepayments on the underlying debt instruments. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as the Stripped Certificates which technically represent
ownership interests in the underlying Mortgage Loans, rather than being debt
instruments "secured by" those loans. Nevertheless, it is believed that the
Cash Flow Bond Method is a reasonable method of reporting income for such
Certificates, and it is expected that original issue discount will be
reported on that basis. In applying the calculation to such Certificates, the
Trustee will treat all payments to be received with respect to the
Certificates, whether attributable to principal or interest on the loans, as
payments on a single installment obligation and as includible in the stated
redemption price at maturity. The Internal Revenue Service could, however,
assert that original issue discount must be calculated separately for each
Mortgage Loan underlying a Certificate. In addition, in the case of Ratio
Strip Certificates, the Internal Revenue Service could assert that original
issue discount must be calculated separately for each stripped coupon or
stripped bond underlying a Certificate.
Under certain circumstances, if the Mortgage Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Certificateholder's recognition of income. If, however, the
Mortgage Loans prepay at a rate slower than the prepayment assumption, in
some circumstances the use of this method may decelerate a
Certificateholder's recognition of income.
In the case of a Stripped Certificate which either embodies only interest
payments on the underlying loans or (if it embodies some principal payments
on the Mortgage Loans) is issued at a price that exceeds the principal
payments (an "Interest Weighted Certificate"), additional uncertainty exists
because of the enhanced potential for applicability of the proposed
contingent principal provisions of the Original Proposed OID Regulations.
Under the contingent principal provisions, "contingent principal"
represents the portion of the purchase price in excess of the amount of
principal payments. Under this method, the Certificateholder is in effect put
on the cash method with respect to interest income at the applicable federal
rate. First, each payment denominated "interest" is treated as interest to
the extent of accrued and unpaid interest on the debt instrument at the time
that the payment is received. Second, the portion of a payment denominated
97
<PAGE>
interest that is not treated as interest, as described in the preceding
sentence, is treated as a repayment of contingent principal. The interest for
any accrual period, other than an initial short period, is the product of the
applicable federal rate (published monthly by the Treasury Department) at the
time of the debt instrument's issuance and the adjusted issue price at the
beginning of the accrual period (the sum of the purchase price of the instrument
plus the accrued interest for all prior accrual periods, reduced by the total of
payments received in all prior periods). The total of the payments denominated
interest with respect to the Interest Weighted Certificate that may be treated
as principal may not exceed the amount of contingent principal. If the
contingent principal has been completely recovered, all subsequent payments will
be treated as interest.
The Original Proposed OID Regulations provide that if all contingent
principal is not recovered as of the final payment, then the final payment
will be treated as principal to the extent of such unrecovered principal and
interest to the extent of the remainder, if any. To the extent the final
payment is not sufficient to cover the principal amount, the
Certificateholders will recognize a loss. If the loss generating Mortgage
Loan was issued by a natural person, such loss may be an ordinary loss since
loss recognized on retirement of a debt instrument issued by a natural person
is not a loss from a sale or exchange. However, the IRS might contend that
such loss should be a capital loss if the Certificateholder held its
Certificate as a capital asset within the meaning of Section 1221 of the
Code.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates described above are not the only possible
interpretations of the applicable Code provisions. Among other possibilities,
the Internal Revenue Service could contend that (i) in certain Series, each
non-Interest Weighted Certificate is composed of an unstripped undivided
ownership interest in Loans and an installment obligation consisting of
stripped principal payments; (ii) the non-Interest Weighted Certificates are
subject to the Proposed Regulations; (iii) each Interest Weighted Certificate
is composed of an unstripped undivided ownership interest in the Mortgage
Loans and an installment obligation consisting of stripped interest payments;
or (iv) there are as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan.
Given the variety of alternatives for treatment of the Certificates and
the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Certificates for federal income tax
purposes.
Character as Qualifying Mortgage Loans. In the case of Stripped
Certificates there is no specific legal authority existing regarding whether
the character of the Certificates, for federal income tax purposes, will be
the same as the Mortgage Loans. The IRS could take the position that the
Mortgage Loans' character is not carried over to the Certificates in such
circumstances. Pass-Through Certificates will be, and, although the matter is
not free from doubt, Stripped Certificates should be considered to represent
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, "real estate assets" within the meaning of Section 856(c)(6)(B) of the
Code, and "loans secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to
the Certificates should be considered to represent "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of Section 856(c)(3)(B) of the Code. However, Mortgage
Loans secured by non-residential real property will not constitute "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C) of the Code. In addition, it is possible that various reserves
or funds underlying the Certificates may cause a proportionate reduction in
the above-described qualifying status categories of Certificates.
Sale of Certificates. As a general rule, 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 gain or loss
will generally be capital gain or loss if the Certificate is held as a
capital asset. In the case of Pass-Through Certificates, such tax basis will
generally equal the holder's cost of the Certificate increased by any
discount income with respect to the loans represented by such Certificate
previously included in income, and decreased by the amount of any
distributions of principal previously received with respect to the
Certificate. Such gain, to the extent not otherwise treated as ordinary
income, will be treated as ordinary income to the extent of any accrued
market discount not previously reported as income. In the case of Stripped
Certificates, the tax basis will generally equal the Certificateholder's cost
for the Certificate, increased by any discount income with respect to the
Certificate previously included in income, and decreased by the amount of all
payments previously received with respect to such Certificate.
98
<PAGE>
MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Bondholder or Certificateholder, other than a
Residual Bondholder or Residual Certificateholder, may, under certain
circumstances, be subject to "backup withholding" at the rate of 31% with
respect to distributions or the proceeds of a sale of certificates to or
through brokers that represent interest or original issue discount on the
Certificates. This withholding generally applies if the holder of a Security
(i) fails to furnish the Issuer with its taxpayer identification number
("TIN"); (ii) furnishes the Issuer an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Issuer or
such holder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number and that the
holder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Bondholders or
Certificateholders, including payments to certain exempt recipients (such as
exempt organizations) and to certain Nonresidents (as defined below). Holders
of the Certificates should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Issuer will report to the Securityholders and to the Internal Revenue
Service for each calendar year the amount of any "reportable payments" during
such year and the amount of tax withheld, if any, with respect to payments on
the Certificates.
TAX TREATMENT OF FOREIGN INVESTORS
Under the Code, unless interest (including OID) paid on a Security (other
than a Residual Interest Security) is considered to be "effectively
connected" with a trade or business conducted in the United States by a
nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of
10% or more of the capital or profits interest in the Issuer or (ii) the
recipient is a controlled foreign corporation to which the Issuer is a
related person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the Issuer normally will be relieved of the
obligation to withhold federal income tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the Issuer to withhold at a 30% rate (unless
such rate were reduced or eliminated by an applicable tax treaty) on, among
other things, interest and other fixed or determinable, annual or periodic
income paid to Nonresidents.
Interest and original issue discount of Bondholders or Certificateholders
who are foreign persons are not subject to withholding if they are
effectively connected with a United States business conducted by the
Bondholder or Certificateholders. They will, however, generally be subject to
the regular United States income tax.
Payments to holders of Residual Interest Certificates who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." To the extent that a payment represents a portion of
REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require
such amounts to be taken into account at an earlier time in order to prevent
the avoidance of tax. Such regulations could, for example, require
withholding prior to the distribution of cash in the case of Residual
Interest Certificates that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all Federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual holder
amounts that will equal at least 30% of each excess inclusion, and 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. If a Nonresident transfers a Residual Interest
99
<PAGE>
Security to a United States person, and if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "Excess Inclusion Income."
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "FEDERAL
INCOME TAX CONSIDERATIONS," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Certificates. State and local 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 or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of investment in the
Bonds or Certificates. In particular, potential investors in Residual
Interest Certificates should consult their tax advisers regarding the
taxation of the Residual Interest Certificates in general and the effect of
foreclosure on the Mortgaged Properties on such taxation.
ERISA CONSIDERATIONS
ERISA and the Code impose certain restrictions on employee benefit plans
("Plans") that are subject to ERISA and on persons who have certain specified
relationships to such Plans (so-called "parties in interest" within the
meaning of ERISA or "disqualified persons" within the meaning of the Code,
hereinafter referred to collectively as "Parties in Interest"). ERISA also
imposes certain duties on persons who are fiduciaries of Plans subject to
ERISA and prohibits certain transactions between a Plan and Parties in
Interest with respect to such Plan. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets
of a Plan, and any person who provides investment advice with respect to such
assets for a fee, is a fiduciary of such Plan.
A final regulation promulgated by the Department of Labor (the "DOL")
defining the term "plan assets" was published in the Federal Register (the
"DOL Regulation"). Under the DOL Regulation, generally, when a Plan makes an
equity investment in another entity (for example, the purchase of a REMIC
Certificate), the underlying assets of that entity may be considered Plan
assets unless certain exceptions apply. There can be no assurance that any of
the exceptions set forth in the DOL Regulation will apply to the purchase or
holding of Certificates. A Plan's investment in Certificates may cause the
Loans or other assets comprising or underlying the Primary Assets to be
deemed Plan assets. If the Loans or other assets constitute Plan assets, then
any party exercising management or discretionary control regarding those
assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements and prohibited transaction provisions of ERISA and the
Code with respect to the Loans and other assets. Certain affiliates of the
Depositor, including Lehman Brothers Inc., the Underwriter of the
Certificates, and Lehman Commercial Paper Incorporated, the parent of the
Depositor, might be considered or might become fiduciaries or other Parties
in Interest with respect to investing Plans. Moreover, the Trustee, the
Master Servicer or any other Servicer, any insurer, special hazard insurer,
primary insurer or any other issuer of a credit support instrument relating
to the Primary Assets in a Trust Fund or certain of their respective
affiliates might be considered fiduciaries or other Parties in Interest with
respect to investing Plans. Prohibited transactions within the meaning of
ERISA and the Code could arise if Certificates are acquired by a Plan with
respect to which any such person is a Party in Interest.
One or more exemptions may be available, however, with respect to any such
prohibited transaction, including, but not limited to: Prohibited Transaction
Exemption ("PTE") 90-1, regarding investments by insurance company pooled
separate accounts; PTE 95-60, regarding investments by insurance company
general accounts; PTE 80-51, regarding investments by bank collective
investment funds; PTE 83-1, regarding mortgage pool investment trusts; or PTE
84-14, regarding transactions effected by a "qualified professional asset
manager."
The DOL has issued Prohibited Transaction Class Exemption 83-1 ("PTCE
83-1"), which exempts from the prohibited transaction provisions of ERISA
certain transactions involving single family residential mortgage pool
investment trusts. With respect to Mortgage Loans secured solely by property
consisting of single family residential housing, PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might
otherwise be prohibited between Plans and parties in interest with respect to
those Plans, related to the origination, maintenance and termination of
mortgage pools and the acquisition and holding of certain mortgage pool
100
<PAGE>
pass-through certificates by Plans, whether or not the Plan's assets would be
deemed to include an ownership interest in the mortgages in the mortgage
pool. PTCE 83-1 does not apply to investments in Subordinate Certificates to
Certificates that evidence an interest in distributions of principal only.
Because certain of the Certificates may, if specified in the related
Prospectus Supplement, be Subordinated Certificates or evidence an interest
in distributions of principal only or interest only from the pooled Mortgage
Loans, PTCE 83-1 will not be applicable to such Certificates.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (1) the maintenance of a system
of insurance or other protection for the pooled housing loans and property
securing such loans, and for indemnifying certificate holders against
reductions in pass-through payments due to property damage or defaults in
loan payments; (2) the existence of a pool trustee who is not an affiliate of
the pool sponsor; and (3) a limitation on the amount of the payment retained
by the pool sponsor together with other benefits inuring to its benefit, to
not more than adequate consideration for selling the housing loans plus
reasonable compensation for services provided by the pool sponsor to the loan
pool. PTCE 83-1 also imposes additional specific conditions for certain types
of transactions and where certain parties in interest are fiduciaries with
respect to a Plan that acquires a Certificate.
If a Trust Fund consists of Agency Certificates, then under the terms of
the DOL Regulation, even if the acquisition or holding by an ERISA Plan of a
Certificate with respect to such Trust Fund were characterized as the
acquisition of ownership rights in the assets of the Trust Fund (including
the Agency Certificates) such acquisition or holding would not constitute
acquisition of ownership rights in the mortgage loans underlying the Agency
Certificates.
In addition, the DOL has granted to Lehman Brothers Inc. an administrative
exemption (Prohibited Transaction Exemption 91-14 et al.; Exemption
Application No. D-7958 et al., 56 Fed. Reg. 7413 (1991) (the "Exemption")
from certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding, and the subsequent resale by Benefit Plans of
certificates in pass-through trusts that consist of certain receivables,
loans, and other obligations that meet the conditions and requirements of the
Exemption. The loans covered by the Exemption include mortgage loans and
manufactured home loans such as the Loans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) 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;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other Certificates of the Trust Fund;
(3) The Certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group Corporation,
Moody's Investors Service, Inc., Fitch Investors Service, Inc. or Duff &
Phelps Credit Rating Co.;
(4) The sum of all payments made to the underwriter 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 Depositor pursuant to the assignment of the
Loans to the Trust Fund represents not more than the fair market value of
such Loans. The sum of all payments made to and retained by the Master
Servicer and any other Servicer represents not more than reasonable
compensation for such person's services under the Trust Agreement and
reimbursement of such person's reasonable expenses in connection
therewith; and
(5) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions only if, among other requirements: (i) no
fiduciary (or its affiliate) is an obligor with respect to more than five
percent of the fair market value of the obligations contained in the trust;
101
<PAGE>
(ii) the Plan's investment in certificates does not exceed twenty-five percent
of all of the certificates outstanding at the time of the acquisition and (iii)
immediately after the acquisition, no more than twenty-five percent of the
assets of the Plan are invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
The Depositor believes that the Exemption will apply to the acquisition
and holding of Certificates rated in one of the three highest applicable
rating categories by at least one Rating Agency by Plans and that in such
cases all conditions of the Exemption other than those within the control of
the investors will have been met. In addition, as of the date hereof, there
is no single obligor with respect to Loans included in the Trust Fund that
constitutes more than five percent of the aggregate unamortized principal
balance of the assets of the Trust Fund.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1,
the Exemption or other exemptions, and the potential consequences to their
specific circumstances, prior to making an investment in the Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment
in the Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
Unless otherwise set forth in the related Prospectus Supplement, sequences
of any series rated in one of the two highest applicable rating categories by
at least one Rating Agency will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are so rated and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state-chartered savings
banks, commercial banks, savings and loan associations and insurance
companies, as well as 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.
Certain sequences of some series may not be rated in one of the two
highest applicable rating categories by at least one Rating Agency and,
accordingly, will not constitute "mortgage related securities" for purposes
of SMMEA. Investors should consult their own legal advisors to determine the
extent to which such sequences may be purchased by such investors.
Under SMMEA, if a State enacts legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities
with respect to "mortgage related securities," the Certificates will
constitute legal investments for entities subject to such legislation only to
the extent provided in such legislation. SMMEA provides, however, that in no
event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in any securities, or
require the sale or other disposition of any securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of 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 with
mortgage-related securities without limitations as to the percentage of their
assets represented thereby; federal credit unions may invest in
mortgage-related securities, and national banks may purchase mortgage-related
securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. sec. Section 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe.
Certain regulatory authorities (such as the banking or insurance
regulatory authorities) in certain states have issued public statements to
the effect that notwithstanding SMMEA, institutions under their jurisdiction
may not invest in certain types of mortgage-related securities. In addition,
institutions the investment activities of which are subject to review by
certain regulatory authorities may be or may become subject to restrictions,
which may be retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain types of mortgage related
securities. Each of the Federal Financial Institutions Examination Council,
102
<PAGE>
the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Federal Home Loan Bank Board, the Board of Governors of the Federal Reserve
System and the National Credit Union Administration have issued either policy
statements or guidelines relating to investments by the institutions regulated
by them in various types of mortgage or asset backed or derivative securities,
including in particular zero coupon, residual or stripped instruments. In
addition, several states have adopted or are considering regulations that
prohibit state-chartered savings institutions from purchasing or holding similar
types of securities. Under certain of these policy statements or guidelines,
certain of such investments (most likely those in zero coupon, residual,
stripped or other instruments) will receive increased regulatory scrutiny and
may well be considered unsuitable investments for depository institutions other
than those having highly sophisticated and well-managed securities portfolios,
mortgage portfolios or mortgage banking functions. There may be other
restrictions on the ability of certain investors, including depository
institutions, either to purchase Certificates or to purchase Certificates
representing more than a specified percentage of such investor's assets. All
investors should consult their own legal advisors in determining whether and to
what extent the Certificates constitute legal investments for such investors.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters, and the
material federal income tax consequences of the Certificates will be passed
upon for the Depositor, by Skadden, Arps, Slate, Meagher & Flom, New York,
New York.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 2,
1987. The principal office of the Depositor is located at 200 Vesey Street,
New York, New York 10285. Its telephone number is (212) 526-5594.
The Certificate of Incorporation of the Depositor provides that the
Depositor may not conduct any activities other than those related to the
issue and sale of one or more Series and to serve as depositor of one or more
trusts that may issue and sell bonds or certificates. The Certificate of
Incorporation of the Depositor provides that any securities, except for
subordinated securities, issued by the Depositor must be rated in one of the
three highest categories available by any Rating Agency rating the Series.
The Series Supplement for a particular Series may permit the Primary
Assets pledged to secure the related Series of Certificates to be transferred
by the Issuer to a trust, subject to the obligations of the Certificates of
such Series, thereby relieving the Issuer of its obligations with respect to
such Certificates.
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 Primary Assets, to repay indebtedness which has
been incurred to obtain funds to acquire the Primary 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 Primary
Assets. Unless otherwise specified in the related Prospectus Supplement, the
Primary 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 Primary Assets from time to time either in the open market or
in privately negotiated transactions.
103
<PAGE>
PLAN OF DISTRIBUTION
Each Series of Certificates offered hereby and by means of the related
Prospectus Supplements may be offered through any one or more of the
following: Lehman Brothers Inc., an affiliate of the Depositor; underwriting
syndicates represented by Lehman Brothers Inc.; any originator of Loans
underlying a Series; or underwriters, agents or dealers selected by such
originator (collectively, the "Underwriters"). The Prospectus Supplement with
respect to each such Series of Certificates will set forth the terms of the
offering of such Series of Certificates and each Sequence within such Series,
including the name or names of the Underwriters (if known), the proceeds to
the Depositor (if any), and including either the initial public offering
price, the discounts and commissions to the Underwriters and any discounts or
commissions allowed or reallowed to certain dealers, or the method by which
the prices at which the Underwriters will sell the Certificates will be
determined.
The Underwriters may or may not 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.
104
<PAGE>
GLOSSARY
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental
Glossary" in the Prospectus Supplement for a Series, such definitions shall
apply to capitalized terms used in such Prospectus Supplement. The
definitions may vary from those in the Trust Agreement and the Trust
Agreement generally provides a more complete definition of certain of the
terms. Reference should be made to the Trust Agreement for a more complete
definition of such terms.
"Accrual Date" means, with respect to any Multi-Class Series, the date
upon which interest begins accruing on the Certificates of the Series, as
specified in such Certificates and the related Prospectus Supplement.
"Accrual Distribution Amount" means, with respect to any Distribution Date
for a Multi-Class Series that occurs prior to or on the Accrual Termination
Date, the aggregate amount of interest which has accrued on the Compound
Interest Certificates of such Series during the Interest Accrual Period
ending on or prior to such Distribution Date but which is not then required
to be paid.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Certificates, the Distribution Date on which all Certificates of the
related Series with Stated Maturities earlier than that of such Class of
Compound Interest Certificates have been fully paid, or such other date or
period as may be specified in the related Prospectus Supplement.
"Advance" means a cash advance by the Master Servicer or a Servicer in
respect of delinquent payments of principal of and interest on a Loan, and
for the other purposes specified herein and in the related Prospectus
Supplement.
"Agency Certificates" means GNMA Certificates, FNMA Certificates, and
FHLMC Certificates.
"Aggregate Asset Principal Balance" means, with respect to the Mortgage
Loans in the Trust Fund, the aggregate of the Asset Principal Balances for
all such Mortgage Loans at the time of any determination.
"Appraised Value" means, with respect to a property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at
origination of the Loan or the sales price of such mortgaged property.
"ARM" or "Adjustable Rate Mortgage" means a Mortgage Loan as to which the
related Mortgage Note provides for periodic adjustments in the interest rate
component of the Scheduled Payment pursuant to an Index as described in the
related Prospectus Supplement.
"Asset Group" means a group of individual Primary Assets which share
similar characteristics and are aggregated into one group for purposes of
assigning a single aggregate Asset Value.
"Asset Principal Balance" means, with respect to any Mortgage Loan, at the
time of any determination, its outstanding principal balance as of the
Cut-off Date reduced by all amounts distributed to Certificateholders (or
used to fund the Subordination Reserve Fund, if any) and reported as
allocable to principal payments on such Mortgage Loan.
"Asset Value" means, unless otherwise specified in the related Prospectus
Supplement for a Series, with respect to Primary Assets comprising the Trust
Fund for a Multi-Class Series, an amount equal to, as of the date of such
determination, the lesser of (a) the present value of the stream of remaining
regularly Scheduled Payments of principal and interest on the Primary Assets
(less any Retained Interest) through the earlier of (1) the Final Scheduled
Distribution Date of the Class of such Series having the latest Final
Scheduled Distribution Date or (2) the Distribution Date next succeeding the
latest maturity date of such Primary Assets (after taking into account
applicable withdrawals from any Funds or Accounts and charges for servicing,
insurance and related matters, as specified in the related Prospectus
Supplement), together with Reinvestment Income thereon at the Assumed
Reinvestment Rate for such Series, from the Assumed Deposit Date to the next
succeeding Distribution Date, discounted from such Distribution Date to the
date for which such determination is made with the same frequency as payments
are made on the Certificates of such Series at the highest Certificate Rate
for such Series; provided that if any Class pays more frequently than another
Class, such determination shall be made as provided in the related Series
Supplement and (b) the maximum Asset Value specified in the related
Prospectus Supplement.
105
<PAGE>
"Assumed Deposit Date" means the date specified therefor in the Prospectus
Supplement for a Series, upon which distributions on the Primary Assets are
assumed to be received for purposes of calculating Reinvestment Income
thereon.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any
Fund or Account for the Series.
"Available Distribution Amount" means the amount in the Certificate
Account (including amounts deposited therein from any reserve fund or other
fund or account) eligible for distribution to Certificateholders on a
Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Bi-Weekly Loan" means a Mortgage Loan which provides for payments of
principal and interest by the borrower once every two weeks.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are
authorized or obligated by law, regulation or executive order to be closed.
"Buy-Down Fund" means a custodial account, established by the Master
Servicer or the Servicer for a Buy-Down Loan, that meets the requirements
set forth herein.
"Buy-Down Loan" means a level payment Mortgage Loan for which funds have
been provided by a Person other than the mortgagor to reduce the mortgagor's
Scheduled Payment during the early years of such Mortgage Loan.
"Buy-Down Period" means, with respect to a Buy-Down Loan, the period when
the related mortgagor is not obligated, on account of the buy-down plan, to
pay the full monthly payment otherwise due on the Buy-Down Loan.
"Certificate Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances
received from the Master Servicer in respect of the Primary Assets in a Trust
Fund.
"Certificate guarantee insurance" means an insurance policy issued by one
or more insurance companies which will guarantee timely distributions of
interest and full distributions of principal of a Series on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement for the Series.
"Certificateholder" or "Holder" means the Person in whose name a
Certificate is registered in the Certificate register.
"Certificate Rate" means, with respect to any Multi-Class Series, the per
annum rate at which interest accrues on the principal balance of the
Certificates of such Series or a Class of such Series, which rate may be
fixed or variable, as specified in the related Prospectus Supplement.
"Certificates" means the Asset Trust Pass-Through Certificates. "Class"
means a Class of Certificates of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Certificates of such
Series are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Master Servicer for the deposit by the Master
Servicer of payments received from the Primary Assets in a Trust Fund (or
from the Servicers, if any).
106
<PAGE>
"Compound Interest Certificate" means any Certificate of a Multi-Class
Series on which interest accrues and is added to the principal balance of
such Certificate periodically, but with respect to which no interest or
principal shall be payable except during the period or periods specified in
the related Prospectus Supplement.
"Compound Value" means, with respect to a Class of Compound Interest
Certificates, as of any Determination Date, the original principal balance of
such Class, plus all accrued and unpaid interest, if any, previously added to
the principal balance thereof and reduced by any payments of principal
previously made on such Class of Compound Interest Certificates.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest
in all parts of the Condominium Building (other than the individual
Condominium Units) and all areas or facilities, if any, for the common use of
the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium
Unit (together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Conventional Loan" means a Loan that is not insured or guaranteed by the
FHA or the VA.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) of
a security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated in the Trust Agreement for a
Series on or before which amounts due and payable with respect to a Primary
Asset will not inure to the benefit of Certificateholders of the Series.
"Cut-off Date Aggregate Asset Principal Balance" means, with respect to
the Loans in the Trust Fund as of the Cut-off Date, the Aggregate Asset
Principal Balance for all such Loans as of the Cut-off Date, reduced by all
payments of principal due on or before the Cut-off Date and not paid, and
increased by scheduled payments of principal due after the Cut-off Date but
received by the Master Servicer on or before the Cut-off Date.
"Deferred Interest" means excess interest resulting when the amount of
interest paid by a Mortgagor on a Negatively Amortizing ARM in any month is
less than the amount of interest accrued on the Stated Principal Balance
thereof.
"Deficiency Event" means, with respect to a Series, the inability of the
Trustee to distribute to Holders of one or more Classes of Certificates of
the Series (other than any Class of Subordinate Certificates prior to the
time that the Available Distribution Amount is reduced to zero), in
accordance with the terms thereof and the related Trust Agreement, any
distribution of principal or interest thereon when and as distributable due
to insufficient funds for such purpose then held in the related Trust Fund.
"Deleted Mortgage Loan" means a Mortgage Loan which is repurchased from
the Trust Fund by the Depositor or as to which a Qualifying Substitute Loan
is substituted therefor.
"Depositor" means Structured Asset Securities Corporation.
107
<PAGE>
"Determination Date" means the day specified in the related Prospectus
Supplement as the day on which the Master Servicer calculates the amounts to
be distributed to Certificateholders on the next succeeding Distribution
Date.
"Distribution Date" means, with respect to a Series or Class, each date
specified as a distribution date for such Series or Class in the related
Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable to the Trustee or its nominee on any Primary Asset.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "THE TRUST AGREEMENTS -- Investment of
Funds."
"Eligible Reserve Fund Investments" means Eligible Investments and any
other obligations or securities described as Eligible Reserve Fund
Investments in the applicable Trust Agreement, as described in the related
Prospectus Supplement for a Series.
"ERISA" means the Employer Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Master Servicer or the Servicer for a Loan, into which payments by borrowers
to pay taxes, assessments, mortgage and hazard insurance premiums and other
comparable items that are required to be paid to the mortgagee are deposited.
"Excess Cash Flow" means, with respect to a Multi-Class Series, the
amount, if any, by which (a) the cash flow received from the Primary Assets
in the related Trust Fund and deposited in the related Certificate Account
(excluding any Retained Interest but including transfers from any applicable
Reserve Fund), net of applicable servicing fees, guarantee fees, insurance
premiums and other administrative expenses, on the relevant determination
date exceeds (b) the sum of (1) the Minimum Principal Distribution Amount for
such Series on such Distribution Date and (2) the Accrual Distribution
Amount, if any, on such Distribution Date.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration, a division of HUD.
"FHA Loan" means a fixed-rate housing loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Certificate" means a mortgage participation certificate or other
pass-through certificate guaranteed by FHLMC as to the timely payment of
interest and, except as specified in the related Prospectus Supplement, the
ultimate collection of principal, which represents ultimately a proportional
beneficial ownership interest in a pool of residential mortgage loans.
"Final Scheduled Distribution Date" means, with respect to a Class of a
Series, the date after which no Certificates of such Class will remain
outstanding assuming timely payments or distributions are made on the Primary
Assets in the related Trust Fund.
"Floating Rate" means a Certificate Rate which is subject to change from
time to time.
"Floating Rate Certificate" means any Certificate of a Multi-Class Series
which accrues interest at a Floating Rate.
"Floating Rate Distribution Date" means the Distribution Date for a Class
of Floating Rate Certificates, which may be either more or less frequent than
the Distribution Date for other Classes of the Series.
"Floating Rate Period" means the period of time during which a given
Certificate Rate applies to a Class of Floating Rate Certificates.
"FNMA" means the Federal National Mortgage Association.
"FNMA Certificate" means a guaranteed mortgage pass-through certificate or
a stripped mortgage-backed security, the full and timely payment of principal
of and interest on which is guaranteed by FNMA, which represents ultimately a
proportional beneficial ownership interest in a pool of residential mortgage
loans.
108
<PAGE>
"FSLIC" means the Federal Savings and Loan Insurance Corporation or any
successor thereto.
"Fund or account" means any fund or account, including, without
limitation, the Certificate Account or any reserve fund established under the
Trust Agreement for a Series, excluding any fund or account not available to
make distributions to Certificateholders.
"GEM Loan" means, unless specified otherwise in the related Prospectus
Supplement for a Series, a fixed rate, fully amortizing mortgage loan
providing for monthly payments based on a 10- to 30-year amortization
schedule, with further provisions for scheduled annual payment increases for
a number of years with the full amount of such increases being applied to
principal, and with further provision for level payments thereafter.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificate" means a mortgage pass-through certificate the full and
timely payment of principal of and interest on which is guaranteed by GNMA
and issued under either the GNMA I or the GNMA II program, which represents
ultimately a proportional beneficial ownership interest in a pool of
residential housing loans. A "GNMA I Certificate" is a GNMA Certificate
issued under the GNMA I program, and a "GNMA II Certificate" is a GNMA
Certificate issued under the GNMA II program.
"GPM Fund" means a trust account established by the Master Servicer or the
Servicer of a GPM Loan into which funds sufficient to cover the amount by
which payments of principal and interest on such GPM Loan assumed in
calculating payments due on the Certificates of the related Multi-Class
Series exceed scheduled payments on such GPM Loan.
"GPM Certificate" means a Certificate backed by GPM Loans.
"GPM Loan" means a mortgage loan providing for graduated payments, having
an amortization schedule (a) requiring the mortgagor's monthly installments
of principal and interest to increase at a predetermined rate annually for a
predetermined period of time after which the monthly installments become
fixed for the remainder of the mortgage term, (b) providing for deferred
payment of a portion of the interest due monthly during such period of time
and (c) providing for recoupment of the interest deferred through negative
amortization whereby the difference between the scheduled payment of interest
on the mortgage note and the amount of interest actually accrued is added
monthly to the outstanding principal balance of the mortgage note.
"Guaranteed Investment Contract" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund
or account, guaranteeing a minimum or a fixed rate of return on the
investment of moneys deposited therein.
"HUD" means the United States Department of Housing and Urban Development.
"Index" means the index applicable to any adjustments in the Mortgage
Rates of any ARMs included in the Primary Assets.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means, unless otherwise provided in a Supplement,
amounts paid by the insurer under any of the Insurance Policies covering any
Loan or Mortgaged Property.
"Interest Accrual Period" means the period specified in the related
Prospectus Supplement for a Multi-Class Series, during which interest accrues
on the Certificates or a Class of Certificates of such Series with respect to
any Distribution Date or Special Distribution Date.
"Interest Weighted Certificates" means a Class of Certificates entitled to
a greater percentage of interest on the Loans underlying or comprising the
Primary Assets for the Series than the percentage of principal on such Loans
to which it is entitled.
"IRS" means the Internal Revenue Service.
"L/C Bank" means the issuer of a letter of credit.
109
<PAGE>
"L/C Percentage" means the maximum liability of a L/C Bank under a letter
of credit, equal to the percentage specified in the related Prospectus
Supplement for a Series for which a letter of credit is issued of the initial
aggregate principal balance of the Loans in the related Trust Fund or one or
more Class of Certificates of the Series.
"Letter of credit" means an irrevocable letter of credit issued by the L/C
Bank to provide limited protection against certain losses relating to Loans,
as described in the related Prospectus Supplement for a Series.
"Lifetime Mortgage Rate Cap" means the lifetime limit on the Mortgage Rate
during the life of each ARM.
"Liquidation Proceeds" means amounts received by the Master Servicer or
Servicer in connection with the liquidation of a mortgage, net of liquidation
expenses.
"Loan" means a Mortgage Loan (including an interest therein) or a
Manufactured Home Loan (including an interest therein) that is deposited by
the Depositor into the Trust Fund for a Series.
"Loan-to-Value Ratio" means the ratio, expressed as a percentage, of the
principal amount of a Loan at the date of determination to the Appraised
Value.
"Manufactured Home" means a manufactured home within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as
"a structure, transportable in one or more sections, which in the traveling
mode, is eight body feet or more in width or forty body feet or more in
length, or, when erected on site, is three hundred twenty or more square
feet, and which is built on a permanent chassis and designed to be used as a
dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the
size requirements and with respect to which the manufacturer voluntarily
files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this]
chapter."
"Manufactured Home Loan" means a loan secured by a Manufactured Home.
"Master Servicer" means, with respect to a Series secured by Loans, the
Person, if any, designated in the related Prospectus Supplement to manage and
supervise the administration and servicing by the Servicers of the Loans
comprising or underlying the Primary Assets for that Series, or the
successors or assigns of such Person.
"Maximum Floating Rate" means, as to any Multi-Class Series, the per annum
interest rate cap specified for any Floating Rate Certificates of such Series
in the related Prospectus Supplement.
"Minimum Floating Rate" means, as to any Multi-Class Series, the per annum
interest rate floor specified for any Floating Rate Certificates of such
Series in the related Prospectus Supplement.
"Minimum Principal Distribution Amount" means, with respect to a
Distribution Date for a Multi-Class Series, the amount, if any, by which (a)
the outstanding principal balance of the Certificates of such Series (before
giving effect to any payment of principal on that Distribution Date) exceeds
(b) the aggregate Asset Value of the Primary Assets for the Series as of that
Distribution Date.
"Minimum Mortgage Rate" means the lifetime minimum Mortgage Rate during
the life of each ARM.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note.
"Mortgage Loan" means a mortgage loan (including an interest therein)
secured by Mortgaged Property including Cooperative Loans and Condominium
Loans.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgage Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rates borne by each Loan.
"Mortgaged Property" means the real property securing a Mortgage Loan.
"Mortgagor" means the obligor on a Mortgage Note.
110
<PAGE>
"Multifamily Property" means any property securing a Loan consisting of
multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units.
"Multi-Class Series" means a Series of Certificates that may include,
Floating Rate Certificates, Compound Interest Certificates and Planned
Amortization Certificates, and/or Subordinate and Senior Classes embodying a
subordination feature which protects the Senior Class or Classes in the event
of failure of timely payment of Primary Assets. With respect to Series of
Asset Trust Pass-Through Certificates other than Multi-Class Series, each
Class is designated to receive a particular portion of future principal or
interest cash flows on the Primary Assets, which designation does not change
over the term of the Certificates; provided, however, a Series may be so
characterized if the designation changes only on account of a subordination
feature in one or more Subordinate Classes which protects one or more Senior
Classes in the event of failure of timely payment of Primary Assets.
"1986 Act" means the Tax Reform Act of 1986.
"Negatively Amortizing ARMs" means ARMs which provide for limitations on
changes in the Scheduled Payment which can result in Scheduled Payments which
are greater or less than the amount necessary to amortize such ARM by its
stated maturity at the Mortgage Rate in effect in any particular month.
"Pass-Through Rate" means the rate of interest paid to the
Certificateholders in respect of the Primary Assets.
"PAC" ("Planned Amortization Certificates") means a Class of Certificates
of a Series on which no payment of principal will need to be made until the
earlier of the date specified in the related Prospectus Supplement or the
date on which the principal of all Certificates of the Series having an
earlier Final Scheduled Distribution Date have been paid in full.
"Percentage Interest" means, with respect to a Certificate, the proportion
(expressed as a percentage) of the percentage amounts of all of the
Certificates in the related Class represented by such Certificate, as
specified in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"PMBS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private
Mortgage-Backed Security is issued.
"PMBS Issuer" means, with respect to Private Mortgage-Backed Securities,
the depositor or seller/ servicer under a PMBS Agreement.
"PMBS Servicer" means the servicer of the Loans underlying a Private
Mortgage-Backed Security.
"PMBS Trustee" means the trustee designated under a PMBS Agreement.
"Participation Certificate" means a certificate evidencing a participation
interest in a pool of Loans.
"Prepayment Period" means, with respect to any Distribution Date, the
period specified in the related Prospectus Supplement for a Series.
"Primary Assets" means the Agency Certificates, Private Mortgage-Backed
Securities or Loans, as the case may be, which are included in the Trust Fund
for such Series. A Primary Asset refers to a specific Agency Certificate,
Private Mortgage-Backed Security or Loan, as the case may be.
"Principal Distribution Amount" means, unless specified otherwise in the
Prospectus Supplement for a Multi-Class Series, the sum of (a) the Accrual
Distribution Amount, if any, (b) the Minimum Principal Distribution Amount
and (c) the percentage, if any, of Excess Cash Flow specified in the related
Prospectus Supplement.
"Principal Weighted Certificates" means a Class of Certificates entitled
to a greater percentage of principal on the Loans underlying or comprising
the Primary Assets in the Trust Fund for the related Series than the
percentage of interest to which it is entitled.
111
<PAGE>
"Private Mortgage-Backed Security" means a mortgage participation or
pass-through certificate representing a fractional, undivided interest in
Loans or collateralized mortgage obligations secured by Loans.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Proposed Regulations" means the proposed Treasury regulations issued
under Sections 1271-1273 and 1275 of the Code.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgage
Properties are located duly authorized and licenced in such states to
transact the applicable insurance business and to write the insurance
provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the
Depositor to rate the Certificates upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC as described herein
under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Tax Status as a REMIC."
"Reinvestment Income" means any interest or other earnings on Funds or
Accounts that are part of the Trust Fund for a Series.
"REMIC" means a real estate mortgage investment conduit under Section 860D
of the Code.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to
serve as administrator of the Series.
"Remittance Date" means the calendar day or days of each month, as
specified in the related Prospectus Supplement for a Series, on which the
Servicer is required to withdraw funds from the related Servicer Account for
remittance to the Master Servicer.
"REO Property" means real property which secured a defaulted Loan which
has been acquired upon foreclosure, deed in lieu of foreclosure or
repossession.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the Trust Agreement.
"Residual Interest" means a residual interest in a REMIC as described
herein under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Tax Status as a
REMIC."
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement which is not sold
by the Depositor or seller of the Primary Asset and, therefore, is not
included in the Trust Fund for the related Series.
"Scheduled Payments" the scheduled payments of principal and interest to
be made by the borrower on a Mortgage Loan in accordance with the terms of
the related Mortgage Note.
"Senior Certificateholder" means the Holder of a Senior Certificate.
"Senior Certificates" means a Class of Certificates as to which the
Holders' rights to receive distributions of principal and interest are senior
to the rights of Holders of Subordinate Certificates, to the extent specified
in the related Prospectus Supplement.
"Servicer" means the entity which has primary liability for servicing
Loans if other than the Master Servicer.
"Servicer Account" means an account established by a Servicer (other than
the Master Servicer) who is directly servicing Loans, into which such
Servicer will be required to deposit all receipts received by it with respect
to the Primary Assets serviced by such Servicer.
"Single Family Property" means property securing a Loan consisting of
one-to four-family attached or detached residential housing, including
Cooperative Dwellings.
112
<PAGE>
"Special Distribution" means, with respect to a Multi-Class Series, a
distribution (other than a regular distribution on a Distribution Date) made
on account of particular circumstances specified herein.
"Special Distribution Date" means, with respect to a Multi-Class Series,
the date each month (other than any month in which a Distribution Date
occurs) on which Special Distributions may be made on Certificates of that
Series pursuant to the related Trust Agreement; such date shall be the same
day of the month as the day on which Distribution Dates for the Certificates
of that Series occurs.
"Subordinate Certificateholder" means a Holder of a Subordinate
Certificate.
"Subordinate Certificates" means a Class of Certificates as to which the
rights of Holders to receive distributions of principal and interest is
subordinated to the rights of Holders of Senior Certificates, to the extent
and under the circumstances specified in the related Prospectus Supplement.
"Subordinated Amount" means the amount, if any, specified in the related
Prospectus Supplement for a Series with a Class of Subordinated Certificates,
that the Subordinate Certificates are subordinated to the Senior Certificates
of the same Series.
"Subordination Reserve Fund" means the subordination reserve fund, if any,
for a Series with a Class of Subordinate Certificates, established pursuant
to the related Trust Agreement.
"Subsidy Account" means a custodial account established by the Master
Servicer or the Servicer for a Loan into which subsidy funds contributed by
the seller of the property securing the Loan (or by another party) necessary
to maintain the scheduled level of payments due on the Loan are deposited.
"Trust Agreement" means the trust agreement relating to a Series among the
Depositor, the Master Servicer, and the Trustee.
"Trustee" means the trustee under a Trust Agreement, and its successors.
"Trust Fund" means all property and assets held for the benefit of the
Certificateholders by the Trustee under the Trust Agreement for a Series of
Certificates including, without limitation, the Primary Assets (except any
Retained Interests), all amounts in the Certificate Account, Collection
Account or Servicer Accounts, distributions on the Primary Assets (net of
servicing fees), and reinvestment earnings on such net distributions and
amounts deposited in any reserve fund and the proceeds of any insurance
policies required to be maintained with respect to the Loans.
"UCC" means the Uniform Commercial Code.
"VA" means the Veterans Administration.
"VA Loans" means housing loans partially guaranteed by the VA.
113
<PAGE>
===================================== ========================================
No person has been authorized to give
any information or to make any
representation other than those
contained in this Prospectus
Supplement or the Prospectus and, if $182,123,198
given or made, such information or (Approximate)
representation must not be relied
upon. This Prospectus Supplement and
the Prospectus do not constitute an
offer to sell or a solicitation of an
offer to buy any securities other than
the securities offered hereby nor an
offer of such securities to any person
in any state or other jurisdiction in
which such offer would be unlawful.
The delivery of this Prospectus
Supplement and the Prospectus at any
time does not imply that information
herein is correct as of any time
subsequent to their respective dates.
---------- Structured Asset
TABLE OF CONTENTS
Prospectus Supplement Securities Corporation
Page
----
Summary.......................... S-5
Risk Factors..................... S-13
Description of the Certificates.. S-13 Mortgage Pass-Through Certificates
Description of the Mortgage Pool. S-29 Series 1996-1
Additional Information........... S-33
Norwest Mortgage, Inc............ S-34
Servicing of Mortgage Loans...... S-36
Trust Agreement.................. S-37
Yield, Prepayment and Weighted
Average Life.................... S-38
The Class A3 Certificate
Insurance Policy................ S-51
Certain Federal Income Tax
Considerations.................. S-55
Legal Investment Considerations.. S-56
Use of Proceeds.................. S-57
Underwriting..................... S-57
ERISA Considerations............. S-57 Norwest Mortgage, Inc.
Experts.......................... S-57 Originator and Servicer
Legal Matters.................... S-57
Ratings.......................... S-58
Glossary......................... S-59
Prospectus
Page
----
Prospectus Supplement............ 2 -------------------
Additional Information........... 2 PROSPECTUS SUPPLEMENT
Reports to Certificateholders.... 2 April 16, 1996
Summary of Terms of the -------------------
Certificates.................... 3
Risk Factors..................... 17
Description of the Certificates.. 19
Yield, Prepayment and Maturity
Considerations.................. 25
The Trust Funds.................. 29
Loan Underwriting Procedures and
Standards....................... 42
Servicing of Loans............... 45
Credit Support................... 55
Description of Mortgage and Other
Insurance....................... 58
The Trust Agreements............. 65
Certain Legal Aspects of Loans... 74
Certain Federal Income Tax
Considerations.................. 85 LEHMAN BROTHERS
State Tax Considerations......... 100 EDWARD JONES
ERISA Considerations............. 100
Legal Investment................. 102
Legal Matters.................... 103
The Depositor.................... 103
Use of Proceeds.................. 103
Plan of Distribution............. 104
Glossary......................... 105
====================================== =======================================
