<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 18, 1998)
$132,556,100 (APPROXIMATE)
STRUCTURED ASSET SECURITIES CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-6
---------------------------
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
MASTER SERVICER
---------------------------
The Structured Asset Securities Corporation Mortgage Pass-Through
Certificates, Series 1998-6 (the "Certificates") will evidence, in the
aggregate, the entire beneficial ownership interest in a trust fund (the "Trust
Fund") consisting primarily of a pool of fixed rate, fully amortizing and
balloon, conventional, first and second 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 Certificateholders. The
Mortgage Loans will be sold by Lehman Capital, A Division of Lehman Brothers
Holdings Inc. (the "Seller" or "Lehman Capital"), to the Depositor on the date
of the initial issuance of the Certificates. 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-12 AND IN THE
PROSPECTUS AT PAGE 19.
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.
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.
<TABLE>
<CAPTION>
Class Certificate Certificate
Class Principal Amount(1) Interest Rate CUSIP Number
----- ------------------- ------------- ------------
<S> <C> <C> <C>
A1 ........................................................ $112,737,000 6.50% 863572UA9
A2 ........................................................ 2,003,000 6.50% 863572UB7
AX1........................................................ (2) (2) 863572UG6
B1 ....................................................... 8,552,000 6.50% 863572UD3
B2 ....................................................... 5,701,000 6.50% 863572UE1
B3 ....................................................... 3,563,000 6.50% 863572UF8
R ....................................................... 100 6.50% 863572UC5
</TABLE>
- ---------------
(1) Approximate, as described herein.
(2) The Class AX1 Certificates will have no Certificate Principal Amount and
will accrue interest on a Notional Amount equal, as to any Distribution
Date, to the aggregate Scheduled Principal Balance of the Mortgage Loans as
of the first day of the related Interest Accrual Period (as defined herein).
The aggregate Notional Amount for the Class AX1 Certificates for the initial
Interest Accrual Period is expected to be approximately $142,534,738. The
Class AX1 Certificates will be interest-only Certificates; accordingly, they
will not be entitled to distributions of principal. Interest will accrue on
the applicable Notional Amount with respect to each Distribution Date at a
per annum rate equal to the weighted average (by Scheduled Principal Balance
of the Mortgage Loans) of the Net Mortgage Rates (as defined herein) of the
Mortgage Loans as of the first day of the calendar month immediately
preceding such Distribution Date minus 6.75%. The Certificate Interest Rate
for the Class AX1 Certificates for the first Interest Accrual Period will be
approximately 3.3074%.
The Class A1, Class A2, Class AX1, Class B1, Class B2, Class B3 and Class R
Certificates (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. Proceeds to the Depositor from the
sale of the Offered Certificates will be approximately 104.50% 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 Offered Certificates 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 Offered Certificates (other than the Class R Certificate)
will be delivered in book-entry form through the Same-Day Funds Settlement
System of The Depository Trust Company on or about July 7, 1998. It is expected
that the Class R Certificate will be delivered in certificated form at the
offices of Lehman Brothers Inc., New York, New York on or about July 7, 1998.
---------------------------
LEHMAN BROTHERS
July 3, 1998
<PAGE> 2
The Certificates will consist of the Class A1, Class A2, Class AX1, Class
AX2, Class B1, Class B2, Class B3, Class B4, Class B5, Class B6 and Class R
Certificates. The Class A1, Class A2, Class AX1 and Class R Certificates are
referred to herein as the "Senior Certificates;" the Class B1, Class B2 and
Class B3 Certificates are referred to herein as the "Offered Subordinate
Certificates;" and the Offered Subordinate Certificates and the Class B4, Class
B5 and Class B6 Certificates are referred to herein as the "Subordinate
Certificates." Only the Senior Certificates and the Offered Subordinate
Certificates are offered hereby.
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 25th day is not a Business Day, on the next succeeding
Business Day, commencing on July 27, 1998 (each, a "Distribution Date"). As more
fully described herein, interest on the Offered Certificates will be calculated
on the basis of the Certificate Principal Amounts or Notional Amounts thereof
and the applicable Certificate Interest Rates.
The Class B1, Class B2 and Class B3 Certificates are subordinate to the
Senior Certificates and to the Class AX2 Certificates to the extent described
herein. Investors should consider that, as a result of such subordination, the
yields to maturity on the Class B1, Class B2 and Class B3 Certificates will be
sensitive, in varying degrees (and will each be more sensitive than the yields
to maturity on the Senior Certificates), to delinquencies and losses on the
Mortgage Loans.
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") and,
as such, are not legal investments for certain entities to the extent provided
in SMMEA.
THE CLASS B1, CLASS B2 AND CLASS B3 CERTIFICATES MAY NOT BE TRANSFERRED TO
PLANS (AS DEFINED HEREIN), EXCEPT AS DESCRIBED HEREIN. THE CLASS R CERTIFICATE
(THE "RESIDUAL CERTIFICATE") MAY NOT BE TRANSFERRED TO PLANS 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.
An election will be made to treat all or a portion of the assets of the
Trust Fund as a "real estate mortgage investment conduit" ("REMIC"). The Offered
Certificates other than the Residual Certificate will be designated as "regular
interests" and the Residual Certificate will be designated as the sole class of
"residual interests" in the REMIC. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" herein and in the Prospectus.
THE YIELDS 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 DISCOUNT, A SLOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD, AND THAT IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A
PREMIUM, IN PARTICULAR THE CLASS AX1 CERTIFICATES, A FASTER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
THE ANTICIPATED YIELD, AND COULD, IN THE CASE OF THE CLASS AX1 CERTIFICATES,
RESULT IN THE FAILURE OF INVESTORS TO RECOVER FULLY THEIR INITIAL INVESTMENTS.
SEE "YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE" 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> 3
The information set forth herein under "THE MASTER SERVICER" has been
provided by Norwest Bank Minnesota, National Association ("Norwest" or the
"Master Servicer"), the information set forth herein under "THE SERVICERS" has
been provided by the respective Servicers (as defined herein), and the
information set forth herein under "THE SPECIAL SERVICER" has been provided by
Ocwen Federal Bank FSB ("Ocwen" or the "Special Servicer"). No representation is
made by the Depositor, the Underwriter or any of their respective affiliates as
to the accuracy or completeness of the information provided by the Master
Servicer, either of the Servicers or the Special Servicer.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by the
Underwriter, an affiliate of the Seller, the Depositor and Aurora (as defined
herein), in connection with market making transactions in the Offered
Certificates. The Underwriter may act as principal or agent in such
transactions. Such transactions will be at prices related to prevailing market
prices at the time of sale.
---------------------------
No person is authorized in connection with this offering to give any
information or to make any representation about the Seller, the Depositor, the
Master Servicer, the Servicers, the Special Servicer, 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 Depositor or the Underwriter. 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> 4
PROSPECTUS SUPPLEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF TERMS............................................ S- 5
RISK FACTORS................................................ S-12
Second Mortgages.......................................... S-12
Special Yield Considerations for the Class AX1
Certificates............................................ S-12
Underwriting Standards and Potential Delinquencies........ S-12
Geographical Concentration of the Mortgage Loans.......... S-12
Proposed Bankruptcy Legislation........................... S-13
Subordination............................................. S-13
Limited Liquidity......................................... S-13
DESCRIPTION OF THE CERTIFICATES............................. S-13
General................................................... S-13
Book-Entry Registration................................... S-14
Priority of Distributions................................. S-15
Distributions of Interest................................. S-17
Distributions of Principal................................ S-18
Available Distribution Amount............................. S-20
Example of Distributions.................................. S-21
The Residual Certificate.................................. S-22
Allocation of Realized Losses............................. S-22
Final Scheduled Distribution Date......................... S-23
Optional Termination of the Trust......................... S-23
The Trustee............................................... S-24
DESCRIPTION OF THE MORTGAGE POOL............................ S-24
General................................................... S-24
Underwriting Guidelines................................... S-30
ADDITIONAL INFORMATION...................................... S-32
THE MASTER SERVICER......................................... S-32
THE SERVICERS............................................... S-32
THE SPECIAL SERVICER........................................ S-34
SERVICING OF THE MORTGAGE LOANS............................. S-35
General................................................... S-35
Special Servicing of Delinquent Mortgage Loans............ 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
Insurance Coverage........................................ S-38
Evidence as to Compliance................................. S-38
Certain Rights Related to Foreclosure and the Special
Servicer................................................ S-38
TRUST AGREEMENT............................................. S-38
General................................................... S-38
Assignment of Mortgage Loans.............................. S-38
Purchase of Certain Defaulted Mortgage Loans.............. S-39
Voting Rights............................................. S-40
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE................. S-40
General................................................... S-40
Sensitivity of the Class AX1 Certificates................. S-41
Subordination of the Offered Subordinate Certificates..... S-42
Weighted Average Life..................................... S-42
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... S-45
General................................................... S-45
Residual Certificate...................................... S-45
LEGAL INVESTMENT CONSIDERATIONS............................. S-47
USE OF PROCEEDS............................................. S-47
UNDERWRITING................................................ S-47
ERISA CONSIDERATIONS........................................ S-48
LEGAL MATTERS............................................... S-48
RATINGS..................................................... S-48
GLOSSARY.................................................... S-50
</TABLE>
S-4
<PAGE> 5
SUMMARY OF TERMS
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 herein
have the respective meanings assigned to them in the Prospectus. Wherever
reference is made herein to a percentage of some or all of the Mortgage Loans,
such percentage is determined (unless otherwise specified) on the basis of the
aggregate Scheduled Principal Balance of such Mortgage Loans as of the Cut-off
Date.
THE OFFERED CERTIFICATES... Mortgage Pass-Through Certificates, Series 1998-6,
in the Classes indicated on the cover page
hereof. The Offered Certificates will be issued
pursuant to a Trust Agreement, to be dated as of
June 1, 1998, among the Depositor, the Trustee
and the Master Servicer (the "Trust Agreement").
See "DESCRIPTION OF THE CERTIFICATES" herein.
DEPOSITOR.................. Structured Asset Securities Corporation. 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.
MASTER SERVICER AND
SERVICERS.................. The Mortgage Loans will be master serviced by
Norwest Bank Minnesota, National Association,
which will not be ultimately responsible for the
performance of the servicing activities by the
Servicers or the Special Servicer except as
described under "SERVICING OF THE MORTGAGE
LOANS -- Prepayment Interest Shortfalls" and
"-- Advances" herein. The Mortgage Loans will
initially be serviced by Aurora Loan Services
Inc. and Option One Mortgage Corporation (each, a
"Servicer") as described herein. In addition,
special servicing of certain delinquent Mortgage
Loans, and ongoing servicing of such loans to the
extent not liquidated, will initially be
performed by Ocwen Federal Bank FSB. The
Servicers and the Special Servicer are referred
to together herein, unless the context requires
otherwise, as the "Servicers."
The Master Servicer and the Servicers will each
receive a monthly fee, in addition to other
compensation as described herein. The Special
Servicer will also receive certain additional
compensation as provided in the Trust Agreement.
See "THE MASTER SERVICER," "THE SERVICERS," "THE
SPECIAL SERVICER" and "SERVICING OF THE MORTGAGE
LOANS" herein.
TRUSTEE.................... First Union National Bank, a national banking
association with its main office in Charlotte,
North Carolina. See "DESCRIPTION OF THE
CERTIFICATES -- The Trustee" herein.
CUT-OFF DATE............... June 1, 1998.
CLOSING DATE............... On or about July 7, 1998.
DISTRIBUTION DATE.......... The distribution date will be the 25th day of each
month or, if such 25th day is not a Business Day,
then on the next succeeding Business Day,
commencing on July 27, 1998.
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
S-5
<PAGE> 6
month in which such Distribution Date occurs
(except that the Record Date with respect to the
first Distribution Date will be the Closing
Date).
DISTRIBUTIONS OF INTEREST
AND PRINCIPAL.............. Interest accrued during the calendar month (each,
an "Interest Accrual Period") preceding the month
in which the related Distribution Date occurs on
each Class of Offered Certificates at the
applicable per annum rate set forth or described
on the cover page hereof will be distributable
(except in the case of the Class A2 Certificates)
on each Distribution Date. Interest on the Class
A2 Certificates will not be distributable thereon
(except after the Credit Support Depletion Date
(as defined herein)) but will instead be added to
the Class Certificate Principal Amount thereof
and an equal amount will be distributable, as
principal, as described herein. See "DESCRIPTION
OF THE CERTIFICATES -- Distributions of Interest"
herein.
The approximate initial Class Certificate Principal
Amount or aggregate Notional Amount of each Class
of Offered Certificates is set forth or described
on the cover page hereof.
On each Distribution Date, an amount equal to the
sum of the Principal Distribution Amount and the
Accrual Amount (each as defined herein) for such
Distribution Date will be applied, as more fully
described herein, to make distributions of
principal on the Offered Certificates (other than
the Class AX1 Certificates). See "DESCRIPTION OF
THE CERTIFICATES -- Distributions of Principal"
herein.
ALLOCATION OF PRINCIPAL
PREPAYMENTS.............. Principal prepayments on the Mortgage Loans will be
allocated to the Senior Certificates (other than
the Class AX1 Certificates), as a group, during
the first five years following the Closing Date
(except as described herein). This allocation
will have the effect of accelerating the
amortization of the Senior Certificates, as a
group, and slowing the amortization of the
Subordinate Certificates. See "DESCRIPTION OF THE
CERTIFICATES" herein.
THE MORTGAGE POOL.......... The Mortgage Pool will consist of approximately
2,026 conventional, fixed rate, fully amortizing
and balloon, first and second lien residential
Mortgage Loans with original terms to maturity
from the first due date of the scheduled monthly
payment (a "Scheduled Payment") of not more than
30 years, having an aggregate Scheduled Principal
Balance as of the Cut-off Date of approximately
$142,534,738. The Mortgage Loans were originated
or acquired by the Originators described herein
generally in accordance with the Underwriting
Guidelines described herein. Because such
Underwriting Guidelines do not conform to FNMA or
FHLMC guidelines, the Mortgage Loans are likely
to experience higher rates of delinquency,
foreclosure and bankruptcy than if they had been
underwritten to a higher standard.
Approximately 73.15% of the Mortgage Loans provide
for payment by the mortgagor of a prepayment
premium in connection with certain full or
partial prepayments of principal. Generally, each
such Mortgage Loan provides for payment of a
prepayment premium in connection with certain
partial prepayments and prepayments in full made
within the period of time specified in the
related Mortgage Note,
S-6
<PAGE> 7
ranging from one to five years from the date of
origination of such Mortgage Loan, as described
herein. The amount of the applicable prepayment
premium, to the extent permitted under applicable
state law, is as provided in the related Mortgage
Note; generally, such amount is equal to six
months' interest on any amounts prepaid in excess
of 20% of the original principal balance of the
related Mortgage Loan during any 12 month period.
Each of the Mortgage Loans is secured by a first or
second lien on a one-to four-family residential
real property (each, a "Mortgaged Property") and
bears interest at a fixed rate (each, a "Mortgage
Rate"). See "DESCRIPTION OF THE MORTGAGE POOL"
herein.
ADVANCES................... The Master Servicer is required to make advances
("Advances") in respect of Scheduled Payments
(other than Balloon Payments) on the Mortgage
Loans, net of the Master Servicing Fee and the
applicable Servicing Fee (or Basic Fee) (each as
defined herein), if the related Servicer fails in
its obligation to do so, subject to the
limitations described herein. The Trustee will be
obligated to make any such Advance if the Master
Servicer fails in its obligation to do so, to the
extent provided in the Trust Agreement. See
"SERVICING OF THE MORTGAGE LOANS -- Advances"
herein.
SUBORDINATION AND
ALLOCATION OF LOSSES....... The Class B1, Class B2, Class B3, Class B4, Class
B5 and Class B6 Certificates are subordinate to
the Senior Certificates (as defined herein) and
to each Class of Certificates having a higher
priority (i.e., the Class B6 Certificates are
subordinate to the Class B5 Certificates, the
Class B5 Certificates are subordinate to the
Class B4 Certificates, and so forth) to the
extent described herein. The initial aggregate
Certificate Principal Amount of the Class B4,
Class B5 and Class B6 Certificates (which are not
offered hereby) will equal approximately 7.00% of
the initial aggregate Certificate Principal
Amount of all of the Certificates and
approximately 35.90% of the initial aggregate
Certificate Principal Amount of all of the
Subordinate Certificates.
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 in respect of such Classes and (ii) the
allocation of Realized Losses (as defined herein)
on the Mortgage Loans in the following manner.
Subject to the limitations described below, the
principal portion of Realized Losses on the
Mortgage Loans will be allocated first, to the
Class B6, Class B5, Class B4, Class B3, Class B2
and Class B1 Certificates, in that order, until
the Class Certificate Principal Amounts thereof
have been reduced to zero, before being allocated
to the Senior Certificates, pro rata in
proportion to their respective outstanding Class
Certificate Principal Amounts (or Notional
Amount, in the case of the Class AX1
Certificates). The protection provided to the
Senior Certificates by the subordination of the
Classes of the Subordinate
S-7
<PAGE> 8
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" herein.
FINAL SCHEDULED
DISTRIBUTION DATE.......... Scheduled distributions on the Mortgage Loans,
assuming no defaults or losses that are not
covered by the limited credit support described
herein, will be sufficient to make timely
distributions of interest and reduce the
Certificate Principal Amounts of the Offered
Certificates to zero not later than July 25,
2028. The actual final Distribution Date for the
Offered Certificates may be earlier or later, and
could be substantially earlier, than the 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 10% 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.............. The Offered Certificates, except for the Residual
Certificate (collectively, the "Book-Entry
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,
in the case of the Class A1, Class A2, Class B1,
Class B2 and Class B3 Certificates, and in
minimum percentage interests of 10%, in the case
of the Class AX1 Certificates. The Residual
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 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
S-8
<PAGE> 9
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. However, the majority of the Mortgage Loans
are subject to prepayment premiums to the extent
described herein. 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 "YIELD, PREPAYMENT AND WEIGHTED
AVERAGE LIFE" herein.
Approximately 73.15% of the Mortgage Loans are
subject to prepayment premiums during intervals
ranging from one to five years following
origination, as described under "THE MORTGAGE
POOL" herein. Such prepayment premiums may have
the effect of reducing the amount or the
likelihood of prepayment of such Mortgage Loans
during such intervals. See "DESCRIPTION OF THE
MORTGAGE POOL -- General" herein.
Principal prepayments on the Mortgage Loans will be
allocated to the Senior Certificates (other than
the Class AX1 Certificates), as a group, during
the first five years following the Closing Date
(except as otherwise described herein). This
allocation will have the effect of accelerating
the amortization of such Senior Certificates as a
group, and slowing the amortization of the
Subordinate Certificates. 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 of such Certificates. The
yields to maturity on the Offered Certificates
will also depend on other factors, such as the
applicable Certificate Interest Rate and the
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 related Mortgage Loans.
In general, in the case of any Offered Certificates
purchased at a premium, if principal payments on
the related Mortgage Loans occur at a rate faster
than anticipated at the time of purchase, the
investor's
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actual yield to maturity may be lower than that
originally anticipated, and, in the case of the
Class AX1 Certificates, investors could fail to
recover their initial investments. Conversely, in
the case of any Offered Certificates purchased at
a discount, if principal payments on the related
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.
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 as a REMIC. Each Class of
Offered Certificates other than the Residual
Certificate will be designated as a Class of
"regular interests" and the Residual Certificate
will be designated as the sole class of "residual
interest" in the REMIC.
The holders of the Offered Certificates (other than
the Residual Certificate) must include interest
income derived therefrom in income as it accrues,
regardless of such holders' usual methods of
accounting. The Class A2 and Class AX1
Certificates will be, and the other Classes of
Offered Certificates may be, issued with original
issue discount for federal income tax purposes.
Original issue discount must be included in
income as it accrues on a constant yield method,
regardless of whether a holder receives
concurrently the cash attributable to such
original issue discount.
A 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 a Residual
Certificateholder in many or all taxable years.
As the residual interest in the REMIC, a Residual
Certificate will be taxable as described in the
Prospectus under "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Holders of Residual
Interest Certificates."
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.... The 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, the 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 the 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
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FEDERAL INCOME TAX CONSIDERATIONS" herein and in
the Prospectus.
RATINGS.................... It is a condition to the issuance of the Senior
Certificates (other than the Class AX1
Certificates) that they be rated "AAA" by
Standard & Poor's Rating Services, a division of
The McGraw-Hill Companies, Inc. ("S&P" or the
"Rating Agency"). It is a condition to the
issuance of the Class AX1 Certificates that they
be rated "AAAr" by S&P. It is a condition to the
issuance of the Class B1 Certificates that they
be rated "AA" by S&P; it is a condition to the
issuance of the Class B2 Certificates that they
be rated "A" by S&P; it is a condition to the
issuance of the Class B3 Certificates that they
be rated "BBB" by S&P. 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 OFFERED 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 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA and, as
such, are not legal investments for certain
entities to the extent provided in SMMEA.
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 constitute a legal
investment or are 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 in the Prospectus.
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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.
SECOND MORTGAGES
It is expected that approximately 8.68% of the Mortgage Loans (by Scheduled
Principal Balance as of the Cut-off Date) will be secured by mortgages that are
junior to one other mortgage held by another lender or investor. The rights of
the Trustee as mortgagee under a junior mortgage are subordinate to those of the
mortgagee under the senior mortgage. If the senior mortgagee causes the related
Mortgaged Property to be sold upon default under the senior mortgage, the
Trustee's interest under the related junior mortgage may be extinguished and the
Trustee will receive funds only to the extent the sales proceeds exceed the
amounts due in respect of the senior mortgage. In most states no notice of
default under the senior mortgage is required to be given by a senior mortgagee
to a junior mortgagee, and such notices are seldom given to the junior
mortgagee. In several states, no notice is required to be given by the senior
mortgagee to the junior mortgagee in the case of foreclosure or sale of property
subject to a junior mortgage. See "CERTAIN LEGAL ASPECTS OF LOANS -- Junior
Mortgages; Rights of Senior Mortgages" in the Prospectus.
SPECIAL YIELD CONSIDERATIONS FOR THE CLASS AX1 CERTIFICATES
The yield to maturity of the Class AX1 Certificates will be extremely
sensitive to the rate and timing of principal prepayments on the Mortgage Loans.
Investors in the Class AX1 Certificates should carefully consider the risk that
a faster than anticipated rate of prepayments on the Mortgage Loans could result
in actual yields that are lower than the anticipated yields, and could result in
the failure of such investors to fully recover their initial investments.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Originators' underwriting standards are primarily intended to assess
the value of a mortgaged property and to evaluate the adequacy of such property
as collateral for a mortgage loan. The Originators provide loans primarily to
borrowers who do not qualify for loans conforming to FNMA and FHLMC guidelines
but who have equity in their property. Although the Originators' primary
consideration in underwriting a mortgage loan is the value of the related
mortgaged property, the Originators also consider, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property.
As a result of application of the Originators' underwriting standards, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in accordance with higher standards.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated under stricter
guidelines. No assurance can be given that the values of the Mortgaged
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans.
GEOGRAPHICAL CONCENTRATION OF THE MORTGAGE LOANS
Approximately 30.29% of the Mortgage Loans 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 such state.
In recent periods, certain regions of the United States 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
hazards, such as wildfires and mudslides, and certain types of special hazards
not covered by insurance, such as earthquakes, than properties located in other
parts of the country.
Natural disasters affecting regions of the United States from time to time
may result in prepayments of Mortgage Loans. In particular, many areas of
Florida are currently being affected by wildfires, some of which
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are continuing to spread as of the date of this Prospectus Supplement. Mortgaged
Properties securing approximately 5.82% of the Mortgage Loans are located in
Florida, and there can be no assurance that some of such properties have not
been, or will not be, damaged or destroyed by such fires. See "YIELD, PREPAYMENT
AND WEIGHTED AVERAGE LIFE -- General."
For additional information regarding the geographic distribution of the
Mortgage Loans, see "DESCRIPTION OF THE MORTGAGE POOL" herein.
PROPOSED BANKRUPTCY LEGISLATION
Bankruptcy reform legislation being considered by the U.S. Senate would
amend Title 11 of the United States Code (the "Bankruptcy Code") (such
amendment, the "TILA Amendment") to authorize bankruptcy court judges to
disallow claims based on secured debt if the creditor failed to comply with
certain provisions of the federal Truth in Lending Act. As most recently
proposed, such provision would apply retroactively to secured debt incurred by a
debtor prior to the date of effectiveness of such legislation, including the
Mortgage Loans. The U.S. House of Representatives bill does not include a
comparable provision as of the date hereof. If the TILA Amendment were to become
law, a violation of the Truth in Lending Act with respect to a Mortgage Loan
could result in a total loss with respect to such loan in a bankruptcy
proceeding. Any such violation of law would be a breach of representation and
warranty of the Depositor, and the Depositor would be obligated to repurchase
such Mortgage Loan or substitute another mortgage loan therefor as described
herein.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans have been considered by Congress, and
more such proposed legislation may be considered. No assurance can be given that
any particular proposal will or will not be enacted into law, or that any
provision so enacted will not differ materially from the proposals described
above.
SUBORDINATION
Credit enhancement for the Offered Certificates is provided by the
subordination of Certificates having a lower priority of distribution. The
yields to maturity of the Offered Subordinate Certificates will be more
sensitive, in varying degrees, to delinquencies and losses on the Mortgage Loans
than the yields of Classes of Offered Certificates having a relatively higher
priority of distribution. See "YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE"
herein. Proceeds of liquidated Mortgage Loans available for distribution to
Certificateholders will be reduced by the Special Servicer Incentive Fee, as
described under "SERVICING OF THE MORTGAGE LOANS -- Servicing Compensation and
Payment of Expenses" 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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1998-6 Mortgage Pass-Through Certificates will consist of the
following Classes: Class A1, Class A2, Class AX1, Class AX2, Class B1, Class B2,
Class B3, Class B4, Class B5, Class B6 and Class R. Only the Offered
Certificates are offered hereby.
Each Class of Offered Certificates will have the respective approximate
initial aggregate Certificate Principal Amount (a "Class Certificate Principal
Amount") set forth or described on the cover page hereof. The approximate
initial aggregate Certificate Principal Amount of each of the Class B4, Class B5
and Class B6 Certificates (which are not offered hereby) is $4,917,000,
$2,422,000 and $2,639,638, respectively, or, in aggregate, 35.90% of the
aggregate Certificate Principal Amount of all of the Subordinate Certificates.
The aggregate Certificate Principal Amount of the Certificates, and the initial
Class Certificate Principal Amount of each Class of Offered Certificates, may be
increased or decreased by up to five percent to the
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extent that the Cut-off Date Balance of the Mortgage Loans is increased or
decreased as described under "DESCRIPTION OF THE MORTGAGE POOL" herein.
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 the Certificate Account, (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure and (iv) any
applicable insurance policies and all proceeds thereof.
Distributions on the Offered Certificates will be made on each Distribution
Date, commencing in July 1998, to Certificateholders of record on the applicable
Record Date. The "Record Date" for each Distribution Date will be the last
Business Day of the month immediately preceding the month in which the
Distribution Date occurs (or in the case of the initial Record Date, the Closing
Date). A "Business Day" is generally any day other than a Saturday or Sunday or
a day on which banks in New York, North Carolina or Maryland (or, as to each
Servicer, such other states as are specified in the related Servicing Agreement)
are closed.
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.
The Offered 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 (as defined herein). The Class A1, Class
A2, Class B1, Class B2 and Class B3 Certificates will be issued in minimum
denominations of $100,000 and integral multiples of $1 in excess thereof. The
Class AX1 Certificates will be issued in minimum percentage interests of 10%.
The Class R Certificate will be issued as a single certificate and maintained in
definitive, fully registered form, representing the entire Percentage Interest
in such Class.
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. 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 -- 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 Book-Entry 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 & Co., as the registered holder of the
Book-Entry Certificates, for distribution to Beneficial Owners by DTC in
accordance with DTC procedures.
BOOK-ENTRY REGISTRATION
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
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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 with respect to 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 with respect to
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
"DESCRIPTION OF THE CERTIFICATES -- Book-Entry Registration." Upon the
occurrence of an event described in the penultimate paragraph thereunder, the
Trustee is required to direct DTC 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 herein), in the following order of priority:
(i) to payment of the Trustee Fee (as defined herein) for such
Distribution Date to the Trustee;
(ii) to payment of Accrued Certificate Interest on each Class of
Senior Certificates and the Class AX2 Certificates (in each case as reduced
by any Net Prepayment Interest Shortfalls allocated to such Class of
Certificates on such Distribution Date) from the Available Distribution
Amount for such Distribution Date, pro rata in proportion to Accrued
Certificate Interest (as so reduced) on each such Class; provided that,
through the Credit Support Depletion Date, such amount otherwise
distributable to the Class A2 Certificates will instead be added to the
Class Certificate Principal Amount thereof and will be allocated as
provided under "-- Allocation of Accrual Amount" below;
(iii) to payment of any outstanding Interest Shortfalls (as defined
herein) on each Class of Senior Certificates and the Class AX2 Certificates
from the Available Distribution Amount for such Distribution Date, pro rata
in proportion to any outstanding Interest Shortfalls; provided that,
through the Credit Support Depletion Date, any Interest Shortfalls for the
Class A2 Certificates shall be applied as provided under "Allocation of
Accrual Amount" below;
(iv) to the payment of principal on the Senior Certificates (other
than the Class AX1 Certificates), in reduction of their respective Class
Certificate Principal Amounts, in an amount up to the Senior Principal
Distribution Amount for such Distribution Date, in the following order of
priority:
(1) to the Class A1 Certificates, until the Class Certificate
Principal Amount thereof has been reduced to zero;
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(2) to the Class A2 Certificates, until the Class Certificate
Principal Amount thereof has been reduced to zero; and
(3) to the Class R Certificate, until the Class Certificate
Principal Amount thereof has been reduced to zero; and
(v) to the Subordinate Certificates, to the extent of the remaining
Available Distribution Amount for such Distribution Date, to payment to the
Class B1 Certificates, the Class B2 Certificates, the Class B3
Certificates, the Class B4 Certificates, the Class B5 Certificates and the
Class B6 Certificates, in that order, of the following amounts, in the
following order of priority: (x) Accrued Certificate Interest thereon (as
reduced by any Net Prepayment Interest Shortfalls allocated to such Class
on such Distribution Date), (y) any outstanding Interest Shortfalls
previously allocated to such Class, and (z) such Class's Subordinate Class
Percentage of the Subordinate Principal Distribution Amount for such
Distribution Date, except as provided below, in reduction of the Class
Certificate Principal Amount thereof.
With respect to each Class of Subordinate Certificates other than the Class
B6 Certificates, if on any Distribution Date the Credit Support Percentage for
such Class is less than the Original Credit Support Percentage for such Class,
then no distributions in respect of clauses (ii) and (iii) of the definition of
Subordinate Principal Distribution Amount will be made to any Class 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 Class Certificate Principal Amounts. The "Credit Support Percentage"
for a Class of Subordinate Certificates for any Distribution Date is equal to
the sum of the Class Percentages (as defined herein) of each Class of lower
priority (without giving effect to distributions on such date). The "Original
Credit Support Percentage" for a Class of Subordinate Certificates is the Credit
Support Percentage for such Class of Subordinate Certificates on the Closing
Date.
On and after the Distribution Date on which the aggregate Certificate
Principal Amounts of the Subordinate Certificates has been reduced to zero (the
"Credit Support Depletion Date"), the Available Distribution Amount remaining
after distribution of interest to the Senior Certificates on such date will be
distributed among the Senior Certificates remaining outstanding, 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.
Allocation of Accrual Amount. On each Distribution Date through the Credit
Support Depletion Date, before distribution of any amount pursuant to priority
(iv) above, an amount equal to the Accrual Amount (as defined herein) for such
date will be distributed in the following order of priority:
first, to the Class A1 Certificates, in reduction of the Class
Certificate Principal Amount thereof, until the Class Certificate Principal
Amount thereof has been reduced to zero; and
second, to the Class A2 Certificates, in reduction of the Class
Certificate Principal Amount thereof, until the Class Certificate Principal
Amount thereof has been reduced to zero.
On each Distribution Date after the Credit Support Depletion Date, Accrued
Certificate Interest allocable to the Class A2 Certificates pursuant to
priorities (ii) and (iii) above will be distributable as interest thereon and
will not be added to the Class Certificate Principal Amount thereof.
Allocation of Prepayment Penalty Amount. In addition to the distributions
of interest and principal from Available Distribution Amounts made to the Class
R Certificateholder as described above, on each Distribution Date the Class R
Certificateholder shall also be entitled to receive all Prepayment Penalty
Amounts (as defined herein) collected by the Servicers during the related Due
Period irrespective of whether the Certificate Principal Amount of the Class R
Certificate has been reduced to zero. For this purpose, Prepayment Penalty
Amounts include any premium or charge paid by the obligors under the Mortgage
Notes due to full or partial prepayments of principal on the Mortgage Loans. See
"DESCRIPTION OF THE MORTGAGE POOL -- General" for a description of the terms and
conditions under which such Prepayment Penalty Amounts are due.
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DISTRIBUTIONS OF INTEREST
The amount of interest distributable (or added to principal, in the case of
the Class A2 Certificates) on each Distribution Date in respect of each Class of
Certificates will equal the Accrued Certificate Interest (as defined below) for
such Class on such Distribution Date, as reduced by any Net Prepayment Interest
Shortfalls allocable to such Class for such date. "Accrued Certificate Interest"
for each Class of Certificates on any Distribution Date will equal the amount of
interest accrued during the related Interest Accrual Period (as defined below)
on the Class Certificate Principal Amount or aggregate Notional Amount thereof
immediately prior to such Distribution Date at the applicable Certificate
Interest Rate, as reduced by such Class's pro rata share of (i) the interest
portion of any Excess Losses and, after the related Credit Support Depletion
Date, any Realized Losses, in each case for such Distribution Date and (ii) with
respect to any Mortgage Loan as to which there has been a reduction in the
amount of interest collectible as a result of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act," and any such
reduction, a "Relief Act Reduction"), the amount of any such reduction. See
"CERTAIN LEGAL ASPECTS OF LOANS -- Soldiers' and Sailors' Civil Relief Act of
1940" in the Prospectus. Interest will accrue on the Certificates on the basis
of a 360-day year consisting of twelve 30-day months. Such interest will be
distributed (or added to principal), except to the extent described below, from
the Available Distribution Amount on each Distribution Date. Accrued Certificate
Interest not distributed (or added to principal) on the Distribution Date
related to the Interest Accrual Period in which it accrued, other than any Net
Prepayment Interest Shortfalls, will be an "Interest Shortfall." Interest will
not accrue on Interest Shortfalls.
The "Certificate Interest Rate" for each Class of Offered Certificates will
be the applicable per annum rate set forth or described on the cover page
hereof. The "Net Mortgage Rate" for any Mortgage Loan at any time equals the
Mortgage Rate thereof minus the sum of the Trustee Fee Rate, the applicable
Servicing Fee Rate (or Basic Fee Rate) and the Master Servicing Fee Rate (each
as defined herein). The "Certificate Principal Amount" of any Certificate other
than a Class AX1 or Class AX2 Certificate as of any Distribution Date will equal
such Certificate Principal Amount as of the Closing Date as reduced by all
amounts previously distributed on such Certificate in respect of principal and
the principal portion of any Realized Losses previously allocated to such
Certificate. The "Interest Accrual Period" for each Class of Certificates will
be the calendar month immediately preceding the month in which the related
Distribution Date occurs.
The aggregate Notional Amount for the Class AX2 Certificates for any
Interest Accrual Period will be the aggregate Scheduled Principal Balance of all
the Mortgage Loans as of the first day of such Interest Accrual Period. The
Certificate Interest Rate for the Class AX2 Certificates as to any Distribution
Date will be 0.25% per annum. Interest distributable on each Distribution Date
in respect of the Class AX2 Certificates will be deposited into the Reserve Fund
(as described herein under "SERVICING OF THE MORTGAGE LOANS -- Servicing
Compensation and Payment of Expenses") and will be applied to the payment of any
due and unpaid Special Servicer Fee (as defined herein) with respect to such
Distribution Date or any previous Distribution Date prior to any distributions
of interest being made to the Class AX2 holder.
On each Distribution Date through the Credit Support Depletion Date,
Accrued Certificate Interest on the Class A2 Certificates, as reduced by any Net
Prepayment Interest Shortfalls allocated to such Class, plus any amount
allocable to such Class in respect of Interest Shortfalls, will not be
distributable thereon but will instead be added to the Class Certificate
Principal Amount thereof, and an equal amount (the "Accrual Amount") will be
distributable, as principal, as described under "-- Priority of
Distributions -- Allocation of Accrual Amount" herein.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only 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 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 following the applicable prepayment
period. 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 distributions of interest on the
related Certificates could result. The difference between one month's interest
at the Mortgage Rate, as reduced by the Master Servicing Fee Rate and applicable
Servicing Fee Rate (or Basic Fee Rate, if applicable), on a Mortgage Loan as to
which a voluntary prepayment has been
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<PAGE> 18
made and the amount of interest actually received in connection with such
prepayment is a "Prepayment Interest Shortfall." With respect to prepayments in
full or in part, the related Servicer is obligated to reduce the aggregate of
its Servicing Fees (as defined herein) for the related Distribution Date to fund
any resulting Prepayment Interest Shortfalls. The Master Servicer is obligated
to reduce the aggregate of its Aggregate Master Servicing Compensation (as
defined herein) for the related Distribution Date to the extent necessary to
fund any Prepayment Interest Shortfalls required to be paid but not paid by the
Servicers. See "SERVICING OF THE MORTGAGE LOANS -- Prepayment Interest
Shortfall" herein. Any Prepayment Interest Shortfalls not funded by the
Servicers or the Master 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.
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 and the Accrual 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 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 product of (a) the Senior Percentage and (b) the principal
portion of each Scheduled Payment (without giving effect to any Debt
Service Reduction occurring prior to the applicable Bankruptcy Coverage
Termination Date) on a Mortgage Loan due during the related Due Period;
(ii) the product of (a) the Senior Prepayment 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 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 related net Liquidation Proceeds allocable to
principal and (b) the product of the Senior Prepayment Percentage for such
date and the remaining Scheduled Principal Balance of such 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.
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is generally equal to the 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 Class 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 Subordinate
Certificates for each Distribution Date will be equal to the percentage obtained
by dividing the Class Certificate Principal Amount of such Class immediately
prior to such Distribution Date by the aggregate Certificate Principal Amount of
all Subordinate Certificates immediately prior to such date.
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<PAGE> 19
The "Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction, the numerator of which is the aggregate Certificate
Principal Amount of the Senior Certificates immediately prior to such date and
the denominator of which is the aggregate Certificate Principal Amount of all
Classes of 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, as a group, 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; 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 subsequent Distribution Date,
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
specified above will be effective if, as of such Distribution Date as to which
any such decrease applies, (i) the average outstanding principal balance on such
Distribution Date and for the preceding five Distribution Dates of all Mortgage
Loans that were 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) is greater than
or equal to 50% of the aggregate Certificate Principal Amount of the Subordinate
Certificates immediately prior to such Distribution Date or (ii) cumulative
Realized Losses with respect to the Mortgage Loans exceed (a) with respect to
the Distribution Date on the fifth anniversary of the first Distribution Date,
30% as of the Closing Date (the "Original Subordinate Principal Balance"), (b)
with respect to the Distribution Date on the sixth anniversary of the first
Distribution Date, 35% of the Original Subordinate Principal Balance, (c) with
respect to the Distribution Date on the seventh anniversary of the first
Distribution Date, 40% of the Original Subordinate Principal Balance, (d) with
respect to the Distribution Date on the eighth anniversary of the first
Distribution Date, 45% of the Original Subordinate Principal Balance and (e)
with respect to the Distribution Date on the ninth anniversary of the first
Distribution Date, 50% of the Original Subordinate Principal Balance.
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 product of (a) the Subordinate Percentage and (b) the
principal portion of each Scheduled Payment (without giving effect to any
Debt Service Reduction occurring prior to the Bankruptcy Coverage
Termination Date) on a Mortgage Loan due during the related Due Period;
(ii) the product of (a) the Subordinate Prepayment 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
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<PAGE> 20
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 with respect to 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 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.
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 "Prepayment Period" is as defined in the
applicable Servicing Agreement. The "Servicer Remittance Date" is, as to each
Servicing Agreement, the 18th day (or if such 18th day is not a business day (as
defined in the related Servicing Agreement), the next succeeding business day)
of the month in which the related Distribution Date occurs. The "Deposit Date"
is the Business Day immediately preceding the related Distribution Date.
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 Master Servicer from
the Servicers on the applicable Servicer Remittance Dates immediately
preceding such Distribution Date 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 prior to the related Servicer
Remittance Date or advanced by the Master Servicer or any Servicer (or the
Trustee), (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 such Mortgage Loans ("Principal Prepayments"), together with
accrued interest thereon, if any, identified as having been received on the
Mortgage Loans during the applicable Prepayment Period, plus any amounts
paid by the Master Servicer or any Servicer in respect of Prepayment
Interest Shortfalls, in each case for such Distribution Date, (iii) the
proceeds of any repurchase of a Mortgage Loan required to be repurchased by
the Seller, the Depositor or any other party as a result of a breach of a
representation or warranty or document defect, 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 on the
Mortgage Loans collected but due on a date subsequent to the related Due
Period;
(b) all Principal Prepayments on the Mortgage Loans received or
identified after the applicable Prepayment Period (together with any
interest payments, if any, received with such prepayments to the extent
that they represent (in accordance with the applicable Servicer's usual
application of funds) the payment of interest accrued on the Mortgage
Loans for the period subsequent to the applicable Prepayment Period);
(c) Liquidation Proceeds and Insurance Proceeds received after the
applicable Prepayment Period with respect to the Mortgage Loans;
(d) all fees and other amounts due or reimbursable to the Master
Servicer pursuant to the Trust Agreement or to any Servicer pursuant to
the Servicing Agreement; and
(e) any Prepayment Penalty Amounts received during the applicable
Prepayment Period; and
(2) any other payments made by the Master Servicer, any Servicer or
the Depositor with respect to such Distribution Date.
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<PAGE> 21
"Insurance Proceeds" means all proceeds (net of unreimbursed payments of
property taxes, insurance premiums and similar items incurred, and unreimbursed
Advances or servicing advances made by the applicable Servicer or the Master
Servicer (or the Trustee), if any) of applicable insurance policies, to the
extent such proceeds are not applied to the restoration of the Mortgaged
Property or released to the borrower.
"Liquidation Proceeds" means all amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure, unreimbursed Advances or
servicing advances, if any, and any Special Servicer Incentive Fees (as defined
herein)) 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.
EXAMPLE OF DISTRIBUTIONS
The following sets forth an example of distributions on the Certificates.
<TABLE>
<S> <C> <C>
July 2 through August 1... Prepayment Period. Partial principal prepayments and prepayments
in full with interest thereon to the date of
such prepayment received at any time during
this period will be deposited into the related
Servicer's custodial account for distribution
to Certificateholders on August 25.
July 2 through August 1... Due Period. Payments due during the related Due Period
(July 2 through August 1) from mortgagors will
be deposited in the applicable Servicer's
custodial account as received and will include
scheduled principal payments plus interest on
the July 1 principal balances of the Mortgage
Loans.
July 31................... Record Date. Distributions will be made to
Certificateholders of record as of the close
of business on the last Business Day of the
month immediately preceding the month in which
the Servicer Remittance Date occurs (or in the
case of the initial Record Date, the Closing
Date).
August 18................. Remittance Date. The Servicers will remit collections and
recoveries in respect of the related Mortgage
Loans, as provided in the applicable Servicing
Agreement, to the Master Servicer on the
18(th) day (or if such day is not a business
day, the next succeeding business day, as
specified in the related Servicing Agreement)
of each month, as specified in the applicable
Servicing Agreement.
August 24................. Deposit Date. On the Business Day immediately preceding the
Distribution Date, the Master Servicer will
remit to the Trustee the amount of principal
and interest to be distributed to
Certificateholders with respect to the related
Mortgage Loans on August 25, including any
Advances required to be made by the applicable
Servicer or the Master Servicer for such
Distribution Date.
August 25................. Distribution Date. On the 25(th) day of each month (or if such
day is not a Business Day, the next succeeding
Business Day), the Trustee will make
distributions to Certificateholders.
</TABLE>
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<PAGE> 22
Succeeding months follow the same pattern.
THE RESIDUAL CERTIFICATE
As described herein, all Prepayment Penalty Amounts received during a
Prepayment Period will be distributable in respect of the Residual Certificate
on the following Distribution Date. In addition to distributions of principal,
interest, and Prepayment Penalty Amounts, the holder of the Residual Certificate
will be entitled to receive, generally, (i) the amount, if any, of any Available
Distribution Amount remaining in the REMIC on any Distribution Date after
distributions of principal and interest are made on the regular interests and on
the Residual Certificate on such date and (ii) the proceeds, if any, of the
assets of the Trust Fund remaining in the REMIC after the principal amounts of
the regular interests and of the Residual Certificate have been reduced to zero.
It is generally not anticipated that any material assets will be remaining for
such distributions at any such time.
The aggregate amount of Prepayment Penalty Amounts distributed in respect
of the Residual Certificate will depend on, among other things, the rate of
prepayments experienced by the Mortgage Loans, the timing of such prepayments
and the terms of the Mortgage Loans subject to prepayment. No assurance can be
given as to the rate or timing of such prepayments.
See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein and in the
accompanying Prospectus.
ALLOCATION OF REALIZED LOSSES
On each Distribution Date, subject to the limitations set forth below with
respect to Special Hazard Losses, Fraud Losses and Bankruptcy Losses, the
principal portion of any Realized Losses on the Mortgage Loans will be allocated
to and reduce the Class Certificate Principal Amounts of, first, the Class B6,
Class B5, Class B4, Class B3, Class B2 and Class B1 Certificates, in that order,
until the Class Certificate Principal Amount of each such Class of Certificates
has been reduced to zero, before being allocated to the Senior Certificates, pro
rata in proportion to, and in reduction of, their respective outstanding Class
Certificate Principal Amounts or Notional Amounts.
The Class 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 on such date) exceeds the aggregate Scheduled
Principal Balance of the Mortgage Loans for the related Distribution Date.
In general, a "Realized Loss" means (i) with respect to a Liquidated
Mortgage Loan, the amount by which the remaining unpaid principal balance of
such 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 such Mortgage Loan, or (ii) the amount by which, in the event of
bankruptcy of a borrower, a bankruptcy court reduces the secured debt to the
value of the related Mortgaged Property (a "Deficient Valuation"). "Bankruptcy
Losses" are losses that are incurred as a result of Deficient Valuations and any
reduction, in a bankruptcy proceeding, of the amount of the Scheduled Payment on
a Mortgage Loan other than as a result of a Deficient Valuation (a "Debt Service
Reduction"). The principal portion of Debt Service Reductions will not be
allocated in reduction of the Class Certificate Principal Balances of any
Classes of Certificates. "Special Hazard Losses" are, in general terms, Realized
Losses arising out of certain direct physical loss or damage to Mortgaged
Properties that are 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 misrepresentation. 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.
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 all
amounts expected to be recovered in respect of such Mortgage Loan have been
received by the Master Servicer or the related Servicer on behalf of the Trust.
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<PAGE> 23
The principal portion of Special Hazard Losses, Bankruptcy Losses (other
than Debt Service Reductions), and Fraud Losses on the Mortgage Loans that
exceed the "Special Hazard Loss Limit," "Bankruptcy Loss Limit," and "Fraud Loss
Limit," respectively ("Excess Losses"), will be allocated as described above.
The "Special Hazard Loss Limit" will initially be approximately $1,425,347, the
"Bankruptcy Loss Limit" will initially be approximately $100,000, and the "Fraud
Loss Limit" will initially be approximately $4,276,042.
The Special Hazard Loss Limit will be reduced, from time to time, to 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
Balance 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 date on which the
Bankruptcy Loss Limit has been reduced to zero is the "Bankruptcy Coverage
Termination Date."
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 anniversary of the Cut-off Date, to an amount equal to the excess of 2% of
the aggregate Scheduled Principal Balance of the Mortgage Loans as of the
Cut-off Date (the "Cut-off Date Balance") over the cumulative amount of Fraud
Losses allocated to the Certificates, (b) on the second, third and fourth
anniversaries of the Cut-off Date, to an amount equal to the excess of 1% of the
Cut-off Date Balance over the cumulative amount of Fraud Losses allocated to the
Certificates and (b) on the fifth anniversary of the Cut-off Date, to zero.
In the event that any amount is recovered in respect of principal of a
Liquidated Mortgage Loan after any related Realized Loss has been allocated as
described herein, such amount will be distributed to the Certificates still
outstanding, pro rata on the basis of any Realized Losses previously allocated
thereto. It is generally not anticipated that any such amounts will be
recovered.
FINAL SCHEDULED DISTRIBUTION DATE
Scheduled distributions on the Mortgage Loans, assuming no defaults or
losses that are not covered by the limited credit support described elsewhere
herein, will be sufficient to make timely distributions of interest on the
Offered Certificates and to reduce the aggregate Certificate Principal Amount of
the Offered Certificates to zero not later than July 25, 2028. 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.
The Final Scheduled Distribution Date for the Offered Certificates has been
determined by adding three months to the month of scheduled maturity of the
latest maturing Mortgage Loan (i.e., April 2028).
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 10% of 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 Mortgage Loans, 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.
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<PAGE> 24
THE TRUSTEE
First Union National Bank will be the Trustee under the Trust Agreement.
The Trustee will be paid a monthly fee (the "Trustee Fee") calculated as a fixed
percentage equal to 0.0055% per annum (the "Trustee Fee Rate") on the aggregate
Scheduled Principal Balance of the Mortgage Loans as of the first day of the
related Due Period, and will also be entitled to retain, as additional
compensation, any interest or other income earned on funds on deposit in the
Certificate Account pending distribution to Certificateholders. The Trustee will
be entitled to reimbursement for certain expenses prior to distribution of any
amounts to Certificateholders. The Trustee's "Corporate Trust Office" for
purposes of presentment and surrender of the Offered Certificates for the final
distribution thereon and for all other purposes is located at 230 South Tryon
Street NC1179, Charlotte, North Carolina 28288, Attention: Structured Finance,
or such address as the Trustee may designate from time to time by notice to the
Certificateholders, the Depositor and the Master Servicer.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately 2,026 conventional, fixed
rate, fully-amortizing and balloon Mortgage Loans with original terms to
maturity from the first due date of the scheduled monthly payment (a "Scheduled
Payment") of not more than 30 years, having an aggregate Scheduled Principal
Balance as of the Cut-off Date (after giving effect to Scheduled Payments due on
such date) of approximately $142,534,738 (the "Cut-off Date Balance"). The
Mortgage Loans were originated or acquired by the Originators described herein
generally in accordance with the Underwriting Guidelines described herein.
Because such Underwriting Guidelines do not conform to FNMA or FHLMC guidelines,
the Mortgage Loans are likely to experience higher rates of delinquency,
foreclosure and bankruptcy than if they had been underwritten to a higher
standard. Interest on the Mortgage Loans accrues on the basis of a 360-day year
consisting of twelve 30-day months.
Wherever reference is made herein to a percentage of some or all of the
Mortgage Loans, such percentage is determined (unless otherwise specified) on
the basis of the aggregate Scheduled Principal Balance of such Mortgage Loans as
of the Cut-off Date.
All of the Mortgage Loans are secured by first or second mortgages or deeds
of trust or other similar security instruments creating first liens on one- to
four-family residential properties consisting of one- to four-family dwelling
units, individual condominium units, manufactured housing or individual units in
planned unit developments. The Mortgage Loans to be included in the Mortgage
Pool will be acquired by the Depositor from the Seller, which acquired the
Mortgage Loans from the Originators. See "TRUST AGREEMENT -- Assignment of
Mortgage Loans" herein.
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 unpaid principal amount thereof 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.
Approximately 26.58% of the Mortgage Loans have current Loan-to-Value
Ratios in excess of 80%. None of such Mortgage Loans are covered by primary
mortgage insurance policies. 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.
As of the Cut-off Date, approximately 40.41% of the Mortgage Loans were one
Scheduled Payment delinquent and approximately 8.66% of the Mortgage Loans were
two Scheduled Payments delinquent.
It is expected that approximately 8.97% of the Mortgage Loans will have
original terms to maturity that are shorter than their amortization schedules,
leaving final payments ("Balloon Payments") due on their
S-24
<PAGE> 25
maturity dates that are significantly larger than other monthly payments (such
loans, "Balloon Loans"). The Balloon Loans are generally expected to have
original terms to maturity of 15 years. The ability of the borrower to repay a
Balloon Loan at maturity frequently will depend on such borrower's ability to
refinance such loan. Any loss on a Balloon Loan as a result of the borrower's
inability to refinance such loan will be borne by Certificateholders, to the
extent not covered by the applicable credit enhancement described herein.
Neither the applicable Servicer, the Master Servicer nor the Trustee will make
any Advance with respect to delinquent Balloon Payments.
Approximately 73.15% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment premium (each, a "Prepayment Penalty Amount") in
connection with certain full or partial prepayments of principal. Generally,
each such Mortgage Loan provides for payment of a Prepayment Penalty Amount in
connection with certain partial prepayments and prepayments in full made within
the period of time specified in the related Mortgage Note, ranging from one to
five years from the date of origination of such Mortgage Loan, as described
herein. The amount of the applicable Prepayment Penalty Amount, to the extent
permitted under applicable state law, is as provided in the related Mortgage
Note; generally, such amount is equal to six months' interest on any amounts
prepaid in excess of 20% of the then original principal balance of the related
Mortgage Loan during any 12 month period.
The Mortgage Loans are expected to have the following approximate aggregate
characteristics as of the Cut-off Date. 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 Certificates.
<TABLE>
<S> <C>
Number of Mortgage Loans.............................. 2,026
Aggregate Scheduled Principal Balance................. $142,534,738.10
Mortgage Rates:
Weighted Average................................. 10.575%
Range............................................ 7.350% to 14.600%
Weighted Average Remaining Term to Maturity (in
months)............................................. 317
</TABLE>
The Scheduled Principal Balances of the Mortgage Loans range from
approximately $7,348 to approximately $584,444. The Mortgage Loans had an
average Scheduled Principal Balance of approximately $70,353.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately 71.76% and no Mortgage has a Loan-to-Value Ratio at
origination exceeding 100%.
No more than approximately 0.74% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, aggregate
Scheduled Principal Balance and percentage of the Mortgage Loans having the
stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
S-25
<PAGE> 26
ORIGINAL LOAN-TO-VALUE RATIOS*
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
RANGE OF ORIGINAL LOAN-TO- NUMBER OF PRINCIPAL SCHEDULED
VALUE RATIOS (%) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
-------------------------- -------------- --------- -----------------
<S> <C> <C> <C>
0.01 to 10.00............................... 8 $ 140,782.97 0.10%
10.01 to 20.00............................... 116 3,797,508.04 2.66
20.01 to 30.00............................... 95 4,341,664.44 3.05
30.01 to 40.00............................... 69 3,569,759.98 2.50
40.01 to 50.00............................... 73 3,852,161.01 2.70
50.01 to 60.00............................... 154 8,921,398.56 6.26
60.01 to 70.00............................... 417 24,518,726.32 17.20
70.01 to 80.00............................... 693 55,328,161.47 38.82
80.01 to 90.00............................... 397 37,711,788.15 26.46
90.01 to 100.00............................... 4 352,787.16 0.25
----- --------------- ------
Total................................ 2,026 $142,534,738.10 100.00%
===== =============== ======
</TABLE>
The weighted average original Loan-to-Value Ratio is approximately 71.76%.
- ---------------
* The above table does not reflect the combined Loan-to-Value Ratios of
Mortgaged Properties secured by second liens.
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
RANGE OF NUMBER OF PRINCIPAL SCHEDULED
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
------------------ -------------- --------- -----------------
<S> <C> <C> <C>
7.001 to 7.500............................... 5 $ 401,615.19 0.28%
7.501 to 8.000............................... 24 3,202,980.43 2.25
8.001 to 8.500............................... 69 9,770,327.44 6.85
8.501 to 9.000............................... 106 10,520,646.35 7.38
9.001 to 9.500............................... 114 11,647,474.41 8.17
9.501 to 10.000............................... 242 23,085,953.13 16.20
10.001 to 10.500............................... 207 14,407,419.08 10.11
10.501 to 11.000............................... 335 22,534,769.63 15.81
11.001 to 11.500............................... 211 12,169,103.01 8.54
11.501 to 12.000............................... 243 12,588,954.61 8.83
12.001 to 12.500............................... 172 8,585,448.10 6.02
12.501 to 13.000............................... 210 9,848,944.21 6.91
13.001 to 13.500............................... 66 2,854,477.52 2.00
13.501 to 14.000............................... 16 565,358.68 0.40
14.001 to 14.500............................... 5 293,434.67 0.21
14.501 to 15.000............................... 1 57,831.64 0.04
----- --------------- ------
Total................................ 2,026 $142,534,738.10 100.00%
===== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 10.58% per annum.
S-26
<PAGE> 27
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------------- -------------- --------- -----------------
<S> <C> <C> <C>
169 to 192..................................... 564 $ 29,861,428.86 20.95%
217 to 240..................................... 25 962,666.50 0.68
337 to 360..................................... 1,437 111,710,642.74 78.37
----- --------------- ------
Total................................ 2,026 $142,534,738.10 100.00%
===== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 321 months.
REMAINING TERMS TO MATURITY FOR FULLY AMORTIZING LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------------- -------------- --------- -----------------
<S> <C> <C> <C>
169 to 174..................................... 133 $ 5,069,161.38 3.91%
175 to 180..................................... 253 12,008,939.97 9.26
229 to 234..................................... 22 817,486.25 0.63
235 to 240..................................... 3 145,180.25 0.11
349 to 354..................................... 313 23,472,864.44 18.09
355 to 360..................................... 1,124 88,237,778.30 68.01
----- --------------- ------
Total................................ 1,848 $129,751,410.59 100.00%
===== =============== ======
</TABLE>
The weighted average remaining term to maturity of the fully amortizing
Mortgage Loans is approximately 331 months.
REMAINING TERMS TO MATURITY FOR BALLOON LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------------- -------------- --------- -----------------
<S> <C> <C> <C>
169 to 174...................................... 114 $ 6,029,381.08 47.17%
175 to 180...................................... 64 6,753,946.43 52.83
--- -------------- ------
Total................................. 178 $12,783,327.51 100.00%
=== ============== ======
</TABLE>
The weighted average remaining term to maturity of the Balloon
Loans is approximately 175 months.
S-27
<PAGE> 28
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
STATE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
----- -------------- --------- -----------------
<S> <C> <C> <C>
California......................................... 374 $ 43,168,914.78 30.29%
Florida............................................ 143 8,301,070.81 5.82
Texas.............................................. 143 8,014,672.10 5.62
Illinois........................................... 88 5,797,020.65 4.07
Mississippi........................................ 107 5,105,571.55 3.58
Arizona............................................ 67 5,009,470.48 3.51
Washington......................................... 61 4,704,653.99 3.30
Oklahoma........................................... 95 4,562,542.68 3.20
Colorado........................................... 50 4,142,547.38 2.91
Oregon............................................. 53 3,812,951.15 2.68
Louisiana.......................................... 77 3,445,948.14 2.42
Minnesota.......................................... 45 3,258,807.04 2.29
Hawaii............................................. 16 2,781,690.53 1.95
Pennsylvania....................................... 45 2,631,351.86 1.85
Nevada............................................. 34 2,572,488.73 1.80
Maryland........................................... 39 2,382,361.08 1.67
New York........................................... 26 2,257,779.61 1.58
Ohio............................................... 43 2,245,152.34 1.58
Virginia........................................... 34 1,793,603.50 1.26
Georgia............................................ 26 1,775,184.00 1.25
Missouri........................................... 43 1,759,721.72 1.23
Michigan........................................... 43 1,652,610.88 1.16
Arkansas........................................... 40 1,640,802.17 1.15
New Mexico......................................... 20 1,606,304.40 1.13
Idaho.............................................. 23 1,517,289.91 1.06
Tennessee.......................................... 26 1,492,067.67 1.05
Kansas............................................. 34 1,344,210.73 0.94
New Jersey......................................... 14 1,338,166.28 0.94
Maine.............................................. 19 1,245,044.62 0.87
Connecticut........................................ 19 1,128,440.00 0.79
Other.............................................. 179 10,046,297.32 7.05
----- --------------- -------
Total..................................... 2,026 $142,534,738.10 100.00%
===== =============== =======
</TABLE>
PRIORITY OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
PRIORITY MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
-------- -------------- --------- -----------------
<S> <C> <C> <C>
First-priority..................................... 1,775 $130,156,289.93 91.32%
Second-priority.................................... 251 12,378,448.17 8.68
----- --------------- -------
Total..................................... 2,026 $142,534,738.10 100.00%
===== =============== =======
</TABLE>
S-28
<PAGE> 29
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
RANGE OF NUMBER OF PRINCIPAL SCHEDULED
SCHEDULED PRINCIPAL BALANCES ($) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
-------------------------------- -------------- --------- -----------------
<S> <C> <C> <C>
0.01 to 50,000.00.......................... 942 $ 31,054,369.08 21.79%
50,000.01 to 100,000.00.......................... 692 48,616,815.29 34.11
100,000.01 to 150,000.00.......................... 226 27,307,291.08 19.16
150,000.01 to 200,000.00.......................... 91 15,649,402.59 10.98
200,000.01 to 250,000.00.......................... 39 8,684,859.17 6.09
250,000.01 to 300,000.00.......................... 20 5,525,522.14 3.88
300,000.01 to 350,000.00.......................... 11 3,545,187.76 2.49
350,000.01 to 400,000.00.......................... 3 1,148,790.95 0.81
400,000.01 to 450,000.00.......................... 1 418,056.95 0.29
550,000.01 to 600,000.00.......................... 1 584,443.09 0.41
----- --------------- -------
Total..................................... 2,026 $142,534,738.10 100.00%
===== =============== =======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately $70,353.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
PROPERTY TYPE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
------------- -------------- --------- -----------------
<S> <C> <C> <C>
Single-Family...................................... 1,667 $114,943,707.82 80.64%
Condominium........................................ 65 4,623,871.21 3.24
Planned Unit Development........................... 87 7,484,183.48 5.25
Two-to-Four Family................................. 181 13,809,048.41 9.69
Manufactured Housing............................... 26 1,673,927.18 1.17
----- --------------- -------
Total..................................... 2,026 $142,534,738.10 100.00%
===== =============== =======
</TABLE>
LOAN PURPOSE
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
LOAN PURPOSE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
------------ -------------- --------- -----------------
<S> <C> <C> <C>
Purchase....................................... 449 $ 33,127,079.64 23.24%
Rate/Term Refinance............................ 286 22,050,030.08 15.47
Cash Out Refinance............................. 1,291 87,357,628.38 61.29
----- --------------- -------
Total................................ 2,026 $142,534,738.10 100.00%
===== =============== =======
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
OCCUPANCY STATUS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------- -------------- --------- -----------------
<S> <C> <C> <C>
Owner Occupied................................. 1,218 $ 95,566,527.01 67.05%
Primary Home................................... 494 28,970,719.25 20.33
Non-Owner Occupied............................. 217 12,449,028.92 8.73
Second Home.................................... 13 1,332,749.22 0.94
Investment..................................... 84 4,215,713.70 2.96
----- --------------- -------
Total................................ 2,026 $142,534,738.10 100.00%
===== =============== =======
</TABLE>
S-29
<PAGE> 30
UNDERWRITING GUIDELINES
The Mortgage Loans have been originated or acquired by various originators
(the "Originators") in accordance with the underwriting guidelines established
by each of them (collectively, the "Underwriting Guidelines"). Such Underwriting
Guidelines differ among the Originators in various particulars. The following is
a general summary of the Underwriting Guidelines believed by the Depositor to be
generally applied, with some variation, by each Originator. It does not purport
to be a complete description of the underwriting standards of any of the
Originators.
The Underwriting Guidelines are primarily intended to evaluate the value
and adequacy of the mortgaged property as collateral; such guidelines are also
intended, to a lesser extent, to consider the mortgagor's credit standing and
repayment ability. On a case-by-case basis, the Originators may determine that,
based upon compensating factors, a prospective mortgagor not strictly qualifying
under the applicable underwriting guidelines warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment,
financial reserves, and time in residence at the applicant's current address. A
significant number of the Mortgage Loans may represent such underwriting
exceptions.
Under the Underwriting Guidelines, the Originators review and verify the
loan applicant's sources of income (except under the stated income programs),
calculate the amount of income from all such sources indicated on the loan
application, review the credit history of the applicant and calculate the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
review the mortgaged property for compliance with the Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure that
generally requires (i) an appraisal of the mortgaged property that conforms to
FNMA and FHLMC standards and (ii) a review of such appraisal, which review may
be conducted by the Originator's staff appraiser or representative and,
depending upon the original principal balance and loan-to-value ratio of the
mortgaged property, may include a review of the original appraisal or a drive-by
review appraisal of the mortgaged property. The Underwriting Guidelines
generally permit single-family loans with loan-to-value ratios at origination of
up to 90% (or, with respect to certain Mortgage Loans, up to 95%) for the
highest credit grading category (80% under the stated income programs),
depending on the creditworthiness of the mortgagor and, in some cases, the type
and use of the property and the debt-to-income ratio. Under the Underwriting
Guidelines, the maximum combined loan-to-value ratio for purchase money mortgage
loans may differ from those applicable to refinancings.
The Mortgage Loans were originated on the basis of loan application
packages submitted through mortgage brokerage companies or at the related
Originator's retail branches or were purchased from originators approved by the
Originators. Loan application packages submitted through mortgage brokerage
companies, containing in each case relevant credit, property and underwriting
information on the loan request, are compiled by the applicable mortgage
brokerage company and submitted to the Originator for approval and funding. The
mortgage brokerage companies receive all or a portion of the loan origination
fee charged to the mortgagor at the time the loan is made.
Each prospective borrower completes an application that includes
information with respect to the applicant's liabilities, income (except with
respect to certain "No Documentation" mortgage loans described below) and
employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers. Each appraisal includes a market
data analysis based on recent sales of comparable homes in the area and, where
deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. Except with respect to purchase money mortgage
loans, independent appraisals are generally reviewed by the related Originators
before the loan is funded, and a drive-by review or appraisal is generally
performed in connection with loan amounts over a certain predetermined dollar
amount established for each state. With respect to purchase money mortgage
loans, an independent appraisal may or may not be reviewed by the Originator.
S-30
<PAGE> 31
The Underwriting Guidelines are less stringent than the standards generally
acceptable to FNMA and FHLMC. Mortgagors who qualify under the Underwriting
Guidelines generally have payment histories and debt ratios that would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors. Because such
Underwriting guidelines do not conform to FNMA or FHLMC guidelines, the Mortgage
Loans are likely to experience higher rates of delinquency, foreclosure and
bankruptcy than if they had been underwritten to a higher standard. See "RISK
FACTORS -- Underwriting Standards and Potential Delinquencies" herein.
In general, a substantial majority of the Mortgage Loans were originated
consistent with and generally conform to "Full Documentation," "Limited
Documentation," or "Stated Income Documentation" residential loan programs.
Under each of such programs, the related Originator generally reviews the
applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the type and
use of the property being financed. The Underwriting Guidelines require that
mortgage loans be underwritten according to a standardized procedure that
complies with applicable federal and state laws and regulations and requires the
Originator's underwriters to be satisfied that the value of the property being
financed, as indicated by an appraisal and a review of the appraisal, supports
the outstanding loan balance. The Underwriting Guidelines permit one- to
four-family loans to have loan-to-value ratios at origination of generally up to
90% (or, in certain cases, 95%), depending on, among other things, the loan
documentation program, the purpose of the mortgage loan, the mortgagor's credit
history, and repayment ability, as well as the type and use of the property.
With respect to mortgage loans secured by mortgaged properties acquired by a
mortgagor under a "lease option purchase," the loan-to-value ratio of the
related mortgage loan is generally based on the appraised value at the time of
origination of such mortgage loan.
Certain of the Mortgage Loans were originated under "No Documentation"
programs, pursuant to which no information was obtained regarding the borrowers'
income or employment and there was no verification of the borrowers' assets.
Under the Full Documentation programs, applicants generally are required to
submit two written forms of verification of stable income for 24 months (or, if
certain loan-to-value ratio guidelines are met, for 12 months). Under the
Limited Documentation programs, generally one such form of verification is
required for six or 12 months, depending upon the practices of the applicable
Originator. Under the Stated Income Documentation programs, generally an
applicant may be qualified based upon monthly income as stated on the mortgage
loan application if the applicant meets certain criteria. All the foregoing
programs typically require that with respect to each applicant, there be a
telephone verification of the applicant's employment. Verification of the source
of funds (if any) required to be deposited by the applicant into escrow in the
case of a purchase money loan is generally required under the Full Documentation
program guidelines, except, with respect to certain Originators, in the case of
mortgage loans with loan-to-value ratios below a specified level. Generally, no
such verification is required under the other programs.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgage
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories that permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
A substantial portion of the Mortgage Loans were classified by the related
Originators in relatively low -- that is, relatively higher risk -- credit
categories. The incidence of delinquency, default and bankruptcy with respect to
such Mortgage Loans is expected to be greater than if such Mortgage Loans had
been classified in relatively higher categories.
S-31
<PAGE> 32
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool 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 days after
the initial issuance of the Offered Certificates. In the event that Mortgage
Loans are removed from or added to the Mortgage Pool as set forth under
"DESCRIPTION OF THE MORTGAGE POOL," such removal or addition, to the extent
material, will be noted in the Current Report on Form 8-K.
THE MASTER SERVICER
The information set forth in this section has been provided by Norwest Bank
Minnesota, National Association ("Norwest" or the "Master Servicer"), and
neither the Depositor nor the Underwriter makes any representations or
warranties as to the accuracy or completeness of such information.
Norwest is a national banking association, with executive offices located
at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its
master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044.
The Servicers, including the Special Servicer, will directly service the
Mortgage Loans under the supervision of the Master Servicer. The Master Servicer
will not be ultimately responsible for the servicing of the Mortgage Loans
except to the extent described under "SERVICING OF THE MORTGAGE LOANS" herein.
The Master Servicer is engaged in the business of master servicing single
family residential mortgage loans secured by properties located in all 50 states
and the District of Columbia. As of March 31, 1998, the Master Servicer master
serviced more than 300,000 mortgage loans with an aggregate outstanding
principal balance of approximately $36.5 billion.
THE SERVICERS
The information set forth in this section has been provided by the
respective Servicers, and neither the Depositor nor the Underwriter makes any
representations or warranties as to the accuracy or completeness of such
information.
The Mortgage Loans will initially be serviced by Aurora, in the case of
approximately 92.84% of the Mortgage Loans, and by Option One Mortgage
Corporation ("Option One"), in the case of approximately 7.16% of the Mortgage
Loans.
Aurora. Aurora, an affiliate of Lehman Brothers Holdings Inc., began
operation as a servicer of residential mortgage loans in August 1997 following
the acquisition of substantially all of the assets and a majority of the
management and employees of Harbourton Financial Services L.P. ("Harbourton").
Prior to such acquisition, Harbourton liquidated a substantial portion of its
servicing portfolio, generally retaining loans with higher rates of delinquency.
Aurora's executive offices are located at 2530 South Parker Road, Suite
601, Aurora, Colorado 80014 and its centralized real estate loan servicing
facility is located at 601 Fifth Avenue, Scottsbluff, Nebraska 69361. Aurora has
been approved to service mortgage loans for GNMA, FNMA, and FHLMC.
As of March 31, 1998, Aurora's total loan servicing and subservicing
portfolio included loans with an aggregate outstanding principal balance of
approximately $4.3 billion, of which the substantial majority are subserviced
for Lehman Brothers Holdings Inc. The following table sets forth certain
information regarding the delinquency and foreclosure experience of Aurora and
Harbourton with respect to conventional mortgage loans. The indicated periods of
delinquency are based on the number of days past due on a contractual basis.
S-32
<PAGE> 33
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------- MARCH 31,
1994 1995 1996 1997(3) 1998(3)
-------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Total mortgage loans................................ $1,061 $1,625 $1,765 $1,203 $1,195
Percentage of mortgage loans delinquent by period
of Delinquency(1)(2)
30 to 59 days.................................. 1.93% 2.26% 1.92% 3.21% 3.04%
60 to 89 days.................................. 0.40 0.46 0.45 0.73 0.66
90 days or more................................ 0.35 0.24 0.25 0.28 0.24
------ ------ ------ ------ ------
Total percentage of mortgage loans
delinquent(1)(2)........................ 2.68% 2.96% 2.62% 4.22% 3.94%
In foreclosure (excluding bankruptcies)........ 0.50 0.99 1.16 1.99 1.93
In bankruptcy.................................. 0.57 0.36 0.47 0.78 0.87
------ ------ ------ ------ ------
Total(2).................................. 3.75% 4.31% 4.25% 6.99% 6.74%
</TABLE>
- ---------------
(1) Delinquency information is for conventional loans only, excluding
bankruptcies.
(2) Percentages are based on the number of mortgage loans.
(3) Excludes information related to the servicing of certain sub-prime loans
acquired in 1997 and 1998.
The above delinquency and foreclosure data represent the recent experience
of Aurora. The loans in Aurora's servicing portfolio may differ significantly
from the Mortgage Loans. The actual loss and delinquency experience on the
Mortgage Loans will depend, among other things, on the value of the Mortgaged
Properties securing such Mortgage Loans and the ability of mortgagors to make
required payments. 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 tables above, nor is any representation made as
to the rate at which losses may be experienced on liquidation of defaulted
Mortgage Loans.
The likelihood that mortgagors will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be affected
by a number of factors related to borrowers' personal circumstances, including,
for example, 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 a 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.
Option One. Option One was incorporated in 1992, commenced receiving
applications for mortgage loans under its regular lending program in February
1993 and began funding such mortgage loans indirectly in the same month. The
principal business of Option One is the origination, sale and servicing of
non-conforming mortgage loans.
As of March 3, 1995, Option One was a subsidiary of Fleet National Bank,
Rhode Island, which is in turn a subsidiary of Fleet Financial Group, Inc.
("Fleet Financial Group"). On June 17, 1997, Fleet Financial Group consummated
the sale of Option One to H&R Block, Inc. As of March 31, 1998, Option One had
four loan origination centers in California, two loan origination centers in
Florida, and one loan origination center in each of Connecticut, Georgia,
Illinois, Ohio, Pennsylvania, Rhode Island, Texas, Virginia and Wisconsin.
Option One operates as a stand-alone mortgage banking company and is a FNMA
approved servicer.
S-33
<PAGE> 34
THE SPECIAL SERVICER
The information set forth in this section has been provided by the Special
Servicer, and neither the Depositor nor the Underwriter makes any
representations or warranties as to the accuracy or completeness of such
information.
Ocwen Federal Bank FSB ("Ocwen" or the "Special Servicer"), a federally
chartered savings bank with its home office in Fort Lee, New Jersey and its
servicing operations and corporate offices in West Palm Beach, Florida, will
serve as the Special Servicer of the Mortgage Loans pursuant to a special
servicing agreement (the "Special Servicing Agreement"), as described under
"SERVICING OF THE MORTGAGE LOANS" below. Ocwen may be terminated as Special
Servicer at any time by the Directing Holder (as defined herein), without cause.
See "SERVICING OF THE MORTGAGE LOANS -- Certain Rights Related to Foreclosure
and the Special Servicer" herein. Ocwen is a wholly-owned subsidiary of Ocwen
Financial Corporation, a public financial services holding company. At March 31,
1998, Ocwen had approximately $2.488 billion in assets, approximately $2.234
billion in liabilities and approximately $254 million in equity. At March 31,
1998, Ocwen's tangible and leverage capital ratio was approximately 10.24% and
its risk-based capital ratio was approximately 12.82%. For the three months
ended March 31, 1998, Ocwen's net income from continuing operations was
approximately $19 million.
The primary business of the Special Servicer has been the resolution of
nonperforming single-family, multifamily and commercial mortgage loan portfolios
acquired from the Resolution Trust Corporation, from private investors, and most
recently, from the United States Department of Housing and Urban Development
("HUD") through HUD's auction of defaulted FHA Loans.
The following tables set forth, for the non-conforming credit mortgage loan
("BCD Mortgage Loan") servicing portfolio serviced by the Special Servicer,
certain information relating to the delinquency, foreclosure, REO and loss
experience with respect to such mortgage loans (including loans in foreclosure
included in the Special Servicer's servicing portfolio (which portfolio does not
include mortgage loans that are subserviced by others)) at the end of the
indicated periods. The indicated periods of delinquency are based on the number
of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until it is one month past due on a contractual
basis. The information contained in the monthly remittance reports that will be
sent to investors will be compiled, to the extent relating to Mortgage Loans
serviced by the Special Servicer, using the same methodology as that used to
compile the information contained in the table below.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------------------------- ------------------------------------------
PERCENT PERCENT
BY PERCENT BY BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 2,834 $305,085 100.00% 100.00% 21,827 $2,318,261 100.00% 100.00%
Period of
Delinquency:
30-59 Days.......... 107 10,554 3.78% 3.46% 437 41,429 2.00% 1.79%
60-89 Days.......... 38 4,321 1.34% 1.42% 171 17,803 0.78% 0.77%
90 Days or more..... 138 17,969 4.87% 5.89% 302 36,878 1.38% 1.59%
Total Delinquent
Loans............... 283 32,844 9.99% 10.77% 910 96,110 4.17% 4.15%
Loans in
Foreclosure(1)...... 136 17,805 4.80% 5.84% 281 34,663 1.29% 1.50%
<CAPTION>
AS OF
MARCH 31, 1998
------------------------------------------
PERCENT
BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ---------- -------- -------
<S> <C> <C> <C> <C>
Total Portfolio...... 34,425 $3,494,243 100.00% 100.00%
Period of
Delinquency:
30-59 Days.......... 527 49,571 1.53% 1.42%
60-89 Days.......... 416 40,327 1.21% 1.15%
90 Days or more..... 643 65,543 1.87% 1.88%
Total Delinquent
Loans............... 1,586 155,441 4.61% 4.45%
Loans in
Foreclosure(1)...... 498 56,884 1.45% 1.63%
</TABLE>
- ---------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
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REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
------------------- -------------------- ---------------------
BY BY BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio.................... 2,834 $305,085 21,827 2,318,261 34,425 $3,494,243
Foreclosed Loans(1)................ 34 3,329 66 7,387 92 11,185
Foreclosure Ratio(2)............... 1.20% 1.09% 0.30% 0.32% 0.27% 0.32%
</TABLE>
- ---------------
(1) For the purposes of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by the Special Servicer.
(2) The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the total Portfolio at the end
of the indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------- ----------------- --------------
<S> <C> <C> <C>
Total Portfolio(1)............................. 305,085 $2,318,261 3,494,243
Net Gains/(Losses)(2)........................ 24 (1,209) (387)
Net Gains/(Losses) as a Percentage of Total
Portfolio................................. 0.01% (0.05)% (0.01)%
</TABLE>
- ---------------
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or losses
on liquidated properties are calculated as net sales proceeds less book
value (exclusive of loan purchase premium or discount). Shortfall payoffs
are calculated as the difference between principal payoff amount and unpaid
principal at the time of payoff.
The above delinquency, foreclosure, real estate owned and loss statistics
represent the recent experience of Ocwen. The loans in Ocwen's servicing
portfolio may differ significantly from the Mortgage Loans. The actual loss and
delinquency experience on the Mortgage Loans will depend, among other things, on
the value of the Mortgaged Properties securing such Mortgage Loans and the
ability of mortgagors to make required payments. 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 tables above, nor is any
representation made as to the rate at which losses may be experienced on
liquidation of defaulted Mortgage Loans.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will be serviced by the Servicers and, to the extent
applicable as described below, the Special Servicer, under the supervision of
the Master Servicer in accordance with the provisions of the applicable
servicing agreements or, if applicable, the Special Servicing Agreement (each, a
"Servicing Agreement"). The Servicers and the Special Servicer are referred to
together herein, unless the context requires otherwise, as the "Servicers."
Notwithstanding anything to the contrary in the Prospectus, the Master
Servicer will not be ultimately responsible for the performance of the servicing
activities by the Servicers, except as described under "-- Prepayment Interest
Shortfalls" and "-- Advances" below. If a Servicer fails to fulfill its
obligations
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under the applicable Servicing Agreement, the Master Servicer is obligated to
terminate such Servicer and appoint a successor servicer as provided in the
Trust Agreement.
Lehman Capital will retain ownership of the servicing rights with respect
to the Mortgage Loans serviced by Aurora and may transfer such servicing to one
or more successor servicers at any time, subject to the conditions set forth in
the Trust Agreement, including the requirements that any such successor servicer
be qualified to service mortgage loans for FNMA or FHLMC and that each Rating
Agency confirm in writing that such transfer of servicing will not result in a
qualification, withdrawal or downgrade of the then-current ratings of any of the
Certificates.
SPECIAL SERVICING OF DELINQUENT MORTGAGE LOANS
If a Mortgage Loan becomes more than 60 days delinquent, the responsibility
for servicing such Mortgage Loan (a "Transferred Mortgage Loan") will be
transferred to the Special Servicer. The Special Servicer will be required under
the Special Servicing Agreement to diligently attempt to collect all amounts due
under each Transferred Mortgage Loan. The Special Servicer will be authorized
under such agreement to foreclose on any Transferred Mortgage Loan or to pursue
such alternatives to foreclosure as modification of the terms of such loan,
negotiation of a repayment plan and forbearance of foreclosure, or acceptance of
a discounted payoff. If the borrower resumes payment on a Transferred Mortgage
Loan, such loan will continue to be serviced by the Special Servicer pursuant to
the provisions of the Special Servicing Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be paid a monthly fee (the "Master Servicing Fee")
with respect to each Mortgage Loan calculated as a fixed percentage equal to
0.0125% per annum (the "Master Servicing Fee Rate") of the outstanding principal
balance of each Mortgage Loan as of the first day of the related Due Period.
Each Servicer (other than the Special Servicer) will be paid a monthly fee (a
"Servicing Fee") with respect to each Mortgage Loan serviced by it calculated as
0.50% per annum (the "Servicing Fee Rate") of the outstanding principal balance
of each such Mortgage Loan as of the first day of the related Due Period.
Each Servicer will also be entitled to receive, to the extent provided in
the applicable Servicing Agreement, additional compensation, in the form of any
interest or other income earned on funds it has deposited in a custodial account
pending remittance to the Master Servicer, as well as certain customary fees and
charges paid by borrowers (but excluding any Prepayment Penalty Amount, which
will be distributed to the Class R Certificateholder. See "DESCRIPTION OF THE
CERTIFICATES -- Priority of Distributions -- Prepayment Penalty Amount"). The
Master Servicer will be entitled to receive, as additional compensation, any
interest or other income earned on funds in the Collection Account prior to
deposit into the Certificate Account. The aggregate of the Master Servicing Fees
and such additional compensation is referred to herein as the Master Servicer's
"Aggregate Master Servicing Compensation."
The Special Servicer will be paid a monthly fee (the "Basic Fee") with
respect to each Transferred Mortgage Loan calculated as 0.50% per annum (the
"Basic Fee Rate") of the outstanding principal balance of each such Mortgage
Loan as of the first day of the related Due Period. In addition, the Special
Servicer is entitled to a fee in connection with the liquidation of Transferred
Mortgage Loans (the "Special Servicer Incentive Fee") and to additional
compensation (the "Special Servicer Fee") with respect to each Transferred
Mortgage Loan.
The Special Servicer Incentive Fee will be paid with respect to each
Mortgage Loan liquidated by the Special Servicer and will equal 50% of the
excess, if any, of (x) the principal portion of Liquidation Proceeds (prior to
the reduction by the payment of any Special Servicer Incentive Fees) with
respect to such Mortgage Loan over (y) the percentage specified in the Special
Servicing Agreement of the outstanding principal balance of such Mortgage Loan
immediately prior to receipt of such Liquidation Proceeds. The payment of the
Special Servicer Incentive Fee will reduce the amount of net Liquidation
Proceeds available to the Trust Fund.
The Special Servicer Fee will be paid from and to the extent of funds on
deposit in a reserve fund (the "Reserve Fund"). On each Distribution Date,
amounts otherwise distributable as interest on the Class AX2 Certificates will
be withheld by the Trustee and deposited in the Reserve Fund and will be applied
to pay the
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Special Servicer any Special Servicer Fees due and unpaid with respect to such
Distribution Date and any previous Distribution Dates. Thereafter, any amounts
remaining in the Reserve Fund over $30,000 will be released to the Class AX2
holder. Upon the termination of the Trust Fund, the Class AX2 holder will be
entitled to any amounts remaining in the Reserve Fund after payment of any due
and unpaid Special Servicer Fees. The Reserve Fund will not be considered an
asset of the REMIC but rather the Class AX2 holder will be considered as the
owner of the Reserve Fund for federal income tax purposes and, as such, will be
entitled to all investment earnings thereon.
The aggregate compensation of the Master Servicer, the Servicing Fee of
each Servicer, and the Basic Fee of the Special Servicer are subject to
reduction as described below under "Prepayment Interest Shortfalls." See
"SERVICING OF LOANS -- Servicing Compensation and Payment of Expenses" in the
Prospectus for information regarding expenses payable by the Master Servicer and
the Servicers (including the Special Servicer). The Master Servicer and each
Servicer (including the Special Servicer) will be entitled to reimbursement for
certain expenses prior to distribution of any amounts to Certificateholders. See
"SERVICING OF LOANS -- Servicing Compensation and Payment of Expenses" in the
Prospectus.
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
Scheduled Payment dates, the borrower pays interest on the amount prepaid only
from the last Scheduled Payment date to the date of prepayment (or to the first
day of the applicable month, in the case of certain prepayments in part), with a
resulting reduction in interest payable for the month during which the
prepayment is made. Any Prepayment Interest Shortfall resulting from a
prepayment in full, but not in part, is generally required to be paid by the
applicable Servicer, but only to the extent that such amount does not exceed the
Servicing Fee or, in the case of the Special Servicer, the Basic Fee, on the
Mortgage Loans serviced by it for the applicable Distribution Date.
Any Prepayment Interest Shortfall required to be funded but not funded by
the applicable Servicer is required to be funded by the Master Servicer, to the
extent that such amount does not exceed the Aggregate Master Servicing
Compensation for the applicable Distribution Date, through a reduction in the
amount of such compensation.
ADVANCES
Each Servicer will generally be obligated to make Advances with respect to
delinquent payments of principal of and interest on the Mortgage Loans (other
than Balloon Payments), adjusted to the related Mortgage Rate less the
applicable Servicing Fee Rate (or Basic 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 Master Servicer will be obligated to make any such Advances if the
applicable Servicer fails to do so, and the Trustee will be obligated to make
any required Advance if the Master Servicer fails in its obligation to do so, to
the extent provided in the Trust Agreement. The Master Servicer, the applicable
Servicer or the Trustee, as applicable, will be entitled to recover any Advances
made by it with respect to a Mortgage Loan out of late payments thereon or out
of related 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. No
party will 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 a
reduction of the applicable Mortgage Rate by application of the Relief Act.
COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS
The Servicers will, to the extent required by the related loan documents,
maintain escrow accounts for the collection of hazard insurance premiums and
real estate taxes with respect to the Mortgage Loans, and will make advances
with respect to delinquencies in required escrow payments by the related
mortgagors.
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<PAGE> 38
INSURANCE COVERAGE
The Master Servicer and each Servicer are 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 their respective
officers and employees.
EVIDENCE AS TO COMPLIANCE
The Trust Agreement will provide that each year during which the Master
Servicer directly services any of the Mortgage Loans a firm of independent
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 mortgage
loans similar to the Mortgage Loans by the Master Servicer and that, on the
basis of such examination, such firm is of the opinion that the master servicing
has been conducted in accordance with the terms of the Trust Agreement, except
for (i) such exceptions as the firm believes to be immaterial and (ii) such
other exceptions set forth in such statement.
CERTAIN RIGHTS RELATED TO FORECLOSURE AND THE SPECIAL SERVICER
Certain rights in connection with foreclosure of defaulted Mortgage Loans
will be granted to the holder of the then outstanding Class of Subordinate
Certificates having the highest numerical Class designation (i.e., the
Subordinate Class most junior in priority of distributions) (the "Directing
Holder"). Such rights will include (i) the right to recommend foreclosure or
alternatives to foreclosure, which recommendation the Special Servicer shall
follow to the extent consistent with applicable servicing standards set forth in
the Special Servicing Agreement and (ii) the right to purchase such Mortgage
Loans from the Trust Fund. Any such purchase may affect the yields to maturity
of the Offered Certificates.
The Directing Holder will also have the right to terminate the rights and
obligations of the Special Servicer under the Special Servicing Agreement at any
time, without cause, and to appoint a successor special servicer, provided that
(i) such successor is reasonably acceptable to the Master Servicer and (ii) a
letter is provided to the Trustee from the Rating Agency to the effect that such
termination and appointment will not result in the qualification, reduction or
withdrawal of the ratings then applicable to the Certificates.
The rights of the Directing Holder may be transferred to any future holder
of the Class of Subordinate Certificates then holding such rights if, prior to
such transfer, (i) the Special Servicer consents thereto and (ii) a letter is
provided to the Trustee from the Rating Agency to the effect that the transfer
of such rights to the proposed transferee will not result in the qualification,
reduction or withdrawal of the ratings then applicable to the Certificates.
TRUST AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Trust Agreement (the "Trust
Agreement") dated as of June 1, 1998 among the Depositor, the Master Servicer
and the 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. Offered Certificates in
certificated form will be transferable and exchangeable at the Corporate Trust
Office of the Trustee, which will serve as Certificate Registrar and Paying
Agent. The Trustee 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 First Union National Bank, 230 South
Tryon Street NC1179, Charlotte, North Carolina 28288, Attention: Structured
Finance.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned to the Trustee, together with all
principal and interest received with respect to the Mortgage Loans on and after
the Cut-off Date, other than Scheduled Payments due on such 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
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<PAGE> 39
specify with respect to each Mortgage Loan, among other things, the original
principal balance and the Scheduled Principal Balance 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 or in blank, (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 to be a true and
complete copy of such Mortgage sent for recording) or, in the case of a
Cooperative Loan, the original security agreement and related documents, (iii)
an original assignment of the Mortgage to the Trustee or in blank in recordable
form or, in the case of a Cooperative Loan, an original assignment of security
agreement and related documents, (iv) the policies of title insurance issued
with respect to each Mortgage Loan (other than a Cooperative Loan), and (v) the
originals of any assumption, modification, extension or guaranty agreements.
Where necessary to protect the interest of the Trustee in the Mortgage Loans,
the assignments to the Trustee in connection with the Mortgage Loans are
required to be submitted for recording promptly after the Closing Date.
Pursuant to the terms of the agreements (each, a "Sale Agreement") whereby
the Loans were purchased by the Seller, each transferor of Mortgage Loans (a
"Transferor") has made, as of the date of the applicable agreement (each such
date, a "Sale Date"), to the Seller certain representations and warranties
concerning the related Mortgage Loans that generally include representations and
warranties similar to those summarized in the Prospectus under the heading "LOAN
UNDERWRITING PROCEDURES AND STANDARDS -- Representations and Warranties." The
Seller's rights under each Sale Agreement will be assigned to the Trustee for
the benefit of Certificateholders. Within the period of time specified in the
applicable Sale Agreement following its discovery of a breach of any
representation or warranty that materially or adversely affects the interests of
Certificateholders in a Mortgage Loan, or receipt of notice of such breach, the
applicable Transferor will be obligated to cure such breach or purchase the
affected Mortgage Loan from the Trust Fund for a price equal to the unpaid
principal balance thereof plus accrued interest thereon (or, in certain
circumstances, to substitute another mortgage loan).
Pursuant to the terms of a sale and assignment agreement (the "Sale and
Assignment Agreement") whereby the Mortgage Loans will be purchased by the
Depositor, the Seller will make to the Depositor (and the Depositor will assign
its rights thereunder to the Trustee for the benefit of Certificateholders) only
certain limited representations and warranties intended to address certain
material conditions that may arise with respect to the Mortgage Loans between
the applicable Sale Date and the Closing Date. In the event of a breach of any
such representation or warranty that does not constitute a breach of any
representation or warranty made by the applicable Transferor as described above,
the Seller will be obligated in the same manner as the Transferor, as described
above.
To the extent that any such Mortgage Loan is not repurchased by the
applicable Transferor or the Seller and a Realized Loss occurs with respect to
such Mortgage Loan, holders of Offered Certificates, in particular the Offered
Subordinate Certificates, may incur a loss.
PURCHASE OF CERTAIN DEFAULTED MORTGAGE LOANS
Pursuant to the terms of the Trust Agreement, the Special Servicer (and in
certain circumstances, the Directing Holder) will have the option to purchase
certain seriously delinquent Mortgage Loans. Any such purchase may affect the
yields to maturity of the Offered Certificates. The aggregate of such purchases
may not exceed five percent of the aggregate Scheduled Principal Balance of the
Mortgage Loans as of the Cut-off Date.
The Directing Holder will also have the right to purchase any defaulted
Mortgage Loan serviced by the Special Servicer under the circumstances described
under "SERVICING OF THE MORTGAGE LOANS -- Certain Rights Related to Foreclosure
and the Special Servicer" herein.
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<PAGE> 40
VOTING RIGHTS
Voting rights under the Trust Agreement will be allocated among the Offered
Certificates in proportion to their respective Certificate Principal Amounts or
Notional Amounts, and among all Certificates as provided in the Trust Agreement.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
GENERAL
The yields to maturity on the Offered Certificates will be affected by the
rate of principal payments on the Mortgage Loans (including prepayments, which
may include amounts received by virtue of repurchase, condemnation, insurance or
foreclosure), the extent to which Mortgage Loans bearing higher Mortgage Rates
prepay at a more rapid rate than Mortgage Loans with lower Mortgage Rates, the
amount and timing of mortgagor delinquencies and defaults resulting in Realized
Losses, the purchase price for the Certificates and other factors.
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 below the interest rates on the Mortgage 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 such factors as
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.
The majority of the Mortgage Loans are subject to prepayment penalties
during the first five years after origination (the "Penalty Period"). In any
twelve-month period during the Penalty Period, the borrower may prepay up to 20%
of the original principal balance of the Mortgage Loan without penalty. The
penalty for prepayments in excess of 20% of the original principal balance will
be equal to the lesser of (a) six months' interest on any amount prepaid in
excess of 20% or (b) 2% of any prepayment in excess of 20%. No prepayment
penalty is assessed for any prepayment made after the Penalty Period or if such
prepayment is concurrent with the sale of the Mortgaged Property. Such
prepayment penalties may have the effect of reducing the amount or the
likelihood of prepayment on the Mortgage Loans during the Penalty Period.
The rate of principal payments on the Mortgage Loans will also 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 and
warranties or defective documentation and purchases of defaulted Mortgage Loans
by the Special Servicer or the Directing Holder as described under "TRUST
AGREEMENT -- Purchase of Certain Defaulted Mortgage Loans" and "SERVICING OF THE
MORTGAGE LOANS -- Certain Rights Related to Foreclosure and the Special
Servicer" herein. The timing of changes in the rate of prepayments, liquidations
and repurchases of the related Mortgage Loans may, and the timing of 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. Because 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 payments on the Offered Certificates. In general, the
earlier a prepayment of principal of the related 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 Certificates may not be offset by a subsequent like decrease (or
increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by flooding,
severe storms, landslides, wildfires or other natural disasters. Under each Sale
Agreement, the applicable transferor has represented and warranted that each
Mortgaged Property was free of material damage as of the date of sale of the
related Mortgage Loans to Lehman Capital; under a sale and assignment agreement,
Lehman Capital will make a
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<PAGE> 41
similar representation and warranty as of the Closing Date. In the event of an
uncured breach of any such representation and warranty that materially and
adversely affects the interests of Certificateholders, the related Transferor or
Lehman Capital, as applicable, will be required to repurchase the affected
Mortgage Loan or substitute another mortgage loan therefor. If any damage caused
by the flooding, storms, wildfires, or landslides (or other cause) occurs after
the Closing Date, neither any Transferor nor Lehman Capital will have any such
obligation. In addition, the standard hazard policies covering the Mortgaged
Properties generally do not cover damage caused by flooding and landslides, and
flood or landslide insurance may not have been obtained with respect to such
Mortgaged Properties. To the extent that the insurance proceeds received with
respect to any damaged Mortgage Properties are not applied to the restoration
thereof, such proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may reduce
the weighted average lives of the Offered Certificates and will reduce the
yields on such Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions to holders of the related Certificates of principal amounts
that would otherwise be distributed over the remaining terms of such 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 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 AX1 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 AX1 Certificates should carefully consider that a faster than anticipated
rate of prepayments on the Mortgage Loans could result in an actual yield that
is lower than the anticipated yield, and could result in the failure of such
investors to fully recover their initial investments. See "RISK
FACTORS -- Special Yield Considerations for the Class AX1 Certificates."
The effective yield to holders of the Offered Certificates will be lower
than the yield otherwise produced by the applicable Certificate Interest Rate
and the related purchase price because monthly distributions will not be payable
to such holders until the 25th day of the month (or the immediately following
Business Day if such day is not a Business Day) 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).
SENSITIVITY OF THE CLASS AX1 CERTIFICATES
The yields to maturity of the Class AX1 Certificates will be extremely
sensitive to the rate and timing of principal prepayments on the Mortgage Loans.
Investors in the Class AX1 Certificates should carefully consider the risk that
a faster than anticipated rate of prepayments on the Mortgage Loans could result
in actual yields that are lower than the anticipated yields, and could result in
the failure of such investors to fully recover their initial investments.
Further, prepayments in respect of Mortgage Loans with higher Net Mortgage Rates
(which, under certain scenarios are more likely to be subject to prepayment) may
reduce the Certificate Interest Rate and yield on the Class AX1 Certificates.
To illustrate the significance of prepayments on the yields on such
Certificates, the following table indicates the pre-tax yields to maturity (on a
corporate bond equivalent basis) under the specified assumptions at the constant
percentages of the prepayment assumption (the "Prepayment Assumption," 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. It is
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<PAGE> 42
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, even if the average rate of principal prepayments is consistent with
an investor's expectation.
The following table was prepared on the basis of the characteristics of the
Mortgage Loans expected to be included in the Mortgage Pool and the additional
assumptions that (i) the applicable assumed purchase price, exclusive of accrued
interest in the case of the Class AX1 Certificates (expressed as a percentage of
the applicable Class Certificate Principal Amount or aggregate Notional Amount)
for each Class of Certificates is as set forth below and (ii) the initial
aggregate Notional Amount and Certificate Interest Rate of the Class AX1
Certificates are as set forth or described on the cover page hereof.
PRE-TAX YIELD* TO MATURITY OF THE CLASS AX1 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 9.875%)
<TABLE>
<CAPTION>
PERCENTAGES OF PREPAYMENT ASSUMPTION
------------------------------------
0% 50% 100% 150% 200%
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Yield* .............................................. 33.7% 19.5% 4.2% (12.4)% (30.7)%
</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 and that the actual pre-tax yields
to maturity for the Class AX1 Certificates will correspond to any of the
calculated yields 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 AX1 Certificate.
SUBORDINATION OF THE OFFERED SUBORDINATE CERTIFICATES
On each Distribution Date, the holders of Certificates having a relatively
higher priority of distribution will have a preferential right to receive
amounts of interest and principal due to them on such Distribution Date before
any distributions are made on any Class of Certificates subordinate to such
higher ranking Class. As a result, the yields to maturity and the aggregate
amount of distributions on the Class B1, Class B2 and Class B3 Certificates will
be more sensitive than the yields of higher ranking Certificates to the rate of
delinquencies and defaults on the Mortgage Loans.
Proceeds of liquidated Mortgage Loans available for distribution to
Certificateholders will be reduced by the Special Servicer Incentive Fee, as
described under "SERVICING OF THE MORTGAGE LOANS -- Servicing Compensation and
Payment of Expenses" herein.
As more fully described herein, the principal portion of Realized Losses
(other than Excess Losses) on the Mortgage Loans will be allocated first to the
lower ranking Class of Certificates, then to the higher ranking Class of
Subordinate Certificates, in inverse order of priority, until the Class
Certificate Principal Amount of each such Class has been reduced to zero, before
any such Realized Losses will be allocated to the related Senior Certificates.
The interest portion of Realized Losses on the Mortgage Loans (other than Excess
Losses) will reduce the amount available for distribution on the related
Distribution Date to the lowest ranking related Class outstanding on such date.
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 related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
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<PAGE> 43
Interest otherwise distributable on the Class A2 Certificates will not be
distributable thereon (except as described herein) but will instead be added to
the Class Certificate Principal Amount thereof, and an equal amount will be
distributable as principal in reduction of the Class A1 Certificates, as
described herein.
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 is a prepayment assumption (the "Prepayment Assumption"),
which represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption assumes a constant prepayment rate
of 5% per annum of the outstanding principal balance of such Mortgage Loans in
the first month of the life of such Mortgage Loans and an additional
approximately 1.81818182% (expressed as a percentage per annum) in each month
thereafter until the twelfth month; beginning in the twelfth month and in each
month thereafter during the life of such Mortgage Loans, a constant prepayment
rate of 25% per annum is assumed. As used in the tables below, a 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption,
i.e. no prepayments; a 50% Prepayment Assumption assumes prepayment rates equal
to 50% of the Prepayment Assumption, and so forth. The Prepayment Assumption
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.
The following tables were prepared based on the characteristics of the
Mortgage Loans expected to be included in the Mortgage Pool and the following
additional assumptions (collectively, the "Modeling Assumptions"): (i) the
initial Class Certificate Principal Amounts or aggregate Notional Amount and the
Certificate Interest Rates are as set forth or described on the cover of this
Prospectus Supplement; (ii) each Scheduled Payment of principal and interest is
timely received on the first day of each month commencing in July 1998; (iii)
principal prepayments are received in full on the last day of each month
commencing in June 1998 and there are no Net 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 July 7, 1998
and (viii) Distribution Dates occur on the 25th day of each month commencing in
July 1998.
The actual characteristics of the Mortgage Loans may, and the 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 not expected that the Mortgage
Loans will prepay at a constant rate until maturity, that all of the Mortgage
Loans will prepay at the same rate or that there will be no defaults or
delinquencies on the Mortgage Loans. 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 the
Prepayment Assumption 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 cause the percentages of
initial Class Certificate Principal Amounts outstanding over time and the
weighted average lives of the Offered Certificates to differ (which difference
could be material) from the corresponding information in the tables for each
indicated percentage of the Prepayment Assumption.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class Certificate Principal Amounts of the
Offered Certificates that would be outstanding after each of the Distribution
Dates shown at various percentages of the Prepayment Assumption.
The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the applicable Class 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 Class Certificate
Principal Amount described in (i) above.
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<PAGE> 44
PERCENTAGE OF INITIAL CLASS CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT
ASSUMPTION
<TABLE>
<CAPTION>
CLASS A1 CERTIFICATES CLASS A2 CERTIFICATES
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
June 1999............. 99 85 72 58 44 107 107 107 107 107
June 2000............. 98 71 47 26 9 114 114 114 114 114
June 2001............. 97 58 28 6 0 121 121 121 121 0
June 2002............. 95 47 14 0 0 130 130 130 0 0
June 2003............. 94 37 4 0 0 138 138 138 0 0
June 2004............. 92 29 0 0 0 148 148 45 0 0
June 2005............. 91 23 0 0 0 157 157 0 0 0
June 2006............. 89 18 0 0 0 168 168 0 0 0
June 2007............. 86 15 0 0 0 179 179 0 0 0
June 2008............. 84 12 0 0 0 191 191 0 0 0
June 2009............. 81 9 0 0 0 204 204 0 0 0
June 2010............. 78 7 0 0 0 218 218 0 0 0
June 2011............. 75 5 0 0 0 232 232 0 0 0
June 2012............. 72 3 0 0 0 248 248 0 0 0
June 2013............. 61 1 0 0 0 264 264 0 0 0
June 2014............. 59 0 0 0 0 282 278 0 0 0
June 2015............. 56 0 0 0 0 301 234 0 0 0
June 2016............. 53 0 0 0 0 321 197 0 0 0
June 2017............. 50 0 0 0 0 343 164 0 0 0
June 2018............. 46 0 0 0 0 366 135 0 0 0
June 2019............. 43 0 0 0 0 390 111 0 0 0
June 2020............. 38 0 0 0 0 416 90 0 0 0
June 2021............. 34 0 0 0 0 444 71 0 0 0
June 2022............. 29 0 0 0 0 474 56 0 0 0
June 2023............. 23 0 0 0 0 506 42 0 0 0
June 2024............. 17 0 0 0 0 539 30 0 0 0
June 2025............. 10 0 0 0 0 576 20 0 0 0
June 2026............. 2 0 0 0 0 614 11 0 0 0
June 2027............. 0 0 0 0 0 279 4 0 0 0
June 2028............. 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life in Years 18.0 4.7 2.1 1.4 1.0 28.9 20.6 5.9 3.5 2.5
</TABLE>
<TABLE>
<CAPTION>
CLASS B1, CLASS B2 AND CLASS B3 CERTIFICATES CLASS R CERTIFICATES
---------------------------------------------- ------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ------ ------ ------ ------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
June 1999............. 99 99 99 99 99 100 100 100 100 100
June 2000............. 98 98 98 98 98 100 100 100 100 100
June 2001............. 97 97 97 97 70 100 100 100 100 0
June 2002............. 96 96 96 81 35 100 100 100 0 0
June 2003............. 95 95 95 50 17 100 100 100 0 0
June 2004............. 93 90 86 31 8 100 100 100 0 0
June 2005............. 92 84 66 19 4 100 100 0 0 0
June 2006............. 90 76 48 12 2 100 100 0 0 0
June 2007............. 88 67 35 7 1 100 100 0 0 0
June 2008............. 86 57 26 4 * 100 100 0 0 0
June 2009............. 84 48 19 3 * 100 100 0 0 0
June 2010............. 81 41 14 2 * 100 100 0 0 0
June 2011............. 78 35 10 1 * 100 100 0 0 0
June 2012............. 75 29 7 1 * 100 100 0 0 0
June 2013............. 64 22 5 * * 100 100 0 0 0
June 2014............. 62 19 3 * * 100 100 0 0 0
June 2015............. 60 16 2 * * 100 100 0 0 0
June 2016............. 58 13 2 * * 100 100 0 0 0
June 2017............. 55 11 1 * * 100 100 0 0 0
June 2018............. 52 9 1 * * 100 100 0 0 0
June 2019............. 49 7 1 * * 100 100 0 0 0
June 2020............. 45 6 * * * 100 100 0 0 0
June 2021............. 41 5 * * * 100 100 0 0 0
June 2022............. 36 4 * * * 100 100 0 0 0
June 2023............. 31 3 * * * 100 100 0 0 0
June 2024............. 26 2 * * * 100 100 0 0 0
June 2025............. 20 1 * * * 100 100 0 0 0
June 2026............. 13 1 * * * 100 100 0 0 0
June 2027............. 5 * * * 0 100 100 0 0 0
June 2028............. 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life in Years 19.2 11.8 8.6 5.6 3.9 29.8 29.8 6.2 3.6 2.6
</TABLE>
- ---------------
* Indicates a value between 0.0% and 0.5%.
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<PAGE> 45
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. In the opinion of Brown & Wood LLP, assuming compliance
with all provisions of the Trust Agreement, for federal income tax purposes the
Trust Fund will qualify as a REMIC pursuant to Section 860D of the Internal
Revenue Code of 1986, as amended (the "Code"), each Offered Certificate other
than the Residual Certificates will be a "regular interest" in the REMIC within
the meaning of the Code, and the Residual Certificate will be the sole class of
"residual interest" in the REMIC within the meaning of the Code. 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 Offered
Certificates, other than the Class AX1, Class A2 and Class R Certificates, as
"qualified stated interest" and not as original issue discount. A holder of the
Offered Certificates must include qualified stated interest in income as it
accrues regardless of the holder's usual method of accounting.
The Class AX1 and Class A2 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 100% of the Prepayment
Assumption. 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.
RESIDUAL CERTIFICATES
Special tax considerations apply to an investment in the Residual
Certificate. In certain circumstances, the method of taxation of the Residual
Certificate can produce a significantly less favorable after-tax return for a
beneficial owner of the Residual Certificate than would be the case, if (i) the
Residual Certificate was taxable as a debt instrument or (ii) no portion of the
taxable income on the Residual Certificate in each period was 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.
The Residual Certificate 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 the Residual Certificate by marking them to
market.
The Small Business Job Protection Act of 1996 (the "Small Business Act")
has eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Act provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
residual holder. First, alternative minimum taxable income for
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<PAGE> 46
such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
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 U.S. 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 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 a nonresident alien individual, foreign
partnership or foreign corporation ("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.
The Small Business Act changed the definition of a "foreign" trust. Under
prior law, the definition was based on whether a trust's foreign source income
would be subject to U.S. tax. The new definition contains two objective
requirements which, if satisfied, will cause a trust to be treated as a U.S.
trust. It looks first to whether the trust's administration is subject to a U.S.
court's "primary supervision" and second to whether U.S. fiduciaries control all
substantial decisions of the trust. If both these requirements are met, the
trust is a U.S. trust. All other trusts are "foreign" trusts. The Taxpayer
Relief Act of 1997 clarified the definition of U.S. trusts. It provided that a
trust is a U.S. person if a court in the U.S. has primary jurisdiction over the
trust's administration and one or more U.S. persons have control over
substantial trust decisions. Thus, the fact that a substantial decision is
controlled by a U.S. person who is not a fiduciary will not cause the trust to
be treated as a foreign trust. Moreover, the Taxpayer Relief Act of 1997
provided that to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as U.S. persons prior to such date,
may elect to continue to be U.S. persons.
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<PAGE> 47
It is expected that the Residual Certificate will be a "noneconomic
residual interest" and will have "tax avoidance potential" within the meaning of
the proposed regulations.
The 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 certifying that such transferee is not a Disqualified
Organization and is not purchasing the 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, the Residual Certificate 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 Certificates will not constitute "mortgage related securities" for
purposes of SMMEA, and, as such, are not legal investments for certain entities
to the extent provided in SMMEA. Such investments will also 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 may adopt regulations that prohibit
certain state-chartered institutions from purchasing or holding similar types of
securities.
Accordingly, investors should consult their own legal advisors to determine
whether and to what extent the Offered Certificates may be purchased by such
investors.
USE OF PROCEEDS
The net proceeds from the sale of the Offered Certificates will be applied
by the Depositor, or an affiliate thereof, toward 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 in a terms agreement (collectively, the "Underwriting Agreement") between
the Depositor and the Underwriter, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, all
of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter 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.
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<PAGE> 48
Lehman Brothers Inc. has entered into an agreement with the Depositor to
purchase the Class B4, Class B5 and Class B6 Certificates simultaneously with
the purchase of the Offered Certificates, subject to certain conditions.
The Underwriter is an affiliate of the Depositor and Aurora.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by the
Underwriter, an affiliate of the Seller, the Depositor and Aurora, in connection
with market making transactions in the Offered Certificates. The Underwriter may
act as principal or agent in such transactions. Such transactions will be at
prices related to prevailing market prices at the time of sale.
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.
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 LLP, Washington, D.C.
RATINGS
It is a condition to the issuance of the Senior Certificates other than the
Class AX1 Certificates that they be rated "AAA" by S&P. It is a condition to the
issuance of the Class AX1 Certificates that they be rated "AAAr" by S&P. It is a
condition to the issuance of the Class B1 Certificates that they be rated "AA"
by S&P. It is a condition to the issuance of the Class B2 Certificates that they
be rated "A" by S&P. It is a condition to the issuance of the Class B3
Certificates that they be rated "BBB" by S&P.
The rating of "AAA" is the highest rating that S&P assigns to securities.
The "r" symbol is appended to the rating by S&P of those Certificates that S&P
believes may experience high volatility or 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.
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. 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
(particularly, the Class AX1 Certificates) might suffer a lower than anticipated
yield due to prepayments or may fail to recoup their initial investments.
S-48
<PAGE> 49
Additionally, the rating on the Class R Certificate addresses only the return of
the class principal balance and interest thereon at the stated rate.
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 Agency.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agency; 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 Agency.
S-49
<PAGE> 50
GLOSSARY
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Accrual Amount.............................................. S-17
Accrued Certificate Interest................................ S-17
Act......................................................... S-47
Advances.................................................... S-7
Aggregate Master Servicing Compensation..................... S-36
Aurora...................................................... S-32
Available Distribution Amount............................... S-20
Balloon Loans............................................... S-25
Balloon Payments............................................ S-24
Bankruptcy Code............................................. S-13
Bankruptcy Coverage Termination Date........................ S-23
Bankruptcy Loss Limit....................................... S-23
Bankruptcy Losses........................................... S-22
Basic Fee................................................... S-36
Basic Fee Rate.............................................. S-36
BCD Mortgage Loan........................................... S-34
Beneficial Owner............................................ S-8
Book-Entry Certificates..................................... S-8
Business Day................................................ S-14
Certificate Principal Amount................................ S-17
Certificate Interest Rate................................... S-17
Certificates................................................ S-1
Class Certificate Principal Amount.......................... S-13
Class Percentage............................................ S-18
Closing Date................................................ S-5
Code........................................................ S-45
Corporate Trust Office...................................... S-24
Credit Support Depletion Date............................... S-16
Credit Support Percentage................................... S-16
Cut-off Date................................................ S-5
Cut-off Date Balance........................................ S-8
Debt Service Reduction...................................... S-22
Deficient Valuation......................................... S-22
Definitive Certificate...................................... S-14
Deposit Date................................................ S-20
Depositor................................................... S-1
Directing Holder............................................ S-38
Distribution Date........................................... S-2
DTC......................................................... S-8
Due Period.................................................. S-20
ERISA....................................................... S-11
Excess Losses............................................... S-23
FHA......................................................... Prospectus
FHLMC....................................................... Prospectus
Final Scheduled Distribution Date........................... S-8
Financial Intermediary...................................... S-14
Fleet Financial Group....................................... S-33
FNMA........................................................ Prospectus
Foreclosed Loans............................................ S-35
Foreclosure Ratio........................................... S-35
Fraud Loss Limit............................................ S-23
Fraud Losses................................................ S-22
</TABLE>
S-50
<PAGE> 51
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
GNMA........................................................ Prospectus
Harbourton.................................................. S-32
HUD......................................................... S-34
Insurance Proceeds.......................................... S-21
Interest Accrual Period..................................... S-6
Interest Shortfall.......................................... S-17
Lehman Capital.............................................. S-1
Liquidated Mortgage Loan.................................... S-22
Liquidation Proceeds........................................ S-21
Loan-to-Value Ratio......................................... S-24
Master Servicer............................................. S-3
Master Servicing Fee........................................ S-36
Master Servicing Fee Rate................................... S-36
Modeling Assumptions........................................ S-43
Mortgage.................................................... Prospectus
Mortgage Loans.............................................. S-1
Mortgage Note............................................... Prospectus
Mortgage Pool............................................... S-6
Mortgage Rate............................................... S-7
Mortgaged Property.......................................... S-7
Net Gains/(Losses).......................................... S-35
Net Mortgage Rate........................................... S-17
Net Prepayment Interest Shortfalls.......................... S-18
Nonresidents................................................ S-46
Norwest..................................................... S-3
Ocwen....................................................... S-3
Offered Certificates........................................ S-1
Offered Subordinate Certificates............................ S-2
Option One.................................................. S-32
Original Credit Support Percentage.......................... S-16
Original Subordinate Principal Balance...................... S-19
Originators................................................. S-30
Participant................................................. S-14
Penalty Period.............................................. S-40
Plans....................................................... S-48
Prepayment Assumption....................................... S-41
Prepayment Interest Shortfall............................... S-18
Prepayment Penalty Amount................................... S-25
Prepayment Period........................................... S-20
Principal Distribution Amount............................... S-18
Principal Prepayments....................................... S-20
Prospectus.................................................. Prospectus
Rating Agency............................................... S-11
Realized Loss............................................... S-22
Record Date................................................. S-14
Relief Act.................................................. S-17
Relief Act Reduction........................................ S-17
REMIC....................................................... S-2
REMIC Regulations........................................... S-46
Remittance Date............................................. S-21
Reserve Fund................................................ S-36
Residual Certificate........................................ S-2
Restricted Classes.......................................... S-16
Rules....................................................... S-15
</TABLE>
S-51
<PAGE> 52
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Sale Agreement.............................................. S-39
Sale and Assignment Agreement............................... S-39
Sale Date................................................... S-39
Scheduled Payment........................................... S-6
Scheduled Principal Balance................................. S-18
Seller...................................................... S-1
Senior Certificates......................................... S-2
Senior Percentage........................................... S-19
Senior Prepayment Percentage................................ S-19
Senior Principal Distribution Amount........................ S-18
Servicer.................................................... S-5
Servicer Remittance Date.................................... S-20
Servicing Agreement......................................... S-35
Servicing Fee............................................... S-36
Servicing Fee Rate.......................................... S-36
Small Business Act.......................................... S-45
SMMEA....................................................... S-2
S&P......................................................... S-11
Special Hazard Loss Limit................................... S-23
Special Hazard Losses....................................... S-22
Special Servicer............................................ S-3
Special Servicer Fee........................................ S-36
Special Servicer Incentive Fee.............................. S-36
Special Servicing Agreement................................. S-34
Subordinate Certificates.................................... S-2
Subordinate Class Percentage................................ S-18
Subordinate Percentage...................................... S-19
Subordinate Prepayment Percentage........................... S-19
Subordinate Principal Distribution Amount................... S-19
TILA Amendment.............................................. S-13
Total Portfolio............................................. S-35
Transferor.................................................. S-39
Transferred Mortgage Loan................................... S-36
Trust Agreement............................................. S-5
Trust Fund.................................................. S-1
Trustee..................................................... S-24
Trustee Fee................................................. S-24
Trustee Fee Rate............................................ S-24
Underwriter................................................. S-1
Underwriting Agreement...................................... S-47
Underwriting Guidelines..................................... S-30
</TABLE>
S-52
<PAGE> 53
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, where applicable,
the Servicer or 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 forms of credit support specified in
the related Prospectus Supplement. Manufactured Home Loans and 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. Mortgage Loans and 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 Mortgage Loans (or
participation interests therein) may be serviced by a Servicer, which may employ
one or more subservicers, by various servicers under the supervision of a Master
Servicer or by the Master Servicer directly, as specified in the related
Prospectus Supplement.
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. 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 the yields 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.
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,
any Servicer or 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, one or more elections may
be made to treat the Trust Fund for a Series or specified portions thereof as a
"real estate mortgage investment conduit" (a "REMIC") or as a "financial asset
securitization investment trust" (a "FASIT") 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 Inc., an affiliate of the Depositor, as more
fully described herein and in the related Prospectus Supplement. See "PLAN OF
DISTRIBUTION" herein.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH IN "RISK FACTORS" ON PAGE 19.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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 March 18, 1998
<PAGE> 54
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 balance, the Certificate Interest Rate (or method for
determining it) 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) information as to the Trustee and any
Servicer or Master Servicer for a Series, and, 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 Distribution Dates for the respective
Classes; (j) additional information with respect to any certificate guarantee
insurance policy, 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; (k) whether one or more REMIC elections will
be made, and if any such election is made the designation of the regular
interests and residual interests; (l) whether a FASIT election will be made with
respect to the Trust Fund , and if so, the designation of the regular interests
and the ownership interest; and (m) 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, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office,
7 World Trade Center, Suite 1300, 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.
The Commission also maintains a site on the World Wide Web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Seller has filed the Registration Statement, including all exhibits thereto,
through the EDGAR system and therefore such materials should be available by
logging onto the Commission's Web site. The Commission maintains computer
terminals providing access to the EDGAR system at each of the offices referred
to above.
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 Inquiry department of FHLMC at 8200 Jones Branch
Drive, McLean, Virginia 22102 (outside Washington, D.C. metropolitan area,
telephone 800-336-3672; within Washington, D.C. metropolitan area, telephone
703-759-8160). 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Certificates issued by such Trust Fund shall
be deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee specified in the accompanying Prospectus Supplement.
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> 55
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
for such Series. 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 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, any
Servicer or 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 --
Subordinate 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
3
<PAGE> 56
assets included in the Trust Fund for a
Series. See "SPECIAL CONSIDERATIONS" and "THE
DEPOSITOR."
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
Certificate Interest Rate specified in (or
determined in the manner set forth in) the
related Prospectus Supplement. The
Certificate Interest 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, or
may be a floating rate of interest determined
from time to time as specified in the related
Prospectus Supplement.
A Class or Classes of Certificates of a Series
may be entitled to distributions of interest
only or of no interest, or be entitled to
nominal interest or principal distributions,
and may accrue interest that is, for a period
of time, not distributed thereon but instead
is added to the principal balance thereof.
See "DESCRIPTION OF THE CERTIFICATES" and
"YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
PRINCIPAL DISTRIBUTIONS....... 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 include
allocation by request, random lot, or other
means) set forth in the related Prospectus
Supplement.
A Class or Classes of 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
Series having other than monthly Distribution
Dates may 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 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.
4
<PAGE> 57
FINAL SCHEDULED DISTRIBUTION
DATE.......................... The Final Scheduled Distribution Date for each
Class of a Series will be the date after
which no Certificates of such Class will
remain outstanding, on the basis of the
assumption that timely payments or
distributions are made on the Primary Assets
in the related Trust Fund in accordance with
their terms and any other assumptions set
forth in the related Prospectus Supplement.
The Final Scheduled Distribution Date of a
Class 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
"RISK FACTORS" and "YIELD, PREPAYMENT AND
MATURITY CONSIDERATIONS" herein.
OPTIONAL TERMINATION.......... If so specified in the related Prospectus
Supplement, the Depositor, the Servicer or
Master Servicer, or such other entity that is
specified in the related Prospectus
Supplement, including the holder of the
residual interest in a REMIC or the holder of
an ownership interest in a FASIT, 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 Primary Assets or the
aggregate Principal Amount of the
Certificates (or of certain Classes thereof),
as specified in the related Prospectus
Supplement, is less than the amount or
percentage specified in the related
Prospectus Supplement. See "DESCRIPTION OF
THE CERTIFICATES -- Optional Termination"
herein.
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, in whole or in
part, at the request of the holders of such
Class or to mandatory repurchase by the
Depositor (including by random lot or other
means). See "DESCRIPTION OF THE CERTIFICATES"
herein.
5
<PAGE> 58
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. The
Trust Fund for a Series will also include the
Collection Account and the Certificate
Account, and may include certain policies of
insurance relating to the Primary Assets, and
any of various forms of credit support, all
as specified in the related Prospectus
Supplement. See "THE TRUST
FUNDS -- Collection Account and Certificate
Account," "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
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Trustee as 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 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, may have various payment
character-
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istics 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 payments or other
special payment features. The Mortgage Loans
may have fixed or adjustable interest rates
(Mortgage Loans having such adjustable rates
are hereinafter sometimes referred to 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 similar security instruments creating a
first lien or, if so specified in the related
Prospectus Supplement, a second lien, on
related Mortgaged Properties, or on
borrower's leasehold interest in real
property. 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 the 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
properties 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, Mortgaged
Properties will be covered by standard hazard
insurance policies (which may be blanket
policies) insuring against losses due to
various causes, including fire, lightning and
windstorm. Mortgaged Properties 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 and separate standard
hazard insurance on the Condominium Unit
securing a Mortgage Loan will not generally
be required. Unless otherwise specified in
the related Prospectus Supplement, each first
lien Mortgage Loan
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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. To the extent
described herein or in the related Prospectus
Supplement, each Loan (other than a
Cooperative Loan or a Loan secured by a
Manufactured Home) will be covered by a title
insurance policy or, in lieu thereof, an
attorney's opinion of title. 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).
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%, and each
second lien Mortgage Loan will have a 5-to
30-year term at origination and a
Loan-to-Value Ratio at origination not
exceeding 125%.
Mortgage Loans that constitute Primary Assets
will be purchased by the Depositor in the
open market or in privately negotiated
transactions, including transactions with the
Servicer or Master Servicer or with entities
affiliated with the Depositor, the Trustee or
the Servicer or 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. A
Manufactured Home Loan 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.
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 informa-
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<PAGE> 62
tion may be on an approximate basis). Unless
otherwise specified in a related Prospectus
Supplement, each Manufactured Home Loan will
have a 3- to 30-year term at origination and
a Loan-to-Value Ratio at origination not in
excess of 95%.
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 the Servicer or Master
Servicer or with entities affiliated with the
Depositor, the Trustee or the Servicer or
Master Servicer.
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 Trustee, the Servicer or
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. 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 cap
agreement or similar contract issued by a
bank, insurance company, savings bank,
savings and loan association or other entity
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.
PRE-FUNDING ARRANGEMENT....... If so specified in the related Prospectus
Supplement, the related Trust Agreement will
contain provisions pursuant to which the
Depositor will agree to transfer additional
Primary Assets (the "Subsequent Primary
Assets") into the related Trust Fund during a
specified period of time following the date
on which the related Certificates are issued
(such provisions being referred to herein as
a "Pre-Funding Arrangement"). Any such
Pre-Funding Arrangement will require that any
Primary Assets so transferred conform to the
requirements specified in the related Trust
Agreement. See "The Trust
Funds -- Pre-Funding Arrangements."
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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, 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
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 "RISK FACTORS" 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 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
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<PAGE> 64
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 "RISK FACTORS,"
"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 Servicer or 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
due to denial of insurance coverage due to
misrepresentations made in connection with
the origination or sale of a Loan. The issuer
of
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<PAGE> 65
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 may, to the
extent specified in the related Prospectus
Supplement, guarantee timely distributions of
interest and full distributions of principal
on the basis of a schedule of principal
distributions or a Final Scheduled
Distribution Date 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. 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 Fund 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
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<PAGE> 66
released from the Reserve Funds and will not
be available for future distributions on the
Certificates of such Series.
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."
f. FHA INSURANCE AND VA
GUARANTY................. All or a portion of the Mortgage Loans in a
Mortgage Pool may be insured by FHA insurance
("FHA Insurance") and may be partially
guaranteed by the VA (a "VA Guaranty").
g. OTHER ARRANGEMENTS....... Other arrangements as described in the related
Prospectus Supplement including, but not
limited to, one or more letters of credit,
surety bonds, other insurance or third party
guaranties, may be used to provide coverage
for certain risks of default or various types
of losses.
SERVICING OF LOANS............ The Master Servicer or Servicer identified in
the related Prospectus Supplement will
service the Loans directly or administer and
supervise the performance by Servicers or
subservicers, as the case may be, of their
duties and responsibilities under separate
servicing agreements (the "Servicing
Agreements") or subservicing agreements (the
"Subservicing Agreements"). 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 any Servicer
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 sources of
credit support). 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
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<PAGE> 67
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 Certificate that will
guarantee certain of the Servicer's or Master
Servicer's obligations. See "SERVICING OF
LOANS."
FEDERAL INCOME TAX
CONSIDERATIONS................ The federal income tax consequences to
Certificateholders will vary depending on
whether one or more elections are made to
treat the Trust Fund or specified portions
thereof as either a REMIC or a FASIT under
the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"). The
Prospectus Supplement for each Series of
Certificates will specify whether such an
election will be made.
If a REMIC election or a FASIT election is
made, Certificates representing regular
interests in a REMIC or FASIT will generally
be treated as evidences of indebtedness for
federal tax purposes. Stated interest on such
regular interests will be taxable as ordinary
income and taken into account using the
accrual method of accounting, regardless of
the holder's normal accounting method. If
neither a REMIC election nor a FASIT election
is made, interest (other than original issue
discount ("OID")) on Certificates that are
characterized as indebtedness for federal
income tax purposes will be includible in
income by holders thereof in accordance with
their usual method of accounting.
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 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." In the case of a FASIT
election, a class of Certificates will be
designated as the ownership interest, as
defined in the Code. Certificates classified
as REMIC Residual Interests or the FASIT
Ownership Interest 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
or FASIT Regular Interests.
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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.
The holder of a FASIT ownership interest
determines its taxable income by taking into
account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of
a FASIT. In determining that taxable income,
the holder of a FASIT ownership interest must
determine the amount of interest, original
issue discount, market discount, and premium
recognized with respect to the FASIT's assets
and the FASIT regular interests issued by the
FASIT according to a constant yield
methodology and under an accrual method of
accounting. In addition, holders of FASIT
ownership securities are subject to
limitations on their ability to use losses to
offset income from their FASIT regular
interests.
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 Certificates will be considered
to represent "qualifying real property loans"
for mutual savings banks and domestic
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<PAGE> 69
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 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 acquisition,
holding or disposition of Certificates could
give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Code. See "ERISA CONSIDERATIONS."
LEGAL INVESTMENT.............. Unless otherwise specified in the related
Prospectus Supplement, Certificates of each
Series offered by this Prospectus and the
related Prospectus Supplement that 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
CONSIDERATIONS."
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
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<PAGE> 70
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
"RISK FACTORS."
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<PAGE> 71
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 Interest 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.
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<PAGE> 72
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 Classes, any limits with
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".
Status of the Primary Assets in the Event of Insolvency. Each transfer of
the Primary Assets for a Series, including the transfer of such Primary Assets
to the Depositor, and from the Depositor to a trust, will be intended to be an
absolute and unconditional sale of such Primary Assets. However, in the event of
the bankruptcy of a prior owner of the Primary Assets, a trustee in bankruptcy
or a creditor of the insolvent party could attempt to recharacterize the sale of
the Primary Assets by such insolvent party as a borrowing secured by a pledge of
the Primary Assets. Such an attempt, even if unsuccessful, could result in
delays in payments on the Certificates of such Series. If such an attempt were
successful, holders of such Certificates could suffer losses, and could fail to
fully recover their initial investments.
Certain Loans and Mortgaged Property. Loans such as GPM Loans, GEM Loans,
ARMs, Bi-Weekly Loans and Buy-Down Loans are of relatively recent origin. As a
result, reliable prepayment, loss and foreclosure statistics relating to such
Loans may not be 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
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<PAGE> 73
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 or seller 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 although both FNMA and FHLMC are federally-chartered
corporations), such guaranties are backed by the credit of FNMA or FHLMC,
respectively, and not by the full faith and credit of the United States. Neither
the United States 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, holding 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.
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<PAGE> 74
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, Planned Amortization
Certificates ("PACs") or such other Certificates as are described in the related
Prospectus Supplement. 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 fourth 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.
Each Series will be issued in 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. See "-- Book-Entry
Registration" herein.
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 that receive interest will be
made periodically at the intervals and at the Certificate Interest 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 a pro rata or random lot basis among all of the
Certificates of such Class, or otherwise, 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 would have received if there had
been sufficient eligible funds available for distribution and the amount
actually distributed will be included in the calculation of the amount which the
Certificateholders are entitled to receive on the next Distribution Date.
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.
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<PAGE> 75
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
rates, then the Certificate Interest 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 rates, then the Certificate Interest 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 Certificate
Interest 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
one or more Classes of Interest Weighted Certificates, one or more Classes 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 Interest 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 Interest 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 Accretion Termination Date specified in the
related Prospectus Supplement. On each Distribution Date prior to and including
the Accretion Termination Date, interest on such Class of Compound Interest
Certificates will accrue and the amount of interest accrued on such Distribution
Date (the "Accrual Amount") will be added to the principal balance thereof on
the related Distribution Date. On each Distribution Date after the Accretion
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 Interest Rate of a Floating Rate Certificate will
be a variable or adjustable rate, which may be 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.
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<PAGE> 76
To the extent provided in the related Prospectus Supplement, a Series of
Multi-Class Certificates may include one or more Classes of Planned Amortization
Certificates ("PACs"), Targeted Amortization Certificates ("TACs") or other
Certificates whose entitlement to distributions of principal is based on a
schedule of balances or amounts.
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. The Principal Distribution Amount for a Multi-Class
Series on each Distribution Date will be as 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.
OPTIONAL TERMINATION
If so specified in the related Prospectus Supplement for a Series, the
Depositor, the Servicer or 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 Asset Principal Balance of the Primary Assets is less
than a specified percentage of the initial Aggregate Asset Principal Balance, or
the aggregate principal amount of the Certificates (or of certain Classes
thereof) is less than a specified percentage of their initial aggregate
principal amount. In the case of a Trust Fund for which a REMIC or a FASIT
election has been made, the Trustee may require a satisfactory opinion of
counsel that the repurchase will not jeopardize the status of the REMIC or the
status of the FASIT. 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 redemption, in whole
or in part, 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 Agencies. 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.
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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.
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.
Unless otherwise 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, or (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
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book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificateowners.
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.
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 Interest 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 Certificates 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
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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 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 substantially
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 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 Interest 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
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.
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, 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.
Neither CPR nor SPA 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
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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 any 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 CPR or 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.
There can be no assurance as to the respective rates of prepayment of such Loans
in either stable or changing interest rate environments.
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 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
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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".
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, to the extent
that such agreements are assigned to the Trustee; (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 asset,
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).
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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,
the Depositor or another party, 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. 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.
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
Cer-
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tificate 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 and/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.
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 of the United
States of America. Section 306(g) of Title III of the National Housing Act of
1934, as amended (the "Housing Act") authorizes GNMA to guarantee the timely
payment of the principal of and the interest on GNMA 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,
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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 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.
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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 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
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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. Under FHLMC's Gold
PC Program, FHLMC guarantees the timely payment of principal based on the
difference between the pool factor published in the month preceding the month of
distribution and the pool factor published in such month of distribution.
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 reserves
the right to exercise its judgment with respect to the mortgage loans in 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.
Under FHLMC's Cash Program, 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. Under such program, FHLMC
purchases groups of whole mortgage loans from 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. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on
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the underlying mortgage loans, minus a minimum servicing fee and the amount of
FHLMC's management and guarantee income as agreed upon between the seller and
FHLMC.
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. 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
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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.
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
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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 certificate rate or ranges thereof
for the Private Mortgage-Backed Securities; (iv) the weighted average
certificate rate of the Private Mortgage-Backed Securities; (v) the PMBS Issuer,
the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee for such
Private Mortgage-Backed Securities; (vi) 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; (vii) 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 (viii) the terms
on which Loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
If information of the nature described above regarding 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 any 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". Unless otherwise specified
in the Prospectus Supplement for the related Series, 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 or if
so specified in the related Prospectus Supplement, a second 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.
If specified in the applicable Prospectus Supplement, the Mortgage Loans
may be secured by mortgages, deeds of trust or other similar Security
Instruments creating a lien on borrowers' leasehold interests in real property
under circumstances that the Depositor determines are commonly acceptable to
institutional mortgage investors. A Mortgage Loan secured by a leasehold
interest in real property is secured not by a fee simple interest in the
Mortgaged Property but rather by a leasehold interest under which the mortgagor
has the right, for a specified term, to use the related real estate and the
residential dwelling or dwellings located thereon. Generally, a Mortgage Loan
will be secured by a leasehold interest only if the use of leasehold estates as
security for mortgage loans is customary in the area, the lease is not subject
to any prior lien that could
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result in termination of the lease and the term of the lease ends at least five
years beyond the maturity date of the related Mortgage Loan.
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
five years greater than the term of the related Mortgage Loan unless otherwise
specified in the related Prospectus Supplement. 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 to the Cooperative by such tenant-stockholder. See
"CERTAIN LEGAL ASPECTS OF LOANS".
The aggregate principal balance of Mortgage Loans with respect to Mortgaged
Properties 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 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 each Rating Agency that 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 first lien Mortgage Loan shall have had a Loan-to-Value Ratio
at origination in excess of 95%, and no second lien Mortgage Loan shall
have had a Loan-to-Value Ratio at origination in excess of 125%;
(b) no first lien 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 first lien Mortgage Loan must have an original term to
maturity of not less than 10 years and not more than 40 years and each
second lien Mortgage Loan must have an original term to maturity of not
less than 5 years and not more than 30 years;
(d) no Mortgage Loan may be included which, as of the Cut-off Date, is
more than 59 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
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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"). In the case of a Mortgage Loan to finance the purchase
of a Mortgaged Property, the fair market value of such Mortgaged Property 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%,and the Buy-Down Period
will not exceed three years. The maximum amount of funds 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 (the "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.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Property, (a) no Mortgage Loan will have been delinquent
for more than 59 days within the 12-month period ending with the Cut-off Date,
(b) no more than two payments will have been 59 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, biweekly payment, conventional,
fully-amortizing Mortgage Loans 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 one or more Scheduled
Payments; thereafter, the Mortgage Rates will adjust periodically 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.
Adjustable mortgage rates can cause payment increases that some borrowers
may find difficult to make. However, each of the ARMs may provide that its
mortgage rate may not be adjusted to a rate above the applicable lifetime
mortgage rate cap (the "Lifetime Mortgage Rate Cap"), if any, 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
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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.
The index applicable to any ARMs comprising the Primary Assets (the
"Index") will be the one-month LIBOR Index, 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 or such other index or indices as are specified or
described in the related Prospectus Supplement.
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, 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 not 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 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 any 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.
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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 30 years;
(c) no Manufactured Home Loan may be as of the Cut-off Date more than
59 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".
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 any 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.
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PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a Series,
the related Trust Agreement will provide for a commitment by the Depositor to
subsequently convey to the applicable Trust Fund additional Primary Assets
("Subsequent Primary Assets") following the date on which the related
Certificates are issued (a "Pre-Funding Arrangement"). With respect to a Series,
the Pre-Funding Arrangement will require that any Subsequent Primary Assets
included in the Trust Fund conform to the requirements and conditions provided
in the related Trust Agreement. If a Pre-Funding Arrangement is utilized in
connection with the issuance of the Series of Certificates, on the closing date
for the issuance of such Series the related Trustee will be required to deposit
in a segregated account (a "Pre-Funding Account") all or a portion of the
proceeds received by such Trustee in connection with the sale of one or more
Classes of Certificates of such Series; and, subsequently, the Trust Fund will
acquire Subsequent Primary Assets in exchange for the release of money from the
Pre-Funding Account for such Series. In addition, the Pre-Funding Arrangement
will be limited to a specified period, not to exceed three months, during which
time any transfers of Subsequent Primary Assets must occur and to a maximum
deposit to the related Pre-Funding Account of no more than thirty-five percent
(35%) of the aggregate proceeds received from the sale of all Classes of
Certificates of such Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Certificates as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Primary Assets to be included
in the Trust Fund after the closing date for the issuance of any particular
Series will require application of substantially all of the Pre-Funding Account,
and it is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any Certificates, no assurance can be
given that such a distribution with respect to the Certificates will not occur
on the Distribution Date following the end of the Pre-Funding Arrangement.
Amounts on deposit in the Pre-Funding Account will be invested as provided
in the related Trust Agreement in investments permitted by each applicable
Rating Agency.
COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
A separate Collection Account for each Series will be established by the
Trustee, or 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. If 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 Trustee, the Master Servicer or a
Servicer as additional 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 C 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 (or Servicer) and all required
withdrawals from any reserve funds for such Series will be deposited, pending
distribution to the Certificateholders. If specified in the related Prospectus
Supplement, any reinvestment income or other gain
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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 Trustee or the Master Servicer as additional 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 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.
LOAN UNDERWRITING PROCEDURES AND STANDARDS
UNDERWRITING STANDARDS
The Depositor expects that all Loans comprising the Primary Assets for a
Series will have been originated generally in accordance with the underwriting
procedures and standards described herein, except as otherwise set forth in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, 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; 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, 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 the FHA and the VA,
respectively.
In general, 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 generally will have furnished information with
respect to its assets, liabilities, income, credit history, employment history
and personal information, and furnished 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. In general, an employment verification is
obtained from an independent source (typically the borrower's employer), which
reports the length of employment with that organization, the borrower's current
salary and whether it is expected that the borrower will continue such
employment in the future. If the borrower was self-employed, the borrower may
have been required to submit copies of recent signed 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,
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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 personally inspect the property and verify that it was in
good condition and that construction, if new, had been completed. If an
appraisal was required, such 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.
In general, 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
or a condominium association) 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 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.
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
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 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" or "no documentation" program. 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.
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.
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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
value of the real property securing such Loans will continue; in fact, some
regions of the country have experienced significant depreciation in real estate
values in recent periods. Further, there is no assurance that appreciation of
real estate values generally, if such appreciation occurs, 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 in one or more
regions of the United States should experience 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. 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 other
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) with respect to first lien Mortgage Loans,
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 of material damage and was in good repair; (iv) each
Mortgage Loan at the time
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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 one or two payments 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 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, unless otherwise
specified in the related Prospectus Supplement, the Depositor will represent and
warrant based, in part, upon representations and warranties of the originator of
such Cooperative Loan that (i) with respect to first lien Cooperative Loans, 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, in part, 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) with respect
to fist lien Manufactured Home Loans, 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 59 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.
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SUBSTITUTION OF PRIMARY ASSETS
Substitution of Primary Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Primary Asset or
in the event the documentation with respect to any Primary Asset is determined
by the Trustee to be incomplete. The period during which such substitution will
be permitted generally will be indicated in the related Prospectus Supplement.
The related Prospectus Supplement will describe any other conditions upon which
Primary Assets may be substituted for Primary Assets initially included in the
Trust Fund.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans constituting the
Primary Assets in the Trust Fund will be provided, as specified in the related
Prospectus Supplement, either by the Master Servicer directly or through one or
more servicers (the "Servicers") subject to supervision by the Master Servicer,
or by a single Servicer that is a party to the Trust Agreement for a Series and
services the Loans directly or through one or more subservicers (the
"Subservicers"). In general, descriptions herein of the rights and obligations
of a Master Servicer will also be applicable to a Servicer, and descriptions
herein of the rights and obligations of Servicers that service Loans under the
supervision of a Master Servicer will generally be applicable to Subservicers.
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 may or may not, as
specified in the related Prospectus Supplement, 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. If a single Servicer services the Loans through Subservicers, such
Servicer will be ultimately responsible for the performance of all servicing
activities.
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
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 either
a portion of the Servicing Fee or a separate 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 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.
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COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Master Servicer, acting directly or through Servicers, 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 and any 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 or the Servicers acting under its supervision, 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. However, 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 premiums, 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
or the applicable Servicers 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 or the Trustee will establish a separate account (the
"Collection Account") in the name of the Trustee. The Collection Account will be
maintained in an account or accounts (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, (ii) 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 or (iii) with a depository
institution otherwise acceptable to each Rating Agency.
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.
Unless otherwise specified in the related Prospectus Supplement, 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
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("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 interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
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 the related 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
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(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 generally 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.
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 or 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
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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 (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, the 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 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
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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 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
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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. To the extent specified in the related
Prospectus Supplement, the Master Servicer will maintain a special hazard
insurance policy, 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 terminated 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
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
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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 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
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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
than the value of 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-onsale 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.
CERTAIN RIGHTS RELATED TO FORECLOSURE
Certain rights in connection with foreclosure of defaulted Mortgage Loans
may be granted to the holders of the Class of Subordinate Certificates ranking
lowest in priority and, when such Certificates are no longer outstanding, to the
holders of the Class of Subordinate Certificates ranking next lowest in
priority. Such rights may include the right to delay foreclosure until a
Mortgage Loan has been delinquent for six months, provided that upon election to
delay foreclosure such holder establishes a reserve fund for the benefit of the
Trust Fund in an amount equal to 125% of the greater of the Scheduled Principal
Balance of such Mortgage Loan or the appraised value of the related Mortgaged
Property, plus three months' accrued interest on such Mortgage Loan. Any
exercise of such right to delay foreclosure could affect the amount recovered
upon liquidation of the related Mortgaged Property. Such rights may also include
the right to recommend foreclosure or
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alternatives to foreclosure with respect to a defaulted Mortgage Loan, and the
right to purchase defaulted Mortgage Loan from the Trust Fund.
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.
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 the 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
Unless otherwise specified in the related Prospectus Supplement, 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 mortgage loans by the Master Servicer and that, on the basis of such
examination, such firm is of the opinion that the
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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.
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)
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 and (v)
provided further that 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. 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
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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.
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
Interest 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).
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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
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 origination of the related Loan, or
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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.
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
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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.
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.
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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 marketable 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 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 marketable 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
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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 marketable 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.
Mortgage Loans designated in the related Prospectus Supplement as FHA Loans will
be insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one-to-four-family housing units and the FHA 245
graduated payment mortgage program. These programs generally limit the principal
amount and interest rates of the mortgage loans insured. Mortgage Loans insured
by the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Mortgage Loans relating to
a Series may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of such loan.
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 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
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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.
Mortgage Loans designated in the related Prospectus Supplement as VA Loans
will be partially guaranteed by the VA under the Servicemen's Readjustment Act
of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one-to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Mortgage Loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guaranty for such Mortgage Loan.
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 guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. As of
January 1, 1990, the maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a 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 any claim under the pool insurance
policy that the insured maintain a primary mortgage insurance policy that is
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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 marketable 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 resulting from war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including
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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 (generally defined as the replacement cost at the time and
place of loss, 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 area where 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),
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nuclear reaction, flood (if the mortgaged property is in a federally designated
flood area), chemical contamination and certain other risks.
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.
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
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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 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.
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The Trustee, its agent, or a custodian will review the documents relating
to each Mortgage Loan within the time period specified in the related Trust
Agreement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be missing
or defective in any material respect, the Trustee (or such custodian) will
notify the Master Servicer and the Depositor, and the Master Servicer will
notify the party (the "Seller") from which the Depositor, or an affiliate
thereof, purchased such Mortgage Loan. If the Seller cannot cure the omission or
defect within the time period specified in the related Trust Agreement after
receipt of such notice, the Seller will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price or, if specified in the
related Prospectus Supplement, replace such Mortgage Loan with another mortgage
loan that meets certain requirements set forth therein. There can be no
assurance that a Seller will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage Loan Program -- Representations by Sellers;
Repurchases," neither the Master Servicer nor the Depositor will be obligated to
purchase such Mortgage Loan if the Seller defaults on its purchase obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Master Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this purchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for omission of, or a material defect in, any document.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC or a FASIT election is to be made, unless the related Prospectus
Supplement otherwise provides, no purchase of a Mortgage Loan will be made if
such purchase would result in a prohibited transaction under the Code.
The Trustee will be authorized to appoint a custodian to maintain
possession of and, if applicable, to review the documents relating to the
Mortgage Loans as agent of the Trustee.
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 "Manufactured Home Loan Schedule")
appearing as an exhibit to the related Trust Agreement. Such Manufactured Home
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 agreement 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 agreements 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 agreements without notice of such assignment, the
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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 Manufactured
Home Loan Schedule provides an accurate listing of the Manufactured Home Loans
and that the information respecting such Manufactured Home Loans set forth in
such Manufactured Home 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
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
such other time period as is specified in the Prospectus Supplement for the
related Series, (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
such other period as is specified in the related Prospectus Supplement, the
Depositor will, not later than 90 days, or such other period as is 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
Interest 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
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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, such substitution must be made within two years of such date.
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.
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;
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(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) 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
(xii) 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
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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 or Servicer to distribute or remit any required
payment which continues unremedied for five business days (or such shorter
period as is specified in the applicable agreement) after the giving of written
notice of such failure to the Master Servicer or Servicer by the Trustee for
such Series, or to the Master Servicer or 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 or 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 after the giving of written notice of
such failure to the Master Servicer or Servicer by the Trustee, or to the Master
Servicer or 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 and (iii) certain events in insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings and
certain actions by the Master Servicer or 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.
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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.
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 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 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.
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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. Unless otherwise 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
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
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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 Trust Agreement will specify the method of determining
allocation of Voting Rights with respect to a Series.
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 OR FASIT 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 or a FASIT 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 ("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 or as a FASIT 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
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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.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
If specified in the applicable Prospectus Supplement, Mortgage Loans
included in the Mortgage Pool will be secured by junior mortgages or deeds of
trust which are subordinate to senior mortgages or deeds of trust held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
the Certificateholders) as beneficiary under a junior deed of trust or as
mortgagee under a junior mortgage, are subordinate to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive rents, hazard insurance
and condemnation proceeds and to cause the property securing the Mortgage Loan
to be sold upon default of the mortgagor or trustor, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the Special Servicer
asserts its subordinate interest in a property in foreclosure litigation or
satisfies the defaulted senior loan. As discussed more fully below, in many
states a junior mortgagee or beneficiary may satisfy a defaulted senior loan in
full,
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or may cure such default and bring the senior loan current, in either event
adding the amounts expended to the balance due on the junior loan. Absent a
provision in the senior mortgage, no notice of default is required to be given
to the junior mortgagee.
The form of the mortgage or deed of trust used by many institutional
lenders confers on the mortgagee or beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under the senior mortgage or deed of trust will have the prior right
to collect any insurance proceeds payable under a hazard insurance policy and
any award of damages in connection with the condemnation and to apply the same
to the indebtedness secured by the senior mortgage or deed of trust. Proceeds in
excess of the amount of senior mortgage indebtedness will, in most cases, be
applied to the indebtedness of a junior mortgage or trust deed. The laws of
certain states may limit the ability of mortgagees or beneficiaries to apply the
proceeds of hazard insurance and partial condemnation awards to the secured
indebtedness. In such states, the mortgagor or trustor must be allowed to use
the proceeds of hazard insurance to repair the damage unless the security of the
mortgagee or beneficiary has been impaired. Similarly, in certain states, the
mortgagee or beneficiary is entitled to the award for a partial condemnation of
the real property security only to the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or "optional" advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage or
deed of trust and the date of the future advance, and notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
and has actual knowledge of the intervening junior mortgages or deeds of trust
and other liens, the advance may be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
"future advance" clause rests, in many other states, on state law giving
priority to all advances made under the loan agreement up to a "credit limit"
amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
the mortgage or deed of trust to perform the obligation itself, at its election,
with the mortgagor or trustor agreeing to reimburse the mortgagee or beneficiary
for any sums expended by the mortgagee or beneficiary on behalf of the mortgagor
or trustor. All sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage or deed of trust.
The form of mortgage or deed of trust used by many institutional lenders
typically requires the mortgagor or trustor to obtain the consent of the
mortgagee or beneficiary in respect of actions affecting the mortgaged property,
including, without limitation, leasing activities (including new leases and
termination or modification of existing leases), alterations and improvements to
buildings forming a part of the mortgaged property and management and leasing
agreements for the mortgaged property. Tenants will often refuse to execute a
lease unless the mortgagee or beneficiary executes a written agreement with the
tenant not to disturb the tenant's
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possession of its premises in the event of a foreclosure. A senior mortgagee or
beneficiary may refuse to consent to matters approved by a junior mortgagee or
beneficiary with the result that the value of the security for the junior
mortgage or deed of trust is diminished. For example, a senior mortgagee or
beneficiary may decide not to approve a lease or to refuse to grant a tenant a
non-disturbance agreement. If, as a result, the lease is not executed, the value
of the mortgaged property may be diminished.
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.
Cooperative Loans are not secured by liens on real estate. The "owner" of a
cooperative apartment does not own the real estate constituting the apartment,
but owns shares of stock in a corporation which holds title to the building in
which the apartment is located, and by virtue of owning such stock is entitled
to a proprietary lease or occupancy agreement to occupy the specific apartment.
A Cooperative Loan is a loan secured by a lien on the shares and an assignment
of the lease or occupancy agreement. If the borrower defaults on a Cooperative
Loan, the lender's remedies are similar to the remedies which apply to a
foreclosure of a leasehold mortgage or deed of trust, in that the lender can
foreclose the loan and assume ownership of the shares and of the borrower's
rights as lessee under the related proprietary lease or occupancy agreement.
Typically, the lender and the cooperative housing corporation enter into a
recognition agreement that establishes the rights and obligations of both
parties in the event of a default by the borrower on its obligations under the
lease or occupancy agreement.
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 and 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.
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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.
There are certain risks that arise as a result of the cooperative form of
ownership which differentiate Cooperative Loans from other types of Mortgage
Loans. For example, the power of the board of directors of most cooperative
housing corporations to reject a proposed purchaser of a unit owner's shares
(and prevent the sale of an apartment) for any reason (other than reasons based
upon unlawful discrimination), or for no reason, significantly reduces the
universe of potential purchasers in the event of a foreclosure. Moreover, in
buildings where the "sponsor" (i.e., the owner of the unsold shares in the
corporation) holds a significant number of unsold interests in apartments,
cooperative apartment owners run a special risk that the sponsor may go into
default on its proprietary leases or occupancy agreements, and thereby cause a
default under the underlying mortgage loan to the cooperative housing
corporation which is secured by a mortgage on the building. In such event, the
unit owners may be forced to make up any shortfall in income to the cooperative
housing corporation resulting from the sponsor's default or risk losing their
apartments in a foreclosure proceeding brought by the holder of the mortgage on
the building. Not only would the value attributable to the right to occupy a
particular apartment be adversely affected by such an occurrence, but the
foreclosure of a mortgage on the building in which the apartment is located
could result in a total loss of the shareholder's equity in the building and
right to occupy the apartment (and a corresponding loss of the lender's security
for its Cooperative Loan).
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) 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
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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 generally 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 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
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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 are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elect to remain in the building but who did not purchase shares in the
cooperative when the building was so converted.
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
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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 rehabilitative plan under
the Bankruptcy Code to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a 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
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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 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
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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.
Unless otherwise specified in the related Prospectus Supplement, 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.
ENVIRONMENTAL RISKS
Under the laws of some states, and under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), it is
conceivable that a secured lender (such as the Trust Fund) may be held liable as
an "owner" or "operator" for the costs of addressing releases or threatened
releases of hazardous substances at a Mortgage Property, even though the
environmental damage or threat was caused by a prior or current owner or
"responsible parties", including owners and operators. However, CERCLA excludes
from the definition of "owner or operator" a secured creditor who holds indicia
of ownership primarily to protect its security interest, but does not
"participate in the management" of the Mortgaged Property (the "secured creditor
exclusion"). Thus, if a lender's activities begin to encroach on the actual
management of a contaminated property, the lender may incur liability as an
"owner or operator" under CERCLA. Similarly, if a lender forecloses and takes
title to a contaminated property, the lender may incur CERCLA liability in
various circumstances, including, but not limited to, when it holds the property
as an investment (including leasing the property to a third party), or fails to
market the property in a timely fashion.
Recently enacted amendments to CERCLA have clarified the range of
activities in which a lender may engage without becoming subject to liability
under CERCLA. However, liability for costs associated with the investigation and
cleanup of environmental contamination may also be governed by state law, which
may not provide any specific protections to lenders, or, alternatively, may not
impose liability on lenders at all.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs associated with releases
of petroleum contamination. Federal regulation of underground petroleum storage
tanks (other than heating oil tanks) is governed by Subtitle I of the federal
Resource Conservation and Recovery Act ("RCRA"). The United States Environmental
Protection Agency
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("EPA") has promulgated a lender liability rule for underground storage tanks
regulated by Subtitle I of RCRA. Under the EPA rule, a holder of a security
interest in an underground storage tank, is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, recent amendments to RCRA, enacted currently
with the CERCLA amendments discussed in the previous paragraph, extend to the
holders of security interests in petroleum underground storage tanks the same
protections accorded to secured creditors under CERCLA. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide any specific protection for lenders, or,
alternatively, may not impose liability on lenders at all.
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 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 dueon-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-onsale 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 transfer of the related
Mortgaged Property to an uncreditworthy Person, which could increase the
likelihood of default or 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
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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 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,
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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 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
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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 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 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
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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. 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.
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Applicability of Usury Laws. 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
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 or
a FASIT 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 or as a FASIT 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, or as "regular interests" or "ownership
interests" in a FASIT, 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 or as regular interests or ownership
interests in a FASIT 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
Certificateholders of any such Series will be described in the applicable
Prospectus Supplement.
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
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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 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 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.
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 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 (ii) 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) or (ii) above, then
Certificates will qualify for the tax treatment described in (i) or (ii) 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.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
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QUALIFICATION AS A FASIT
The Small Business and Job Protection Act of 1996 added Sections 860H
through 860L to the Code (the "FASIT Provisions"), which provide for a new type
of entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). Although the FASIT provisions of
the Code became effective on September 1, 1997, no Treasury regulations or other
administrative guidance have been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of FASITs.
A Trust Fund will qualify as a FASIT if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and (B)
the nature of the investors' interests in the FASIT are met on a continuing
basis, and (iii) the Trust Fund is not a regulated investment company as defined
in section 851(a) of the Code.
For a Trust Fund to be eligible for FASIT status, substantially all of the
Trust Fund Assets must consist of "permitted assets" as of the close of the
third month beginning after the closing date and at all times thereafter (the
"FASIT Qualification Test"). Permitted assets include (i) cash or cash
equivalents, (ii) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate), (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying hedging
instruments, (vi) FASIT regular interest, and (vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of the
FASIT's ownership interest or by any person related to such holder.
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C Corporation. FASIT interests will be classified as
either FASIT regular interests, which generally will be treated as debt for
federal income tax purposes, or FASIT ownership interests, which generally are
not treated as debt for such purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The Prospectus Supplement for each Series of Securities will indicate
which Securities of such Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interests (i.e., certain qualified
floating rates and weighted average rates). Interest will be considered to be
based on a permissible variable rate if generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rate,"
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "High-Yield Interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by
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domestic C corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs, and dealers in securities who acquire
such interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Federal Income Tax Consequences -- Taxation of Trust
as a FASIT -- Treatment of High-Yield Interests."
If a Trust Fund fails to comply with one or more of ongoing requirements
for FASIT status during any taxable year, the Code provides that its FASIT
status may be lost for that year and thereafter. If FASIT status is lost, the
treatment of the former FASIT and interests therein for federal income tax
purposes is uncertain. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the requirements for
FASIT status occurs inadvertently and in good faith, such regulations have not
yet been issued. It is possible that disqualification relief might be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the FASIT's income for the period of time in which the requirements
for FASIT status are not satisfied.
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. Certificates representing regular
interests in a FASIT are treated as debt instruments. Certificates designated as
regular interests in a REMIC or a FASIT will be referred to hereinafter
collectively as "Regular Interest Certificates." Stated interest on a Regular
Interest Certificate will be taxable as ordinary income using the accrual method
of accounting, regardless of the 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
"Contingent Regulations") governing the treatment of contingent payment
obligations have recently been finalized. 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 Contingent Regulations contain rules
applicable to instruments governed by Section 1272(a)(6). Although technically
not applicable to prepayable securities, the 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 Certificateholder each taxable
year (the "Tax Administrator") intends to base its computations on Code Section
1272(a)(6), the OID Regulations and the 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 Certificate and its issue
price. A holder of a Regular Interest Certificate 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 Certificate will be considered to be zero if
it is less than a de minimis amount determined under the Code. However, the
amount of any
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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 Certificate 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 Certificateholder for accrued interest that
relates to a period prior to the Closing Date of such Regular Interest
Certificate. 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 Certificate 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."
The holder of a Regular Interest Certificate issued with OID must include
in gross income, for all days during its taxable year on which it holds such
Regular Interest Certificate, 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 Certificate, 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 Certificate
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 Certificate, 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 Certificate is the sum of its issue price plus prior
accruals of OID, reduced by the total payments made with respect to such Regular
Interest Certificate 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
Certificate (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 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 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
Certificateholders based on the Prepayment Assumption, no representation is made
to 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 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.
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Certain classes of Regular Interest Certificates may represent more than
one class of REMIC regular interests or FASIT regular interests. Unless the
applicable Prospectus Supplement specifies otherwise, based on the OID
Regulations and solely for the purposes of computing OID, the Trustee intends to
calculate OID on such Regular Interest Certificates as if the separate regular
interests were a single debt instrument.
Certain Series of Certificates may represent regular interests ("Lower Tier
Interests") in other REMICs or FASITs. Unless otherwise provided in the
applicable Prospectus Supplement, based on the OID Regulations and solely for
the purposes of computing OID, the Trustee intends to calculate OID on such
certificates as if the separate regular interests were a single debt instrument.
A holder of a Regular Interest Certificate, which acquires the Regular
Interest Certificate 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 Certificate which acquires the Regular Interest
Certificate 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 Certificate for an amount that exceeds its
adjusted issue price will be entitled (as will an initial holder who pays more
than a Regular Interest Certificate'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 on
qualified mortgages held by a REMIC or a FASIT ("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 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 Contingent Regulations, if they were applicable
to Interest Weighted Certificates (which, as Section 1272(a)(6) instruments, are
specifically excluded from the scope of the 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. Under the OID Regulations, the amount
and accrual of OID 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
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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 a rate that varies directly with an
objective index. 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 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.
Under the Contingent Regulations, 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
Certificate will be required to accrue interest and original issue discount on
such Certificate 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 Certificate 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. Accordingly, holders of Regular
Interest Certificates should consult their own tax advisors on this point.
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 Certificate
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
Certificate, or upon sale or exchange of the Regular Interest Certificate. 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
Certificate 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 Certificate. 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
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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 Certificate (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 Certificate at a premium, which it may elect to amortize as
an offset to interest income on such Certificate (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 and FASIT 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 Certificate will be calculated using the prepayment assumption used in
pricing such Regular Interest Certificate. If a holder makes an election to
amortize premium on a Certificate, 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.
The Regulations dealing with amortizable bond premium specifically do not
apply to prepayable debt instruments subject to Code Section 1272(a)(6) such as
the Certificates. Absent further guidance from the IRS, the Trustee intends to
account for amortizable bond premium in the manner described above. Prospective
purchasers of Certificates should consult their tax advisors regarding the
possible application of the Amortizable Bond Premium Regulations.
SALE OR EXCHANGE OF REGULAR INTEREST CERTIFICATES
A Regular Interest Certificateholder's tax basis in its Regular Interest
Certificates is the price such holder pays for a Certificate, increased by
amounts of original issue discount included in income and 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 Certificate's basis as so adjusted, will
generally be capital gain or loss, assuming that the Regular Interest
Certificate 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 Certificate, any OID, including OID that did not previously accrue. If,
however, a 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 Certificate will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Certificate
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 Certificate 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 Certificate.
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
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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 income
exceeds the applicable amount 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" below.
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,
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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 Certificate representing a REMIC residual interest (a
"Residual Interest Certificate") will take into account the "daily portion" of
the taxable income or net loss of the REMIC for each day during the taxable 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 Certificate 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
Certificate 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 Certificate 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
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 Certificate (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 Certificate. If the amount of such payment exceeds a holder's adjusted
basis in the Residual Interest Certificate, however, the holder will recognize
gain (treated as gain from the sale of the Residual Interest Certificate) to the
extent of such excess.
Mark-to-Market Rules. 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 Certificate will
recognize gain or loss on the sale or exchange of a Residual Certificate equal
to the difference, if any, between the amount realized and such
Certificateholder's adjusted basis in the Residual Interest Certificate 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
Certificate will be disallowed if the selling Certificateholder acquires any
residual interest in a REMIC or similar mortgage pool within six months before
or after such disposition.
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Excess Inclusion Income. The portion of a 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
Certificateholder's federal income tax return. Further, if the holder of a
Residual Interest Certificate is an organization subject to the tax on unrelated
business income imposed by Code Section 511, such Residual Certificateholder's
excess inclusion income will be treated as unrelated business taxable income of
such 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
Certificate, 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 Certificate 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 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 Certificate, 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
Certificate at the beginning of such quarterly period. The adjusted issue price
of a Residual Interest Certificate 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 Certificate), 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 Certificate 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.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
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 REMIC 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
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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 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.
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 Certificateholder on that day. In the case of a holder of a
Regular Interest Certificate who is an individual or a "passthrough 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
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 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 Certificate 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.
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
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of REMIC income, gain, loss, deduction, or credit, by the Internal Revenue
Service in a unified administrative proceeding.
TAXATION OF HOLDERS OF FASIT HIGH-YIELD INTERESTS
FASIT High-Yield Interests are subject to special rules regarding the
eligibility of holders of such interest, and the ability of such holders to
offset income derived from those interests with losses. High-Yield Interests
only may be held by Eligible Corporations, other FASITs, and dealers in
securities who acquire such interests as inventory. If a securities dealer
(other than an Eligible Corporation) initially acquires a High-Yield Interest as
inventory, but later begins to hold it for investment, the dealer will be
subject to an excise tax equal to the income from the High-Yield Interest
multiplied by the highest corporate income tax rate. In addition, transfers of
High-Yield Interests to disqualified holders will be disregarded for federal
income tax purposes, and the transferor will continue to be treated as the
holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular interest that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT regular
interest and that have the same features as High-Yield Interests.
TAXATION OF HOLDERS OF FASIT OWNERSHIP INTERESTS
A FASIT ownership interest represents the residual equity interest in a
FASIT. As such, the holder of a FASIT ownership interest determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss and credit of a FASIT. In general, the character of the
income to the holder of a FASIT ownership interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
ownership interest must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT regular interests issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
regular interests as are holders of High-Yield Interest.
Rules similar to the wash sale rules applicable to REMIC residual interests
also will apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership interest generally will be disallowed where
within six months before or after the disposition, the seller of such interest
acquires any other FASIT ownership interest that is economically comparable to a
FASIT ownership interest. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT ownership interest
was required to be marked-to-market under section 475 of the Code by such
holder, then section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually.
The holder of a FASIT ownership interest will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series of Securities for which a FASIT election is made
generally will be structured in order to avoid application of the prohibited
transaction tax.
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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 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.
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
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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 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
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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 IRS 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"), the Trustee intends, absent contrary
authority, to report income to Certificateholders as OID, in the manner
described above in "-- Interest Weighted Certificates".
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 "real estate
assets" within the meaning of Section 856(c)(6)(B) of the Code, and "loans
secured by an interest in real property"
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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.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
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.
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 Certificate (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 Certificateholders 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
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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
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 an 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.
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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
Class Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 95-60, regarding investments by insurance company
general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 83-1, regarding mortgage pool investment trusts; PTCE
84-14, regarding transactions effected by a "qualified professional asset
manager; or PTCE 96-23, regarding transactions effected by an "in-house asset
manager."
PTCE 83-1 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 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
Subordinate 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 a 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.
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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
acquisition, holding and the subsequent disposition by 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 Services, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch IBCA, 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; (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.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage loans
or other secured receivables (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five percent
of the total principal amount of the certificates being offered by the trust, to
be transferred to the trust within a 90-day or three-month period following the
closing date (the "Pre-Funding Period") instead of requiring that all such
Obligations be either identified or transferred on or before the closing date.
The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent.
(2) All Obligations transferred after the closing date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust, which
terms and conditions have been approved by a Rating Agency.
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(3) The transfer of such Additional Obligations to the trust during
the Pre-Funding Period must not result in the certificates to be covered by
the Exemption receiving a lower credit rating from a Rating Agency upon
termination of the Pre-funding Period than the rating that was obtained at
the time of the initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Obligations in the trust at the end of the Pre-Funding Period must not
be more than 100 basis points lower than the average interest rate for the
Obligations which were transferred to the trust on the closing date.
(5) In order to ensure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which are
transferred to the trust,
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider which is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each Rating
Agency rating the certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of the Additional
Obligations conform to the characteristics described in the related
prospectus or prospectus supplement and/or pooling and servicing
agreement. In preparing such letter, the independent accountant must use
the same type of procedures as were applicable to the Obligations which
were transferred to the trust as of the closing date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling
and servicing agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments.
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit
for the trust; and
(iv) that the amounts remaining in the pre-funding account at the
end of the Pre-Funding Period will be remitted to certificateholders as
repayments of principal.
(9) The related trust agreement must describe the permitted
investments for the pre-funding and/or capitalized interest account and, if
no disclosed in the related prospectus or prospectus supplement, the terms
and conditions for eligibility of Additional Obligations.
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 as amended 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 prudence 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 CONSIDERATIONS
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the classes of Certificates offered thereby will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Classes of Certificates that
qualify
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as "mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
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 as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
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 therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline.
SMMEA also amended the legal investment authority of federally-chartered
depository institution as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
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 Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), (whether or not the class of Certificates under consideration
for purchase constitutes a "mortgage related security").
All depository institutions considering an investment in the Certificates
(whether or not the class of certificates under consideration for purchase
constitutes a "mortgage related security" should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective regulators) (the "Policy
Statement"), setting forth, in relevant part, certain securities trading and
sales practices deemed unsuitable for an institution's investment portfolio, and
guidelines for (and restrictions on) investing in mortgage derivative products,
including "mortgage related securities" that are "high-risk mortgage securities"
as defined in the Policy Statement. According to the Policy Statement, such
"high-risk mortgage securities" include securities such as Certificates not
entitled to distributions allocated to principal or interest, or Subordinated
Certificates. Under the Policy Statement, it is the responsibility of each
depository institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security," and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but no limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
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 the
investor's assets. 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 Brown & Wood LLP, Washington, D.C.
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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.
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.
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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.
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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 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 that 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.
"Accretion Termination Date" means, with respect to a Class of Compound
Interest Certificates, such date 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/or 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 certain purposes.
"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.
"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.
"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.
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"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 Interest 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).
"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).
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"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Conventional Loan" means a Loan that is not insured or guaranteed by any
governmental agency.
"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 Cutoff 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.
"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.
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"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 Interest 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 Interest 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.
"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.
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"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 Certificates,
Loans, or Private Mortgage-Backed Securities.
"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.
"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.
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"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 Pool" means with respect to a Trust Fund for a Series of
Certificates, a pool of Mortgage Loans.
"Mortgaged Property" means the real property securing a Mortgage Loan.
"Mortgage Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rates borne by each Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"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,
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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, limited liability
company, 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.
"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.
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"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 licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means any nationally recognized statistical rating
organization (or organizations) that 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 that 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.
"Servicing 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.
"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 are
subordinated to the rights of Holders of Senior Certificates, to the extent and
under the circumstances specified in the related Prospectus Supplement.
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"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.
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===============================================================================
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 given or made, such information or 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.
---------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary..................................... S- 5
Risk Factors................................ S-12
Description of the Certificates............. S-13
Description of the Mortgage Pool............ S-24
Additional Information...................... S-32
The Master Servicer......................... S-32
The Servicers............................... S-32
The Special Servicer........................ S-34
Servicing of the Mortgage Loans............. S-35
Trust Agreement............................. S-38
Yield, Prepayment and Weighted Average
Life...................................... S-40
Certain Federal Income Tax Considerations... S-45
Legal Investment Considerations............. S-47
Use of Proceeds............................. S-47
Underwriting................................ S-47
ERISA Considerations........................ S-48
Legal Matters............................... S-48
Ratings..................................... S-48
Glossary.................................... S-50
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
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<S> <C>
Prospectus Supplement....................... 2
Additional Information...................... 2
Incorporation of Certain Documents by....... 2
Reference Reports to Certificateholders..... 2
Summary of Terms of the Certificates........ 3
Risk Factors................................ 19
Description of the Certificates............. 21
Yield, Prepayment and Maturity.............. 26
Considerations The Trust Funds.............. 29
Loan Underwriting Procedures and
Standards................................. 43
Servicing of Loans.......................... 47
Credit Support.............................. 58
Description of Mortgage and Other
Insurance................................. 61
The Trust Agreements........................ 67
Certain Legal Aspects of Loans.............. 77
Certain Federal Income Tax Considerations... 91
State Tax Considerations.................... 108
ERISA Considerations........................ 108
Legal Investment Considerations............. 111
Legal Matters............................... 112
The Depositor............................... 113
Use of Proceeds............................. 113
Plan of Distribution........................ 113
Glossary.................................... 115
</TABLE>
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$132,556,100
(APPROXIMATE)
STRUCTURED ASSET
SECURITIES CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1998-6
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
MASTER SERVICER
---------------------------
PROSPECTUS SUPPLEMENT
JULY 3, 1998
---------------------------
LEHMAN BROTHERS
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