<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 23, 2000)
$367,466,000 (APPROXIMATE)
AMORTIZING RESIDENTIAL COLLATERAL TRUST
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-BC2
STRUCTURED ASSET SECURITIES CORPORATION
DEPOSITOR
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
-------------------------
The trust fund will issue certificates including the
following:
<TABLE>
<CAPTION>
CLASS
PRINCIPAL INTEREST CUSIP
CLASS AMOUNT(1) RATE NUMBER
----- ------------ -------- ---------
<S> <C> <C> <C>
A2........................................ $222,867,000 (2) 863572P72
M1........................................ 72,299,000 (2) 863572P80
M2........................................ 56,807,000 (2) 863572P98
B......................................... 15,493,000 (2) 863572Q22
</TABLE>
---------------------------------------------------
(1) These balances are approximate, as described in
this prospectus supplement.
(2) Interest will accrue on the Class A2, M1, M2 and B
Certificates based upon one-month LIBOR plus a
specified margin, subject to limitation, as
described in this prospectus supplement under
"Description of the Certificates -- Distributions
of Interest."
This prospectus supplement and the accompanying
prospectus relate only to the offering of the
certificates listed in the table above and not to the
other classes of certificates that will be issued by
the trust fund as described in this prospectus
supplement.
The assets of the trust fund will primarily
consist of two pools of conventional, first and second
lien, fixed and adjustable rate, fully amortizing and
balloon, residential mortgage loans that were
originated in accordance with underwriting guidelines
that are not as strict as Fannie Mae and Freddie Mac
guidelines. As a result, these mortgage loans may
experience higher rates of delinquency, foreclosure
and bankruptcy than if they had been underwritten in
accordance with higher standards.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED THE CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS
IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The certificates listed in the table above will be purchased by Lehman
Brothers Inc. from Structured Asset Securities Corporation, and are being
offered by Lehman Brothers Inc. from time to time for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to Structured Asset Securities Corporation from the sale
of these certificates will be approximately 100.00% of their initial total
principal amount, plus accrued interest, before deducting expenses.
On or about May 30, 2000, delivery of the certificates offered by this
prospectus supplement will be made through the book-entry facilities of The
Depository Trust Company, Clearstream Banking, societe anonyme (formerly
Cedelbank) and the Euroclear System.
Underwriter:
LEHMAN BROTHERS
MAY 23, 2000.
CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING ON
PAGE S-12 OF THIS
PROSPECTUS SUPPLEMENT.
For a list of capitalized
terms used in this
prospectus supplement and
the prospectus, see the
Index of Defined Terms
beginning on page S-96 of
this prospectus supplement
and on page 142 in the
prospectus.
The certificates will
represent interests in the
trust fund only and will
not represent interests in
or obligations of any other
entity.
This prospectus supplement
may be used to offer and
sell the certificates only
if accompanied by the
prospectus.
<PAGE> 2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-2
<PAGE> 3
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF TERMS..................... S-6
RISK FACTORS......................... S-12
DESCRIPTION OF THE CERTIFICATES...... S-19
General......................... S-19
Book-Entry Registration......... S-20
Distributions of Interest....... S-24
Determination of LIBOR.......... S-29
Distributions of Principal...... S-29
Credit Enhancement.............. S-34
Final Scheduled Distribution
Date.......................... S-38
Optional Purchase of Mortgage
Loans; Termination of the
Trust Fund.................... S-38
Reports to Certificateholders... S-38
The Trustee..................... S-40
DESCRIPTION OF THE MORTGAGE POOLS.... S-40
General......................... S-40
Adjustable Rate Mortgage
Loans......................... S-42
The Indices..................... S-43
Pool 1 Mortgage Loans........... S-43
Pool 2 Mortgage Loans........... S-56
ADDITIONAL INFORMATION............... S-68
UNDERWRITING GUIDELINES.............. S-69
THE MASTER SERVICER.................. S-71
THE PRIMARY SERVICERS................ S-71
General......................... S-71
Ocwen........................... S-72
Option One...................... S-74
Wells Fargo Home Mortgage,
Inc........................... S-77
SERVICING OF THE MORTGAGE LOANS...... S-78
General......................... S-78
Servicing Compensation and
Payment of Expenses........... S-78
Prepayment Interest
Shortfalls.................... S-78
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Advances; Servicing Advances.... S-79
Collection of Taxes, Assessments
and Similar Items............. S-79
Insurance Coverage.............. S-80
Evidence as to Compliance....... S-80
The Loss Mitigation Advisor..... S-80
Termination Rights.............. S-80
TRUST AGREEMENT...................... S-81
General......................... S-81
Assignment of Mortgage Loans.... S-81
Voting Rights................... S-83
Amendment....................... S-83
YIELD, PREPAYMENT AND WEIGHTED
AVERAGE LIFE....................... S-84
General......................... S-84
Overcollateralization........... S-85
Subordination of the Offered
Subordinate Certificates...... S-85
Weighted Average Life........... S-86
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS..................... S-90
General......................... S-90
Taxation of Regular Interests... S-90
Status of the Offered
Certificates.................. S-91
The Cap Contract Components..... S-91
LEGAL INVESTMENT CONSIDERATIONS...... S-91
ERISA CONSIDERATIONS................. S-92
USE OF PROCEEDS...................... S-92
UNDERWRITING......................... S-92
LEGAL MATTERS........................ S-93
RATINGS.............................. S-93
INDEX OF DEFINED TERMS............... S-94
ANNEX I GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES... A-1
</TABLE>
S-3
<PAGE> 4
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE SECURITIES......... 2
General.......................... 2
Distributions on the
Securities..................... 3
Optional Termination............. 5
Optional Purchase of
Securities..................... 6
Other Purchases.................. 6
Book-Entry Registration.......... 6
YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS...................... 11
Payment Delays................... 11
Principal Prepayments............ 11
Timing of Reduction of Principal
Amount......................... 11
Interest or Principal Weighted
Securities..................... 11
Final Scheduled Distribution
Date........................... 12
Prepayments and Weighted Average
Life........................... 12
Other Factors Affecting Weighted
Average Life................... 13
THE TRUST FUNDS....................... 15
General.......................... 15
Ginnie Mae Certificates.......... 16
Fannie Mae Certificates.......... 18
Freddie Mac Certificates......... 20
Private Mortgage-Backed
Securities..................... 23
The Mortgage Loans............... 25
The Manufactured Home Loans...... 30
Pre-Funding Arrangements......... 32
Collection Account and
Distribution Account........... 32
Other Funds or Accounts.......... 33
LOAN UNDERWRITING PROCEDURES AND
STANDARDS........................... 33
Underwriting Standards........... 33
Loss Experience.................. 35
Representations and Warranties... 36
Substitution of Primary Assets... 37
SERVICING OF LOANS.................... 38
General.......................... 38
Collection Procedures; Escrow
Accounts....................... 39
Deposits to and Withdrawals from
the Collection Account......... 39
Servicing Accounts............... 41
Buy-Down Loans, GPM Loans and
Other Subsidized Loans......... 41
Advances and Limitations
Thereon........................ 43
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Maintenance of Insurance Policies
and Other Servicing
Procedures..................... 46
Presentation of Claims;
Realization Upon Defaulted
Loans.......................... 47
Enforcement of Due-On-Sale
Clauses........................ 48
Certain Rights Related to
Foreclosure.................... 48
Servicing Compensation and
Payment of Expenses............ 48
Evidence as to Compliance........ 49
Certain Matters Regarding the
Master Servicer................ 49
CREDIT SUPPORT........................ 50
General.......................... 50
Subordinate Securities;
Subordination Reserve Fund..... 51
Cross-Support Features........... 52
Insurance........................ 52
Letter of Credit................. 53
Financial Guaranty Insurance
Policy......................... 53
Reserve Funds.................... 53
DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE........................... 54
Mortgage Insurance on the
Loans.......................... 54
Hazard Insurance on the Loans.... 61
Bankruptcy Bond.................. 63
Repurchase Bond.................. 63
THE AGREEMENTS........................ 63
Issuance of Securities........... 63
Assignment of Primary Assets..... 64
Repurchase and Substitution of
Non-Conforming Loans........... 66
Reports to Securityholders....... 68
Investment of Funds.............. 69
Event of Default; Rights Upon
Event of Default............... 70
The Trustee...................... 72
Duties of the Trustee............ 72
Resignation of Trustee........... 73
Distribution Account............. 73
Expense Reserve Fund............. 73
Amendment of Agreement........... 74
Voting Rights.................... 74
REMIC or FASIT Administrator..... 74
Administration Agreement......... 74
Termination...................... 75
LEGAL ASPECTS OF LOANS................ 76
Mortgages........................ 76
Junior Mortgages; Rights of
Senior Mortgages............... 77
</TABLE>
S-4
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cooperative Loans................ 78
Foreclosure on Mortgages......... 80
Realizing Upon Cooperative Loan
Security....................... 81
Rights of Redemption............. 83
Anti-Deficiency Legislation and
Other Limitations on Lenders... 83
Soldiers' and Sailors' Civil
Relief Act of 1940............. 85
Environmental Risks.............. 86
Due-on-Sale Clauses in Mortgage
Loans.......................... 87
Enforceability of Prepayment and
Late Payment Fees.............. 87
Equitable Limitations on
Remedies....................... 87
Applicability of Usury Laws...... 88
Adjustable Interest Rate Loans... 88
Manufactured Home Loans.......... 89
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS...................... 92
General.......................... 92
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxable Mortgage Pools........... 93
REMICs........................... 93
FASIT............................ 116
Grantor Trust Funds.............. 120
Partnership Trust Funds & Debt
Securities..................... 127
STATE TAX CONSIDERATIONS.............. 132
ERISA CONSIDERATIONS.................. 132
General.......................... 133
Pre-Funding Accounts............. 136
LEGAL INVESTMENT CONSIDERATIONS....... 138
LEGAL MATTERS......................... 139
THE DEPOSITOR......................... 139
USE OF PROCEEDS....................... 139
PLAN OF DISTRIBUTION.................. 139
ADDITIONAL INFORMATION................ 140
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................... 141
REPORTS TO SECURITYHOLDERS............ 141
INDEX OF DEFINED TERMS................ 142
</TABLE>
S-5
<PAGE> 6
SUMMARY OF TERMS
- THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING
YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING
OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS ENTIRE
DOCUMENT AND ACCOMPANYING PROSPECTUS.
- WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
- SOME OF THE INFORMATION THAT FOLLOWS CONSISTS OF FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND
OTHER FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A
VARIETY OF RISKS AND UNCERTAINTIES, SUCH AS GENERAL ECONOMIC AND BUSINESS
CONDITIONS AND REGULATORY INITIATIVES AND COMPLIANCE, MANY OF WHICH ARE
BEYOND THE CONTROL OF THE PARTIES PARTICIPATING IN THIS TRANSACTION.
ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM THE
PROJECTIONS INCLUDED HEREIN.
- WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST FUND OR IN ANY POOL, THAT PERCENTAGE HAS BEEN CALCULATED ON THE
BASIS OF THE TOTAL "SCHEDULED PRINCIPAL BALANCE" OF THOSE MORTGAGE LOANS
AS OF MAY 1, 2000, UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN THIS
PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF THE CERTIFICATES --
DISTRIBUTIONS OF PRINCIPAL" HOW THE SCHEDULED PRINCIPAL BALANCE OF A
MORTGAGE LOAN IS DETERMINED. WHENEVER WE REFER IN THIS SUMMARY OR IN THE
RISK FACTORS SECTION OF THIS PROSPECTUS SUPPLEMENT TO THE TOTAL PRINCIPAL
BALANCE OF ANY MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR SCHEDULED
PRINCIPAL BALANCES, UNLESS WE SPECIFY OTHERWISE.
THE OFFERED CERTIFICATES
Amortizing Residential Collateral Mortgage Trust Pass-Through Certificates,
Series 2000-BC2, consist of the following classes: A1, A2, M1, M2, B, P, X and
R. Only the Class A2, M1, M2 and B Certificates are being offered by this
prospectus supplement. The certificates offered hereunder will be issued in
book-entry form.
See "Description of the Certificates -- General" in this prospectus
supplement for a discussion of the minimum denominations and the incremental
denominations of each class of certificates.
The certificates represent ownership interests in a trust fund, the assets
of which consist primarily of conventional, first and second lien, adjustable
and fixed rate, fully amortizing and balloon, residential mortgage loans. The
mortgage loans to be included in the Trust Fund will be divided into two pools:
"pool 1" and "pool 2". Pool 1 will consist of those mortgage loans in the trust
fund with original principal balances which do not exceed the applicable Freddie
Mac maximum original loan limitations for one- to four-family mortgaged
properties. Pool 2 will consist of mortgage loans with original principal
balances which may be less than, equal to, or in excess of, those loan amount
limitations.
Distributions of principal and interest on the Class A1 Certificates will
be based, mostly, on collections from the pool 1 mortgage loans. The Class A1
Certificates (which are not offered hereby) will also have the benefit of a
guarantee issued by Freddie Mac. Distributions of principal and interest on the
Class A2 Certificates will be based, mostly, on collections from the pool 2
mortgage loans. Distributions of principal and interest on the Class M1, Class
M2 and Class B Certificates will be based on collections from both mortgage
pools. None of the Class A2, Class M1, Class M2 or Class B Certificates will
have the benefit of the Freddie Mac guarantee.
The rights of holders of the Class M1, M2 and B Certificates to payments
will be subordinate to the rights of the holders of certificates having a senior
priority of payment, as described in this Summary of Terms under "-- Credit
Enhancement -- Subordination of Payments" below. In describing this
subordination feature, we sometimes refer to the Class M1, M2 and B Certifi-
S-6
<PAGE> 7
cates as "subordinate" certificates, and to the Class A1 and A2 Certificates as
"senior" certificates.
The Class X and Class R Certificates are not entitled to monthly
distributions of principal and interest, but rather solely to any residual cash
flows remaining after all payments on the other classes of the certificates and
certain fees and expenses of the trust fund have been made on the related
distribution date.
The certificates will have an approximate total initial principal amount of
$2,065,694,000. Any difference between the total principal amount of the
certificates on the date they are issued and the approximate total principal
amount of the certificates on the date of this prospectus supplement will not
exceed 5%.
THE PARTIES
The Originators
The originators of the mortgage loans are various mortgage lending
institutions, including Ameriquest Mortgage Company, BNC Mortgage, Inc., Option
One Mortgage Corporation and Wells Fargo Home Mortgage, Inc. (formerly known as
Norwest Mortgage, Inc.) or their correspondents which have previously sold the
mortgage loans under separate sale agreements to either Lehman Brothers Holdings
Inc., or Lehman Brothers Bank, FSB.
See "The Trust Agreement -- Assignment of the Mortgage Loans" in this
prospectus supplement.
The Seller
Prior to the closing date, Lehman Brothers Bank, FSB will have assigned all
of its interest in the mortgage loans to Lehman Brothers Holdings Inc. On the
closing date, Lehman Brothers Holdings Inc., as seller, will convey all of its
interest in the mortgage loans to the depositor.
See "The Trust Agreement -- Assignment of the Mortgage Loans" in this
prospectus supplement.
The Depositor
Structured Asset Securities Corporation, a limited purpose Delaware
corporation and an indirect wholly-owned subsidiary of Lehman Brothers Holdings
Inc., will convey the mortgage loans to the trust fund.
See "The Trust Agreement -- Assignment of the Mortgage Loans" in this
prospectus supplement.
The Trustee
First Union National Bank, a national banking association, will act as the
trustee of the trust fund titled the "Amortizing Residential Collateral Trust."
See "Description of the Certificates -- The Trustee" in this prospectus
supplement.
The Master Servicer
Norwest Bank Minnesota, National Association, as master servicer, will
oversee, but have no primary responsibility for, the servicing of the mortgage
loans by the primary servicers.
See "The Master Servicer" in this prospectus supplement
The Primary Servicers
Ocwen Federal Bank FSB, Option One Mortgage Corporation and Wells Fargo
Home Mortgage, Inc. will each act as a primary servicer of certain of the
mortgage loans in the trust fund pursuant to separate servicing agreements.
See "The Primary Servicers" and "Servicing of the Mortgage Loans" in this
prospectus supplement.
The PMI Insurer
The seller has acquired for the benefit of the trust fund certain
loan-level primary mortgage insurance policies to be issued by Mortgage Guaranty
Insurance Corporation with respect to approximately 96.83% of those mortgage
loans with original loan-to-value ratios in excess of 60% and not covered by an
existing primary mortgage insurance policy.
See "Description of the Certificates -- Credit Enhancement -- Primary
Mortgage Insurance" in this prospectus supplement.
S-7
<PAGE> 8
The Loss Mitigation Advisor
The Murrayhill Company, as loss mitigation advisor for the trust fund, will
monitor the performance of, and make recommendations to the primary servicers
regarding, certain delinquent and defaulted mortgage loans.
See "Servicing of the Mortgage Loans -- The Loss Mitigation Advisor in this
prospectus supplement."
The Guarantor
Freddie Mac is guaranteeing the timely payment of interest and principal
solely with respect to the Class A1 Certificates (which are not offered hereby).
CUT-OFF DATE
May 1, 2000.
CLOSING DATE
On or about May 30, 2000.
PAYMENTS ON THE CERTIFICATES
Distribution Dates. Principal and interest on the certificates will be
payable on the 25th day of each month, beginning in June 2000. However, if the
25th day is not a business day, distributions will be made on the next business
day after the 25th day of the month.
Interest Payments. Interest will accrue on each class of offered
certificates, other than the Class P, Class X and R Certificates, at the
applicable annual rate described in this prospectus supplement.
See "Description of the Certificates -- Distributions of Interest" in this
prospectus supplement.
Principal Payments. The amount of principal payable on the offered
certificates will be determined by (1) formulas that allocate portions of
principal payments received on the mortgage loans among the different mortgage
pools and the different certificate classes, (2) funds actually received or
advanced on the mortgage loans that are available to make principal payments on
the certificates and (3) the application of excess interest to pay principal on
the certificates as described below. Funds actually received on the mortgage
loans may consist of expected monthly scheduled payments, and unexpected
payments resulting from prepayments or defaults by borrowers.
The manner of allocating payments of principal will differ, as described in
this prospectus supplement, depending upon whether a distribution date occurs
before the distribution date in June 2003 or on or after that date, and
depending upon whether the delinquency and loss performance of the mortgage
loans is worse than certain levels determined by the rating agencies.
See "Description of the Certificates -- Distributions of Principal" in this
prospectus supplement.
PREPAYMENT PREMIUMS ON THE MORTGAGE LOANS
The Class P Certificate will solely be entitled to the cash flow from both
mortgage pools arising from prepayment premiums paid by the borrowers on certain
voluntary full and partial prepayments of the mortgage loans. Accordingly, such
amounts will not be available for distribution to the other classes of
certificates.
See "Description of the Certificates" and "Description of the Mortgage
Pools -- General" in this prospectus supplement.
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the offered certificates will be the assets of the trust fund. The trust fund
will have no other source of cash other than collections and recoveries of the
mortgage loans through insurance or otherwise and no other entity will be
required or expected to make any payments on the offered certificates.
CREDIT ENHANCEMENT
The payment structure includes overcollateralization, subordination, loss
allocation, limited cross-collateralization and limited insurance features to
enhance the likelihood that certificateholders of more senior classes will
receive regular distributions of interest and ultimate payment of principal. The
Class B Certificates are more likely to experience losses than the M2, M1 and A2
Certificates. The Class M2 Certificates are more likely to experience losses
than the Class M1 and A2 Certificates; and the Class M1 Certificates are
S-8
<PAGE> 9
more likely to experience losses than the Class A2 Certificates.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement" in this prospectus
supplement.
Excess Interest. The mortgage loans owned by the trust fund bear interest
each month that in the aggregate is expected to exceed the amount needed to pay
monthly interest on the offered certificates and the other certificates to be
issued by the trust fund and certain fees and expenses of the trust fund. This
"excess interest" received from the mortgage loans each month will be available
to absorb realized losses on the mortgage loans and to achieve and maintain
overcollateralization at required levels.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement -- Excess Interest" in
this prospectus supplement.
Overcollateralization. On the closing date, the total principal amount of
the certificates is expected to approximately equal the total principal balance
of the mortgage loans in the trust fund. Commencing with the distribution date
in December 2000, any excess interest will be used to reduce the total principal
amount of the certificates to a predetermined level until the mortgage loans
have a total principal balance that exceeds the total outstanding principal
amount of the certificates by a predetermined amount. This condition is referred
to as "overcollateralization." We cannot, however, assure you that sufficient
interest will be generated by the mortgage loans to create overcollateralization
or to maintain any level of overcollateralization after it has been created.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement -- Overcollateralization'
in this prospectus supplement.
Subordination of Payments. The senior certificates as a group will have a
payment priority over the subordinate certificates. The Class M1 Certificates
will have a payment priority over the Class M2 and B Certificates; and the Class
M2 Certificates will have a payment priority over the Class B Certificates.
See "Description of the Certificates -- Credit Enhancement --
Subordination' in this prospectus supplement.
Allocation of Losses. Amounts representing losses on the mortgage loans
(in excess of the overcollateralization) will be applied to reduce the principal
amount of the subordinate class of certificates still outstanding that has the
lowest payment priority, until the principal amount of that class of
certificates has been reduced to zero. For example, losses in excess of the
overcollateralization will first be allocated in reduction of the principal
amount of the Class B Certificates until it is reduced to zero, then to the
principal amount of the Class M2 Certificates until it is reduced to zero, and
finally to the principal amount of the Class M1 Certificates until it is reduced
to zero. If a loss has been allocated to reduce the principal amount of your
subordinate certificate, you will receive no payment in respect of that
reduction. If the applicable subordination were insufficient to absorb losses,
then holders of senior certificates will incur losses and may never receive all
of their principal payments.
See "Description of the Certificates -- Credit Enhancement -- Application
of Realized Losses" in this prospectus supplement.
Cross-collateralization. Under certain limited circumstances, payments on
the mortgage loans in a pool 1 may be distributed as principal to holders of the
Class A2 Certificates. If the Class A1 Certificates have been retired but the
Class A2 Certificates are outstanding, then certain payments on the pool 1
mortgage loans may be paid to the Class A2 Certificates before being paid to the
Class M1, M2 and B Certificates.
See "Description of the Certificates -- Distributions of Principal" in this
prospectus supplement.
Primary Mortgage Insurance. The seller has acquired on behalf of the trust
fund certain loan-level primary mortgage insurance policies for approximately
96.83% of those mortgage loans in the trust fund with original loan-to-value
ratios in excess of 60% not otherwise covered by an existing primary mortgage
insurance policy. However, such policies will provide only limited protection
against losses on defaulted mortgage loans.
S-9
<PAGE> 10
See "Description of the Certificates -- Credit Enhancement -- Primary
Mortgage Insurance" in this prospectus supplement.
THE MORTGAGE LOANS
On the closing date, the assets of the trust fund will consist of two pools
of mortgage loans with an aggregate scheduled principal balance of approximately
$2,065,694,753. The mortgage loans will be secured by mortgages or deeds of
trust all of which are referred to in this prospectus supplement as mortgages.
The mortgage loans include conventional, first and second lien, fixed and
adjustable rate, fully amortizing and balloon, residential mortgage loans,
approximately 94.02% of which have original terms to stated maturity of 30
years.
The mortgage loans were generally originated or acquired in accordance with
underwriting guidelines that are less strict than customary Fannie Mae and
Freddie Mac guidelines. As a result, such mortgage loans are likely to
experience higher rates of delinquency, foreclosure and bankruptcy than mortgage
loans underwritten in accordance with higher standards.
The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.
See "Description of the Mortgage Pools" and "Underwriting Guidelines" in
this prospectus supplement and "The Trust Funds -- The Mortgage Loans" and "Loan
Underwriting Procedures and Standards" in the prospectus.
MASTER AND PRIMARY SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be master serviced by Norwest Bank Minnesota,
National Association. The master servicer will oversee, but will not, except in
its role as successor servicer in the event of a default by the primary servicer
as provided in the Trust Agreement, have any primary responsibility for the
servicing of the mortgage loans by the primary servicers. In addition, the
master servicer will perform certain reporting and advancing (in the event a
primary servicer fails to advance) functions with respect to the mortgage loans
on behalf of the trust fund based upon information provided by the primary
servicers.
Initially, the primary servicers of the mortgage loans will be Ocwen
Federal Bank FSB, Option One Mortgage Corporation and Wells Fargo Home Mortgage,
Inc. (formerly known as Norwest Mortgage, Inc.), which primary servicers will be
responsible for servicing approximately 39.61%, 43.77% and 16.62%, respectively,
of the mortgage loans in the trust fund (by Cut-off Date Balance).
The master servicer will have the authority to terminate a primary servicer
if it defaults in its obligations under its respective servicing agreement.
Freddie Mac, as guarantor, will also have the ability to terminate and replace a
primary servicer if (a) either (i) the rating originally assigned by the rating
agencies to the Class M1 Certificates is downgraded from "AA" (or its
equivalent) to "A" (or its equivalent) or below or (ii) realized losses
generated by the related serviced mortgage loans are applied to reduce the
principal balance of the Class B Certificates or (b) such other events occur as
the applicable primary servicer and Freddie Mac may agree. In addition, the
Class X Certificateholder, with the consent of Freddie Mac, will have the right
to terminate and replace a primary servicer, at any time, without cause, in
accordance with the terms of the applicable servicing agreement.
See "The Master Servicer," "The Primary Servicers" and "Servicing of the
Mortgage Loans" in this prospectus supplement.
OPTIONAL PURCHASE OF MORTGAGE LOANS
The Class X Certificateholder may purchase the mortgage loans on any
distribution date after the date on which the outstanding principal balance (in
the aggregate rather than by mortgage pool) is less than 10% of the Cut-off Date
Balance of the mortgage loans. In addition, under certain conditions described
herein, the depositor will have the option to purchase the mortgage loans in the
event that the Class X Certificateholder fails to exercise its optional purchase
right.
If such purchase option is exercised, the purchase price must be sufficient
to pay the outstanding principal balance of the mortgage loans, any accrued and
unpaid interest thereon, and any outstanding amounts owed to the Master Servicer
or the Guarantor.
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If the Class X Certificateholder does not exercise its option to purchase
the mortgage loans on the first distribution date it is first entitled to do so,
then commencing on the next succeeding distribution date the interest rates of
the Class A2, M1, M2 and B certificates will be increased as described in this
prospectus supplement.
See "Description of the Certificates -- Optional Purchase of Mortgage
Loans; Termination of the Trust Fund" and "Description of the
Certificates -- Distributions of Interest" in this prospectus supplement.
FINANCING
An affiliate of the underwriter has provided financing for the mortgage
loans. The Depositor will use a portion of the proceeds of the sale of the
certificates to repay the financing.
TAX STATUS
The trustee will elect to treat a portion of the trust fund as two real
estate mortgage investment conduits ("REMICs") for federal income tax purposes.
Each of the certificates, other than the Class P and Class R Certificates, will
represent ownership of REMIC "regular interests." The Class R Certificate will
be designated as the sole class of "residual interest" in each REMIC. The Class
P Certificate will evidence an interest in the trust fund but not in the REMICs.
Certain of the offered certificates may be issued with original issue
discount for federal income tax purposes.
See "Material Federal Income Tax Considerations" in this prospectus
supplement and in the prospectus.
ERISA CONSIDERATIONS
Generally, the Class A2 Certificates may, but the Class M1, M2 and B
Certificates may not, be purchased by employee benefit plans or individual
retirement accounts subject to the Employee Retirement Income Security Act of
1974 or Section 4975 of the Internal Revenue Code of 1986. A fiduciary of an
employee benefit plan or an individual retirement account must determine that
the purchase of a certificate is consistent with its fiduciary duties under
applicable law and does not result in a nonexempt prohibited transaction under
applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will NOT constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
There are other restrictions on the ability of certain types of investors
to purchase the certificates that prospective investors should consider.
See "Legal Investment Considerations" in this prospectus supplement and in
the prospectus.
RATINGS OF THE CERTIFICATES
The offered certificates offered by this prospectus supplement will
initially have the following ratings from Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc., Fitch IBCA, Inc. and Moody's
Investors Service, Inc.
<TABLE>
<CAPTION>
STANDARD &
POOR'S FITCH MOODY'S
CLASS RATING RATING RATING
----- ---------- ------ -------
<S> <C> <C> <C>
A2 AAA AAA Aaa
M1 AA AA Aa2
M2 A A A2
B BBB BBB Baa2
</TABLE>
- These ratings are not recommendations to buy, sell or hold these offered
certificates. A rating may be changed or withdrawn at any time by the
assigning rating agency.
- The ratings do not address the possibility that, as a result of principal
prepayments, the yield on your certificates may be lower than
anticipated.
See "Ratings" in this prospectus supplement.
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RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES.
UNDERWRITING GUIDELINES AND
POTENTIAL DELINQUENCIES The mortgage loans were originated or acquired
by mortgage lending institutions or their
correspondents generally in accordance with the
underwriting guidelines described in this
prospectus supplement. In general, these
guidelines are primarily intended to assess the
credit risk of mortgage loans made to borrowers
with imperfect credit histories, ranging from
minor delinquencies to bankruptcy, or borrowers
with relatively high ratios of monthly mortgage
payments to income or relatively high ratios of
total monthly credit payments to income. In
addition, such guidelines also evaluate the
value and adequacy of the underlying mortgaged
property as collateral. Such guidelines are not
as strict as Fannie Mae's or Freddie Mac's
customary acquisition guidelines, so 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 such
higher standards.
Changes in the values of mortgaged properties
related to the mortgage loans may have a
greater effect on the delinquency, foreclosure,
bankruptcy and loss experience of the mortgage
loans in the trust fund than on mortgage loans
originated under stricter guidelines. We cannot
assure you that the values of the mortgaged
properties have remained or will remain at
levels in effect on the dates of origination of
the related mortgage loans.
See "Description of the Mortgage
Pools -- General" in this prospectus supplement
for a description of the characteristics of
each mortgage pool and "Underwriting
Guidelines" for a general description of the
underwriting guidelines applied in originating
the mortgage loans.
EFFECT OF MORTGAGE LOAN
INTEREST RATES ON THE
CERTIFICATES The Class A2, M1, M2 and B Certificates will
accrue interest at an interest rate based on
the one-month LIBOR index plus a specified
margin, but such interest rates are subject to
limitations. The limit on the interest rate of
each of these certificates is based on the
weighted average interest rate of the mortgage
loans in pool 2, in the case of the Class A2
Certificates, or in both pools, in the case of
the subordinate certificates, net of certain
allocable fees and expenses of the trust fund.
The mortgage loans in each pool have interest
rates that either are fixed or adjust based on
a six-month LIBOR index or the one-year CMT
index, as described in "Description of the
Mortgage Pools -- The Indices."
The adjustable rate mortgage loans in each pool
may also have periodic, maximum and minimum
limitations on adjustments to their interest
rates, and approximately 98.57% of such
adjustable rate mortgage loans will have the
first adjustment to their
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interest rates two to three years after their
first payment dates. As a result, the Class A2,
M1, M2 and B Certificates may accrue less
interest than they would accrue if their
interest rate were based solely on the
one-month LIBOR index plus the specified
margin.
A variety of factors could limit the interest
rates and adversely affect the yield to
maturity on the Class A2, M1, M2 and B
Certificates. Some of these factors are
described below.
- The interest rates for the Class A2, M1, M2
and B Certificates adjusts monthly, while the
interest rates on the mortgage loans in each
pool either adjust less frequently or do not
adjust at all. Consequently, the limits on
the interest rates on these certificates may
prevent increases in the interest rates on
the related certificates for extended periods
in a rising interest rate environment.
- The interest rates on the adjustable rate
mortgage loans in each pool may respond to
economic and market factors that differ from
those that affect one-month LIBOR. It is
possible that the interest rates on the
adjustable rate mortgage loans in each pool
may decline while the interest rates on the
Class A2, M1, M2 and B Certificates are
stable or rising. It is also possible that
the interest rates on the adjustable rate
mortgage loans in each pool and the interest
rates on the Class A2, Class M1, Class M2 and
Class B Certificates may both decline or
increase during the same period, but that the
interest rate on such certificates may
decline or increase more slowly or rapidly.
If the interest rates on the Class A2, M1, M2
and B Certificates are limited for any
distribution date, the resulting basis risk
shortfalls (see "Description of the
Certificates -- Distributions of
Interest -- Basis Risk Shortfalls") may be
recovered by the holders of those certificates
on future distribution dates if there is enough
cashflow generated from excess interest on the
mortgage loans to fund such shortfall.
See "Description of the Certificates -- Credit
Enhancement -- Overcollateralization" in this
prospectus supplement. For detailed information
on the interest rates of the mortgage loans,
see "Description of the Mortgage Pools" in this
prospectus supplement.
POTENTIAL INADEQUACY OF CREDIT
ENHANCEMENT The offered certificates are not insured by any
financial guaranty insurance policy. The
overcollateralization, subordination, limited
cross-collateralization and primary mortgage
insurance features described in this prospectus
supplement are intended to enhance the
likelihood that certificateholders of more
senior classes will receive regular payments of
interest and principal, but such credit
enhancements are limited in nature and may be
insufficient to cover all losses on the
mortgage loans.
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<PAGE> 14
OVERCOLLATERALIZATION. In order to create
overcollateralization, it will be necessary
that the mortgage loans in a mortgage pool
generate more interest than is needed to pay
interest on the related certificates, as well
as such pool's allocable portion of fees and
expenses of the trust fund. We expect that the
mortgage loans will generate more interest than
is needed to pay those amounts, at least during
certain periods, because the weighted average
of the interest rates on the mortgage loans in
a mortgage pool is higher than the weighted
average of the interest rates on the related
certificates. We cannot assure you, however,
that enough excess interest will be generated
to reach the overcollateralization level
required by the rating agencies. The following
factors will affect the amount of excess
interest that the mortgage loans will generate:
- Prepayments. Every time a mortgage loan is
prepaid, total excess interest after the date
of prepayment will be reduced because that
mortgage loan will no longer be outstanding
and generating interest. The effect on your
certificates of this reduction will be
influenced by the amount of prepaid loans and
the characteristics of the prepaid loans.
Prepayment of a disproportionately high
number of high interest rate mortgage loans
would have a greater negative effect on
future excess interest.
- Defaults. The rate of defaults on the
mortgage loans related to your certificates
may turn out to be higher than expected.
Defaulted mortgage loans may be liquidated,
and liquidated mortgage loans will no longer
be outstanding and generating interest.
- Level of LIBOR. If LIBOR increases, more
money will be needed to pay current interest
to the Class A2, M1, M2 and B
certificateholders, so less money will be
available as excess interest.
See "Description of the Certificates -- Credit
Enhancement -- Overcollateralization" in this
prospectus supplement.
SUBORDINATION. If applicable subordination is
insufficient to absorb such losses, then
certificateholders will likely incur losses and
may never receive all of their principal
payments. You should consider the following:
- if you buy a Class B Certificate and losses
on the mortgage loans exceed any
overcollateralization that has been created,
the principal amount of your certificate will
be reduced proportionately with the principal
amounts of the other Class B Certificates by
the amount of that excess;
- if you buy a Class M2 Certificate and losses
on the mortgage loans exceed any
overcollateralization that has been created
plus the total principal amount of the Class
B Certificates, the principal amount of your
certificate will be reduced proportion-
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<PAGE> 15
ately with the principal amounts of the other
Class M2 Certificates by the amount of that
excess;
- if you buy a Class M1 Certificate and losses
on the mortgage loans exceed any
overcollateralization that has been created
plus the total principal amount of the Class
B and Class M2 Certificates, the principal
amount of your certificate will be reduced
proportionately with the principal amounts of
the other Class M1 Certificates by the amount
of that excess.
Losses on the mortgage loans will not reduce
the principal amount of the Class A1 or A2
Certificates.
If, after overcollateralization is created in
the required amount, the mortgage loans
generate interest in excess of the amount
needed to pay interest and principal on the
certificates and fees and expenses of the trust
fund, the excess interest will be used to pay
you and other certificateholders the amount of
any reduction in the principal balances of the
certificates caused by application of losses.
These payments will be made in order of
seniority. We cannot assure you, however, that
any excess interest will be generated and, in
any event, no interest will be paid to you on
the amount by which your principal balance was
reduced because of the application of losses.
See "Description of the Certificates -- Credit
Enhancement -- Subordination" and
"-- Application of Losses" in this prospectus
supplement.
CROSS-COLLATERALIZATION. If you buy a Class A2
Certificate, your principal payments will
depend, for the most part, on collections on
the mortgage loans in the pool 2. However, your
certificates will have the benefit of credit
enhancement in the form of
overcollateralization and subordination from
both pools. That means that even if the rate of
losses on mortgage loans in pool 2 is low,
losses in pool 1 will reduce the loss
protection for your certificates.
PRIMARY MORTGAGE INSURANCE. Approximately
92.46% of the mortgage loans included in pool 1
and approximately 92.35% of the mortgage loans
included in pool 2 have original loan-to-value
ratios in excess of 60%, calculated as
described at "Description of the Mortgage
Pools -- General". Of such mortgage loans,
approximately 98.51% and 98.32%, respectively,
are not otherwise covered by an existing
primary mortgage insurance policy. The seller
has acquired on behalf of the trust fund
loan-level primary mortgage insurance policies
for approximately 95.90% of such mortgage loans
in pool 1 with original loan-to-value ratios in
excess of 60% and approximately 91.27% of such
mortgage loans in pool 2 with original
loan-to-value ratios in excess of 60%. However,
such policies will provide only limited
protection against losses on defaulted mortgage
loans.
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<PAGE> 16
See "Description of the Certificates -- Credit
Enhancement -- Primary Mortgage Insurance" in
this prospectus supplement.
JUNIOR LIEN LOANS AND BALLOON
LOANS Approximately 0.09% of the mortgage loans
included in pool 1 and approximately 0.13% of
the mortgage loans included in pool 2 are
secured by junior mortgages that are
subordinate to senior mortgages held by
lenders. If the property securing a junior
mortgage loan is sold, you will not receive any
distributions from the proceeds until the
senior mortgage loan has been paid in full. If
a borrower defaults on a junior mortgage loan
and the related property is sold, there may not
be enough proceeds to pay both the senior
mortgage loan and the junior mortgage loan. If
that happens, holders of the related lowest
priority certificates outstanding may suffer a
loss if other forms of credit enhancement are
insufficient or unavailable to cover the loss.
Approximately 1.53% of the mortgage loans
included in pool 1 and approximately 0.15% of
the mortgage loans included in pool 2 are
balloon loans. Balloon loans pose a special
payment risk because the borrower must pay a
large lump sum payment of principal at the end
of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you
may suffer a loss if the collateral for such
loan is insufficient and the other forms of
credit enhancement are insufficient or
unavailable to cover the loss.
See "Description of the Mortgage Pools" in this
prospectus supplement.
UNPREDICTABILITY AND EFFECT OF
PREPAYMENTS The rate of prepayments on the mortgage loans
will be sensitive to prevailing interest rates.
Generally, if prevailing interest rates
decline, mortgage loan prepayments may increase
due to the availability of fixed rate mortgage
loans or other adjustable rate mortgage loans
at lower interest rates. Conversely, if
prevailing interest rates rise significantly,
the prepayments on the mortgage loans may
decrease.
A prepayment of a mortgage loan will usually
result in a prepayment on the certificates.
- If you purchase your certificates at a
discount and principal is repaid slower than
you anticipate, then your yield may be lower
than you anticipate.
- If you purchase your certificates at a
premium and principal is repaid faster than
you anticipate, then your yield may be lower
than you anticipate.
Borrowers may prepay their mortgage loans in
whole or in part at any time; however,
approximately 78.32% of the mortgage loans in
pool 1 (by Cut-off Date Balance) and 73.50% of
the mortgage loans in pool 2 (by Cut-off Date
Balance) require the borrower to pay a premium
under certain circumstances if the borrower
prepays the mortgage loan during periods
ranging from one to five years after the
mortgage loan was originated. A
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<PAGE> 17
prepayment premium may or may not discourage a
borrower from prepaying the mortgage loan
during the applicable period. Any prepayment
premiums collected with respect to the mortgage
loans shall be distributed to the Class P
certificateholder and, accordingly, are not
available to make interest distributions on the
offered certificates.
Prepayments of principal on the offered
certificates may also be caused by liquidations
of or insurance payments on the mortgage loans.
In addition, the seller may be required to
purchase mortgage loans from the trust fund in
the event certain breaches of representations
and warranties have not been cured. These
purchases will have the same effect on the
holders of the offered certificates as a
prepayment of the mortgage loans.
See "Yield, Prepayment, and Weighted Average
Life" in this prospectus supplement for a
description of factors that may influence the
rate and timing of prepayments on the mortgage
loans.
DELAY IN RECEIPT OF
LIQUIDATION PROCEEDS;
LIQUIDATION PROCEEDS
MAY BE LESS THAN MORTGAGE
LOAN BALANCE Substantial delays could be encountered in
connection with the liquidation of delinquent
mortgage loans. Further, reimbursement of
advances made on a mortgage loan and
liquidation expenses such as legal fees, real
estate taxes and maintenance and preservation
expenses may reduce the portion of liquidation
proceeds payable to you. If a mortgaged
property fails to provide adequate security for
the related mortgage loan, you could incur a
loss on your investment if the credit
enhancements are insufficient to cover the
loss.
GEOGRAPHIC CONCENTRATION Approximately 18.09% of the underlying
mortgaged properties in pool 1 and
approximately 49.83% of such properties in pool
2 are located in California. Mortgaged
properties in California may be particularly
susceptible to certain types of uninsurable
hazards, such as earthquakes, mudslides and
other natural disasters.
In addition, the conditions below will have a
disproportionate impact on the mortgage loans
in general:
- Economic conditions in states with high
concentrations of mortgage loans may affect
the ability of borrowers to repay their loans
on time even if such conditions do not affect
real property values.
- Declines in the residential real estate
markets in the states with high
concentrations of mortgage loans may reduce
the values of properties located in those
states, which would result in an increase in
current loan-to-value ratios.
For additional information regarding the
geographic distribution of the mortgage loans
in each mortgage pool, see the applicable table
under "Description of the Mortgage Pools" in
this prospectus supplement.
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<PAGE> 18
LIMITED ABILITY TO RESELL
CERTIFICATES The underwriter is not required to assist in
resales of the offered certificates, although
it may do so. A secondary market for any class
of certificates may not develop. If a secondary
market does develop, it might not continue or
it might not be sufficiently liquid to allow
you to resell any of your certificates.
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<PAGE> 19
DESCRIPTION OF THE CERTIFICATES
The definitions of certain capitalized terms used herein may be defined
elsewhere in this prospectus supplement. We refer you to "Index of Defined
Terms" on page S-94 of this prospectus supplement for the location of the
definition of certain capitalized terms.
GENERAL
Amortizing Residential Collateral Trust (the "Trust") Mortgage Pass-Through
Certificates, Series 2000-BC2 will consist of the following Classes: Class A1,
Class A2, Class M1, Class M2, Class B, Class P, Class X and Class R (together,
the "Certificates").
The Class A1 and Class A2 Certificates are collectively referred to herein
as the "Senior Certificates," and the Class M1, Class M2 and Class B
Certificates are collectively referred to herein as the "Offered Subordinate
Certificates." Only the Class A2, Class M1, Class M2 and Class B Certificates
(collectively, the "Offered Certificates") are offered hereby. The Class A1,
Class A2, Class M1, Class M2 and Class B Certificates are sometimes collectively
referred to herein as the "LIBOR Certificates." The Class M1, Class M2, Class B,
Class X and Class R Certificates are collectively referred to herein as the
"Subordinate Certificates." The Class R Certificate is also referred to as the
"Residual Certificate."
Each of the Class P Certificate, the Class X Certificate and the Class R
Certificate will be issued as a single Certificate in fully registered,
definitive form.
The Certificates represent beneficial ownership interests in a trust fund
(the "Trust Fund"), the assets of which will primarily consist of (1) two pools
("Pool 1" and "Pool 2", respectively, and each a "Mortgage Pool") of
conventional, first and second lien, fixed and adjustable rate, fully amortizing
and balloon, residential mortgage loans (each, a "Mortgage Loan"), (2) such
assets as from time to time are identified as deposited in respect of the
Mortgage Loans in a certificate account established and maintained by the
Trustee for the benefit of certificateholders (the "Certificate Account"), (3)
property acquired by foreclosure of such Mortgage Loans or deed in lieu of
foreclosure, (4) the primary mortgage insurance policies covering certain of the
Mortgage Loans whether acquired by the borrower, the lender or by the Seller on
behalf of the Trust Fund and any other applicable insurance policies and all
proceeds thereof, (5) the rights of the Depositor under the Sale and Assignment
Agreement (as defined under "The Trust Agreement -- Assignment of the Mortgage
Loans") between the Depositor and the Seller, (6) the Basis Risk Reserve Fund
(as described under "-- Distributions of Interest -- Basis Risk Shortfalls") and
(7) the obligations of Freddie Mac under its Guarantee (as described under
"-- Credit Enhancement -- Freddie Mac Guarantee").
Pool 1 will consist only of Mortgage Loans in the Trust Fund with original
principal balances which do not exceed the applicable Freddie Mac maximum
original loan amount limitations for one- to four-family mortgaged properties.
Pool 2 will consist of Mortgage Loans in the Trust Fund with original principal
balances which may be less than, equal to, or in excess of, those loan amount
limitations.
Each Class of Offered Certificates will be issued in the respective
approximate initial aggregate principal amount (a "Class Principal Amount") set
forth on the cover page hereof. The Class A1 Certificates will be offered
separately but contemporaneously with the Offered Certificates pursuant to an
offering with Freddie Mac. The Class P, the Class X and Class R Certificates
will be issued without principal or notional amounts or interest rates, and will
be entitled only to such amounts as are described herein. The aggregate
Certificate Principal Amount (as defined herein) of the Certificates and the
initial Class Principal Amount of each Class of Offered Certificates may be
increased or decreased by up to five percent to the extent that the Cut-off Date
Balance (as defined herein) of the Mortgage Loans is increased or decreased as
described under "Description of the Mortgage Pools" herein.
For purposes of allocating distributions of principal and interest on the
Senior Certificates, (i) the Class A1 Certificates will relate to, and generally
will be limited to collections from, the Mortgage Loans in Pool 1 and (ii) the
Class A2 Certificates will relate to, and generally be limited to collections
from, the
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<PAGE> 20
Mortgage Loans in Pool 2. However, holders of Senior Certificates will receive
the benefit of Monthly Excess Interest (as defined under "-- Distributions of
Interest -- Interest Payment Priorities") generated by either Mortgage Pool.
Holders of Subordinate Certificates will be entitled to receive distributions of
principal and interest based upon collections from both Mortgage Pools, but such
rights to distributions will be subordinate to the rights of the holders of the
Senior Certificates to the extent described herein.
The Class P Certificates will be entitled to all prepayment premiums
received in respect of the Mortgage Loans from either Mortgage Pool and,
accordingly, such amounts will not be available for distribution to the holders
of the other classes of Certificates. The Class X and Class R Certificates will
represent the remaining interest in the assets of the Trust Fund after the
required distributions are made to all other classes of Certificates. The Class
X Certificateholder will also be entitled to exercise certain rights with
respect to the servicing of the Mortgage Loans as described under "Servicing of
the Mortgage Loans -- Termination Rights." The Class R Certificate evidences the
residual interest in the REMICs.
Distributions on the Certificates will be made on the 25th day of each
month or, if such 25th day is not a Business Day (as defined below), on the next
succeeding Business Day, commencing in June 2000 (each a "Distribution Date"),
to holders of record (the "Certificateholders") on the applicable Record Date.
The "Record Date" for the Certificates will be the close of business on the
Business Day immediately preceding the related Distribution Date. A "Business
Day" is any day other than a Saturday or Sunday or a day on which Freddie Mac or
banks in California, Florida, Maryland, Minnesota, North Carolina, New York or
Pennsylvania (or as to any Primary Servicer, such other states as are specified
in the applicable servicing agreement) are closed.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (1) by check mailed to the address of such
Certificateholder as it appears on the books of the Trustee (as defined herein),
or (2) at the request, submitted to the Trustee in writing at least five
Business Days prior to the related Record Date, 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
Certificate will be made only upon presentation and surrender of such
Certificate at the Corporate Trust Office (as defined herein) 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 Book-Entry
Certificates will be issued in minimum denominations in principal amount of
$25,000 and integral multiples of $1 in excess thereof.
Each Class of Book-Entry Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. Structured Asset
Securities Corporation (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. Persons acquiring beneficial ownership interests in the
Book-Entry Certificates ("Certificate Owners") will hold their Certificates
through DTC in the United States, or Clearstream Banking, societe anonyme
(formerly Cedelbank) (hereinafter, "Clearstream Luxembourg") or the Euroclear
System ("Euroclear") in Europe if they are participants of such systems, or
indirectly through organizations which
S-20
<PAGE> 21
are participants in such systems. Each Class of Book-Entry Certificates will be
issued in one or more certificates that equal the initial Class Principal Amount
of the related Class of Offered Certificates and will initially be registered in
the name of Cede & Co., the nominee of DTC. Clearstream Luxembourg and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream Luxembourg's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries names on the books of DTC.
Citibank will act as depositary for Clearstream Luxembourg and Chase will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively, the "European Depositaries"). Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such
Certificate. Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Offered Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm (a "Participant") that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant and on the records of Clearstream Luxembourg or Euroclear, as
appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfer of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Clearstream Luxembourg Participants on such
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream Luxembourg Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with
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respect to tax documentation procedures relating to the Certificates, see
"Material Federal Income Tax Considerations -- REMICs -- Taxation of Certain
Foreign Investors" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Luxembourg Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with the DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however, such
cross market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Luxembourg Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Clearstream Banking, societe anonyme (referred to herein as Clearstream
Luxembourg) is incorporated under the laws of Luxembourg as a professional
depository. Clearstream Luxembourg holds securities for its participating
organizations ("Clearstream Luxembourg Participants") and facilitates the
clearance and settlement of securities transactions between Clearstream
Luxembourg Participants through electronic book-entry changes in accounts of
Clearstream Luxembourg Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Clearstream Luxembourg
in any of 28 currencies, including United States dollars. Clearstream Luxembourg
provides to its Clearstream Luxembourg Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally-traded securities and securities lending and borrowing.
Clearstream Luxembourg interfaces with domestic markets in several countries. As
a professional depository, Clearstream Luxembourg is subject to regulation by
the Luxembourg Monetary Institute. Clearstream Luxembourg participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Clearstream Luxembourg is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
Luxembourg Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 35 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing, and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts
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and Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payment to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Clearstream Luxembourg Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Considerations REMICs -- Taxation of Certain
Foreign Investors" in the Prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to beneficial owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Clearstream
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Clearstream Luxembourg Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to
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effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Book-Entry
Certificates which conflict with actions taken with respect to other Offered
Certificates.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Certificates
among participants of DTC, Clearstream Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
None of the Depositor, the Seller, the Master Servicer, any Primary
Servicer or the Trustee (as such terms are defined herein) will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Securities -- 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 (as defined herein).
DISTRIBUTIONS OF INTEREST
Calculation of Interest. The amount of interest distributable on each
Distribution Date in respect of each class of LIBOR Certificates will equal the
sum of (1) Current Interest (as defined herein) for such class on such date and
(2) any Carryforward Interest (as defined herein) for such class and date.
Interest will accrue on the LIBOR Certificates on the basis of a 360-day year
and the actual number of days elapsed during the related Accrual Period (as
defined below). The Class P, Class X and Class R Certificates will not be
entitled to distributions of interest.
- "Current Interest" with respect to any class of LIBOR Certificates and
any Distribution Date will equal the amount of interest accrued at the
applicable Interest Rate (as defined below) during the related Accrual
Period on the class Principal Amount of such class (as described below)
immediately prior to such Distribution Date.
- "Carryforward Interest" with respect to any class of LIBOR Certificates
and any Distribution Date will equal with respect to any Distribution
Date the sum of (1) the amount, if any, by which (x) the sum of (A)
Current Interest for such class for the immediately preceding
Distribution Date and (B) any unpaid Carryforward Interest from previous
Distribution Dates exceeds (y) the amount distributed in respect of
interest on such class on such immediately preceding Distribution Date,
and (2) interest on such amount for the related Accrual Period at the
applicable Interest Rate.
- The "Accrual Period" applicable to the LIBOR Certificates with respect to
each Distribution Date will be the period beginning on the immediately
preceding Distribution Date (or on the Closing Date, in the case of the
first Accrual Period) and ending on the day immediately preceding the
related Distribution Date.
The "Interest Rate" for each Class of LIBOR Certificates will be the
applicable annual rate described below.
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- Class A1 Certificates: the lesser of (i) LIBOR plus 0.14% (the "A1
Spread") and (ii) the Pool 1 Net Funds Cap (as defined below).
- Class A2 Certificates: the lesser of (i) LIBOR plus 0.24% (the "A2
Spread") and (ii) with respect to any Distribution Date on which the
Class A1 Certificates are outstanding, the Pool 2 Net Funds Cap (as
defined below) or, after the Distribution Date on which the Class
Principal Amount of the Class A1 Certificates has been reduced to zero,
the Average Rate (as defined below).
- Class M1 Certificates: the lesser of (i) LIBOR plus 0.55% (the "M1
Spread") and (ii) the Average Rate (as defined below).
- Class M2 Certificates: the lesser of (i) LIBOR plus 0.90% (the "M2
Spread") and (ii) the Average Rate (as defined below).
- Class B Certificates: the lesser of (i) LIBOR plus 1.85% (the "B
Spread") and (ii) the Average Rate (as defined below).
However, if the Class X Certificateholder does not exercise its option to
purchase the Mortgage Loans when it is first entitled to do so, as described
under "-- Optional Purchase of Mortgage Loans; Termination of the Trust Fund"
herein, then with respect to such Distribution Date and each succeeding
Distribution Date, the A1 Spread will be increased to 0.28%, the A2 Spread will
be increased to 0.48%, the M1 Spread will be increased to 1.05%, the M2 Spread
will be increased to 1.40% and the B Spread will be increased to 2.35%.
- The "Pool 1 Net Funds Cap" with respect to each Distribution Date and the
Class A1 Certificates will be an annual rate equal to (a) a fraction,
expressed as a percentage, the numerator of which is the product of (1)
the Pool 1 Optimal Interest Remittance Amount (as defined below) for such
date and (2) 12, and the denominator of which is the Pool Balance (as
defined below) for Pool 1 for the immediately preceding Distribution
Date, multiplied by (b) a fraction, the numerator of which is 30 and the
denominator of which is the actual number of days in the immediately
preceding calendar month.
- The "Pool 1 Optimal Interest Remittance Amount" with respect to each
Distribution Date and the Class A1 Certificates will be equal to the
product of (1) (x) the weighted average of the Net Mortgage Rates (as
defined below) of the Pool 1 Mortgage Loans as of the first day of the
related Collection Period (as defined at "-- Distributions of Principal"
below) divided by (y) 12 and (2) the Pool Balance for Pool 1 for the
immediately preceding Distribution Date.
- The "Pool 2 Net Funds Cap" with respect to each Distribution Date and the
Class A2 Certificates will be an annual rate equal to (a) a fraction
expressed as a percentage, the numerator of which is the product of (1)
the Pool 2 Optimal Interest Remittance Amount (as defined below) for such
date and (2) 12, and the denominator of which is the Pool Balance for
Pool 2 for the immediately preceding Distribution Date multiplied by (b)
a fraction, the numerator of which is 30 and the denominator of which is
the actual number of days in the immediately preceding calendar month.
- The "Pool 2 Optimal Interest Remittance Amount" with respect to each
Distribution Date and the Class A2 Certificates will be equal to the
product of (1)(x) the weighted average of the Net Mortgage Rates of the
Pool 2 Mortgage Loans as of the first day of the related Collection
Period divided by (y) 12 and (2) the Pool Balance for Pool 2 for the
immediately preceding Distribution Date.
- The "Average Rate" with respect to the Class M1, Class M2 and Class B
Certificates and any Distribution Date on which the Class A1 Certificates
are outstanding will be equal to the weighted average of the applicable
Net Funds Cap for each of the Mortgage Pools, weighted on the basis of
the Pool Subordinate Amount for each Mortgage Pool. After the
Distribution Date on which the Class Principal Amount of the Class A1
Certificates has been reduced to zero, the "Average Rate" will equal the
weighted average of the Pool 1 Net Funds Cap and the Pool 2 Net Funds
Cap, weighted on the basis of the Pool Balance for each Mortgage Pool.
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<PAGE> 26
- The "Pool Subordinate Amount" as to either Mortgage Pool and any
Distribution Date is the excess of the Pool Balance for such Mortgage
Pool for the immediately preceding Distribution Date over the aggregate
Certificate Principal Amount (as defined below) of the Class A1
Certificates (in the case of Pool 1) or the Class A2 Certificates (in the
case of Pool 2) immediately prior to the related Distribution Date.
- The "Net Mortgage Rate" for any Mortgage Loan at any time equals the
Mortgage Rate (as defined at "Description of the Mortgage
Pools -- Adjustable Rate Mortgage Loans") thereof minus the Aggregate
Expense Rate.
- The "Aggregate Expense Rate" for any Mortgage Loan equals the sum of the
applicable Servicing Fee Rate, the Master Servicing Fee Rate, the Trustee
Fee (expressed as a per annum percentage of the Aggregate Loan Balance),
the Insurance Fee Rate (in the case of any Mortgage Loan covered by the
PMI Policies), the Freddie Mac Guarantee Fee (solely in the case of any
Mortgage Loan in Pool 1 and based on a fraction expressed as a
percentage, the numerator of which is the Class Principal Amount of the
Class A1 Certificates and the denominator of which is the Pool Balance of
Pool 1) and the Advisor's Fee Rate (each as defined herein).
- The "Pool Balance" for either Mortgage Pool as of any date of
determination will be equal to the aggregate of the Scheduled Principal
Balances (as defined at "-- Distributions of Principal") of the Mortgage
Loans in such Mortgage Pool as of such date.
- The "Pool Percentage" for each Mortgage Pool and any Distribution Date
will be a fraction, expressed as a percentage, the numerator of which is
the Pool Balance for such Mortgage Pool for such date and the denominator
of which is the Aggregate Loan Balance for such date.
- The "Aggregate Loan Balance" as of any date of determination will be
equal to the aggregate of the Scheduled Principal Balances of the
Mortgage Loans as of such date.
- The "Certificate Principal Amount" of any Certificate (other than a Class
P, Class X and Class R Certificate) with respect to any date of
determination will equal the principal amount of such Certificate on the
Closing Date as reduced by all amounts previously distributed on such
Certificate in respect of principal and, in the case of any Offered
Subordinate Certificate, as reduced by any Applied Loss Amount (as
defined at "-- Credit Enhancement -- Application of Realized Losses")
previously allocated thereto.
Basis Risk Shortfalls. With respect to each Distribution Date and any
Class of LIBOR Certificates, to the extent that (a) the amount calculated under
clause (i) of the definition of "Interest Rate" for such Class exceeds (b) in
the case of the Class A1 and Class A2 Certificates, the amount payable under the
applicable Net Funds Cap (or Average Rate, if applicable, for the Class A2
Certificates) and, in the case of the Offered Subordinate Certificates, the
Average Rate for such class (such excess, a "Basis Risk Shortfall"), such
Certificates will be entitled to the amount of such Basis Risk Shortfall or
Unpaid Basis Risk Shortfall (as defined below) with interest thereon at the
applicable Interest Rate (calculated without regard to the applicable Net Funds
Cap or Average Rate) before the holders of the Class X Certificate and the Class
R Certificate are entitled to any distributions. Such class will be entitled to
the amount of such Basis Risk Shortfall or Unpaid Basis Risk Shortfall from
Monthly Excess Cashflow (as described below) treated as paid from and to the
extent such funds are on deposit in a reserve fund (the "Basis Risk Reserve
Fund"). See "-- Credit Enhancement -- Application of Monthly Excess Cashflow"
below. The source of funds on deposit in the Basis Risk Reserve Fund will be
limited to an initial deposit of $5,000 by the Seller and certain amounts that
would otherwise be distributed on the Class X Certificate. Notwithstanding the
foregoing, the amount of any Basis Risk Shortfall for any class of LIBOR
Certificates in respect of any Distribution Date may not exceed the excess of
(x) the amount payable at the applicable Maximum Interest Rate (as defined
below) over
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<PAGE> 27
(y) the amount payable at the applicable Net Funds Cap (or applicable Average
Rate in the case of the Subordinate Certificates and the Class A2 Certificates
(if applicable).
- The "Unpaid Basis Risk Shortfall" for any class of LIBOR Certificates on
any Distribution Date will equal the aggregate of all Basis Risk
Shortfalls for such Class remaining unpaid from all previous Distribution
Dates, together with interest thereon at the applicable Interest Rate
(calculated without regard to the applicable Net Funds Cap or Average
Rate).
- The "Maximum Interest Rate" with respect to any Distribution Date on
which the Class A1 Certificates are outstanding will be an annual rate
equal to the weighted average of the maximum "lifetime" Mortgage Rates
specified in the related mortgage notes of the (a) Pool 1 Mortgage Loans
(in the case of the Class A1 Certificates), (b) Pool 2 Mortgage Loans (in
the case of the Class A2 Certificates) or (c) the weighted average of the
rates determined in clause (a) and (b), weighted on the basis of the
applicable Pool Subordinate Amounts, in the case of the Offered
Subordinate Certificates. After the Distribution Date on which the Class
Principal Amount of the Class A1 Certificates has been reduced to zero,
the "Maximum Interest Rate" will in all cases be equal to the weighted
average of the maximum "lifetime" Mortgage Rates specified in the
mortgage notes for all the Mortgage Loans.
- The amount of Monthly Excess Cashflow distributable with respect to the
Class X Certificate on any Distribution Date will be reduced by the
amount of any Basis Risk Payment. The "Basis Risk Payment" for any
Distribution Date will be the sum of (1) any Basis Risk Shortfall for
such Distribution Date, (2) any Unpaid Basis Risk Shortfall for such
Distribution Date, and (3) any Required Reserve Fund Deposit (as
specified in the Trust Agreement) for such Distribution Date. The amount
of the Basis Risk Payment for any Distribution Date cannot exceed the
amount otherwise distributable in respect to the Class X Certificate.
Interest Payment Priorities. On each Distribution Date, the Interest
Remittance Amount (as defined below) for Pool 2 for such date will be
distributed in the following order of priority:
(i) to the Trustee, such Pool's allocable portion (based upon the Pool
Percentage) of the Trustee Fee;
(ii) to the holders of the Class A2 Certificates, Current Interest
(calculated as described herein taking into account the Pool 2 Net Funds Cap or
Average Rate, as applicable) for such Class and any Carryforward Interest for
such Distribution Date;
(iii) to the Class M1 Certificates, Current Interest (taking into account
the Average Rate, if applicable) for such Class and such Distribution Date;
(iv) to the Class M2 Certificates, Current Interest (taking into account
the Average Rate, if applicable) for such Class and such Distribution Date;
(v) to the Class B Certificates, Current Interest (taking into account the
Average Rate, if applicable) for such Class and such Distribution Date;
(vi) to the Loss Mitigation Advisor, the Loss Mitigation Advisor's Fee as
described at "Servicing of the Mortgage Loans -- The Loss Mitigation Advisor;"
(vii) to the Master Servicer, previously unreimbursed extraordinary costs,
liabilities and expenses to the extent provided in the Trust Agreement;
(viii) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described at "-- Credit Enhancement -- Application of
Monthly Excess Cashflow" below, any such Interest Remittance Amount for Pool 2
remaining after application pursuant to clauses (i) through (vii) (such amount,
the "Pool 2 Monthly Excess Interest" for such Distribution Date).
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The Interest Remittance Amount for Pool 1 on any Distribution Date will be
distributed in accordance with the same priorities as described above for Pool
2, except that the Freddie Mac Guarantee Fee paid with respect to the Class A1
Certificates and any unreimbursed advances ("Guarantor Advances") under such
guarantee will be paid immediately prior to any distributions of Current
Interest or Carryforward Interest to the holders of the Class A1 Certificates
(calculated as described above at "-- Calculation of Interest"). Any Interest
Remittance Amount for Pool 1 remaining for such Distribution Date after
application to all priorities (such amount, the "Pool 1 Monthly Excess
Interest") would be similarly applied as part of Monthly Excess Cashflow as
described under "-- Credit Enhancement -- Application of Monthly Excess
Cashflow."
The "Interest Remittance Amount" with respect to any Distribution Date and
either Mortgage Pool will equal (a) the sum of (1) all interest collected (other
than Payaheads (as defined herein)) or advanced in respect of Scheduled Payments
(as defined herein) on the Mortgage Loans in such Mortgage Pool during the
related Collection Period (as defined herein) by the Primary Servicer or the
Master Servicer, less (w) the PMI Insurance Premiums related to such Mortgage
Pool and certain state taxes imposed on such premiums (as described under
"-- Credit Enhancement -- Primary Mortgage Insurance"), (x) any prepayment
premiums received by the Primary Servicers with respect to such Mortgage Loans
during such Collection Period, (y) the applicable Servicing Fee and Master
Servicing Fee with respect to such Mortgage Loans and (z) previously
unreimbursed Advances (as defined at "Servicing of the Mortgage
Loans -- Advances; Servicing Advances") to the extent allocable to interest and
previously unreimbursed Servicing Advances, (2) all Compensating Interest (as
defined herein) paid by any Primary Servicer or the Master Servicer with respect
to such Mortgage Loans with respect to the related Prepayment Period (as defined
herein), (3) the portion of any Substitution Amount (as defined herein) paid
with respect to such Mortgage Loans during the related Prepayment Period
allocable to interest, and (4) all Net Liquidation Proceeds (as defined herein),
Insurance Proceeds (as defined herein) and any other recoveries collected with
respect to such Mortgage Loans during the related Prepayment Period, to the
extent allocable to interest, as reduced by (b) the Pool Percentage of other
costs, expenses or liabilities reimbursable to the Trustee, the Primary
Servicers and the Master Servicer to the extent provided in the Trust Agreement
but, in the case of the Master Servicer, such amounts may not exceed the dollar
limitation per annum set forth in the Trust Agreement.
- A "Payahead" is generally any Scheduled Payment intended by the related
borrower to be applied in a Collection Period subsequent to the
Collection Period in which such payment was received.
- The "Substitution Amount" will be generally equal to the amount, if any,
by which the Scheduled Principal Balance of a Mortgage Loan required to
be removed from a Mortgage Pool due to a breach of a representation or
warranty or defective documentation exceeds the principal balance of the
related substitute Mortgage Loan, plus unpaid interest accrued thereon,
and any unpaid Advances or Servicing Advances, unpaid Servicing Fee, or
any Guarantee Advances and related interest.
The Master Servicer will be entitled to any interest or other income earned
on funds on deposit in an account (the "Collection Account") (and be responsible
for any investment losses) maintained by the Master Servicer for the collection
of all principal and interest payments on the Mortgage Loans received from the
Primary Servicers prior to remittance of such funds by the Master Servicer to
the Trustee for deposit into the Certificate Account. The Trustee will be
entitled to any interest or other income earned on funds on deposit in the
Certificate Account (and be responsible for any investment losses) pending
distribution to Certificateholders. See "Servicing of the Mortgage
Loans -- Servicing Compensation and Payment of Expenses." Accordingly, such
investment earnings from either account will not be included in the
determination of the Interest Remittance Amount for either Mortgage Pool.
Prepayment Interest Shortfalls. When a principal prepayment in full or in
part 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. To the
extent that, as a result of a full or partial prepayment, a borrower is not
required to pay a full
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month's interest on the amount prepaid, a shortfall in the amount available to
make distributions of interest on the Certificates could result. The amount by
which one month's interest at the Mortgage Rate (as reduced by the Servicing Fee
Rate and Master Servicing Fee Rate) on a Mortgage Loan as to which a voluntary
prepayment has been made exceeds the amount of interest actually received in
connection with such prepayment is a "Prepayment Interest Shortfall." With
respect to prepayments in full and in part, the applicable Primary Servicer will
be obligated to fund any resulting Prepayment Interest Shortfalls (such payment
obligation being limited to the aggregate of the Servicing Fees on the Mortgage
Loans serviced by it for the applicable Distribution Date). The Master Servicer
is obligated to reduce its Master Servicing Fee for the related Distribution
Date to the extent necessary to fund any Prepayment Interest Shortfalls required
to be funded by the Primary Servicers but not funded in full. See "Servicing of
the Mortgage Loans -- Prepayment Interest Shortfalls" herein. Any such payment
by a Servicer or the Master Servicer is referred to herein as "Compensating
Interest", whether or not collected. Absent payment under the Freddie Mac
Guarantee, any Prepayment Interest Shortfalls not funded by the applicable
Primary Servicer or the Master Servicer ("Net Prepayment Interest Shortfalls")
will reduce the Current Interest available for distribution on the related
Distribution Date.
DETERMINATION OF LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period (each such date, a "LIBOR Determination
Date"), the Master Servicer will determine LIBOR based on the "Interest
Settlement Rate" for U.S. dollar deposits of one-month maturity set by the
British Bankers' Association (the "BBA") as of 11:00 a.m. (London time) on the
LIBOR Determination Date ("LIBOR").
The BBA's Interest Settlement Rates are currently displayed on the Dow
Jones Telerate Service page 3750 (such page, or such other page as may replace
page 3750 on that service or such other service as may be nominated by the BBA
as the information vendor for the purpose of displaying the BBA's Interest
Settlement Rates for deposits in U.S. dollars, the "Designated Telerate Page").
Such Interest Settlement Rates are also currently available on Reuters Monitor
Money Rates Service page "LIBOR01" and Bloomberg L.P. page "BBAM." The BBA's
Interest Settlement Rates currently are rounded to five decimal places.
A "LIBOR Business Day" is any day on which banks in London and New York are
open for conducting transactions in foreign currency and exchange.
With respect to any LIBOR Determination Date, if the BBA's Interest
Settlement Rate does not appear on the Designated Telerate Page as of 11:00 a.m.
(London time) on such date, or if the Designated Telerate Page is not available
on such date, the Master Servicer will obtain such rate from the Reuters or
Bloomberg page. If such rate is not published for such LIBOR Determination Date,
LIBOR for such date will be the most recently published Interest Settlement
Rate. In the event that the BBA no longer sets an Interest Settlement Rate, the
Master Servicer will designate an alternative index that has performed, or that
the Master Servicer expects to perform, in a manner substantially similar to the
BBA's Interest Settlement Rate. The Master Servicer will select a particular
index as the alternative index only if it receives an opinion of counsel that
the selection of such index will not cause any of the REMICs to lose their
classification as REMICs for federal income tax purposes.
The establishment of LIBOR on each LIBOR Determination Date by the Master
Servicer and the Master Servicer's calculation of the rate of interest
applicable to the LIBOR Certificates for the related Accrual Period will (in the
absence of manifest error) be final and binding.
DISTRIBUTIONS OF PRINCIPAL
General Definitions. Distributions of principal on the Class A1 and Class
A2 Certificates will be made primarily from the Principal Distribution Amount
for the related Mortgage Pool and secondarily from Monthly Excess Cashflow from
both Mortgage Pools, to the extent of such excess available funds, as described
at "-- Credit Enhancement -- Application of Monthly Excess Cashflow" below.
Distributions of
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principal on the Offered Subordinate Certificates will be made from the
aggregate of the Principal Distribution Amounts from both Mortgage Pools after
distributions of principal have been made on the Class A1 and Class A2
Certificates.
- The "Principal Distribution Amount" for each Mortgage Pool for any
Distribution Date will be equal to the Principal Remittance Amount for
such Mortgage Pool for such date minus the Overcollateralization Release
Amount (as defined at "-- Definitions Relating to Principal Payment
Priorities" below), if any, for such Mortgage Pool for such Distribution
Date.
- The "Principal Remittance Amount" for each Mortgage Pool for any
Distribution Date will be equal to (a) the sum of (1) all principal
collected (other than Payaheads) or advanced in respect of Scheduled
Payments on the Mortgage Loans in such Mortgage Pool during the related
Collection Period by the Primary Servicer or the Master Servicer (less
unreimbursed Advances due to any Primary Servicers, the Master Servicer
or the Trustee with respect to such Mortgage Loans, to the extent
allocable to principal), (2) all prepayments in full or in part received
on the Mortgage Loans in such Mortgage Pool during the related Prepayment
Period, (3) the outstanding principal balance of each Mortgage Loan that
was repurchased by the Seller from such Mortgage Pool during the related
Prepayment Period, (4) the principal portion of any Substitution Amount
paid with respect to any replaced Mortgage Loans in such Mortgage Pool
during the related Prepayment Period allocable to principal, and (5) all
Net Liquidation Proceeds, Insurance Proceeds and any other recoveries
collected with respect to the Mortgage Loans in such Mortgage Pool during
the related Prepayment Period, to the extent allocable to principal,
minus (b) the Pool Percentage of any other costs, expenses or liabilities
reimbursable to the Master Servicer from the Interest Remittance Amount
described in clause (b) of the definition thereof and not reimbursed
therefrom or otherwise.
- The "Collection Period" with respect to any Distribution Date is the
one-month period beginning on the second day of the calendar month
immediately preceding the month in which such Distribution Date occurs
and ending on the first day of the month in which such Distribution Date
occurs.
- "Insurance Proceeds" means any amounts paid by an insurer under a primary
mortgage insurance policy (whether obtained by the borrower or the Seller
on behalf of the Trust Fund), any standard hazard insurance policy, flood
insurance policy or any other insurance policy relating to the Mortgage
Loans or related mortgaged properties other than amounts to cover
expenses incurred by the applicable Primary Servicer in connection with
procuring such proceeds, applied to the restoration and repair of the
related mortgaged property or to be paid to the borrower pursuant to the
mortgage note or state law.
- "Net Liquidation Proceeds" means all amounts, net of (1) unreimbursed
expenses and (2) unreimbursed Advances and Servicing Advances, received
and retained in connection with the liquidation of defaulted Mortgage
Loans, through insurance or condemnation proceeds, 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.
- The "Prepayment Period" with respect to each Distribution Date is the
one-month period beginning on the Cut-off Date, in the case of the first
Distribution Date, and thereafter on the second day of the calendar month
immediately preceding the month in which the related Distribution Date
occurs, in the case of each subsequent Distribution Date, and ending on
the first day of the month in which such Distribution Date occurs.
- A "Scheduled Payment" is the monthly scheduled payment of interest and
principal specified in the related mortgage note for the Mortgage Loan.
- The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination will be generally equal to its outstanding principal
balance as of the Cut-off Date, after giving effect to
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Scheduled Payments due on or before such date, whether or not received,
reduced by (i) the principal portion of all Scheduled Payments due on or
before the due date in the Collection Period immediately preceding 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 Collection Period immediately preceding such date of
determination.
Principal Payment Priorities. The Principal Distribution Amount for each
Mortgage Pool will be distributed on each Distribution Date as follows:
I. On each Distribution Date (a) prior to the Stepdown Date or (b) with
respect to which a Trigger Event has occurred, the Trustee will make the
following distributions:
For Pool 1: Until the aggregate Certificate Principal Amount of the Class
A1, Class A2, Class M1, Class M2 and Class B Certificates equals the Target
Amount for such Distribution Date, the Principal Distribution Amount for Pool 1
will be distributed in the following order of priority:
(i) to the Class A1 Certificates, until the Class Principal Amount of
such Class has been reduced to zero;
(ii) to the Class A2 Certificates, until the Class Principal Amount of
such Class has been reduced to zero;
(iii) to the Class M1 Certificates, until the Class Principal Amount
of such Class has been reduced to zero;
(iv) to the Class M2 Certificates, until the Class Principal Amount of
such Class has been reduced to zero;
(v) to the Class B Certificates, until the Class Principal Amount of
such Class has been reduced to zero; and
(vi) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under "-- Credit Enhancement -- Application
of Monthly Excess Cashflow" below, any such Principal Distribution Amount
for Pool 1 remaining after application pursuant to clauses (i) through (v)
above.
For Pool 2: Until the aggregate Certificate Principal Amount of the Class
A1, Class A2, Class M1, Class M2 and Class B Certificates equals the Target
Amount for such Distribution Date, the Principal Distribution Amount for Pool 2
will be distributed in the following order of priority:
(i) to the Class A2 Certificates, until the Class Principal Amount of
such Class has been reduced to zero;
(ii) to the Class M1 Certificates, until the Class Principal Amount of
such Class has been reduced to zero;
(iii) to the Class M2 Certificates, until the Class Principal Amount
of such Class has been reduced to zero;
(iv) to the Class B Certificates, until the Class Principal Amount of
such Class has been reduced to zero; and
(v) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under "-- Credit Enhancement -- Application
of Monthly Excess Cashflow" below, any such Principal Distribution Amount
for Pool 2 remaining after application pursuant to clauses (i) through (iv)
above.
Any Principal Distribution Amount remaining on any Distribution Date after
the Target Amount is achieved will be applied as part of the Monthly Excess
Cashflow for such Distribution Date as described under "-- Credit
Enhancement -- Application of Monthly Excess Cashflow" below.
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II. On each Distribution Date (a) on or after the Stepdown Date and (b)
with respect to which a Trigger Event has not occurred, the Principal
Distribution Amount for both Mortgage Pools for such date will be distributed in
the following order of priority:
(i) so long as the Class M1, Class M2 or Class B Certificates are
outstanding, to the Class A1 Certificates (in the case of Pool 1) and to
the Class A2 Certificates (in the case of Pool 2), an amount equal to the
lesser of (x) the Principal Distribution Amount for the related Mortgage
Pool for such Distribution Date and (y) the Senior Principal Distribution
Amount for the related Mortgage Pool for such Distribution Date, in each
case until the Class Principal Amount of such Class has been reduced to
zero; provided, however, to the extent that the Senior Principal
Distribution Amount for Pool 1 exceeds the Class Principal Amount of the
Class A1 Certificates, such excess shall be applied to the Class A2
Certificates; otherwise to the Class A1 and Class A2 Certificates, the
Principal Distribution Amount for the related Mortgage Pool for such
Distribution Date;
(ii) to the Class M1 Certificates, an amount equal to the lesser of
(x) the excess of (a) the aggregate Principal Distribution Amounts for each
of Pool 1 and Pool 2 for such Distribution Date over (b) the amount
distributed to the Class A1 and Class A2 Certificates on such Distribution
Date pursuant to clause (i) above, and (y) the M1 Principal Distribution
Amount for such Distribution Date, until the Class Principal Amount of such
Class has been reduced to zero;
(iii) to the Class M2 Certificates, an amount equal to the lesser of
(x) the excess of (a) the aggregate Principal Distribution Amounts for each
of Pool 1 and Pool 2 for such Distribution Date over (b) the amount
distributed to the Class A1, Class A2 and Class M1 Certificates on such
Distribution Date pursuant to clauses (i) and (ii) above, respectively, and
(y) the M2 Principal Distribution Amount for such Distribution Date, until
the Class Principal Amount of such Class has been reduced to zero;
(iv) to the Class B Certificates, an amount equal to the lesser of (x)
the excess of (a) the aggregate Principal Distribution Amounts for each of
Pool 1 and Pool 2 for such Distribution Date over (b) the amount
distributed to the Class A1, Class A2, Class M1 and Class M2 Certificates
on such Distribution Date pursuant to clauses (i), (ii) and (iii) above,
respectively, and (y) the B Principal Distribution Amount for such
Distribution Date, until the Class Principal Amount of such Class has been
reduced to zero; and
(v) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under "-- Credit Enhancement -- Application
of Monthly Excess Cashflow" below, any such Principal Distribution Amount
remaining after application pursuant to clauses (i) through (iv) above.
Notwithstanding the foregoing, on any Distribution Date on which the Class
Principal Amount of each Class of Certificates having a higher priority of
distribution has been reduced to zero, any remaining Principal Distribution
Amount of a Mortgage Pool will be distributed to the remaining Certificates, in
the order of priority set forth above, until the Class Principal Amount of each
such Class has been reduced to zero.
Definitions Relating to Principal Payment Priorities.
- The "Target Amount" with respect to any Distribution Date will be equal
to the Aggregate Loan Balance as of such Distribution Date minus the
product of (1) 0.50% and (2) the Cut-off Date Balance.
- A "Trigger Event" has occurred with respect to any Distribution Date if
the Rolling Three Month Delinquency Rate as of the last day of the
immediately preceding month equals or exceeds the Senior Enhancement
Percentage for such Distribution Date.
- As provided in the Trust Agreement, the "Rolling Three Month
Delinquency Rate" with respect to any Distribution Date will be the
average of the Delinquency Rates for each of the three (or one and
two, in the case of the first and second Distribution Dates)
immediately preceding months. The "Delinquency Rate" for any month
will be the fraction, expressed as a
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percentage, the numerator of which is the aggregate outstanding
principal balance of all Mortgage Loans 60 or more days delinquent
(including all foreclosures, bankruptcies and REO Properties) as of the
close of business on the last day of such month, and the denominator of
which is the Aggregate Loan Balance as of the close of business on the
last day of such month.
- The "Stepdown Date" is the later to occur of (x) the Distribution Date in
June 2003 and (y) the first Distribution Date on which the Senior
Enhancement Percentage (calculated for this purpose after giving effect
to payments or other recoveries in respect of the Mortgage Loans during
the related Collection Period but before giving effect to distributions
on any Certificates on such Distribution Date) is greater than or equal
to approximately 15.00%.
- The "Senior Principal Distribution Amount" for each Mortgage Pool for any
Distribution Date will be equal to (a) prior to the Stepdown Date or if a
Trigger Event has occurred with respect to such Distribution Date, 100%
of the Principal Distribution Amount and (b) on or after the Stepdown
Date and as long as a Trigger Event has not occurred with respect to such
Distribution Dates the lesser of (x) the Principal Distribution Amount
for such Mortgage Pool and (y) the product of (i) the applicable Senior
Proportionate Percentage and (ii) the amount, if any, by which (x) the
aggregate Certificate Principal Amount of the Senior Certificates
immediately prior to such Distribution Date exceeds (y) the Senior Target
Amount (as defined below).
- The "M1 Principal Distribution Amount" for any Distribution Date will be
equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if
any, by which (x) the sum of (i) the aggregate Class Principal Amount of
the Class A1 and Class A2 Certificates after giving effect to
distributions on such Distribution Date and (ii) the Class Principal
Amount of the Class M1 Certificates immediately prior to such
Distribution Date exceeds (y) the M1 Target Amount (as defined below).
- The "M2 Principal Distribution Amount" for any Distribution Date will be
equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if
any, by which (x) the sum of (i) the aggregate Class Principal Amount of
the Class A1, Class A2 and Class M1 Certificates, in each case, after
giving effect to distributions on such Distribution Date and (ii) the
Class Principal Amount of the Class M2 Certificates immediately prior to
such Distribution Date exceeds (y) the M2 Target Amount (as defined
below).
- The "B Principal Distribution Amount" for any Distribution Date will be
equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if
any, by which (x) the sum of (i) the aggregate Class Principal Amounts of
the Class A1, Class A2, Class M1 and Class M2 Certificates, in each case,
after giving effect to distributions on such Distribution Date and (ii)
the Class Principal Amount of the Class B Certificates immediately prior
to such Distribution Date exceeds (y) the B Target Amount (as defined
below).
- The "Overcollateralization Amount" with respect to any Distribution Date
will be equal to the amount, if any, by which (x) the Aggregate Loan
Balance for such Distribution Date exceeds (y) the aggregate Class
Principal Amount of the Class A1, Class A2, Class M1, Class M2 and Class
B Certificates after giving effect to distributions on such Distribution
Date.
- The "Overcollateralization Deficiency" with respect to any Distribution
Date will be equal to the amount, if any, by which (x) the Targeted
Overcollateralization Amount for such Distribution Date exceeds (y) the
Overcollateralization Amount for such Distribution Date, calculated for
this purpose after giving effect to the reduction on such Distribution
Date of the Certificate Principal Amounts of the Certificates resulting
from the distribution of the Principal Remittance Amount on such
Distribution Date, but prior to allocation of any Applied Loss Amount on
such Distribution Date.
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- The "Overcollateralization Release Amount" with respect to each Mortgage
Pool and any Distribution Date will be equal to the product of (1) the
Aggregate Overcollateralization Release Amount for such Distribution Date
and (2) the Pool Percentage for such Mortgage Pool for such Distribution
Date.
- The "Aggregate Overcollateralization Release Amount" with respect to any
Distribution Date will be equal to the lesser of (x) the aggregate of the
Principal Remittance Amounts of both Mortgage Pools for such Distribution
Date and (y) the amount, if any, by which (1) the Overcollateralization
Amount for such date (calculated for this purpose on the basis of the
assumption that 100% of the aggregate of the Principal Remittance Amounts
for such Distribution Date is applied on such date in reduction of the
aggregate of the Certificate Principal Amounts of the Certificates)
exceeds (2) the Targeted Overcollateralization Amount for such
Distribution Date.
- The "Senior Enhancement Percentage" with respect to any Distribution Date
will be the fraction, expressed as a percentage, the numerator of which
is the sum of the aggregate Class Principal Amounts of the Subordinate
Certificates and the Overcollateralization Amount (which, for purposes of
this definition only, shall not be less than zero), in each case after
giving effect to distributions on such Distribution Date, and the
denominator of which is the Aggregate Loan Balance for such Distribution
Date.
- The "Senior Proportionate Percentage" for Pool 1 with respect to any
Distribution Date will be the fraction, expressed as a percentage, the
numerator of which is the Principal Distribution Amount for Pool 1 for
such Distribution Date and the denominator of which is the aggregate of
the Principal Distribution Amounts for Pool 1 and Pool 2 for such
Distribution Date. The "Senior Proportionate Percentage" for Pool 2 with
respect to any Distribution Date will be the fraction, expressed as a
percentage, the numerator of which is the Principal Distribution Amount
for Pool 2 for such Distribution Date and the denominator of which is the
aggregate of the Principal Distribution Amounts for Pool 1 and Pool 2 for
such Distribution Date.
- The "Targeted Overcollateralization Amount" with respect to any
Distribution Date will be equal to 0.50% of the Cut-off Date Balance.
- The "Senior Target Amount" for each Mortgage Pool for any Distribution
Date will be equal to the lesser of (a) the product of (i) approximately
85.00% and (ii) the Aggregate Loan Balance for such Distribution Date and
(b) the amount, if any, by which (i) the Aggregate Loan Balance for such
Distribution Date exceeds (ii) 0.50% of the Cut-off Date Balance.
- The "M1 Target Amount" for any Distribution Data will be equal to the
lesser of (a) the product of (i) approximately 92.00% and (ii) the
Aggregate Loan Balance for such Distribution Date and (b) the amount, if
any, by which (i) the Aggregate Loan Balance for such Distribution Date
exceeds (ii) 0.50% of the Cut-off Date Balance.
- The "M2 Target Amount" for any Distribution Date will be equal to the
lesser of (a) the product of (i) approximately 97.50% and (ii) the
Aggregate Loan Balance for such Distribution Date and (b) the amount, if
any, by which (i) the Aggregate Loan Balance for such Distribution Date
exceeds (ii) 0.50% of the Cut-off Date Balance.
- The "B Target Amount" for any Distribution Date will be equal to the
lesser of (a) the product of (i) approximately 99.00% and (ii) the
Aggregate Loan Balance for such Distribution Date and (b) the amount, if
any, by which (i) the Aggregate Loan Balance for such Distribution Date
exceeds (ii) 0.50% of the Cut-off Date Balance.
CREDIT ENHANCEMENT
Excess Interest. The Mortgage Loans included in each Mortgage Pool bear
interest each month that in the aggregate is expected to exceed the amount
needed to pay monthly interest on the related Certificates and the fees and
expenses of the Master Servicer, the Primary Servicers, the Trustee, the
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Guarantor, the PMI Insurer and the Loss Mitigation Advisor. Such excess interest
from the Mortgage Loans each month will be available to absorb Realized Losses
(as defined below at "-- Application of Realized Losses") on the Mortgage Loans
and to achieve and maintain overcollateralization at required levels.
Overcollateralization. The weighted average of the Net Mortgage Rates of
the Mortgage Loans is currently, and generally in the future is expected to be,
higher than the weighted average interest rate on the Certificates. As described
below, the application of interest collections as distributions of principal
will cause the aggregate Certificate Principal Amounts of the Certificates to
amortize more rapidly than the Aggregate Loan Balance, thus creating and
maintaining overcollateralization. However, Realized Losses with respect to
Mortgage Loans in any Mortgage Pool will reduce overcollateralization, and could
result in an Overcollateralization Deficiency.
As described herein, on and after the applicable Stepdown Date, to the
extent that the Overcollateralization Amount exceeds the related Targeted
Overcollateralization Amount, a portion of the Principal Distribution Amount
will not be applied in reduction of the Certificate Principal Amounts of the
Certificates, but will instead be applied as described below.
Application of Monthly Excess Cashflow. The sum of the Pool 1 Monthly
Excess Interest and the Pool 2 Monthly Excess Interest for any Distribution Date
(see "-- Distributions of Interest -- Interest Payment Priorities") and the
Aggregate Overcollateralization Release Amount for such date will constitute the
"Monthly Excess Cashflow" for such Distribution Date, which will, on each
Distribution Date (except as noted in (1) below), be distributed in the
following order of priority:
(1) for each Distribution Date occurring (a) after the Distribution
Date in November 2000, but before the Stepdown Date or (b) on or after the
Stepdown Date but for which a Trigger Event has occurred, then until the
aggregate Certificate Principal Amount equals the Aggregate Loan Balance
for such Distribution Date minus the Targeted Overcollateralization Amount
for such Distribution Date,
(a) concurrently, in proportion to their respective Class Principal
Amounts after giving effect to previous distributions on such
Distribution Date (as described at "-- Principal Payment Priorities"
above), to the Class A1 Certificates and the Class A2 Certificates until
the respective Class Principal Amounts of each such Class has been
reduced to zero;
(b) to the Class M1 Certificates, until the Class Principal Amount
of such Class has been reduced to zero;
(c) to the Class M2 Certificates, until the Class Principal Amount
of such Class has been reduced to zero; and
(d) to the Class B Certificates, until the Class Principal Amount
of such Class has been reduced to zero;
(2) for each Distribution Date occurring on or after the Stepdown Date
and for which no Trigger Event has occurred,
(a) concurrently, in proportion to their respective Class Principal
Amounts after giving effect to previous distributions on such
Distribution Date (as described at "-- Principal Priorities" above), to
the Class A1 Certificates and the Class A2 Certificates until the
aggregate Class Principal Amount of the Senior Certificates equals the
Senior Target Amount;
(b) to the Class M1 Certificates, until the Class Principal Amount
for such Class equals the M1 Target Amount;
(c) to the Class M2 Certificates, until the Class Principal Amount
for such Class equals the M2 Target Amount; and
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(d) to the Class B Certificates, until the Class Principal Amount
for such Class equals the B Target Amount;
(3) to the Basis Risk Reserve Fund, the amount of any Basis Risk
Payment, and then from the Basis Risk Reserve Fund,
(a) concurrently, in proportion to their respective Class Principal
Amounts after giving effect to previous distributions on such
Distribution Date, to the Class A1 and Class A2 Certificates, any
applicable Basis Risk Shortfall and Unpaid Basis Risk Shortfall for each
such Class and such Distribution Date;
(b) to the Class M1 Certificates, any applicable Basis Risk
Shortfall and Unpaid Basis Risk Shortfall for such Distribution Date;
(c) to the Class M2 Certificates, any applicable Basis Risk
Shortfall and Unpaid Basis Risk Shortfall for such Distribution Date;
and
(d) to the Class B Certificates, any applicable Basis Risk
Shortfall and Unpaid Basis Risk Shortfall for such Distribution Date;
(4) to the Class M1 Certificates, any Carryforward Interest for such
Class and such date;
(5) to the Class M1 Certificates, any Deferred Amount (as defined
below) for such Class and such date;
(6) to the Class M2 Certificates, any Carryforward Interest for such
Class and such date;
(7) to the Class M2 Certificates, any Deferred Amount for such Class
and such date;
(8) to the Class B Certificates, any Carryforward Interest for such
Class and such date;
(9) to the Class B Certificates, any Deferred Amount for such Class
and such date;
(10) to the Class X Certificate, the amount distributable thereon
under the Trust Agreement; and
(11) to the Class R Certificate, any remaining amount.
With respect to each Distribution Date, the "Deferred Amount" for each
Class of Subordinate Certificates will be equal to the amount by which (x) the
aggregate of Applied Loss Amounts (as defined below at "-- Application of
Realized Losses") previously applied in reduction of the Class Principal Amount
thereof exceeds (y) the aggregate of amounts previously distributed in
reimbursement thereof.
Subordination. The rights of holders of the Subordinate Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated,
to the extent described herein, to such rights of holders of each class of
Certificates having a higher priority of distribution, as described under
"-- Distributions of Interest" and "-- Distributions of Principal." This
subordination is intended to enhance the likelihood of regular receipt by
holders of the Senior Certificates of distributions of the full amount of
interest and principal distributable thereon, and to afford such
Certificateholders limited protection against Realized Losses incurred with
respect to the Mortgage Loans.
The limited protection afforded to holders of Class A1, Class A2, Class M1
and Class M2 Certificates by means of the subordination of Subordinate
Certificates having a lower priority of distribution will be accomplished by the
preferential right of such holders to receive, prior to any distribution in
respect of interest or principal, respectively, being made on any Distribution
Date in respect of Certificates having a lower priority of distribution, the
amounts of interest due them and principal available for distribution,
respectively, on such Distribution Date.
Application of Realized Losses. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during any Collection Period, the related Net Liquidation
Proceeds, to the extent allocable to principal, may be less than the outstanding
principal balance of such Mortgage Loan. The amount of such insufficiency is a
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"Realized Loss." Realized Losses on Mortgage Loans will have the effect of
reducing amounts distributable in respect of, first, the Class X Certificate
(both through the application of Monthly Excess Cashflow to fund such deficiency
and through a reduction in the Overcollateralization Amount for the related
Distribution Date); second, the Class B Certificates; third, the Class M2
Certificates; and fourth, the Class M1 Certificates, before reducing amounts
distributable in respect of the Senior Certificates. A "Liquidated Mortgage
Loan" is, in general, a defaulted Mortgage Loan as to which the applicable
Primary Servicer has determined that all amounts that it expects to recover in
respect of such Mortgage Loan have been recovered (exclusive of any possibility
of a deficiency judgment).
To the extent that Realized Losses occur, such Realized Losses will reduce
the Aggregate Loan Balance, and thus may reduce the Overcollateralization
Amount. As described herein, the Overcollateralization Amount is created or
maintained by application of Monthly Excess Cashflow to make distributions of
principal on the Certificates.
If on any Distribution Date after giving effect to all Realized Losses
incurred with respect to Mortgage Loans during the related Collection Period and
distributions of principal on such Distribution Date, the aggregate Certificate
Principal Amount of the Certificates exceeds the Aggregate Loan Balance for such
Distribution Date (such excess, an "Applied Loss Amount"), the Certificate
Principal Amounts of the Subordinate Certificates will be reduced in inverse
order of priority of distribution. Applied Loss Amounts will be allocated in
reduction of the Class Principal Amount of first, the Class B Certificates,
until the Class Principal Amount thereof has been reduced to zero; second, the
Class M2 Certificates, until the Class Principal Amount thereof has been reduced
to zero; and third, the Class M1 Certificates, until the Class Principal Amounts
thereof have been reduced to zero. The Class Principal Amounts of the Senior
Certificates will not be reduced by allocation of Applied Loss Amounts.
Holders of Offered Subordinate Certificates will not receive any
distributions in respect of Applied Loss Amounts, except to the extent of
available Monthly Excess Cashflow as described below.
Primary Mortgage Insurance. Approximately 92.46% of the Mortgage Loans
included in Pool 1 and approximately 92.35% of the Mortgage Loans included in
Pool 2 have original Loan-to-Value Ratios in excess of 60.00%. See "Description
of the Mortgage Pools -- General" herein. Of such Mortgage Loans, approximately
98.51% (in the case of Pool 1) and approximately 98.32% (in the case of Pool 2)
are not otherwise covered by existing primary mortgage insurance policies. The
Seller has acquired on behalf of the Trust Fund loan-level primary mortgage
insurance policies (the "PMI Policies") with respect to approximately 95.90% of
such Mortgage Loans in Pool 1 and approximately 91.27% of such Mortgage Loans in
Pool 2 through Mortgage Guaranty Insurance Corporation (the "PMI Insurer").
The PMI Insurer is a wholly-owned subsidiary of MGIC Investment
Corporation. As of May 12, 2000, the PMI Insurer had financial strength ratings
of "AA+" from Standard and Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc., and "Aa2" from Moody's Investors Service. The rating agency
issuing the financial strength rating can withdraw or change its rating at any
time. For further information regarding the PMI Insurer, investors are directed
to MGIC Investment Corporation's periodic reports filed with the Securities and
Exchange Commission, which are publicly available. The following is a brief
description of the PMI Policies provided by the PMI Insurer:
The PMI Policies do not cover Mortgage Loans with original
Loan-to-Value-Ratios (as defined at "Description of the Mortgage
Pools -- General") in excess of 95%, Second Lien Mortgage Loans, certain
Mortgage Loans in default at the applicable "Effective Date" of the PMI Policies
(i.e., the Cut-off Date) or any Mortgage Loan otherwise insured under the terms
of a traditional mortgage guaranty insurance policy. Each Mortgage Loan covered
by a PMI Policy is covered by the PMI Policy for losses up to the policy limits;
provided, however, that the PMI Policy will not cover special hazard,
bankruptcy, fraud losses and certain other types of losses as described in such
policy. Claims on insured Mortgage Loans will reduce uninsured exposure to an
amount equal to 60% of the lesser of the appraised value or purchase price, as
the case may be, of the related Mortgaged property, in each case, at the time of
the applicable Effective Date of the PMI Policy. The PMI Policies are not
assignable by the insured thereunder without
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<PAGE> 38
the prior consent of the PMI Insurer and, unless otherwise required by
applicable law, are cancelable only with the consent of the Trustee and the PMI
Insurer in accordance with the PMI Policies' terms. The PMI Policies may be
terminated for failure to pay premiums or if the PMI Insurer is no longer
qualified under state law to write the insurance provided by the PMI Policies.
The premiums payable to the PMI Insurer (the "PMI Insurance Premiums") for
coverage of each insured Mortgage Loan, together with certain state taxes
imposed on such premiums, will be paid by the Trust Fund from interest
collections on the Mortgage Loans as described at "-- Distributions of
Interest." The PMI Insurance Premiums (including any related state taxes) will
be paid on each Distribution Date. Such premiums are calculated as a per annum
percentage (the "Insurance Fee Rate") of the Scheduled Principal Balance of each
Mortgage Loan covered by the PMI Policies.
The PMI Policies will provide only limited protection against losses on
defaulted Mortgage Loans.
The foregoing description of the PMI Policies is only a brief outline and
does not purport to summarize or describe all of the provisions, terms and
conditions of the PMI Policies. For a more complete description of these
provisions, terms and conditions, reference is made to the PMI Policies, copies
of which are available upon request from the Trustee.
FINAL SCHEDULED DISTRIBUTION DATE
It is expected that scheduled distributions on the Mortgage Loans, assuming
no defaults or losses that are not covered by the credit enhancement described
herein, will be sufficient to make timely distributions of interest on the Class
A2, Class M1, Class M2, and Class B Certificates and to reduce the Class
Principal Amount of each such Class to zero not later than April 25, 2030 (the
"Final Scheduled Distribution Date"). The Final Scheduled Distribution Date for
such Certificates is the Distribution Date immediately following the last
scheduled payment of the Mortgage Loans in the Trust Fund with the latest
maturity date. The actual final Distribution Date of such Classes may be earlier
or later, and could be substantially earlier than the Final Scheduled
Distribution Date.
OPTIONAL PURCHASE OF MORTGAGE LOANS; TERMINATION OF THE TRUST FUND
On any Distribution Date after the date on which the Aggregate Loan Balance
is less than 10% of the Cut-off Date Balance (the first such Distribution Date,
the "Initial Purchase Date"), the holder of the Class X Certificate will
(subject to the terms of the Trust Agreement) have the option to purchase the
Mortgage Loans, any REO Property and any other related property for a price (the
"Termination Price") equal to the sum of (a) 100% of the aggregate outstanding
principal balance of such Mortgage Loans and REO Properties, plus accrued
interest thereon at the applicable Mortgage Rate, (b) any amount due to the
Guarantor under the Trust Agreement and (c) any outstanding amounts owed to the
Master Servicer or the Guarantor. If the Class X Certificateholder has not
exercised such option by the third Distribution Date following the Initial
Purchase Date, the Depositor will have the option to purchase the related
Mortgage Loans and related property at the Termination Price. If either such
option is exercised, the Trust Fund will be terminated (such event, an "Optional
Termination").
If the Class X Certificateholder does not exercise its option as described
above on the Initial Purchase Date, the applicable spread of each Class of LIBOR
Certificates will be increased as described under "-- Distributions of
Interest -- Calculation of Interest" above.
REPORTS TO CERTIFICATEHOLDERS
Five Business Days prior to each Distribution Date, the Master Servicer
will forward to Freddie Mac, and on each Distribution Date the Trustee will
provide or make available to each holder of a Certificate, a
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<PAGE> 39
statement based upon information received from the Master Servicer generally
setting forth, among other things:
(i) the amount of distributions with respect to each class of
Certificates;
(ii) the amount of such distributions set forth in clause (i)
allocable to principal, separately identifying the aggregate amount of
any principal prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of such distributions set forth in clause (i)
allocable to interest and the calculation thereof;
(iv) the amount of any unpaid Carryforward Interest or Unpaid Basis
Risk Shortfalls;
(v) the Interest Remittance Amounts and Principal Distribution
Amounts for such Distribution Date;
(vi) the Class Principal Amount of each class of LIBOR Certificates
after giving effect to the distribution of principal on such
Distribution Date;
(vii) the Aggregate Loan Balance and Pool Balance for both Mortgage
Pools at the end of the related Collection Period (after giving effect
to the principal portion of the Scheduled Payments due during the
related Collection Period, to the extent received or advanced, and
unscheduled collections of principal received during the related
Prepayment Period);
(viii) by Pool and in the aggregate, the amounts of Servicing Fees,
Master Servicing Fees, PMI Insurance Premiums, Loss Mitigation Advisor's
Fees or Trustee Fees paid to or retained by the Primary Servicers, the
Master Servicer, the PMI Insurer, the Loss Mitigation Advisor or the
Trustee, respectively;
(ix) in the aggregate, the amount of Advances made by the Primary
Servicers or the Master Servicer for the related Collection Period, the
amount of unrecovered Advances (after giving effect to Advances made on
the Distribution Date) outstanding, and the aggregate amount of
non-recoverable Advances for such Distribution Date;
(x) by Pool and in the aggregate, the number and aggregate
Scheduled Principal Balance of Mortgage Loans that were (A) delinquent
(exclusive of Mortgage Loans in bankruptcy or foreclosure or REO
Properties) (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days, (B) in foreclosure, (C) in bankruptcy and (D) REO Properties;
(xi) the aggregate Scheduled Principal Balance of all Mortgage
Loans with respect to which the related mortgaged property was acquired
by the Trust Fund in foreclosure or by deed in lieu of foreclosure (any
such mortgaged property, an "REO Property") as of the close of business
on the last day of the related Prepayment Period;
(xii) by Pool and in the aggregate, the amount of Realized Losses
incurred during the related Prepayment Period and the cumulative amount
of Realized Losses;
(xiii) in the aggregate, the amount of any Net Prepayment Interest
Shortfalls for such Distribution Date to the extent not covered by the
Primary Servicers or the Master Servicer;
(xiv) any Overcollateralization Deficiency Amount (after giving
effect to distributions of principal on such Distribution Date);
(xv) the aggregate principal balance of Mortgage Loans purchased by
the Seller; and
(xvi) with respect to Mortgage Loans covered by the PMI Policies,
the amount of (a) claims paid under such policies, (b) claims denied
under such policies (on both an aggregate basis for the related
Collection Period and on a cumulative basis over the term of the Trust
Fund) and (c) policies subject to cancellation in the immediately
preceding Collection Period.
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<PAGE> 40
The Master Servicer may also make the monthly statements containing the
above data (and, at its option, any additional files containing the same
information in an alternative format) available each month to Certificateholders
and other parties to the Trust Agreement via the Master Servicer's internet
website and its fax-on-demand service. The Master Servicer's fax-on-demand
service may be accessed by calling (301) 815-6610. The Master Servicer's
internet website shall initially be located at "www.ctslink.com." Assistance in
using the website or the fax-on-demand service can be obtained by calling the
Master Servicer's customer service desk at (301) 815-6600. Parties that are
unable to use the above distribution options are entitled to have a paper copy
mailed to them by calling the Trustee and indicating such.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to Freddie Mac and each
holder of record of a Certificate during the previous calendar year a statement
containing information necessary to enable holders of the Certificates to
prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
THE TRUSTEE
First Union National Bank will be the trustee (the "Trustee") under the
Trust Agreement. The Trustee will be paid an annual administration fee (the
"Trustee Fee") equal to $3,500, plus certain other acceptance fees and
reimbursement of certain expenses. The Trustee will be entitled to reimbursement
for certain administrative 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 is Corporate Trust Operation/CIC, 1525 West W.T. Harris Boulevard, 3C3,
Charlotte, North Carolina 28288-1153 and for all other purposes is located at
401 S. Tryon Street N.C. 1179, Charlotte, North Carolina 28288-1179, Attention:
Structured Finance Trust Services, or such address as the Trustee may designate
from time to time by notice to the Certificateholders, Freddie Mac, the
Depositor and the Master Servicer.
DESCRIPTION OF THE MORTGAGE POOLS
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 CUT-OFF DATE BALANCE OF SUCH MORTGAGE LOANS.
GENERAL
The Trust Fund will primarily consist of 20,432 conventional, first and
second lien, adjustable and fixed rate, fully-amortizing and balloon,
residential Mortgage Loans with original terms to maturity from the first due
date of the Scheduled Payment of not more than 30 years, having a Cut-off Date
Balance of approximately $2,065,694,753.
The Mortgage Loans were originated or acquired by various mortgage lending
institutions, including Ameriquest Mortgage Company, BNC Mortgage, Inc., Option
One Mortgage Corporation and Wells Fargo Home Mortgage, Inc. or their
correspondents (collectively, the "Originators") generally in accordance with
the underwriting guidelines described herein. See "Underwriting Guidelines"
below. Because, in general, such underwriting guidelines do not conform to
Freddie Mac 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. The Mortgage Loans to be included in the Trust Fund will be
acquired by the Depositor from Lehman Brothers Holdings Inc. (the "Seller"). The
Seller acquired the Mortgage Loans either directly from the Originators or
indirectly through an affiliate, Lehman Brothers Bank, FSB. See "The Trust
Agreement -- Assignment of Mortgage Loans" herein.
Approximately 2,114 (or 8.58%) of the Mortgage Loans in the Trust Fund bear
fixed rates of interest (the "Fixed Rate Mortgage Loans") and approximately
18,318 (or 91.42%) have interest rates that are subject to periodic adjustment
(the "Adjustable Rate Mortgage Loans") as described in more detail at
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<PAGE> 41
"-- Adjustable Rate Mortgage Loans" below. Interest on both the Fixed Rate
Mortgage Loans and the Adjustable Rate Mortgage Loans accrues on the basis of a
360-day year consisting of twelve 30-day months.
Approximately 20,374 (or 99.91%) of the Mortgage Loans are secured by first
mortgages ("First Lien Mortgage Loans") and approximately 58 (or 0.09%) are
secured by junior mortgages or deeds of trust ("Second Lien Mortgage Loans") or
similar security instruments, creating first or second liens on residential
properties consisting of one- to four-family dwelling units, individual
condominium units, manufactured housing, townhouses or individual units in
planned unit developments. In the case of the Second Lien Mortgage Loans, the
related senior mortgage loans are not included in the Trust Fund.
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" in the Prospectus.
In the case of those Mortgage Loans which are First Lien Mortgage Loans,
approximately 28.04% of the Mortgage Loans have current Loan-to-Value Ratios in
excess of 80%. Generally, the "Loan-to-Value Ratio" of a Mortgage Loan at any
time is calculated as 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
sales 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. In the
case of those Mortgage Loans which are Second Lien Mortgage Loans, approximately
15.10% of such Mortgage Loans have Combined Loan-to-Value Ratios in excess of
80%. Generally, the "Combined Loan-to-Value Ratio" of a Mortgage Loan at any
time is calculated as the ratio of the principal balance of such Mortgage Loan
at the date of determination plus, the principal balance of each mortgage loan
senior thereto based upon the most recent information available to the Seller,
to (a) in the case of a purchase, the lesser of the sales 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.
Approximately 98.49% of the First Lien Mortgage Loans with original
Loan-to-Value Ratios in excess of 60% are not covered by an existing primary
insurance policy. With respect to approximately 95.36% of such Mortgage Loans,
the Seller has acquired through the PMI Insurer primary mortgage insurance as
described under "Description of the Certificates -- Credit
Enhancement -- Primary Mortgage Insurance."
As of the Cut-off Date, approximately 2.69% of the Mortgage Loans were
delinquent in their most recent Scheduled Payment. In addition, as of the
Cut-off Date, no more than 0.98% of the Mortgage Loans were delinquent in two
consecutive Scheduled Payments in the last twelve months (or since their
origination, if less than twelve months), and no more than 0.27% of the Mortgage
Loans were delinquent in two consecutive Scheduled Payments more than once in
the last twelve months (or since their origination, if less than twelve months).
All of the Adjustable Rate Mortgage Loans and approximately 84.07% of the
Fixed Rate Mortgage Loans are fully amortizing. Approximately 15.93% of the
Fixed Rate Mortgage Loans will have original terms to maturity that are shorter
than their amortization schedules, leaving final payments ("Balloon Payments")
due on their 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.
None of the Primary Servicers, the Master Servicer, or the Trustee will make any
Advances with respect to delinquent Balloon Payments.
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<PAGE> 42
Approximately 77.76% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment premium (each, 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 voluntary, full or partial prepayments 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. 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. Such
Prepayment Premiums will not be part of available funds applied to pay interest
or principal on the Class A1 Certificates, but rather will be distributed to the
holder of the Class P Certificate.
As earlier described under "Description of the Certificates -- General,"
the Mortgage Loans in the Trust Fund have been divided into two Mortgage Pools,
Pool 1 and Pool 2, for the purpose of allocating interest and principal
distributions between the Class A1 and Class A2 Certificates. Pool 1 will
consist only of Mortgage Loans with original principal balances which do not
exceed the applicable Freddie Mac maximum original loan limitations for one- to
four-family properties. Pool 1 will consist of approximately (i) 2,028 Fixed
Rate Mortgage Loans having an aggregate Cut-off Date Balance of approximately
$166,420,245 and (ii) 17,441 Adjustable Rate Mortgage Loans having an aggregate
Cut-off Date Balance of approximately $1,659,632,022. Pool 2 will consist of
Mortgage Loans in the Trust Fund with original principal balances which may be
less than, equal to, or in excess of, the applicable Freddie Mac original loan
limitations. Pool 2 will consist of approximately (i) 86 Fixed Rate Mortgage
Loans having an aggregate Cut-off Date Balance of approximately $10,871,030 and
(ii) 877 Adjustable Rate Mortgage Loans having an aggregate Cut-off Date Balance
of approximately $228,771,455. Other important statistical characteristics of
each Mortgage Pool are described under "-- Pool 1 Mortgage Loans" and "--Pool 2
Mortgage Loans."
ADJUSTABLE RATE MORTGAGE LOANS
Approximately 94.84% of the Adjustable Rate Mortgage Loans included in Pool
1 and approximately 95.50% of the Adjustable Rate Mortgage Loans included in
Pool 2 provide for semi-annual adjustment of the related interest rate (the
"Mortgage Rate") specified in the related mortgage note based on the Six-Month
LIBOR Index (as described below under "-- The Indices"), and for corresponding
adjustments to the monthly Scheduled Payment due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date");
provided that the first such adjustment for approximately 29.09% of the
Adjustable Rate Mortgage Loans in Pool 1 (and approximately 33.12% in Pool 2)
will occur after an initial period of two years following the first payment
date; in the case of approximately 65.18% of the Adjustable Rate Mortgage Loans
in Pool 1 (and approximately 61.00% in Pool 2), three years after the first
payment date; in the case of approximately 0.25% of the Adjustable Rate Loans in
Pool 1 (and approximately 0.93% in Pool 2), five years after the first payment
date; and for approximately 0.32% of such Adjustable Rate Mortgage Loans in Pool
1 (0.44% in the case of Pool 2), there will be no delayed adjustment date. On
each Adjustment Date for each Adjustable Rate Mortgage Loan, the Mortgage Rate
thereon will be adjusted to equal the sum, rounded generally to the next highest
or nearest multiple of 1/8%, of the Six-Month LIBOR Index and a fixed percentage
amount (the "Gross Margin"), provided that in the substantial majority of cases
the Mortgage Rate on each such Adjustable Rate Mortgage Loan generally will not
increase or decrease by more than a fixed percentage ranging from 0.75% to 3.00%
as specified in the related mortgage note (the "Periodic Cap") on any related
Adjustment Date, except in the case of the first such Adjustment Date, and will
not exceed a specified maximum Mortgage Rate over the life of such Adjustable
Rate Mortgage Loan (the "Maximum Rate") or be less than a specified minimum
Mortgage Rate over the life of such Adjustable Rate Mortgage Loan (the "Minimum
Rate"). The Mortgage Rate generally will not increase or decrease on the first
Adjustment Date by more than a fixed percentage specified in the related
mortgage note (the "Initial Cap"); the Initial Cap ranges from 1.00% to 3.00%
annually for substantially all Adjustable Rate Mortgage Loans.
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<PAGE> 43
Effective with the first monthly payment due on each Adjustable Rate Mortgage
Loan after each related Adjustment Date, the monthly payment amount will be
adjusted to an amount that will amortize fully the outstanding principal balance
of the related Adjustable Rate Mortgage Loan over its remaining term, and pay
interest at the Mortgage Rate as so adjusted. Due to the application of the
Initial Caps, Periodic Caps and Maximum Rates, the Mortgage Rate on each such
Adjustable Rate Mortgage Loan, as adjusted on any related Adjustment Date, may
be less than the sum of the Six-Month LIBOR Index and the related Gross Margin,
rounded as described herein. See "-- The Indices" herein. The Adjustable Rate
Mortgage Loans in Pool 1 do not permit the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage Rate.
THE INDICES
The index applicable to the determination of the Mortgage Rates for
approximately 94.84% of the Adjustable Rate Mortgage Loans included in Pool 1
and approximately 95.50% of the Adjustable Rate Mortgage Loans included in Pool
2 will be the average of the interbank offered rates for six-month United States
dollar deposits in the London market, calculated as provided in the related
mortgage note (the "Six-Month LIBOR Index") and as most recently available
either (1) as of the first business day a specified period of time prior to such
Adjustment Date, (2) as of the first business day of the month preceding the
month of such Adjustment Date or (3) the last business day of the second month
preceding the month in which such Adjustment Date occurs, as specified in the
related mortgage note. Approximately 5.16% of the Adjustable Rate Mortgage Loans
included in Pool 1 and approximately 4.50% of the Adjustable Rate Mortgage Loans
included in Pool 2 adjust their Mortgage Rates on the basis of the "One-Year CMT
Index" calculated on the basis of information contained in the "Release"
regarding yields on actively traded issues of U.S. Treasury securities adjusted
to a constant maturity of one year. In the event that either indices described
above becomes unavailable or otherwise unpublished, the applicable Primary
Servicer will select a comparable alternative index over which it has no direct
control and which is readily verifiable.
POOL 1 MORTGAGE LOANS
The Mortgage Loans included in Pool 1 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 Pool 1 as a
result of incomplete documentation or otherwise, if the Depositor or the
Guarantor deems such removal necessary or appropriate. In addition, a limited
number of other mortgage loans may be included in Pool 1 prior to the issuance
of the Certificates.
<TABLE>
<S> <C>
Number of Mortgage Loans.................................... 19,469
Number of Fixed Rate Mortgage Loans......................... 2,028
Number of Adjustable Rate Mortgage Loans.................... 17,441
Aggregate Scheduled Principal Balance....................... $1,826,052,268.51
Mortgage Rates:
Weighted Average.......................................... 9.955%
Range..................................................... 6.200% to 16.250%
Weighted Average Remaining Term to Maturity (in months)..... 343
</TABLE>
The Scheduled Principal Balances of the Mortgage Loans in Pool 1 range from
approximately $3,006 to approximately $481,351. The Pool 1 Mortgage Loans had an
average Scheduled Principal Balance as of the Cut-off Date of approximately
$93,793.
The weighted average Combined Loan-to-Value Ratio at origination of the
Pool 1 Mortgage Loans is approximately 77.33%, and approximately 27.48% of the
Pool 1 Mortgage Loans have a Combined Loan-to-Value Ratio at origination
exceeding 80%.
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<PAGE> 44
No more than approximately 0.22% of the Pool 1 Mortgage Loans are secured
by mortgaged properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, aggregate
Scheduled Principal Balance and percentage of the Pool 1 Mortgage Loans having
the stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL PRINCIPAL
SCHEDULED PRINCIPAL BALANCES ($) MORTGAGE LOANS BALANCE BALANCE
-------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
1 to 50,000............................. 4,191 $ 153,690,071.58 8.42%
50,001 to 100,000............................. 8,122 589,059,135.62 32.26
100,001 to 150,000............................. 4,248 518,828,052.86 28.41
150,001 to 200,000............................. 1,841 317,657,148.43 17.40
200,001 to 250,000............................. 957 214,778,223.50 11.76
250,001 to 300,000............................. 76 20,220,214.67 1.11
300,001 to 350,000............................. 20 6,454,288.78 0.35
350,001 to 400,000............................. 11 4,020,987.80 0.22
400,001 to 450,000............................. 2 862,793.84 0.05
450,001 to 500,000............................. 1 481,351.43 0.03
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately $93,793.
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<PAGE> 45
MORTGAGE RATES -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE RATES(%) MORTGAGE LOANS BALANCE BALANCE
----------------- -------------- ----------------- --------------
<S> <C> <C> <C>
6.001 to 6.500............................... 2 $ 413,226.09 0.02%
6.501 to 7.000............................... 11 1,197,292.89 0.07
7.001 to 7.500............................... 95 12,304,718.82 0.67
7.501 to 8.000............................... 565 69,894,679.98 3.83
8.001 to 8.500............................... 1,058 127,299,772.75 6.97
8.501 to 9.000............................... 2,020 238,543,455.67 13.06
9.001 to 9.500............................... 2,121 230,592,469.63 12.63
9.501 to 10.000............................... 3,678 363,709,163.94 19.92
10.001 to 10.500............................... 2,822 252,933,421.83 13.85
10.501 to 11.000............................... 3,085 254,293,731.29 13.93
11.001 to 11.500............................... 1,621 125,868,885.50 6.89
11.501 to 12.000............................... 1,126 77,537,653.83 4.25
12.001 to 12.500............................... 547 34,058,815.23 1.87
12.501 to 13.000............................... 376 21,126,797.97 1.16
13.001 to 13.500............................... 149 7,050,590.03 0.39
13.501 to 14.000............................... 111 5,726,947.42 0.31
14.001 to 14.500............................... 44 1,746,584.51 0.10
14.501 to 15.000............................... 30 1,381,171.08 0.08
15.001 to 15.500............................... 4 234,243.50 0.01
15.501 to 16.000............................... 3 113,913.14 0.01
16.001 to 16.500............................... 1 24,733.41 0.00
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
The weighted average Mortgage Rate is approximately 9.955%.
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<PAGE> 46
LOAN TYPE -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
LOAN TYPE MORTGAGE LOANS BALANCE BALANCE
--------- -------------- ----------------- --------------
<S> <C> <C> <C>
3/27 ARM (Six-Month LIBOR)..................... 11,837 $1,081,787,611.24 59.24%
2/28 ARM (Six-Month LIBOR)..................... 4,640 482,804,898.65 26.44
Fixed Rate (Fully Amortizing).................. 1,717 138,530,050.60 7.59
3/27 ARM (One-Year CMT)........................ 746 71,327,670.06 3.91
Fixed Rate (Balloon)........................... 311 27,890,195.07 1.53
ARM (One-Year CMT)............................. 129 14,324,724.42 0.78
ARM (Six-Month LIBOR).......................... 42 5,327,165.58 0.29
5/25 ARM (Six-Month LIBOR)..................... 47 4,059,952.89 0.22
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
ORIGINAL TERMS TO MATURITY -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE BALANCE
---------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
61 to 120..................................... 16 $ 601,206.16 0.03%
121 to 180..................................... 1,457 85,031,051.73 4.66
181 to 240..................................... 546 35,125,771.22 1.92
241 to 300..................................... 1 71,862.27 0.00
301 to 360..................................... 17,449 1,705,222,377.13 93.38
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
The weighted average original term to maturity is approximately 349 months.
S-46
<PAGE> 47
REMAINING TERMS TO MATURITY (LEVEL PAY) -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE BALANCE
---------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
109 to 120..................................... 16 $ 601,206.16 0.03%
157 to 168..................................... 4 125,608.51 0.01
169 to 180..................................... 1,142 57,015,248.15 3.17
217 to 228..................................... 1 40,958.90 0.00
229 to 240..................................... 545 35,084,812.32 1.95
289 to 300..................................... 1 71,862.27 0.00
337 to 348..................................... 117 11,303,310.49 0.63
349 to 360..................................... 17,332 1,693,919,066.64 94.20
------ ----------------- ------
Total................................ 19,158 $1,798,162,073.44 100.00%
====== ================= ======
</TABLE>
The weighted average remaining term to maturity is approximately 346 months.
REMAINING TERMS TO MATURITY (BALLOON) -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE BALANCE
---------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
157 to 168....................................... 4 $ 591,213.68 2.12%
168 to 180....................................... 307 27,298,981.39 97.88
------ -------------- ------
Total.................................. 311 $27,890,195.07 100.00%
====== ============== ======
</TABLE>
The weighted average remaining term to maturity is approximately 172 months.
S-47
<PAGE> 48
ORIGINAL LOAN-TO-VALUE RATIO -- POOL 1*
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF ORIGINAL NUMBER OF PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS(%) MORTGAGE LOANS BALANCE BALANCE
----------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0.001 to 10.000............................. 9 $ 221,874.86 0.01%
10.001 to 20.000............................. 66 2,433,282.98 0.13
20.001 to 30.000............................. 135 5,874,059.34 0.32
30.001 to 40.000............................. 258 13,607,790.61 0.75
40.001 to 50.000............................. 491 31,077,802.21 1.70
50.001 to 60.000............................. 1,210 84,548,744.93 4.63
60.001 to 70.000............................. 2,888 229,213,687.11 12.55
70.001 to 80.000............................. 9,975 957,558,653.25 52.44
80.001 to 90.000............................. 4,133 464,026,132.11 25.41
90.001 to 100.000............................. 298 37,120,235.25 2.03
100.001 to 125.000............................. 6 370,005.86 0.02
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
---------------
* The above table does not reflect the Combined Loan-to-Value Ratio of mortgaged
properties secured by second liens.
The weighted average original Loan-to-Value Ratio is approximately 77.28%.
COMBINED LOAN-TO-VALUE RATIOS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF ORIGINAL NUMBER OF PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS(%) MORTGAGE LOANS BALANCE BALANCE
----------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0.001 to 10.000............................. 3 $ 108,064.22 0.01%
10.001 to 20.000............................. 39 1,617,067.45 0.09
20.001 to 30.000............................. 122 5,328,919.82 0.29
30.001 to 40.000............................. 257 13,541,991.35 0.74
40.001 to 50.000............................. 493 31,110,796.03 1.70
50.001 to 60.000............................. 1,210 84,548,744.93 4.63
60.001 to 70.000............................. 2,893 229,405,083.00 12.56
70.001 to 80.000............................. 10,006 958,580,501.83 52.49
80.001 to 90.000............................. 4,142 464,320,858.77 25.43
90.001 to 100.000............................. 298 37,120,235.25 2.03
100.001 to 110.000............................. 2 137,962.55 0.01
110.001 to 120.000............................. 2 141,190.24 0.01
120.001 to 125.000............................. 2 90,853.07 0.00
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
The weighted average Combined Loan-to-Value Ratio is approximately 77.33%.
S-48
<PAGE> 49
GEOGRAPHIC DISTRIBUTION -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
STATE MORTGAGE LOANS BALANCE BALANCE
----- -------------- ----------------- --------------
<S> <C> <C> <C>
Alabama............................................... 229 $ 14,185,759.78 0.78%
Alaska................................................ 26 3,357,063.52 0.18
Arizona............................................... 493 43,047,100.15 2.36
Arkansas.............................................. 93 5,643,549.00 0.31
California............................................ 2,320 330,414,555.31 18.09
Colorado.............................................. 444 50,635,608.76 2.77
Connecticut........................................... 295 29,906,648.99 1.64
Delaware.............................................. 31 2,966,530.89 0.16
District of Columbia.................................. 49 4,548,976.16 0.25
Florida............................................... 1,216 97,542,585.45 5.34
Georgia............................................... 407 32,365,708.27 1.77
Hawaii................................................ 254 41,455,705.98 2.27
Idaho................................................. 105 7,574,462.94 0.41
Illinois.............................................. 1,199 120,541,676.09 6.60
Indiana............................................... 522 33,890,448.35 1.86
Iowa.................................................. 165 10,520,756.37 0.58
Kansas................................................ 107 7,344,265.37 0.40
Kentucky.............................................. 172 12,849,159.92 0.70
Louisiana............................................. 252 17,557,887.96 0.96
Maine................................................. 65 5,420,834.81 0.30
Maryland.............................................. 363 37,865,583.36 2.07
Massachusetts......................................... 587 68,780,044.93 3.77
Michigan.............................................. 1,219 96,702,702.74 5.30
Minnesota............................................. 757 71,788,711.18 3.93
Mississippi........................................... 70 5,120,777.13 0.28
Missouri.............................................. 355 22,278,826.20 1.22
Montana............................................... 35 2,857,035.91 0.16
Nebraska.............................................. 140 10,484,927.04 0.57
Nevada................................................ 67 6,909,429.57 0.38
New Hampshire......................................... 119 11,337,000.35 0.62
New Jersey............................................ 495 54,881,555.87 3.01
New Mexico............................................ 171 14,951,033.44 0.82
New York.............................................. 632 64,131,403.46 3.51
North Carolina........................................ 313 24,095,664.79 1.32
North Dakota.......................................... 8 412,637.37 0.02
Ohio.................................................. 988 72,578,528.37 3.97
Oklahoma.............................................. 182 9,035,160.63 0.49
Oregon................................................ 377 42,426,958.14 2.32
Pennsylvania.......................................... 746 52,469,040.09 2.87
Rhode Island.......................................... 123 11,739,439.95 0.64
South Carolina........................................ 226 14,722,415.06 0.81
South Dakota.......................................... 15 1,162,277.52 0.06
Tennessee............................................. 358 25,523,176.34 1.40
Texas................................................. 1,231 85,681,664.89 4.69
Utah.................................................. 247 27,239,835.48 1.49
Vermont............................................... 26 1,852,383.74 0.10
Virginia.............................................. 195 18,973,017.09 1.04
Washington............................................ 542 65,064,475.04 3.56
West Virginia......................................... 40 2,302,665.21 0.13
Wisconsin............................................. 377 29,213,287.56 1.60
Wyoming............................................... 21 1,701,325.99 0.09
------ ----------------- ------
Total........................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
S-49
<PAGE> 50
LIEN PRIORITY -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
LIEN PRIORITY MORTGAGE LOANS BALANCE BALANCE
------------- -------------- ----------------- --------------
<S> <C> <C> <C>
First Lien..................................... 19,420 $1,824,400,107.30 99.91%
Second Lien.................................... 49 1,652,161.21 0.09
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
PROPERTY TYPE -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
PROPERTY TYPE MORTGAGE LOANS BALANCE BALANCE
------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Single Family.................................. 16,481 $1,538,426,051.00 84.25%
Two-to-Four-Family............................. 1,064 115,587,515.32 6.33
Planned Unit Development....................... 573 68,190,287.36 3.73
Condominium.................................... 767 68,084,184.05 3.73
Manufactured Housing........................... 521 30,506,364.90 1.67
Townhouse...................................... 63 5,257,865.88 0.29
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
LOAN PURPOSE -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
LOAN PURPOSE MORTGAGE LOANS BALANCE BALANCE
------------ -------------- ----------------- --------------
<S> <C> <C> <C>
Cash Out Refinance............................. 9,986 $ 881,318,990.31 48.26%
Rate/Term Refinance............................ 4,965 495,224,376.73 27.12
Purchase....................................... 4,518 449,508,901.47 24.62
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
OCCUPANCY STATUS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
SCHEDULED BY AGGREGATE
NUMBER OF PRINCIPAL SCHEDULED
OCCUPANCY STATUS MORTGAGE LOANS BALANCE BALANCE
---------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Primary Home................................... 17,982 $1,719,834,835.02 94.18%
Investment..................................... 1,303 92,559,266.51 5.07
Second Home.................................... 184 13,658,166.98 0.75
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
S-50
<PAGE> 51
LOAN DOCUMENTATION -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
LOAN DOCUMENTATION MORTGAGE LOANS BALANCE BALANCE
------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
Full........................................... 15,587 $1,430,848,892.04 78.36%
Stated Income.................................. 2,923 291,255,602.98 15.95
Limited........................................ 959 103,947,773.49 5.69
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
PREPAYMENT PREMIUM YEARS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
PREPAYMENT PREMIUM (YEARS) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0........................................... 4,263 $ 395,922,100.12 21.68%
0.01 to 1.00................................... 306 35,579,631.67 1.95
1.01 to 2.00................................... 3,207 350,096,376.11 19.17
2.01 to 3.00................................... 4,546 443,534,997.79 24.29
3.01 to 4.00................................... 10 1,090,324.32 0.06
4.01 to 5.00................................... 7,137 599,828,838.50 32.85
------ ----------------- ------
Total................................ 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
RATE TYPE -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
NUMBER OF SCHEDULED SCHEDULED
MORTGAGE PRINCIPAL PRINCIPAL
RATE TYPE LOANS BALANCE BALANCE
--------- --------- ----------------- --------------
<S> <C> <C> <C>
Adjustable......................................... 17,441 $1,659,632,022.84 90.89%
Fixed.............................................. 2,028 166,420,245.67 9.11
------ ----------------- ------
Total.................................... 19,469 $1,826,052,268.51 100.00%
====== ================= ======
</TABLE>
S-51
<PAGE> 52
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF GROSS MARGINS (%) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
3.251 to 3.500............................... 3 $ 401,580.13 0.02%
3.501 to 3.750............................... 21 2,778,657.09 0.17
3.751 to 4.000............................... 47 5,093,752.02 0.31
4.001 to 4.250............................... 55 4,959,672.21 0.30
4.251 to 4.500............................... 75 7,155,260.79 0.43
4.501 to 4.750............................... 81 7,980,393.52 0.48
4.751 to 5.000............................... 319 32,900,955.92 1.98
5.001 to 5.250............................... 450 52,883,071.97 3.19
5.251 to 5.500............................... 1,087 109,119,332.92 6.57
5.501 to 5.750............................... 778 83,636,279.12 5.04
5.751 to 6.000............................... 1,912 202,052,936.68 12.17
6.001 to 6.250............................... 1,536 147,328,723.43 8.88
6.251 to 6.500............................... 5,476 531,919,427.50 32.05
6.501 to 6.750............................... 1,720 157,296,781.09 9.48
6.751 to 7.000............................... 970 89,131,090.14 5.37
7.001 to 7.250............................... 2,287 165,923,511.22 10.00
7.251 to 7.500............................... 350 34,990,263.56 2.11
7.501 to 7.750............................... 133 11,985,044.82 0.72
7.751 to 8.000............................... 94 9,161,825.41 0.55
8.001 to 8.250............................... 19 1,175,817.00 0.07
8.251 to 8.500............................... 9 752,589.53 0.05
8.501 to 8.750............................... 12 548,432.06 0.03
8.751 to 9.000............................... 3 167,217.03 0.01
9.251 to 9.500............................... 3 229,632.49 0.01
10.501 to 10.750............................... 1 59,775.19 0.00
------ ----------------- ------
Total................................ 17,441 $1,659,632,022.84 100.00%
====== ================= ======
</TABLE>
The weighted average Gross Margin for Adjustable Rate Mortgage Loans is
approximately 6.315%.
S-52
<PAGE> 53
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MAXIMUM RATES (%) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
10.001 to 10.500............................... 1 $ 106,206.85 0.01%
10.501 to 11.000............................... 2 242,917.14 0.01
11.001 to 11.500............................... 1 135,657.91 0.01
12.501 to 13.000............................... 3 397,963.59 0.02
13.001 to 13.500............................... 76 10,255,849.99 0.62
13.501 to 14.000............................... 438 53,339,828.69 3.21
14.001 to 14.500............................... 809 96,053,886.58 5.79
14.501 to 15.000............................... 1,499 171,033,645.41 10.31
15.001 to 15.500............................... 1,598 169,714,889.44 10.23
15.501 to 16.000............................... 2,968 298,106,879.23 17.96
16.001 to 16.500............................... 2,582 246,332,318.18 14.84
16.501 to 17.000............................... 2,922 263,189,101.82 15.86
17.001 to 17.500............................... 1,501 127,762,150.00 7.70
17.501 to 18.000............................... 1,214 99,235,795.41 5.98
18.001 to 18.500............................... 630 47,250,633.95 2.85
18.501 to 19.000............................... 536 37,652,183.44 2.27
19.001 to 19.500............................... 281 18,112,879.63 1.09
19.501 to 20.000............................... 218 12,948,166.22 0.78
20.001 to 20.500............................... 87 4,440,434.43 0.27
20.501 to 21.000............................... 52 2,418,765.48 0.15
21.001 to 21.500............................... 11 468,183.65 0.03
21.501 to 22.000............................... 8 267,355.32 0.02
22.001 to 22.500............................... 3 130,348.92 0.01
22.501 to 23.000............................... 1 35,981.56 0.00
------ ----------------- ------
Total................................ 17,441 $1,659,632,022.84 100.00%
====== ================= ======
</TABLE>
The weighted average Maximum Rate for Adjustable Rate Mortgage Loans is
approximately 16.214%.
S-53
<PAGE> 54
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MINIMUM RATES (%) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
5.501 to 6.000............................... 1 $ 243,200.40 0.01%
6.001 to 6.500............................... 2 413,226.09 0.02
6.501 to 7.000............................... 9 1,038,349.24 0.06
7.001 to 7.500............................... 89 11,522,894.95 0.69
7.501 to 8.000............................... 501 61,990,851.33 3.74
8.001 to 8.500............................... 954 115,113,980.78 6.94
8.501 to 9.000............................... 1,820 216,245,982.20 13.03
9.001 to 9.500............................... 1,934 212,598,695.82 12.81
9.501 to 10.000............................... 3,378 339,426,101.61 20.45
10.001 to 10.500............................... 2,602 235,987,990.96 14.22
10.501 to 11.000............................... 2,786 231,999,655.29 13.98
11.001 to 11.500............................... 1,416 111,225,247.04 6.70
11.501 to 12.000............................... 928 64,392,230.94 3.88
12.001 to 12.500............................... 425 26,420,813.74 1.59
12.501 to 13.000............................... 310 17,381,148.56 1.05
13.001 to 13.500............................... 119 5,707,380.56 0.34
13.501 to 14.000............................... 95 4,699,108.36 0.28
14.001 to 14.500............................... 36 1,519,067.91 0.09
14.501 to 15.000............................... 30 1,381,171.08 0.08
15.001 to 15.500............................... 3 211,759.60 0.01
15.501 to 16.000............................... 2 88,432.97 0.01
16.001 to 16.500............................... 1 24,733.41 0.00
------ ----------------- ------
Total................................ 17,441 $1,659,632,022.84 100.00%
====== ================= ======
</TABLE>
The weighted average Minimum Rate for Adjustable Rate Mortgage Loans is
approximately 9.937%.
S-54
<PAGE> 55
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
NEXT ADJUSTMENT DATE MORTGAGE LOANS BALANCE BALANCE
-------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
June 2000...................................... 10 $ 974,129.91 0.06%
July 2000...................................... 8 842,244.99 0.05
August 2000.................................... 15 2,067,294.63 0.12
September 2000................................. 23 2,926,891.42 0.18
October 2000................................... 15 1,995,085.29 0.12
November 2000.................................. 39 4,416,751.50 0.27
December 2000.................................. 37 4,136,546.38 0.25
January 2001................................... 38 4,068,684.44 0.25
February 2001.................................. 9 1,151,820.64 0.07
March 2001..................................... 11 1,245,065.50 0.08
April 2001..................................... 17 1,580,003.38 0.10
May 2001....................................... 21 2,015,971.31 0.12
June 2001...................................... 69 8,372,663.05 0.50
July 2001...................................... 184 20,743,381.70 1.25
August 2001.................................... 562 59,465,421.48 3.58
September 2001................................. 1,115 117,690,848.99 7.09
October 2001................................... 336 35,472,030.43 2.14
November 2001.................................. 682 70,581,051.08 4.25
December 2001.................................. 784 77,484,548.42 4.67
January 2002................................... 732 75,375,391.02 4.54
February 2002.................................. 194 20,875,562.74 1.26
March 2002..................................... 130 13,076,132.94 0.79
April 2002..................................... 2 83,701.65 0.01
May 2002....................................... 6 417,086.29 0.03
June 2002...................................... 16 1,567,369.26 0.09
July 2002...................................... 55 5,368,380.50 0.32
August 2002.................................... 114 12,492,304.62 0.75
September 2002................................. 621 66,597,447.10 4.01
October 2002................................... 3,176 279,089,668.72 16.82
November 2002.................................. 3,260 288,286,669.91 17.37
December 2002.................................. 3,172 284,110,153.07 17.12
January 2003................................... 1,086 104,221,739.35 6.28
February 2003.................................. 410 40,432,541.32 2.44
March 2003..................................... 446 46,481,007.98 2.80
April 2003..................................... 2 170,752.07 0.01
May 2004....................................... 1 56,050.26 0.00
August 2004.................................... 5 419,283.10 0.03
September 2004................................. 15 1,232,525.65 0.07
October 2004................................... 6 405,430.75 0.02
November 2004.................................. 1 124,288.18 0.01
December 2004.................................. 2 149,409.53 0.01
January 2005................................... 5 496,154.11 0.03
February 2005.................................. 6 665,189.63 0.04
March 2005..................................... 3 207,348.55 0.01
------ ----------------- ------
Total................................ 17,441 $1,659,632,022.84 100.00%
====== ================= ======
</TABLE>
S-55
<PAGE> 56
INITIAL PERIODIC CAP OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
INITIAL PERIODIC CAP (%) MORTGAGE LOANS BALANCE BALANCE
------------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
1.000.......................................... 45 $ 5,682,408.93 0.34%
2.000.......................................... 4,294 450,325,984.53 27.13
3.000.......................................... 13,102 1,203,623,629.38 72.52
------ ----------------- ------
Total........................................ 17,441 $1,659,632,022.84 100.00%
====== ================= ======
</TABLE>
The weighted average Initial Periodic Cap of the Adjustable Rate Mortgage
Loans is approximately 2.722%.
SUBSEQUENT PERIODIC CAP OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
SUBSEQUENT PERIODIC CAP (%) MORTGAGE LOANS BALANCE BALANCE
--------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0.750.......................................... 1 $ 141,864.19 0.01%
1.000.......................................... 16,388 1,551,090,628.40 93.46
1.500.......................................... 170 22,099,563.02 1.33
2.000.......................................... 881 86,117,798.72 5.19
3.000.......................................... 1 182,168.51 0.01
------ ----------------- ------
Total........................................ 17,441 $1,659,632,022.84 100.00%
====== ================= ======
</TABLE>
The weighted average Subsequent Periodic Cap of the Adjustable Rate
Mortgage Loans is approximately 1.059%.
POOL 2 MORTGAGE LOANS
The Mortgage Loans included in Pool 2 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 Pool 2 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 Pool 2 prior to the issuance of the
Certificates.
<TABLE>
<S> <C>
Number of Mortgage Loans................. 963
Aggregate Scheduled Principal Balance.... $239,642,485.37
Mortgage Rates:
Weighted Average....................... 9.551%
Range.................................. 6.550% to 13.950%
Weighted Average Remaining Term to
Maturity (in months)................... 353
</TABLE>
The Scheduled Principal Balances of the Mortgage Loans in Pool 2 range from
approximately $15,968 to approximately $616,221. The Pool 2 Mortgage Loans had
an average Scheduled Principal Balance of approximately $248,850.
S-56
<PAGE> 57
The weighted average Combined Loan-to-Value Ratio at origination of the
Pool 2 Mortgage Loans is approximately 78.02%, and approximately 32.90% of the
Pool 2 Mortgage Loans have a Combined Loan-to-Value Ratio at origination
exceeding 80%.
No more than approximately 0.96% of the Pool 2 Mortgage Loans are secured
by mortgaged properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, aggregate
Scheduled Principal Balance and percentage of the Pool 2 Mortgage Loans having
the stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL PRINCIPAL
SCHEDULED PRINCIPAL BALANCES ($) MORTGAGE LOANS BALANCE BALANCE
-------------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
1 to 50,000.............................. 119 $ 4,179,172.18 1.74%
50,001 to 100,000.............................. 124 9,005,959.00 3.76
100,001 to 150,000.............................. 33 4,082,516.34 1.70
150,001 to 200,000.............................. 10 1,726,364.44 0.72
200,001 to 250,000.............................. 4 986,183.49 0.41
250,001 to 300,000.............................. 298 81,628,355.66 34.06
300,001 to 350,000.............................. 195 63,127,790.33 26.34
350,001 to 400,000.............................. 88 33,050,983.32 13.79
400,001 to 450,000.............................. 52 22,181,109.29 9.26
450,001 to 500,000.............................. 34 16,315,063.74 6.81
500,001 to 550,000.............................. 3 1,575,915.18 0.66
550,001 to 600,000.............................. 2 1,166,851.66 0.49
600,001 to 650,000.............................. 1 616,220.74 0.26
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately
$248,850.
S-57
<PAGE> 58
MORTGAGE RATES -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE BALANCE
------------------ -------------- --------------- --------------
<S> <C> <C> <C>
6.501 to 7.000................................ 10 $ 951,782.15 0.40%
7.001 to 7.500................................ 21 4,644,719.88 1.94
7.501 to 8.000................................ 52 13,553,194.69 5.66
8.001 to 8.500................................ 89 27,309,706.38 11.40
8.501 to 9.000................................ 144 43,070,504.96 17.97
9.001 to 9.500................................ 114 33,103,575.78 13.81
9.501 to 10.000................................ 164 49,734,086.05 20.75
10.001 to 10.500................................ 100 24,475,363.23 10.21
10.501 to 11.000................................ 110 23,061,051.80 9.62
11.001 to 11.500................................ 50 9,526,339.42 3.98
11.501 to 12.000................................ 54 6,011,468.53 2.51
12.001 to 12.500................................ 21 2,589,545.27 1.08
12.501 to 13.000................................ 20 859,011.65 0.36
13.001 to 13.500................................ 8 530,297.89 0.22
13.501 to 14.000................................ 6 221,837.69 0.09
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 9.551%.
LOAN TYPE -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
LOAN TYPE MORTGAGE LOANS BALANCE BALANCE
--------- -------------- --------------- --------------
<S> <C> <C> <C>
3/27 ARM (Six-Month LIBOR)...................... 520 $139,559,011.69 58.24%
2/28 ARM (Six-Month LIBOR)...................... 313 75,777,210.34 31.62
Fixed Rate (Fully Amortizing)................... 79 10,522,917.79 4.39
3/27 ARM (One-Year CMT)......................... 26 8,151,104.94 3.40
ARM (One-Year CMT).............................. 7 2,141,699.09 0.89
5/25 ARM (Six-Month LIBOR)...................... 8 2,129,774.14 0.89
ARM (Six-Month LIBOR)........................... 3 1,012,654.90 0.42
Fixed Rate (Balloon)............................ 7 348,112.48 0.15
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
S-58
<PAGE> 59
ORIGINAL TERMS TO MATURITY -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE BALANCE
---------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
61 to 120...................................... 1 $ 27,883.72 0.01%
121 to 180...................................... 25 1,609,149.99 0.67
181 to 240...................................... 3 628,258.80 0.26
301 to 360...................................... 934 237,377,192.86 99.05
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 358 months.
REMAINING TERMS TO MATURITY (LEVEL PAY) -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE BALANCE
---------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
109 to 120...................................... 1 $ 27,883.72 0.01%
169 to 180...................................... 18 1,261,037.51 0.53
229 to 240...................................... 3 628,258.80 0.26
337 to 348...................................... 21 5,292,054.52 2.21
349 to 360...................................... 913 232,085,138.34 96.99
--- --------------- ------
Total......................................... 956 $239,294,372.89 100.00%
=== =============== ======
</TABLE>
The weighted average remaining term to maturity is approximately 353 months.
REMAINING TERMS TO MATURITY (BALLOON) -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE BALANCE
---------------------------- -------------- ----------- --------------
<S> <C> <C> <C>
169 to 180.......................................... 7 $348,112.48 100.00%
-- ----------- ------
Total............................................. 7 $348,112.48 100.00%
== =========== ======
</TABLE>
The weighted average remaining term to maturity is approximately 172 months.
S-59
<PAGE> 60
ORIGINAL LOAN-TO-VALUE RATIO -- POOL 2*
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF ORIGINAL NUMBER OF PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS BALANCE BALANCE
------------------------ -------------- --------------- --------------
<S> <C> <C> <C>
10.001 to 20.000............................... 8 $ 246,427.56 0.10%
20.001 to 30.000............................... 10 471,224.01 0.20
30.001 to 40.000............................... 12 1,146,081.54 0.48
40.001 to 50.000............................... 24 3,800,108.50 1.59
50.001 to 60.000............................... 60 12,670,443.87 5.29
60.001 to 70.000............................... 129 25,782,569.69 10.76
70.001 to 80.000............................... 434 116,684,187.55 48.69
80.001 to 90.000............................... 275 76,027,336.75 31.73
90.001 to 100.000............................... 11 2,814,105.90 1.17
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
---------------
* The above table does not reflect the Combined Loan-to-Value Ratio of mortgaged
properties secured by second liens.
The weighted average original Loan-to-Value Ratio is approximately 77.95%.
COMBINED LOAN-TO-VALUE RATIOS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
RANGE OF COMBINED NUMBER OF PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS BALANCE BALANCE
------------------------ -------------- --------------- --------------
<S> <C> <C> <C>
10.001 to 20.000............................... 3 $ 116,163.68 0.05%
20.001 to 30.000............................... 7 325,065.76 0.14
30.001 to 40.000............................... 11 1,122,375.64 0.47
40.001 to 50.000............................... 24 3,800,108.50 1.59
50.001 to 60.000............................... 60 12,670,443.87 5.29
60.001 to 70.000............................... 131 25,830,189.76 10.78
70.001 to 80.000............................... 441 116,936,695.51 48.80
80.001 to 90.000............................... 275 76,027,336.75 31.73
90.001 to 100.000............................... 11 2,814,105.90 1.17
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
The weighted average Combined Loan-to-Value Ratio is approximately 78.02%.
S-60
<PAGE> 61
GEOGRAPHIC DISTRIBUTION -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
STATE MORTGAGE LOANS BALANCE BALANCE
----- -------------- --------------- --------------
<S> <C> <C> <C>
Alabama......................................... 2 $ 569,965.68 0.24%
Alaska.......................................... 2 145,167.57 0.06
Arizona......................................... 13 3,214,388.62 1.34
Arkansas........................................ 3 380,322.04 0.16
California...................................... 413 119,416,221.53 49.83
Colorado........................................ 31 8,577,780.31 3.58
Connecticut..................................... 11 2,609,439.18 1.09
Delaware........................................ 1 83,822.81 0.03
District of Columbia............................ 2 354,254.90 0.15
Florida......................................... 36 8,224,496.90 3.43
Georgia......................................... 8 1,213,366.18 0.51
Hawaii.......................................... 17 5,606,847.34 2.34
Idaho........................................... 1 46,713.66 0.02
Illinois........................................ 59 15,985,540.56 6.67
Indiana......................................... 22 1,990,080.16 0.83
Iowa............................................ 2 82,355.34 0.03
Kansas.......................................... 5 943,416.08 0.39
Kentucky........................................ 2 106,743.08 0.04
Louisiana....................................... 5 722,047.91 0.30
Maine........................................... 1 61,401.12 0.03
Maryland........................................ 28 6,761,962.94 2.82
Massachusetts................................... 16 4,945,171.34 2.06
Michigan........................................ 10 2,905,715.01 1.21
Minnesota....................................... 40 6,336,526.36 2.64
Missouri........................................ 7 1,550,878.32 0.65
Montana......................................... 6 909,886.84 0.38
Nebraska........................................ 2 159,671.95 0.07
Nevada.......................................... 6 1,453,060.18 0.61
New Hampshire................................... 6 1,183,861.88 0.49
New Jersey...................................... 20 5,321,940.79 2.22
New Mexico...................................... 1 127,918.69 0.05
New York........................................ 22 5,865,792.59 2.45
Ohio............................................ 18 1,863,242.24 0.78
Oklahoma........................................ 11 734,741.02 0.31
Oregon.......................................... 9 2,229,204.26 0.93
Pennsylvania.................................... 16 3,641,048.55 1.52
Rhode Island.................................... 4 1,574,545.12 0.66
South Carolina.................................. 14 1,157,925.19 0.48
South Dakota.................................... 2 369,885.45 0.15
Tennessee....................................... 7 1,369,154.60 0.57
Texas........................................... 18 4,933,059.04 2.06
Utah............................................ 13 2,640,320.39 1.10
Virginia........................................ 11 2,654,722.96 1.11
Washington...................................... 26 7,278,784.59 3.04
Wisconsin....................................... 11 829,638.61 0.35
Wyoming......................................... 3 509,455.49 0.21
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
S-61
<PAGE> 62
LIEN PRIORITY -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
LIEN PRIORITY MORTGAGE LOANS BALANCE BALANCE
------------- -------------- --------------- --------------
<S> <C> <C> <C>
First Lien...................................... 954 $239,342,357.34 99.87%
Second Lien..................................... 9 300,128.03 0.13
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
PROPERTY TYPE -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
PROPERTY TYPE MORTGAGE LOANS BALANCE BALANCE
------------- -------------- --------------- --------------
<S> <C> <C> <C>
Single Family................................... 819 $205,715,069.95 85.84%
Planned Unit Development........................ 63 19,474,751.45 8.13
Condominium..................................... 30 7,799,003.55 3.25
Two-to-Four Family.............................. 22 4,159,749.04 1.74
Five-plus Family................................ 25 1,983,210.30 0.83
Townhouse....................................... 1 262,467.44 0.11
Manufactured Housing............................ 2 207,670.52 0.09
Other........................................... 1 40,563.12 0.02
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
LOAN PURPOSE -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
LOAN PURPOSE MORTGAGE LOANS BALANCE BALANCE
------------ -------------- --------------- --------------
<S> <C> <C> <C>
Cash Out Refinance.............................. 557 $123,337,191.63 51.47%
Rate/Term Refinance............................. 206 58,490,088.01 24.41
Purchase........................................ 194 57,353,490.97 23.93
Construction Permanent.......................... 6 461,714.76 0.19
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
S-62
<PAGE> 63
OCCUPANCY STATUS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
OCCUPANCY STATUS MORTGAGE LOANS BALANCE BALANCE
---------------- -------------- --------------- --------------
<S> <C> <C> <C>
Primary Home.................................... 941 $235,152,586.32 98.13%
Investment...................................... 17 3,525,603.74 1.47
Second Home..................................... 5 964,295.31 0.40
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
LOAN DOCUMENTATION -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
LOAN DOCUMENTATION MORTGAGE LOANS BALANCE BALANCE
------------------ -------------- --------------- --------------
<S> <C> <C> <C>
Full............................................ 676 $167,766,215.45 70.01%
Stated Income................................... 208 46,662,312.30 19.47
Limited......................................... 79 25,213,957.62 10.52
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
PREPAYMENT PREMIUM YEARS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
PREPAYMENT PREMIUM (YEARS) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
0............................................ 263 $ 63,499,764.50 26.50%
0.01 to 1.00.................................... 47 14,304,720.54 5.97
1.01 to 2.00.................................... 207 53,761,600.04 22.43
2.01 to 3.00.................................... 280 68,737,100.06 28.68
4.01 to 5.00.................................... 166 39,339,300.23 16.42
--- --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
=== =============== ======
</TABLE>
S-63
<PAGE> 64
RATE TYPE -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RATE TYPE MORTGAGE LOANS BALANCE BALANCE
--------- -------------- --------------- --------------
<S> <C> <C> <C>
Fixed........................................... 86 $ 10,871,030.27 4.54%
Adjustable...................................... 877 228,771,455.10 95.46
------ --------------- ------
Total......................................... 963 $239,642,485.37 100.00%
====== =============== ======
</TABLE>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE
LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF GROSS MARGINS (%) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
3.251 to 3.500.................................... 1 $ 294,158.90 0.13%
3.501 to 3.750.................................... 1 616,220.74 0.27
3.751 to 4.000.................................... 3 902,730.49 0.39
4.001 to 4.250.................................... 1 447,651.43 0.20
4.251 to 4.500.................................... 1 467,164.25 0.20
4.501 to 4.750.................................... 5 1,498,386.80 0.65
4.751 to 5.000.................................... 39 8,926,285.20 3.90
5.001 to 5.250.................................... 39 11,816,874.31 5.17
5.251 to 5.500.................................... 54 13,385,086.39 5.85
5.501 to 5.750.................................... 52 13,596,246.95 5.94
5.751 to 6.000.................................... 151 39,914,491.46 17.45
6.001 to 6.250.................................... 89 21,091,650.64 9.22
6.251 to 6.500.................................... 225 64,690,052.87 28.28
6.501 to 6.750.................................... 73 18,340,521.69 8.02
6.751 to 7.000.................................... 68 16,451,305.96 7.19
7.001 to 7.250.................................... 34 7,280,584.87 3.18
7.251 to 7.500.................................... 22 5,953,111.57 2.60
7.501 to 7.750.................................... 7 1,280,178.67 0.56
7.751 to 8.000.................................... 2 441,848.54 0.19
8.001 to 8.250.................................... 5 475,722.10 0.21
8.251 to 8.500.................................... 2 767,245.42 0.34
8.501 to 8.750.................................... 2 103,949.68 0.05
8.751 to 9.000.................................... 1 29,986.17 0.01
--- --------------- ------
Total................................... 877 $228,771,455.10 100.00%
=== =============== ======
</TABLE>
The weighted average Gross Margin for Adjustable Rate Mortgage Loans is
approximately 6.197%.
S-64
<PAGE> 65
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE
LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MAXIMUM RATES(%) MORTGAGE LOANS BALANCE BALANCE
------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
12.001 to 12.500.................................. 1 $ 294,158.90 0.13%
13.001 to 13.500.................................. 3 1,087,813.26 0.48
13.501 to 14.000.................................. 32 8,329,018.34 3.64
14.001 to 14.500.................................. 67 19,590,902.53 8.56
14.501 to 15.000.................................. 97 26,341,610.73 11.51
15.001 to 15.500.................................. 84 24,811,851.95 10.85
15.501 to 16.000.................................. 140 43,045,138.81 18.82
16.001 to 16.500.................................. 108 31,590,300.90 13.81
16.501 to 17.000.................................. 125 35,668,529.74 15.59
17.001 to 17.500.................................. 63 13,622,602.52 5.95
17.501 to 18.000.................................. 63 11,931,668.34 5.22
18.001 to 18.500.................................. 34 6,162,761.03 2.69
18.501 to 19.000.................................. 31 3,265,643.24 1.43
19.001 to 19.500.................................. 17 2,593,920.38 1.13
19.501 to 20.000.................................. 8 316,390.40 0.14
20.001 to 20.500.................................. 3 93,343.41 0.04
20.501 to 21.000.................................. 1 25,800.62 0.01
--- --------------- ------
Total................................... 877 $228,771,455.10 100.00%
=== =============== ======
</TABLE>
The weighted average Maximum Rate for Adjustable Rate Mortgage Loans is
approximately 16.029%.
S-65
<PAGE> 66
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE
LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF MINIMUM RATES(%) MORTGAGE LOANS BALANCE BALANCE
------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
6.501 to 7.000.................................... 9 $ 859,113.84 0.38%
7.001 to 7.500.................................... 21 4,644,719.88 2.03
7.501 to 8.000.................................... 49 13,167,768.34 5.76
8.001 to 8.500.................................... 86 26,770,081.55 11.70
8.501 to 9.000.................................... 137 40,913,042.68 17.88
9.001 to 9.500.................................... 111 32,867,904.15 14.37
9.501 to 10.000................................... 155 47,172,408.46 20.62
10.001 to 10.500.................................. 91 23,051,994.68 10.08
10.501 to 11.000.................................. 97 21,672,809.70 9.47
11.001 to 11.500.................................. 46 9,326,597.97 4.08
11.501 to 12.000.................................. 39 4,925,254.96 2.15
12.001 to 12.500.................................. 17 2,415,765.22 1.06
12.501 to 13.000.................................. 12 521,495.69 0.23
13.001 to 13.500.................................. 6 436,697.36 0.19
13.501 to 14.000.................................. 1 25,800.62 0.01
--- --------------- ------
Total................................... 877 $228,771,455.10 100.00%
=== =============== ======
</TABLE>
The weighted average Minimum Rate for Adjustable Rate Mortgage Loans is
approximately 9.526%.
S-66
<PAGE> 67
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE
LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
NEXT ADJUSTMENT DATE MORTGAGE LOANS BALANCE BALANCE
-------------------- -------------- --------------- -------------
<S> <C> <C> <C>
June 2000......................................... 1 $ 329,457.00 0.14%
July 2000......................................... 3 993,783.50 0.43
August 2000....................................... 1 336,033.48 0.15
September 2000.................................... 3 906,364.75 0.40
November 2000..................................... 3 907,421.09 0.40
December 2000..................................... 1 311,369.11 0.14
January 2001...................................... 1 262,684.60 0.11
April 2001........................................ 2 789,168.57 0.34
May 2001.......................................... 4 1,328,965.53 0.58
June 2001......................................... 16 3,143,952.45 1.37
July 2001......................................... 21 3,966,867.16 1.73
August 2001....................................... 15 2,732,524.64 1.19
September 2001.................................... 44 10,994,939.51 4.81
October 2001...................................... 34 7,869,989.06 3.44
November 2001..................................... 37 10,017,806.33 4.38
December 2001..................................... 53 15,983,398.41 6.99
January 2002...................................... 52 14,738,818.83 6.44
February 2002..................................... 22 2,324,491.48 1.02
March 2002........................................ 19 3,596,989.97 1.57
April 2002........................................ 2 543,986.19 0.24
June 2002......................................... 1 342,744.86 0.15
July 2002......................................... 4 1,170,282.44 0.51
August 2002....................................... 7 1,557,657.52 0.68
September 2002.................................... 49 12,707,647.60 5.55
October 2002...................................... 100 28,053,689.69 12.26
November 2002..................................... 109 32,675,014.17 14.28
December 2002..................................... 99 29,633,967.63 12.95
January 2003...................................... 52 15,478,273.72 6.77
February 2003..................................... 63 12,086,147.68 5.28
March 2003........................................ 52 11,226,213.76 4.91
August 2004....................................... 1 294,158.90 0.13
September 2004.................................... 2 824,082.87 0.36
October 2004...................................... 2 310,445.47 0.14
February 2005..................................... 1 262,163.15 0.11
March 2005........................................ 1 69,953.98 0.03
--- --------------- ------
Total................................... 877 $228,771,455.10 100.00%
=== =============== ======
</TABLE>
S-67
<PAGE> 68
INITIAL PERIODIC CAP OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE
LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
INITIAL PERIODIC CAP(%) MORTGAGE LOANS BALANCE BALANCE
----------------------- -------------- --------------- -------------
<S> <C> <C> <C>
1.000............................................. 3 $ 1,012,654.90 0.44%
2.000............................................. 485 111,951,667.69 48.94
3.000............................................. 389 115,807,132.51 50.62
--- --------------- ------
Total................................... 877 $228,771,455.10 100.00%
=== =============== ======
</TABLE>
The weighted average Initial Periodic Cap of the Adjustable Rate Mortgage Loans
is approximately 2.502%.
SUBSEQUENT PERIODIC CAP OF THE ADJUSTABLE RATE MORTGAGE LOANS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE
LOANS
AGGREGATE BY AGGREGATE
SCHEDULED SCHEDULED
NUMBER OF PRINCIPAL PRINCIPAL
SUBSEQUENT PERIODIC CAP(%) MORTGAGE LOANS BALANCE BALANCE
-------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
1.000............................................. 808 $207,170,806.85 90.56%
1.500............................................. 36 11,307,844.22 4.94
2.000............................................. 33 10,292,804.03 4.50
--- --------------- ------
Total................................... 877 $228,771,455.10 100.00%
=== =============== ======
</TABLE>
The weighted average Subsequent Periodic Cap of the Adjustable Rate Mortgage
Loans is approximately 1.070%.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pools and the
Mortgaged Properties is based upon each 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
herein under "Description of the Mortgage Pools," such removal or addition, to
the extent material, will be noted in the Current Report on Form 8-K.
Pursuant to the Trust Agreement, the Master Servicer will prepare a monthly
statement to Certificateholders which will set forth certain information
regarding the Certificates and the Mortgage Pools. The Master Servicer may make
available each month, to any interested party, the monthly statement to
Certificateholders via the Master Servicer's website, electronic bulletin board
and its fax-on-demand service. The Master Servicer's website will be located at
www.ctslink.com. and its fax-on-demand service may be accessed by calling (301)
815-6610.
S-68
<PAGE> 69
UNDERWRITING GUIDELINES
The Mortgage Loans have been originated or acquired by 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. HOWEVER, THIS DISCUSSION DOES
NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE UNDERWRITING STANDARDS OF ANY OF
THE ORIGINATORS.
The Underwriting Guidelines are generally intended to evaluate the credit
risk of mortgage loans made to borrowers with imperfect credit histories,
ranging from minor delinquencies to bankruptcy, or borrowers with relatively
high ratios of monthly mortgage payments to income or relatively high ratios of
total monthly credit payments to income. In addition, such guidelines also
evaluate the value and adequacy of the mortgage note as collateral. 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, relatively low loan-to-value ratio,
relatively 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 or similar documentation, 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 Fannie Mae and Freddie Mac 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 or
correspondents 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 Originators 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 (to the extent reported) any record of payment 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
S-69
<PAGE> 70
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.
The Underwriting Guidelines are less stringent than the standards generally
acceptable to Fannie Mae and Freddie Mac. Mortgagors who qualify under the
Underwriting Guidelines generally have payment histories and debt ratios that
would not satisfy Fannie Mae's or Freddie Mac's 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 Fannie Mae or Freddie Mac
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-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 borrower's
income or employment and there was no verification of the borrower's assets.
Under the Full Documentation programs, applicants generally are required to
submit two written forms of verification of stable income for 12 to 24 months,
depending on the particular Originator and its guidelines. 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
note 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.
S-70
<PAGE> 71
A substantial portion of the Mortgage Loans were classified by the related
Originators in relatively low (i.e., 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.
THE MASTER SERVICER
The information set forth under "The Master Servicer" has been provided by
Norwest Bank Minnesota, National Association ("Norwest" or the "Master
Servicer"), and none of the Depositor, the Seller, Lehman Brothers Inc. (the
"Underwriter" or "Lehman Brothers"), the Trustee, any Primary Servicer or any of
their respective affiliates 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 Primary Servicers will directly service the Mortgage Loans under the
supervision of the Master Servicer. The Master Servicer, however, will not be
ultimately responsible for the servicing of the Mortgage Loans except to the
extent described under "Servicing of the Mortgage Loans" herein. One of the
Primary Servicers, Wells Fargo Home Mortgage, Inc., is an affiliate of the
Master Servicer.
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, 2000, the Master Servicer master
serviced approximately 713,000 mortgage loans with an aggregate outstanding
principal balance of approximately $66 billion.
THE PRIMARY SERVICERS
GENERAL
The Mortgage Loans will initially be serviced by Ocwen Federal Bank FSB
("Ocwen"), in the case of approximately 41.08% of the Mortgage Loans included in
Pool 1 and approximately 28.43% of the Mortgage Loans included in Pool 2; Option
One Mortgage Corporation ("Option One"), in the case of approximately 42.32% of
the Mortgage Loans included in Pool 1 and approximately 54.75% of the Mortgage
Loans included in Pool 2; and Wells Fargo Home Mortgage, Inc. ("WFHM"), formerly
known as Norwest Mortgage, Inc., in the case of approximately 16.60% of the
Mortgage Loans included in Pool 1 and approximately 16.82% of the Mortgage Loans
included in Pool 2 (Ocwen, Option One and WFHM each a "Primary Servicer" and
collectively, the "Primary Servicers"). The Primary Servicers will have primary
responsibility for servicing the Mortgage Loans including, but not limited to,
all collection, advancing and loan level reporting obligations, maintenance of
escrow accounts and maintenance of insurance and enforcement of foreclosure
proceedings with respect to the Mortgage Loans and the related mortgaged
properties. Such responsibilities will be performed under the supervision of the
Master Servicer and with the assistance of the Loss Mitigation Advisor, in each
case in accordance with the provisions of the related servicing agreement (each,
a "Servicing Agreement") and a Loss Mitigation Advisory Agreement among the Loss
Mitigation Advisor, the Trustee and each Primary Servicer. See "Servicing of the
Mortgage Loans."
Under each Servicing Agreement, the Master Servicer has the authority to
terminate the Primary Servicer for certain events of default which indicate the
Primary Servicer is not performing, or is unable to perform, its duties and
obligations under its respective Servicing Agreement. The Guarantor will have
the right to terminate a Primary Servicer and appoint a successor servicer
reasonably acceptable to the Depositor, the Master Servicer and the Trustee if
(a) either (i) the rating of "AA" (or its equivalent) originally assigned by the
rating agencies to the Class M1 Certificates is downgraded to "A" (or its
equivalent) or below or (ii) Realized Losses generated by such Primary
Servicer's serviced Mortgage Loans result in the application of an Applied Loss
Amount to the Class B Certificates or (b) such other events occur as the
applicable Primary Servicer and Freddie Mac have agreed in the related Servicing
S-71
<PAGE> 72
Agreement. See "Description of the Certificates -- Credit Enhancement --
Application of Realized Losses." In addition, under each Servicing Agreement,
the Class X Certificateholder, with the consent of the Guarantor, has the
authority to terminate the Primary Servicer, without cause, upon thirty days'
notice and, with limited exceptions, the payment of certain termination fees and
expenses to the Primary Servicer. See "Servicing of the Mortgage Loans" below.
The information set forth in the following paragraphs has been provided by
the particular Primary Servicer. None of the Depositor, the Seller, the
Underwriter, the Trustee, the Master Servicer, the other Primary Servicers or
any of their respective affiliates has made or will make any representation as
to the accuracy or completeness of such information.
The delinquency and loan loss data set forth below for any particular
Primary Servicer solely represents the historical experience of that Primary
Servicer's servicing portfolio for the periods indicated. The actual delinquency
and loss experience of the Mortgage Pools will be affected by a number of
factors, including but not limited to the borrowers' personal circumstances,
including, for example, unemployment or change in employment (or in the case of
self-employed borrowers or borrowers relying on commission income, fluctuations
in income), marital separation and a borrower'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 made with respect to 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. In
addition, any particular servicing portfolio described below may include
mortgage loans which have not been outstanding long enough to have seasoned to a
point where delinquencies would be fully reflected. In the absence of
substantial continuous additions of servicing for recently originated mortgage
loans to an unseasoned portfolio, it is possible that the delinquency and
foreclosure percentages experienced could be significantly higher than that
indicated in the tables below. ACCORDINGLY, NO REPRESENTATION IS MADE BY ANY
PRIMARY SERVICER THAT THE DELINQUENCY AND LOSS EXPERIENCE OF THE MORTGAGE POOLS
WILL BE SIMILAR TO THAT OF ANY PARTICULAR PRIMARY SERVICER'S SERVICING
PORTFOLIO, NOR IS ANY REPRESENTATION MADE AS TO THE RATE AT WHICH LOSSES MAY BE
EXPERIENCED ON LIQUIDATION OF DEFAULTED MORTGAGE LOANS IN THE MORTGAGE POOLS.
OCWEN
Ocwen is 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. Ocwen is a wholly-owned subsidiary of Ocwen Financial
Corporation, a public financial services holding company. As of March 31, 2000,
Ocwen had approximately $2.60 billion in assets, approximately $2.33 billion in
liabilities and approximately $265.5 million in equity. As of March 31, 2000,
Ocwen's tangible and leveraged capital ratio was approximately 9.33% and its
total risk-based capital ratio was approximately 17.67%. For the year ended
December 31, 1999, Ocwen's net income from continuing operations was
approximately $47.5 million.
The primary business of Ocwen has been the resolution of nonperforming
single-family, multifamily and commercial mortgage loan portfolios acquired from
the Resolution Trust Corporation, from private investors, from the United States
Department of Housing and Urban Development ("HUD") through HUD's auction of
defaulted FHA Loans, and third-party mortgage loan servicing for third parties.
The following tables set forth, for the non-conforming credit mortgage loan
("BCD Mortgage Loan") servicing portfolio serviced by Ocwen, certain information
relating to the delinquency, foreclosure, REO and loss experience with respect
to such mortgage loans (including loans in foreclosure included in Ocwen'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.
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<PAGE> 73
OCWEN
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------------------- ---------------------------------------
PERCENT PERCENT PERCENT PERCENT
BY NO. BY BY BY BY NO. BY BY BY
OF DOLLAR NO. OF DOLLAR OF DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ ---------- ------- ------- ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio.................... 68,274 $6,099,336 100.00% 100.00% 91,948 $8,080,272 100.00% 100.00%
Period of Delinquency(1)
31-59 days....................... 3,325 $ 265,396 4.87% 4.35% 4,194 $ 348,575 4.56% 4.31%
60-89 days....................... 1,555 $ 129,439 2.28% 2.12% 1,873 $ 157,404 2.04% 1.95%
90 days or more.................. 6,322 $ 561,709 9.26% 9.21% 13,853 $1,173,259 15.06% 14.52%
------ ---------- ------ ------ ------ ---------- ------ ------
Total Delinquent Loans............. 11,202 $ 956,545 16.41% 15.68% 19,920 $1,679,238 21.66% 20.78%
====== ========== ====== ====== ====== ========== ====== ======
Loans in Foreclosure(2)............ 3,158 $ 297,859 4.63% 4.88% 5,629 $ 514,476 6.12% 6.37%
<CAPTION>
AS OF
MARCH 31, 2000
---------------------------------------
PERCENT PERCENT
BY NO. BY BY BY
OF DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT
------ ---------- ------- -------
<S> <C> <C> <C> <C>
Total Portfolio.................... 80,519 $6,953,608 100.00% 100.00%
Period of Delinquency(1)
31-59 days....................... 2,993 $ 255,090 3.72% 3.67%
60-89 days....................... 1,568 $ 138,568 1.95% 1.99%
90 days or more.................. 13,496 $1,168,125 16.76% 16.80%
------ ---------- ------ ------
Total Delinquent Loans............. 18,057 $1,561,783 22.42% 22.46%
====== ========== ====== ======
Loans in Foreclosure(2)............ 5,350 $ 484,365 6.64% 6.97%
</TABLE>
---------------
(1) Includes 13,737 loans totaling $1,128,704,545 for March 31, 2000 which were
delinquent at the time of transfer to Ocwen.
(2) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
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<PAGE> 74
OCWEN
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
--------------------- --------------------- -------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT LOANS AMOUNT
-------- ---------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio................. 68,274 $6,099,336 91,948 $8,080,272 80,519 $6,953,608
Foreclosed Loans(1)............. 808 $ 70,592 2,913 $ 232,157 3,130 $ 249,290
Foreclosure Ratio(2)............ 1.18% 1.16% 3.17% 2.87% 3.89% 3.59%
</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 Ocwen.
(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.
OCWEN
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Total Portfolio(1)...................................... $6,099,366 $8,080,272 $6,953,608
Net Gains/(Losses) (2)(3)............................... ($ 26,068) ($ 139,000) ($ 189,035)
Net Gains/(Losses) as a Percentage of Total Portfolio... (0.43)% (1.72)% (2.72)%
</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 the principal payoff amount and
unpaid principal at the time of payoff.
(3) Includes $103,694,089 as of March 31, 2000 of losses attributable to loans
which were delinquent at the time of transfer to Ocwen.
OPTION ONE
Option One is a California corporation headquartered in Irvine, California.
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.
Option One is a wholly-owned subsidiary of Block Financial, which is in
turn a wholly-owned subsidiary of H&R Block, Inc.
As of March 31, 2000, Option One had five loan origination centers in
California, three loan origination centers in each of Florida, Ohio, Illinois
and Virginia, two loan origination centers in each of Arizona and Rhode Island
and one loan origination center in each of Colorado, Connecticut, Georgia,
Indiana, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Texas,
Washington and Wisconsin.
Option One operates as a stand-alone mortgage banking company and is a
Freddie Mac approved seller/servicer.
The following tables set forth, as of December 31, 1997, 1998 and 1999 and
March 31, 2000 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in
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<PAGE> 75
progress and bankruptcies) of one-to four-family residential mortgage loans
included in Option One's entire servicing portfolio (which portfolio includes
mortgage loans originated under Option One's underwriting guidelines and
mortgage loans that are subserviced for 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 has not been paid by the next scheduled due date for
such mortgage loan.
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<PAGE> 76
OPTION ONE
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
AT AT
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------------------- ------------------------------------------
PERCENT PERCENT PERCENT PERCENT
BY NO. BY BY BY BY NO. BY BY BY
OF DOLLAR NO. OF DOLLAR OF DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-------- ---------- ------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........ 34,707 $3,407,167 N/A N/A 55,708 $5,601,703 N/A N/A
Period of Delinquency
31-59 Days............ 457 42,556 1.32 1.25 514 47,806 0.92 0.85
60-89 Days............ 222 20,364 0.64 0.60 276 25,731 0.50 0.46
90 days or more....... 1,099 100,238 3.17 2.94 1,161 101,984 2.08 1.82
------ ---------- ---- ---- ------ ---------- ---- ----
Total Delinquent
Loans................. 1,778 $ 163,158 5.12 4.79% 1,051 $ 175,521 3.50% 3.13%
====== ========== ==== ==== ====== ========== ==== ====
Loans in
Foreclosure*.......... 923 $ 83,726 2.66 2.46% 939 $ 83,757 1.69% 1.50%
<CAPTION>
(DOLLARS IN THOUSANDS)
AT AT
JUNE 30, 1999 MARCH 31, 2000
--------------------------------------- -----------------------------------------
PERCENT PERCENT PERCENT PERCENT
BY NO. BY BY BY BY NO. BY BY BY
OF DOLLAR NO. OF DOLLAR OF DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ ---------- ------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........ 98,910 $9,924,101 N/A N/A 108,470 $10,790,743 N/A N/A
Period of Delinquency
31-59 Days............ 1,085 94,371 1.10 0.95 1,098 101,828 1.01 0.94
60-89 Days............ 605 53,276 0.61 0.54 582 55,510 0.54 0.51
90 days or more....... 2,167 193,290 2.19 1.95 2,632 235,963 2.43 2.19
------ ---------- ----- ---- ------- ----------- ----- ----
Total Delinquent
Loans................. 3.857 $ 340,937 3.90 3.44% 4,312 393,301 3.98% 3.66%
====== ========== ===== ==== ======= =========== ===== ====
Loans in
Foreclosure*.......... 1,983 $ 177,763 2.00 1.79% 2,243 203,391 2.07% 1.88%
</TABLE>
---------------
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
OPTION ONE
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AT AT AT
DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1999 MARCH 31, 2000
--------------------- --------------------- --------------------- ----------------------
BY BY BY BY
DOLLAR DOLLAR DOLLAR DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- ---------- -------- ---------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio.................. 34,707 $3,407,167 55,708 $5,601,703 98,910 $9,924,101 108,470 $10,790,743
Foreclosed Loans(1).............. 296 $ 26,313 336 $ 28,344 367 $ 28,940 487 38,792
Foreclosure Ratio(2)............. 0.85 0.77% 0.60% 0.51% 0.37% 0.29% 0.45% 0.36%
</TABLE>
---------------
(1) For the purpose of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by Option One, by investors or by an insurer following
foreclosure or delivery of a deed in lieu of foreclosure.
(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.
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<PAGE> 77
OPTION ONE
LOAN LOSS EXPERIENCE ON OPTION ONE'S SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------ QUARTER ENDED
1997 1998 1999 MARCH 31, 2000
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Total Portfolio(1).......................... $3,407,167 $5,601,703 $9,924,101 $10,790,743
Net Losses(2)(3)............................ $ 24,870 $ 22,132 $ 26,492 $ 6,928
Net Losses as a Percentage of Total
Portfolio(4).............................. 0.73% 0.40% 0.27% 0.26%
</TABLE>
---------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses" are
actual losses incurred on liquidated properties for each respective period.
Losses are calculated after repayment of all principal, foreclosure costs
and accrued interest to the date of liquidation. "Recoveries" are recoveries
from liquidation proceeds and deficiency judgments.
(3) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may change
in future periods. The information in this table reflects costs and
recoveries through March 31, 2000.
(4) For March 31, 2000, "Net Losses as a Percentage of Total Portfolio" was
annualized by multiplying "Net Losses" by 4.0 before calculating the
percentage of "Net Losses as a Percentage of Total Portfolio."
WELLS FARGO HOME MORTGAGE, INC.
WFHM is a direct, wholly-owned subsidiary of Wells Fargo Bank, National
Association and an indirect wholly-owned subsidiary of Wells Fargo & Company.
WFHM is engaged principally in the business of (i) originating, purchasing and
selling residential mortgage loans in its own name and through its affiliates
and (ii) servicing residential mortgage loans for its own account and for the
account of others. WFHM is an approved servicer of Freddie Mac. WFHM's principal
office is located at 1 Home Campus, Des Moines, Iowa 50328-0001. WFHM conducts
its sub-prime mortgage loan servicing activities primarily at its offices in
Charlotte, North Carolina and Frederick, Maryland. The address of its Charlotte,
North Carolina office is 5024 Parkway Plaza Boulevard, Charlotte, North Carolina
28217-1962. The address of its Frederick, Maryland office is 7485 North Horizon
Way, Frederick, Maryland 21703. As of April 11, 2000, WFHM's year-to-date
servicing portfolio was 2,567,877 loans representing approximately $284 billion.
The following table sets forth certain information regarding the
delinquency experience of WFHM with respect to all sub-prime mortgage loans
serviced by it.
WFHM
SUB-PRIME MORTGAGE LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 AS OF MARCH 31, 2000
------------------------------------------------- ---------------------------------------------------
PERCENT PERCENT PERCENT PERCENT
BY NO. BY DOLLAR BY NO. OF BY DOLLAR BY NO. BY NO. OF BY DOLLAR
OF LOANS AMOUNT LOANS AMOUNT OF LOANS BY DOLLAR AMOUNT LOANS AMOUNT
-------- -------------- --------- --------- -------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 20,129 $2,035,584,330 22,319 $2,230,757,382
Period of
Delinquency(2)
30-59 Days......... 1,116 $ 106,994,172 5.54% 5.26% 932 $ 89,042,811 4.18% 3.99%
60-89 Days......... 379 $ 36,695,806 1.88% 1.80% 277 $ 28,500,000 1.24% 1.28%
90 days or more.... 220 $ 22,135,325 1.09% 1.09% 260 $ 24,657,983 1.16% 1.11%
Total Delinquent
Loans.............. 1,715 $ 165,825,302 8.52% 8.15% 1,469 $ 142,200,794 6.58% 6.37%
Loans in
Foreclosure(3)..... 310 $ 29,534,158 1.54% 1.45% 398 $ 36,770,925 1.78% 1.65%
REO.................. 48 $ 4,650,159 0.24% 0.23% 86 $ 7,979,402 0.39% 0.36%
</TABLE>
---------------
(1) Percentages in the table are rounded to the nearest 0.01%.
(2) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
those purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(3) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property has been
acquired as of the date indicated.
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<PAGE> 78
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will be serviced by the related Primary Servicer, under
the supervision of the Master Servicer, in accordance with the provisions of the
applicable Servicing Agreement.
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 Primary Servicer, except as described under "-- Prepayment
Interest Shortfalls" and "-- Advances; Servicing Advances" below. If a Primary
Servicer fails to fulfill its obligations under the related Servicing Agreement,
the Master Servicer is obligated to terminate such Primary Servicer and appoint
a successor servicer as provided in the Trust Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each Primary 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"). Each Primary Servicer will also be entitled to receive,
to the extent provided in its respective 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 (other than
Prepayment Premiums).
The Master Servicer will be paid a monthly fee (the "Master Servicing Fee")
with respect to each Mortgage Loan master serviced by it calculated as 0.00625%
per annum (the "Master Servicing Fee Rate") of the Scheduled Principal Balance
of each such Mortgage Loan.
The Master Servicing Fee and the Servicing Fee of each Primary Servicer are
subject to reduction as described below under "-- Prepayment Interest
Shortfalls."
The existing Servicing Agreement with Ocwen provides for the payment of a
one-time fixed special servicing fee to Ocwen (in addition to its base Servicing
Fees described above) for those Mortgage Loans specially serviced by Ocwen which
become more than 150 days delinquent. Any such special servicing fee paid to
Ocwen will be junior in payment priority to all amounts due or distributable to
the Guarantor, the other Primary Servicers, the Master Servicer, the Trustee,
the Loss Mitigation Advisor or the holders of the Senior and Subordinate
Certificates but senior to any amounts distributed to the Class X and Class R
Certificateholders described thereunder.
The existing Servicing Agreements with Option One and WFHM similarly
provide that the Class X Certificateholder may, with the prior written consent
of the Master Servicer, the Trustee and the Guarantor, arrange for the
appointment of a special servicer for the special servicing of those Mortgage
Loans which become more than 90 days delinquent; provided that any special
servicing fees paid to a special servicer with respect to such Mortgage Loans
will be in lieu of (and may not exceed) the base Servicing Fee with respect to
such Mortgage Loans. See "Servicing of Loans -- Servicing Compensation and
Payment of Expenses" in the Prospectus for information regarding
servicing-related expenses payable by the Master Servicer and the Servicers. The
Master Servicer and each 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
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<PAGE> 79
Prepayment Interest Shortfall resulting from a prepayment in full or in part, is
generally required to be paid by the Primary Servicer, but only to the extent
that such amount does not exceed the aggregate of the Servicing Fees on the
Mortgage Loans serviced by it for the applicable Distribution Date.
Prepayment Interest Shortfalls required to be funded but not funded in full
by the Primary Servicers are required to be funded by the Master Servicer, to
the extent that such amounts in the aggregate do not exceed the Master Servicing
Fee for the applicable Distribution Date, through a reduction in the amount of
such compensation.
ADVANCES; SERVICING ADVANCES
Each Primary Servicer will generally be obligated to make on each
Distribution Date, either from its own funds (or, to the extent permitted by the
Guarantor, from funds on deposit in the custodial account maintained by the
Primary Servicer for collections of principal and interest on the Mortgage
Loans, any collections not included in available funds for the related
Distribution Date) an advance 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 (an "Advance"),
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 Advance if the applicable Primary Servicer fails in its obligation 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 Primary Servicer, the Master 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,
condemnation 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 Scheduled Payments on Mortgage Loans due to reductions made by a
bankruptcy court in the amount of a Scheduled Payment owed by a borrower or a
reduction of the applicable Mortgage Rate by application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act").
In the course of performing its servicing obligations, each Primary
Servicer will be required to pay all reasonable and customary "out-of-pocket"
costs and expenses, including costs and expenses of foreclosures (including
reasonable attorney's fees and disbursements) incurred in the performance of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration, inspection and protection of the mortgaged
properties, (ii) any enforcement or judicial proceedings and (iii) the
management and liquidation of mortgaged properties acquired in satisfaction of
the related mortgage. Each such expenditure will constitute a "Servicing
Advance."
The Primary Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds, condemnation
proceeds and such other amounts as may be collected by the Primary Servicer from
the related mortgagor or otherwise relating to the Mortgage Loan in respect of
which such unreimbursed amounts are owed, unless such unreimbursed amounts are
deemed to be nonrecoverable by the Primary Servicer, in which event
reimbursement will be made to the Primary Servicer from general funds in the
custodial account maintained by such Primary Servicer for collection of
principal and interest on the Mortgage Loans.
COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS
Each Primary Servicer 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
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<PAGE> 80
Mortgage Loans, and will make advances with respect to delinquencies in required
escrow payments by the related borrowers.
INSURANCE COVERAGE
The Master Servicer and each Primary 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 and the Guarantor 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. The Servicing
Agreement applicable to each Primary Servicer contains corresponding provisions
requiring each Primary Servicer to conduct similar compliance reviews with their
respective independent accountants.
THE LOSS MITIGATION ADVISOR
In connection with the PMI Policies obtained by the Seller for the Trust
Fund, The Murrayhill Company, a Colorado corporation (the "Loss Mitigation
Advisor"), will act as the Trust's representative in monitoring and making
recommendations to the Primary Servicers regarding certain delinquent and
defaulted Mortgage Loans and in monitoring and reporting to the Trust on the
performance of such Mortgage Loans. The Loss Mitigation Advisor will rely upon
mortgage loan data that is provided to it by the Primary Servicers in performing
its advisory and monitoring functions.
The Loss Mitigation Advisor will be entitled to receive a Loss Mitigation
Advisor's Fee until the termination of the Trust or until its removal by a vote
of at least 66 2/3% of the Certificateholders. Such fee will be paid by the
Trust Fund and will be equal to 0.015% per annum (the "Advisor's Fee Rate") of
the Scheduled Principal Balance of each Mortgage Loan.
TERMINATION RIGHTS
In addition to the Master Servicer's authority to terminate a Primary
Servicer for cause upon the occurrence and the continuance of an event of
default under the applicable Servicing Agreement, the Guarantor has the right to
terminate a Primary Servicer upon the occurrence of certain downgrade events,
Realized Loss triggers or such other events as the Primary Servicer and the
Guarantor have agreed to in the applicable Servicing Agreement, as described
under "The Primary Servicers -- General." The Guarantor also has the right to
audit the Master Servicer's master servicing practices if either (i) the credit
rating assigned by any of the rating agencies to the Master Servicer's master
servicing operations is downgraded to a rating which in the Guarantor's
reasonable judgement merits an audit or (ii) the net worth of the Master
Servicer falls below $50,000,000. Based upon the results of such audit, the
Guarantor, in its reasonable discretion, may declare an event of default under
the Trust Agreement, which with the consent of Certificateholders holding at
least 51% of the voting rights would result in termination of the Master
Servicer.
It is anticipated that Lehman Brothers will be the initial holder of the
Class X Certificate. Lehman Brothers or any subsequent holder of the Class X
Certificate, with the consent of Freddie Mac, upon 30 days' prior written
notice, will also have the right to terminate the rights and obligations of any
Primary Servicer under the applicable Servicing Agreement, at any time, without
cause, and to appoint a successor servicer, provided that (1) such successor is
reasonably acceptable to the Master Servicer, the Guarantor and the Trustee, (2)
a letter is provided to the Trustee and the Guarantor from each rating agency
rating
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<PAGE> 81
the Certificates 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 and (3) all other applicable requirements of the
Trust Agreement and the related Servicing Agreement are satisfied, including the
payment of any applicable termination fee or expenses to the Primary Servicer.
TRUST AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Trust Agreement (the "Trust
Agreement") dated as of May 1, 2000 among the Depositor, the Seller, the Master
Servicer, the Loss Mitigation Advisor, the Trustee and the Guarantor. 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, 401 S. Tryon Street, N.C. 1179,
Charlotte North Carolina 28288-1179, Attention: Structured Finance Trust
Services.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned to the Trustee by the Depositor,
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 or
before 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 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 Mortgage Rate, the Scheduled Payment, the maturity date and
those Mortgage Loans covered by the PMI Policies.
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 and the related custodial agreements: (1) the related original
mortgage note endorsed without recourse to the Trustee or in blank, (2) 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), (3) an original assignment of the mortgage to the Trustee or in
blank in recordable form and an original copy of any intervening assignments
showing a complete chain of assignments, (4) the policies of title insurance
issued with respect to each Mortgage Loan, and (5) the originals of any
assumption, modification, extension or guaranty agreements.
The Trust Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee (or
a custodian, as the Trustee's agent for such purpose) the mortgage notes
endorsed either in blank or to the Trustee on behalf of the Certificateholders
and the related documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Depositor may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit executed by the Depositor. The
assignments of mortgage are generally required to be recorded by the Depositor
on behalf of the Trustee in the appropriate offices for real property records.
However, such assignments of mortgage are not required to be recorded if the
Depositor furnishes to the Trustee, on or before the Closing Date, at the
Depositor's expense, an opinion of counsel with respect to the relevant
jurisdictions that such recording is not necessary to perfect the Trustee's
interest in the related Mortgage Loan. Any cost associated with the recording of
such assignments of mortgage will be borne by the Seller.
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<PAGE> 82
Within 45 days of the Closing Date, the Trustee or its custodian will
review the Mortgage Loans and the related documents pursuant to the Trust
Agreement and if any Mortgage Loan or related document is found to be defective
in any material respect and such defect is not cured within 90 days following
notification thereof to the Depositor by the Trustee, the Seller will be
obligated to either (i) substitute for such Mortgage Loan a Qualifying
Substitute Mortgage Loan (as defined below); provided, however, such
substitution is permitted only within two years of the Closing Date and may not
be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify the Trust as a REMIC or result in a prohibited
transaction tax under the Internal Revenue Code of 1986, as amended (the "Code")
or (ii) purchase such Mortgage Loan at a price (the "Purchase Price") equal to
the outstanding principal balance of such Mortgage Loan as of the date of
purchase, plus all accrued and unpaid interest thereon, computed at the Mortgage
Rate through the end of the calendar month in which the purchase is effected and
all outstanding Advances and Servicing Advances owed to the Primary Servicers or
the Master Servicer. The Purchase Price will be deposited in the Certificate
Account on or prior to the next succeeding Determination Date after such
obligation arises. The obligation of the Depositor to repurchase or substitute
for a defective Mortgage Loan is the sole remedy regarding any defects in the
Mortgage Loans and related documents available to the Trustee or the
Certificateholders.
In connection with the substitution of a Qualifying Substitute Mortgage
Loan, the Seller will be required to deposit the Substitution Amount in the
Certificate Account on or prior to the next succeeding Determination Date after
such obligation arises.
A "Qualifying Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Scheduled Principal Balance (or in the
case of a substitution of more than one Mortgage Loan for a defective Mortgage
Loan, an aggregate Scheduled Principal Balance), not in excess of, and not more
than 5% less than, the principal balance of the defective Mortgage Loan; (ii) in
the case of an Adjustable Rate Mortgage Loan, have a Maximum Rate and Minimum
Rate not less than the respective rate for the defective Mortgage Loan, have a
Gross Margin equal to that of the defective Mortgage Loan, have the same index
and adjustment frequency as the defective Mortgage Loan and have an initial
Adjustment Date not later than that of the defective Mortgage Loan; (iii) have
the same due date as the defective Mortgage Loan; (iv) have a remaining term to
maturity not more than one year earlier and not later than the remaining term to
maturity of the defective Mortgage Loan; (v) comply with each representation and
warranty as to the Mortgage Loans set forth in the Sale and Assignment Agreement
(as defined below) (deemed to be made as of the date of substitution); (vi) have
been underwritten by the same Originator or in accordance with the same
underwriting criteria and guidelines as the Mortgage Loan being replaced; (vii)
be secured by the same property type of mortgaged property; (viii) be of the
same or better credit quality as the Mortgage Loan being replaced; (ix) in the
case of Mortgage Loans replaced in Pool 1, have an original principal balance
not higher than that which Freddie Mac is permitted by law to purchase; (x) in
the case of a Mortgage Loan substituted in Pool 1, be approved by Freddie Mac;
(xi) be current; (xii) have a current Mortgage Rate no less than that of the
defective Mortgage Loan; (xiii) have the same or higher lien position; and (xiv)
satisfy certain other conditions specified in the Trust Agreement.
The Mortgage Loans were originally purchased by the Seller (or Lehman
Brothers Bank, FSB ("Bank"), an affiliate of the Seller) from the Originators or
their correspondents (collectively, the "Transferors") pursuant to various
mortgage loan sale agreements (each a "Sale Agreement"). Prior to the Closing
Date, Bank will assign all its rights under its various Sale Agreements, without
recourse, to the Seller. Pursuant to the terms of each Sale Agreement, each
Originator has made, as of the date of (or provided in) the applicable Sale
Agreement, certain representations and warranties concerning the Mortgage Loans.
The Seller's rights under the various Sale Agreements will be assigned to the
Depositor under the Mortgage Loan Sale and Assignment Agreement ("Sale and
Assignment Agreement"). The Depositor will in turn assign such rights to the
Trustee for the benefit of the Certificateholders pursuant to the Trust
Agreement. Pursuant to the terms of the Sale and Assignment Agreement whereby
the Mortgage Loans will be purchased by the Depositor from the Seller, the
Seller will make to the Depositor (and the Depositor will assign its rights
thereunder to the Trustee for the benefit of Certificateholders)
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<PAGE> 83
certain representations and warranties in addition to those made by the
Transferors intended to address certain material conditions that may arise with
respect to the Mortgage Loans. Within the period of time specified in the Sale
Agreements or the Sale and Assignment Agreement following the discovery of any
breach of a representation or warranty made by the Transferors or the Seller
that materially and adversely affects the interests of the Certificateholders
(which shall be deemed to have occurred in the case of a breach of any of the
representations and warranties set forth in clauses (i) through (iv) above) in a
Mortgage Loan, the Seller will be obligated to cure such breach or purchase the
affected Mortgage Loan from the Trust Fund for the Purchase Price or, in certain
circumstances, to substitute a Qualifying Substitute Mortgage Loan.
To the extent that any such Mortgage Loan is not repurchased by 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.
VOTING RIGHTS
At all times 98% of all voting rights will be allocated among the holders
of the Senior Certificates, the Offered Subordinate Certificates and the Class R
Certificates as provided below. The portion of such voting rights allocated to
such Certificates (other than the Class R Certificates) shall be based on the
fraction, expressed as a percentage, the numerator of which is the aggregate
Class Principal Amount then outstanding and the denominator of which is the
Aggregate Loan Balance then outstanding. The remainder of such percentage of
voting rights shall be allocated to the Class R Certificates. At all times
during the term of the Trust Fund, the holders of the Class P Certificates and
the Class X Certificates each shall be allocated 1% of the voting rights. The
voting rights allocated to any Certificates shall be allocated among all holders
of each such class in proportion to the outstanding Certificate Principal Amount
or Percentage Interest of such Certificates. Notwithstanding the foregoing, with
respect to any date of determination, if no default by the Guarantor under the
Guarantee exists and is continuing and the Class A1 Certificates are outstanding
or any amounts are owed to the Guarantor under the Trust Agreement, all of the
voting rights allocated to the holders of the Class A1 Certificates shall be
vested in the Guarantor.
AMENDMENT
The Trust Agreement may be amended by the Master Servicer, the Seller, the
Loss Mitigation Advisor, the Depositor, the Trustee and the Guarantor (i) to
cure any ambiguity; (ii) to correct or supplement any provision therein which
may be defective or inconsistent with any other provision therein; or (iii) to
make any other revisions with respect to matters or questions arising under the
Trust Agreement which are not inconsistent with the provisions thereof or any
provision of any Servicing Agreement, provided that such action will not
adversely affect in any material respect the interests of any holders of the
Certificates. In addition, the Trust Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary to
maintain the qualification of the Trust as a REMIC, provided that the Trustee
receives an opinion of counsel to the effect that such action is necessary or
helpful to maintain such qualification. The Trustee will not be entitled to
consent to an amendment to the Trust Agreement without having first received an
opinion of counsel to the effect that such amendment will not cause the Trust to
fail to qualify as a REMIC. In addition, the Trust Agreement may be amended by
the Master Servicer, the Seller, the Depositor, the Loss Mitigation Advisor, the
Guarantor and the Trustee and the holders of a majority in interest of any class
of Certificates affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Agreement or of modifying in any manner the rights of the holders of any class
of Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, distributions required to be made
on any class of Certificates without the consent of the holders of all such
Certificates; (ii) adversely affect in any material respect the interests of the
holders of any class of Certificates in a manner other than as described in
clause (i) above, without the consent of the holders of such class evidencing
percentage interests aggregating at least 66 2/3%; or (iii) reduce the aforesaid
S-83
<PAGE> 84
percentage of aggregate outstanding principal amount of Certificates, the
holders of which are required to consent to any such amendment, without the
consent of the holders of all such Certificates.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
GENERAL
The yields to maturity (or to early termination) 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
purchase, condemnation, insurance or foreclosure). Such yields will also be
affected by 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 application of Monthly Excess Cashflow, the purchase price for the
Offered Certificates and other factors.
Yields on the Class A1 and Class A2 Certificates will be affected by the
rate of principal payments on the Mortgage Loans in the related Mortgage Pool,
primarily, and only to a lesser extent (if at all) by the rate of principal
prepayments on the Mortgage Loans in the other Mortgage Pool.
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 the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
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, borrowers' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions. The Mortgage
Loans generally have due-on-sale clauses which may provide that if the mortgagor
or obligor sells, transfers or conveys the mortgaged property, such loan may be
accelerated by the mortgagee or the security party.
Approximately 78.32% of the Mortgage Loans included in Pool 1 and
approximately 73.50% of the Mortgage Loans included in Pool 2 are subject to
Prepayment Premiums during intervals ranging from one to five years following
origination. See "Description of the Mortgage Pools -- General." Such prepayment
premiums may have the effect of reducing the amount or the likelihood of
prepayment of such Mortgage Loans during such intervals.
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 borrowers, liquidations of defaulted Mortgage Loans
and repurchases of Mortgage Loans due to certain breaches of representations and
warranties or defective documentation. The timing of changes in the rate of
prepayments, liquidations and purchases 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. 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 the Sale
and Assignment Agreement, the Seller will represent
S-84
<PAGE> 85
and warrant that as of the Closing Date each Mortgaged Property was free of
material damage. In the event of an uncured breach of such representation and
warranty that materially and adversely affects the interests of
Certificateholders, the Seller will be required to repurchase the affected
Mortgage Loan or substitute another mortgage loan therefor. If any damage caused
by flooding, storms, wildfires, or landslides (or other cause) occurs after the
Closing Date, the Seller will not 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. As a
consequence, Realized Losses could result. 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 purchases 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 the
Mortgage Loans are expected to occur with greater frequency in their early
years.
The yields to investors in the Offered Certificates will be affected by the
exercise by the holder of the Class X Certificate or the Depositor of their
respective rights to purchase the Mortgage Loans, as described under
"Description of the Certificates -- Optional Purchase of Mortgage Loans;
Termination of the Trust" herein, or the failure of such parties to exercise
such rights.
If the purchaser of a Certificate offered at a discount from its initial
principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Mortgage Loans, the actual yield
may be lower than that so calculated. Conversely, if the purchaser of a
Certificate offered at a premium calculates its anticipated yield based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield may be lower than
that so calculated.
The Interest Rates applicable to the LIBOR Certificates will be affected by
the level of LIBOR from time to time, and by the Mortgage Rates of the Mortgage
Loans from time to time as described under "Risk Factors -- Effect of Mortgage
Loan Interest Rates on the Certificates."
OVERCOLLATERALIZATION
The yields of the Offered Certificates will be affected by the application
of Monthly Excess Cashflow as described herein and by the amount of
overcollateralization. The amount of Monthly Excess Cashflow will be affected by
the delinquency, default and prepayment experience of the Mortgage Loans. There
can be no assurance as to the rate at which overcollateralization will be
created, or whether such overcollateralization will be maintained at the levels
described herein. In addition, because of the cross-collateralization features
of the Pools as described under "Description of the
Certificates -- Distributions of Principal" payments of principal on the Class
A2 Certificates may be accelerated before principal payments are applied to the
Subordinate Certificates.
SUBORDINATION OF THE OFFERED SUBORDINATE CERTIFICATES
As described herein, the Senior Certificates are senior to the Offered
Subordinate Certificates, and such Senior Certificates will have a preferential
right to receive amounts in respect of interest to the extent of the Interest
Remittance Amount and amounts in respect of principal to the extent of the
Principal Distribution Amount from their related Mortgage Pool on any
Distribution Date. In addition, Applied Loss Amounts will be allocated among the
Class M1, Class M2 and Class B Certificates in inverse order of priority of
distribution. As a result, the yields of the Offered Subordinate Certificates
will be more sensitive, in varying degrees, to delinquencies and losses on the
Mortgage Loans than the yields of the
S-85
<PAGE> 86
Class A2 Certificates and classes of Offered Subordinate Certificates which have
a relatively higher priority of distribution.
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.
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 ("CPR") represents an assumed constant 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. CPR 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 tables beginning on page S-88 were prepared based on the following
assumptions among other things (collectively, the "Modeling Assumptions"): (1)
the initial Class Principal Amount of the Class A1 Certificates is
$1,698,228,000 and the initial Class Principal Amounts are as set forth on the
cover of this Prospectus Supplement for the Class A2, Class M1, Class M2 and
Class B Certificates and the Interest Rates of each class are as described
herein; (2) each Scheduled Payment of principal and interest is timely received
on the first day of each month commencing in June 2000; (3) principal
prepayments are received in full on the last day of each month commencing in May
2000; (4) there are no defaults or delinquencies on the Mortgage Loans; (5)
Distribution Dates occur on the 25th day of each month, commencing in June 2000;
(6) there are no purchases or substitutions of the Mortgage Loans; (7) the
Mortgage Rate of each Adjustable Rate Mortgage Loan is adjusted on the next
applicable Adjustment Date to equal the value of the applicable Index set forth
below, plus the related Gross Margin, subject to the respective Periodic Cap;
(8) the Mortgage Rates of the Adjustable Rate Mortgage Loans adjust either
semi-annually based on Six-Month LIBOR or annually based on the One-Year CMT
Index as described at "Description of the Mortgage Pool -- The Indices"; (9) the
value of the Six-Month LIBOR Index is 7.06% per annum and remains constant for
each LIBOR Determination Date and the value of one-month LIBOR is 6.61% per
annum and remains constant for each LIBOR Determination Date; (10) the value of
the One-Year CMT Index is 6.82% per annum; (11) the applicable Index for the
Class A1, Class A2, Class M1, Class M2 and Class B Certificates is one-month
LIBOR calculated as described at "Description of the
Certificates -- Distributions of Interest -- LIBOR"; (12) except as otherwise
indicated, there is no Optional Termination of the Trust Fund; (13) the
Certificates are issued on May 30, 2000; (14) no Prepayment Premiums are
collected on the Mortgage Loans; (15) the Trustee Fee is assumed to be zero;
(16) the Interest Rate on any class of LIBOR Certificates has been determined
without regard to the applicable Net Funds Cap or Average Rate; (17) the Net
Coupon Rate (as defined below) is further reduced to reflect the Master
Servicing Fee compensation of the Master Servicer and the
S-86
<PAGE> 87
Guarantee Fee paid to Freddie Mac; and (18) the Mortgage Loans were assumed to
have the following characteristics:
ASSUMED MORTGAGE LOAN CHARACTERISTICS OF POOL 1
<TABLE>
<CAPTION>
REMAINING REMAINING
GROSS NET TERM TO AMORTIZATION NEXT RATE
MORTGAGE LOAN PRINCIPAL COUPON COUPON MATURITY TERM ADJUSTMENT GROSS
TYPE BALANCE($) RATE (%) RATE* (%) (MONTHS) (MONTHS) DATE INDEX MARGIN (%)
------------- --------------- -------- --------- --------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed/Balloon........ $ 27,890,195.07 9.980 9.000 172 352 N/A N/A N/A
Fixed................ 17,912,042.19 9.882 9.002 171 171 N/A N/A N/A
Fixed................ 120,618,008.41 10.159 9.179 348 348 N/A N/A N/A
Adjustable........... 6,448,912.91 10.511 9.481 353 353 09/01/00 6-Month LIBOR 6.172
Adjustable........... 95,228,318.29 9.967 8.997 350 350 07/01/01 6-Month LIBOR 5.968
Adjustable........... 376,342,656.11 10.133 9.133 354 354 10/01/01 6-Month LIBOR 6.199
Adjustable........... 390,859,641.58 9.780 8.780 343 343 09/01/02 6-Month LIBOR 6.358
Adjustable........... 271,279,460.82 9.815 8.815 342 342 11/01/02 6-Month LIBOR 6.431
Adjustable........... 433,820,638.65 9.940 8.940 347 347 12/01/02 6-Month LIBOR 6.342
Adjustable........... 10,910,031.21 10.104 9.174 353 353 10/01/00 1 year CMT 6.448
Adjustable........... 3,605,402.13 9.771 8.771 355 355 01/01/01 1 year CMT 6.136
Adjustable........... 71,136,961.14 10.189 9.189 355 355 11/01/02 1 year CMT 6.565
<CAPTION>
RATE
INITIAL SUBSEQUENT RESET
MORTGAGE LOAN PERIODIC CAP PERIODIC FREQUENCY
TYPE (%) RATE (%) (MONTHS)
------------- ------------ ---------- ---------
<S> <C> <C> <C>
Fixed/Balloon........ N/A N/A N/A
Fixed................ N/A N/A N/A
Fixed................ N/A N/A N/A
Adjustable........... 1.178 1.000 6
Adjustable........... 2.846 1.008 6
Adjustable........... 2.667 1.018 6
Adjustable........... 2.772 1.008 6
Adjustable........... 2.861 1.002 6
Adjustable........... 2.611 1.001 6
Adjustable........... 2.000 2.000 12
Adjustable........... 2.053 2.000 12
Adjustable........... 3.000 2.000 12
</TABLE>
---------------
* The Net Coupon Rate equals the Gross Current Rate less (i) the applicable
Servicing Fees paid to the Primary Servicers and (ii) the PMI Insurance
Premiums paid to the PMI Insurer.
ASSUMED MORTGAGE LOAN CHARACTERISTICS OF POOL 2
<TABLE>
<CAPTION>
REMAINING REMAINING
GROSS NET TERM TO AMORTIZATION NEXT RATE
MORTGAGE LOAN PRINCIPAL COUPON COUPON MATURITY TERM ADJUSTMENT GROSS
TYPE BALANCE($) RATE (%) RATE* (%) (MONTHS) (MONTHS) DATE INDEX MARGIN (%)
------------- --------------- -------- --------- --------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed/Balloon........ $ 348,112.48 11.723 11.113 172 352 N/A N/A N/A
Fixed................ 10,522,917.79 9.942 8.972 334 334 N/A N/A N/A
Adjustable........... 1,642,729.84 9.982 9.142 351 351 07/01/00 6-Month LIBOR 6.648
Adjustable........... 57,090,296.26 9.819 8.869 353 353 09/01/01 6-Month LIBOR 6.103
Adjustable........... 121,613,646.05 9.353 8.353 353 353 09/01/02 6-Month LIBOR 6.279
Adjustable........... 36,371,174.55 9.513 8.583 357 357 01/01/03 6-Month LIBOR 5.970
Adjustable........... 1,760,804.37 8.602 7.812 353 353 10/01/04 6-Month LIBOR 5.166
Adjustable........... 2,141,699.09 10.682 9.842 353 353 09/01/00 1 year CMT 6.958
Adjustable........... 8,151,104.94 10.024 9.054 354 354 10/01/02 1 year CMT 6.568
<CAPTION>
RATE
INITIAL SUBSEQUENT RESET
MORTGAGE LOAN PERIODIC CAP PERIODIC FREQUENCY
TYPE (%) RATE (%) (MONTHS)
------------- ------------ ---------- ---------
<S> <C> <C> <C>
Fixed/Balloon........ N/A N/A N/A
Fixed................ N/A N/A N/A
Adjustable........... 1.384 1.097 6
Adjustable........... 2.423 1.067 6
Adjustable........... 2.636 1.012 6
Adjustable........... 2.120 1.005 6
Adjustable........... 3.000 1.000 6
Adjustable........... 2.000 2.000 12
Adjustable........... 3.000 2.000 12
</TABLE>
---------------
* The Net Coupon Rate equals the Gross Current Rate less (i) the applicable
Servicing Fees paid to the Primary Servicers and (ii) the PMI Insurance
Premiums paid to the PMI Insurer.
The actual characteristics 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 CPR 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 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 CPR.
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 Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of CPR.
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<PAGE> 88
The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the applicable Class 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 Principal Amount described
in (1) above.
S-88
<PAGE> 89
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE
CLASS A2, CLASS M1, CLASS M2 AND CLASS B CERTIFICATES OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A2 CERTIFICATES CLASS M1 CERTIFICATES
---------------------------------- ----------------------------------
DISTRIBUTION DATE 0% 15% 25% 30% 35% 50% 0% 15% 25% 30% 35% 50%
----------------- ---- --- --- --- --- --- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............. 100 100 100 100 100 100 100 100 100 100 100 100
May 2001....................... 99 83 72 67 61 45 100 100 100 100 100 100
May 2002....................... 98 69 52 44 37 18 100 100 100 100 100 100
May 2003....................... 97 57 36 28 21 5 100 100 100 100 100 100
May 2004....................... 97 47 28 21 16 5 100 100 62 47 35 24
May 2005....................... 96 39 21 15 10 3 100 86 46 33 23 0
May 2006....................... 96 33 16 10 7 1 100 73 34 23 15 0
May 2007....................... 95 28 12 7 4 * 100 61 26 16 6 0
May 2008....................... 94 24 9 5 3 0 100 52 19 9 0 0
May 2009....................... 93 20 6 3 2 0 100 43 14 2 0 0
May 2010....................... 92 17 5 2 1 0 100 36 8 0 0 0
May 2011....................... 91 14 4 1 * 0 100 31 2 0 0 0
May 2012....................... 90 12 3 1 * 0 100 26 0 0 0 0
May 2013....................... 88 10 2 * 0 0 100 21 0 0 0 0
May 2014....................... 86 8 1 * 0 0 100 18 0 0 0 0
May 2015....................... 84 7 1 0 0 0 100 15 0 0 0 0
May 2016....................... 82 6 * 0 0 0 100 12 0 0 0 0
May 2017....................... 79 5 * 0 0 0 100 7 0 0 0 0
May 2018....................... 76 4 0 0 0 0 100 3 0 0 0 0
May 2019....................... 73 3 0 0 0 0 100 0 0 0 0 0
May 2020....................... 69 2 0 0 0 0 100 0 0 0 0 0
May 2021....................... 64 2 0 0 0 0 100 0 0 0 0 0
May 2022....................... 59 1 0 0 0 0 100 0 0 0 0 0
May 2023....................... 53 1 0 0 0 0 100 0 0 0 0 0
May 2024....................... 47 1 0 0 0 0 95 0 0 0 0 0
May 2025....................... 41 * 0 0 0 0 81 0 0 0 0 0
May 2026....................... 34 0 0 0 0 0 64 0 0 0 0 0
May 2027....................... 25 0 0 0 0 0 46 0 0 0 0 0
May 2028....................... 16 0 0 0 0 0 24 0 0 0 0 0
May 2029....................... 6 0 0 0 0 0 0 0 0 0 0 0
May 2030....................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years:
Without Optional
Termination................. 21.7 5.4 3.2 2.6 2.1 1.3 26.6 9.4 5.5 4.7 4.2 3.9
With Optional Termination at
earliest possible date...... 21.6 5.0 2.9 2.4 1.9 1.2 26.6 8.8 5.2 4.4 4.0 3.4
<CAPTION>
CLASS M2 CERTIFICATES CLASS B CERTIFICATES
---------------------------------- ----------------------------------
DISTRIBUTION DATE 0% 15% 25% 30% 35% 50% 0% 15% 25% 30% 35% 50%
----------------- ---- --- --- --- --- --- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............. 100 100 100 100 100 100 100 100 100 100 100 100
May 2001....................... 100 100 100 100 100 100 100 100 100 100 100 100
May 2002....................... 100 100 100 100 100 100 100 100 100 100 100 100
May 2003....................... 100 100 100 100 100 100 100 100 100 100 100 100
May 2004....................... 100 100 62 47 32 0 100 100 36 11 0 0
May 2005....................... 100 86 46 29 15 0 100 77 10 0 0 0
May 2006....................... 100 73 32 15 3 0 100 54 0 0 0 0
May 2007....................... 100 61 19 5 0 0 100 35 0 0 0 0
May 2008....................... 100 52 9 0 0 0 100 19 0 0 0 0
May 2009....................... 100 43 2 0 0 0 100 6 0 0 0 0
May 2010....................... 100 35 0 0 0 0 100 0 0 0 0 0
May 2011....................... 100 26 0 0 0 0 100 0 0 0 0 0
May 2012....................... 100 19 0 0 0 0 100 0 0 0 0 0
May 2013....................... 100 13 0 0 0 0 100 0 0 0 0 0
May 2014....................... 100 8 0 0 0 0 100 0 0 0 0 0
May 2015....................... 100 3 0 0 0 0 100 0 0 0 0 0
May 2016....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2017....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2018....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2019....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2020....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2021....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2022....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2023....................... 100 0 0 0 0 0 100 0 0 0 0 0
May 2024....................... 95 0 0 0 0 0 92 0 0 0 0 0
May 2025....................... 81 0 0 0 0 0 68 0 0 0 0 0
May 2026....................... 64 0 0 0 0 0 41 0 0 0 0 0
May 2027....................... 46 0 0 0 0 0 9 0 0 0 0 0
May 2028....................... 17 0 0 0 0 0 0 0 0 0 0 0
May 2029....................... 0 0 0 0 0 0 0 0 0 0 0 0
May 2030....................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years:
Without Optional
Termination................. 26.5 8.7 5.1 4.3 3.8 3.3 25.6 6.4 3.8 3.3 3.1 3.1
With Optional Termination at
earliest possible date...... 26.5 8.6 5.1 4.3 3.8 3.3 25.6 6.4 3.8 3.3 3.1 3.1
</TABLE>
---------------
* Indicates a value between 0.0% and 0.5%.
S-89
<PAGE> 90
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Trust Agreement provides that the Trust Fund, exclusive of the assets
held in the Basis Risk Reserve Fund and any prepayment premiums received on the
Mortgage Loans, will comprise a "Lower Tier REMIC" and an "Upper Tier REMIC"
organized in a tiered REMIC structure. The Lower Tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the Upper Tier REMIC. Each of the Lower Tier REMIC and the Upper Tier REMIC will
designate a single class of interests as the residual interest in that REMIC.
The Class R Certificate will represent ownership of the residual interests in
each of the REMICs. Elections will be made to treat each of the Lower Tier REMIC
and the Upper Tier REMIC as a REMIC for federal income tax purposes.
Each class of Offered Certificates and the Class X Certificate will
represent beneficial ownership of a corresponding class of regular interests
issued by the Upper Tier REMIC. In addition, each of the Offered Certificates
will represent a beneficial interest in the right to receive payments from the
Basis Risk Reserve Fund.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel") will deliver its opinion to the effect that, assuming compliance with
the Trust Agreement, for federal income tax purposes, each of the Lower Tier
REMIC and the Upper Tier REMIC will qualify as a REMIC within the meaning of
Section 860D of the Internal Revenue Code of 1986, as amended (the "Code"). In
addition, Tax Counsel will deliver an opinion to the effect that the Basis Risk
Reserve Fund is an "outside reserve fund" that is beneficially owned by the
holder of the Class X Certificate. Moreover, Tax Counsel will deliver an opinion
to the effect that the rights of the holders of these Offered Certificates to
receive payments from the Basis Risk Reserve Fund represent, for federal income
tax purposes, interests in an interest rate cap contract.
TAXATION OF REGULAR INTERESTS
A holder of a Class of Offered Certificates will be treated for federal
income tax purposes as owning an interest in the corresponding Class of Regular
Interests in the Upper Tier REMIC and, an interest in a limited recourse
interest rate cap contract (the "Cap Contract"). A holder of an Offered
Certificate must allocate its purchase price for the Offered Certificate between
its components -- the REMIC Regular Interest component and the Cap Contract
component. For information reporting purposes, the Trustee will assume that,
with respect to any Offered Certificate, the Cap Contract component will have
only nominal value relative to the value of the Regular Interest component. The
IRS could, however, argue that the Cap Contract component has significant value,
and if that argument were to be sustained, the Regular Interest component could
be viewed as having been issued with an additional amount of original issue
discount ("OID") (which could cause the total amount of OID to exceed a
statutorily defined de minimis amount). See "Material Federal Income Tax
Considerations -- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Original Issue Discount" in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered Certificate,
the holder must allocate the amount realized between the components of the
Offered Certificate based on the relative fair market values of those components
at the time of sale. Assuming that an Offered Certificate is held as a "capital
asset" within the meaning of section 1221 of the Code, gain or loss on the
disposition of an interest in the Cap Contract component should be capital gain
or loss, and gain or loss on the disposition of the Regular Interest component
should, subject to the limitation described below, be capital gain or loss. Gain
attributable to the Regular Interest components of an Offered Certificate will
be treated as ordinary income, however, to the extent such gain does not exceed
the excess, if any, of (1) the amount that would have been includible in the
holder's gross income with respect to the Regular Interest component had income
thereon accrued at a rate equal to 110% of the applicable federal rate as
defined in section 1274(d) of the Code determined as of the date of purchase of
the Offered Certificate over (2) the amount actually included in such holder's
income.
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Interest on the Regular Interest component of an Offered Certificate must
be included in income by a holder under the accrual method of accounting,
regardless of the holder's regular method of accounting. In addition, the
Regular Interest components of the other Offered Certificates could be
considered to have been issued with OID. See "Material Federal Income Tax
Considerations -- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Original Issue Discount" in the Prospectus. The prepayment
assumption that will be used in determining the accrual of any OID, market
discount, or bond premium, if any, will be a rate equal to 30% CPR. No
representation is made that the Mortgage Loans will prepay at such a rate or at
any other rate. OID must be included in income as it accrues on a constant yield
method, regardless of whether the holder receives currently the cash
attributable to such OID.
STATUS OF THE OFFERED CERTIFICATES
The Regular Interest components of the Offered Certificates will be treated
as assets described in Section 7701(a)(19)(C) of the Code, and as "real estate
assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust Fund, exclusive of the Basis Risk
Reserve Fund, would be so treated. In addition, to the extent the Regular
Interest component of an Offered Certificate represents real estate assets under
section 856(c)(5)(B) of the Code, the interest derived from that component would
be interest on obligations secured by interests in real property for purposes of
section 856(c)(3) of the Code. The Cap Contract components of the Offered
Certificates will not, however, qualify as an asset described in Section
7701(a)(19)(C) of the Code or as a real estate asset under Section 856(c)(5)(B)
of the Code.
THE CAP CONTRACT COMPONENTS
As indicated above, a portion of the purchase price paid by a holder to
acquire an Offered Certificate will be attributable to the Cap Contract
component of such Certificate. The portion of the overall purchase price
attributable to the Cap Contract component must be amortized over the life of
such Certificate, taking into account the declining balance of the related
Regular Interest component. Treasury regulations concerning notional principal
contracts provide alternative methods for amortizing the purchase price of an
interest rate cap contract. Under one method -- the level yield constant
interest method -- the price paid for an interest rate cap is amortized over the
life of the cap as though it were the principal amount of a loan bearing
interest at a reasonable rate. Holders are urged to consult their tax advisors
concerning the methods that can be employed to amortize the portion of the
purchase price paid for the Cap Contract component of an Offered Certificate.
Any payments made to a holder from the Basis Risk Reserve Fund will be
treated as periodic payments on an interest rate cap contract. To the extent the
sum of such periodic payments for any year exceeds that year's amortized cost of
the Cap Contract component, such excess is ordinary income. If for any year the
amount of that year's amortized cost exceeds the sum of the periodic payments,
such excess is allowable as an ordinary deduction.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Material Federal Income Tax
Considerations -- REMICs -- Taxation of Owners of REMIC Regular Interests" in
the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
Because of the inclusion of Second Lien Mortgage Loans in the Trust Fund,
the Certificates will NOT constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
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
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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.
See "Legal Investment Considerations" in the Prospectus.
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 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 the Subordinate
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.
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 and the repayment of any related financing. The Mortgage Loans will be
acquired by the Depositor from the Seller in a privately negotiated transaction.
Immediately prior to the sale of the Mortgage Loans to the Trustee, the Mortgage
Loans were subject to financing provided by an affiliate of the Underwriter. The
Depositor will apply a portion of the proceeds from the sale of the Certificates
to repay the financing.
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.
Lehman Brothers has entered into an agreement with the Depositor to
purchase the Class P, Class X Certificate and the Residual Certificate
simultaneously with the purchase of the Offered Certificates, subject to certain
conditions.
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Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $210,000.
The Underwriter is an affiliate of the Depositor.
LEGAL MATTERS
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 Class A2 Certificates that they be
rated "AAA" by Standard & Poor's Rating Services, a division of the McGraw-Hill
Companies, Inc. ("S&P"), "AAA" by Fitch IBCA, Inc. ("Fitch") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's", and together with S&P and Fitch, the
"Rating Agencies" or a "Rating Agency"). It is a condition to the issuance of
the Class M1 Certificates that they be rated "AA" by S&P, "AA" by Fitch and
"Aa2" by Moody's. It is a condition to the issuance of the Class M2 Certificates
that they be rated "A" by S&P, "A" by Fitch and "A2" by Moody's. It is a
condition to the issuance of the Class B Certificates that they be rated "BBB"
by S&P, "BBB" by Fitch and "Baa2" by Moody's.
The rating of "AAA" is the highest rating that S&P and Fitch ("Aaa", in the
case of Moody's) assigns to securities.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. A securities rating addresses the likelihood of the receipt by
holders of Offered Certificates 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 holders
of Offered Certificates might suffer a lower than anticipated yield due to
prepayments. In addition, the ratings do not address the likelihood that any
Basis Risk Shortfall or Unpaid Basis Risk Shortfall will be repaid to
Certificateholders from Monthly Excess Cashflow.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
A1 Spread................................................... S- 25
A2 Spread................................................... S- 25
Accrual Period.............................................. S- 24
Act......................................................... S- 92
Adjustable Rate Mortgage Loan............................... S- 40
Adjustment Date............................................. S- 42
Advance..................................................... S- 79
Advisor's Fee Rate.......................................... S- 80
Aggregate Expense Rate...................................... S- 26
Aggregate Loan Balance...................................... S- 26
Aggregate Overcollateralization Release Amount.............. S- 34
Applied Loss Amount......................................... S- 37
Average Rate................................................ S- 25
BBA......................................................... S- 29
BBAM........................................................ S- 29
B Principal Distribution Amount............................. S- 33
B Spread.................................................... S- 25
B Target Amount............................................. S- 34
Balloon Loans............................................... S- 41
Balloon Payments............................................ S- 41
Bank........................................................ S- 82
Basis Risk Payment.......................................... S- 27
Basis Risk Reserve Fund..................................... S- 26
Basis Risk Shortfall........................................ S- 26
BCD Mortgage Loans.......................................... S- 72
Beneficial Owner............................................ S- 20
Book-Entry Certificates..................................... S- 20
Business Day................................................ S- 20
Cap Contract................................................ S- 90
Capital Asset............................................... S- 90
Carryforward Interest....................................... S- 24
Certificate Account......................................... S- 19
Certificate Owners.......................................... S- 20
Certificate Principal Amount................................ S- 26
Certificateholder........................................... S- 20
Certificates................................................ S- 19
Class Principal Amount...................................... S- 19
Clearstream Luxembourg...................................... S- 20
Clearstream Luxembourg Participants......................... S- 22
Closing Date................................................ S- 8
Code........................................................ S- 82
Collection Account.......................................... S- 28
Collection Period........................................... S- 30
Combined Loan-to-Value Ratio................................ S- 41
Compensating Interest....................................... S- 29
Cooperative................................................. S- 22
Corporate Trust Office...................................... S- 40
CPR......................................................... S- 86
Current Interest............................................ S- 24
Cut-off Date................................................ S- 8
Deferred Amount............................................. S- 36
Definitive Certificate...................................... S- 20
Delinquency Rate............................................ S- 32
Depositor................................................... S- 20
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Designated Telerate Page.................................... S- 29
Distribution Date........................................... S- 20
DTC......................................................... S- 20
Effective Date.............................................. S- 37
ERISA....................................................... S- 92
Euroclear................................................... S- 20
Euroclear Operator.......................................... S- 22
Euroclear Participants...................................... S- 22
European Depositaries....................................... S- 21
Financial Intermediary...................................... S- 21
First Lien Mortgage Loans................................... S- 41
Fitch....................................................... S- 93
Fixed Rate Mortgage Loan.................................... S- 40
Full Documentation.......................................... S- 70
Global Securities........................................... A- 1
Gross Margin................................................ S- 42
Guarantor Advances.......................................... S- 28
HUD......................................................... S- 72
Initial Cap................................................. S- 42
Initial Purchase Date....................................... S- 38
Insurance Fee Rate.......................................... S- 38
Insurance Proceeds.......................................... S- 30
Interest Rate............................................... S- 24
Interest Remittance Amount.................................. S- 28
Lehman Brothers............................................. S- 71
LIBOR....................................................... S- 29
LIBOR01..................................................... S- 29
LIBOR Business Day.......................................... S- 29
LIBOR Certificates.......................................... S- 19
LIBOR Determination Date.................................... S- 29
Limited Documentation....................................... S- 70
Liquidated Mortgage Loan.................................... S- 37
Loan-to-Value Ratio......................................... S- 41
Loss Mitigations Advisor.................................... S- 80
Lower Tier REMIC............................................ S- 90
M1 Principal Distribution Amount............................ S- 33
M1 Spread................................................... S- 25
M1 Target Amount............................................ S- 34
M2 Principal Distribution Amount............................ S- 33
M2 Spread................................................... S- 25
M2 Target Amount............................................ S- 34
Master Servicer............................................. S- 71
Master Servicing Fee........................................ S- 78
Master Servicing Fee Rate................................... S- 78
Maximum Interest Rate....................................... S- 27
Maximum Rate................................................ S- 42
Minimum Rate................................................ S- 42
Modeling Assumptions........................................ S- 86
Monthly Excess Cashflow..................................... S- 35
Moody's..................................................... S- 93
Mortgage Loan............................................... S- 19
Mortgage Pools.............................................. S- 19
Mortgage Rate............................................... S- 42
Mortgage Related Securities................................. S- 11
Net Liquidation Proceeds.................................... S- 30
Net Mortgage Rate........................................... S- 26
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Net Prepayment Interest Shortfalls.......................... S- 29
No Documentation............................................ S- 70
Norwest..................................................... S- 71
Ocwen....................................................... S- 71
Offered Certificates........................................ S- 19
Offered Subordinate Certificates............................ S- 19
OID......................................................... S- 90
One-Year CMT Index.......................................... S- 43
Option One.................................................. S- 71
Optional Termination........................................ S- 38
Originators................................................. S- 40
Overcollateralization....................................... S- 9
Overcollateralization Amount................................ S- 33
Overcollateralization Deficiency............................ S- 33
Overcollateralization Release Amount........................ S- 34
Participant................................................. S- 21
Payahead.................................................... S- 28
Periodic Cap................................................ S- 42
Plans....................................................... S- 92
PMI Insurance Premiums...................................... S- 38
PMI Insurer................................................. S- 37
PMI Policies................................................ S- 37
Pool 1...................................................... S- 19
Pool 1 Monthly Excess Interest.............................. S- 28
Pool 1 Net Funds Cap........................................ S- 25
Pool 1 Optimal Interest Remittance Amount................... S- 25
Pool 2...................................................... S- 19
Pool 2 Monthly Excess Interest.............................. S- 27
Pool 2 Net Funds Cap........................................ S- 25
Pool 2 Optimal Interest Remittance Amount................... S- 25
Pool Balance................................................ S- 26
Pool Percentage............................................. S- 26
Pool Subordinate Amount..................................... S- 26
Prepayment Interest Shortfall............................... S- 29
Prepayment Period........................................... S- 30
Prepayment Premiums......................................... S- 42
Principal Distribution Amount............................... S- 30
Principal Remittance Amount................................. S- 30
Primary Servicer(s)......................................... S- 71
Purchase Price.............................................. S- 82
Qualifying Substitute Mortgage Loan......................... S- 82
Rating Agencies............................................. S- 93
Rating Agency............................................... S- 93
Realized Loss............................................... S- 37
Record Date................................................. S- 20
Relevant Depositary......................................... S- 21
Relief Act.................................................. S- 79
REMICs...................................................... S- 11
REO Property................................................ S- 39
Residual Certificate........................................ S- 19
Rolling Three Month Delinquency Rate........................ S- 32
Rules....................................................... S- 21
S&P......................................................... S- 93
Sale Agreement.............................................. S- 82
Sale and Assignment Agreement............................... S- 82
Scheduled Payment........................................... S- 30
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Scheduled Principal Balance................................. S- 30
Second Lien Mortgage Loans.................................. S- 41
Seller...................................................... S- 40
Senior Certificates......................................... S- 19
Senior Enhancement Percentage............................... S- 34
Senior Principal Distribution Amount........................ S- 33
Senior Proportionate Percentage............................. S- 34
Senior Target Amount........................................ S- 34
Servicing Advance........................................... S- 79
Servicing Agreement......................................... S- 71
Servicing Fee............................................... S- 78
Servicing Fee Rate.......................................... S- 78
Six-Month LIBOR Index....................................... S- 43
Stated Income Documentation................................. S- 70
Stepdown Date............................................... S- 33
Subordinate Certificates.................................... S- 19
Substitution Amount......................................... S- 28
Target Amount............................................... S- 32
Targeted Overcollateralization Amount....................... S- 34
Tax Counsel................................................. S- 90
Termination Price........................................... S- 38
Terms and Conditions........................................ S- 23
Transferors................................................. S- 82
Trigger Event............................................... S- 32
Trust....................................................... S- 19
Trust Agreement............................................. S- 81
Trust Fund.................................................. S- 19
Trustee..................................................... S- 40
Trustee Fee................................................. S- 40
U.S. Person................................................. A- 4
Underwriter................................................. S- 71
Underwriting Agreement...................................... S- 92
Underwriting Guidelines..................................... S- 69
Unpaid Basis Risk Shortfall................................. S- 27
Upper Tier REMIC............................................ S- 90
WFHM........................................................ S- 71
</TABLE>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Amortizing
Residential Collateral Mortgage Pass-Through Certificates, Series 2000-BC2 (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC,
Clearstream Luxembourg or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or Euroclear
and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR
PARTICIPANTS. Secondary market trading between Clearstream Luxembourg
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds.
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<PAGE> 99
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of either the
actual number of days in such accrual period and a year assumed to consist of
360 days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream Luxembourg or
Euroclear. Under this approach, they may take on credit exposure to Clearstream
Luxembourg or Euroclear until the Global Securities are credited to their
accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of either the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the
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<PAGE> 100
first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to the settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Clearstream
Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the United States) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
Beneficial Owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8) OR FORM W-8BEN). Beneficial
Owners of Certificates that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If the information shown on Form W-8 changes, a
new Form W-8 or Form W-8BEN must be filed within 30 days of such change. After
December 31, 2000, only Form W-8BEN will be acceptable.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM 4224
OR FORM W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade or Business in the
United States) or Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001 OR FORM W-8BEN). Non-U.S. Persons that are Beneficial Owners
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by
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filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If Form 1001 is provided and the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Beneficial Owner or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Beneficial Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date the form is signed.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (3) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (4) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, certain trusts in existence on
August 20, 1996 and treated as United States persons prior to such date that
elect to continue to be so treated also shall be considered U.S. Persons. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
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PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION
DEPOSITOR
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
-------------------------
EACH TRUST FUND:
- may periodically issue asset-backed pass-through certificates or asset
backed notes, in each case in one or more series with one or more
classes; and
- will be established to hold assets transferred to it by Structured Asset
Securities Corporation, including:
- mortgage loans or participation interests in mortgage loans,
including manufactured home loans;
- mortgage backed certificates insured or guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae; and/or
- private mortgage backed certificates, as described in this
prospectus; and
- payments due on those mortgage loans and mortgage backed
certificates.
The assets in your trust fund will be specified in the prospectus
supplement for your trust fund, while the types of assets that may be included
in a trust fund, whether or not included in your trust fund, are described in
greater detail in this prospectus.
THE SECURITIES:
- will be offered for sale pursuant to a prospectus supplement;
- will evidence beneficial ownership of, or be secured by, the assets in
the related trust fund and will be paid only from the trust fund assets
described in this prospectus; and
- may have one or more forms of credit enhancement.
The securityholders will receive distributions of principal and interest
that are dependent upon the rate of payments, including prepayments, on the
mortgage loans, mortgage backed certificates and other assets in the trust fund.
The prospectus supplement will state whether the securities are expected to
be classified as indebtedness and whether the trust will make a REMIC or FASIT
election for federal income tax purposes.
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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
LEHMAN BROTHERS
The date of this prospectus is May 23, 2000
<PAGE> 103
DESCRIPTION OF THE SECURITIES
GENERAL
The asset-backed certificates (the "Certificates") of each series
(including any class of certificates not offered hereby) will represent the
entire beneficial ownership interest in the trust fund created pursuant to the
related Agreement (as defined herein). A series of Securities may also include
asset-backed notes (the "Notes," and together with the Certificates, the
"Securities") that will represent indebtedness of the related trust fund and
will be issued pursuant to an indenture. See "The Agreements."
Each series of Securities will consist of one or more classes of
Securities, one or more of that may:
- accrue interest based on a variable or adjustable rate ("Floating Rate
Securities");
- provide for the accrual of interest, which is periodically added to the
principal balance of the Securities, but on which no interest or
principal is payable except during any periods specified in the
prospectus supplement ("Compound Interest Securities");
- be 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 the Loans to which the Securities are entitled ("Interest
Weighted Securities");
- be entitled to a greater percentage of principal on the Loans underlying
or comprising the Primary Assets for the series than the percentage of
interest on the Loans to which the Securities are entitled ("Principal
Weighted Securities");
- not be entitled to principal until the earlier of the date specified in
the prospectus supplement or the date on which the principal of all
Securities of the series having an earlier Final Scheduled Distribution
Date have been paid in full ("Planned Amortization Certificates" or
"PACs");
- be subordinate to one or more other classes of Securities in respect of
receiving distributions of principal and interest, to the extent and
under the circumstances specified in the prospectus supplement
("Subordinate Securities"); and/or
- other types of Securities, as described in the prospectus supplement.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the assets in the related trust fund (each portion of
Assets, an "Asset Group").
Each class of Securities offered by this prospectus and the prospectus
supplement (the "Offered Securities") will be issued in the minimum original
principal amount or notional amount for Securities of each class specified in
the prospectus supplement. The transfer of any Offered Securities may be
registered, and those Securities may be exchanged, without the payment of any
service charge. The classes of Securities of a series may be issued in fully
registered, certificated form ("Definitive Securities") or issued in book-entry
form only ("Book-Entry Securities") in specified minimum denominations and
integral multiples thereof, as provided in the prospectus supplement. See "--
Book-Entry Registration."
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DISTRIBUTIONS ON THE SECURITIES
General
Distributions on the Securities of each series will be made by or on behalf
of the trustee from the Available Distribution Amount for that series, on each
Distribution Date, as specified in the prospectus supplement. Distributions
(other than the final distribution) will be made to the persons in whose names
the Securities are registered on the close of business on the record date
specified in the prospectus supplement. Payments will be made by check mailed to
the registered owners at their addresses appearing on the Security Register, or
by wire transfer (at the expense of the securityholder requesting payment by
wire transfer) in certain circumstances described in the prospectus supplement;
provided, however, that the final distribution in retirement of a Security will
be made only upon presentation and surrender of the Security at the corporate
trust office of the trustee or as otherwise specified in the prospectus
supplement. Advance notice of the final distribution on a Security will be
mailed to the securityholders.
Distributions of interest on Securities entitled to receive interest will
be made periodically at the intervals and Interest Rates specified or determined
in accordance with the prospectus supplement. Interest on the Securities will be
calculated on the basis of a 360-day year consisting of twelve 30-day months,
unless the prospectus supplement specifies a different basis. Distributions of
principal on each class of Securities in a series will be made on a pro rata or
random lot basis among all of the Securities of the class, or as otherwise
specified in the prospectus supplement.
The funds in the Distribution Account (together with any amounts
transferred from any Reserve Fund or applicable credit support) may be
insufficient to make the full distribution to securityholders on a Distribution
Date. In this case, the funds available for distribution to the securityholders
of each class will be distributed in accordance with their respective interests.
However, as described in the prospectus supplement, holders of Securities will
receive their current distributions and past amounts due but unpaid to them
before holders of Subordinate Securities are paid (in each case, these amounts
are calculated as described in the prospectus supplement). The difference
between the amount that the securityholders 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 that the
securityholders are entitled to receive on the next Distribution Date.
For a description of the reports to be furnished to securityholders
concerning a distribution, see "The Agreements -- Reports to Securityholders."
Single Class Securities Generally
With respect to a series of Securities that is not a Multi-Class Series,
distributions on the Securities on each Distribution Date will generally be
allocated to each Security entitled to payment on the basis of the undivided
percentage interest (the "Percentage Interest") evidenced by the Security, or on
the basis of the Security's outstanding principal amount or notional amount
(subject to any subordination of the rights of any classes of Subordinate
Securities to receive current distributions), as specified in the prospectus
supplement. See "Subordinate Securities" below.
If the Primary Assets for a series of Securities have adjustable or
variable interest rates, then the rate at which interest accrues on the
principal balance of the Securities or on a class in the series (the "Interest
Rate") may also vary, due to changes in prevailing interest rates and due to
prepayments on Loans comprising or underlying the Primary Assets. If the Primary
Assets for a series have fixed interest rates, then the Interest Rate on
Securities of a series may be fixed, or may vary, to the extent prepayments
cause changes in the weighted average interest rate of the Primary Assets. If
the Primary Assets have lifetime or periodic adjustment caps on their respective
rates, then the Interest Rate on the Securities of the related series may also
reflect those caps.
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If specified in the prospectus supplement, a series of Securities may
include one or more classes that are Interest Weighted Securities, Principal
Weighted Securities, 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 the
distributions, the interest component of the distributions, or both, and will be
further allocated on a pro rata basis among the Securities within each class.
The method or formula for determining the Percentage Interest of a Security will
be set forth in the prospectus supplement.
Multi-Class Series
A series of Securities may include Floating Rate Securities, Compound
Interest Securities and Planned Amortization Certificates, and/or classes of
Subordinate Securities and Senior Securities (a "Multi-Class Series"). For a
series of Securities that is not a Multi-Class Series, each class is designated
to receive a particular portion of future principal or interest cash flows on
the Primary Assets. This designation does not change over the term of the
Securities unless the series has a subordination feature in one or more classes
of Subordinate Securities that protects one or more classes of Senior Securities
in the event of failure of timely payment of the Primary Assets. Unless
otherwise specified in the prospectus supplement, each Security of a Multi-Class
Series will have a principal amount or a notional amount and a specified
Interest Rate (that may be zero). Interest distributions on a Multi-Class Series
will be made on each Security entitled to an interest distribution on each
Distribution Date at the Interest Rate specified in or determined in accordance
with the prospectus supplement, to the extent funds are available in the
Distribution Account, subject to any subordination of the rights of any classes
of Subordinate Securities to receive current distributions. See "Subordinate
Securities" below and "Credit Support -- Subordinate Securities; Subordination
Reserve Fund."
Distributions of interest on Compound Interest Securities will begin only
after the related accretion termination date specified in the prospectus
supplement. On each Distribution Date on or before the accretion termination
date, interest on the Compound Interest Securities accrues, and the amount of
interest accrued is added on each Distribution Date to the principal balance of
the Security. On each Distribution Date after the accretion termination date,
interest distributions will be made on classes of Compound Interest Securities
on the basis of the current Compound Value of the class. The "Compound Value" of
a class of Compound Interest Securities equals the initial aggregate principal
balance of the class, plus accrued and undistributed interest added to the class
through the immediately preceding Distribution Date, less any principal
distributions previously made to reduce the aggregate outstanding principal
balance of the class.
A Multi-Class Series may also include one or more classes of Floating Rate
Securities. The Interest Rate of a Floating Rate Security will be a variable or
adjustable rate, which may be subject to a maximum floating rate, a minimum
floating rate, or both, as specified in the prospectus supplement. For each
class of Floating Rate Securities, the prospectus supplement will set forth the
initial Floating Rate (or the method of determining it), the period during which
the Floating Rate applies, and the formula, index, or other method by which the
Floating Rate for each period will be determined.
Distributions of principal will be allocated among the classes of a
Multi-Class Series in the order of priority and amount specified in the
prospectus supplement. Generally, the "Principal Distribution Amount" for a
Multi-Class Series on any Distribution Date will be equal to the sum of (1) the
accrual distribution amount for any Compound Interest Securities, (2) the
Minimum Principal Distribution Amount and (3) the percentage, if any, of the
excess cash flow specified in the prospectus supplement. The "Minimum Principal
Distribution Amount" is the amount, if any, by which the outstanding principal
balance of the Securities of a series (before giving effect to any
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payment of principal on that Distribution Date) exceeds the aggregate value of
the Primary Assets as of that Distribution Date
Subordinate Securities
A series of Securities may include one or more classes of Subordinate
Securities that provide some or all of the credit support for the Senior
Securities in the series. The rights of holders of some classes of securities
(the "Subordinate Securities") to receive distributions will be subordinate in
right and priority to the rights of holders of senior securities of the series
(the "Senior Securities") but only to the extent described in the prospectus
supplement. If the Primary Assets are divided into separate Asset Groups,
evidenced by separate classes, credit support may be provided by a cross-
support feature. This feature requires that distributions be made to Senior
Securities prior to making distributions on Subordinate Securities backed by
assets in another Asset Group within the trust fund. Unless rated in one of the
four highest rating categories by at least one nationally recognized statistical
rating organization (each, a "Rating Agency"), Subordinate Securities will not
be offered by this prospectus or the prospectus supplement. See "Credit
Support -- Subordinate Securities; Subordination Reserve Fund."
OPTIONAL TERMINATION
If specified in the prospectus supplement for a series of Securities, the
depositor, the servicer or master servicer, or any other designated entity may,
at its option, purchase or direct the sale of a portion of the Primary Assets of
the trust fund, or cause an early termination of the trust fund by repurchasing
all of the Primary Assets from the trust fund or directing the sale of the
Primary Assets. This termination may occur on a date on or after the date on
which either (1) the Aggregate Asset Principal Balance of the Primary Assets is
less than a specified percentage of the initial Aggregate Asset Principal
Balance, or (2) the aggregate principal amount of the Securities (or of certain
classes in a series) is less than a specified percentage of their initial
aggregate principal amount, as described in the prospectus supplement.
- "Asset Principal Balance" means, for any Loan at the time of
determination, its outstanding principal balance as of the Cut-off Date,
reduced by all amounts distributed to securityholders (or used to fund
the Subordination Reserve Fund, if any) and reported as allocable to
principal payments on the Loan.
- "Aggregate Asset Principal Balance" means, at the time of determination,
the aggregate of the Asset Principal Balances of all the Loans in a trust
fund.
The optional termination described in this section will be in addition to
terminations that may result from other events. See "The Agreements -- Event of
Default; Rights Upon Event of Default" and "-- Termination."
OPTIONAL PURCHASE OF SECURITIES
The prospectus supplement for a series of Securities may provide that one
or more classes of the series may be purchased, in whole or in part, at the
option of the depositor, the servicer or master servicer, or another designated
entity, at specified times and purchase prices, and under particular
circumstances. Notice of any purchase must be given by the trustee prior to the
optional purchase date, as specified in the prospectus supplement.
OTHER PURCHASES
If specified in the prospectus supplement for a series, any class of
Securities in the series may be subject to redemption, in whole or in part, at
the request of the holders of that class or mandatory
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purchase by the depositor, the servicer or master servicer, or another
designated entity. The terms and conditions of any redemption or mandatory
purchase with respect to a class of Securities will be described in the
prospectus supplement.
The depositor may also have the option to obtain for any series of
Securities, one or more guarantees from a company or companies acceptable to the
Rating Agencies. As specified in the prospectus supplement, these guarantees may
provide for one or more of the following for any series of Securities:
- call protection for any class of Securities of a series;
- a guarantee of a certain prepayment rate of some or all of the Loans
underlying the series; or
- certain other guarantees described in the prospectus supplement.
BOOK-ENTRY REGISTRATION
General
If provided for in the prospectus supplement, one or more classes of the
Offered Securities of any series will be issued as Book-Entry Securities, and
each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Clearstream Banking, societe anonyme (formerly Cedelbank) (referred to
herein as "Clearstream") or the Euroclear System ("Euroclear") . Each class of
Book-Entry Securities will be issued in one or more certificates or notes, as
the case may be, that equal the initial principal amount of the related class of
Offered Securities and will initially be registered in the name of Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "-- Definitive Securities." Unless and until Definitive
Securities are issued for the Book-Entry Securities under the limited
circumstances described in the related prospectus supplement or this prospectus,
all references to actions by securityholders with respect to the Book-Entry
Securities will refer to actions taken by DTC, Clearstream or Euroclear upon
instructions from their Participants (as defined below), and all references
herein to distributions, notices, reports and statements to securityholders with
respect to the Book-Entry Securities will refer to distributions, notices,
reports and statements to DTC, Clearstream or Euroclear, as applicable, for
distribution to Beneficial Owners by DTC in accordance with the procedures of
DTC and if applicable, Clearstream and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in the
United States, or, if the Offered Securities are offered for sale globally,
through Clearstream or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include some other organizations. Indirect access to the DTC, Clearstream and
Euroclear systems also is available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
Participants, some of which (and/or their representatives) own DTC, and
facilitate the clearance and settlement of securities transactions between its
Participants through electronic book-entry changes in
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their accounts, thereby eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Securities,
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Securities will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Clearstream
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its Participants and facilitates
the clearance and settlement of securities transactions between its Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally-traded
securities and securities lending and borrowing. Clearstream interfaces with
domestic markets in several countries. As a professional depository, Clearstream
is subject to regulation by the Luxembourg Monetary Institute. Participants of
Clearstream are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant of
Clearstream, either directly or indirectly.
Euroclear
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of securities and any risk from lack of simultaneous transfers
of securities and cash. Transactions may be settled in any of 35 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative Corporation"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Participant of Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in
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Euroclear are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of its Participants, and has
no record of or relationship with persons holding through Participants of
Euroclear.
Clearstream and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold positions in customers' securities accounts in the depositaries names
on the books of DTC. Citibank will act as depositary for Clearstream and The
Chase Manhattan Bank will act as depositary for Euroclear (individually the
"Relevant Depositary" and collectively, the "European Depositaries").
Beneficial Ownership of Book-Entry Securities
Except as described below, no Beneficial Owner will be entitled to receive
a physical certificate representing a Certificate or a Note. Unless and until
Definitive Securities are issued, it is anticipated that the only
"securityholder" of the Offered Securities will be Cede & Co., as nominee of
DTC. Beneficial Owners will not be "Certificateholders" or "Noteholders" as
those terms are used in the related Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants, DTC,
Clearstream or Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have accounts
with respect to Offered Securities are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates or notes, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Beneficial Owners who are not Participants may
transfer ownership of Offered Securities only through Participants and Indirect
Participants by instructing the Participants and Indirect Participants to
transfer Offered Securities, by book-entry transfer, through DTC for the account
of the purchasers of the Offered Securities, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfer of ownership of Book-Entry Securities will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and Indirect Participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Beneficial Owners.
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Because of time zone differences, any credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Participants of Clearstream or Euroclear on that business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Participant of Clearstream or Euroclear to a Participant of DTC will be received
with value on the DTC settlement date but will be available in the relevant
Clearstream or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Securities, see "Material Federal Income Tax
Considerations -- REMICs -- Taxation of Certain Foreign Investors," "-- Grantor
Trust Funds -- Taxation of Certain Foreign Investors" and "-- Partnership Trust
Funds and Debt Securities -- Tax Consequences to Foreign Securityholders" herein
and, if the Book-Entry Securities are globally offered and the prospectus
supplement so provides, see "Global Clearance, Settlement and Tax Documentation
Procedures -- Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream or Euroclear will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants of
Clearstream or Euroclear, on the other, will be effected in DTC in accordance
with the DTC Rules on behalf of the relevant European international clearing
system by the Relevant Depositary; however, cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in that system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the Relevant Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Participants of
Clearstream or Euroclear may not deliver instructions directly to the European
Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC will
be responsible for disbursing the distribution to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, because the
distributions will be forwarded by the trustee to Cede & Co. Any distributions
on Securities held through Clearstream or Euroclear will be credited to the cash
accounts of Participants of Clearstream or Euroclear in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Federal
Income Tax Considerations -- REMICs -- Taxation of Certain Foreign
Investors," -- "Grantor Trust Funds -- Taxation of Certain Foreign Investors"
and "-- Partnership Trust Funds and Debt Securities -- Tax Consequences to
Foreign Securityholders" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Securities to persons or entities that do not participate in the depository
system, or
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otherwise take actions in respect of Book-Entry Securities, may be limited due
to the lack of physical securities for the Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of the securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by the holders of the Book-Entry Securities under the related Agreement, only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that actions are taken on
behalf of Financial Intermediaries whose holdings include the Book-Entry
Securities. If the Book-Entry Securities are globally offered, Clearstream or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a securityholder under the related Agreement, on behalf of a
Participant of Clearstream or Euroclear only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect those actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Offered Securities
that conflict with actions taken with respect to other Offered Securities.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities among
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and the procedures may be
discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee, any
securities registrar or paying agent or any of their affiliates will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
Definitive Securities
Securities initially issued in book-entry form will be issued as Definitive
Securities to Beneficial Owners or their nominees, rather than to DTC or its
nominee only (1) if DTC or the depositor advises the trustee in writing that DTC
is no longer willing or able to properly discharge its responsibilities as
depository for the Securities and the depositor is unable to locate a qualified
successor, (2) if the depositor, at its option, elects to end the book-entry
system through DTC or (3) in accordance with any other provisions described in
the prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the Book-Entry
Securities, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Securities to which they are entitled, and
thereafter the trustee will recognize the holders of those Definitive Securities
as securityholders under the related Agreement.
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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 the payments or distributions are paid to securityholders. This 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 prospectus
supplement will set forth an example of the timing of receipts and the
distribution of collections to securityholders, so that the impact of this delay
can be understood.
PRINCIPAL PREPAYMENTS
With respect to a series for which the Primary Assets consist of Loans or
participation interests in Loans, when a Loan prepays in full, the borrower will
generally be required to pay interest on the amount of the prepayment only to
the prepayment date. In addition, the prepayment may not be required to be paid
to securityholders until the month following receipt. The effect of these
provisions is to reduce the aggregate amount of interest that would otherwise be
available for distributions on the Securities. Therefore, the yield that would
be obtained if interest continued to accrue on the Loan until the principal
prepayment is paid to securityholders, is effectively reduced. To the extent
specified in the 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 prepaid Loans. Further, if the
Interest Rate on a class of Securities in a series is based upon a weighted
average of the interest rates on the Loans comprising or underlying the Primary
Assets, interest on these Securities may be paid or accrued in the future at a
rate lower than the initial interest rate, to the extent that Loans bearing
higher rates of interest are prepaid more quickly than Loans bearing 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 Securities 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, as specified in the prospectus supplement, will be less than the
amount that would have accrued on the actual principal amount of the Securities
outstanding. The effect of these provisions is to produce a lower yield on the
Securities than would be obtained if interest were to accrue on the Securities
on the actual unpaid principal amount of the Securities to each Distribution
Date. The prospectus supplement will specify the time at which the principal
amounts of the Securities are determined or are deemed reduced for purposes of
calculating interest distributions on Securities of a Multi-Class Series.
INTEREST OR PRINCIPAL WEIGHTED SECURITIES
If a class of Securities consists of Interest Weighted Securities or
Principal Weighted Securities, a lower rate of principal prepayments than
anticipated will negatively affect yield to investors in Principal Weighted
Securities, and a higher rate of principal prepayments than anticipated will
negatively affect yield to investors in Interest Weighted Securities. The
prospectus supplement will include a table showing the effect of various levels
of prepayment on yields on these types of Securities. The tables will illustrate
the sensitivity of yields to various prepayment rates and will not purport to
predict, or provide information enabling investors to predict, yields or
prepayment rates.
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FINAL SCHEDULED DISTRIBUTION DATE
The prospectus supplement will specify the Final Scheduled Distribution
Date or Maturity Date for each class of a Multi-Class Series. The Maturity Date
for each class of Notes is the date on which the principal of the class of Notes
will be fully paid. The Final Scheduled Distribution Date for each class of
Certificates is the date on which the entire aggregate principal balance of the
class will be reduced to zero. These calculations will be based on the
assumptions described in the prospectus supplement. Because 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
Securities, it is likely that the actual maturity of the class will occur
earlier, and may occur substantially earlier, than its Final Scheduled
Distribution Date. Furthermore, with respect to the Certificates, as a result of
delinquencies, defaults and liquidations of the assets in the trust fund, the
actual final distribution date of any Certificate may occur later 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 the
security will be repaid to the investor. The weighted average life of the
Securities of a series will be influenced by the rate at which principal on the
Loans comprising or underlying the Primary Assets for the Securities 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, those Loans are likely to prepay at rates higher
than if prevailing interest rates remain at or above the interest rates borne by
those Loans. 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 Interest Rate on
the Securities may be a number of percentage points less than interest rates on
the Loans. In addition, the weighted average life of the Securities 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 Securities, 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 the
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 the 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.
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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 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 that series under a given set
of prepayment assumptions. The prospectus supplement will also describe the
percentage of the initial principal balance of each class of a series that would
be outstanding on specified Distribution Dates for the series based on the
assumptions stated in the 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 the prospectus supplement. These tables and assumptions
are intended to illustrate the sensitivity of weighted average life of the
Securities to various prepayment rates and will not be intended to predict or to
provide information that will enable investors to predict the actual weighted
average life of the Securities or prepayment rates of the Loans comprising or
underlying the related Primary Assets.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Loan
Mortgage Loans secured by multifamily residential rental property or
cooperatively owned multifamily property consisting of five or more dwelling
units ("Multifamily Properties") may have provisions that prevent prepayment for
a number of years and may provide for payments of interest only during a certain
period followed by amortization of principal on the basis of a schedule
extending beyond the maturity of the related Mortgage Loan. 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 that 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 these Loans in either stable or changing interest rate
environments.
In the case of a Negatively Amortizing ARM, if interest rates rise without
a simultaneous increase in the related scheduled payment of principal and
interest (the "Scheduled Payment"), negative amortization may result or the
amount of interest accrued on the Stated Principal Balance thereof may exceed
the amount of interest paid by the mortgagor in any month (such excess,
"Deferred Interest"). However, borrowers may pay amounts in addition to their
Scheduled Payments in order to avoid negative amortization and to increase tax
deductible interest payments.
To the extent that any of Mortgage Loans negatively amortize over their
respective terms, future interest accruals are computed on the higher
outstanding principal balance of the 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 the Mortgage Loans will increase.
In a declining interest rate environment, 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 the ARM. Any such acceleration in
amortization of the principal balance of any Negatively Amortizing ARM will
shorten the weighted average life of the Mortgage Loan. The application of
partial prepayments to reduce the outstanding principal balance of a Negatively
Amortizing ARM will tend to reduce the weighted
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average life of the Mortgage Loan and will adversely affect the yield to holders
who purchased their Securities at a premium, if any, and holders of classes of
Interest Weighted Securities. The pooling of Negatively Amortizing ARMs having
Rate Adjustment Dates in different months, together with different initial
interest rates borne by the Loans ("Mortgage Rates"), Lifetime Mortgage Rate
Caps, Minimum Mortgage Rates and stated maturity dates, could result in some
Negatively Amortizing ARMs that 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 prospectus supplement, be obligated to repurchase any Loan
so converted. Any such conversion and repurchase would reduce the average
weighted life of the Securities of the related series.
A GEM Loan provides for scheduled annual increases in the borrower's
Scheduled Payment. Because the additional portion of the Scheduled Payment is
applied to reduce the unpaid principal balance of the GEM Loan, the stated
maturity of a GEM Loan will be significantly shorter than the 25 to 30 year term
used as the basis for calculating the installments of principal and interest
applicable until the first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of housing
loans. Even though some Manufactured Home Loans may be FHA Loans, no statistics
similar to those describing the FHA experience above are available with respect
to Manufactured Home Loans.
In the case of Mortgage Loans that do not require the borrowers to make
payments of principal or interest until the occurrence of certain maturity
events, the Mortgage Loans will generate enough cash to pay interest and
principal on the Securities of the related series only if specified maturity
events occur with sufficient frequency and relative regularity. There can be no
assurance regarding the rate and timing of the occurrence of maturity events
with respect to these Mortgage Loans.
Foreclosures and Payment Plans
The number of foreclosures and the principal amount of the Loans comprising
or underlying the Primary Assets that are foreclosed in relation to the number
of Loans that 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 Securities. 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 Securities who purchased their Securities at a premium, if any,
and the return on a class of Interest Weighted Securities 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 real
property securing a Mortgage Loan (the "Mortgaged Property") 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
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to the related Loan under the circumstances and in the manner it enforces
due-on-sale 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 specified in the prospectus supplement, any designated entity may cause
an early termination of the trust fund by repurchasing the remaining Primary
Assets in the Trust Fund, or may purchase Securities of certain classes. See
"Description of the Securities -- Optional Termination."
THE TRUST FUNDS
GENERAL
The Notes will be secured by a pledge of the assets of the trust fund, or
an individual Asset Group, and the Certificates will represent beneficial
ownership interests in the assets of the trust fund, or an individual Asset
Group, each as specified in the prospectus supplement. The Securities will be
non-recourse obligations of the trust fund. Holders of the Notes may only
proceed against the assets of the trust fund as collateral in the case of a
default, and then only to the extent provided in the indenture, and may not
proceed against any assets of the depositor or its affiliates, or assets of the
trust fund not pledged to secure the Notes.
The trust fund for each series of Securities will be held by the trustee
for the benefit of the related securityholders, and will consist of:
- amounts due and payable with respect to the Primary Assets as of the
cut-off date designated in the prospectus supplement (the "Cut-off
Date");
- amounts held from time to time in the Collection Account and the
Distribution Account established for a series of Securities;
- Mortgaged Properties that secured a Mortgage Loan and that are acquired
on behalf of the securityholders by foreclosure, deed in lieu of
foreclosure or repossession;
- any Reserve Fund established pursuant to the Agreement for a series of
Securities, if specified in the prospectus supplement;
- any Servicing Agreements relating to Mortgage Loans in the trust fund, to
the extent that these agreements are assigned to the trustee;
- any primary mortgage insurance policies, FHA insurance, or VA guarantee
relating to Mortgage Loans in the trust fund;
- any pool insurance policy, special hazard insurance policy, bankruptcy
bond or other credit support relating to the series;
- investments held in any fund or account or any guaranteed investment
contract and income from the reinvestment of these funds, if specified in
the prospectus supplement; and
- any other asset, instrument or agreement relating to the trust fund and
specified in the prospectus supplement (which may include an interest
rate swap agreement or an interest rate cap agreement or similar
agreement).
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The prospectus supplement may specify that a certain amount or percentage
of a Primary Asset will not be sold by the depositor or seller of the Primary
Asset, but will be retained by that party (the "Retained Interest"). Therefore,
amounts received with respect to a Retained Interest in 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 but will be payable to the seller
of the respective asset, or to the master servicer (if any), servicer, depositor
or another party, free and clear of the interest of securityholders under the
Agreements.
The "Primary Assets" in the trust fund for a series of Securities may
consist of any combination of the following, to the extent and as specified in
the prospectus supplement:
- Ginnie Mae certificates (which may be Ginnie Mae I certificates or Ginnie
Mae II certificates);
- Fannie Mae certificates;
- Freddie Mac certificates;
- mortgage pass-through certificates representing a fractional, undivided
interest in Loans or collateralized mortgage obligations secured by Loans
("Private Mortgage-Backed Securities");
- Mortgage Loans or participation interests in Mortgage Loans; and
- Manufactured Home Loans or participation interests in Manufactured Home
Loans.
Mortgage Loans and Manufactured Home Loans are referred to in this
prospectus as "Loans." Ginnie Mae certificates, Fannie Mae certificates and
Freddie Mac certificates are referred to in this prospectus as "Agency
Certificates."
Private Mortgage-Backed Securities will evidence a beneficial ownership
interest in underlying assets that will consist of Agency Certificates or Loans.
Participation interests in a Loan or 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 the
Participation Agreement will be evidenced by a participation certificate. The
trustee will be the holder of a participation certificate. Loans that 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 an affiliate of the depositor.
See "The Agreements -- Assignment of Primary Assets."
GINNIE MAE CERTIFICATES
General
The Ginnie Mae certificates will be "fully modified pass-through"
mortgage-backed certificates issued and serviced by Ginnie Mae-approved issuers
of Ginnie Mae certificates (the "Ginnie Mae Servicers") under the Ginnie Mae I
and/or the Ginnie Mae II program. The full and timely payment of principal of
and interest on the Ginnie Mae certificates is guaranteed by Ginnie Mae, which
obligation is backed by the full faith and credit of the United States of
America. The Ginnie Mae 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
Ginnie Mae Servicer to the registered holder of the Ginnie Mae certificate of
monthly payments of principal and interest equal to the aggregated amount of the
monthly constant principal and interest payments on each mortgage loan, less
servicing and guarantee fees aggregating the excess of the interest on the
mortgage loans over the Ginnie Mae certificate's pass-through rate. Each
repayment to a holder of a Ginnie Mae certificate will include pass-through
payments of any prepayments of principal of the mortgage loans underlying the
Ginnie Mae
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certificate and the remaining principal balance in the event of a foreclosure or
other disposition of a mortgage loan.
The Ginnie Mae certificates do not constitute a liability of, or evidence
any recourse against, the Ginnie Mae 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 Ginnie Mae.
Ginnie Mae approves the issuance of each Ginnie Mae certificate in
accordance with a guaranty agreement (the "Guaranty Agreement") between Ginnie
Mae and the Ginnie Mae Servicer of the Ginnie Mae certificate. Pursuant to the
Guaranty Agreement, the Ginnie Mae Servicer is required to advance its own funds
in order to make timely payments of all amounts due on the Ginnie Mae
certificate, whether or not the payments received by the Ginnie Mae Servicer on
the underlying mortgage loans equal the amounts due on the Ginnie Mae
certificate. If a Ginnie Mae Servicer is unable to make a payment as it becomes
due, it must promptly notify Ginnie Mae and request Ginnie Mae to make the
payment. Upon notification and request, Ginnie Mae will make payments directly
to the registered holder of the Ginnie Mae certificate. In the event no payment
is made by a Ginnie Mae Servicer and the Ginnie Mae Servicer fails to notify and
request Ginnie Mae to make a payment, the holder of the Ginnie Mae certificate
has recourse only against Ginnie Mae to obtain the payment. The trustee or its
nominee, as registered holder of the Ginnie Mae certificates, may proceed
directly against Ginnie Mae under the terms of any Ginnie Mae certificate or the
Guaranty Agreement relating to the Ginnie Mae certificate for any amounts that
are not paid under the Ginnie Mae certificate.
Monthly installment payments on a Ginnie Mae certificate will be comprised
of interest due as specified on the Ginnie Mae certificate plus the scheduled
principal payments on the mortgage loans backing the Ginnie Mae certificate due
on the first day of the month in which the scheduled monthly installment on the
Ginnie Mae certificate is due. The monthly installments on the Ginnie Mae
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 the Ginnie Mae certificate received
during any month will be passed through to the registered holder of the Ginnie
Mae certificate the following month.
With respect to Ginnie Mae certificates issued under the Ginnie Mae I
program, the Ginnie Mae 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. Ginnie Mae
certificates issued under the Ginnie Mae II program provide for 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 Ginnie Mae I program single issuer approach, an individual
Ginnie Mae issuer assembles a pool of mortgages against which it issues and
markets Ginnie Mae I certificates while, under the Ginnie Mae II program,
multiple issuer pools may be formed through the aggregation of loan packages of
more than one Ginnie Mae issuer. Under this option, packages submitted by
various Ginnie Mae issuers for a particular issue date and interest rate are
aggregated into a single pool that backs a single issue of Ginnie Mae II
certificates. However, single issuer pools may be formed under the Ginnie Mae II
program as well.
The Underlying Mortgage Loans
Unless otherwise specified in the prospectus supplement, mortgage loans
underlying the Ginnie Mae certificates included in the trust fund for a series
will consist of FHA Loans and/or housing loans partially guaranteed by the VA
("VA Loans"), all of which are assumable by a purchaser. Ginnie Mae certificates
securing a series may be backed by level payment mortgage loans, Ginnie Mae
Loans, GEM Loans or Buy-Down Loans or adjustable rate mortgage loans or other
mortgage
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loans eligible for inclusion in a Ginnie Mae certificate. The mortgage loans may
be secured by Manufactured Homes, Single Family Property or Multifamily
Property.
All mortgages underlying any Ginnie Mae certificate issued under the Ginnie
Mae I program must have the same annual interest rate (except for pools of loans
secured by manufactured homes). The annual interest rate on such Ginnie Mae
certificate is equal to one-half percentage point less than the annual interest
rate on the mortgage loans backing the Ginnie Mae certificate.
Mortgages underlying a Ginnie Mae certificate issued under the Ginnie Mae
II program may have annual interest rates that vary from each other by up to one
percentage point. The annual interest rate on each Ginnie Mae 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 the Ginnie Mae certificate.
The Ginnie Mae certificates included in the trust fund for a series may
have other characteristics and terms different from those described above, so
long as the Ginnie Mae certificates and underlying mortgage loans meet the
criteria of each Rating Agency rating the Securities of that series. The Ginnie
Mae certificates and underlying mortgage loans will be described in the
prospectus supplement.
Ginnie Mae
The Government National Mortgage Association ("Ginnie Mae") 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 Ginnie Mae to guarantee the timely payment of the principal of and
the interest on Ginnie Mae certificates, which are based on and backed by a pool
of mortgages insured by the Federal Housing Administration, a division of HUD
("FHA") under the Housing Act or Title V of the Housing Act of 1949, or
partially guaranteed by the Veterans Administration ("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 that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under the guarantees, Ginnie Mae may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury an amount that is at any
time sufficient to enable Ginnie Mae, with no limitations as to amount, to
perform its obligations under its guarantee.
FANNIE MAE CERTIFICATES
General
Fannie Mae certificates are either Guaranteed Mortgage Pass-Through
Certificates, Stripped Mortgage Backed Securities or Guaranteed REMIC
Pass-Through Certificates. Fannie Mae certificates represent factional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Unless otherwise
specified in the 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 Fannie Mae from its own portfolio
or purchased pursuant to the criteria set forth under the Fannie Mae purchase
program.
Fannie Mae guarantees to each holder of a Fannie Mae certificate that it
will distribute amounts representing scheduled principal and interest (at the
rate provided for by the Fannie Mae certificate) on the mortgage loans in the
pool represented by the Fannie Mae 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 the principal amount is
actually recovered. The obligations
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of Fannie Mae under its guarantees are obligations solely of Fannie Mae and are
neither backed by nor entitled to the full faith and credit of the United States
of America. If Fannie Mae were unable to satisfy those obligations,
distributions on Fannie Mae certificates would consist solely of payments and
other recoveries on the underlying mortgage loans and, accordingly,
delinquencies and defaults would affect monthly distributions on the Fannie Mae
certificates and could adversely affect the payments on the Securities of a
series secured by the Fannie Mae certificates.
Unless otherwise specified in the prospectus supplement, Fannie Mae
certificates evidencing interests in pools formed on or after May 1, 1985 (other
than Fannie Mae 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 Fannie Mae certificate
will be made by Fannie Mae on the twenty-fifth day of each month to the persons
in whose name the Fannie Mae certificates are entered in the books of the
Federal Reserve Bank of New York (or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates) as of the
close of business on the last day of the preceding month. With respect to Fannie
Mae certificates issued in book-entry form, distributions will be made by wire;
with respect to Fannie Mae certificates issued in fully registered form,
distributions will be made by check.
The Underlying Mortgage Loans
Unless otherwise specified in the prospectus supplement for a series of
Securities, mortgage loans underlying Fannie Mae certificates in the trust fund
for a series will consist of:
- fixed-rate level payment mortgage loans that are not insured or
guaranteed by any governmental agency ("Conventional Loans");
- fixed-rate level payment FHA Loans or VA Loans;
- adjustable rate mortgage loans;
- GEM Loans, Buy-Down Loans or GPM Loans; and
- mortgage loans secured by one-to-four family attached or detached
residential housing, including Cooperative Dwellings ("Single Family
Property") or by Multifamily Property.
Each mortgage loan must meet the applicable standards set forth under the
Fannie Mae 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.
Fannie Mae Stripped Mortgage Backed Securities are issued by Fannie Mae 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
the difference between the fractional interests in principal and interest of
each class, the effective rate of interest on the principal of each class of
Fannie Mae 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 Fannie Mae or Ginnie Mae
certificates) as to which Fannie Mae has elected REMIC status for federal income
tax purposes.
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Mortgage loans underlying a Fannie Mae 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 Fannie Mae certificate (and the series pass-through rate
payable with respect to a Fannie Mae 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
Fannie Mae'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 Fannie Mae certificate
will be between .50 and 2.50 percentage points greater than the annual interest
rate for the Fannie Mae certificate (or the series pass-through rate payable
with respect to a Fannie Mae Stripped Mortgage Backed Security), and, under a
special servicing option (pursuant to which the mortgagee or other servicer is
reimbursed by Fannie Mae for foreclosure losses), the annual interest rates on
the mortgage loans underlying a Fannie Mae certificate will be between .55 and
2.55 percentage points greater than the annual Fannie Mae certificate interest
rate (or the series pass-through rate payable with respect to a Fannie Mae
Stripped Mortgage Backed Security).
The trust fund for a series of Securities may include Fannie Mae
certificates having characteristics and terms different from those described
above, so long as the Fannie Mae certificates and underlying mortgage loans meet
the criteria of each Rating Agency rating the series. The Fannie Mae
certificates and underlying mortgage loans will be described in the prospectus
supplement.
Fannie Mae
Fannie Mae ("Fannie Mae") 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.). Fannie Mae 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.
Fannie Mae provides funds to the mortgage market primarily by purchasing
home mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae 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,
Fannie Mae helps to redistribute mortgage funds from capital-surplus to
capital-short areas. In addition, Fannie Mae issues mortgage backed securities,
primarily in exchange for pools of mortgage loans from lenders. See "Additional
Information" for the availability of further information with respect to Fannie
Mae and Fannie Mae certificates.
FREDDIE MAC CERTIFICATES
General
The Freddie Mac certificates represent an undivided interest in a group of
mortgages or participations in mortgages (a "PC Pool") purchased by Freddie Mac.
Freddie Mac certificates are sold under the terms of a Mortgage Participation
Certificate Agreement and may be issued under either Freddie Mac'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 Freddie Mac certificates.
Under Freddie Mac'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 Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after that date, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates cannot exceed the pass-through rate on
the Freddie Mac certificates by more than two hundred basis points.
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Under this program, Freddie Mac 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 Freddie Mac. 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 Freddie Mac. No loan or participation
is purchased by Freddie Mac 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 Freddie Mac 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 Freddie Mac rather than on the interest rate on the
underlying mortgage loans. However, beginning with PC Pools formed on or after
June 1, 1987, the range of interest rates on the mortgages in Cash Program PC
Pools will not exceed 100 basis points.
Under Freddie Mac's Guarantor Program, the pass-through rate on a Freddie
Mac certificate is established based upon the lowest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of Freddie Mac's
management and guaranty income as agreed upon between the seller and Freddie
Mac. For Freddie Mac 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 Freddie Mac certificates will be guaranteed by Freddie Mac as to the
timely payment of interest at the applicable Freddie Mac certificate rate on the
holder's pro rata share of the unpaid principal balance outstanding on the
underlying mortgage loans, whether or not received. Freddie Mac 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" Freddie Mac certificates
issued under the Guarantor Program, guarantee the timely payment of scheduled
principal. Under Freddie Mac's Gold PC Program, Freddie Mac 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 the month of distribution.
Pursuant to its guarantee, Freddie Mac indemnifies holders of Freddie Mac
certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac 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:
- 30 days following foreclosure sale;
- 30 days following payment of the claim by any mortgage insurer; or
- 30 days following the expiration of any right of redemption.
In any event, Freddie Mac must remit the guarantee amount 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 Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgages
that Freddie Mac has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
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Holders of Freddie Mac certificates are entitled to receive their pro rata
share of all principal payments on the underlying mortgage loans received by
Freddie Mac, including any scheduled principal payments, full and partial
prepayments of principal and principal received by Freddie Mac by virtue of
condemnation, insurance, liquidation or foreclosure, including repayments of
principal resulting from acquisition by Freddie Mac of the real property
securing the mortgage. Freddie Mac is required to remit to each holder its pro
rata share of principal payments on the underlying mortgage loans, interest at
an applicable Freddie Mac certificate rate and any other sums, such as
prepayment fees, within 60 days of the date on which Freddie Mac is deemed to
receive the payments.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac certificate
may exceed the pass-through rate on the Freddie Mac certificate. Under this
program, Freddie Mac 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 Freddie Mac. 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 Freddie Mac certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a Freddie Mac certificate group based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guarantee income as agreed upon between the seller and Freddie Mac.
Freddie Mac 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 Freddie Mac were unable to satisfy those obligations, distributions on
Freddie Mac certificates would consist solely of payments and other recoveries
on the underlying mortgage loans, and, accordingly, delinquencies and defaults
would affect monthly distributions on the Freddie Mac certificates and could
adversely affect distributions on the Securities of the related series.
Requests for registration of ownership of Freddie Mac 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 Freddie Mac certificates sold by Freddie Mac
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 a Freddie Mac certificate will normally be
received by the holder by the fifteenth day of the second month following the
month in which the holder became a holder of the Freddie Mac certificate.
Thereafter, payments will normally be received by the fifteenth day of each
month.
The Underlying Mortgage Loans
Unless otherwise specified in the prospectus supplement, each PC Pool
underlying the Freddie Mac 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
prospectus supplement, all of the mortgage loans evidenced by a Freddie Mac
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 Freddie Mac must meet certain standards set
forth in the Freddie Mac Act (as defined below).
The trust fund for a series may include Freddie Mac certificates having
other characteristics and terms different from those described above, so long as
the Freddie Mac certificates and the
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underlying mortgage loans meet the criteria of each Rating Agency rating the
Securities of the series. The Freddie Mac certificates and underlying mortgage
loans will be described in the prospectus supplement.
Freddie Mac
The Federal Home Loan Mortgage Corporation ("Freddie Mac") 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 "Freddie Mac Act"). Freddie Mac 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 Freddie Mac consists of the purchase of first lien, conventional,
residential mortgage loans and participation interests in 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 Freddie Mac certificates. In 1981, Freddie Mac initiated its Guarantor
Program under which Freddie Mac purchases mortgages from sellers in exchange for
Freddie Mac certificates representing interests in the mortgages so purchased.
Transactions under the Guarantor Program have resulted in a significant increase
in the volume of Freddie Mac's purchases of mortgages and sales of Freddie Mac
certificates. All mortgage loans purchased by Freddie Mac must meet certain
standards set forth in the Freddie Mac Act. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans that 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 Freddie Mac and Freddie Mac
certificates.
PRIVATE MORTGAGE-BACKED SECURITIES
General
The trust fund for a series may consist of Private Mortgage-Backed
Securities, which include:
- mortgage pass-through certificates, evidencing an undivided interest in a
pool of Loans or Agency Certificates; or
- collateralized mortgage obligations secured by Loans or Agency
Certificates.
Private Mortgage-Backed Securities are issued pursuant to a pooling and
servicing agreement, a trust agreement, an indenture or similar agreement (a
"PMBS Agreement"). The seller/servicer of the underlying Loans, or the issuer of
the collateralized mortgage obligations, as the case may be, enters into the
PMBS Agreement with the trustee under the PMBS Agreement (the "PMBS Trustee").
The PMBS Trustee or its agent, or a custodian, possesses the Loans underlying
the Private Mortgage-Backed Security. Loans underlying a Private Mortgage-Backed
Security are 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 generally be a Fannie Mae or Freddie Mac approved
servicer and, if FHA Loans underlie the Private Mortgage-Backed Securities, will
be approved by the United States Department of Housing and Urban Development
("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; a limited purpose corporation or other entity
organized for the purpose of, among other things, establishing trusts and
acquiring and selling housing loans to the trusts, and selling beneficial
interests in the trusts; or one of the trusts. If specified in the
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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 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 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
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 prospectus supplement:
- no Loan will have had a Loan-to-Value Ratio at origination in excess of
95%;
- each Mortgage Loan secured by a 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;
- each Loan will have had an original term to stated maturity of not less
than 10 years and not more than 40 years;
- no Loan that was more than 89 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the assets
under the related PMBS Agreement;
- 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
- 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,
mortgage insurance, hazard insurance and other insurance policies ("Insurance
Policies") required to be maintained with respect to Securities, Loans, or
Private Mortgage-Backed Securities 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 depend on 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.
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Additional Information
The prospectus supplement for a series of Securities for which the trust
fund includes Private Mortgage-Backed Securities will specify, to the extent
material:
- the aggregate approximate principal amount and type of the Agency
Certificates and Private Mortgage-Backed Securities to be included in the
trust fund;
- certain characteristics of the Agency Certificates or Loans that comprise
the underlying assets for the Private Mortgage-Backed Securities
including, (1) the payment features of Loans (i.e., whether they are
fixed rate or adjustable rate and whether they provide for fixed level
payments or other payment features), (2) the approximate aggregate
principal balance, if known, of underlying Loans insured or guaranteed by
a governmental entity, (3) the servicing fee or range of servicing fees
with respect to the Loans, and (4) the minimum and maximum stated
maturities of the underlying Loans at origination;
- the interest rate or range of interest rates of the Private
Mortgage-Backed Securities;
- the weighted average interest rate of the Private Mortgage-Backed
Securities;
- the PMBS Issuer, the PMBS Servicer and the PMBS Trustee for the Private
Mortgage-Backed Securities;
- 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 the Private
Mortgage-Backed Securities themselves;
- the terms on which the underlying Loans for the 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
- the terms on which Loans may be substituted for those originally
underlying the Private Mortgage-Backed Securities.
If information of the type described above regarding the Private
Mortgage-Backed Securities or Agency Certificates is not known to the depositor
at the time the Securities 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 the Securities.
THE MORTGAGE LOANS
General
The Primary Assets in a trust fund for a series of Securities may include
mortgage loans or participation interests in mortgage loans (together, "Mortgage
Loans"). Generally, the originators of the Mortgage Loans are savings and loan
associations, savings banks, commercial banks, credit unions, insurance
companies, or similar institutions supervised and examined by a Federal or State
authority or by mortgagees approved by the Secretary of Housing and Urban
Development pursuant to sections 203 and 211 of the National Housing Act. An
affiliate of the depositor may have originated some of the Mortgage Loans.
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The Mortgage Loans in a trust fund may be Conventional Loans, housing loans
insured by the FHA ("FHA Loans") or VA Loans, with the following interest rate
and payment characteristics:
- fixed interest rate or adjustable interest rate Mortgage Loans;
- "GPM Loans," which provide for fixed level payments or graduated
payments, with an amortization schedule (1) requiring the mortgagor's
monthly installments of principal and interest to increase at a
predetermined rate annually for a predetermined period after which the
monthly installments become fixed for the remainder of the mortgage term,
(2) providing for deferred payment of a portion of the interest due
monthly during that period of time; or (3) 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;
- "GEM Loans," which are fixed rate, fully amortizing mortgage loans
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 those increases being
applied to principal, and with further provision for level payments
thereafter;
- Buy-Down Loans;
- "Bi-Weekly Loans," which are fixed-rate, conventional, fully-amortizing
Mortgage Loans secured by first mortgages on one-to-four family
residential properties that provide for payments of principal and
interest by the borrower once every two weeks; or
- Mortgage Loans with other payment characteristics as described in this
prospectus and the prospectus supplement.
The Mortgage Loans may include:
- "Cooperative Loans," which are evidenced by promissory notes secured by a
lien on the shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and on the related proprietary leases or
occupancy agreements granting exclusive rights to occupy individual
housing units in a building owned by a Cooperative ("Cooperative
Dwellings"); or
- "Condominium Loans," which are secured by a mortgage on an individual
housing unit (a "Condominium Unit") in which the owner of the real
property (the "Condominium") 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, together
with the Condominium Unit's appurtenant interest in the common elements.
Generally, the Mortgage Loans are secured by mortgages or deeds of trust or
other similar security instruments creating a first lien or (if so specified in
the prospectus supplement) a junior lien on Mortgaged Property. If specified in
the prospectus supplement, the Mortgage Loans may be secured by security
instruments creating a lien on borrowers' leasehold interests in real property,
if the depositor determines the Mortgage Loans 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 on the real estate. 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 result in termination of the
lease, and the term of the lease ends at least five years beyond the maturity
date of the Mortgage Loan.
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The Mortgaged Properties may include Single Family Properties (i.e., one-to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) or Multifamily Properties (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,
townhouses, duplexes, triplexes, quadriplexes, row houses, individual units in
planned unit developments and other attached dwelling units. Multifamily
Property or Single Family 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 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 the
tenant-stockholder. See "Legal Aspects of Loans."
The prospectus supplement will disclose the aggregate principal balance of
Mortgage Loans secured by Mortgaged Properties that are owner-occupied. 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 (1) a
representation by the mortgagor at origination of the Mortgage Loan that either
the borrower will use the underlying Mortgaged Property 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 (2) a finding that the address of the Mortgaged
Property is the borrower's mailing address, as reflected in the servicer's
records. To the extent specified in the 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.
The characteristics of the Mortgage Loans comprising or underlying the
Primary Assets for a series may vary if credit support is provided in levels
satisfactory to the Rating Agencies that rate a series of Securities. Generally,
unless otherwise specified in the prospectus supplement, the following selection
criteria apply to Mortgage Loans included in the Primary Assets:
- no first lien Mortgage Loan may have a Loan-to-Value Ratio at origination
in excess of 95%, and no second lien Mortgage Loan may have a
Loan-to-Value Ratio at origination in excess of 125%;
- 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 in
this prospectus;
- 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;
- no Mortgage Loan may be included that, as of the Cut-off Date, is more
than 59 days delinquent as to payment of principal or interest; and
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- no Mortgage Loan (other than a Cooperative Loan) may be included unless a
title insurance policy or, in lieu thereof, an attorney's opinion of
title, and a standard hazard insurance policy (which may be a blanket
policy) is in effect with respect to the Mortgaged Property securing the
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
the 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 the Mortgaged Property is the
lesser of the purchase price paid by the borrower or the Appraised Value of the
Mortgaged Property.
Unless otherwise specified in the prospectus supplement, "Buy-Down Loans,"
which are level payment Mortgage Loans 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 the Mortgage Loan, are also generally subject to the
following requirements:
- 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 the loan, the Buy-Down Loans must provide for
Scheduled Payments based on a hypothetical reduced interest rate (the
"Buy-Down Mortgage Rate") that is not more than 3% below the mortgage
rate at origination and for annual increases in the Buy-Down Mortgage
Rate during the Buy-Down Period that will not exceed 1%;
- the Buy-Down Period may not exceed three years;
- the maximum amount of funds that may be contributed for a Mortgaged
Property having a Loan-to-Value Ratio (1) of 90% or less at origination
is limited to 10% of the Appraised Value of the Mortgaged Property, and
(2) of over 90% at origination is limited to 6% of the Appraised Value of
the Mortgaged Property;
- 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); and
- the borrower under each Buy-Down Loan must be qualified at a mortgage
rate that is not more than 3% per annum below the current mortgage rate
at origination. (Accordingly, the repayment of a Buy-Down Loan depends on
the borrower's ability to make larger Scheduled Payments after the
Buy-Down Amounts are depleted).
Multifamily Properties are generally subject to the following requirements,
unless otherwise specified in the prospectus supplement:
- no Mortgage Loan may be delinquent for more than 59 days within the
12-month period ending with the Cut-off Date;
- no more than two payments may be 59 days or more delinquent during a
three-year period ending on the Cut-off Date;
- Mortgage Loans with respect to any single borrower may not exceed 5% of
the aggregate principal balance of the Loans comprising the Primary
Assets as of the Cut-off Date; and
- the debt service coverage ratio for each Mortgage Loan (calculated as
described in the prospectus supplement) will not be less than 1.1:1.
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As specified in the prospectus supplement, "ARMs" or "Adjustable Rate
Mortgages," which provide for periodic adjustments in the interest rate
component of the Scheduled Payment in accordance with an Index, 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 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 prospectus supplement, any ARM that is
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 the ARM. In addition, certain of the ARMs provide for limitations on the
maximum amount by which their mortgage rates may adjust for any single
adjustment period (the "Maximum Mortgage Rate Adjustment"). Some ARMs are
payable in self-amortizing payments of principal and interest. Other ARMs
("Negatively Amortizing ARMs") instead provide for limitations on changes in the
Scheduled Payment to protect borrowers from payment increases due to rising
interest rates.
These limitations can result in Scheduled Payments that 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 the ARM, resulting in negative
amortization, and will be repaid through future Scheduled Payments. If specified
in the prospectus supplement, Negatively-Amortizing ARMs may provide for the
extension of their original stated maturity to accommodate changes in their
mortgage rate. The prospectus supplement will specify whether the ARMs
comprising or underlying the Primary Assets are Negatively Amortizing ARMs.
The index (the "Index") applicable to any ARM comprising the Primary Assets
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 institutions
insured by the Federal Savings and Loan Insurance Corporation ("FSLIC"), or any
other index or indices as described in the prospectus supplement.
Certain of the Mortgage Loans may be fixed or variable rate Mortgage Loans
that do not provide for monthly payments of principal and interest by the
borrower. Instead, these Mortgage Loans will provide generally either for the
accrual of interest on a monthly basis and the repayment of principal, interest
and, in some cases, certain amounts calculated by reference to the value, or the
appreciation in value of the related Mortgaged Property, or for payment in lieu
of interest of an amount calculated by reference to the appreciation in value of
the related Mortgaged Property, in each case upon the occurrence of specified
maturity events. Maturity events generally include:
- the death of the borrower, or the last living of two co-borrowers;
- the borrower, or the last living of two co-borrowers, ceasing to use the
related Mortgaged Property as his or her principal residence; or
- the sale of the related Mortgaged Property.
The maturity of this type of Mortgage Loan may be accelerated upon the
occurrence of certain events, such as deterioration in the condition of the
Mortgaged Property.
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The prospectus supplement for each series of Securities will provide
information about the Mortgage Loans, as of the Cut-off Date, including:
(1) the aggregate outstanding principal balance of the Mortgage Loans;
(2) the weighted average Mortgage Rate of 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;
(3) the average outstanding principal balance of the Mortgage Loans;
(4) the weighted average term-to-stated maturity of the Mortgage Loans and
the range of remaining terms-to-stated maturity;
(5) the range of Loan-to-Value Ratios for the Mortgage Loans;
(6) the relative percentage (by outstanding principal balance as of the
Cut-off Date) of Mortgage Loans that are ARMs, Cooperative Loans, Conventional
Loans, FHA Loans and VA Loans;
(7) the percentage of Mortgage Loans (by outstanding principal balance as
of the Cut-off Date) that are not covered by primary mortgage insurance
policies;
(8) any pool insurance policy, special hazard insurance policy or
bankruptcy bond or other credit support relating to the Mortgage Loans;
(9) the geographic distribution of the Mortgaged Properties securing the
Mortgage Loans; and
(10) 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.
If information of the type described above respecting the Mortgage Loans is
not known to the depositor at the time the Securities 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 the Securities.
THE MANUFACTURED HOME LOANS
The Loans secured by Manufactured Homes ("Manufactured Home Loans")
comprising or underlying the Primary Assets for a series of Securities 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 that is a Fannie Mae- or
Freddie Mac-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 prospectus supplement, the Manufactured Home
Loans will be fully amortizing and will bear interest at a fixed interest rate.
Each "Manufactured Home" securing the Manufactured Home Loan consists of 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
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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 prospectus supplement for a series, the
following restrictions apply with respect to Manufactured Home Loans comprising
or underlying the Primary Assets for a series:
- no Manufactured Home Loan may have a Loan-to-Value Ratio at origination
in excess of 95%;
- each Manufactured Home Loan must have an original term to maturity of not
less than three years and not more than 30 years;
- 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
- 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 the 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 the 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 prospectus supplement for a series of Securities will provide
information about the Manufactured Home Loans comprising the Primary Assets as
of the Cut-off Date, including:
(1) the aggregate outstanding principal balance of the Manufactured Home
Loans comprising or underlying the Primary Assets;
(2) the weighted average interest rate on the Manufactured Home Loans;
(3) the average outstanding principal balance of the Manufactured Home
Loans;
(4) the weighted average scheduled term to maturity of the Manufactured
Home Loans and the range of remaining scheduled terms to maturity;
(5) the range of Loan-to-Value Ratios of the Manufactured Home Loans;
(6) 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;
(7) any pool insurance policy, special hazard insurance policy or
bankruptcy bond or other credit support relating to the Manufactured Home Loans;
and
(8) the distribution by state of Manufactured Homes securing the Loans.
If information of the type specified above respecting the Manufactured Home
Loans is not known to the depositor at the time the Securities 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
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on the date of issuance of the related series and to be filed with the
Commission within 15 days after the initial issuance of the Securities.
The information described above regarding the Manufactured Home Loans in a
trust fund may be presented in the prospectus supplement in combination with
similar information regarding the Mortgage Loans in the trust fund.
PRE-FUNDING ARRANGEMENTS
The depositor may be required to deposit cash or liquid securities into a
pre-funding account on the issuance date. To the extent provided in the
prospectus supplement for a series, the related Agreements may provide for a
commitment by the depositor to subsequently convey to the trust fund additional
Primary Assets or additional advances in respect of Mortgage Loans that comprise
existing Primary Assets ("Subsequent Primary Assets") following the date on
which the Securities are issued (a "Pre-Funding Arrangement"). 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
Agreements. If a Pre-Funding Arrangement is utilized, on the closing date for
the issuance of the Securities, the trustee will be required to deposit in a
segregated account (a "Pre-Funding Account") all or a portion of the proceeds
received by the trustee in connection with the sale of one or more classes of
Securities of the series. Subsequently, the trust fund will acquire Subsequent
Primary Assets in exchange for the release of money from the Pre-Funding
Account. Unless otherwise specified in the prospectus supplement, the
Pre-Funding Arrangement will be limited to a specified period, generally not to
exceed three months, during which time any transfers of Subsequent Primary
Assets must occur.
If all of the funds originally deposited in the Pre-Funding Account are not
used by the end of any specified period, then any remaining amount will be
applied as a mandatory prepayment of a class or classes of Securities, as
specified in the prospectus supplement. Although we expect that substantially
all of the funds in the Pre-Funding Account will be used to acquire Subsequent
Primary Assets, so that there will be no material principal distributions from
amounts remaining on deposit in the Pre-Funding Account, we cannot assure you
that such a distribution 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 Agreements in investments permitted by the Rating Agencies.
COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT
The trustee, or the master servicer, in the name of the trustee, will
establish a separate Collection Account for each series, for deposit of all
distributions received with respect to the Primary Assets for the series, any
initial cash deposit, and reinvestment income. If specified in the prospectus
supplement, any reinvestment income or other gain from investments of funds in
the Collection Account will be credited to the Collection Account, and any loss
resulting from the investments will be charged to the Collection Account.
Reinvestment income may, however, be payable to the trustee, the master servicer
or a servicer as additional compensation. See "Servicing of Loans" and "The
Agreements -- Investment of Funds." In this case, the reinvestment income would
not be included in calculation of the Available Distribution Amount. See
"Description of the Securities -- Distributions on the Securities."
Funds on deposit in the Collection Account will be available for remittance
to the trustee for deposit into the Distribution Account to the extent of the
Available Distribution Amount and for certain other payments provided for in the
Agreements. Unless otherwise specified in the prospectus supplement, amounts in
the Collection Account constituting reinvestment income payable to the master
servicer as additional servicing compensation or for the reimbursement of
advances or
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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
Distribution Account.
A separate Distribution Account will be established by the trustee in the
name of the trustee for the benefit of the securityholders into which all funds
received from the master servicer (or servicer) and all required withdrawals
from any reserve funds for the related series will be deposited, pending
distribution to the securityholders. If specified in the prospectus supplement,
any reinvestment income or other gain from investments of funds in the
Distribution Account will be credited to the Distribution Account, and any loss
resulting from the investments will be charged to the Distribution Account.
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 Distribution Account, subject to certain permitted withdrawals by
the trustee as set forth in the Agreements, will be available for remittance to
the securityholders. See also "The Agreements -- Distribution Account."
OTHER FUNDS OR ACCOUNTS
A trust fund may include 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 specified in the 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 similar funds to be held by the servicer. See
"Servicing of Loans -- Collection Procedures; Escrow Accounts" and "-- Deposits
to and Withdrawals from the Collection Account." 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 that will be similar to
that which would be established if GPM Loans constituted the Primary Assets. See
"Servicing of Loans -- Deposits to and Withdrawals from the Collection Account."
Other similar accounts may be established as specified in the prospectus
supplement.
LOAN UNDERWRITING PROCEDURES AND STANDARDS
UNDERWRITING STANDARDS
The depositor expects that Loans comprising the Primary Assets for a series
of Securities will have been originated generally in accordance with
underwriting procedures and standards similar to those described in this
prospectus, except as otherwise described in the prospectus supplement.
Unless otherwise specified in the prospectus supplement, the originators of
the Mortgage Loans will have been savings and loan associations, savings banks,
commercial banks, credit unions, insurance companies or similar institutions
supervised and examined by a federal or state authority; mortgagees approved by
the Secretary of Housing and Urban Development pursuant to Sections 203 and 211
of the National Housing Act, or wholly-owned subsidiaries thereof; or by
subsidiaries of the depositor. Manufactured Home Loans may have been originated
by these 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 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.
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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 that 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 that
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, 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 the 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, the appraisal will have been based upon a market data
analysis of recent sales of comparable properties and, when deemed applicable, a
replacement cost analysis based on the current cost of constructing or
purchasing a similar property.
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.
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Certain types of Loans that may be included in the Primary Assets for a
series of Securities 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 prospectus supplement, the depositor may
purchase Loans (or participation interests therein) for inclusion in a trust
fund that are underwritten under standards and procedures that vary from and are
less stringent than those described in this prospectus. For instance, Loans may
be underwritten under a "limited documentation" or "no documentation" program.
With respect to those Loans, minimal investigation into the borrowers' credit
history and income profile is undertaken by the originator and the 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 prospectus supplement will specify the underwriting standards
applicable to the Mortgage Loans.
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 "Legal Aspects of Loans."
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, we cannot assure you that the past pattern of appreciation in value of
the real property securing the Loans will continue; in fact, some regions of the
country have experienced significant depreciation in real estate values in
recent periods. Also, there is no assurance that appreciation of real estate
values generally, if 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 the
Loan. If the residential real estate market in one or more regions of the United
States should experience decline in property values so that the outstanding
balances of the Loans and any secondary financing on the Mortgaged Properties
securing the Loans become equal to or greater than the value of the related
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 "Legal Aspects of Loans."
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
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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 Securities are not covered by the
methods of credit support or the insurance policies described in this prospectus
or the prospectus supplement, losses will be borne by holders of the Securities
of the related 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 prospectus supplement, at the time of
delivery of the Mortgage Loans to the trustee, the depositor or another entity
will represent and warrant to the trustee with respect to the Mortgage Loans
comprising the Primary Assets in a trust fund, that:
- 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 the
representation and warranty;
- immediately prior to the transfer and assignment of the Mortgage Loans
the depositor (or other entity) with respect to each Mortgage Loan had
good title to and was sole owner of each Mortgage Loan;
- with respect to first lien Mortgage Loans, each Mortgage constituted a
valid 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;
- each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws, including usury, equal
credit opportunity and truth-in-lending or similar disclosure laws; and
- 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 itself is
responsible for the maintenance of hazard insurance for property owned by the
Cooperative and the persons appointed or elected by the Condominium Unit owners
to govern the affairs of the Condominium (the "Condominium Association") are
responsible for maintaining standard hazard insurance, insuring the entire
multi-unit building or buildings, or group of buildings, whether or not attached
to each other, located on property subject to Condominium ownership (the
"Condominium Building") (including each individual Condominium Unit), and the
borrowers of that Cooperative or Condominium may 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."
With respect to a Cooperative Loan, unless otherwise specified in the
prospectus supplement, the depositor will represent and warrant based, in part,
upon representations and warranties of the originator of the Cooperative Loan
that (1) 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
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the Cooperative Loan (subject to the right of the related Cooperative to cancel
shares and terminate the proprietary lease for unpaid assessments) and (2) the
related Cooperative Dwelling is free of material damage and in good repair.
Unless otherwise specified in the prospectus supplement, with respect to
each Manufactured Home Loan, the depositor or another entity, based, in part,
upon representations and warranties of the originator of the Manufactured Home
Loan, will represent and warrant, among other things that:
- 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;
- as of the date of the transfer and assignment, the Manufactured Home
Loans are subject to no offsets, defenses or counterclaims;
- 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;
- with respect to first lien Manufactured Home Loans, as of the date of the
transfer and assignment, each Manufactured Home Loan constitutes a valid
lien on the related Manufactured Home and is free of material damage and
is in good repair;
- as of the date of the 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
- 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 the insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made by
the depositor or another entity in respect of a Loan that materially and
adversely affects the value of the Loan, such party will be obligated to cure
the breach in all material respects, repurchase the Loan from the trustee, or,
unless specified otherwise in the prospectus supplement, deliver a Qualified
Substitute Mortgage Loan as described below under "The 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, 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. 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 the Loan. If specified in the prospectus supplement, the master servicer may
be obligated to enforce this obligation rather than the trustee or PMBS Trustee.
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 prospectus supplement will indicate the
period during which a substitution will be permitted and will describe any other
conditions upon which Primary Assets may be substituted for Primary Assets
initially included in the trust fund.
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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
prospectus supplement, either by the master servicer directly or through one or
more servicers subject to supervision by the master servicer, or by a single
servicer that is a party to the applicable Agreement for a series and services
the Loans directly or through one or more subservicers (the "Subservicers"). In
general, descriptions of the rights and obligations of a master servicer will
also be applicable to a servicer, and descriptions 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 generally:
- administer and supervise the performance by the servicers of their
servicing responsibilities under their servicing agreements ("Servicing
Agreements") with the master servicer,
- maintain any standard or special hazard insurance policy, primary
mortgage insurance, bankruptcy bond or pool insurance policy required for
the related Loans and
- advance funds as described below under "Advances and Limitations
Thereon."
If the master servicer services the Loans through servicers as its agents,
the master servicer may or may not, as specified in the 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 the servicers. If a single servicer services the
Loans through Subservicers, the servicer will be ultimately responsible for the
performance of all servicing activities.
The master servicer will be a party to the applicable 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
that constitute the Primary Assets. The master servicer may be an affiliate of
the depositor. Unless otherwise specified in the prospectus supplement, the
master servicer and each servicer will be required to be a Fannie Mae- or
Freddie Mac-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 Agreement as specified in the 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 the
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:
- withholding the Servicing Fee from any scheduled payment of interest
prior to the deposit of the payment in the Collection Account for the
related series,
- withdrawing the Servicing Fee from the Collection Account after the
entire Scheduled Payment has been deposited in the Collection Account, or
- requesting that the trustee pay the Servicing Fee out of amounts in the
Distribution 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 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, (1) waive any assumption fee, late payment charge, or other
charge in connection with a Loan and (2) arrange with a mortgagor a schedule for
the liquidation of delinquencies by extending the Due Dates for Scheduled
Payments on the Loan.
As specified in the prospectus supplement, the master servicer or the
servicers acting under its supervision, to the extent permitted by law, may
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 those payments under the loan related documents, in which case
the master servicer would not be required to establish any Escrow Account with
respect to those 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 the 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 the account when a deficiency exists.
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 (1) 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 Securities of the related series, (2) the deposits in which are insured to
the maximum extent available by the Federal Deposit Insurance Corporation or
which are secured in a manner meeting requirements established by each Rating
Agency or (3) 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 specified in the 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.
As specified in the applicable Agreement, the master servicer will deposit
into the Collection Account for each series on the Business Day following the
closing date for the issuance of a series, 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 the Cut-off Date):
- all payments on account of principal, including prepayments, on the
Loans;
- all payments on account of interest on the Loans after deducting
therefrom, at the discretion of the master servicer but only to the
extent of the amount permitted to be withdrawn or
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withheld from the Collection Account in accordance with the related
Agreement, the Servicing Fee in respect of the Loans;
- 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 the Loans received from the mortgagor, other than amounts
required to be paid to the mortgagor pursuant to the terms of the
applicable Mortgage or otherwise pursuant to law ("Liquidation
Proceeds"), exclusive of, in the discretion of the master servicer but
only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the
Servicing Fee, if any, in respect of the related Loan;
- all proceeds received by the trustee under any title, hazard or other
insurance policy covering any 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 Agreement (which will be
retained by the master servicer and not deposited in the Collection
Account);
- all amounts required to be deposited therein from any applicable Reserve
Fund for the related series pursuant to the related Agreement;
- all Advances for the related series made by the master servicer pursuant
to the related Agreement; and
- all proceeds of any Loans repurchased by the depositor pursuant to the
related Agreement.
Generally, the master servicer is permitted, from time to time, to make
withdrawals from the Collection Account for each series for the following
purposes:
- to reimburse itself for Advances for the related series made by it
pursuant to the related 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 Advance was made;
- to reimburse itself for any Advances for the related 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 the Advance was made or from Liquidation Proceeds or the
proceeds of insurance policies;
- 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 reimbursement are in excess of the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon at the applicable Interest Rate to the Due Date next
succeeding the date of its receipt of Liquidation Proceeds, to pay to
itself out of the excess the amount of any unpaid Servicing Fee and any
assumption fees, late payment charges, or other charges on the related
Loan;
- 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 the
Scheduled Payment, late payment or recovery into the Collection Account,
to pay to itself the Servicing Fee, as adjusted pursuant to the related
Agreement, from the related Scheduled Payment, late payment or other
recovery, to the extent permitted by the Agreement;
- to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
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- 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 Agreement all amounts received thereon and not distributed as
of the date on which the related repurchase price was determined;
- to reimburse itself for the excess of any unreimbursed Advances with
respect to a particular Loan over the related Liquidation Proceeds;
- to make payments to the trustee of the related series for deposit into
the Distribution Account, if any, or for remittance to the
securityholders of the related series in the amounts and in the manner
provided for in the related Agreement; and
- to clear and terminate the Collection Account pursuant to the related
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 the amount from the 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 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 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 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 the deposit, together
with investment earnings thereon at the rate specified in the prospectus
supplement, will provide sufficient funds to support the payments on the
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 securityholders may be
affected.
Unless otherwise provided in the 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 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 (1) the total payments to be made from those funds pursuant to
the related buydown plan or (2) if the 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 the 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 securityholders
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,
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when added to the amount due from the borrower on the Buy-Down Loan, equals the
full monthly payment that would be due on the Buy-Down Loan if it were not
subject to the buy-down plan.
If the borrower on a Buy-Down Loan prepays the 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 the 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 the insurer and the insurer pays all of the loss incurred in
respect of the default. In the case of any prepaid or defaulted Buy-Down Loan,
the buy-down funds in respect of which were supplemented by investment earnings,
the master servicer will withdraw from the Buy-Down Fund and retain or remit to
the borrower, depending upon the terms of the buy-down plan, any investment
earnings remaining in the related Buy-Down Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the master servicer will deposit the
subsidy funds in a custodial account (which may be interest-bearing) complying
with the requirements set forth above for the Collection Account (a "Subsidy
Fund"). Unless otherwise specified in the 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 the Loan. Neither the master servicer, any
servicer nor the depositor will be obligated to add to the Subsidy Fund any of
its own funds. Unless otherwise provided in the prospectus supplement, the
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 the GPM Loan's scheduled maximum principal
balance, the master servicer will, if and to the extent provided in the
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 prospectus supplement, will be sufficient
to cover the amount by which payments of principal and interest on the GPM Loans
assumed in calculating payments due on the Securities of that Multi-Class Series
exceed the scheduled payments on the GPM Loans. The trustee will withdraw
amounts from the GPM Fund for a series upon a prepayment of the GPM Loan as
necessary and apply those amounts to the payment of principal and interest on
the Securities of the related 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
securityholders may be affected. Unless otherwise specified in the prospectus
supplement, the GPM Fund will not be included in or deemed to be part of the
trust fund.
With respect to any other type of Loan that provides for payments other
than on the basis of level payments, an account may be established as described
in the prospectus supplement on terms similar to those relating to the Buy-Down
Fund, the Subsidy Fund or the GPM Fund.
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ADVANCES AND OTHER PAYMENTS, AND LIMITATIONS THEREON
General
The 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 prospectus supplement,
neither the master servicer nor any servicer will be obligated to make Advances,
and the obligation to do so 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 that obligation as described in the 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 that 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 prospectus supplement.
Payments in Connection With Prepaid Loans
In addition, when a borrower makes a principal prepayment in full between
the due dates on which the borrower is required to make its payments on the
Loan, as specified in the prospectus supplement (each, a "Due Date"), the
borrower will generally be required to pay interest on the principal amount
prepaid only to the date of the prepayment. If and to the extent provided in the
prospectus supplement, in order that one or more classes of the securityholders
of a series will not be adversely affected by any resulting shortfall in
interest, the master servicer may be obligated to make payment from its own
funds to the extent necessary to include in its remittance to the trustee for
deposit into the Distribution Account an amount equal to a full Scheduled
Payment of interest on the related Loan (adjusted to the applicable Interest
Rate). Any principal prepayment, together with a full Scheduled Payment of
interest thereon at the applicable Interest Rate (to the extent of the
adjustment or advance), will be distributed to securityholders on the related
Distribution Date. If the amount necessary to include a full Scheduled Payment
of interest as described above exceeds the amount that the master servicer is
obligated to pay, 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 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." Unless otherwise
specified in the prospectus supplement, coverage will be in an amount at least
equal to the greater of (1) the amount necessary to avoid the enforcement of any
co-insurance clause contained in the policy or (2) 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
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insurance policy in an amount that is at least equal to the maximum insurable
value of the 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 applicable laws and
regulations as may at any time be in force and will require 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 property flood insurance as
required under the Flood Disaster Protection Act of 1973, to the extent
available, or as described in the prospectus supplement.
Any amounts collected by the master servicer or the servicer, as the case
may be, under any 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 that assigns a
rating to the related 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 the policy absent a deductible clause,
deposit in the Collection Account the amount not otherwise payable under the
blanket policy because of the application of the 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 may not maintain individual hazard insurance policies. To
the extent, however, that a Cooperative and the related borrower on a
Cooperative Loan do not maintain insurance or do not maintain adequate coverage
or any insurance proceeds are not applied to the restoration of damaged
property, any damage to the borrower's Cooperative Dwelling or the Cooperative's
building could significantly reduce the value of the collateral securing the
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 may not maintain
separate hazard insurance policies. To the extent, however, that a Condominium
Association and the related borrower on a Condominium Loan do not maintain
insurance or do not maintain adequate coverage or any insurance proceeds are not
applied to the restoration of damaged property, any damage to the borrower's
Condominium Unit or the related Condominium Building could significantly reduce
the value of the collateral securing the Condominium Loan to the extent not
covered by other credit support.
Special Hazard Insurance Policy
To the extent specified in the 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 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
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insurer a replacement policy comparable to the terminated special hazard
insurance policy with a total coverage that is equal to the then existing
coverage of the terminated special hazard insurance policy; provided that if the
cost of any 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 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 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 insurance coverage is required for as long as the related mortgagor is
obligated to maintain primary mortgage insurance under the terms of the related
Loan. The master servicer will not cancel or refuse to renew any primary
mortgage insurance policy in effect at the date of the initial issuance of the
Securities that is required to be kept in force unless a replacement primary
mortgage insurance policy for the cancelled or nonrenewed policy is maintained
with a mortgage guarantee or insurance company duly qualified as such under the
laws of the state in which the related Mortgaged Property is located duly
authorized and licensed in the state to transact the applicable insurance
business and to write the insurance provided (each, a "Qualified Insurer").
Primary insurance policies will be required with respect to Manufactured
Home Loans only to the extent described in the prospectus supplement. If primary
mortgage insurance is to be maintained with respect to Manufactured Home Loans,
the master servicer will be required to maintain the 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 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 steps reasonably necessary to keep the insurance and
guarantees in full force and effect. See "Description of Mortgage and Other
Insurance -- Mortgage Insurance on the Loans."
Pool Insurance Policy
If specified in the 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
prospectus supplement. Unless otherwise specified in the 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 the pool insurance policy on a timely
basis.
The prospectus supplement will identify the pool insurer for each series of
Securities. If the pool insurer ceases to be a Qualified Insurer because it is
not approved as an insurer by Freddie Mac or Fannie Mae or because its
claims-paying ability is no longer rated in the category required by the
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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 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 specified in the 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 Agreement, unless coverage thereunder has
been exhausted through payment of claims. If 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 the cancellation or reduction does not adversely affect
the then current rating of the related series of Securities. See "Description of
Mortgage and Other Insurance -- Bankruptcy Bond."
PRESENTATION OF CLAIMS; REALIZATION UPON DEFAULTED LOANS
The master servicer, on behalf of the trustee and the securityholders, 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 the related Loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with any foreclosure or other conversion, the master
servicer will follow those 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: (1) the restoration
or foreclosure will increase the Liquidation Proceeds in respect of the related
Mortgage Loan available to the securityholders after reimbursement to itself for
its expenses and (2) that the expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance.
Notwithstanding anything to the contrary in this prospectus, in the case of
a trust fund for which a REMIC election has been made, the master servicer will
not liquidate any collateral acquired through foreclosure later than one year
after the acquisition of the collateral. While the holder of Mortgaged Property
acquired through foreclosure can often maximize its recovery by providing
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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 (1)
that the restoration will increase the Liquidation Proceeds in respect of the
Loan after reimbursement of the expenses incurred by the servicer or the master
servicer and (2) that the 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
"Legal Aspects of Loans -- Realizing Upon Cooperative Loan Security." 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 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 the property will be less than anticipated when the Loan was
originated. To the extent that equity does not cushion the loss in market value
and the 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 the loss is not covered by other credit support, a
loss may be experienced by the trust fund.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Typically, when any Mortgaged Property is about to be conveyed by the
borrower, the master servicer will, to the extent it has knowledge of the
prospective conveyance and prior to the conveyance, exercise its rights to
accelerate the maturity of the Loan under the applicable "due-on-sale" clause,
if any, unless it reasonably believes that the clause is not enforceable under
applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In this case, or if the
master servicer reasonably believes that enforcement of a due-on-sale clause
will not be enforceable, the master servicer is authorized to accept from or
enter into an assumption agreement with the person to whom the property has been
or is about to be conveyed, pursuant to which that person becomes liable under
the Loan and pursuant to which the original borrower is released from liability
and that 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 prospectus supplement, securityholders would not benefit from
any increase.
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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 Securities ranking
lowest in priority and, when those Securities are no longer outstanding, to the
holders of the class of Subordinate Securities ranking next lowest in priority.
These 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 the 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 the Mortgage Loan or the appraised value of the related Mortgaged
Property, plus three months' accrued interest on the Mortgage Loan. Any exercise
of the right to delay foreclosure could affect the amount recovered upon
liquidation of the related Mortgaged Property. These rights may also include the
right to recommend foreclosure or alternatives to foreclosure with respect to a
defaulted Mortgage Loan, and the right to purchase the defaulted Mortgage Loan
from the trust fund.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The master servicer or any servicer will be entitled to a servicing fee in
an amount to be determined as specified in the prospectus supplement. The
servicing fee may be fixed or variable. In addition, 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.
As provided in the prospectus supplement, the trust fund or 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, the payment of insurance policy premiums and the cost of credit
support, if any, and the payment of expenses incurred in enforcing the
obligations of servicers and in preparation of reports to securityholders.
Certain of these expenses may be reimbursable pursuant to the terms of the
related 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 the 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 that would be distributable
to securityholders.
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, the right of reimbursement being prior to the rights
of the securityholders 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 prospectus supplement, in order that
one or more classes of the securityholders 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
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servicer's remittance to the trustee for deposit into the Distribution Account
an amount equal to a full scheduled payment of interest on the related Loan
(adjusted to the applicable Interest Rate). Any principal prepayment, together
with a full Scheduled Payment of interest thereon at the applicable Interest
Rate (to the extent of the adjustment or advance), will be distributed to
securityholders 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 securityholders 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 securityholders of the related series.
EVIDENCE AS TO COMPLIANCE
If specified in the prospectus supplement, the related 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 the firm has examined
certain documents and records relating to the servicing of mortgage loans by the
master servicer and that, on the basis of its examination, the firm is of the
opinion that the servicing has been conducted in compliance with the related
Agreement except for exceptions that the firm believes to be immaterial and any
other exceptions as set forth in the statement.
The related Agreement for each series may also provide for delivery to the
trustee for the 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 Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The master servicer for each series, if any, will be identified in the
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 related Agreement, the master
servicer may be replaced by the trustee or a successor master servicer. See "The
Agreements -- Event of Default; Rights upon Events of Default."
The master servicer will generally have the right to assign its rights and
delegate its duties and obligations under the related Agreement for each series;
provided that the purchaser or transferee accepting the assignment or
delegation:
- is qualified to service mortgage loans for Fannie Mae or Freddie Mac;
- is reasonably satisfactory to the trustee for the related series;
- has a net worth of not less than $15,000,000; and
- executes and delivers to the trustee an agreement, in form and substance
reasonably satisfactory to the trustee, which contains an assumption by
the 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 related Agreement from and after the date
of the agreement; and
provided further that each Rating Agency's rating of the Securities for the
related series in effect immediately prior to the assignment, sale or transfer
is not qualified, downgraded or withdrawn as a result of the assignment, sale or
transfer.
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No assignment will become effective until the trustee or a successor master
servicer has assumed the master servicer's obligations and duties under the
related Agreement. To the extent that the master servicer transfers its
obligations to a wholly-owned subsidiary or affiliate, the subsidiary or
affiliate need not satisfy the criteria set forth above, however, in this case,
the assigning master servicer will remain liable for the servicing obligations
under the related 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 Agreement, provided that the successor or surviving entity
meets the requirements for a successor master servicer set forth in the
preceding paragraph.
Each 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 securityholders for any action taken
or for failing to take any action in good faith pursuant to the related
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 related Agreement or the failure to perform its
obligations in compliance with any standard of care set forth in the related
Agreement or liability that 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 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 Agreements or the Securities, 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 related Agreement provides
that the master servicer is not under any obligation to appear in, prosecute or
defend any legal action that is not incidental to its servicing responsibilities
under the related Agreement which, in its opinion, may involve it in any expense
or liability. The master servicer may, in its discretion, undertake any action
which it may deem necessary or desirable with respect to the related Agreement
and the rights and duties of the parties thereto and the interests of the
securityholders thereunder. In this case, the legal expenses and costs of the
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
Credit support may be provided with respect to one or more classes of a
series of Securities or for the related Primary Assets. Credit support may take
the form of one or more of the following:
- an irrevocable letter of credit;
- the subordination of one or more classes of the Securities of a series;
- reserve funds;
- a pool insurance policy, bankruptcy bond, repurchase bond or special
hazard insurance policy;
- a surety bond or financial guaranty insurance policy;
- the use of cross-support features; or
- another method of credit support described in the prospectus supplement.
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In all cases, the amounts and terms and conditions of the credit support
must be acceptable to each Rating Agency. If specified in the prospectus
supplement, any form of credit support may be structured so as to protect
against losses relating to more than one trust fund.
Unless otherwise specified in the 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 Securities and
interest thereon at the applicable Interest Rate. If losses occur which exceed
the amount covered by credit support or which are not covered by the credit
support, securityholders will bear their allocable share of deficiencies. See
"The Agreement -- Event of Default; Rights Upon Event of Default." Moreover, if
a form of credit support covers more than one trust fund (each, a "Covered
Trust"), holders of Securities issued by any of the Covered Trusts will be
subject to the risk that the credit support will be exhausted by the claims of
other Covered Trusts prior to the Covered Trust receiving any of its intended
share of the coverage.
If credit support is provided with respect to a series, or the related
Primary Assets, the prospectus supplement will include a description of:
- the amount payable under the credit support;
- any conditions to payment thereunder not otherwise described in this
prospectus;
- the conditions (if any) under which the amount payable under the credit
support may be reduced and under which the credit support may be
terminated or replaced; and
- the material provisions of any agreement relating to the credit support.
Additionally, the prospectus supplement will set forth certain information
with respect to the issuer of any third-party credit support, including:
- a brief description of its principal business activities;
- its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
- if applicable, the credit ratings assigned to it by rating agencies; and
- certain financial information.
SUBORDINATE SECURITIES; SUBORDINATION RESERVE FUND
If specified in the prospectus supplement, one or more classes of a series
may be Subordinate Securities. If specified in the prospectus supplement, the
rights of the Subordinate securityholders to receive distributions of principal
and interest from the Distribution Account on any Distribution Date will be
subordinated to the rights of the Senior securityholders to the extent of the
then applicable "Subordinated Amount" as defined in the prospectus supplement.
The Subordinated Amount will decrease whenever amounts otherwise payable to the
Subordinate securityholders are paid to the senior securityholders (including
amounts withdrawn from the subordination reserve fund, if any, established
pursuant to the related Agreement (the "Subordination Reserve Fund") and paid to
the senior securityholders), and will (unless otherwise specified in the
prospectus supplement) increase whenever there is distributed to the holders of
Subordinate Securities amounts in respect of which subordination payments have
previously been paid to the senior securityholders (which will occur when
subordination payments in respect of delinquencies and certain other
deficiencies have been recovered).
A series may include a class of Subordinate Securities entitled to receive
cash flows remaining after distributions are made to all other classes. This
right will effectively be subordinate to the rights of other securityholders,
but will not be limited to the Subordinated Amount. If specified in the
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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 federal bankruptcy code, 11 United States Code 101 et seq.,
and related rules and regulations promulgated thereunder (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 that includes one or more classes of Subordinate
Securities, a Subordination Reserve Fund may be established if specified in the
prospectus supplement. The Subordination Reserve Fund, if any, will be funded
with cash, an irrevocable 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 Securities, or both, as specified in
the prospectus supplement. The Subordination Reserve Fund will not be a part of
the trust fund, unless otherwise specified in the 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 securityholders. Moneys
will be withdrawn from the Subordination Reserve Fund to make distributions of
principal of or interest on Senior Securities under the circumstances set forth
in the prospectus supplement.
Moneys deposited in any Subordinated Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the prospectus
supplement, any reinvestment income or other gain from these investments will be
credited to the Subordinated Reserve Fund for the related series, and any loss
resulting from the investments will be charged to the Subordinated Reserve Fund.
Amounts in any Subordinated Reserve Fund in excess of the Required Reserve Fund
Balance may be periodically released to the holders of Subordinate Securities
under the conditions and to the extent specified in the prospectus supplement.
Additional information concerning any Subordinated Reserve Fund will be set
forth in the prospectus supplement, including the amount of any initial deposit
to the 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 securityholders 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,
beneficial ownership of which is evidenced by, or which secure, a separate class
or classes of a series, credit support may be provided by a cross-support
feature that requires that distributions be made on Senior Securities backed by
one Asset Group prior to distributions on Subordinate Securities backed by
another Asset Group within the trust fund. The prospectus supplement for a
series that includes a cross-support feature will describe the manner and
conditions for applying the 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 insurance policy, with respect to all Loans
comprising or underlying the Primary Assets for a series, or those Loans with
certain characteristics. The insurance policies include primary mortgage
insurance and standard hazard insurance and may, if specified in the 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
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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 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 Securities of the related series.
LETTER OF CREDIT
The letter of credit, if any, with respect to a series of Securities will
be issued by the bank or financial institution specified in the 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
prospectus supplement of the aggregate principal balance of the Loans on the
related Cut-off Date or of one or more classes of Securities (the "L/C
Percentage"). If specified in the 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 Securities will expire at the earlier of the date specified
in the prospectus supplement or the termination of the trust fund. See
"Description of the Securities -- Optional Termination" and "The
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 Securities of the related series.
FINANCIAL GUARANTY INSURANCE POLICY
Credit support may be provided in the form of a financial guaranty
insurance policy by one or more insurance companies named in the prospectus
supplement. The financial guaranty insurance policy will guarantee, with respect
to one or more classes of Securities of the related series, timely distributions
of interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the prospectus supplement. If specified in the prospectus supplement, the
financial guaranty insurance policy will also guarantee against any payment made
to a securityholder that is subsequently recovered as a "voidable preference"
payment under the Bankruptcy Code. A copy of the financial guaranty insurance
policy 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
following the issuance of the Securities 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 specified in the 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 prospectus supplement.
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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 prospectus supplement. A Reserve
Fund may be provided to increase the likelihood of timely payments of principal
of and interest on the Securities, if required as a condition to the rating of
the related series by each Rating Agency, or to reduce the likelihood of special
distributions with respect to any Multi-Class Series. If specified in the
prospectus supplement, Reserve Funds may be established to provide limited
protection, in an amount satisfactory to each Rating Agency, against certain
types of losses not covered by Insurance Policies or other credit support, such
as losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the Bankruptcy Code or losses resulting from denial of
insurance coverage due to fraud or misrepresentation in connection with the
origination of a Loan. Following each Distribution Date amounts in the 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 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 prospectus supplement.
Unless otherwise specified in the prospectus supplement, any reinvestment income
or other gain from the investments will be credited to the related Reserve Fund
for the series, and any loss resulting from the investments will be charged to
the Reserve Fund. However, this income may be payable to the master servicer or
a servicer as additional servicing compensation. See "Servicing of Loans" and
"The 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
prospectus supplement.
Additional information concerning any Reserve Fund will be set forth in the
prospectus supplement, including the initial balance of the 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 securityholders 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 specified in the prospectus supplement, 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 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 with respect to the amount of
each 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
the Mortgage Loan is reduced to 80% of the original Appraised Value.
A pool insurance policy will be obtained if specified in the prospectus
supplement to cover any loss (subject to limitations described in this
prospectus) 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
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the borrower under a Mortgage Loan. See "Legal Aspects of Loans." These losses
will be covered to the extent described in the 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 these
losses are not covered by the pool insurance policy or other credit support for
the related series, any losses would affect payments to securityholders. 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 hazards
could adversely affect payments to securityholders.
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 (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:
- 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;
- 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;
- amounts expended but not approved by the mortgage insurer;
- claim payments previously made by the mortgage insurer; and
- 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:
- 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;
- failure to construct the Mortgaged Property subject to the Mortgage Loan
in accordance with specified plans;
- physical damage to the Mortgaged Property; and
- the related servicer not being approved as a servicer by the mortgage
insurer.
Primary mortgage insurance policies generally contain provisions
substantially as follows: (1) 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; (2) when a claim is presented,
the mortgage insurer will have the option of paying the claim in full and taking
title to the property and arranging for the sale thereof or paying the insured
percentage of the claim and allowing the insured to retain title to the
property; (3) 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
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(4) 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:
- advance or discharge all hazard insurance policy premiums, and 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 the primary mortgage insurance policy, ordinary wear
and tear excepted, (3) Mortgaged Property sales expenses, (4) any
outstanding liens (as defined in the primary mortgage insurance policy)
on the Mortgaged Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees;
- in the event of any physical loss or damage to the Mortgaged Property,
restore and repair the Mortgaged Property to at least as good a condition
as existed at the effective date of the primary mortgage insurance
policy, ordinary wear and tear excepted; and
- 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:
- no change may be made in the terms of the Mortgage Loan without the
consent of the mortgage insurer;
- 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 the
Mortgage Loan or that any proceedings affecting the borrower's interest
in the Mortgaged Property securing the Mortgage Loan have been commenced,
and thereafter the insured must report monthly to the mortgage insurer
the status of any Mortgage Loan until the Mortgage Loan is brought
current, the proceedings are terminated or a claim is filed;
- the mortgage insurer will have the right to purchase the Mortgage Loan,
at any time subsequent to the 10 days' notice described above and prior
to the commencement of foreclosure proceedings, at a price equal to the
unpaid principal amount of the Mortgage Loan plus accrued and unpaid
interest thereon at the applicable Mortgage Rate and reimbursable amounts
expended by the insured for the real estate taxes and fire and extended
coverage insurance on the Mortgaged Property for a period not exceeding
12 months and less the sum of any claim previously paid under the policy
with respect to the Mortgage Loan and any due and unpaid premium with
respect to the policy;
- 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;
- the insured must notify the mortgage insurer of the institution of any
proceedings, provide it with copies of documents relating thereto, notify
the mortgage insurer of the price amounts specified above at least 15
days prior to the sale of the Mortgaged Property by foreclosure, and bid
that amount unless the mortgage insurer specifies a lower or higher
amount; and
- 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.
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The mortgage insurer will be required to pay to the insured either: (1) the
insured percentage of the loss; or (2) at its option under certain of the
primary mortgage insurance policies, the sum of the delinquent 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 that are
derived from or are in any way related to the mortgaged property will be
deducted from any claim payment.
FHA Insurance and VA Guaranty
The benefits of the FHA insurance and VA guaranty are limited, as described
below. To the extent that amounts payable under the applicable policy are
insufficient to cover losses in respect of the related Mortgage Loan, any loss
in excess of the applicable credit enhancement will be borne by securityholders.
Under both the FHA and VA programs the master servicer or servicer must
follow certain prescribed procedures in submitting claims for payment. Failure
to follow procedures could result in delays in receipt of the amount of proceeds
collected in respect of any liquidated Mortgage Loan under the applicable FHA
insurance or VA guaranty ("FHA/VA Claim Proceeds") and reductions in FHA/VA
Claim Proceeds received.
FHA, a division of HUD, is responsible for administering federal mortgage
insurance programs authorized under the Federal Housing Act of 1934, as amended,
and the United States Housing Act of 1937, as amended. FHA Mortgage Loans are
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 as well as to refinance an existing insured
mortgage. These programs generally limit the principal amount of the mortgage
loans insured. Mortgage loans originated prior to October 21, 1998, and insured
by the FHA generally require a minimum down payment of approximately 3% to 5% of
the acquisition cost, which includes the lesser of the appraised value or sales
price, plus eligible closing costs, subject to a maximum loan-to-value ratio of
approximately 97%. Mortgage loans originated on or after October 21, 1998, and
insured by the FHA generally require a minimum cash investment of 3% of the
lesser of appraised value or sales price, subject to a maximum loan-to-value
ratio (generally, approximately 97.75%) that is determined based on the loan
amount and the state in which the mortgaged property is located.
The monthly or periodic insurance premiums for FHA Mortgage Loans will be
collected by the master servicer or servicer and paid to FHA. The regulations
governing FHA single-family mortgage insurance programs provide that insurance
benefits are payable upon foreclosure (or other acquisition or possession) and
in general, conveyance of the mortgaged property to HUD. With respect to a
defaulted FHA Mortgage Loan, a master servicer or servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined by a master
servicer or servicer or HUD that default was caused by circumstances beyond the
borrower'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 borrower. Relief may involve the
reduction or suspension of Scheduled Payments for a specified period, which
payments are to be made up on or before the maturity date of the Mortgage Loan,
or the rescheduling or other adjustment of payments due under the Mortgage Loan
up to or beyond the scheduled maturity date. In addition, when a default caused
by specified circumstances is accompanied by certain other factors, HUD may
provide relief by making payments to a master servicer or servicer in partial or
full satisfaction of amounts due under the Mortgage Loan (which payments, under
certain circumstances, are to be repaid by the
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borrower to HUD). With certain exceptions, at least three full installments must
be due and unpaid under the Mortgage Loan before a master servicer or servicer
may initiate foreclosure proceedings.
HUD terminated its assignment program for borrowers, effective April 25,
1996. Borrowers who did not request the assignment of their mortgage to HUD
prior to that date are ineligible for consideration. Under this terminated
program, HUD previously accepted assignment of defaulted mortgages and paid
insurance benefits to lenders. The program was available only to eligible
borrowers whose default was caused by circumstances beyond their control.
On March 20, 1998, an Illinois Federal District Court in Ferrell v. United
States Department of Housing and Urban Development (N.D. Ill. (No. 73C 334))
granted a preliminary injunction requiring HUD to reinstate the assignment
program or an equivalent substitute. Plaintiffs in Ferrell have alleged that HUD
is required to maintain the program pursuant to the terms of prior court order.
It is difficult to assess what effect, if any, the final outcome of the Ferrell
litigation will have on FHA claim policies or procedures and what effect changes
in these policies or procedures, if any are made, will have on the servicing of
FHA Mortgage Loans.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Current practice is to pay claims 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 related master servicer or servicer will be
obligated to purchase any such debenture issued in satisfaction of a defaulted
FHA Mortgage Loan for an amount equal to the principal balance of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
unpaid principal balance of the defaulted mortgage loan, plus amounts to
reimburse the mortgagee for certain costs and expenses, less certain amounts
received or retained by the mortgagee after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the mortgagee is compensated for no more than two-thirds
of its foreclosure costs, and for interest accrued and unpaid from a date 60
days after the borrower's first uncorrected failure to perform any obligation or
make any payment due under the mortgage loan and, upon assignment, interest from
the date of assignment to the date of payment of the claim, in each case at the
applicable HUD debenture interest rate, provided all applicable HUD requirements
have been met.
Although FHA insurance proceeds include accrued and unpaid interest on the
defaulted mortgage loan, the amount of interest paid may be substantially less
than accrued interest. As described above, FHA will reimburse interest at the
applicable debenture interest rate, which will generally be lower than the
Mortgage Rate on the related Mortgage Loan. Negative interest spread between the
debenture rate and the Mortgage Rate, as well as the failure of FHA insurance to
cover the first 60 days of accrued and unpaid interest and all foreclosure
expenses as described above, could result in losses to securityholders. The
interest payable may be curtailed if a master servicer or servicer has not met
FHA's timing requirements for certain actions during the foreclosure and
conveyance process. When a master servicer or servicer exceeds the timing
requirements and has not obtained an extension from FHA, FHA will pay interest
only to the date the particular action should have been completed.
VA Mortgage Loans are partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, which 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 or to refinance an existing guaranteed loan. The program requires no down
payment from the purchaser and permits the guarantee of mortgage loans of up to
30 years' duration. The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan
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depends upon the original principal balance of the mortgage loan. At present,
the maximum guaranty that may be issued by the VA under a VA guaranteed mortgage
loan is 50% of the unpaid principal balance of a loan of $45,000 or less,
$22,500 for any loan of more than $45,000 but less than $56,250, to the lesser
of $36,000 or 40% of the principal balance of a loan of $56,251 to $144,000,
and, for loans of more than $144,000, the lesser of 25% of the principal balance
of the mortgage loan or $50,750.
With respect to a defaulted VA guaranteed mortgage loan, the mortgagee is,
absent exceptional circumstances, authorized to foreclose only after the default
has continued for three months. Generally, a claim for the guarantee is
submitted after foreclosure and after the filing with the VA by the mortgagee of
a notice of election to convey the related mortgaged property to the VA.
In instances where the net value of the mortgaged property securing a VA
guaranteed mortgage loan is less than the unguaranteed portion of the
indebtedness outstanding (including principal, accrued interest and certain
limited foreclosure costs and expenses) on the related mortgage loan, the VA may
notify the mortgagee that it will not accept conveyance of the mortgaged
property (a "No-Bid"). In the case of a No-Bid, the VA will pay certain guaranty
benefits to the mortgagee and the mortgagee will generally take title to and
liquidate the mortgaged property. The guaranty benefits payable by the VA in the
case of a No-Bid will be an amount equal to the original guaranteed amount or,
if less, the initial guarantee percentage multiplied by the outstanding
indebtedness with respect to the defaulted mortgage loan. The amount of the
guarantee decreases pro rata with any decrease in the amount of indebtedness
(which may include accrued and unpaid interest and certain expenses of the
mortgagee, including foreclosure expenses) up to the amount originally
guaranteed.
When the mortgagee receives the VA's No-Bid instructions with respect to a
defaulted mortgage loan, the mortgagee has the right (but not the obligation) to
waive or satisfy a portion of the indebtedness outstanding with respect to the
defaulted mortgage loan by an amount that would cause the unguaranteed portion
of the indebtedness (including principal, accrued interest and certain limited
foreclosure costs and expenses) after giving effect to the reduction to be less
than the net value of the mortgaged property securing the mortgage loan (a
"Buydown"). In the case of a Buydown, the VA will accept conveyance of the
mortgaged property and the mortgagee will suffer a loss to the extent of the
indebtedness that was satisfied or waived in order to effect the Buydown, in
addition to any other losses resulting from unreimbursed foreclosure costs and
expenses and interest that may have accrued beyond the applicable VA cut-off
date.
In the event the VA elects a No-Bid, the amount paid by the VA cannot
exceed the original guaranteed amount or, if less, the initial guarantee
percentage multiplied by the outstanding indebtedness with respect to the
defaulted Mortgage Loan. The amount of the guarantee decreases pro rata with any
decrease in the amount of indebtedness, as described above. As a result of these
limitations, losses associated with defaulted VA Mortgage Loans could be
substantial.
Pool Insurance Policy
If specified in the prospectus supplement, the master servicer will be
required to maintain a pool insurance policy for the Loans in the trust fund on
behalf of the trustee and the securityholders. 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 the policies generally.
The prospectus supplement will describe any provisions of a pool insurance
policy that 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
acceptable to the pool insurer on all Mortgage Loans in the related trust fund
that have
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Loan-to-Value Ratios at the time of origination in excess of 80% and that a
claim under the 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:
- the amount of the unpaid principal balance of the defaulted Mortgage Loan
immediately prior to the approved sale of the Mortgaged Property,
- the amount of the accumulated unpaid interest on the Mortgage Loan to the
date of claim settlement at the contractual rate of interest, and
- advances made by the insured as described above less certain payments.
An "approved sale" is:
- 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,
- a foreclosure or trustee's sale of the Mortgaged Property at a price
exceeding the maximum amount specified by the pool insurer,
- the acquisition of the Mortgaged Property under the primary mortgage
insurance policy by the mortgage insurer, or
- 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 that the restoration will increase the proceeds to the
securityholders on liquidation of the Mortgage Loan after reimbursement of the
master servicer for its expenses and that the 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 Securities 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 "Legal
Aspects of Loans." 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 Securities. 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 the Loan or otherwise, it will not be obligated to make an
advance respecting any delinquency since the Advance would not be ultimately
recoverable by it. See "Servicing of Loans -- Advances and Limitations Thereon."
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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 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, the 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 policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides,
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit support will adversely affect distributions to
securityholders. 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 the 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, the clause will provide that the hazard insurer's
liability in the event of partial loss will not exceed the greater of (1) 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 and (2) the 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 the 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 may not maintain
individual hazard insurance policies. To the extent, however, that either the
Cooperative or the related borrower do not maintain insurance, or do not
maintain adequate coverage, or do not apply any insurance proceeds to the
restoration of damaged property, then damage to the borrower's Cooperative
Dwelling or the Cooperative's building could significantly reduce the value of
the Mortgaged Property securing the related Cooperative Loan. Similarly, the
depositor will not require
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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
may not maintain separate hazard insurance policies. To the extent, however,
that either the Condominium Association or the related borrower do not maintain
insurance, or do not maintain adequate coverage, or do not apply any insurance
proceeds to the restoration of damaged property, then damage to the borrower's
Condominium Unit or the related Condominium Building could significantly reduce
the value of the Mortgaged Property securing the related Condominium Loan.
Special Hazard Insurance Policy
Although the terms of the 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 the damage is not covered by the
standard hazard insurance policy or any flood insurance policy, if applicable,
required to be maintained with respect to the 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 (1) the cost of repair or replacement of the property and (2) upon transfer
of the property to the special hazard insurer, the unpaid principal balance of
the Loan at the time of acquisition of the 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
the 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 that 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 that amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the property with the proceeds described under (1) above is
expected to satisfy the condition under the pool insurance policy that the
property be restored before a claim under the pool insurance policy may be
validly presented with respect to the defaulted Loan secured by the property.
The payment described under (2) above will render unnecessary presentation of a
claim in respect of the 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 Securities, 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 prospectus supplement will specify the required types and
amounts of additional insurance and describe the general terms of the insurance
and conditions to payment thereunder.
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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 the Loan. The amount of the
secured debt could be reduced to that value, and the holder of the Loan thus
would become an unsecured creditor to the extent the outstanding principal
balance of the 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 "Legal Aspects of Loans." If
so provided in the 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
the court of the principal amount of a Loan and will cover certain unpaid
interest on the amount of the 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 prospectus supplement for all Loans in the Pool secured by single unit
primary residences. This amount will be reduced by payments made under the
bankruptcy bond in respect of the Loans, unless otherwise specified in the
prospectus supplement, and will not be restored.
REPURCHASE BOND
If specified in the prospectus supplement, the depositor or master servicer
will be obligated to repurchase any Loan (up to an aggregate dollar amount
specified in the prospectus supplement) for which insurance coverage is denied
due to dishonesty, misrepresentation or fraud in connection with the origination
or sale of the Loan. This obligation may be secured by a surety bond
guaranteeing payment of the amount to be paid by the depositor or the master
servicer.
THE AGREEMENTS
The following summaries describe certain material provisions of the
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 Agreements.
Where particular provisions or terms used in the Agreements are referred to,
these provisions or terms are as specified in the related Agreement.
ISSUANCE OF SECURITIES
Securities representing interests in a trust fund, or an Asset Group, that
the trustee will elect to have treated as a REMIC, a FASIT or a grantor trust
will be issued, and the related trust fund will be created, pursuant to a trust
agreement between the depositor and the trustee. A series of Notes issued by a
trust fund will be issued pursuant to an indenture between the related trust
fund and an indenture trustee named in the prospectus supplement. In the case of
a series of Notes, the trust fund and the depositor will also enter into a sale
and collection agreement with the indenture trustee and the issuer.
As applicable, the trust agreement, in the case of Certificates, and the
indenture, together with the sale and collection agreement, in the case of
Notes, are referred to as the "Agreements." In the case of a series of Notes,
the trust fund will be established either as a statutory business trust under
the law of the state specified in the prospectus supplement or as a common law
trust under the law of the state specified in the prospectus supplement pursuant
to a deposit trust agreement between the depositor and an owner trustee
specified in the prospectus supplement relating to that series of Notes. The
Primary Assets of a trust fund will be serviced in accordance with one or more
underlying servicing agreements.
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ASSIGNMENT OF PRIMARY ASSETS
General
At the time of issuance, 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. The assignment
will include all principal and interest due on or with respect to the Primary
Assets after the Cut-off Date specified in the prospectus supplement (except for
any Retained Interests). The trustee will, concurrently with the assignment,
execute and deliver the Securities.
Assignment of Private Mortgage-Backed Securities
The depositor will cause the Private Mortgage-Backed Securities to be
registered in the name of the trustee or its nominee or correspondent. The
trustee or its nominee or correspondent will have possession of any certificated
Private Mortgage-Backed Securities. Unless otherwise specified in the 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."
Each Private Mortgage-Backed Security will be identified in a schedule
appearing as an exhibit to the related 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 Agreement, the depositor will represent and warrant to the
trustee regarding the Private Mortgage-Backed Securities:
(1) that the information contained in the Mortgage Certificate Schedule is
true and correct in all material respects;
(2) 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);
(3) that there has been no other sale by it of the Private Mortgage-Backed
Securities; and
(4) that there is no existing lien, charge, security interest or other
encumbrance (other than any Retained Interest) on the Private Mortgage-Backed
Securities.
Assignment of Mortgage Loans
As specified in the prospectus supplement, the depositor will, as to each
Mortgage Loan, deliver or cause to be delivered to the trustee, or a custodian
on behalf of the trustee:
- 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 the Mortgage will be delivered, together with a
certificate that the original of the Mortgage was delivered to the
recording office); and
- an assignment of the Mortgage in recordable form.
The trustee, or the custodian, will hold the documents in trust for the
benefit of the securityholders.
If so specified in the prospectus supplement, the depositor will, at the
time of delivery of the Securities, 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
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the trustee, recording is not required to protect the trustee's interest in the
Mortgage Loan. If specified in the prospectus supplement, the depositor will
cause the assignments to be so recorded within the time after delivery of the
Securities as is specified in the prospectus supplement, in which event, the
Agreement may, as specified in the prospectus supplement, require the depositor
to repurchase from the trustee any Mortgage Loan required to be recorded but not
recorded within that time, at the price described below with respect to
repurchase by reason of defective documentation. Unless otherwise provided in
the prospectus supplement, the enforcement of the repurchase obligation would
constitute the sole remedy available to the securityholders or the trustee for
the failure of a Mortgage Loan to be recorded.
With respect to any 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.
The trustee, its agent, or a custodian will review the documents relating
to each Mortgage Loan within the time period specified in the related Agreement
after receipt thereof, and the trustee will hold the documents in trust for the
benefit of the securityholders. Unless otherwise specified in the prospectus
supplement, if any document is found to be missing or defective in any material
respect, the trustee (or the 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 the Mortgage Loan.
If the Seller cannot cure the omission or defect within the time period
specified in the related Agreement after receipt of notice, the Seller will be
obligated to purchase the related Mortgage Loan from the trustee at the Purchase
Price or, if specified in the prospectus supplement, replace the Mortgage Loan
with another mortgage loan that meets certain requirements set forth therein. We
cannot assure you that a Seller will fulfill this purchase obligation. Although
the master servicer may be obligated to enforce the obligation to the extent
described above under "Loan Underwriting Procedures and
Standards -- Representations and Warranties," neither the master servicer nor
the depositor will be obligated to purchase the Mortgage Loan if the Seller
defaults on its purchase obligation, unless the 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 prospectus supplement, this
purchase obligation constitutes the sole remedy available to the securityholders
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 prospectus
supplement otherwise provides, no purchase of a Mortgage Loan will be made if
the purchase would result in a prohibited transaction under the Code.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit
to the related Agreement (the "Mortgage Loan Schedule"). The Mortgage Loan
Schedule will specify the number of Mortgage Loans that 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.
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Assignment of Manufactured Home Loans
The depositor will cause any Manufactured Home Loans included in the
Primary Assets for a series of Securities 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 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 Agreement. The
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
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
securityholders 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 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
the assignment, the interest of the securityholders in the Manufactured Home
Loans could be defeated. See "Legal Aspects of Loans -- Manufactured Home
Loans."
Assignment of Participation Certificates
The depositor will cause any certificates evidencing a participation
interest in a Loan or a pool of loans ("Participation Certificates") obtained
under a participation agreement to be assigned to the trustee by delivering to
the trustee the Participation Certificates, which will be reregistered in the
name of the trustee. Unless otherwise specified in the 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 related Agreement, the depositor will represent and warrant
to the trustee regarding each Participation Certificate:
- that the information contained in the Participation Certificate Schedule
is true and correct in all material respects;
- that, immediately prior to the conveyance of the Participation
Certificates, the depositor had good title to and was sole owner of the
Participation Certificates;
- that there has been no other sale by it of the Participation
Certificates; and
- that the 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 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 Agreement, or any other time
period 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
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closing date of the issuance of the series) to be defective in any material
respect and the depositor does not cure the defect within 90 days, or any other
period specified in the prospectus supplement, the depositor will, not later
than 90 days, or any other period specified in the 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.
Unless otherwise specified in the prospectus supplement, the repurchase
price will be generally equal to (a) the lesser of (1) the outstanding principal
balance of the Mortgage Loan (or, in the case of a foreclosed Mortgage Loan, the
outstanding principal balance of the Mortgage Loan immediately prior to
foreclosure) and (2) 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 the Mortgage Loan at the related Interest Rate (less any unreimbursed
Advances respecting the Mortgage Loan), provided, however, the purchase price
will not be limited in (1) above to the trust fund's federal income tax basis if
the repurchase at a price equal to the outstanding principal balance of the
Mortgage Loan will not result in any prohibited transaction tax under Section
860F(a) of the Code.
If provided in the prospectus supplement, the depositor may, rather than
repurchase the Loan as described above, remove the 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 (1) with respect
to a trust fund for which no REMIC election is made, the substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(2) with respect to a trust fund for which a REMIC election is made, the
substitution must be made within two years of the date.
Any Qualifying Substitute Mortgage Loan will have, on the date of
substitution, the characteristics specified in the applicable Agreement,
generally including (1) 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 Distribution Account in the month of substitution for
distribution to securityholders), (2) an interest rate not less than (and not
more than 2% greater than) the interest rate of the Deleted Loan, (3) 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 prospectus supplement, the above-described
cure, repurchase or substitution obligations constitute the sole remedies
available to the securityholders 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 that 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 representations and
warranties in all material respects within 90 days after notification by the
trustee of the breach, and if the breach is of a nature that materially and
adversely affects the value of the Loan, the depositor or such entity is
obligated to repurchase the affected Loan or, if provided in the 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 the Loans.
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REPORTS TO SECURITYHOLDERS
The trustee will prepare and forward to each securityholder 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:
(1) with respect to a series (a) other than a Multi-Class Series, the
amount of the 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) that is 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 the distribution;
(2) with respect to a series (a) other than a Multi-Class Series, the
amount of the distribution allocable to interest on the Primary Assets and the
amount, if any, advanced by the master servicer or a servicer or (b) that is not
a Multi-Class Series, the amount of the interest distribution;
(3) the amount of servicing compensation with respect to the Principal
Assets and paid during the Due Period commencing on the Due Date to which the
distribution relates and the amount of servicing compensation during that period
attributable to penalties and fees;
(4) 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 (1) above;
(5) the aggregate outstanding principal amount of the Securities of the
related series as of the Due Date, after giving effect to distributions
allocated to principal reported under (1) above;
(6) with respect to Compound Interest Securities, prior to the Accrual
Termination Date in addition to the information specified in (1)(b) above, the
amount of interest accrued on the Securities during the related interest accrual
period and added to the Compound Value thereof;
(7) in the case of Floating Rate Securities, the Floating Rate applicable
to the distribution being made;
(8) if applicable, the amount of any shortfall (i.e., the difference
between the aggregate amounts of principal and interest which securityholders
would have received if there were sufficient eligible funds in the Distribution
Account and the amounts actually distributed);
(9) 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 the
distribution relates;
(10) if applicable, the value of any REO Property acquired on behalf of
securityholders 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 the distribution relates;
(11) the amount of any withdrawal from any applicable reserve fund included
in amounts actually distributed to securityholders and the remaining balance of
each reserve fund (including any Subordinated Reserve Fund), if any, on the
Distribution Date, after giving effect to distributions made on that date; and
(12) any other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the trustee, unless otherwise specified in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year: (a) the aggregate of amounts reported pursuant to (1) through
(4), (6) and (8) above for the calendar year and (b) the information specified
in the related
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Agreement to enable securityholders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
reports provided to the securityholders 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."
INVESTMENT OF FUNDS
The Distribution 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:
- direct obligations of, and obligations fully guaranteed as to timely
payment of principal and interest by, the United States of America,
Freddie Mac, Fannie Mae 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;
- demand and time deposits, certificates of deposit or bankers'
acceptances;
- repurchase obligations pursuant to a written agreement with respect to
any security described in the first clause above;
- 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;
- 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);
- a guaranteed investment contract issued by an entity having a credit
rating acceptable to each Rating Agency; and
- 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 prospectus supplement ("Eligible Reserve Fund Investments").
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 Distribution Account, any Reserve Fund or the
Subordinated Reserve Fund for the related series are required or may be
anticipated to be required to be applied for the benefit of securityholders of
the series.
If so provided in the prospectus supplement, the reinvestment income from
the Subordination Reserve Fund, other Reserve Fund, Servicing Account,
Collection Account or the Distribution Account may be property of the master
servicer or a servicer and not available for distributions to securityholders.
See "Servicing of Loans."
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EVENT OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Trust Agreement
As specified in the prospectus supplement, events of default under the
trust agreement for a series of Certificates include:
- any failure by the master servicer or servicer to distribute or remit any
required payment that continues unremedied for five business days (or any
shorter period as is specified in the applicable agreement) after the
giving of written notice of the failure to the master servicer or
servicer by the trustee for the related series, or to the master servicer
or servicer and the trustee by the holders of Certificates of the series
evidencing not less than a specified percentage of the aggregate
outstanding principal amount of the Certificates for the series;
- 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 that continues unremedied for a specified number of days
after the giving of written notice of the 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 the related series evidencing
not less than 25% of the aggregate outstanding principal amount of the
Certificates; and
- 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.
So long as an Event of Default remains unremedied under the trust agreement
for a series, the trustee for the related series or holders of Certificates of
the series evidencing not less than a specified percentage of the aggregate
outstanding principal amount of the Certificates for the 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 the 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
prospectus supplement, together with the other servicing compensation in the
form of assumption fees, late payment charges or otherwise, as provided in the
trust agreement.
During the continuance of any event of default under the trust agreement
for a series, the trustee for that 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 that series, and holders of Certificates
evidencing not less than a specified percentage of the aggregate outstanding
principal amount of the Certificates for that 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 remedy or to exercise any
of the trusts or powers unless the Certificateholders have offered the trustee
reasonable security or indemnity against the cost, expenses and liabilities that
may be incurred by the trustee therein or thereby. Also, the trustee may decline
to follow the direction if the trustee determines that the action or proceeding
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so directed may not lawfully be taken or would involve it in personal liability
or be unjustly prejudicial to the non-assenting Certificateholders.
No holder of a series of Certificates, solely by virtue of that holder's
status as a Certificateholder, will have any right under the trust agreement for
the related series to institute any proceeding with respect to the trust
agreement, unless that holder previously has given to the trustee for that
series written notice of default and unless the holders of Certificates
evidencing not less than a specified percentage of the aggregate outstanding
principal amount of the Certificates for that series have made written request
upon the trustee to institute a proceeding in its own name as trustee thereunder
and have offered to the trustee reasonable indemnity, and the trustee for a
specified number of days has neglected or refused to institute such a
proceeding.
Indenture
As specified in the prospectus supplement, events of default under the
indenture for each series of Notes generally include:
- a default for a specified number of days in the payment of any interest
or installment of principal on a Note of that series, to the extent
specified in the prospectus supplement, or the default in the payment of
the principal of any Note at the Note's maturity;
- failure to perform in any material respect any other covenant of the
trust in the indenture that continues for a specified number of days
after notice is given in accordance with the procedures described in the
prospectus supplement;
- any failure to observe or perform any covenant or agreement of the trust,
or any representation or warranty made by the trust in the indenture or
in any certificate or other writing delivered pursuant or in connection
with the series having been incorrect in a material respect as of the
time made, and that breach is not cured within a specified number of days
after notice is given in accordance with the procedures described in the
prospectus supplement;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the trust; or
- any other event of default provided with respect to Notes of that series.
If an event of default with respect to the Notes of any series at the time
outstanding occurs and is continuing, subject to the terms of the indenture,
either the trustee or the holders of a specified percentage of the then
aggregate outstanding amount of the Notes of the series may declare the
principal amount or, if the Notes of that series are zero coupon securities,
that portion of the principal amount as may be specified in the terms of that
series, of all the Notes of the series to be due and payable immediately. That
declaration may, under certain circumstances, be rescinded and annulled by the
holders of a specified percentage in aggregate outstanding amount of the Notes
of that series.
If, following an event of default with respect to any series of Notes, the
Notes of that series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding any acceleration, elect to maintain
possession of the collateral securing the Notes of the series and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal and interest on the Notes of that series as they would have
become due if there had not been a declaration of acceleration. In addition, the
trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an event of default, unless:
- the holders of 100% (or any other percentages specified in the indenture)
of the then aggregate outstanding amount of the Notes (or certain classes
of Notes) of the series consent to the sale;
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- the proceeds of the sale or liquidation are sufficient to pay in full the
principal and accrued interest, due and unpaid, on the outstanding Notes
of the series at the date of the sale; or
- the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the Notes as the payments would
have become due if the Notes had not been declared due and payable, and
the trustee obtains the consent of the holders of a specified percentage
of the then aggregate outstanding amount of the Notes of the series.
As specified in the prospectus supplement, in the event the principal of
the Notes of a series is declared due and payable, the holders of any Notes
issued at a discount from par may be entitled to receive no more than an amount
equal to the unpaid principal amount less the amount of the discount that is
unamortized.
Subject to the provisions for indemnification and certain limitations
contained in the indenture, the holders of a specified percentage of the then
aggregate outstanding amount of the Notes of a series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the Notes of the series, and the holders of a specified
percentage of the then aggregate outstanding amount of the Notes of that series
may, in certain cases, waive any default, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
indenture that cannot be modified without the waiver or consent of all the
holders of the outstanding Notes of that series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the trustee for each series of Securities will be set forth in
the 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 Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the trustee by the Agreement relating to that series will be
conferred or imposed upon the trustee and each separate trustee or co-trustee
jointly, or, in any jurisdiction in which the trustee is incompetent or
unqualified to perform certain acts, singly upon the separate trustee or
co-trustee who will exercise and perform those 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 will
have any or all of the rights, powers, duties and obligations of the trustee
conferred on them by their appointment; provided that the trustee will continue
to be responsible for its duties and obligations under the Agreement.
DUTIES OF THE TRUSTEE
The trustee makes no representations as to the validity or sufficiency of
the Agreements, the Securities or of any Primary Asset or related documents. If
no event of default (as defined in the related Agreement) has occurred, the
trustee is required to perform only those duties specifically required of it
under the 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 Agreement, however, the trustee will not be responsible for the
accuracy or content of any documents furnished by it or the securityholders to
the master servicer under the related 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
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securityholders in an event of default, see "Event of Default; 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 the Agreement, or in the exercise of any of its rights or powers,
if it has reasonable grounds for believing that repayment of those funds or
adequate indemnity against risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The trustee may, upon written notice to the depositor, resign at any time,
in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted the appointment within a specified number of days after giving notice
of resignation, the resigning trustee or the securityholders may petition any
court of competent jurisdiction for appointment of a successor trustee.
The trustee may also be removed at any time:
- if the trustee ceases to be eligible to continue to act as trustee under
the Agreement;
- if the trustee becomes insolvent; or
- by the securityholders of securities evidencing a specified percentage of
the aggregate voting rights of the securities in the trust fund upon
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.
DISTRIBUTION ACCOUNT
The trustee will establish a separate account (the "Distribution Account")
in its name as trustee for the securityholders. Unless otherwise specified in
the prospectus supplement, the Distribution Account will be maintained as an
interest bearing account or the funds held therein may be invested, pending
disbursement to securityholders of the related series, pursuant to the terms of
the Agreement, in Eligible Investments. If specified in the prospectus
supplement, the master servicer will be entitled to receive as additional
compensation, any interest or other income earned on funds in the Distribution
Account. The trustee will deposit into the Distribution 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 prospectus
supplement, the trustee is permitted from time to time to make withdrawals from
the Distribution 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 Distribution 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 securityholders and to clear and terminate the Distribution
Account.
Unless otherwise specified in the prospectus supplement, "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.
EXPENSE RESERVE FUND
If specified in the prospectus supplement relating to a series, the
depositor may deposit on the related closing date of the issuance of a series in
an account to be established with the trustee (the "Expense Reserve Fund") cash
or eligible investments that 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
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funded over time through the deposit therein of all or a portion of cash flow,
to the extent described in the 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 AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each series of Securities may be amended by the parties to the Agreement,
without notice to or consent of the securityholders:
(1) to cure any ambiguity;
(2) to conform to the provisions of the prospectus supplement and
prospectus, to correct any defective provisions or to supplement any provision;
(3) to add any other provisions with respect to matters or questions
arising under the Agreement; or
(4) to comply with any requirements imposed by the Code;
provided that any amendment except pursuant to clause (3) above, will not
adversely affect in any material respect the interests of any securityholders of
the related series not consenting thereto. If provided in the Agreement, any
amendment pursuant to clause (3) of the preceding sentence will be deemed not to
adversely affect in any material respect the interests of any securityholder if
the trustee receives written confirmation from each Rating Agency rating the
Securities of that series that the amendment will not cause the Rating Agency to
reduce the then current rating.
As specified in the prospectus supplement, the Agreement may also be
amended by the parties to the Agreement with the consent of the securityholders
possessing a specified percentage of the aggregate outstanding principal amount
of the Securities (or, if only certain classes are affected by the amendment, a
specified percentage of the aggregate outstanding principal amount of each class
affected), for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the Agreement or modifying in any manner
the rights of securityholders; provided, however, that no amendment may:
- reduce the amount or delay the timing of payments on any Security without
the consent of the holder of that Security; or
- reduce the percentage required to consent to the amendment, without the
consent of securityholders of 100% of each class of Securities affected
by the amendment.
VOTING RIGHTS
The prospectus supplement may set forth a method of determining allocation
of voting rights with respect to a series of Securities.
REMIC OR FASIT ADMINISTRATOR
For any Multi-Class Series with respect to which a REMIC or FASIT election
is made, 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.
ADMINISTRATION AGREEMENT
If specified in the prospectus supplement for a series of Notes, the
depositor, the trust fund and an administrator specified in the prospectus
supplement will enter into an administration agreement.
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The administrator will agree, to the extent provided in the administration
agreement, to provide certain notices and to perform certain other
administrative obligations required to be performed by the trust fund under the
sale and collection agreement, the indenture and the deposit trust agreement.
Certain additional administrative functions may be performed on behalf of the
trust fund by the depositor.
TERMINATION
Trust Agreement
The obligations created by the trust agreement for a series will terminate
upon the distribution to securityholders of all amounts distributable to them
pursuant to the trust agreement after the earlier of:
- the later of (a) the final payment or other liquidation of the last
Mortgage Loan remaining in the trust fund for the related series and (b)
the disposition of all property acquired upon foreclosure or deed in lieu
of foreclosure in respect of any Mortgage Loan ("REO Property"); and
- the repurchase, as described below, by the master servicer from the
trustee for the related series of all Mortgage Loans at that time subject
to the trust agreement and all REO Property.
As specified in the prospectus supplement, the trust agreement for each
series permits, but does not require, the specified entity to repurchase from
the trust fund for that series all remaining Mortgage Loans at a price equal,
unless otherwise specified in the prospectus supplement, to:
- 100% of the Aggregate Asset Principal Balance of the Mortgage Loans, plus
- with respect to REO Property, if any, the outstanding principal balance
of the related Mortgage Loan, minus
- related unreimbursed Advances, or in the case of the Mortgage Loans, only
to the extent not already reflected in the computation of the Aggregate
Asset Principal Balance of the Mortgage Loans, minus
- unreimbursed expenses that are reimbursable pursuant to the terms of the
trust agreement, plus
- accrued interest at the weighted average Mortgage Rate through the last
day of the Due Period in which the 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:
- 100% of the Aggregate Asset Principal Balance of the Mortgage Loans, plus
accrued interest thereon at the applicable Net Mortgage Rates through the
last day of the month of the repurchase, and
- the aggregate fair market value of the 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 this right will effect early retirement of the Certificates
of the 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 prospectus
supplement, of the aggregate asset principal balance on the Cut-off Date. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last survivor of a certain person
identified therein. For each series, the master servicer or the trustee,
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as applicable, will give written notice of termination of the Agreement to each
securityholder, 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 prospectus supplement for a series, the
depositor or another entity may effect an optional termination of the trust fund
under the circumstances described in the prospectus supplement. See "Description
of the Securities -- Optional Termination."
Indenture
The indenture will be discharged with respect to a series of Notes, except
with respect to certain continuing rights specified in the indenture, upon the
delivery to the trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the trustee of funds sufficient for the payment
in full of all of the Notes.
In addition, with certain limitations, the indenture may provide that the
trust will be discharged from any and all obligations in respect of the Notes,
except for certain administrative duties, upon the deposit with the trustee of
money or direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in accordance with
their terms will provide funds in an amount sufficient to pay the principal of
and each installment of interest on the Notes on the stated maturity date and
any installment of interest on the Notes in accordance with the terms of the
indenture and the Notes. In the event of any defeasance and discharge of Notes,
holders of the Notes will be able to look only to the funds or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
housing loans that are general in nature. Because certain of these 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 (other than any Cooperative 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 the 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 the 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
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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, certain Mortgage
Loans included in the pool of Mortgage Loans will be secured by junior mortgages
or deeds of trust that 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 securityholders) 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
servicer asserts its subordinate interest in a property in foreclosure
litigation or satisfies the defaulted senior loan. As discussed more fully
below, in many states a junior mortgagee or beneficiary may satisfy a defaulted
senior loan in full, or may cure the 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 standard 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 the proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in the
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 those 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 a future advance 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 the
intervening junior mortgages or deeds of trust and other liens at the time of
the advance. Where
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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 the 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 that 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 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, the Mortgage Loans may also
contain Cooperative Loans evidenced by promissory notes secured by security
interests in shares issued by private corporations that are entitled to be
treated as housing cooperatives under the Code and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the corporations' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property that it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. This 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 that holds title to the building in
which the apartment is located, and by virtue of owning the 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 that apply to a
foreclosure of a leasehold mortgage or deed of trust, in that
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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 that is entitled to be treated as a housing cooperative under
the Code owns all the real property or some interest therein sufficient to
permit it to own the building and all separate dwelling units therein. The
Cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building and/or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as property mortgagor, is
also responsible for meeting these mortgage 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 (1) 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 (2) 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 final
payment could lead to foreclosure by the mortgagee. Similarly, a land lease has
an expiration date and the inability of the Cooperative to extend its term or,
in the alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary leases
and occupancy agreements. A foreclosure by the holder of a blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed an individual tenant-stockholder of Cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans. Similarly, the termination of the land lease by its holder could
eliminate or significantly diminish the value of any collateral held by the
lender who financed an individual tenant-stockholder of the Cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing the tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See " -- Realizing Upon Cooperative Loan Security" below.
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There are certain risks that arise as a result of the cooperative form of
ownership that 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 that is secured by a mortgage on the building. In this case, 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 the 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
these items are allowable as a deduction to the corporation, that 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 the section for any particular year. In the event that 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 the 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 that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. The
trustor, borrower, or any person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorney's fees, which may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in
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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 sufficient 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 the 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 the 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 that 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 it is available.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making 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 the
tenant-stockholder, including mechanics' liens against the Cooperative apartment
building incurred by the tenant-stockholder. Commonly, rent and other
obligations and charges
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arising under a proprietary lease or occupancy agreement that 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 the 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
that 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 the 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 the 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 some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure 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 mortgage secured by the cooperative
building itself, where the building 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 that 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. In addition, all cooperative units that were
previously rent controlled or rent stabilized may convert to their prior state
of rent-controlled or rent-stabilized apartments.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a nonstatutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The right of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or 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.
In addition to the statutory prohibitions on deficiency judgments, certain
Mortgage Loans in the trust fund may, by their terms, prohibit recourse to the
borrower in the event proceeds from foreclosure or other liquidation are
insufficient to satisfy the debt. These Mortgage Loans may also not require
payments of principal and interest until maturity, thereby increasing the
likelihood that a deficiency will exist.
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.
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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 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 the case. If the trustee or debtor-in-possession
rejects an executory contract or an unexpired lease, rejection generally
constitutes a breach of the executory contract or unexpired lease immediately
before the date of the filing of the petition. As a
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consequence, the other party or parties to the 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 the 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
damages from the termination of a lease of real property will be limited to the
sum of (1) the rent reserved by the lease, without acceleration, for the greater
of one year or 15 percent, not to exceed three years, of the remaining term of
the lease, following the earlier of the date of the filing of the petition and
the date on which the lender repossessed, or the lessee surrendered, the leased
property, and (2) any unpaid rent due under the lease, without acceleration, on
the earlier of these 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 the lease as terminated by rejection or, in the
alternative, may remain in possession of the leasehold for the balance of the
term and for any renewal or extension of the 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 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 renewal or extension thereof,
any damages occurring after that date caused by the nonperformance of any
obligation of the lessor under the lease after that 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 the executory contract or unexpired
lease, notwithstanding any provision therein or in applicable law that
prohibits, restricts or conditions the 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 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 the 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:
- 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;
- may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on the obligations entered
into prior to military service; and
- may have the maturity of the 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.
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However, the benefits listed above are subject to challenge by creditors
and if, in the opinion of the court, the ability of a person to comply with the
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 the amounts, and any loss in respect thereof may reduce the
amounts available to be paid to the holders of the securities of the related
series.
As specified in the 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 securities of the related series that is entitled to
receive interest in respect of the Mortgage Loans or Manufactured Home Loans in
proportion to the interest that each class of Securities 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.
Amendments to CERCLA enacted in 1996 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 ("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, amendments to RCRA, enacted
concurrently 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.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act") generally preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms. As a
result, due-on-sale clauses have become enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of
due-on-sale clauses with respect to mortgage loans that were:
- originated or assumed during the "window period" under the Garn-St.
Germain Act which ended in all cases not later than October 15, 1982, and
- originated by lenders other than national banks, federal savings
institutions and federal credit unions.
Freddie Mac has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states", five states -- Arizona,
Michigan, Minnesota, New Mexico and Utah -- have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from a bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to 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
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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 that
state have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
The depositor has been advised by counsel that a court interpreting Title V
would hold that Mortgage Loans related to a series originated on or after
January 1, 1980 are subject to federal preemption. Therefore, in a state that
has not taken the requisite action to reject application of Title V or to adopt
a provision limiting discount points or other charges prior to origination of
the Mortgage Loans, any such limitation under the state's usury law would not
apply to the 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 the state action will be eligible as Primary
Assets if the 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. These 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
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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 these
provisions. Certain states have taken this type of action.
The depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARMs that 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 a 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 the notation or delivery is not effected or the
security interest is not filed in accordance with the applicable law (for
example, is filed under a motor vehicle title statute rather than under the UCC,
in a few states), a first priority security interest in the Manufactured Home
securing a Manufactured Home Loan may not be obtained.
As Manufactured Homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that Manufactured Homes, under certain circumstances, may become
subject to real estate title and recording laws. As a result, a security
interest in a Manufactured Home could be rendered subordinate to the interests
of other parties claiming an interest in the Manufactured Home under applicable
state real estate law. In order to perfect a security interest in a Manufactured
Home under real estate laws, the holder of the security interest must file
either a "fixture filing" under the provisions of the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the home is located.
Manufactured Home Loans typically contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home that is prior to the security interest originally
retained by the lender or its assignee. With respect to a series of Securities
evidencing interests in a trust fund that includes Manufactured Home Loans and
as described in the prospectus supplement, the depositor may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. If the real estate filings are not made and if any of the foregoing
events were to occur, the only recourse of the securityholders would be against
the depositor pursuant
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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 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 the 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, the
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 the 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 relocation and thereafter
only if and after the owner reregisters the Manufactured Home in the state. If
the owner were to relocate a Manufactured Home to another state and not
reregister the Manufactured Home in the state, and if steps are not taken to
reperfect the trustee's security interest in the 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 the Manufactured Home must be surrendered or, in the case of
Manufactured Homes registered in states that 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
that 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 Agreements, the
depositor is obligated to take these 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, the liens could arise at any time during the term of a Manufactured
Home Loan. No notice will be given to the trustee or securityholders in the
event a lien arises. PMBS Agreements pursuant to which Private Mortgage-Backed
Securities backed by Manufactured Home Loans are issued will contain
substantially similar requirements.
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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 the 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 the
resale. In the event of 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 the 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 the 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 Laws 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 that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the borrower thereunder. The effect of this rule is to subject the
assignee of the contract to all claims and defenses that 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 the 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 the sale or transfer for
which no the 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
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respect to any Manufactured Home Loan secured by a Manufactured Home occupied by
the borrower, the ability to accelerate will not apply to those types of
transfers discussed in "Due On Sale Clauses in Mortgage Loans" above. FHA Loans
and VA Loans are not permitted to contain "due-on-sale" clauses, and so are
freely assumable.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations will not apply to any loan that 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.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Brown & Wood LLP as to
the material federal income tax consequences of the purchase, ownership and
disposition of the Offered Securities. This opinion assumes compliance with all
provisions of the Agreements pursuant to which the Securities are issued. This
discussion is directed solely to securityholders that hold the Securities as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"), and does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, this discussion is based on
authorities that are subject to changes that could apply retroactively.
In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Securities. See "State
Tax Considerations." The depositor recommends that securityholders consult their
own tax advisors concerning the federal, state, local or other tax consequences
to them of the purchase, ownership and disposition of the Offered Securities.
The following discussion addresses Securities of five general types:
- REMIC Securities representing interests in a trust fund, or a portion
thereof, that the trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G
(the "REMIC Provisions") of the Code;
- FASIT Securities representing interests in a trust fund, or a portion
thereof, that the trustee will elect to have treated as a financial asset
securitization investment trust ("FASIT") under Sections 860H through
860L (the "FASIT Provisions") of the Code;
- Grantor Trust Securities representing interests in a trust fund (a
"Grantor Trust Fund") as to which no REMIC or FASIT election will be made
and which will be treated as a trust for federal income tax purposes;
- Partnership Securities representing interests in a trust fund (a
"Partnership Trust Fund") that is treated as a partnership for federal
income tax purposes; and
- Debt Securities representing indebtedness of a Partnership Trust Fund of
the beneficial owner of a Grantor Trust Fund for federal income tax
purposes.
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The prospectus supplement for each series of Securities will indicate which
of the foregoing treatments will apply to that series and, if a REMIC election
(or elections) will be made for the related trust fund, will identify all
"regular interests" and "residual interests" in the REMIC or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interest" in the FASIT. For purposes of this tax
discussion, (1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security, and (2) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
in part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"), and in part upon the FASIT Provisions. The FASIT
Provisions of the Code became effective on September 1, 1997. The Treasury
Department, on February 7, 2000, released proposed regulations interpreting the
FASIT Provisions and the proposed regulations would only become effective at the
time they are issued in final form. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of the holders of
FASIT Securities. In addition, the OID Regulations do not adequately address
certain issues relevant to, and in some instances provide that they are not
applicable to, securities such as the Securities.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT (as defined herein)
will be considered a Taxable Mortgage Pool if (1) substantially all of the
assets of the entity consist of debt obligations and more than 50% of those
obligations consist of "real estate mortgages," (2) that entity is the borrower
under debt obligations with two or more maturities, and (3) under the terms of
the debt obligations on which the entity is the borrower, payments on those
obligations bear a relationship to payments on the obligations held by the
entity. Furthermore, a group of assets held by an entity can be treated as a
separate Taxable Mortgage Pool if the assets are expected to produce significant
cash flow that will support one or more of the entity's issues of debt
obligations. Unless otherwise provided in the applicable prospectus supplement,
the depositor will structure offerings of non-REMIC Securities to avoid the
application of the Taxable Mortgage Pool rules.
REMICS
Classification of REMICs
For each series of REMIC Securities, assuming compliance with all
provisions of the related trust agreement, in the opinion of Brown & Wood LLP,
the related trust fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Securities offered with respect thereto will be considered
to evidence ownership of "regular interests" ("Regular Securities") or "residual
interests" ("Residual Securities") in the REMIC within the meaning of the REMIC
Provisions. In addition, to the extent provided in the applicable prospectus
supplement, Regular Securities may also evidence ownership of an interest in a
notional principal contract. See "Characterization of Investments in REMIC
Securities" below.
For the REMIC Pool to qualify as a REMIC, the REMIC Pool must continuously
comply with the REMIC Provisions. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis portion of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the "Startup
Day" (which for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified
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mortgages" and "permitted investments." The REMIC Regulations provide a safe
harbor pursuant to which the de minimis requirement will be met if at all times
the total adjusted basis of the nonqualified assets is less than 1% of the total
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The trust agreement for
each series of REMIC Securities will contain provisions meeting these
requirements. See "-- Taxation of Owners of Residual Securities -- Tax-Related
Restrictions on Transfer of Residual Securities -- Disqualified Organizations"
below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
- in exchange for any qualified mortgage within a three-month period
thereafter; or
- in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably foreseeable;
(2) a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real property
(but only if the mortgage is disposed of within 90 days of discovery).
A mortgage loan that is "defective" as described in clause (4) above that
is not sold or, if within two years of the Startup Day, exchanged, within 90
days of discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure
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property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally may not be
held for more than three taxable years after the taxable year of acquisition
unless extensions are granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (1) one or more classes of regular interests or
(2) a single class of residual interests on which distributions, if any, are
made pro rata.
- A regular interest is an interest in a REMIC Pool that is issued on the
Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal
amount (or other similar amount), and provides that interest payments (or
other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a
specified, nonvarying portion of the interest payments on qualified
mortgages. That specified portion may consist of a fixed number of basis
points, a fixed percentage of the total interest, or a qualified variable
rate, inverse variable rate or difference between two fixed or qualified
variable rates on some or all of the qualified mortgages. The specified
principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero.
- A residual interest is an interest in a REMIC Pool other than a regular
interest that is issued on the Startup Day and that is designated as a
residual interest.
An interest in a REMIC Pool may be treated as a regular interest even if
payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the REMIC Provisions during any taxable
year, the REMIC Provisions provide that the entity will not be treated as a
REMIC for that year and thereafter. In that event, that entity may be taxable as
a corporation under Treasury regulations, and the related REMIC Securities may
not be accorded the status or given the tax treatment described below. Although
the REMIC Provisions authorize the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status, the
Treasury Department has not issued any such regulations. Any relief provided,
moreover, may be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the trust fund's income for the period in which the
requirements for that status are not satisfied. The trust agreement for each
REMIC Pool will include provisions designed to maintain the trust fund's status
as a REMIC under the REMIC Provisions. The depositor does not anticipate that
the status of any REMIC Pool as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
To the extent provided in the applicable prospectus supplement, a Regular
Security could represent not only the ownership of a REMIC regular interest, but
also an interest a notional principal contract. This can occur. For instance,
when the applicable trust agreement provides that the rate of interest payable
by the REMIC on the regular interest is subject to a cap based on the weighted
average of the net interest rates payable on the qualified mortgages held by the
REMIC. In these instances, the trust agreement may provide for a reserve fund
that will be held as part of the trust fund but not as an asset of any REMIC
created pursuant to the trust agreement (an "outside reserve fund"). The outside
reserve fund would typically be funded from monthly excess cashflow. If
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the interest payments on a regular interest were limited due to the
above-described cap, payments of any interest shortfall due to application of
that cap would be made to the regular interest holder to the extent of funds on
deposit in the outside reserve fund. For federal income tax purposes, payments
from the outside reserve fund will be treated as payments under a notional
principal contract written by the owner of the outsider reserve fund in favor of
the regular interest holders.
In the opinion of Brown & Wood LLP, the REMIC Securities (or the regular
interest component of a Regular Security that also represents ownership of an
interest in a notional principal contract) will be treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code in the same proportion that the
assets of the REMIC Pool underlying these Securities would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year.
Interest (including original issue discount) on the Regular Securities (or
the regular interest component of a Regular Security that also represents
ownership of an interest in a notional principal contract) and income allocated
to the class of Residual Securities will be interest described in Section
856(c)(3)(B) of the Code to the extent that the Securities are treated as "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code. In
addition, in the opinion of Brown & Wood LLP, the Regular Securities generally
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Code if transferred to another REMIC on its Startup Day in exchange for regular
or residual interests therein.
The determination as to the percentage of the REMIC Pool's assets that
constitute assets described in the foregoing sections of the Code will be made
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that calendar quarter. The REMIC
will report those determinations to securityholders in the manner and at the
times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that these institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion of
their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if those loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the mortgage loans of
any series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the mortgage loans, or whether those assets (to the extent not invested in
assets described in the foregoing sections) otherwise would receive the same
treatment as the mortgage loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on mortgage loans held
pending distribution are considered part of the mortgage loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
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Tiered REMIC Structures
For some series of REMIC Securities, two or more separate elections may be
made to treat designated portions of the related trust fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any of these
series of REMIC Securities, Brown & Wood LLP will deliver its opinion that,
assuming compliance with all provisions of the related trust agreement, the
Tiered REMICs will each qualify as a REMIC and the respective REMIC Securities
issued by each Tiered REMIC will be considered to evidence ownership of Regular
Securities or Residual Securities in the related REMIC within the meaning of the
REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on those Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Interests
(1) General
In general, interest, original issue discount, and market discount on a
regular interest will be treated as ordinary income to a holder of the regular
interest, and principal payments on a regular interest will be treated as a
return of capital to the extent of the regular interest holder's basis in the
regular interest allocable thereto. regular interest holders must use the
accrual method of accounting with regard to regular interest, regardless of the
method of accounting otherwise used by that regular interest holder.
(2) Original Issue Discount
Accrual Securities will be, and other classes of regular interests may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any class of regular interests having original issue
discount generally must include original issue discount in ordinary income for
federal income tax purposes as it accrues, in accordance with a constant yield
method that takes into account the compounding of interest, in advance of the
receipt of the cash attributable to that income. The following discussion is
based in part on the OID Regulations and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular interest holders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the regular interests . To the extent
that those issues are not addressed in the regulations, the depositor intends to
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion therein and the appropriate
method for reporting interest and original issue discount for the regular
interests.
Each regular interest (except to the extent described below for a regular
interest on which principal is distributed in a single installment or by lots of
specified principal amounts upon the request of a securityholder or by random
lot (a "non-pro rata security")) will be treated as a single installment
obligation for purposes of determining the original issue discount ineludible in
a regular interest holder's income. The total amount of original issue discount
on a regular interest is the excess of the "stated redemption price at maturity"
of the regular interest over its "issue price." The issue
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price of a class of regular interests offered pursuant to this prospectus
generally is the first price at which a substantial amount of that class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the trustee will treat
the issue price of a class as to which there is no substantial sale as of the
issue date or that is retained by the depositor as the fair market value of the
class as of the issue date. The issue price of a regular interest also includes
any amount paid by an initial regular interest holder for accrued interest that
relates to a period before the issue date of the regular interest, unless the
regular interest holder elects on its federal income tax return to exclude that
amount from the issue price and to recover it on the first distribution date.
The stated redemption price at maturity of a regular interest always
includes the original principal amount of the regular interest, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the regular interest. Because there is no penalty or default remedy in the
case of nonpayment of interest for a regular interest, it is possible that no
interest on any class of regular interests will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the regular interests as qualified stated interest. Distributions
of interest on an accrual security, or on other regular interests for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those regular interests
includes all distributions of interest as well as principal thereon. Likewise,
it is anticipated that the trustee will treat an interest-only class or a class
on which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" class) as having no qualified stated interest. Where
the interval between the issue date and the first distribution date on a regular
interest is shorter than the interval between subsequent distribution dates, the
interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a regular interest will
be considered to be zero if the original issue discount is less than 0.25% of
the stated redemption price at maturity of the regular interest multiplied by
the weighted average maturity of the regular interest. For this purpose, the
weighted average maturity of the regular interest is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the regular interest and the denominator of
which is the stated redemption price at maturity of the regular interest. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "prepayment assumption") and the
anticipated reinvestment rate, if any, relating to the regular interests. The
prepayment assumption for a series of regular interests will be set forth in the
prospectus supplement. Holders generally must report de minimis original issue
discount pro rata as principal payments are received, and that income will be
capital gain if the regular interest is held as a capital asset. Under the OID
Regulations, however, regular interest holders may elect to accrue all de
minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-- Election to Treat All Interest Under
the Constant Yield Method" below.
A regular interest holder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the regular interest accrued during an accrual period for each
day on which it holds the regular interest, including the date of
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purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each regular interest, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the regular interest. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the prepayment assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of:
(1) the sum of:
(a) the present value of all of the remaining distributions to be made
on the regular interest as of the end of that accrual period and
(b) the distributions made on the regular interest during the accrual
period that are included in the regular interest's stated redemption
price at maturity, over
(2) the adjusted issue price of the regular interest at the beginning of
the accrual period.
The present value of the remaining distributions referred to in the
preceding sentence is calculated based on:
(1) the yield to maturity of the regular interest at the issue date;
(2) events (including actual prepayments) that have occurred before the end
of the accrual period; and
(3) the Prepayment Assumption.
For these purposes, the adjusted issue price of a regular interest at the
beginning of any accrual period equals the issue price of the regular interest,
increased by the total amount of original issue discount for the regular
interest that accrued in all prior accrual periods and reduced by the amount of
distributions included in the regular interest's stated redemption price at
maturity that were made on the regular interest in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a regular interest holder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the mortgage loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the mortgage loans for a series of Regular Securities
can result in both a change in the priority of principal payments for certain
classes of Regular Securities and either an increase or decrease in the daily
portions of original issue discount for those Regular Securities.
In the case of a non-pro rata Security, it is anticipated that the trustee
will determine the yield to maturity based upon the anticipated payment
characteristics of the class as a whole under the prepayment assumption. In
general, the original issue discount accruing on each non-pro rata Security in a
full accrual period would be its allocable share of the original issue discount
for the entire class, as determined in accordance with the preceding paragraph.
However, in the case of a distribution in retirement of the entire unpaid
principal balance of any non-pro rata Security (or portion of the unpaid
principal balance), (a) the remaining unaccrued original issue discount
allocable to the Security (or to that portion) will accrue at the time of the
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of that class will be adjusted by reducing the present value
of the remaining payments on that class and the adjusted issue price of that
class to
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the extent attributable to the portion of the unpaid principal balance thereof
that was distributed. The depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but with
the rate of accrual of original issue discount determined based on the
prepayment assumption for the class as a whole. Investors are advised to consult
their tax advisors as to this treatment.
(3) Acquisition Premium
A purchaser of a regular interest having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the regular interest reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"-- Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular interests may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (1) the issue price does not exceed the original principal balance by
more than a specified amount and (2) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate. That rate may also be subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that the information is not (1) within the control of the
issuer or a related party or (2) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate.
The amount of original issue discount for a regular interest bearing a
variable rate of interest will accrue in the manner described above under
"-- Original Issue Discount," with the yield to maturity and future payments on
that regular interest generally to be determined by assuming that interest will
be payable for the life of the regular interest based on the initial rate (or,
if different, the value of the applicable variable rate as of the pricing date)
for the relevant class. Unless required otherwise by applicable final
regulations, it is anticipated that the trustee will treat that variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium class. Ordinary income reportable for any period
will be adjusted based on subsequent changes in the applicable interest rate
index.
(5) Market Discount
A subsequent purchaser of a regular interest also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID
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Regulations in the context of original issue discount, "market discount" is the
amount by which the purchaser's original basis in the regular interest (1) is
exceeded by the remaining outstanding principal payments and interest payments
other than qualified stated interest payments due on a regular interest, or (2)
in the case of a regular interest having original issue discount, is exceeded by
the adjusted issue price of that regular interest at the time of purchase. The
purchaser generally will be required to recognize ordinary income to the extent
of accrued market discount on that regular interest as distributions includible
in the stated redemption price at maturity thereof are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner to
be provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a regular
interest issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period.
The purchaser also generally will be required to treat a portion of any
gain on a sale or exchange of the regular interest as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received.
The purchaser will be required to defer deduction of a portion of the
excess of the interest paid or accrued on indebtedness incurred to purchase or
carry a regular interest over the interest distributable thereon. The deferred
portion of the interest expense in any taxable year generally will not exceed
the accrued market discount on the regular interest for that year. Any deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the regular
interest is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the regular interest holder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by the regular interest holder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "-- Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which that election may be deemed to be made. A person who purchases a
regular interest at a price lower than the remaining amounts includible in the
stated redemption price at maturity of the Security, but higher than its
adjusted issue price, does not acquire the regular interest with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount for a regular interest will be considered to be zero if the
market discount is less than 0.25% of the remaining stated redemption price at
maturity of the regular interest (or, in the case of a regular interest having
original issue discount, the adjusted issue price of that regular interest)
multiplied by the weighted average maturity of the regular interest (determined
as described above in the third paragraph under "-- Original Issue Discount"
above) remaining after the date of purchase. It appears that de minimis market
discount would be reported in a manner similar to de minimis original issue
discount. See "-- Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a particular class of regular interests. Prospective investors
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should consult their own tax advisors regarding the application of the market
discount rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
(6) Amortizable Premium
A regular interest purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the regular interest holder holds that regular interest as a
"capital asset" within the meaning of Code Section 1221, the regular interest
holder may elect under Code Section 171 to amortize the premium under a constant
yield method that reflects compounding based on the interval between payments on
the regular interest. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the regular interest holder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service.
The Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations as the regular interests. Amortizable
bond premium generally will be treated as an offset to interest income on a
regular interest, rather than as a separate deductible item. See "-- Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a regular interest may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
this election, (1) "interest" includes stated interest, original issue discount,
de minimis original issue discount, market discount and de minimis market
discount, as adjusted by any amortizable bond premium or acquisition premium and
(2) the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial prepayment assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular interest holders will be required to report income for regular
interests on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a regular interest, particularly a
subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or
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delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. In this
regard, investors are cautioned that while they may generally cease to accrue
interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that regular interest holders that are corporations or
that otherwise hold the regular interests in connection with a trade or business
should in general be allowed to deduct as an ordinary loss that loss with
respect to principal sustained during the taxable year on account of any regular
interest becoming wholly or partially worthless, and that, in general, regular
interest holders that are not corporations and do not hold the regular interests
in connection with a trade or business should be allowed to deduct as a
short-term capital loss any loss sustained during the taxable year on account of
a portion of any regular interests becoming wholly worthless. Although the
matter is not free from doubt, non-corporate regular interest holders should be
allowed a bad debt deduction at the time the principal balance of the regular
interests is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable class of regular interests has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
regular interests are deductible based on some other method that may defer those
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount that would be deductible only against future
positive original issue discount or otherwise upon termination of the class.
Regular interest holders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their regular interests. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business.
(9) Sale or Exchange of Regular Securities
If a regular interest holder sells or exchanges a regular interest, the
regular interest holder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the regular interest.
The adjusted basis of a regular interest generally will equal the original cost
of the regular interest to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
regular interest and reduced by amounts included in the stated redemption price
at maturity of the regular interest that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as provided
in this paragraph, any gain or loss on the sale or exchange of a regular
interest realized by an investor who holds the regular interest as a capital
asset will be capital gain or loss and will be long-term or short-term depending
on whether the regular interest has been held for the long-term capital gain
holding period (currently, more than one year). Gain will be treated as ordinary
income
(1) if a regular interest is held as part of a "conversion transaction" as
defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the regular interest holder's net investment in the conversion
transaction at 120% of the appropriate applicable federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
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treated as ordinary income for any prior disposition of property that was held
as part of that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates; or
(3) to the extent that the gain does not exceed the excess, if any, of (a)
the amount that would have been includible in the gross income of the holder if
its yield on that regular interest were 110% of the applicable federal rate as
of the date of purchase, over (b) the amount of income actually includible in
the gross income of the holder for that regular interest.
In addition, gain or loss recognized from the sale of a regular interest by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of certain noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of those taxpayers (39.6%) for property held for more than one year.
Currently, the maximum tax rate for corporations is the same for both ordinary
income and capital gains.
Taxation of Owners of Residual Securities
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("residual holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a residual holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in that quarter
and by allocating that daily portion among the residual holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on that day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that
(1) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the regular interests, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the regular interests. The REMIC Pool's
deductions include interest and original issue discount expense on the regular
interests, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that residual holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any class of
the related series outstanding.
The taxable income recognized by a residual holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the regular interests, on the other hand. If an
interest in the
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mortgage loans is acquired by the REMIC Pool at a discount, and one or more of
these mortgage loans is prepaid, the prepayment may be used in whole or in part
to make distributions in reduction of principal on the regular interests, and
(2) the discount on the mortgage loans that is includible in income may exceed
the deduction allowed upon those distributions on those regular interests on
account of any unaccrued original issue discount relating to those regular
interests. When there is more than one class of regular interests that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
regular interests when distributions in reduction of principal are being made in
respect of earlier classes of regular interests to the extent that those classes
are not issued with substantial discount or are issued at a premium. If taxable
income attributable to that mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing classes of regular
interests are made.
Taxable income may also be greater in earlier years than in later years as
a result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of that series of regular interests, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of regular interests, whereas, to the extent the REMIC
Pool consists of fixed rate mortgage loans, interest income for any particular
mortgage loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, residual holders must have
sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of that mismatching or unrelated deductions against which
to offset that income, subject to the discussion of "excess inclusions" below
under "-- Limitations on Offset or Exemption of REMIC Income." The timing of
mismatching of income and deductions described in this paragraph, if present for
a series of Securities, may have a significant adverse effect upon a residual
holder's after-tax rate of return.
A portion of the income of a residual holder may be treated unfavorably in
three contexts:
(1) it may not be offset by current or net operating loss deductions;
(2) it will be considered unrelated business taxable income to tax-exempt
entities; and
(3) it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign residual holder.
See "-- Limitations on Offset or Exemption of REMIC Income" below. In addition,
a residual holder's taxable income during certain periods may exceed the income
reflected by those residual holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the residual holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for that Residual Security. The adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the residual holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the residual holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the residual holder
as to whom the loss was disallowed and may be used by the residual holder only
to offset any income generated by the same REMIC Pool.
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A residual holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in some respects, the recovery of basis by
the REMIC Pool will have the effect of amortization of the issue price of the
Residual securities over their life. However, in view of the possible
acceleration of the income of residual holders described above under
"-- Taxation of REMIC Income," the period of time over which the issue price is
effectively amortized may be longer than the economic life of the Residual
Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of the residual interest
as zero rather than the negative amount for purposes of determining the REMIC
Pool's basis in its assets. The preamble to the REMIC Regulations states that
the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and residual holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a residual holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the mortgage loans, the
residual holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "-- Treatment of Certain Items of
REMIC Income and Expense -- Market Discount" below regarding the basis of
mortgage loans to the REMIC Pool and "-- Sale or Exchange of a Residual
Security" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
mortgage loans and expenses for the regular interests, and different methods
could result in different timing or reporting of taxable income or net loss to
residual holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
regular interests as described above under "-- Taxation of Owners of REMIC
Regular Interests -- Original Issue Discount" and "-- Variable Rate Regular
Securities," without regard to the de minimis rule described therein, and
"-- Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that the basis is equal to the total of the issue prices of
all regular and residual interests in the REMIC Pool. The accrued portion of the
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "-- Taxation of Owners of
REMIC Regular Interests -- Market Discount."
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Premium. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired those mortgage loans at a premium equal to the amount of that
excess. As stated above, the REMIC Pool's basis in mortgage loans is the fair
market value of the mortgage loans, based on the total of the issue prices of
the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "-- Taxation of Owners of REMIC Regular Interests -- Amortizable
Premium," a person that holds a mortgage loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on mortgage
loans originated after September 27, 1985, under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on the
mortgage loans, rather than as a separate deduction item. Because substantially
all of the borrowers on the mortgage loans are expected to be individuals, Code
Section 171 will not be available for premium on mortgage loans originated on or
before September 27, 1985. Premium for those mortgage loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of that premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that the premium should be allocated in a different manner, such as allocating
the premium entirely to the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a residual holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for that quarterly period of (1) 120% of the
long-term applicable federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (2) the adjusted issue price of the Residual Security at
the beginning of the quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning of
that quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
that income as the adjusted issue price of the Residual Securities diminishes.
The portion of a residual holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on the residual holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the residual holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the residual holder's
excess inclusions will be treated as unrelated business taxable income of the
residual holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for certain persons who are not U.S.
Persons (as defined below under "-- Tax-Related Restrictions on Transfer of
Residual Securities -- Foreign Investors"), and the portion thereof attributable
to excess inclusions is not eligible for any reduction in the rate of
withholding tax (by treaty or otherwise). See "-- Taxation of Certain Foreign
Investors -- Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons.
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The SBJPA of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Securities that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except for Residual Securities continuously held by a thrift institution since
November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
residual holder. First, alternative minimum taxable income for a residual holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a residual holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a residual holder elects to have those rules apply only to
taxable years beginning after August 20, 1996.
(5) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. The tax also may be waived by the
Internal Revenue Service if the Disqualified Organization promptly disposes of
the Residual Security and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Security is
actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period that person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified
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Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. An exception to this tax, otherwise available to a
Pass-Through Entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
- "Disqualified Organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing
(provided, that the term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of
directors in not selected by any governmental entity), any cooperative
organization furnishing electric energy or providing telephone service or
persons in rural areas as described in Code Section 1381(a)(2)(C), and
any organization (other than a farmers' cooperative described in Code
Section 531) that is exempt from taxation under the Code unless the
organization is subject to the tax on unrelated business income imposed
by Code Section 511.
- "Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and
certain corporations operating on a cooperative basis. Except as may be
provided in Treasury regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to that
interest, be treated as a Pass-Through Entity.
The trust agreement for a series will provide that no legal or beneficial
interest in a Residual Security may be transferred or registered unless (1) the
proposed transferee furnished to the transferor and the trustee an affidavit
providing its taxpayer identification number and stating that the transferee is
the beneficial owner of the Residual Security and is not a Disqualified
Organization and is not purchasing the Residual Security on behalf of a
Disqualified Organization (i.e., as a broker, nominee or middleman thereof) and
(2) the transferor provides a statement in writing to the trustee that it has no
actual knowledge that the affidavit is false. Moreover, the trust agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Security for a series will bear a legend referring to
those restrictions on transfer, and each residual holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
trust agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a residual holder (other than a residual holder
who is not a U.S. Person as defined below under "-- Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
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forth above under "-- Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC.
A safe harbor is provided if (1) the transferor conducted, at the time of
the transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as they
came due and found no significant evidence to indicate that the transferee would
not continue to pay its debts as they came due in the future, and (2) the
transferee represents to the transferor that it understands that, as the holder
of the non-economic residual interest, the transferee may incur liabilities in
excess of any cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due. The trust agreement for each series of Certificates will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"-- Disqualified Organizations."
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor under which transfers of noneconomic
residual interests are treated as not disregarded for federal income tax
purposes. Under the New Proposed Regulations, a transfer of a noneconomic
residual interest would not qualify under this safe harbor unless the present
value of the anticipated tax liabilities associated with holding the residual
interest does not exceed the sum of the present value of the sum of (i) any
consideration given to the transferee to acquire the interest, (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value generally is calculated using a discount rate
equal to the applicable federal rate. The New Proposed Regulations have a
proposed effective date of February 4, 2000.
In addition, President Clinton's Fiscal Year 2001 Budget Proposal contains
a provision under which a REMIC would be secondarily liable for the tax
liability of its residual interest. The proposal states that it would be
effective for REMICs created after the date of enactment. It is unknown whether
this provision will be included in any bill introduced to Congress this year or
if introduced whether it will be enacted. Prospective investors in REMIC
residual interests should consult their tax advisors regarding the New Proposed
Regulations and the Fiscal Year 2001 Budget Proposals.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (1) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (2) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and before the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership
(except as provided in applicable Treasury regulations) or other entity treated
as a partnership or as a
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corporation created or organized in or under the laws of the United States or of
any state (including, for this purpose, the District of Columbia), an estate
that is subject to U.S. federal income tax regardless of the source of its
income, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the trust
(or, to the extent provided in applicable Treasury regulations, certain trusts
in existence on August 20, 1996, which are eligible to elect to be treated as
U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the residual holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "-- Taxation of Owners of Residual
Securities -- Basis and Losses") of the residual holder in the Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a residual holder will have taxable income to the extent that
any cash distribution to it from the REMIC Pool exceeds that adjusted basis on
that Distribution Date. That income will be treated as gain from the sale or
exchange of the residual holder's Residual Security, in which case, if the
residual holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds the Residual Security
as a capital asset under Code Section 1221, then it will recognize a capital
loss at that time in the amount of the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the residual holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash sale
rules of Code Section 1091 will apply to dispositions of Residual Securities
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after the sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
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Taxes That May Be Imposed on the REMIC Pool
(1) Prohibited Transactions.
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of residual holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the
Startup Day;
(b) foreclosure, default, or imminent default of a qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments other
than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to
sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on regular interests as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Securities is outstanding). The REMIC Regulations indicate that the modification
of a mortgage loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
mortgage loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (1) during the
three months following the Startup Day, (2) made to a qualified reserve fund by
a residual holder, (3) in the nature of a guarantee, (4) made to facilitate a
qualified liquidation or clean-up call, and (5) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
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foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of regular interests and
residual holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for the income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single residual holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the residual holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the residual holder, the residual holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other residual holders of certain administrative and judicial
proceedings regarding the REMIC Pool's tax affairs, although other holders of
the Residual Securities of the same series would be able to participate in those
proceedings in appropriate circumstances.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser or (1) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married individual
filing a separate return) (subject to adjustment for inflation), or (2) 80% of
the amount of itemized deductions otherwise allowable for that year. In the case
of a REMIC Pool, those deductions may include deductions under Code Section 212
for the Servicing Fee and all administrative and other expenses relating to the
REMIC Pool, or any similar expenses allocated to the REMIC Pool for a regular
interest it holds in another REMIC. Those investors who hold REMIC Securities
either directly or indirectly through certain pass-through entities may have
their pro rata share of those expenses allocated to them as additional gross
income, but may be subject to that limitation on deductions. In addition, those
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause those investors to be subject to significant
additional tax liability. Temporary Treasury regulations provide that the
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additional gross income and corresponding amount of expenses generally are to be
allocated entirely to the holders of Residual Securities in the case of a REMIC
Pool that would not qualify as a fixed investment trust in the absence of a
REMIC election. For a REMIC Pool that would be classified as an investment trust
in the absence of a REMIC election or that is substantially similar to an
investment trust, any holder of a Regular Security that is an individual, trust,
estate, or pass-through entity also will be allocated its pro rata share of
those expenses and a corresponding amount of income and will be subject to the
limitations or deductions imposed by Code Sections 67 and 68, as described
above. The prospectus supplement will indicate if all those expenses will not be
allocable to the Residual Securities.
In general, the allocable portion will be determined based on the ratio
that a REMIC securityholder's income, determined on a daily basis, bears to the
income of all holders of regular interests and Residual Securities for a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess of
the interest income at the Interest Rate on regular interests that are issued in
a single class or otherwise consistently with fixed investment trust status or
in excess of cash distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
(1) Regular Interests
Interest, including original issue discount, distributable to regular
interest holders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person provides the
trustee, or the person who would otherwise be required to withhold tax from
those distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Security is a Non-U.S. Person. If that statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
certain information, including a United States taxpayer identification number. A
look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
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(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to residual holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
residual holders may qualify as "portfolio interest," subject to the conditions
described in "regular interests" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163 (f) (1). Generally,
mortgage loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, residual holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "-- Taxation of Owners of Residual
Securities -- Limitations on Offset or Exemption of REMIC Income" above. If the
amounts paid to residual holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
those Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to those Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, those amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"-- Tax-Related Restrictions on Transfer of Residual Securities -- Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
(3) Backup Withholding
Distributions made on the regular interests, and proceeds from the sale of
the regular interests to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the trustee, its agent or the broker who
effected the sale of the Regular Security, or that Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the regular interests would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
regular interests or beneficial owners who own regular interests through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of regular interests (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 for a particular series of regular interests. Holders
through nominees must request the information from the nominee.
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The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each residual holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence. Treasury
regulations require that, in addition to the foregoing requirements, information
must be furnished quarterly to residual holders, furnished annually, if
applicable, to holders of regular interests, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to those holders.
Furthermore, under these regulations, information must be furnished quarterly to
residual holders, furnished annually to holders of regular interests, and filed
annually with the Internal Revenue Service concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"-- Characterization of Investments in REMIC Securities."
Residual holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a residual holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each residual holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The Internal Revenue Service may assess a deficiency resulting from
a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it generally
will not have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Security as a nominee for another
person may be required to furnish the related REMIC Pool, in a manner to be
provided in Treasury regulations, with the name and address of that person and
other specified information.
FASITS
Classification of FASITs
For each series of FASIT Securities, assuming compliance with all
provisions of the related trust agreement, in the opinion of Brown & Wood LLP,
the related trust fund will qualify as a FASIT. A FASIT is any entity that (1)
elects FASIT status, (2) satisfies certain requirements concerning the interests
it issues (the "interests test"), and (3) satisfies certain requirements
concerning the composition of its assets (the "asset test"). Any entity
described in Section 851(a) of the Code (i.e., a regulated investment company),
however, would not be eligible to elect FASIT status.
The Interests Test. All interests in a FASIT must be designated as either
regular interests or as the ownership interest. A FASIT can have only one
ownership interest and it must be held directly at all times by an "eligible
corporation" (i.e., a domestic "C" corporation that is subject to tax and that
is not a regulated investment company, a real estate investment trust, a REMIC,
or a subchapter T cooperative). The ownership interest need not have any
particular economic characteristics.
Generally, A FASIT regular interest is any interest issued by the FASIT on
or after its startup day that is designated as such and that (1) unconditionally
entitles the holder to receive a specified principal amount, (2) provides that
interest payments, if any, be determined based on a fixed rate, or, except as
otherwise provided in Treasury Regulations, which have not been promulgated, at
a rate that would qualify as a variable rate under the REMIC regulations, (3)
does not have a stated
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maturity date more than 30 years from the date of issuance, (4) does not have an
issue price in excess of 125% of its stated principal amount, and (5) has a
yield to maturity that is not greater than the appropriate applicable federal
rate published by the IRS for the month of issue plus 5%. Certain FASIT
interests, referred to as "high-yield interests," will qualify as regular
interests even though they do not satisfy the first, fourth, or fifth
requirements set out above. Generally, high-yield interests must be held by
eligible corporations.
The Asset Test. If the Trust Fund is to qualify as a FASIT, then as of the
close of the third month following the date of its formation, and at all times
thereafter, substantially all of its assets must be "permitted assets." The term
"permitted assets" is defined to include (1) cash and cash equivalents, (2)
generally, any instrument that is classified as indebtedness for federal income
tax purpose under which interest payments, if any, are payable at a fixed rate
or a rate that would be a qualifying rate under the REMIC regulations for a
REMIC regular interest, (3) foreclosure property, (4) certain hedging
instruments (e.g., swap contracts, futures contracts, and guarantee
arrangements) intended to hedge against the risks associated with being the
obligor on FASIT regular interests, (5) contract rights to acquire debt
instruments described in (2) above or hedges described in (4) above, and (5) any
regular interest in a REMIC or in another FASIT. The term "permitted asset" does
not, however, include any debt instrument, other than a cash equivalent, issued
by the holder of the ownership interest or any person related to the holder.
If the trust fund fails to comply with one or more of the requirements for
FASIT status during any taxable year, the trust fund may lose its FASIT status
for that year and all years thereafter. If the trust fund were to lose its FASIT
status, the trust fund could be taxable as a corporation.
Taxation of Owners of FASIT Regular Securities
(1) General
Payments received by holders of FASIT Regular Securities generally will be
accorded the same tax treatment under the Code as payments received on REMIC
regular interests. Holders of FASIT Regular Securities must report income from
these Securities under an accrual method of accounting, even if they otherwise
would have used the cash receipts and disbursements method. Except in the case
of FASIT Regular Securities issued with original issue discount, interest paid
or accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Holder and a principal payment on the Security will be treated as
a return of capital to the extent that the securityholder's basis is allocable
to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on the Securities in the same manner described for REMIC
regular interests. See "-- REMICs -- Taxation of Owners of REMIC Regular
Interests" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
regular interests. See "-- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Sale or Exchange of Regular Securities."
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Taxation of Owners of High-Yield Interests
(1) General
The treatment of high-yield interests is intended to ensure that the return
on instruments issued by a FASIT yielding an equity-like return continues to
have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of the interest, and the ability of the
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in Securities who acquire these 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.
(2) Treatment of Losses
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 FASIT Ownership Security
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. The holder of a FASIT Ownership Security 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 Security will be the same as the character of
the income to the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT Ownership Security is treated as ordinary
income. In determining that taxable income, the holder of a FASIT Ownership
Security 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 Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, a holder of
a FASIT Ownership Security is subject to the same limitations on their ability
to use losses to offset income from their FASIT Regular Securities as are
holders of high-yield interest. See "-- Taxation of Owners of High-Yield
Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security.
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(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition;
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver, amendment, or
consent under permitted assets not acquired through foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular interest (i.e.,
a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default) on an asset
of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another such instrument;
or
(7) in order to reduce over-collateralization where a principal purposes of
the disposition was not to avoid recognition of gain arising from an
increase in its market value after its acquisition by the FASIT.
A series of Securities for which a FASIT election is made generally will be
structured in order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities. See
"-- REMICs" above.
Proposed FASIT Regulations
The Treasury Department filed proposed regulations interpreting the FASIT
Provisions ("proposed FASIT regulations") with the Federal Register on Friday,
February 4, 2000. The proposed FASIT regulations generally would be effective on
the date they are issued as final regulations. Certain anti-abuse rules are,
however, proposed to be effective on February 4, 2000. The proposed FASIT
regulations would, among other things, provide procedures for making a FASIT
election, refine the definition of certain terms used in the FASIT provisions,
provide penalties that would apply upon cessation of FASIT status, provide rules
for the tax treatment of transfers of assets to the FASIT, and establish
anti-abuse rules to preclude use of the FASIT vehicle for a transaction that did
not primarily concern the securitization of financial assets.
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GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
For each series of Grantor Trust Securities, assuming compliance with all
provisions of the related Agreement, in the opinion of Brown & Wood LLP, the
related Grantor Trust Fund will be classified as trust under Treasury Regulation
Section 301.7701-4(c) and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the mortgage loans
included in the Grantor Trust Fund.
Standard Securities
(1) General
Where there is no Retained Interest or "excess" servicing for the mortgage
loans underlying the Securities of a series, and where these Securities are not
designated as "Stripped Securities," the holder of each Security of that series
(referred to herein as "Standard Securities") will be treated as the owner of a
pro rata undivided interest in the ordinary income and corpus portions of the
Grantor Trust Fund represented by its Standard Security and will be considered
the beneficial owner of a pro rata undivided interest in each of the mortgage
loans, subject to the discussion below under "-- Recharacterization of Servicing
Fees." Accordingly, the holder of a Standard Security of a particular series
will be required to report on its federal income tax return its pro rata share
of the entire income from the mortgage loans represented by its Standard
Security, including interest at the coupon rate on those mortgage loans,
original issue discount (if any), prepayment fees, assumption fees, and late
payment charges received by the servicer, in accordance with that
securityholder's method of accounting. A securityholder generally will be able
to deduct its share of the servicing fees and all administrative and other
expenses of the trust fund in accordance with its method of accounting, provided
that those amounts are reasonable compensation for services rendered to the
Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through certain pass-through entities,
will be subject to limitations for certain itemized deductions described in Code
Section 67, including deductions under Code Section 212 for the servicing fees
and all administrative and other expenses of the Grantor Trust Fund, to the
extent that those deductions, in total, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (1) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married individual
filing a separate return) (in each case, as adjusted for post-1991 inflation),
or (2) 80% of the amount of itemized deductions otherwise allowable for that
year. As a result, those investors holding Standard Securities, directly or
indirectly through a pass-through entity, may have total taxable income in
excess of the total amount of cash received on the Standard Securities with
respect to interest at the Interest Rate or as discount income on the Standard
Securities. In addition, those expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause those investors to be
subject to significant additional tax liability.
Holders of Standard Securities, particularly any class of a series that are
Subordinate Securities, may incur losses of interest or principal with respect
to the mortgage loans. Those losses would be deductible generally only as
described above under "-- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Treatment of Losses," except that securityholders on the cash
method of accounting would not be required to report qualified stated interest
as income until actual receipt.
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(2) Tax Status
For a series, in the opinion of Brown & Wood LLP a Standard Security owned
by a:
- "domestic building and loan association" within the meaning of Code
Section 7701(a)(19) will be considered to represent "loans . . . secured
by an interest in real property which is . . . residential real property"
within the meaning of Code Section 7701(a)(19)(C)(v), provided that the
real property securing the mortgage loans represented by that Standard
Security is of the type described in that section of the Code.
- real estate investment trust will be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A) to the extent
that the assets of the related Grantor Trust Fund consist of qualified
assets, and interest income on those assets will be considered "interest
on obligations secured by mortgages on real property" to that extent
within the meaning of Code Section 856(c)(3)(B).
- REMIC will be considered to represent an "obligation (including any
participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property" within the meaning
of Code Section 860G(a)(3)(A) to the extent that the assets of the
related Grantor Trust Fund consist of "qualified mortgages" within the
meaning of Code Section 860G(a)(3).
The depositor recommends that securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"-- REMICs -- Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a securityholder's interest in those
mortgage loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. The rules
allowing for the amortization of premium are available for mortgage loans
originated after September 27, 1985. Under the OID Regulations, original issue
discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under some circumstances, by the presence of
"teaser" rates on the mortgage loans. See "-- Stripped Securities" below
regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to that income. No
prepayment assumption will be assumed for purposes of that accrual except as set
forth in the prospectus supplement. However, Code Section 1272 provides for a
reduction in the amount of original issue discount includible in the income of a
holder of an obligation that acquires the obligation after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if those mortgage loans acquired by a securityholder are purchased at a price
equal to the then unpaid principal amount of those mortgage loans, no original
issue discount attributable to the difference between the issue price and the
original principal amount of those mortgage loans (i.e., points) will be
includible by that holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans
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will be determined and will be reported as ordinary income generally in the
manner described above under "-- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Market Discount," except that the ratable accrual methods described
therein will not apply. Rather, the holder will accrue market discount pro rata
over the life of the mortgage loans, unless the constant yield method is
elected. No prepayment assumption will be assumed for purposes of that accrual
except as set forth in the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed reasonable
servicing compensation, the amount of that excess would represent neither income
nor a deduction to securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that the amount would exceed reasonable servicing compensation as to
some of the mortgage loans would be increased. Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the mortgage loans to be treated under the "stripped
bond" rules. That guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of those amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer who receives a servicing fee in excess of those amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
mortgage loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of those mortgage loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "-- Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder thereof. While securityholders would still
be treated as owners of beneficial interests in a grantor trust for federal
income tax purposes, the corpus of the trust could be viewed as excluding the
portion of the mortgage loans the ownership of which is attributed to the
servicer, or as including that portion as a second class of equitable interest.
In general, that recharacterization should not have any significant effect upon
the timing or amount of income reported by a securityholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"-- Stripped Securities" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
(4) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total adjusted basis will equal the
securityholder's cost for the Standard Security, exclusive of accrued interest,
increased by the amount of any income previously reported for the Standard
Security and decreased by the amount of any losses previously reported for the
Standard Security and the amount of any distributions (other than accrued
interest) received thereon. Except as provided above with respect to market
discount on any mortgage loans, and except for certain financial institutions
subject to the provisions of Code Section 582(c), the gain or loss generally
would be capital gain or loss if the Standard Security was held as a capital
asset. However, gain on the sale of a Standard Security will be treated as
ordinary income (1) if a Standard Security is held as part of a "conversion
transaction" as defined in Code
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Section 1258(c), up to the amount of interest that would have accrued on the
securityholder's net investment in the conversion transaction at 120% of the
appropriate applicable federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary income for
any prior disposition of property that was held as part of that transaction or
(2) in the case of a non-corporate taxpayer, to the extent that the taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Long-term capital gains of certain
non-corporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income or short-term capital gains of those taxpayers (39.6%) for
property held for more than one year. The maximum tax rate for corporations
currently is the same for both ordinary income and capital gains.
Stripped Securities
(1) General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" for principal payments and "stripped coupons" for
interest payments. For purposes of this discussion, Securities that are subject
to those rules will be referred to as "Stripped Securities." In the opinion of
Brown & Wood LLP, the Securities will be subject to those rules if:
- the depositor or any of its affiliates retains (for its own account or
for purposes of resale), in the form of retained interest or otherwise,
an ownership interest in a portion of the payments on the mortgage loans;
- the depositor or any of its affiliates is treated as having an ownership
interest in the mortgage loans to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration
for servicing the mortgage loans (see "-- Standard Securities --
Recharacterization of Servicing Fees" above); and
- Securities are issued in two or more classes representing the right to
non-pro-rata percentages of the interest and principal payments on the
mortgage loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for its pro rata share
of all or a portion of the interest payments on each mortgage loan, including
the Stripped Security's allocable share of the servicing fees paid to a
servicer, to the extent that those fees represent reasonable compensation for
services rendered. See the discussion above under "-- Standard
Securities -- Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to securityholders of Stripped Securities, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"-- Standard Securities -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that the stripped
interest is purchased. Although the treatment of Stripped Securities for federal
income tax purposes is not clear in some respects, particularly where Stripped
Securities are issued with respect to a pool of variable-rate mortgage loans, in
the opinion of Brown & Wood LLP, (1) the Grantor Trust Fund will be treated as a
trust under Treasury Regulation Section 301.7701-4(c) and not as a partnership,
an association taxable as a corporation or a "taxable mortgage pool" within the
meaning of Code Section 7701(i), and (2) each Stripped Security should be
treated as a single installment obligation for purposes of
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calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code Sections
1272 through 1275, and the OID Regulations. Although it is possible that
computations for Stripped Securities could be made in one of the ways described
below under "-- Possible Alternative Characterizations," the OID Regulations
state, in general, that two or more debt instruments issued by a single issuer
to a single investor in a single transaction should be treated as a single debt
instrument. Accordingly, for original issue discount purposes, all payments on
any Stripped Securities should be totaled and treated as though they were made
on a single debt instrument. The trust agreement will require that the trustee
make and report all computations described below using the approach described in
this paragraph, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of that Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of that Stripped Security will be required to account for any discount
as market discount rather than original issue discount if either (1) the initial
discount for the Stripped Security was treated as zero under the de minimis
rule, or (2) no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans. That market discount would be
reportable as described above under "-- REMICs -- Taxation of Owners of REMIC
Regular Interests -- Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in that computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the mortgage loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the mortgage loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Stripped Security that is
a Subordinate Security, may deduct losses incurred for the Stripped Security as
described above under "-- Standard Securities General."
(2) Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the mortgage loans. Although the issue is not free from doubt, in the opinion
of Brown & Wood LLP, Stripped Securities owned by applicable holders should be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), "obligation [s] . . . principally secured by an interest in real
property which is . . . . residential real estate" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the mortgage loans and interest on those mortgage loans qualify for that
treatment. See "-- Standard Securities -- Tax Status" above.
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(3) Taxation of Stripped Securities
Original Issue Discount. Except as described above, each Stripped Security
will be considered to have been issued at an original issue discount for federal
income tax purposes. Original issue discount for a Stripped Security must be
included in ordinary income as it accrues, in accordance with a constant yield
method that takes into account the compounding of interest, which may be before
the receipt of the cash attributable to that income. Based in part on the issue
discount required to be included in the income of a holder of a Stripped
Security in any taxable year likely will be computed generally as described
above under "-- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Original Issue Discount" and "-- Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above, the issue price of a Stripped
Security will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the total amount of the payments to be
made on the Stripped Security to that securityholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the mortgage loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of that
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by that securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in the Stripped Security to recognize a
loss (which may be a capital loss) equal to that portion of unrecoverable basis.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security before its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the securityholder's
adjusted basis in that Stripped Security, as described above under
"-- REMICs -- Taxation of Owners of REMIC Regular Interests -- Sale or Exchange
of Regular Securities." Gain or loss from the sale or exchange of a Stripped
Security generally will be capital gain or loss to the securityholder if the
Stripped Security is held as a "capital asset" within the meaning of Code
Section 1221, and will be long-term or short-term depending on whether the
Stripped Security has been held for the long-term capital gain holding period
(currently, more than one year). To the extent that a subsequent purchaser's
purchase price is exceeded by the remaining payments on the Stripped Securities,
the subsequent purchaser will be required for federal income tax purposes to
accrue and report that excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a securityholder other than an
original securityholder should be the Prepayment Assumption or a new rate based
on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one class of Stripped Securities, it is currently unclear
whether for federal income tax purposes those classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the securityholder may be treated
as the owner of
(1) one installment obligation consisting of the Stripped Security's pro
rata share of the payments attributable to principal on each mortgage loan
and a second installment obligation consisting of the Stripped Security's
pro rata share of the payments attributable to interest on each mortgage
loan;
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(2) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan; or
(3) a separate installment obligation for each mortgage loan, representing
the Stripped Security's pro rata share of payments of principal and/or
interest to be made with respect thereto.
Alternatively, the holder of one or more classes of Stripped Securities may
be treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that a Stripped Security, or classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each mortgage loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Treasury regulations regarding original issue discount on stripped
obligations make the foregoing interpretations less likely to be applicable. The
preamble to these regulations states that they are premised on the assumption
that an aggregation approach is appropriate for determining whether original
issue discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each securityholder at any time during that year, information
(prepared on the basis described above) necessary to enable the securityholder
to prepare its federal income tax returns. This information will include the
amount of original issue discount accrued on Securities held by persons other
than securityholders exempted from the reporting requirements. However, the
amount required to be reported by the trustee may not be equal to the proper
amount of original issue discount required to be reported as taxable income by a
securityholder, other than an original securityholder who purchased at the issue
price. In particular, in the case of Stripped Securities, the reporting will be
based upon a representative initial offering price of each class of Stripped
Securities except as set forth in the prospectus supplement. The trustee will
also file the original issue discount information with the Internal Revenue
Service. If a securityholder fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a Security older has
not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "-- REMICs -- Backup
Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in mortgage loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or any applicable lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the securityholder on the sale or exchange
of that Security also will be subject to federal income tax at the same rate.
Treasury regulations provide, however, that interest or original issue
discount paid by the trustee or other withholding agent to a Non-U.S. Person
evidencing ownership interest in mortgage loans issued after July 18, 1984 will
be "portfolio interest" and will be treated in the manner, and these persons
will be subject to the same certification requirements, described above under
"-- REMICs -- Taxation of Certain Foreign Investors -- Regular Securities."
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PARTNERSHIP TRUST FUNDS & DEBT SECURITIES
Classification of Partnership Trust Funds and Debt Securities
For each series of Partnership Securities or Debt Securities, Brown & Wood
LLP will deliver its opinion that the trust fund will not be a taxable mortgage
pool or an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the related Agreement and related documents will be complied
with, and on counsel's opinion that the nature of the income of the trust fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (1) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (2) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
Taxation of Debt Securityholders
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
Securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Brown & Wood LLP will deliver its opinion
that the Debt Securities will be classified as indebtedness for federal income
tax purposes. The discussion below assumes this characterization of the Debt
Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
Partnership Trust, and the timing and amount of income allocable to holders of
those Debt Securities may be different than as described in the following
paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (1) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (2) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "-- REMICs -- Taxation
of Owners of REMIC Regular Interests" and "-- Sale or Exchange of Regular
Securities."
Taxation of Owners of Partnership Securities
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the prospectus supplement, the depositor will agree, and
the securityholders will agree by their purchase of Securities, to treat the
Partnership Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Partnership
Trust Fund, the partners of the partnership being the securityholders (including
the depositor), and the
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Debt Securities (if any) being debt of the partnership. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Securities, the Debt Securities, and the depositor is not clear,
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have some features
characteristic of debt, the Partnership Securities might be considered debt of
the depositor or the Partnership Trust Fund. This characterization would not
result in materially adverse tax consequences to securityholders as compared to
the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each securityholder will be required to separately take into
account that holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the mortgage
loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "-- Grantor Trust
Funds -- Standard Securities -- General," and "-- Premium and Discount" and any
gain upon collection or disposition of mortgage loans. The Partnership Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Debt Securities, servicing and other fees, and losses or deductions upon
collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
trust agreement and related documents). The trust agreement will provide, in
general, that the securityholders will be allocated taxable income of the
Partnership Trust Fund for each period equal to the sum of:
(1) the interest that accrues on the Partnership Securities in accordance
with their terms for that Due Period, including interest accruing at the
applicable Interest Rate for that Due Period and interest on amounts
previously due on the Partnership Securities but not yet distributed;
(2) any Partnership Trust Fund income attributable to discount on the
mortgage loans that corresponds to any excess of the principal amount of
the Partnership Securities over their initial issue price; and
(3) any other amounts of income payable to the securityholders for that
period.
This allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Securities over their principal amount. All remaining
taxable income of the Partnership Trust Fund will be allocated to the depositor.
Based on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the Internal Revenue
Service would not require a greater amount of income to be allocated to
securityholders. Moreover, even under the foregoing method of allocation,
securityholders may be allocated income equal to the entire Interest Rate plus
the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Securities on the accrual basis and securityholders may become liable for taxes
on Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay those taxes.
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Part or all of the taxable income allocated to a securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
master servicer but not interest expense) allocable to an individual, estate or
trust securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "-- Grantor Trust Funds -- Standard
Securities -- General." Accordingly, those deductions might be disallowed to the
individual in whole or in part and might result in that holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to that
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization for each mortgage loan would be
calculated in a manner similar to the description above under "-- Grantor Trust
Funds -- Standard Securities -- General" and "-- Premium and Discount."
Notwithstanding that description, it is intended that the Partnership Trust Fund
will make all tax calculations relating to income and allocations to
securityholders on a total basis for all mortgage loans held by the Partnership
Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If the
Internal Revenue Service were to require that these calculations be made
separately for each mortgage loan, the Partnership Trust Fund might be required
to incur additional expense, but it is believed that there would not be a
material adverse effect on securityholders.
(3) Discount and Premium
It is not anticipated that the mortgage loans will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the mortgage loans may be greater or less than the
remaining principal balance of the mortgage loans at the time of purchase. If
so, the mortgage loans will have been acquired at a premium or discount, as the
case may be. See "-- Grantor Trust Funds -- Standard Securities." (As indicated
above, the Partnership Trust Fund will make this calculation on a total basis,
but might be required to recompute it on a mortgage loan-by-mortgage loan
basis.)
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If that termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Those interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when the constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
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(5) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A securityholder's
tax basis in an Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to that
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single total adjusted tax basis in those
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of that total tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to those special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a securityholder is required to recognize a total amount of income (not
including income attributable to disallowed itemized deductions described above)
over the life of the Partnership Securities that exceeds the total cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the Partnership Securities.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of that Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the securityholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
(7) Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder to the extent that the amount of any money
distributed for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a securityholder, no
loss will be recognized except upon a distribution in liquidation of a
securityholder's interest. Any gain or loss recognized by a securityholder will
be capital gain or loss.
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(8) Section 754 Election
If a securityholder sells its Partnership Securities at a profit (loss),
the purchasing securityholder will have a higher (lower) basis in the
Partnership Securities than the selling securityholder had. The tax basis of the
Partnership Trust Fund's assets would not be adjusted to reflect that higher (or
lower) basis unless the Partnership Trust Fund were to file an election under
Section 754 of the Code. To avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Partnership Trust Fund will not make
that election. As a result, securityholder might be allocated a greater or
lesser amount of Partnership Trust Fund income than would be appropriate based
on their own purchase price for Partnership Securities.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. These books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The trustee will file a
partnership information return (Form 1065) with the Internal Revenue Service for
each taxable year of the Partnership Trust Fund and will report each
securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The trustee
will provide the Schedule K-1 information to nominees that fail to provide the
Partnership Trust Fund with the information statement described below and these
nominees will be required to forward that information to the beneficial owners
of the Partnership Securities. Generally, holders must file tax returns that are
consistent with the information return filed by the Partnership Trust Fund or be
subject to penalties unless the holder notifies the Internal Revenue Service of
all those inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. This information includes (1) the name, address and taxpayer
identification number of the nominee and (2) as to each beneficial owner (a) the
name, address and identification number of that person, (b) whether that person
is a United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly-owned agency or instrumentality of
either of the foregoing, and (c) certain information on Partnership Securities
that were held, bought or sold on behalf of that person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish that
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust Fund with the information described
above may be subject to penalties.
Unless another designation is made, the depositor will be designated as the
tax matters partner in the trust agreement and, as the tax matters partner, will
be responsible for representing the securityholders in any dispute with the
Internal Revenue Service. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
until three years after the date on which the partnership information return is
filed. Any adverse determination following an audit of the return of the
Partnership Trust Fund by the appropriate taxing authorities could result in an
adjustment of the returns of the securityholders, and, under certain
circumstances,
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a securityholder may be precluded from separately litigating a proposed
adjustment to the items of the Partnership Trust Fund. An adjustment could also
result in an audit of a securityholder's returns and adjustments of items not
related to the income and losses of the Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for those purposes,
the Partnership Trust Fund will withhold as if it were so engaged to protect the
Partnership Trust Fund from possible adverse consequences of a failure to
withhold. The Partnership Trust Fund expects to withhold on the portion of its
taxable income that is allocable to securityholders who are Non-U.S. Persons
pursuant to Section 1446 of the Code, as if that income were effectively
connected to a U.S. trade or business, at a rate of 35% for Non-U.S. Persons
that are taxable as corporations and 39.6% for all other foreign holders.
Amounts withheld will be deemed distributed to the Non-U.S. Person
securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on Form W-8, Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each Non-U.S. Person holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Partnership Trust Fund's income. Each Non-U.S.
Person holder must obtain a taxpayer identification number from the Internal
Revenue Service and submit that number to the Partnership Trust Fund on Form W-8
to assure appropriate crediting of the taxes withheld. A Non-U.S. Person holder
generally would be entitled to file with the Internal Revenue Service a claim
for refund for taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
securityholder who is a Non-U.S. Person generally will be considered guaranteed
payments to the extent that those payments are determined without regard to the
income of the Partnership Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest may not be considered
"portfolio interest." As a result, securityholders who are Non-U.S. Persons may
be subject to United States federal income tax and withholding tax at a rate of
30%, unless reduced or eliminated pursuant to an applicable treaty. In that
case, a Non-U.S. Person holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld for the
guaranteed payments.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
31% if, in general, the securityholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
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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 Notes 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
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which these plans, accounts or arrangements are invested, that are
subject to Title I of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries for those Plans in connection with the investment of
Plan assets. Some employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject
to ERISA requirements. Therefore, assets of these plans may be invested in
Securities without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal, state and local law. Any of these
plans that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Primary Assets and other
assets included in a related trust fund to be deemed Plan assets. Section
2510.3-101 of the regulations of the United States Department of Labor ("DOL")
provides that when a Plan acquires an equity interest in an entity, the Plan's
assets include both an equity interest and an undivided interest in each of the
underlying assets of the entity, unless certain exceptions not applicable here
apply, or unless the equity participation in the entity by "benefit plan
investors" (i.e., Plans and certain employee benefit plans not subject to ERISA)
is not "significant," both as defined therein. For this purpose, in general,
equity participation by benefit plan investors will be "significant" on any date
if 25% or more of the value of any class of equity interests in the entity is
held by benefit plan investors. To the extent the Securities are treated as
equity interests for purposes of DOL regulations Section 2510.3-101, equity
participation in a trust fund will be significant on any date if immediately
after the most recent acquisition of any Security, 25% or more of any class of
Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice for those assets for a fee, is a fiduciary of the investing Plan. If the
Primary Assets and other assets included in a trust fund constitute Plan assets,
then any party exercising management or discretionary control regarding those
assets, such as the servicer or master servicer, may be deemed to be a Plan
"fiduciary" and thus subject to the
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fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code for the investing Plan. In addition, if the Primary Assets
and other assets included in a trust fund constitute Plan assets, the purchase
of Securities by a Plan, as well as the operation of the trust fund, may
constitute or involve a prohibited transaction under ERISA and the Code.
The DOL issued an individual exemption to Lehman Brothers Inc. (Prohibited
Transaction Exemption 91-14 et al.; Exemption Application No. D-7958 et al., 56
Fed. Reg. 7413 (1991)) (the "Exemption") that generally exempts from the
application of the prohibited transaction provisions of Sections 406(a) and 407
of ERISA, and the excise taxes imposed on those prohibited transactions pursuant
to Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of Securities underwritten by an underwriter, that (1) represent a
beneficial ownership interest in the assets of a trust fund and entitle the
holder the pass-through payments of principal, interest and/or other payments
made with respect to the assets of the trust fund or (2) are denominated as a
debt instrument and represent an interest in a REMIC, provided that certain
conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term "underwriter"
will include (a) Lehman Brothers Inc., (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with Lehman Brothers Inc., and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager for a class of Securities.
The Exemption sets forth five general conditions that must be satisfied for
a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder:
- The acquisition of Securities by a Plan must be on terms (including the
price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party.
- The Exemption only applies to Securities evidencing rights and interests
not subordinated to the rights and interests evidenced by the other
Securities of the trust fund.
- The Securities at the time of acquisition by the Plan must be rated in
one of the three highest generic rating categories by Standard & Poor's
Ratings Services, a division of the McGraw-Hill Companies, Inc. ("S&P"),
Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co.
("DCR") or Fitch IBCA, Inc. ("Fitch").
- The sum of all payments made to and retained by the underwriter(s) must
represent not more than reasonable compensation for underwriting the
Securities; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the assets to the related trust fund must
represent not more than the fair market value of those obligations; and
the sum of all payments made to and retained by the master servicer and
any other servicer must represent not more than reasonable compensation
for that person's services under the related Agreement and reimbursement
of that person's reasonable expenses in connection therewith; and
- The Plan investing in the Securities must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions only if, among other requirements: (1) 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 fund;
(2) the Plan's investment in securities does not exceed twenty-five percent of
all of the
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Securities outstanding at the time of the acquisition and (3) immediately after
the acquisition, no more than twenty-five percent of the assets of the Plan are
invested in securities representing an interest in one or more trusts containing
assets sold or serviced by the same entity.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied for
that Security. However, to the extent Securities are subordinate, the Exemption
will not apply to an investment by a Plan.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c) (1) (A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding
of a Security on behalf of an "Excluded Plan" by any person who has
discretionary authority or renders investment advice with respect to the assets
of that Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of Securities between the depositor or an underwriter and
a Plan when the person who has discretionary authority or renders
investment advice with respect to the investment of Plan assets in the
Securities is (a) an obligor with respect to 5% or less of the fair market
value of the assets of the trust fund or (b) an affiliate of that person;
(2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the trust fund. The
depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied for the Securities so that the Exemption would
provide an exemption from the restrictions imposed by Sections 406(a) and (b) of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) for transactions in connection
with the servicing, management and operation of the Mortgage Pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if those restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to that person)
solely as a result of the Plan's ownership of Securities.
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<PAGE> 237
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
Securities ("Non-Equity Securities") would not cause the assets included in a
related trust fund to be deemed Plan assets. However, the depositor, the master
servicer, the servicer, the trustee, or underwriter may be the sponsor of or
investment advisor with respect to one or more Plans. Because these parties may
receive certain benefits in connection with the sale of Non-Equity Securities,
the purchase of Non-Equity Securities using Plan assets over which any of these
parties has investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may be
available. Accordingly, Non-Equity Securities may not be purchased using the
assets of any Plan if any of the depositor, the servicer, the trustee or
underwriter has investment authority for those assets.
In addition, certain affiliates of the depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
statutory or administrative exemptions such as Prohibited Transaction Class
Exemption ("PTCE") 84-14, which exempts certain transactions effected on behalf
of a Plan by a "qualified professional asset manager," PTCE 90-1, which exempts
certain transactions involving insurance company pooled separate accounts, PTCE
91-38, which exempts certain transactions involving bank collective investment
funds, PTCE 95-60, which exempts certain transactions involving insurance
company general accounts, or PTCE 96-23, which exempts certain transactions
effected on behalf of a Plan by certain "in-house" asset managers. It should be
noted, however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to that investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary that proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The prospectus supplement for a series of Securities may
contain additional information regarding the application of the Exemption, PTCE
83-1 or any other exemption, with respect to the Securities offered thereby. In
addition, any Plan fiduciary that proposes to cause a Plan to purchase Stripped
Securities should consider the federal income tax consequences of that
investment.
Any Plan fiduciary considering whether to purchase a Security on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to that investment.
The sale of Securities to a Plan is in no respect a representation by the
depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
PRE-FUNDING ACCOUNTS
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
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<PAGE> 238
using pre-funding accounts for trusts issuing pass-through certificates. The
amendment generally allows assets in a trust fund supporting payments to
securityholders, and having a value equal to no more than 25% of the total
initial principal balance of the related Securities, to be transferred to the
trust fund within the Pre-Funding Period, instead of requiring that all the
Primary Assets 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 Securities being offered (the "Pre-Funding
Limit") must not exceed 25%.
(2) All assets transferred after the closing date (the "Subsequent Assets")
must meet the same terms and conditions for eligibility as the original
Primary Assets used to create the trust fund, which terms and conditions
have been approved by at least one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund during the
Pre-Funding Period must not result in the Securities that are 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 Securities by the trust fund.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Primary Assets in the trust
fund at the end of the Pre-Funding Period must not be more than 100 basis
points lower than the average interest rate for the Primary Assets
transferred to the trust fund on the closing date.
(5) In order to ensure that the characteristics of the Subsequent Assets
are substantially similar to the original Primary Assets that were
transferred to the trust fund:
- the characteristics of the Subsequent Assets must be monitored by an
insurer or other credit support provider that is independent of the
depositor; or
- an independent accountant retained by the depositor must provide the
depositor with a letter (with copies provided to each rating agency
rating the Securities, the underwriter and the trustee) stating
whether or not the characteristics of the Subsequent Assets conform to
the characteristics described in the related prospectus supplement
and/or the related Agreement. In preparing this letter, the
independent accountant must use the same type of procedures as were
applicable to the Primary Assets transferred to the trust fund 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 related
Agreement or an Event of Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or the capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments ("Permitted Investments").
(8) The prospectus or prospectus supplement must describe:
- the Pre-Funding Account and/or capitalized interest account used in
connection with the Pre-Funding Account;
- the duration of the Pre-Funding Period;
- the percentage and/or dollar amount of the Pre-Funding Limit for the
trust fund; and
- that the amounts remaining in the Pre-Funding Account at the end of
the Pre-Funding Period will be remitted to securityholders as
repayments of principal.
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<PAGE> 239
(9) The related Agreement must prescribe the Permitted Investments for the
Pre-Funding Account and/or capitalized interest account and, if not disclosed in
the prospectus supplement, the terms and conditions for eligibility of
Subsequent Assets.
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement for each series of Securities will specify which,
if any, of the classes of Offered Securities will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Classes of Securities that qualify 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 of these 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 Securities will constitute legal investments for entities subject to this
legislation only to the extent provided therein. Approximately twenty-one states
adopted the 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 Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to any regulations 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 Securities under consideration
for purchase constitutes a "mortgage related security").
All depository institutions considering an investment in the Securities
(whether or not the class of securities 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,
"high-risk mortgage securities" include securities such as the Securities not
entitled to distributions allocated to principal or interest, or Subordinated
Securities. 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 the 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
138
<PAGE> 240
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 Securities or to purchase
Securities 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 Securities constitute legal investments for these
investors.
LEGAL MATTERS
Certain legal matters in connection with the Offered Securities will be
passed upon for the depositor and for the Underwriters, and the material federal
income tax consequences of the Securities will be passed upon for the depositor,
by Brown & Wood LLP, Washington, D.C.
THE DEPOSITOR
The depositor, Structured Asset Securities Corporation, 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 securities. 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 Securities to be transferred by the
Issuer to a trust, subject to the obligations of the Securities of that series,
thereby relieving the Issuer of its obligations with respect to the Securities.
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 prospectus supplement to
purchase the Primary Assets, to repay indebtedness that 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 Securities.
If specified in the prospectus supplement, Securities may be exchanged by the
depositor for Primary Assets. Unless otherwise specified in the prospectus
supplement, the Primary Assets for each series of Securities will be acquired by
the depositor either directly, or through one or more affiliates that will have
acquired the Primary Assets from time to time either in the open market or in
privately negotiated transactions.
PLAN OF DISTRIBUTION
Each series of Securities offered hereby and by means of the 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 the originator
(collectively, the "Underwriters"). The prospectus supplement with respect to
each series of Securities will set forth the terms of the offering of the series
of Securities and each class within the series, including the name or names of
139
<PAGE> 241
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 Securities will be determined.
The Underwriters may or may not be obligated to purchase all of the
Securities of a series described in the prospectus supplement with respect to
the series if any Securities are purchased. The Securities may be acquired by
the Underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale.
If so indicated in the prospectus supplement, the depositor will authorize
Underwriters or other persons acting as the depositor's agents to solicit offers
by certain institutions to purchase the Securities from the depositor pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which these 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 these institutions must be
approved by the depositor. The obligation of any purchaser under the contract
will be subject to the condition that the purchase of the offered Securities
will not at the time of delivery be prohibited under the laws of the
jurisdiction to which the purchaser is subject. The Underwriters and any other
agents will not have any responsibility in respect of the validity or
performance of the contracts.
The depositor may also sell the Securities offered hereby and by means of
the prospectus supplements from time to time in negotiated transactions or
otherwise, at prices determined at the time of sale. The depositor may effect
the transactions by selling Securities to or through dealers and the dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the depositor and any purchasers of Securities for whom they
may act as agents.
The place and time of delivery for each series of Securities offered hereby
and by means of the prospectus supplement will be set forth in the prospectus
supplement with respect to the series.
In the ordinary course of business, Lehman Brothers Inc. or other
Underwriters, or their respective affiliates, may engage in various securities
and financing transactions, including loans or repurchase agreements to provide
interim financing of mortgage loans pending the sale of the mortgage loans or
interests therein, including the Securities.
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 Securities. This prospectus, which forms a part of
the Registration Statement, omits certain information contained in the
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 these materials 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
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<PAGE> 242
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 these
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 Fannie Mae Prospectus for Fannie Mae certificates
and Fannie Mae's annual report and quarterly financial statements as well as
other financial information are available from the Director of Investor
Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The depositor did not participate in the preparation of Fannie
Mae'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 Freddie Mac certificates as
well as Freddie Mac's most recent Information Statement and Information
Statement Supplement and any quarterly report made available by Freddie Mac can
be obtained by writing or calling the Investor Inquiry department of Freddie Mac
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 Freddie Mac'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 Securities issued by the trust fund will 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 the documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein will 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
that also is or is deemed to be incorporated by reference modifies or replaces
the statement. Any statement so modified or superseded will 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
that 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 the
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Requests should be directed to the Corporate
Trust Office of the trustee specified in the accompanying prospectus supplement.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related trust fund are required
under the Agreements to be forwarded to securityholders. Unless otherwise
specified in the prospectus supplement, the reports will not be examined and
reported on by an independent public accountant. See "The Agreements -- Reports
to Securityholders."
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Adjustable Rate Mortgages........... 34
Agency Certificates................. 19
Aggregate Asset Principal Balance... 6
Agreements.......................... 76
Appraised Value..................... 33, 37
ARMs................................ 34
Asset Group......................... 2
Asset Principal Balance............. 6
Bankruptcy Code..................... 62
Beneficial Owner.................... 7
Bi-Weekly Loans..................... 31
Book-Entry Registration............. 3
Book-Entry Securities............... 3
Business Day........................ 88
Buydown............................. 71
Buy-Down Amounts.................... 33
Buy-Down Fund....................... 49
Buy-Down Loans...................... 33
Buy-Down Mortgage Rate.............. 33
Buy-Down Period..................... 33
Cash Program........................ 24
CERCLA.............................. 103
Certificates........................ 2
Clearstream......................... 7
Collection Account.................. 47
Commission.......................... 167
Compound Interest Securities........ 2
Compound Value...................... 5
Condominium......................... 31
Condominium Association............. 43
Condominium Building................ 43
Condominium Unit.................... 31
Conventional Loans.................. 22
Cooperative Corporation............. 8
Cooperative Dwellings............... 31
Cooperatives........................ 31
Covered Trust....................... 61
CPR................................. 14
Cut-off Date........................ 17
DCR................................. 159
Deferred Interest................... 15
Definitive Securities............... 3
Deleted Loan........................ 80
Distribution Account................ 88
DOL................................. 158
DTC................................. 7
Due Date............................ 51
EDGAR............................... 167
Eligible Investments................ 82
Eligible Reserve Fund Investments... 83
EPA................................. 103
ERISA............................... 158
ERISA Considerations................ 159
Escrow Accounts..................... 46
Euroclear........................... 7
Euroclear Operator.................. 8
European Depositaries............... 9
Exchange Act........................ 168
Excluded Plan....................... 160
Exemption........................... 159
Expense Reserve Fund................ 88
Fannie Mae.......................... 23
FHA................................. 21
FHA Loans........................... 30
Final Scheduled Distribution Date... 13
Financial Intermediary.............. 9
Fitch............................... 159
Floating Rate Securities............ 2
Freddie Mac......................... 27
Freddie Mac Act..................... 27
FSLIC............................... 35
Garn-St Germain Act................. 104
GEM Loans........................... 30
Ginnie Mae.......................... 21
Ginnie Mae Servicers................ 19
GPM Fund............................ 51
GPM Loans........................... 30
Guarantor Program................... 24
Guaranty Agreement.................. 19
Holder-In-Due-Course................ 109
Housing Act......................... 21
HUD................................. 27
Index............................... 35
Indirect Participants............... 7
Insurance Policies.................. 29
Insured Loss........................ 65
Interest Rate....................... 4
Interest Weighted Securities........ 2
Investment and Deposit Activities... 164
L/C Bank............................ 63
L/C Percentage...................... 63
Lifetime Mortgage Rate Cap.......... 34
Liquidation Proceeds................ 47
Loans............................... 19
Loan-to-Value Ratio................. 33
Manufactured Home................... 36
Manufactured Home Loan Schedule..... 78
Manufactured Home Loans............. 36
Maximum Mortgage Rate Adjustment.... 34
Minimum Mortgage Rate............... 34
Minimum Principal Distribution
Amount............................ 5
Moody's............................. 159
Mortgage Certificate Schedule....... 76
Mortgage Loan Schedule.............. 78
Mortgage Loans...................... 30
Mortgage Rates...................... 16
Mortgaged Property.................. 17
Multi-Class Series.................. 4
Multifamily Properties.............. 15
NCUA................................ 164
</TABLE>
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<PAGE> 244
<TABLE>
<S> <C>
Negatively Amortizing ARMs.......... 34
No-Bid.............................. 70
Non-Equity Securities............... 161
Non-U.S. Person..................... 136
Notes............................... 2
Offered Securities.................. 2
PACs................................ 2
Participants........................ 7
Participation Agreement............. 19
Participation Certificate
Schedule.......................... 79
Participation Certificates.......... 79
Parties in Interest................. 158
PC Pool............................. 24
Percentage Interest................. 3
Planned Amortization Certificates... 2
Plans............................... 158
PMBS Agreement...................... 27
PMBS Issuer......................... 28
PMBS Servicer....................... 27
PMBS Trustee........................ 27
Policy Statement.................... 164
Pre-Funding Account................. 38
Pre-Funding Arrangement............. 38
Pre-Funding Limit................... 162
Primary Assets...................... 18
Principal Distribution Amount....... 5
Principal Weighted Securities....... 2
Private Mortgage-Backed
Securities........................ 18
PTCE................................ 162
Qualified Insurer................... 54
Qualifying Substitute Mortgage
Loan.............................. 80
Rating Agency....................... 5
RCRA................................ 103
Relevant Depositary................. 9
REO Property........................ 90
Reserve Fund........................ 18
Retained Interest................... 18
Rules............................... 9
S&P................................. 159
Scheduled Payments.................. 15
Scheduled Principal................. 25
Securities.......................... 2
Seller.............................. 78
Senior Securities................... 5
Servicing Account................... 49
Servicing Agreements................ 45
Single Family Property.............. 22
SMMEA............................... 164
SPA................................. 14
Subordinate Securities.............. 2,5
Subordinated Amount................. 61
Subordination Reserve Fund.......... 61
Subsequent Primary Assets........... 38
Subservicers........................ 45
Subsidy Fund........................ 50
Taxable Mortgage Pools.............. 111
Terms and Conditions................ 9
Tiered REMICs....................... 115
Title V............................. 105
Title VIII.......................... 106
UCC................................. 98
underwriter......................... 159
Underwriters........................ 166
VA.................................. 21
VA Loans............................ 20
</TABLE>
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<PAGE> 245
$367,466,000
(APPROXIMATE)
AMORTIZING RESIDENTIAL
COLLATERAL TRUST
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 2000-BC2
STRUCTURED ASSET SECURITIES CORPORATION
DEPOSITOR
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
-------------------------------------------
PROSPECTUS SUPPLEMENT
MAY 23, 2000
-------------------------------------------
LOGO LEHMAN BROTHERS
