<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated May 23, 2000)
$278,609,960 (Approximate)
Structured Asset Securities Corporation
Mortgage Pass-Through Certificates, Series 2000-5
[GRAPHIC OMITTED]
Aurora Loan Services Inc.,
Master Servicer
------------------
Consider carefully the
risk factors beginning on
page S-13 of this prospectus
supplement.
For a list of capitalized
terms used in this prospectus
supplement and the
prospectus, see the index of
principal terms beginning on
page S-85 in this prospectus
supplement and the index of
defined terms on page 123 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 propectus
supplement may be used to
offer and sell the certificates
only if accompanied by the
prospectus.
The trust will issue:
o twelve classes of senior certificates, including four classes of
interest-only certificates and two classes of principal-only
certificates.
o six classes of subordinate certificates.
The classes of certificates offered by this prospectus supplement are
listed, together with their initial class principal amounts (or class notional
amounts) and interest rates, under "Summary of Terms -- The Offered
Certificates" beginning on page S-6 of this prospectus supplement. This
prospectus supplement and the accompanying prospectus relate only to the
offering of the certificates listed in the table on page S-7 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 three pools of
mortgage loans. The mortgage loans were originated in accordance with
underwriting guidelines that are not as strict as Fannie Mae and Freddie Mac
guidelines. As a result, the mortgage loans may experience higher rates of
delinquency, foreclosure and bankruptcy that 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 offered by this prospectus supplement 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. Lehman Brothers Inc. has the right to reject any order.
Proceeds to Structured Asset Securities Corporation from the sale of these
certificates will be approximately 100.19% of their initial total principal
amount, plus accrued interest, before deducting expenses.
On or about October 30, 2000, delivery of the certificates offered by this
prospectus supplement, except the Class R Certificate, will be made through the
book-entry facilities of The Depository Trust Company, and delivery of the
Class R Certificate will be made in physical form at the offices of Lehman
Brothers Inc., New York, New York.
Underwriter:
LEHMAN BROTHERS
The date of this prospectus supplement is October 25, 2000
<PAGE>
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.
---------------
After the initial distribution of the certificates offered by this
prospectus supplement, this prospectus and prospectus supplement may be used by
Lehman Brothers Inc., an affiliate of the depositor and the master servicer, in
connection with market making transactions in those certificates. Lehman
Brothers Inc. may act as principal or agent in these transactions. These
transactions will be at market prices at the time of sale and not at the prices
of the initial offering. Certain information in this prospectus supplement will
be updated from time to time for as long as Aurora Loan Services Inc. continues
to be the master servicer or a servicer.
---------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
---------------
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>
Tables of Contents
Prospectus Supplement
Page
-----
Summary of Terms ....................................... S-6
Parties ............................................. S-6
The Offered Certificates ............................ S-6
Servicing of the Mortgage Loans ..................... S-10
Optional Purchase of Certain Classes of
Certificates ..................................... S-10
Optional Purchase of the Mortgage Loans ............. S-11
Tax Status .......................................... S-11
ERISA Considerations ................................ S-11
Legal Investment Considerations ..................... S-11
Ratings of the Certificates ......................... S-11
Risk Factors ........................................... S-13
Higher Expected Delinquencies of the
Mortgage Loans ................................... S-13
Potential Inadequacy of Credit Enhancement........... S-13
No Cross-Collateralization of Pool 3 ................ S-14
Unpredictability and Effect of Prepayments .......... S-14
Effect of Exercise of Call Option ................... S-15
Special Risks for Certain Classes of
Certificates ..................................... S-15
Changes in LIBOR May Reduce the Yields
on the Class 2-A1 and 2-A3 Certificates .......... S-16
Changes in One Year CMT May Reduce the
Yields on the Class 1-A1, 2-A1 and 3-A1
Certificates ..................................... S-16
Effect of Adjusted Net WAC Cap on
Certificate Interest Rates ....................... S-16
Mortgage Loans with Interest-Only
Payments ......................................... S-16
Default Risk on High Balance Mortgage
Loans ............................................ S-17
Geographic Concentration of Mortgage
Loans ............................................ S-17
Lack of Primary Mortgage Insurance .................. S-18
Effects of Performance of Mortgage Loans
on Ratings of Certificates ....................... S-18
Limited Ability to Resell Certificates .............. S-18
Description of the Certificates ........................ S-19
General ............................................. S-19
Book-Entry Registration ............................. S-21
Priority of Distributions ........................... S-22
Distributions of Interest ........................... S-24
Distributions of Principal .......................... S-27
Cross-Collateralization Between Pool 1 and
Pool 2 ........................................... S-30
Available Distribution Amount ....................... S-31
Example of Distributions ............................ S-33
The Residual Certificate ............................ S-33
Allocation of Realized Losses ....................... S-34
Final Scheduled Distribution Date ................... S-36
<PAGE>
Page
----
Optional Purchase of the Class 1-A1 and
Class 2-A1 Certificates ........................... S-36
Optional Purchase of the Mortgage Loans ............. S-37
The Trustee ......................................... S-37
Description of the Mortgage Pools ...................... S-37
General ............................................. S-37
The Index ........................................... S-39
Pool 1 Mortgage Loans ............................... S-39
Pool 2 Mortgage Loans ............................... S-45
Pool 3 Mortgage Loans ............................... S-50
Underwriting Guidelines ............................. S-54
Aurora Underwriting Guidelines ...................... S-54
The Borrower Advantage Program ...................... S-55
Chase Underwriting Guidelines ....................... S-56
Additional Information ................................. S-56
The Master Servicer .................................... S-56
Delinqencies and Foreclosures .......................... S-57
The Servicers .......................................... S-58
Chase Manhattan Mortgage Corporation ................... S-58
Servicing of the Mortgage Loans ........................ S-59
General ............................................. S-59
Servicing Compensation and Payment of
Expenses ......................................... S-60
Prepayment Interest Shortfalls ...................... S-60
Advances ............................................ S-60
Collection of Taxes, Assessments and Similar
Items ............................................ S-61
Insurance Coverage .................................. S-61
Evidence as to Compliance ........................... S-61
Certain Rights Related to Foreclosure ............... S-61
Trust Agreement ........................................ S-61
General ............................................. S-61
Assignment of Mortgage Loans ........................ S-62
Voting Rights ....................................... S-62
Yield, Prepayment and Weighted Average Life ............ S-63
General ............................................. S-63
Sensitivity of Certain Classes of Certificates ...... S-65
Subordination of the Offered Subordinate
Certificates ..................................... S-68
Weighted Average Life ............................... S-68
Material Federal Income Tax Considerations ............. S-81
General ............................................. S-81
The Class 1-A1 and Class 2-A1
Certificates ..................................... S-81
Residual Certificates ............................... S-82
Legal Investment Considerations ........................ S-82
Use of Proceeds ........................................ S-83
Underwriting ........................................... S-83
ERISA Considerations ................................... S-83
Legal Matters .......................................... S-84
Ratings ................................................ S-84
S-3
<PAGE>
Prospectus
Page
---------
Description of the Securities ...................... 2
General ......................................... 2
Distributions on the Securities ................. 2
Optional Termination ............................ 4
Optional Purchase of Securities ................. 5
Other Purchases ................................. 5
Book-Entry Registration ......................... 5
Yield, Prepayment and Maturity Considerations....... 9
Payment Delays .................................. 9
Principal Prepayments ........................... 9
Timing of Reduction of Principal Amount ......... 10
Interest or Principal Weighted Securities ....... 10
Final Scheduled Distribution Date ............... 10
Prepayments and Weighted Average Life ........... 10
Other Factors Affecting Weighted Average
Life ......................................... 11
The Trust Funds .................................... 13
General ......................................... 13
Ginnie Mae Certificates ......................... 14
Fannie Mae Certificates ......................... 16
Freddie Mac Certificates ........................ 18
Private Mortgage-Backed Securities .............. 20
The Mortgage Loans .............................. 22
The Manufactured Home Loans ..................... 26
Pre-Funding Arrangements ........................ 28
Collection Account and Distribution Account...... 28
Other Funds or Accounts ......................... 29
Loan Underwriting Procedures and
Standards ....................................... 29
Underwriting Standards .......................... 29
Loss Experience ................................. 30
Representations and Warranties .................. 31
Substitution of Primary Assets .................. 33
Servicing of Loans ................................. 33
General ......................................... 33
Collection Procedures; Escrow Accounts .......... 34
Deposits to and Withdrawals from the
Collection Account ........................... 34
Servicing Accounts .............................. 36
Buy-Down Loans, GPM Loans and Other
Subsidized Loans ............................. 36
Advances and Other Payments, and
Limitations Thereon .......................... 37
Maintenance of Insurance Policies and Other
Servicing Procedures ......................... 38
Presentation of Claims; Realization Upon
Defaulted Loans .............................. 40
Enforcement of Due-On-Sale Clauses .............. 41
Certain Rights Related to Foreclosure ........... 41
Servicing Compensation and Payment of
Expenses ..................................... 42
Evidence as to Compliance ....................... 42
Certain Matters Regarding the Master
Servicer ..................................... 43
<PAGE>
Page
---
Credit Support ..................................... 44
General ......................................... 44
Subordinate Securities; Subordination
Reserve Fund ................................. 44
Cross-Support Features .......................... 45
Insurance ....................................... 45
Letter of Credit ................................ 46
Financial Guaranty Insurance Policy ............. 46
Reserve Funds ................................... 46
Description of Mortgage and Other
Insurance ....................................... 47
Mortgage Insurance on the Loans ................. 47
Hazard Insurance on the Loans ................... 53
Bankruptcy Bond ................................. 54
Repurchase Bond ................................. 55
The Agreements ..................................... 55
Issuance of Securities .......................... 55
Assignment of Primary Assets .................... 55
Repurchase and Substitution of Non-
Conforming Loans ............................. 58
Reports To Securityholders ...................... 59
Investment of Funds ............................. 60
Event of Default; Rights Upon Event of
Default ...................................... 60
The Trustee ..................................... 63
Duties of the Trustee ........................... 63
Resignation of Trustee .......................... 63
Distribution Account ............................ 64
Expense Reserve Fund ............................ 64
Amendment of Agreement .......................... 64
Voting Rights ................................... 65
REMIC or FASIT Administrator .................... 65
Administration Agreement ........................ 65
Termination ..................................... 65
Legal Aspects of Loans ............................. 66
Mortgages ....................................... 66
Junior Mortgages; Rights of Senior
Mortgages .................................... 67
Cooperative Loans ............................... 68
Foreclosure on Mortgages ........................ 70
Realizing Upon Cooperative Loan Security ........ 71
Rights of Redemption ............................ 72
Anti-Deficiency Legislation and Other
Limitations on Lenders ....................... 72
Soldiers' and Sailors' Civil Relief Act of
1940 ......................................... 74
Environmental Risks ............................. 74
Due-on-Sale Clauses in Mortgage Loans ........... 75
Enforceability of Prepayment and Late
Payment Fees ................................. 76
Equitable Limitations on Remedies ............... 76
Applicability of Usury Laws ..................... 76
Adjustable Interest Rate Loans .................. 77
Manufactured Home Loans ......................... 77
S-4
<PAGE>
Page
---------
Material Federal Income Tax
Considerations ................................. 80
General ........................................ 80
Taxable Mortgage Pools ......................... 81
REMICs ......................................... 81
FASITs ......................................... 101
Grantor Trust Funds ............................ 103
Partnership Trust Funds & Debt Securities ......... 109
State Tax Considerations .......................... 114
ERISA Considerations .............................. 114
Pre-Funding Accounts .............................. 118
Page
---
Legal Investment Considerations ................... 119
Legal Matters ..................................... 120
The Depositor ..................................... 120
Use of Proceeds ................................... 120
Plan of Distribution .............................. 120
Additional Information ............................ 121
Incorporation of Certain Documents by
Reference ...................................... 122
Reports to Securityholders ........................ 122
Index of Defined Terms ............................ 123
S-5
<PAGE>
Summary of Terms
o This summary highlights selected information from this prospectus supplement
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 prospectus supplement and the accompanying prospectus.
o 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.
o Whenever we refer in this prospectus supplement to a percentage of some or
all of the mortgage loans in the trust fund or in a pool, that percentage
has been calculated on the basis of the total scheduled principal balance of
those mortgage loans as of October 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 of Terms 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.
Parties
Seller
Lehman Capital, A Division of Lehman Brothers Holdings Inc.
Depositor
Structured Asset Securities Corporation
Master Servicer
Aurora Loan Services Inc.
Servicers
Initially, the servicers will be Aurora Loan Services Inc., Chase
Manhattan Mortgage Corporation, and other servicers.
Trustee
The Chase Manhattan Bank
The Offered Certificates
Classes of Certificates
Structured Asset Securities Corporation's Mortgage Pass-Through
Certificates, Series 2000-5, consist of the classes of certificates listed in
the table on the following page, together with the Class 1-A2, Class 2-A2,
Class B4, Class B5 and Class B6 Certificates. Only the classes of certificates
listed in the table are offered by this prospectus supplement.
S-6
<PAGE>
Class
Principal CUSIP
Class Amount(1) Interest Rate Number
----------------- -------------------- ------------------- ----------
1-A1 ............ $75,950,000 7.25 %(2) 863572Y80
1-AX ............ (3) Adjustable(4) 863572Y98
2-A1 ............ 71,657,000 Adjustable(5) 863572Z22
2-A3 ............ (3) Adjustable(4) 863572Z30
2-AX ............ (3) Adjustable(4) 863572Z48
2-AP(6) ......... 4,196,187 0.00% 863572Z55
3-A1 ............ 112,481,000 7.00%(7) 863572Z63
3-AX ............ (3) Adjustable(4) 863572Z71
3-AP(6) ......... 4,673 0.00% 863572Z89
B1 .............. 8,577,000 Adjustable(4) 863572Z97
B2 .............. 3,805,000 Adjustable(4) 8635722A0
B3 .............. 1,939,000 Adjustable(4) 8635722B8
R ............... 100 7.25%(2) 8635722C6
------------
(1) These balances are approximate, as described in this prospectus supplement.
(2) The Class 1-A1 and R Certificates will accrue interest based on an interest
rate of 7.25% per annum, subject to a maximum rate equal to the Adjusted
Net WAC for pool 1, until the Class 1-A1 Call Date. After the Accrual
Period for the Class 1-A1 Call Date, the Class 1-A1 Certificates will
accrue interest based on the Adjusted Net WAC for pool 1, as described in
this prospectus supplement.
(3) The Class 1-AX, 2-A3, 2-AX and 3-AX Certificates are interest-only
certificates; they will not be entitled to payments of principal and will
accrue interest on their notional amounts, as described in this prospectus
supplement.
(4) The Class 1-AX, 2-A3, 2-AX, 3-AX, B1, B2 and B3 Certificates will accrue
interest based on variable interest rates, as described in this prospectus
supplement.
(5) The Class 2-A1 Certificates will accrue interest based on a variable
interest rate, as described in this prospectus supplement, subject to a
maximum rate equal to the Adjusted Net WAC for Pool 2, until the Class
2-A1 Call Date. After the Accrual Period for the Class 2-A1 Call Date, the
Class 2-A1 Certificates will accrue interest based on the Adjusted Net WAC
for pool 2, as described in this prospectus supplement. The initial
interest rate on the Class 2-A1 Certificates will be 7.22%.
(6) The Class 2-AP and 3-AP Certificates are principal-only certificates; they
will not be entitled to payments of interest.
(7) The Class 3-A1 Certificates will accrue interest based on an interest rate
of 7.00% per annum, subject to a maximum rate equal to the Adjusted Net
WAC for pool 3, until the Class 3-A1 Reset Date. After the Accrual Period
for the Class 3-A1 Reset Date, the Class 3-A1 Certificates will accrue
interest based on the Adjusted Net WAC for pool 3, as described in this
prospectus supplement.
S-7
<PAGE>
The certificates offered by this prospectus supplement, except for the
Class R Certificate, will be issued in book-entry form. The Class R Certificate
will be issued in the form of a physical certificate.
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 that
consists primarily of three separate pools of mortgage loans: "pool 1," "pool
2" and "pool 3." As is described in greater detail in this prospectus
supplement, the mortgage loans in pool 1 have original terms to maturity of 30
years and consist of adjustable rate mortgage loans with interest rates which
first adjust after an initial period of three years following origination and
then adjust in each following year; the mortgage loans in pool 2 have original
terms to maturity of 30 years and consist of adjustable rate mortgage loans
with interest rates which first adjust after an initial period of five years
following origination and then generally adjust in each following year; and the
mortgage loans in pool 3 have original terms to maturity of 30 years, consist
of adjustable rate mortgage loans with interest rates which first adjust after
an initial period of seven years following origination and then adjust in each
following year, and have original principal balances that do not exceed the
applicable Fannie Mae/Freddie Mac maximum original loan limitations for one-to
four-family mortgaged properties.
Payments of interest and principal on senior certificates identified with
a "1-" in their class designation and the Class R Certificate will be based on
collections on the pool 1 mortgage loans, and payments on senior certificates
identified with a "2-" in their class designations will be based on collections
on the pool 2 mortgage loans, except, in each case, under the limited
circumstances described in this prospectus supplement. Payments of interest and
principal on senior certificates identified with a "3-" in their class
designation will be based on collections on the pool 3 mortgage loans. Each
class of the subordinate certificates will consist of two payment components:
one component relating to pools 1 and 2, and one component relating to pool 3.
Payments of interest and principal on the components of the subordinate
certificates will be based on collections from the related pools.
The offered certificates will have an approximate total initial principal
amount of $278,609,960. 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%.
Payment Components
As described above, each class of subordinate certificates will consist
of two payment components. The component related to pools 1 and 2 will be
designated with a "(1-2)" and the component related to pool 3 will be
designated with a "(3)".
The balance of each class of subordinate certificates at any time will
equal the sum of its components. For example, the principal amount of the Class
B1 Certificates will equal the sum of the principal amounts of the B1(1-2) and
B1(3) components. In addition, the total amount of interest accrued on the
Class B1 Certificates, for example, in any particular payment period will equal
the sum of the amount of interest accrued on the B1(1-2) and B1(3) components
in that period. The holder of a subordinate certificate will not have a
severable interest in any component, but will have an undivided interest in the
entire related class.
See "Description of the Certificates" in this prospectus supplement.
Payments on the Certificates
Principal and interest on the certificates will be payable on the 25th
day of each month, beginning in November 2000. However, if the 25th day is not
a business day, payments will be made on the next business day after the 25th
day of the month.
Interest Payments
Interest will accrue on each class of certificates, other than the
principal-only certificates, at the applicable annual rates described in this
prospectus supplement.
No interest will be paid on the Class 1-AX, 2-AX, 2-A3 and 3-AX
Certificates after the distribution dates in July 2003, May 2005, May 2005 and
February 2007, respectively.
S-8
<PAGE>
The Class 2-AP and 3-AP Certificates are principal-only certificates and
will not be entitled to payments of interest.
See "Description of the Certificates -- Distributions of Interest" in
this prospectus supplement.
Principal Payments
The amount of principal payable on the certificates, other than the
interest-only certificates, will be determined by (1) formulas that allocate
portions of principal payments received on the mortgage loans among different
classes, and (2) funds actually received on the mortgage loans that are
available to make payments on the certificates. Funds actually received on the
mortgage loans may consist of expected, scheduled payments, and unexpected
payments resulting from prepayments by borrowers, liquidation of defaulted
mortgage loans, or repurchases of mortgage loans under the circumstances
described in this prospectus supplement.
The key allocation concept for the Class 1-A1, 2-A1, 3-A1 and R
Certificates is the Senior Principal Distribution Amount. The key allocation
concept for the Class 2-AP and 3-AP Certificates is the AP Principal
Distribution Amount. The key allocation concept for the Class B Certificates is
the Subordinate Principal Distribution Amount.
The Class 1-AX, 2-A3, 2-AX and 3-AX Certificates are interest-only
certificates and will not be entitled to payments of principal.
See "Description of the Certificates -- Distributions of Principal" in
this prospectus supplement.
Limited Recourse
The only source of cash available to make interest and principal payments
on the certificates will be the assets of the trust fund. The trust fund will
have no other source of cash and no other entity will be required or expected
to make any payments on the certificates.
Enhancement of Likelihood of Payment on the Certificates
The payment structure used by the trust fund includes subordination, loss
allocation and cross-collateralization features to enhance the likelihood that
holders of more senior classes of certificates will receive regular payments of
interest and principal. The senior certificates will be less likely to
experience losses than the subordinate certificates, and each class of
subordinate certificates with a lower numerical class designation will be less
likely to experience losses than each class of subordinate certificates with a
higher numerical class designation.
Because the components related to pools 1 and 2 represent interests in
both such mortgage pools, the component principal amounts of these components
could be reduced to zero as a result of disproportionately high losses on the
mortgage loans in either pool 1 or pool 2, increasing the likelihood that
losses experienced by one pool will be allocated to the senior certificates of
the other pool.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Cross-Collateralization Between Pool 1 and
Pool 2" and "-- Allocation of Realized Losses" in this prospectus supplement
for a detailed description of subordination, loss allocation and cross-
collateralization.
Subordination of Payments
Certificates with an "A" or "R" in their class designation will have a
payment priority as a group over other certificates. The Class B1 Certificates
will have a payment priority over the Class B2 and B3 Certificates, and the
Class B2 Certificates will have a payment priority over the Class B3
Certificates. The Class B3 Certificates will have a payment priority over the
Class B4, B5 and B6 Certificates.
See "Description of the Certificates -- Priority of Distributions" in
this prospectus supplement.
Allocation of Losses
As described in this prospectus supplement, amounts representing losses
on the mortgage loans in a pool (or pools) will be applied to reduce the
principal amount of the related component (i.e., the component for such pool or
pools) still outstanding that has the lowest payment priority, until the amount
of that component has been reduced to zero. For example, losses in pools 1 and
2 will first be allocated in reduction of the B6(1-2) component principal
amount until it is reduced to zero, then to the B5(1-2) component until its
principal amount has been reduced to zero and likewise to the B4(1-2), B3(1-2),
B2(1-2) and B1(1-2)
S-9
<PAGE>
components, in that order, until the principal amount of each component has
been reduced to zero. If the applicable subordination is insufficient to absorb
losses, then senior certificateholders will incur losses and may never receive
all of their principal payments.
Cross-Collateralization Between Pool 1 and Pool 2
Under certain limited circumstances, and with respect to pools 1 and 2
only, payments on the mortgage loans in one pool may be distributed to holders
of certain senior certificates of the other pool. As described in greater
detail in this prospectus supplement, this "cross-collateralization" between
pool 1 and pool 2 may occur in two basic ways. For example:
(1) Rapid prepayment situations:
o If the Class 1-A1, 1-A2 and R Certificates have been retired but the
Class 2-A1 and 2-A2 Certificates are outstanding, and the mortgage
loans are performing below certain standards, then certain payments
on the pool 1 mortgage loans will be paid to the Class 2-A1 and 2-A2
Certificates before being paid to the subordinate certificates.
o If the Class 2-A1 and 2-A2 Certificates have each been retired but the
Class 1-A1 and 1-A2 Certificates are outstanding, and the mortgage
loans are performing below certain standards, then certain payments
on the pool 2 mortgage loans will be paid to the Class 1-A1 and 1-A2
Certificates before being paid to the subordinate certificates.
(2) High loss situations:
o If the total principal amount of the Class 1-A1, 1-A2 and R
Certificates is greater than the total principal balance of the pool
1 mortgage loans, then certain payments on the pool 2 mortgage loans
otherwise payable to the subordinate certificates will be paid to the
Class 1-A1, 1-A2 and R Certificates.
o If the total principal amount of the Class 2-A1 and 2-A2 Certificates
is greater than the total principal balance of the pool 2 mortgage
loans, then certain payments on the pool 1 mortgage loans otherwise
payable to the subordinate certificates will be paid to the Class
2-A1 and 2-A2 Certificates.
See "Description of the Certificates -- Cross-Collateralization Between
Pool 1 and Pool 2" in this prospectus supplement.
The Mortgage Loans
As of the cut-off date, which is October 1, 2000, the assets of the trust
will consist primarily of three pools of mortgage loans with a total principal
balance of approximately $284,658,936. The mortgage loans will be secured by
mortgages, deeds of trust, or other security instruments, all of which are
referred to in this prospectus supplement as mortgages.
The mortgage loans will consist of adjustable rate, conventional, first
lien residential mortgage loans, all of which have original terms to stated
maturity of 30 years.
The mortgage loans were originated or acquired in accordance with
underwriting guidelines that are less strict than Fannie Mae and Freddie Mac
guidelines. As a result, the 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" in this prospectus supplement and
"The Trust Funds -- The Mortgage Loans" in the prospectus for a general
description of the mortgage loans.
Servicing of the Mortgage Loans
The mortgage loans will be master serviced by Aurora Loan Services Inc.
The master servicer will oversee the servicing of the mortgage loans by the
primary loan servicers, but will not be ultimately responsible for the
servicing of the mortgage loans except as described in this prospectus
supplement. Servicing may be transferred to primary servicers other than the
initial servicers in accordance with the trust agreement and the servicing
agreements, as described in this prospectus supplement.
See "The Master Servicer" and "Servicing of the Mortgage Loans" in this
prospectus supplement.
Optional Purchase of Certain Classes of Certificates
The initial holder of the Class 1-A2 Certificate, which is not offered by
this prospectus supplement, may purchase all, but not less than all, of the
Class 1-A1 Certificates remaining
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outstanding on or after the distribution date in July 2003, which we refer to
as the Class 1-A1 call date. The initial holder of the Class 2-A2 Certificate,
which is not offered by this prospectus supplement, may purchase all, but not
less than all, of the Class 2-A1 Certificates remaining outstanding on or after
the distribution date in May 2005, which we refer to as the Class 2-A1 call
date.
See "Description of the Certificates -- Optional Purchase of the Class
1-A1 and Class 2-A1 Certificates" in this prospectus supplement for a
description of the purchase price to be paid for the Class 1-A1 and Class 2-A1
Certificates.
Optional Purchase of the Mortgage Loans
Structured Asset Securities Corporation may repurchase the mortgage loans
on any distribution date after the date on which the total principal balance of
the mortgage loans (determined in the aggregate rather than by pool) declines
to less than 10% of their initial total principal balance. If the mortgage
loans are repurchased, certificateholders will be paid accrued interest and
principal equal to the outstanding principal amount of the certificates.
See "Description of the Certificates -- Optional Purchase of the Mortgage
Loans" in this prospectus supplement for a description of the purchase price to
be paid for the mortgage loans.
Tax Status
The trustee will elect to treat all or a portion of the trust fund as
multiple REMICs for federal income tax purposes. Each of the certificates other
than the Class R Certificate will represent ownership of "regular interests" in
a REMIC and the Class R Certificate will be designated as the sole class of
"residual interest" in each REMIC.
The Class 1-AX, 2-A3, 2-AX, 3-AX, 2-AP and 3-AP Certificates will be, and
other classes of certificates may be, issued with original issue discount for
federal income tax purposes.
There are restrictions on the ability of certain types of investors to
purchase the Class R Certificate.
See "Material Federal Income Tax Considerations" in this prospectus
supplement and in the accompanying prospectus for additional information
concerning the application of federal income tax laws to the certificates.
ERISA Considerations
Generally, the Class 1-A1, 1-AX, 2-A1, 2-A3, 2-AX and 2-AP Certificates
may, but the Class 3-A1, 3-AP, R, B1, B2 and B3 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 for a more complete discussion of these issues.
Legal Investment Considerations
Only the Class 1-A1, 1-AX, 2-A1, 2-A3, 2-AX, 2-AP, 3-A1, 3-AX, 3-AP, B1
and R Certificates will 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.
<PAGE>
Ratings of the Certificates
The certificates offered by this prospectus supplement will initially
have the following ratings from Fitch, Inc. and Standard and Poor's Rating
Services, a division of The McGraw-Hill Companies, Inc. The designation "N/A"
means that a rating agency will not rate the certificates of that class:
Fitch S&P
Class Rating Rating
------------ -------- -------
1-A1 AAA AAA
1-AX AAA AAA
2-A1 AAA AAA
2-A3 AAA AAA
2-AX AAA AAA
2-AP AAA AAA
3-A1 AAA AAA
3-AX AAA AAA
3-AP AAA AAA
R AAA AAA
B1 AA N/A
B2 A N/A
B3 BBB N/A
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<PAGE>
o These ratings are not recommendations to buy, sell or hold these
certificates. A rating may be changed or withdrawn at any time by the
assigning rating agency.
o 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 for a more complete discussion of
the certificate ratings.
S-12
<PAGE>
Risk Factors
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
Higher Expected Delinquencies
of the Mortgage Loans..... The mortgage loans were originated or acquired
by various originators in accordance, generally,
with underwriting guidelines of the type described
in this prospectus supplement. In general, these
guidelines are not as strict as Fannie Mae or
Freddie Mac 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 higher standards.
Changes in the values of mortgaged properties
related to the mortgage loans and the underlying
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 the
mortgage loans in each mortgage loan pool and
"--Underwriting Guidelines" for a general
description of the underwriting guidelines used
in originating the mortgage loans.
Potential Inadequacy of Credit
Enhancement............... The certificates are not insured by any
financial guaranty insurance policy. The
subordination, loss allocation and
cross-collateralization features described in this
prospectus supplement are intended to enhance the
likelihood that holders of more senior classes of
certificates will receive regular payments of
interest and principal, but are limited in nature
and may be insufficient to cover all losses on the
mortgage loans.
As described below, amounts representing losses
on the mortgage loans in a pool or pools will be
applied to reduce the principal amount of the
related component still outstanding that has the
lowest payment priority, until the amount of that
component has been reduced to zero. For example,
losses on pools 1 and 2 will first be allocated
in reduction of the B6(1-2) component principal
amount until it is reduced to zero and then to
the B5(1-2) component until its principal amount
has been reduced to zero and likewise to the
B4(1-2), B3(1-2), B2(1-2) and B1(1-2) components,
in that order, until the principal amount of each
component has been reduced to zero. If applicable
subordination is insufficient to absorb such
losses, then senior certificateholders will
likely incur losses and may never receive all of
their principal payments.
Because the components related to pools 1 and 2
represent interests in both mortgage pools, the
component principal amounts of these components
could be reduced to zero as a result of a
disproportionately high amount of losses on the
mortgage loans in either pool 1 or pool 2. As a
result, losses in one pool will reduce
S-13
<PAGE>
the loss protection provided by the components to
the senior certificates corresponding to the
other such pool, and will increase the likelihood
that losses will be allocated to those other
senior certificates.
See "Description of the Certificates -- Priority
of Distributions" and "--Allocation of Realized
Losses" in this prospectus supplement.
No Cross-Collateralization of
Pool 3.................... Interest and principal on the pool 3 senior
certificates will be payable solely from amounts
collected in respect of the mortgage loans in pool
3. Similarly, interest on each pool 3 component of
the subordinate certificates and principal on each
pool 3 component of the subordinate certificates
will be payable from amounts collected in respect
of the mortgage loans in pool 3. Pool 3 will not
be "cross-collateralized" with either pool 1 or
pool 2--interest and principal received on
mortgage loans in pool 1 and pool 2 will not be
available to the pool 3 certificates and
components. As a result, a disproportionately high
rate of delinquencies or defaults in pool 3 may
result in shortfalls or losses affecting the
related component or components at the same time
that amounts from pool 1 or pool 2 are being
distributed in respect of components relating to
such other pools with lower seniority. For
example, on any distribution date, the component
principal amount of the B1(3) component may be
reduced because of losses on the mortgage loans in
pool 3, even though the B2 component related to
pool 1 and pool 2 is still outstanding and
continues to receive distributions related to pool
1 and pool 2. In the case of extremely high losses
experienced by pool 3, it is possible that the
principal amount of the senior certificates of
pool 3 could be reduced by losses that exceed the
principal amount of the subordinate components of
pool 3, even though the subordinate certificates
are still outstanding and receiving distributions.
See "Description of the Mortgage Pools" and
"Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Realized
Losses" in this prospectus supplement.
Unpredictability and Effect of
Prepayments............... Borrowers may prepay their mortgage loans in
whole or in part at any time; however,
approximately 26.27% of the pool 1 mortgage loans
and approximately 32.77% of the pool 2 mortgage
loans require the payment of a prepayment penalty
in connection with any voluntary prepayment during
periods that range from one to five years after
origination. These penalties may discourage
borrowers from prepaying their mortgage loans
during the penalty period.
The timing of prepayments of principal may also
be influenced by liquidations or repurchases of
or insurance payments on the mortgage loans. A
prepayment of a mortgage loan in a pool will
usually result in a payment of principal on the
related certificates.
o If you purchase your certificates at a discount
and principal is repaid slower than you
anticipate, then your yield may be lower than
you anticipate.
o If you purchase your certificates at a premium
and principal is repaid faster than you
anticipate, then your yield may be lower than
you anticipate.
S-14
<PAGE>
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.
The prepayment experience of the mortgage loans
may differ significantly from that of other first
lien residential mortgage loans.
Effect of Exercise of
Call Option................ If the holder of the Class 1-A2 Certificate
exercises its right to purchase the Class 1-A1
Certificates on or after the Class 1-A1 call date,
or the holder of the Class 2-A2 Certificate
exercises its right to purchase the Class 2-A1
Certificates on or after the Class 2-A1 call date,
the effect on holders of the Class 1-A1 and Class
2-A1 certificates will be the same as if all of
the mortgage loans in the related pool had been
prepaid in full. Although your Class 1-A1 or Class
2-A1 Certificate might trade at a premium in the
secondary market at the time the call option is
exercised, you will not receive any premium.
We cannot assure you that the holder of the call
certificates related to either pool will, or will
not, exercise its right to purchase the related
senior Certificates in either pool when it is
first entitled to do so or on any later date. In
deciding whether to purchase any certificate, you
should make your own assessment of the risk that
the applicable call option will or will not be
exercised, and of the consequences to you if the
call option is or is not exercised.
Special Risks for Certain
Classes of Certificates... The Class 2-AP and 3-AP Certificates are
principal-only certificates and the Class 1-AX,
2-A3, 2-AX and 3-AX, Certificates are
interest-only certificates. These certificates
have yields to maturity (or early termination) --
the yield you will receive if you hold a
certificate until it has been paid in full -- that
are highly sensitive to prepayments on the related
mortgage loans.
If you purchase any of the above classes of
certificates, you should consider the risk that
you may receive a lower than expected yield under
the following circumstances:
o a faster than expected rate of prepayments on
mortgage loans in pool 1, in the case of the
Class 1-AX Certificates, in pool 2, in the case
of Class 2-A3 and 2-AX Certificates, and in pool
3, in the case of the Class 3-AX Certificates;
o in particular, a faster than expected rate of
prepayments on mortgage loans in pool 1 having
net interest rates higher than 7.25%, in the
case of the Class 1-AX Certificates, mortgage
loans in pool 2 having net interest rates
higher than 9.00%, in the case of the Class
2-AX Certificates, and mortgage loans in pool
3 having net interest rates higher than 7.00%,
in the case of the Class 3-AX Certificates; or
o a slower than expected rate of prepayments on
mortgage loans in pool 2 having net interest
rates lower than 9.00%, in the case of the Class
2-AP Certificates, and mortgage loans in pool 3
having net interest rates lower than 7.00%, in
the case of the Class 3-AP Certificates.
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<PAGE>
Prepayments on the related mortgage loans,
including liquidations, repurchases and
insurance payments, could result in the failure
of investors in the Class 1-AX, 2-A3, 2-AX,
3-AX, 2-AP or 3-AP Certificates to fully recover
their initial investments.
See "Yield, Prepayment, and Weighted Average
Life" in this prospectus supplement for a
description of factors that may affect the
sensitivity of these certificates' yields to
maturity.
Changes in LIBOR May Reduce
the Yields on the Class 2-A1
and 2-A3 Certificates..... The amount of interest payable on the Class 2-A1
Certificates is calculated by reference to the
London Interbank Offered Rate, known as LIBOR.
If LIBOR falls, the yield on the Class 2-A1
Certificates will be lower. The interest rates on
the Class 2-A1 Certificates will not exceed
specified rates, regardless of levels of LIBOR.
The amount of interest payable on the Class 2-A3
Certificates is calculated by reference to the
interest rate on the Class 2-A1 Certificates. If
LIBOR rises, the interest rate on the Class 2-A1
Certificates will increase and the yield on the
Class 2-A3 Certificates will be lower.
Changes in One Year CMT May
Reduce the Yields on the
Class 1-A1, 2-A1 and 3-A1
Certificates.............. After the related call or reset date, the amount
of interest payable on the Class 1-A1, Class 2-A1
and Class 3-A1 Certificates will be calculated on
the basis of the adjusted net mortgage rates of
the mortgage loans in the related pools. The
adjusted net mortgage rates of the mortgage loans
are calculated on the basis of an index plus the
applicable margin, as described in this prospectus
supplement. As a result, on and after the related
call or reset dates, any decline in the index on
which the adjusted net mortgage rates are based
will result in a lower yield on the related
certificates.
Effect of Adjusted Net WAC
Cap on Certificate Interest
Rates.................... Because the interest rates on the mortgage loans
adjust at different times and in different
amounts, if the interest rates of the Class 1-A1,
2-A1 and 3-A1 Certificates were not capped as
described in this prospectus supplement under
"Description of the Certificates -- Distributions
of Interest," there may be times when those rates
would exceed the adjusted weighted average of the
interest rates on the mortgage loans in the
related pool (after deduction of fees). If that
happens, the caps will have the effect of reducing
the interest rates on the Class 1-A1, 2-A1 or 3-A1
Certificates, at least temporarily.
See "Yield, Prepayment and Weighted Average Life
-- Sensitivity of Certain Classes of
Certificates" in this prospectus supplement for
more information on the yield sensitivity of
these certificates.
Mortgage Loans with
Interest-Only Payments... Approximately 15.78 % of the pool 1 mortgage
loans and approximately 20.27% of the pool 2
mortgage loans expected to be in the trust fund on
the closing date provide for payment of interest
at the related mortgage interest rate, but no
payment of principal, for a period of ten years
following the origination of the mortgage loan.
Following that ten year period, the monthly
payment with respect to
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<PAGE>
each of these mortgage loans will be increased to
an amount sufficient to amortize the principal
balance of the mortgage loan over the remaining
term and to pay interest at the mortgage interest
rate.
The presence of these mortgage loans in the trust
fund will, absent other considerations, result in
longer weighted average lives of the certificates
than would have been the case had these loans not
been included in the trust fund. If you purchase
a certificate at a discount, you should consider
that the extension of weighted average lives
could result in a lower yield than would be the
case if these mortgage loans provided for payment
of principal and interest on every payment date.
In addition, a borrower may view the absence of
any obligation to make a payment of principal
during the first ten years of the term of a
mortgage loan as a disincentive to prepayment.
If a recalculated monthly payment as described
above is substantially higher than a borrower's
previous interest-only monthly payment, that loan
may be subject to an increased risk of
delinquency and loss.
Default Risk on High Balance
Mortgage Loans............ The principal balances of approximately nine
mortgage loans in pool 1 and seven mortgage loans
in pool 2, representing approximately 15.82% of
the pool 1 mortgage loans and approximately 11.70%
of the pool 2 mortgage loans, were in excess of
$1,000,000 on the closing date. You should
consider the risk that the loss and delinquency
experience on these high balance loans may have a
disproportionate effect on the related pool as a
whole.
Geographic Concentration of
Mortgage Loans............ Approximately 57.31% of the pool 1 mortgage
loans, approximately 54.21% of the pool 2 mortgage
loans and approximately 11.11% of the pool 3
mortgage loans expected to be in the trust fund on
the closing date are secured by properties in
California. There are also significant
concentrations of Mortgage Loans in other states.
The rate of delinquencies, defaults and losses on
the mortgage loans may be higher than if fewer of
the mortgage loans were concentrated in California
or another state because the following conditions
in California or in another state with a
relatively high concentration of mortgaged
properties will have a disproportionate impact on
the mortgage loans in general:
o weak economic conditions, which may or may not
affect real property values, may affect the
ability of borrowers to repay their loans on
time.
o declines in residential real estate market in
California may reduce the values of properties,
which would result in an increase in the
loan-to-value ratios.
o properties in California, may be more
susceptible than homes located in other parts of
the country to certain types of uninsurable
hazards, such as earthquakes, as well as storms,
floods, wildfires, mudslides and other natural
disasters.
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<PAGE>
Natural disasters affect regions of the United
States from time to time, and may result in
increased losses on mortgage loans in those
regions, or in insurance payments that will
constitute prepayments of those mortgage loans.
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
Lack of Primary Mortgage
Insurance................. Approximately 8.18% of the pool 1 mortgage
loans, approximately 9.93% of the pool 2 mortgage
loans and all of the pool 3 mortgage loans
expected to be in the trust fund on the closing
date have original loan-to-value ratios greater
than 80%. Approximately 0.53% of these mortgage
loans are not covered by a primary mortgage
insurance policy. If borrowers without primary
mortgage insurance default on their mortgage
loans, there is a greater likelihood of losses
than if the loans were insured. We cannot assure
you that the applicable credit enhancement will be
adequate to cover those losses.
Effects of Performance of
Mortgage Loans on Ratings
of Certificates........... The ratings assigned to your certificates may be
adversely affected if losses or delinquencies on
the mortgage loans in general or in any pool are
worse than expected, no matter how the mortgage
loans in the other pools perform. Depending on the
available level of credit enhancement at any
particular time, the rating agencies may base
their ratings of the certificates on the payment
performance of the mortgage loans in the worst
performing pool.
Limited Ability to Resell
Certificates.............. The underwriter is not required to assist in
resales of the 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>
Description of the Certificates
General
The Series 2000-5 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the Class 1-A1, Class 1-A2, Class 1-AX, Class 2-A1, Class 2-A2,
Class 2-A3, Class 2-AX, Class 2-AP, Class 3-A1, Class 3-AX, Class 3-AP, Class
B1, Class B2, Class B3, Class B4, Class B5, Class B6 and Class R Certificates.
The Class 1-A1, Class 1-A2, Class 1-AX, Class 2-A1, Class 2-A2, Class 2-A3,
Class 2-AX, Class 2-AP Class 3-A1, Class 3-AX, Class 3-AP and Class R
Certificates are referred to herein as the "Senior Certificates;" the Class B1,
Class B2 and Class B3 Certificates are referred to herein as the "Offered
Subordinate Certificates;" and the Offered Subordinate Certificates and the
Class B4, Class B5 and Class B6 Certificates are referred to herein as the
"Subordinate Certificates." Only the Senior Certificates (other than the Class
1-A2 and Class 2-A2 Certificates) and the Offered Subordinate Certificates
(collectively, the "Offered Certificates") are offered hereby. The Class 2-AP
and Class 3-AP Certificates are sometimes referred to herein as the "Class AP
Certificates;" or as the "Principal-Only Certificates;" the Class 1-AX, Class
2-A3, Class 2-AX and Class 3-AX Certificates are sometimes referred to herein
as the "Interest-Only Certificates;" and the Class 2-A1, Class 2-A2, Class
2-A3, Class 2-AX, Class 3-A1, Class 3-AX and Class R Certificates are sometimes
referred to herein as the "Non-AP Senior Certificates." The Class 1-A2 and
Class 2-A2 Certificates are sometimes referred to herein as the "Call
Certificates."
The Certificates represent beneficial ownership interests in a trust fund
(the "Trust Fund"), the assets of which consist primarily of (1) three pools
("Pool 1," "Pool 2" and "Pool 3," respectively, and each, a "Mortgage Pool") of
adjustable rate, fully amortizing, conventional first lien mortgage loans (the
"Mortgage Loans"), (2) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Certificate Account, (3)
property acquired by foreclosure of Mortgage Loans or deed in lieu of
foreclosure, (4) any applicable insurance policies, and (5) all proceeds
thereof.
The Group 1 and Group 2 Certificates. Except in certain limited
circumstances described herein, distributions of interest and principal on the
Class 1-A1, Class 1-A2, Class 1-AX, and Class R Certificates (the "Group 1
Certificates") will be based on interest and principal received or advanced
with respect to the Mortgage Loans in Pool 1 (the "Pool 1 Mortgage Loans"); and
distributions of interest and principal on the Class 2-A1, Class 2-A2, Class
2-A3, Class 2-AX and Class 2-AP Certificates (the "Group 2 Certificates") will
be based on interest and principal received or advanced with respect to the
Mortgage Loans in Pool 2 (the "Pool 2 Mortgage Loans"). The rights of the
B1(1-2), B2(1-2) and B3(1-2) Components to receive distributions with respect
to the Mortgage Loans will be based on interest and principal received or
advanced with respect to Pool 1 and Pool 2 in the aggregate, and will be
subordinate to the rights of the holders of the Group 1 Certificates and the
Group 2 Certificates to the extent described herein.
The Group 3 Certificates. The Class 3-A1, Class 3-AX and Class 3-AP
Certificates, together with the B1(3), B2(3) and B3(3) Components of the Class
B1, Class B2 and Class B3 Certificates, respectively, are referred to herein as
the "Group 3 Offered Certificates." These Classes and Components, together with
the remaining Group 3 Components (as described below) are referred to herein as
the "Group 3 Certificates." Distributions of interest and principal on the
Group 3 Certificates will be based on interest and principal received or
advanced solely with respect to the Mortgage Loans in Pool 3.
The Group 1, Group 2 and Group 3 Certificates are sometimes referred to
separately as a "Certificate Group."
For purposes of distributions of interest and principal and the allocation
of Realized Losses (as defined herein), each class of the Subordinate
Certificates will be composed of payment components (each, a "Component")
having the designations and approximate initial Component Principal Amounts (as
defined herein) set forth below:
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Approximate Initial
Component
Principal Amount
---------------------
B1(1-2) Component ................... $5,641,000.00
B1(3) Component ..................... 2,936,000.00
B2(1-2) Component ................... 2,924,000.00
B2(3) Component ..................... 881,000.00
B3(1-2) Component ................... 1,587,000.00
B3(3) Component ..................... 352,000.00
B4(1-2) Component ................... 1,044,000.00
B4(3) Component ..................... 352,000.00
B5(1-2) Component ................... 1,127,000.00
B5(3) Component ..................... 176,000.00
B6(1-2) Component ................... 1,053,130.95
B6(3) Component ..................... 296,845.53
The holder of a Class B1, Class B2, Class B3, Class B4, Class B5 or Class
B6 Certificate will not have a severable interest in any Component but will
have an undivided interest in the entire Class. Any amounts distributed in
respect of any Component, and any Realized Losses allocated thereto, will be
distributed or allocated proportionately to all holders of Certificates of such
Class. Each class of subordinate certificates consists of two payment
components (the parenthetical designation of such payment component indicating
the Pool or Pools to which it relates).
Each Class of Offered Certificates will be issued in the respective
approximate initial total principal amount (a "Class Principal Amount")
specified in the table on page S-7 or total notional amount (a "Class Notional
Amount") described under "-- Distributions of Interest." The approximate
initial Class Principal Amount of each of the Class B4, Class B5 and Class B6
Certificates is $1,396,000.00, $1,303,000.00 and $1,349,976.48, respectively,
or, in aggregate, 22.04% of the total Class Principal Amount of all of the
Subordinate Certificates. The initial total Certificate Principal Amount of all
the Certificates and, if applicable, the initial Component Principal Amount of
each related Component may be increased or decreased by up to five percent to
the extent that the total Scheduled Principal Balance on the Cut-off Date (the
"Cut-off Date Balance") of the Mortgage Loans is increased or decreased as
described under "Description of the Mortgage Pools" herein.
Distributions on the Certificates will be made on the 25th day of each
month or, if the 25th day is not a Business Day, on the next succeeding
Business Day, beginning in November 2000 (each a "Distribution Date"), to
Certificateholders of record on the applicable Record Date. The "Record Date"
for each Distribution Date for all the Certificates will be the last Business
Day of the month immediately preceding the month in which the Distribution Date
occurs. A "Business Day" is generally any day other than a Saturday or Sunday
or a day on which banks in New York or Colorado are closed.
Distributions on the Certificates will be made to each registered holder
entitled thereto, either (1) by check mailed to the address of the
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, of (x) any holder of the
entire interest in any Principal-Only or Interest-Only Certificates or (y) any
other Certificate having an initial Certificate Principal Amount of not less
than $2,500,000, by wire transfer (at the expense of the holder) in immediately
available funds; provided, that the final distribution in respect of any
Certificate will be made only upon presentation and surrender of the
Certificate at the Corporate Trust Office (as defined herein) of the Trustee.
See "-- The Trustee" herein.
The Offered Certificates other than the Class R Certificate (collectively,
the "Book-Entry Certificates") will be issued, maintained and transferred on
the book-entry records of The Depository Trust Company ("DTC") and its
Participants (as defined herein). The Class 1-A1, Class 2-A1, Class 2-AP and
Class 3-A1 Certificates will be issued in minimum denominations of $25,000 and
integral multiples of $1 in excess thereof. The Class B1, Class B2 and Class B3
Certificates will be issued in minimum denominations of $100,000 and integral
multiples of $1 in excess thereof. The Class 1-AX, Class 2-A3 and Class 3-AX
Certificates will be issued in minimum denominations of $5,000,000 in Notional
Amount (as defined herein) and integral multiples of $1 in excess thereof. The
Class 2-AX and Class 3-AP Certificates will each be issued as a single
certificate representing the entire Percentage Interest in that Class. The
Class R Certificate (the "Residual Certificate") will be issued as a single
certificate and maintained in definitive, fully registered form, representing
the entire Percentage Interest in that Class.
S-20
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o The "Percentage Interest" of a Certificate will be the fraction,
expressed as a percentage, the numerator of which is that Certificate's
Certificate Principal Amount or Notional Amount and the denominator of
which is the applicable Class Principal Amount or Class Notional Amount.
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 will 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
will refer to distributions, notices, reports and statements to DTC or Cede &
Co., as the registered holder of the Book-Entry Certificates, for distribution
to Beneficial Owners by DTC in accordance with DTC procedures.
Book-Entry Registration
General. Beneficial Owners that are not brokerage firms, banks, thrift
institutions or other financial intermediaries (each, a "Financial
Intermediary") or participating firms that act as agent for a Financial
Intermediary (each, a "Participant") but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Book-Entry
Certificates may do so only through Participants and Financial Intermediaries.
In addition, Beneficial Owners will receive all distributions of principal and
interest on the related Book-Entry Certificates through DTC and its
Participants. Accordingly, Beneficial Owners may experience delays in their
receipt of payments. Unless and until Definitive Certificates are issued for
the related Book-Entry Certificates, it is anticipated that the only registered
Certificateholder of such Book-Entry Certificates will be Cede, as nominee of
DTC. Beneficial Owners will not be recognized by the Depositor or the Trustee
as Certificateholders, as such term is used in the Trust Agreement, and
Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Financial Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal and interest on such Book-Entry Certificates.
Participants and Financial Intermediaries with which Beneficial Owners have
accounts with respect to such Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess physical certificates evidencing their interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Financial Intermediaries, will receive
distributions and will be able to transfer their interests in the Book-Entry
Certificates.
Neither the Depositor, the Trustee nor the Master Servicer or any of their
respective affiliates will have any liability for any actions taken by DTC or
its nominee including, without limitation, actions with respect to any aspect
of the records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Certificates held by Cede, as nominee for DTC, or
with respect to maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the 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.
S-21
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For additional information regarding DTC and the Book-Entry Certificates,
see "Description of the Securities -- Book-Entry Registration" in the
Prospectus.
Priority of Distributions
Distributions in respect of the Certificates of each Certificate Group
will be made on each Distribution Date from the related Available Distribution
Amount (as defined herein), except (in the case of Pool 1 and Pool 2) to the
extent of cross-collateralization payments described herein. Distributions in
respect of the Components will be made as described below. See "-- Available
Distribution Amount" for a description of the available funds for each Mortgage
Pool.
On each Distribution Date, the Available Distribution Amount for each
Mortgage Pool will be allocated among the Classes of Senior Certificates
relating to that Mortgage Pool, to the payment of the Trustee, and among the
Classes of the Subordinate Certificates as follows:
(1) from the Available Distribution Amount for each Mortgage Pool, to
payment of the Trustee, the Trustee Fee (as defined herein) allocable to
that Mortgage Pool for that Distribution Date;
(2) from the Available Distribution Amount for each Mortgage Pool, to
payment of Accrued Certificate Interest on each Class of Senior
Certificates of the related Certificate Group, other than any related
Principal-Only Certificates (reduced, in each case, by any Net Prepayment
Interest Shortfalls for the related Mortgage Pool allocated to that Class
of Certificates on that Distribution Date, as described herein); provided,
however, that any shortfall in available amounts for Pool 1, Pool 2 and
Pool 3 will be allocated among the Classes of the related Certificate
Group in proportion to the amount of such interest (as so reduced) that
would otherwise be distributable thereon;
(3) from the Available Distribution Amount for each Mortgage Pool, to
payment of any outstanding Interest Shortfalls (as defined herein) on each
Class of Senior Certificates of the related Certificate Group, other than
the related Principal-Only Certificates; provided, however, that any
shortfall in available amounts for Pool 1, Pool 2 and Pool 3 will be
allocated among the Classes of the related Certificate Group in proportion
to the amount of such interest (as so reduced) that would otherwise be
distributable thereon;
(4) to the Senior Certificates of each Certificate Group, other than the
related Interest-Only Certificates, to the extent of the remaining related
Available Distribution Amount, as follows:
(A) to the Class 1-A1, Class 1-A2 and Class R Certificates, in
reduction of their Class Principal Amounts, from the Available
Distribution Amount for Pool 1, in the following order of priority:
(i) to the Class R Certificate, the Senior Principal Distribution
Amount for Pool 1, until its Class Principal Amount has been reduced
to zero; and
(ii) to the Class 1-A1 and Class 1-A2 Certificates, in proportion to
their respective Class Principal Amounts, the remaining Senior
Principal Distribution Amount for Pool 1, until their respective Class
Principal Amounts have been reduced to zero; and
(B) to the Class 2-A1, Class 2-A2 and Class 2-AP Certificates, in
reduction of their Class Principal Amounts, from the Available
Distribution Amount for Pool 2, concurrently, as follows:
(i) to the Class 2-A1 and Class 2-A2 Certificates, in proportion to
their respective Class Principal Amounts, the Senior Principal
Distribution Amount for Pool 2, until their Class Principal Amounts
have been reduced to zero; and
(ii) to the Class 2-AP Certificates, the AP Principal Distribution
Amount for Pool 2, until their Class Principal Amount has been reduced
to zero;
(C) to the Class 3-A1 and Class 3-AP Certificates, in reduction of
their Class Principal Amounts, from the Available Distribution Amount
for Pool 3, concurrently, as follows:
(i) to the Class 3-A1 Certificates, the Senior Principal
Distribution Amount for Pool 3, until their Class Principal Amount has
been reduced to zero; and
(ii) to the Class 3-AP Certificates, the AP Principal Distribution
Amount for Pool 3, until their Class Principal Amount has been reduced
to zero;
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(5) to the Class 2-AP and Class 3-AP Certificates, to the extent of the
remaining Available Distribution Amount for the related Mortgage Pool, the
Class AP Deferred Amount for that Class, until the related Class Principal
Amount has been reduced to zero; provided, however, that (x) distributions
pursuant to this priority will not exceed the total Subordinate Principal
Distribution Amount for the related Mortgage Pool for that date; and (y)
such amounts will not reduce the Class Principal Amounts of those Classes;
and
(6) to the extent of the remaining Available Distribution Amounts for
each Mortgage Pool, to the related Components, concurrently, as follows:
(A) to the extent of the remaining Available Distribution Amounts for
Pool 1 and Pool 2, but subject to the prior payment of amounts
described under "--Cross-Collateralization Between Pool 1 and Pool
2" below, to the B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and
B6(1-2) Components, in that order, of the following amounts, in
the following order of priority: (x) Accrued Certificate Interest
thereon (as reduced by any Net Prepayment Interest Shortfalls for
the related Mortgage Pools allocated to that Component on that
Distribution Date), (y) any outstanding Interest Shortfalls
previously allocated to that Component, and (z) the Component's
Subordinate Component Percentage of the Subordinate Principal
Distribution Amount for Pool 1 and Pool 2 for that Distribution
Date, except as provided below, in reduction of the Component
Principal Amounts thereof;
(B) to the extent of the remaining Available Distribution Amount for
Pool 3, to the B1(3), B2(3), B3(3), B4(3), B5(3) and B6(3)
Components, in that order, of the following amounts, in the
following order of priority: (x) Accrued Certificate Interest
thereon (as reduced by any Net Prepayment Interest Shortfalls for
the related Mortgage Pool allocated to that Component on that
Distribution Date), (y) any outstanding Interest Shortfalls
previously allocated to that Component, and (z) the Component's
Subordinate Component Percentage of the Subordinate Principal
Distribution Amount for Pool 3 for that Distribution Date, except
as provided below, in reduction of the Component Principal Amounts
thereof.
With respect to any of the B1(1-2), B2(1-2), B3(1-2), B4(1-2) and B5(1-2)
Components, if on any Distribution Date the Credit Support Percentage for that
Component is less than its Original Credit Support Percentage, then no
distributions in respect of clauses (2) and (3) of the definition of
Subordinate Principal Distribution Amount for Pool 1 and Pool 2 will be made to
any Component of lower priority having the same parenthetical designation
(these Components, "Restricted Components"), and the amount otherwise
distributable to these Restricted Components in respect of such payments will
be allocated among the remaining Components having the same parenthetical
designation, proportionately, based upon their respective Component Principal
Amounts. With respect to any of the B1(3), B2(3), B3(3), B4(3) and B5(3)
Components, if on any Distribution Date the Credit Support Percentage for such
Component is less than the Original Credit Support Percentage for such
Component, then no distributions in respect of clauses (2) and (3) of the
definition of Subordinate Principal Distribution Amount for Pool 3 will be made
to any Component of lower priority having the same parenthetical designation
(these Components, "Restricted Components"), and the amount otherwise
distributable to the Restricted Components in respect of such payments will be
allocated among the remaining Components having the same parenthetical
designation, proportionately, based upon their respective Component Principal
Amounts. The "Credit Support Percentage" for a Component for any Distribution
Date is equal to the sum of the Class Percentages (as defined below) of each
Component having the same parenthetical designation of lower priority (without
giving effect to distributions on such date). The "Original Credit Support
Percentage" for a Component is the Credit Support Percentage for that Component
on the Closing Date. The "Class Percentage" for each Component for each
Distribution Date will be equal to the percentage obtained by dividing the
Component Principal Amount of that Component immediately prior to that
Distribution Date by the sum of the Class Principal Amounts of all Classes of
the related Senior Certificates and the Component Principal Amounts of all
Components having the same parenthetical designation immediately prior to that
date.
On and after the Distribution Date on which, (i) in the case of the Group
1 and Group 2 Certificates, the aggregate Component Principal Amount of the
B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and B6(1-2) Components has been
reduced to zero (the "Credit Support Depletion Date" for Group 1 and Group 2)
and, (ii) in the case of the Senior Certificates in Certificate Group 3, the
aggregate Component Principal Amount of
S-23
<PAGE>
the B1(3), B2(3), B3(3), B4(3), B5(3) and B6(3) Components has been reduced to
zero (the "Credit Support Depletion Date" for Group 3), the Available
Distribution Amount with respect to the related Mortgage Pool or Mortgage Pools
remaining after distribution of interest to the related Senior Certificates on
such date will be distributed among the related Senior Certificates remaining
outstanding, in proportion to their respective Certificate Principal Amounts,
until the Certificate Principal Amounts thereof have been reduced to zero,
regardless of the priorities and allocations set forth above.
Distributions of Interest
The amount of interest distributable on each Distribution Date in respect
of each Class of Certificates (other than the Principal-Only Certificates) will
equal the Accrued Certificate Interest (as defined below) for that Class on
that Distribution Date or, in the case of any Subordinate Certificate, the sum
of the Accrued Certificate Interest for each Component thereof, as reduced by
any Net Prepayment Interest Shortfalls allocable to that Class or Component for
that date, as described below. "Accrued Certificate Interest" for each Class of
Senior Certificates (other than the Principal-Only Certificates) and each
Component on any Distribution Date will equal the amount of interest accrued
during the related Accrual Period (as defined below) on the related Class
Principal Amount or Component Principal Amount immediately prior to that
Distribution Date or the related Class Notional Amount for that Distribution
Date at the applicable Interest Rate, as reduced by such Class's or Component's
share of (1) the interest portion of any related Excess Losses (as defined
herein) for such Distribution Date, allocable as described below, and (2), with
respect to any related Mortgage Loan as to which there has been a reduction in
the amount of interest collectible as a result of application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act," and any
such reduction, a "Relief Act Reduction"), the amount of any such reduction,
allocated as described below. See "Legal Aspects of Loans -- Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. "Accrued Certificate
Interest" for each Class of Subordinate Certificates will equal the sum of the
Accrued Certificate Interest during the related Accrual Period on the
Components of such Class. Interest will accrue on the Certificates on the basis
of a 360-day year consisting of twelve 30-day months. Interest distributable on
the Senior Certificates will be distributed from the related Available
Distribution Amount on each Distribution Date. Accrued Certificate Interest not
distributed on the Distribution Date related to the Accrual Period in which it
accrued, other than any Net Prepayment Interest Shortfalls, will be an
"Interest Shortfall." Interest will not accrue on Interest Shortfalls.
The interest portion of any Excess Loss and any Relief Act Reduction with
respect to a Mortgage Loan in Pool 1 will be allocated among the Group 1
Certificates and the B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and B6(1-2)
Components proportionately based on (1) in the case of the Senior Certificates,
the Accrued Certificate Interest otherwise distributable thereon, and (2) in
the case of the Components, interest accrued on the Apportioned Principal
Balances of such Components, without regard to any reduction pursuant to this
paragraph, for that Distribution Date.
The interest portion of any Excess Loss and any Relief Act Reduction with
respect to a Mortgage Loan in Pool 2 will be allocated among the Non-AP Senior
Certificates in Group 2 and the B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and
B6(1-2) Components proportionately based on (1) in the case of the Senior
Certificates, the Accrued Certificate Interest otherwise distributable thereon,
and (2) in the case of the Components, interest accrued on the Apportioned
Principal Balances of such Components, without regard to any reduction pursuant
to this paragraph, for that Distribution Date.
The interest portion of any Excess Loss and any Relief Act Reduction with
respect to a Mortgage Loan in Pool 3 will be allocated among the Non-AP Senior
Certificates in Group 3 and the B1(3), B2(3), B3(3), B4(3), B5(3) and B6(3)
Components proportionately based on (1) in the case of the Senior Certificates,
the Accrued Certificate Interest otherwise distributable thereon, and (2) in
the case of the Components of the Subordinate Certificates, the Accrued
Certificate Interest otherwise distributable thereon, without regard to any
reduction pursuant to this paragraph, for that Distribution Date.
o The "Interest Rate" for each Accrual Period for the Class 1-A1, Class
2-AP, Class 3-A1, Class 3-AP and Class R Certificates will be the
applicable annual rate specified as described in the table on page S-7
hereof. For each other Class of Offered Certificates, the related Interest
Rates are described below.
The Interest Rate for the Class 1-A2 Certificates will be identical to the
Interest Rate for the Class 1-A1 and Class R Certificates.
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<PAGE>
The Interest Rate for each Accrual Period related to a Distribution Date
on or prior to the Class 1-A1 Call Date for the Class 1-AX Certificates will be
an annual rate equal to (1) the Adjusted Net WAC for Pool 1 minus (2) 7.25%,
subject to a minimum rate of 0.00%. Thereafter, the Class 1-AX Certificates
will not accrue interest and will not be entitled to any distributions.
The Interest Rate for the Class 2-A1 and Class 2-A2 Certificates will be
determined by reference to LIBOR:
o interest will accrue on the Class 2-A1 and Class 2-A2 Certificates with
respect to each Accrual Period at an annual rate equal to the least of (1)
LIBOR plus 0.60%, (2) 9.00% and (3) the Adjusted Net WAC for Pool 2. After
the Class 2-A1 Call Date, the Interest Rate for the Class 2-A1 and Class
2-A2 Certificates will equal the Adjusted Net WAC for Pool 2.
The Interest Rate for the Class 2-A3 Certificates for each Accrual Period
related to a Distribution Date on or prior to the Class 2-A1 Call Date will be
an annual rate equal to (a) the lesser of (1) 9.00% and (2) the Adjusted Net
WAC for Pool 2 minus (b) the Interest Rate for the Class 2-A1 Certificates for
that Accrual Period. Thereafter, the Class 2-A3 Certificates will not accrue
interest and will not be entitled to any distributions.
The Interest Rate for each Accrual Period related to a Distribution Date
on or prior to the Class 2-A1 Call Date for the Class 2-AX Certificates will be
an annual rate equal to (1) the Adjusted Net WAC for Pool 2 minus (2) 9.00%,
subject to a minimum rate of 0.00%. Thereafter, the Class 2-AX Certificates
will not accrue interest and will not be entitled to any distributions.
The Interest Rate for each Accrual Period related to a Distribution Date
on or prior to the Distribution Date in February 2007 (the "Class 3-A1 Reset
Date") for the Class 3-AX Certificates will be an annual rate equal to the
lesser of (a) (1) the Adjusted Net WAC for Pool 3 minus (2) 7.00% and (b) zero.
Thereafter, the Class 3-AX Certificates will not accrue interest and will not
be entitled to any distributions.
The Interest Rate for the Class B1, Class B2, Class B3, Class B4, Class B5
and Class B6 Certificates for each Accrual Period will be an annual rate equal
to the weighted average of the Component Interest Rates for the related
Components, weighted on the basis of their Component Principal Amounts.
The "Component Interest Rate" for the B1(1-2), B2(1-2), B3(1-2), B4(1-2),
B5(1-2) and B6(1-2) Components for each Accrual Period will be an annual rate
equal to the weighted average of the Adjusted Net WAC for each of Pool 1 and
Pool 2, weighted on the basis of the Group Subordinate Amount for each such
Mortgage Pool (the "Average Rate"). The Component Interest Rate for each of the
B1(3), B2(3), B3(3), B4(3), B5(3) and B6(3) Components will be equal to the
Adjusted Net WAC for Pool 3.
The "Adjusted Net WAC" for each Mortgage Pool for each Distribution Date
will be (1) in the case of Pool 1, the weighted average of the Net Mortgage
Rates of the Mortgage Loans in Pool 1 and (2) in the case of Pool 2 and Pool 3,
the weighted average of (A) the weighted average of the Net Mortgage Rates of
the Non-Discount Mortgage Loans, in Pool 2 and Pool 3 at the start of the
related Due Period (as defined herein), weighted on the basis of their
Scheduled Principal Balances, and, (B) the weighted average of the Adjusted Net
Mortgage Rates of the Discount Mortgage Loans at the start of the related Due
Period, weighted on the basis of their Adjusted Principal Balances.
o The "Adjusted Principal Balance" for each Discount Mortgage Loan for any
date will be the product of (1) the Scheduled Principal Balance of that
Mortgage Loan and (2) the applicable Non-AP Percentage.
o The "Adjusted Net Mortgage Rate" for each Discount Mortgage Loan for any
date will be the percentage equivalent of the fraction, the numerator of
which is the product of the applicable Net Mortgage Rate and Scheduled
Principal Balance and the denominator of which is the applicable Adjusted
Principal Balance.
o The "Net Mortgage Rate" of any Mortgage Loan is its mortgage interest
rate less the sum of the Trustee Fee Rate, the Master Servicing Fee Rate,
the Servicing Fee Rate (each as defined herein) and, if applicable, the
PMI Premium Rate.
o The "Certificate Principal Amount" of any Senior Certificate other than
an Interest-Only Certificate as of any Distribution Date will equal its
Certificate Principal Amount as of the Closing Date as reduced by all
amounts previously distributed on that Certificate in respect of principal
and the principal portion of
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<PAGE>
any Realized Losses (as defined herein) previously allocated to that
Certificate. The "Certificate Principal Amount" of any Subordinate
Certificate as of any Distribution Date will equal the sum of the
Component Principal Amounts of the related Components.
o The "Component Principal Amount" of any Component as of any Distribution
Date will equal its Component Principal Amount as of the Closing Date as
reduced by all amounts previously distributed on that Component in respect
of principal, the principal portion of any Realized Losses (as defined
herein) previously allocated to that Component and any Component Writedown
Amount (as defined herein) previously allocated to that Component.
o The "Notional Amount"of each Interest-Only Certificate as of any
Distribution Date will equal that Certificate's Percentage Interest of the
Class Notional Amount of the related Class for that date. The Class
Notional Amounts for the Interest-Only Certificates will be as follows:
o The Class Notional Amount of the Class 1-AX Certificates for any
Distribution Date will be the sum of the Class Principal Amounts of the
Class 1-A1, Class 1-A2 and Class R Certificates immediately before that
Distribution Date.
o The Class Notional Amount of each Class of the Class 2-A3 and Class 2-AX
Certificates for any Distribution Date will be the sum of the Class
Principal Amounts of the Class 2-A1 and Class 2-A2 Certificates
immediately before that Distribution Date.
o The Class Notional Amount of the Class 3-AX Certificates for any
Distribution Date will be equal to the Class Principal Amount of the
Class 3-A1 Certificates immediately before that Distribution Date.
o The "Accrual Period" for each Class of Certificates other than the Class
2-A1 and Class 2-A3 Certificates will be the calendar month immediately
preceding the month in which the related Distribution Date occurs. The
Accrual Period for the Class 2-A1 and Class 2-A3 Certificates will be the
period beginning on the Distribution Date in the calendar month
immediately preceding the month in which the related Distribution Date
occurs (or, in the case of the first Distribution Date, beginning on
October 25, 2000) and ending on the day immediately preceding the related
Distribution Date.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of such prepayment, instead of
for a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Full or partial prepayments (or proceeds
of other liquidations) received in the applicable Prepayment Period (as defined
herein) will be distributed to Certificateholders on the Distribution Date
following the applicable Prepayment Period. To the extent that, as a result of
a full or partial prepayment, a borrower is not required to pay a full month's
interest on the amount prepaid, a shortfall in the amount available to make
distributions of one month's interest on the related Certificates or, in the
case of a prepayment in full on a Mortgage Loan, made in the same month such
prepayment is distributed to Certificateholders, an excess of interest at the
Net Mortgage Rate, to the extent received, over one month's interest (such
excess, "Prepayment Interest Excess")) could result. The amount by which one
month's interest at the Net Mortgage 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 or in part, the Servicer (as
defined herein) is obligated to reduce the total of its Servicing Fees (as
defined herein) for the related Distribution Date to fund any resulting
Prepayment Interest Shortfalls, to the extent not offset by any Prepayment
Interest Excess for that month. The Master Servicer is obligated to reduce its
Total Master Servicing Compensation (as defined herein) for the related
Distribution Date to the extent necessary to fund any Prepayment Interest
Shortfalls required to be paid but not paid by the Servicer. See "Servicing of
the Mortgage Loans -- Prepayment Interest Shortfalls" herein. Any Prepayment
Interest Shortfalls not funded by the Servicer or the Master Servicer ("Net
Prepayment Interest Shortfalls") will be allocated among the Classes of
Certificates or Components as described under "-- Priority of Distributions"
above.
The Class 2-AP and Class 3-AP Certificates are Principal-Only
Certificates; no interest will accrue or be distributable on these Classes.
Determination of LIBOR. On the second London Banking Day (as defined
below) immediately preceding the first day of each Accrual Period other than
the first Accrual Period (each, a "LIBOR
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<PAGE>
Determination Date"), the Trustee will determine the arithmetic mean of the
LIBOR quotations for one-month Eurodollar deposits ("LIBOR") for the succeeding
Accrual Period on the basis of the offered LIBOR quotations provided to the
Trustee as of 11:00 a.m. (London time) on such LIBOR Determination Date. As
used herein with respect to a LIBOR Determination Date, "London Banking Day"
means any day on which commercial banks and foreign exchange markets settle
payments in London and New York City; "Reference Banks" means four leading
banks engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (1) with an established place of business in London, (2)
whose quotations appear on the Bloomberg Screen LIUS01M Index Page on the LIBOR
Determination Date in question and (3) which have been designated as such by
the Depositor and are able and willing to provide such quotations to the
Trustee on each LIBOR Determination Date; and "Bloomberg Screen LIUS01M Index
Page" means the display designated as page "LIUS01M" on the Bloomberg Financial
Markets Commodities News (or such other pages as may replace such page on that
service for the purpose of displaying LIBOR quotations of major banks). If any
Reference Bank is removed from the Bloomberg Screen LIUS01M Index Page or in
any other way fails to meet the qualifications of a Reference Bank, the
Depositor may, in its sole discretion, designate an alternative Reference Bank.
On each LIBOR Determination Date, LIBOR for the next succeeding Accrual
Period will be established by the Trustee as follows:
(1) If on any LIBOR Determination Date two or more of the Reference Banks
provide offered LIBOR quotations on the Bloomberg Screen LIUS01M Index
Page, LIBOR for the next applicable Accrual Period will be the arithmetic
mean of those offered quotations (rounding such arithmetic mean if
necessary to the nearest five decimal places).
(2) If on any LIBOR Determination Date only one or none of the Reference
Banks provide offered quotations, LIBOR for the next applicable Accrual
Period will be the higher of (x) LIBOR as determined on the previous LIBOR
Determination Date and (y) the Reserve Interest Rate. The "Reserve
Interest Rate" will be the annual rate that the Trustee determines to be
either (a) the arithmetic mean (rounding such arithmetic mean if necessary
to the nearest five decimal places) of the one-month Eurodollar lending
rate that New York City banks selected by the Depositor are quoting, on
the relevant LIBOR Determination Date, to the principal London offices of
at least two leading banks in the London interbank market or (b) in the
event that the Trustee can determine no such arithmetic mean, the lowest
one-month Eurodollar lending rate that the New York City banks selected by
the Depositor are quoting on such LIBOR Determination Date to leading
European banks.
(3) If on any LIBOR Determination Date the Trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (2) above, LIBOR for the next applicable Accrual Period will be
LIBOR as determined on the previous LIBOR Determination Date.
Notwithstanding the foregoing, LIBOR for the next succeeding Accrual
Period shall not be based on LIBOR for the previous Accrual Period for two
consecutive LIBOR Determination Dates. If, under the priorities described
above, LIBOR for the next succeeding Accrual Period would be based on LIBOR for
the previous LIBOR Determination Date for the second consecutive LIBOR
Determination Date, the Trustee shall select an alternative index (over which
the Trustee has no control) used for determining Eurodollar lending rates that
is calculated and published (or otherwise made available) by an independent
third party.
The establishment of LIBOR by the Trustee and the Trustee's subsequent
calculation of the rate of interest applicable to the LIBOR Certificates for
the relevant Accrual Period, in the absence of manifest error, will be final
and binding.
LIBOR for the first Accrual Period will be 6.62%.
Distributions of Principal
Distributions of principal on the Certificates (other than the
Interest-Only Certificates) and the Components of each Certificate Group will
be made on each Distribution Date to the extent of amounts available to make
those payments in accordance with the priorities set forth under "-- Priority
of Distributions" above.
o The "Senior Principal Distribution Amount" for each Certificate Group on
each Distribution Date is equal to the sum of:
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(1) the product of (a) the related Senior Percentage and (b) the
principal portion (multiplied, in the case of a Mortgage Loan in Pool 2 or
Pool 3, by the related Non-AP Percentage) of each Scheduled Payment
(without giving effect to any Debt Service Reduction occurring prior to
the Bankruptcy Coverage Termination Date (each as defined herein)) on each
Mortgage Loan in the related Mortgage Pool due during the related Due
Period;
(2) the product of (a) the related Senior Prepayment Percentage and (b)
each of the following amounts (multiplied, in the case of a Mortgage Loan
in Pool 2 or Pool 3, by the related Non-AP Percentage): (i) the principal
portion of each full and partial principal prepayment made by a borrower
on a Mortgage Loan in the related Mortgage Pool during the related
Prepayment Period, (ii) each other unscheduled collection, including
Insurance Proceeds and net Liquidation Proceeds (other than with respect
to any Mortgage Loan in the related Mortgage Pool that was finally
liquidated during the related Prepayment Period), representing or
allocable to recoveries of principal of related Mortgage Loans received
during the related Prepayment Period and (iii) the principal portion of
all proceeds of the purchase (or, in the case of a permitted substitution,
amounts representing a principal adjustment) of any Mortgage Loan in the
related Mortgage Pool actually received by the Trustee with respect to the
related Prepayment Period;
(3) with respect to unscheduled recoveries allocable to principal of any
Mortgage Loan in the related Mortgage Pool that was finally liquidated
during the related Prepayment Period, the lesser of (a) the related net
Liquidation Proceeds allocable to principal (multiplied, in the case of a
Mortgage Loan in Pool 2 or Pool 3, by the related Non-AP Percentage) and
(b) the product of the related Senior Prepayment Percentage for that date
and the remaining Scheduled Principal Balance (multiplied, in the case of
a Mortgage Loan in Pool 2 or Pool 3, by the related Non-AP Percentage) of
such related Mortgage Loan at the time of liquidation; and
(4) any amounts described in clauses (1) through (3) for any previous
Distribution Date that remain unpaid.
o The "Non-AP Percentage" with respect to any Mortgage Loan in Pool 2 or
Pool 3 with an Initial Net Mortgage Rate less than the related Designated
Rate (each such Mortgage Loan, a "Discount Mortgage Loan") will be the
percentage equivalent of the fraction, the numerator of which is the
applicable Initial Net Mortgage Rate and the denominator of which is the
related Designated Rate. The Non-AP Percentage with respect to any
Mortgage Loan in Pool 2 or Pool 3 with an Initial Net Mortgage Rate equal
to or greater than the related Designated Rate (each such Mortgage Loan, a
"Non-Discount Mortgage Loan") will be 100%.
o The "AP Percentage" with respect to any Discount Mortgage Loan in Pool 2
or Pool 3 will be the percentage equivalent of the fraction, the numerator
of which is the related Designated Rate minus the applicable Initial Net
Mortgage Rate, and the denominator of which is the related Designated
Rate. The AP Percentage with respect to any Non-Discount Mortgage Loan in
Pool 2 or Pool 3 will be zero.
o "Initial Net Mortgage Rate" of any Mortgage Loan is equal to the Net
Mortgage Rate as of the Cut-off Date.
o The "Designated Rates" are: for Pool 2, 9.00% and for Pool 3, 7.00%.
o The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is generally equal to its outstanding principal balance as
of October 1, 2000 (the "Cut-off Date"), after giving effect to Scheduled
Payments due on or before that date, reduced by (1) the principal portion
of all Scheduled Payments due on or before the due date in the Due Period
immediately preceding such date of determination, whether or not received,
and (2) all amounts allocable to unscheduled principal payments received
on or before the last day of the Prepayment Period immediately preceding
such date of determination.
o The "Senior Percentage" for each Mortgage Pool for any Distribution Date
is the percentage equivalent of a fraction, the numerator of which is the
sum of the Class Principal Amounts of the Class 1-A1, Class 1-A2 and Class
R Certificates, in the case of Pool 1, the sum of the Class Principal
Amounts of the Class 2-A1 and Class 2-A2 Certificates, in the case of Pool
2, and the Class Principal Amount of the
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Class 3-A1 Certificates, in the case of Pool 3, immediately prior to that
date and the denominator of which is the related Non-AP Pool Balance (or,
in the case of Pool 1, the aggregate Scheduled Principal Balance of the
Mortgage Loans in Pool 1 (the "Pool Balance") for the immediately
preceding Distribution Date.
o The "Non-AP Pool Balance" for each Pool 2 or Pool 3 for any Distribution
Date is the sum of the related Non-AP Percentage of the Scheduled
Principal Balance of each Mortgage Loan included in such Mortgage Pool for
that Distribution Date.
o The "Senior Prepayment Percentage" for each Mortgage Pool for any
Distribution Date occurring during the five years beginning on the first
Distribution Date will equal 100%. Thereafter, the Senior Prepayment
Percentage for each Mortgage Pool will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the
Senior Certificates (other than the related Class AP Certificates) in the
related Mortgage Pool, while, in the absence of Realized Losses,
increasing the relative percentage interest in the Mortgage Loans
evidenced by the related Components. Increasing the proportionate interest
of the related Components relative to that of the Senior Certificates is
intended to preserve the limited protection provided to the Senior
Certificates by the subordination of the related Components.
o The Senior Prepayment Percentage for each Mortgage Pool for any
Distribution Date occurring on or after the fifth anniversary of the first
Distribution Date will be as follows: for any Distribution Date in the
first year thereafter, the related Senior Percentage plus 70% of the
related Subordinate Percentage for that Distribution Date; for any
Distribution Date in the second year thereafter, the related Senior
Percentage plus 60% of the related Subordinate Percentage for that
Distribution Date; for any Distribution Date in the third year thereafter,
the related Senior Percentage plus 40% of the related Subordinate
Percentage for that Distribution Date; for any Distribution Date in the
fourth year thereafter, the related Senior Percentage plus 20% of the
related Subordinate Percentage for that Distribution Date; and for any
subsequent Distribution Date, the related Senior Percentage for that
Distribution Date (unless on any of the foregoing Distribution Dates the
Senior Percentage for any Mortgage Pool exceeds the initial Senior
Percentage for that Mortgage Pool, in which case the Senior Prepayment
Percentage for that Mortgage Pool for that Distribution Date will once
again equal 100% and, if that Mortgage Pool is Pool 1 or Pool 2, the
Senior Prepayment Percentages for both Pool 1 and Pool 2 will once again
equal 100%). Notwithstanding the foregoing, no decrease in the Senior
Prepayment Percentage for any Mortgage Pool below the level in effect for
the most recent prior period specified above will be effective if, as of
that Distribution Date as to which any such decrease applies, (1) the
average outstanding principal balance on that Distribution Date and for
the preceding five Distribution Dates of all Mortgage Loans in the related
Mortgage Pool that were delinquent 60 days or more (including for this
purpose any Mortgage Loans in foreclosure and Mortgage Loans with respect
to which the related Mortgaged Property has been acquired by the Trust
Fund) is greater than or equal to 50% of the applicable Group Subordinate
Amount immediately prior to such Distribution Date or (2) cumulative
Realized Losses with respect to the Mortgage Loans in the related Mortgage
Pool exceed (a) with respect to the Distribution Date on the fifth
anniversary of the first Distribution Date, 30% of the applicable Group
Subordinate Amount as of the Cut-off Date (the "Original Group Subordinate
Amount" with respect to such Mortgage Pool), (b) with respect to the
Distribution Date on the sixth anniversary of the first Distribution Date,
35% of the related Original Group Subordinate Amount, (c) with respect to
the Distribution Date on the seventh anniversary of the first Distribution
Date, 40% of the related Original Group Subordinate Amount, (d) with
respect to the Distribution Date on the eighth anniversary of the first
Distribution Date, 45% of the related Original Group Subordinate Amount
and (e) with respect to the Distribution Date on the ninth anniversary of
the first Distribution Date, 50% of the related Original Group Subordinate
Amount. After the Class Principal Amount of each Class of Senior
Certificates in any Certificate Group has been reduced to zero, the Senior
Prepayment Percentage for the related Mortgage Pool will be 0%.
o The "AP Principal Distribution Amount" for each Group 2 and Group 3 and
each Distribution Date is equal to the sum of:
(1) the related AP Percentage of the principal portion of each Scheduled
Payment (without giving effect to any Debt Service Reduction occurring
prior to the Bankruptcy Coverage Termination Date ) on each Mortgage Loan
in the related Mortgage Pool due during the related Due Period;
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(2) the related AP Percentage of each of the following amounts: (a) the
principal portion of each full and partial principal prepayment made by a
borrower on a Mortgage Loan in the related Mortgage Pool during the
related Prepayment Period, (b) each other unscheduled collection,
including Insurance Proceeds and net Liquidation Proceeds (other than with
respect to any Mortgage Loan in the related Mortgage Pool that was finally
liquidated during the related Prepayment Period), representing or
allocable to recoveries of principal of related Mortgage Loan received
during the related Prepayment Period and (c) the principal portion of all
proceeds of the purchase (or, in the case of a permitted substitution,
amounts representing a principal adjustment) of any Mortgage Loan in the
related Mortgage Pool actually received by the Trustee with respect to the
related Prepayment Period;
(3) with respect to unscheduled recoveries allocable to principal of any
Mortgage Loan in the related Mortgage Pool that was finally liquidated
during the related Prepayment Period, the related AP Percentage of the
related net Liquidation Proceeds allocable to principal; and
(4) any amounts described in clauses (1) through (3) for any previous
Distribution Date that remain unpaid.
o The "Subordinate Principal Distribution Amount" for each Mortgage Pool
for each Distribution Date is equal to the sum of:
(1) the product of (a) the related Subordinate Percentage and (b) the
principal portion (multiplied, in the case of Pool 2 and Pool 3, by the
related Non-AP Percentage) of each Scheduled Payment (without giving
effect to any Debt Service Reduction occurring prior to the Bankruptcy
Coverage Termination Date) on each Mortgage Loan in the related Mortgage
Pool due during the related Due Period;
(2) the product of (a) the related Subordinate Prepayment Percentage and
(b) each of the following amounts (multiplied, in the case of Pool 2 and
Pool 3, by the related Non-AP Percentage): (i) the principal portion of
each full and partial principal prepayment made by a borrower on a
Mortgage Loan in the related Mortgage Pool during the related Prepayment
Period, (ii) each other unscheduled collection, including Insurance
Proceeds and net Liquidation Proceeds (other than with respect to any
related Mortgage Loan that was finally liquidated during the related
Prepayment Period), representing or allocable to recoveries of principal
of related Mortgage Loans received during the related Prepayment Period
and (iii) the principal portion of all proceeds of the purchase (or, in
the case of a permitted substitution, amounts representing a principal
adjustment) of any Mortgage Loan in the related Mortgage Pool actually
received by the Trustee with respect to the related Prepayment Period;
(3) with respect to unscheduled recoveries allocable to principal of any
Mortgage Loan in the related Mortgage Pool that was finally liquidated
during the related Prepayment Period, the related net Liquidation Proceeds
allocable to principal (multiplied, in the case of Pool 2 and Pool 3, by
the applicable Non-AP Percentage), to the extent not distributed pursuant
to subsection (3) of the definition of Senior Principal Distribution
Amount for the related Certificate Group; and
(4) any amounts described in clauses (1) through (3) for any previous
Distribution Date that remain unpaid.
o The "Subordinate Component Percentage" for each Component for each
Distribution Date is equal to the percentage obtained by dividing the
Component Principal Amount of such Component immediately prior to such
Distribution Date by the aggregate Component Principal Amount of all
Components having the same parenthetical designation immediately prior to
such date.
o The "Subordinate Prepayment Percentage" for any Mortgage Pool for any
Distribution Date is the difference between 100% and the related Senior
Prepayment Percentage for such date.
o The "Subordinate Percentage" for any Mortgage Pool for any Distribution
Date is the difference between 100% and the Senior Percentage for that
Mortgage Pool for such date.
The Class 1-AX, Class 2-A3 and Class 2-AX and Class 3-AX Certificates are
Interest-Only Certificates; no principal will be distributable on these
Classes.
Cross-Collateralization Between Pool 1 and Pool 2
On each Distribution Date prior to the Credit Support Depletion Date for
Group 1 and Group 2 but on or after the date on which the total Certificate
Principal Amount of either the Senior Certificates of Certificate
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Group 1 or the Non-AP Senior Certificates of Certificate Group 2 has been
reduced to zero, amounts otherwise distributable as principal on each of the
B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and B6(1-2) Components, in reverse
order of priority, in respect of such Component's Subordinate Component
Percentage of the Subordinate Principal Distribution Amount for the Mortgage
Pool relating to such retired Senior Certificates, will be distributed as
principal to the Senior Certificates (other than the Interest-Only
Certificates) remaining outstanding in Certificate Group 1 or the Non-AP Senior
Certificates (other than the Interest-Only Certificates) remaining outstanding
in Certificate Group 2, as applicable, until the related Class Principal
Amounts have been reduced to zero, provided that on that Distribution Date (a)
the Group 1-2 Subordinate Percentage for such Distribution Date is less than
200% of the Group 1-2 Subordinate Percentage as of the Cut-off Date or (b) the
average outstanding principal balance of the Mortgage Loans in either Pool 1 or
Pool 2 delinquent 60 days or more over the most recent six months as a
percentage of the related Group Subordinate Amount is greater than or equal to
50%.
o The "Group 1-2 Subordinate Percentage" at any time will equal the sum of
the Component Principal Amounts of the B1(1-2), B2(1-2), B3(1-2), B4(1-2),
B5(1-2) and B6(1-2) Components divided by the sum of the Pool Balance for
Pool 1 and the Non-AP Pool Balance for Pool 2.
o The "Group Subordinate Amount" with respect to any Mortgage Pool and any
Distribution Date is the excess of the Non-AP Pool Balance (or, in the
case of Pool 1, the Pool Balance) for the immediately preceding
Distribution Date for that Mortgage Pool over the total Certificate
Principal Amount of the Non-AP Senior Certificates (or, in the case of
Certificate Group 1, the Senior Certificates) of the related Certificate
Group immediately prior to that Distribution Date.
In addition, if on any Distribution Date the total Certificate Principal
Amount of either the Senior Certificates of Certificate Group 1 or the Non-AP
Senior Certificates of Certificate Group 2 (after giving effect to
distributions to be made on that Distribution Date) is greater than the Pool
Balance of Pool 1, in the case of Certificate Group 1 and the Non-AP Pool
Balance of Pool 2, in the case of Certificate Group 2 (any such Group, the
"Undercollateralized Group"), all amounts otherwise distributable as principal
on the B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and B6(1-2) Components, in
reverse order of priority (other than, in the case of Certificate Group 2,
amounts needed to pay any Class AP Deferred Amounts or unpaid Interest
Shortfalls) (or, following the Credit Support Depletion Date for Pools 1 and 2,
such amounts described in the following sentence), will be distributed as
principal to the Senior Certificates, in the case of Certificate Group 1, or
the Non-AP Senior Certificates, in the case of Certificate Group 2 (other than,
in each case, the Interest-Only Certificates) of the Undercollateralized Group,
until the total Certificate Principal Amount of the Senior Certificates, in the
case of Certificate Group 1, or the Non-AP Senior Certificates, in the case of
Certificate Group 2 equals the Pool Balance, in the case of Pool 1, or the
Non-AP Pool Balance in the case of Pool 2, of the related Mortgage Pool (such
distribution, an "Undercollateralization Distribution"). In the event that
Certificate Group 1 or Certificate Group 2 constitutes an Undercollateralized
Group on any Distribution Date following the Credit Support Depletion Date for
Pools 1 and 2, Undercollateralization Distributions will be made from the
excess of the Available Distribution Amount for the other such Mortgage Pool
not related to an Undercollateralized Group remaining after all required
amounts have been distributed to the Senior Certificates, in the case of
Certificate Group 1, or the Non-AP Senior Certificates, in the case of
Certificate Group 2 of the other Certificate Group. In addition, the amount of
any unpaid Interest Shortfalls with respect to the Undercollateralized Group
(including any Interest Shortfalls for the related Distribution Date) will be
distributed to the Senior Certificates, in the case of Certificate Group 1, or
the Non-AP Senior Certificates, in the case of Certificate Group 2 of the
Undercollateralized Group prior to the payment of any Undercollateralization
Distributions from amounts otherwise distributable as principal on the B1(1-2),
B2(1-2), B3(1-2), B4(1-2), B5(1-2) and B6(1-2) Components, in reverse order of
priority (or, following the Credit Support Depletion Date, as provided in the
preceding sentence).
Available Distribution Amount
The due period (the "Due Period") related to each Distribution Date starts
on the second day of the month preceding the month in which such Distribution
Date occurs and ends on the first day of the month in which such Distribution
Date occurs. For a prepayment in full of any Mortgage Loan serviced by Aurora
(other than certain loans), the "Prepayment Period" related to each
Distribution Date starts on the seventeenth day of the month preceding the
month in which such Distribution Date occurs and ends on the sixteenth day of
the month in which such Distribution Date occurs. For a prepayment in full of
any other Mortgage Loan, or for any
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other unscheduled, partial prepayment of principal, the "Prepayment Period"
related to each Distribution Date starts on the second day of the month
preceding the month in which such Distribution Date occurs and ends on the
first day of the month in which such Distribution Date occurs. The "Servicer
Remittance Date" is the 18th day (or if such 18th day is not a Business Day,
the next succeeding Business Day) of the month in which the related
Distribution Date occurs. The "Deposit Date" is the Business Day immediately
preceding the related Distribution Date.
o The "Available Distribution Amount" for each Mortgage Pool on each
Distribution Date, as more fully described in the Trust Agreement, will
generally equal the sum of the following amounts:
(1) the total amount of all cash received by the Master Servicer from the
Servicer on the Servicer Remittance Date immediately preceding such
Distribution Date and remitted to the Trustee on the related Deposit Date,
which includes (a) Scheduled Payments due on the related Mortgage Loans
during the Due Period and collected prior to the Servicer Remittance Date
or advanced by the Master Servicer or the Servicer (or the Trustee), (b)
payments allocable to principal on the related Mortgage Loans (other than
Liquidation Proceeds and Insurance Proceeds) to the extent received in
advance of their scheduled due dates and applied to reduce the principal
balances of those Mortgage Loans ("Principal Prepayments"), together with
accrued interest thereon, if any, identified as having been received on the
related Mortgage Loans during the applicable Prepayment Period, plus any
amounts paid by the Master Servicer or the Servicer in respect of
Prepayment Interest Shortfalls, in each case for such Distribution Date,
(c) the proceeds of any repurchase of a related Mortgage Loan required to
be repurchased by the Seller (as defined herein), the Depositor or any
other party as a result of a breach of a representation or warranty or
document defect, and (d) recoveries through liquidation of any REO Property
with respect to the related Mortgage Loans, including Insurance Proceeds
and Liquidation Proceeds, minus:
(a) all Scheduled Payments of principal and interest on the related
Mortgage Loans collected but due on a date subsequent to the related Due
Period;
(b) all Principal Prepayments on the related Mortgage Loans received
or identified after the applicable Prepayment Period (together with any
interest payments, if any, received with such prepayments to the extent
that they represent (in accordance with the Servicer's usual application
of funds) the payment of interest accrued on the related Mortgage Loans
for the period subsequent to the Prepayment Period);
(c) Liquidation Proceeds and Insurance Proceeds received after the
applicable Prepayment Period with respect to the related Mortgage Loans;
(d) all fees and other amounts due or reimbursable to the Master
Servicer pursuant to the Trust Agreement or to the Servicer pursuant to
the Servicing Agreement; and
(e) any Prepayment Penalty Amounts (as defined herein);
(2) any other payments made by the Master Servicer, the Servicer or the
Depositor with respect to such Distribution Date.
o "Insurance Proceeds" means all proceeds (net of unreimbursed payments of
property taxes, insurance premiums and similar items incurred, and
unreimbursed Advances or servicing advances made by the Servicer or the
Master Servicer (or the Trustee), if any) of applicable insurance
policies, to the extent such proceeds are not applied to the restoration
of the Mortgaged Property or released to the borrower.
o "Liquidation Proceeds" means all amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure, unreimbursed
Advances or servicing advances, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise, together with any net proceeds received on a
monthly basis with respect to any properties acquired on behalf of the
Certificateholders by foreclosure or deed in lieu of foreclosure.
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<PAGE>
Example of Distributions
The following sets forth an example of distributions on the Certificates
for the Distribution Date in December 2000:
<TABLE>
<S> <C> <C>
November 2 through Due Period: Payments due during the related Due Period from
December 1 .......... borrowers will be deposited in the Servicer's
custodial account as received and will include
scheduled principal payments plus interest on
December 1 principal balances of the Mortgage
Loans.
November 2 through Prepayment Period Partial principal prepayments received during the
December 1 .......... (partial and full related Prepayment Period and Prepayments in full
prepayments): received by Servicers other than Aurora (and by
Aurora with respect to certain loans) during the
related Prepayment Period will be deposited into the
Servicers' custodial account for the remittance to
the Master Servicer on December 18.
November 17 through Prepayment Period Prepayments in full received by Aurora during the
December 16 ......... (prepayments in full): related Prepayment Period (other than certain loans)
will be deposited into Aurora's custodial account for
remittance to the Master Servicer on December 18.
November 30 .......... Record Date: Distributions will be made to Certificateholders of
record as of the close of business on the last
Business Day of the month immediately before the
month in which the Distribution Date occurs.
December 18 .......... Servicer Remittance The Servicer will remit collections and recoveries in
Date: respect of the Mortgage Loans to the Master
Servicer on the 18th day (or if the 18th day is not a
Business Day, the Business Day next succeeding
Business Day) of each month, as specified in the
Servicing Agreement.
December 22 .......... Deposit Date: On the Business Day immediately preceding the
Distribution Date, the Master Servicer will remit to
the Trustee the amount of principal and interest to
be distributed to Certificateholders on December 26,
including any Advances required to be made by the
Servicer or the Master Servicer for that Distribution
Date.
December 26 .......... Distribution Date: On the 25th day of each month (or if the 25th day
is not a Business Day, the next succeeding Business
Day), the Trustee will make distributions to
Certificateholders.
</TABLE>
Succeeding months follow the same pattern.
The Residual Certificate
In addition to distributions of principal and interest, the holder of the
Residual Certificate will be entitled to receive, generally, (1) the amount, if
any, of any Available Distribution Amount remaining in each REMIC on any
Distribution Date after distributions of principal and interest are made on the
regular interests and on the Residual Certificate on that date and (2) the
proceeds, if any, of the assets of the Trust Fund remaining in each REMIC after
the principal amounts of the regular interests and of the Residual Certificate
have been reduced to zero. It is generally not anticipated that any material
assets will be remaining for distributions at any such time.
The Trust agreement will include certain restrictions on the transfer of
the Residual Certificate.
See "Material Federal Income Tax Considerations" herein and in the
accompanying Prospectus.
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<PAGE>
Allocation of Realized Losses
If a Realized Loss occurs on a Mortgage Loan in either Pool 1 or Pool 2,
then, on each Distribution Date, the principal portion of that Realized Loss
(multiplied, in the case of Pool 2, by the applicable Non-AP Percentage) other
than an Excess Loss will be allocated first, to reduce the Component Principal
Amounts of the related Components, in inverse order of priority, until the
related Component Principal Amounts thereof have been reduced to zero (that is,
these Realized Losses will be allocated to the related Component of the Class
B6 Certificates while such Component is outstanding, then to the related
Component of the Class B5 Certificates, and so forth) and second, to the Senior
Certificates (other than the related Class AP Certificates) of the related
Certificate Group, proportionately, on the basis of their respective
Certificate Principal Amounts.
If a Realized Loss occurs on a Mortgage Loan in Pool 3, then, on each
Distribution Date, the applicable Non-AP Percentage of the principal portion of
that Realized Loss other than an Excess Loss will be allocated first, to reduce
the Component Principal Amounts of the related Components, in inverse order of
priority, until the related Component Principal Amounts thereof have been
reduced to zero (that is, these Realized Losses will be allocated to the B6(3)
Component while such Component is outstanding, then to the B5(3) Component, and
so forth) and second, to the Senior Certificates (other than the Class AP
Certificates) of Certificate Group 3, proportionately, on the basis of their
respective Certificate Principal Amount.
The AP Percentage of the principal portion of any Realized Loss on a
Discount Mortgage Loan in Pool 2 will be allocated to and reduce the Class
Principal Amount of the Class 2-AP Certificates until their Class Principal
Amount has been reduced to zero. With respect to any Distribution Date through
the Credit Support Depletion Date, the total of all amounts so allocable to the
Class 2-AP Certificates on that date in respect of Realized Losses (other than
Excess Losses) on Pool 2 Mortgage Loans and all amounts previously allocated in
respect of Realized Losses to the Class 2-AP Certificates and not distributed
on prior Distribution Dates will be the "Class 2-AP Deferred Amount." To the
extent that funds are available therefor on any Distribution Date through the
Credit Support Depletion Date, distributions in respect of the Class 2-AP
Deferred Amount will be made on the Class 2-AP Certificates in accordance with
priority (5) under "-- Priority of Distributions" herein. Any distribution in
respect of the Class 2-AP Deferred Amount will not reduce the Class Principal
Amount of the Class 2-AP Certificates. No interest will accrue on the Class
2-AP Deferred Amount. No distributions in respect of the Class 2-AP Deferred
Amount will be made after the Distribution Date on which the Class Principal
Amount of the Class 2-AP Certificates has been reduced to zero. On each
Distribution Date through the Credit Support Depletion Date, the Component
Principal Amount of the lowest ranking Component in Group 2 will be reduced by
the amount of any distributions in respect of the Class 2-AP Deferred Amount on
that Distribution Date. Any such reduction will be allocated in the same manner
as a Realized Loss, as described above. After the Credit Support Depletion
Date, no distributions will be made in respect of, and losses allocated to the
Class 2-AP Certificates will not be added to, the Class 2-AP Deferred Amount.
The AP Percentage of the principal portion of any Realized Loss on a
Discount Mortgage Loan in Pool 3 will be allocated to and reduce the Class
Principal Amount of the Class 3-AP Certificates until their Class Principal
Amount has been reduced to zero. With respect to any Distribution Date through
the Credit Support Depletion Date, the total of all amounts so allocable to the
Class 3-AP Certificates on that date in respect of Realized Losses (other than
Excess Losses) on Pool 3 Mortgage Loans and all amounts previously allocated in
respect of Realized Losses to the Class 3-AP Certificates and not distributed
on prior Distribution Dates will be the "Class 3-AP Deferred Amount." The Class
2-AP Deferred Amount and the Class 3-AP Deferred Amount are each referred to
herein as a "Class AP Deferred Amount." To the extent that funds are available
therefor on any Distribution Date through the Credit Support Depletion Date,
distributions in respect of the Class 3-AP Deferred Amount will be made on the
Class 3-AP Certificates in accordance with priority (5) under "-- Priority of
Distributions" herein. Any distribution in respect of the Class 3-AP Deferred
Amount will not reduce the Class Principal Amount of the Class 3-AP
Certificates. No interest will accrue on the Class 3-AP Deferred Amount. No
distributions in respect of the Class 3-AP Deferred Amount will be made after
the Distribution Date on which the Class Principal Amount of the Class 3-AP
Certificates has been reduced to zero. On each Distribution Date through the
Credit Support Depletion Date, the Component Principal Amount of the lowest
ranking Component in Group 3 will be reduced by the amount of any distributions
in respect of the Class 3-AP Deferred Amount on that Distribution Date. Any
such reduction will be allocated in the same manner as a Realized Loss, as
described above. After the Credit Support Depletion Date, no distributions will
be made in respect of, and losses allocated to the Class 3-AP Certificates will
not be added to, the Class 3-AP Deferred Amount.
S-34
<PAGE>
The principal portion of any Excess Loss (other than a Debt Service
Reduction) on a Mortgage Loan in Pool 1 for any Distribution Date will be
allocated proportionately to the Senior Certificates of Certificate Group 1 on
the basis of their Class Principal Amounts, and to the B1(1-2), B2(1-2),
B3(1-2), B4(1-2), B5(1-2) and B6(1-2) Components on the basis of their
Apportioned Principal Balances.
The applicable Non-AP Percentage of the principal portion of any Excess
Loss (other than a Debt Service Reduction) on a Mortgage Loan in Pool 2 for any
Distribution Date will be allocated proportionately to the Non-AP Senior
Certificates of Certificate Group 2 on the basis of their Class Principal
Amounts, and to the B1(1-2), B2(1-2), B3(1-2), B4(1-2), B5(1-2) and B6(1-2)
Components on the basis of their Apportioned Principal Balances.
The applicable Non-AP Percentage of the principal portion of any Excess
Loss (other than a Debt Service Reduction) on a Mortgage Loan in Pool 3 for any
Distribution Date will be allocated proportionately to the Non-AP Senior
Certificates of Certificate Group 3 on the basis of their Class Principal
Amounts, and to the related Components on the basis of their Component
Principal Balances.
The applicable AP Percentage of the principal portion of any Excess Loss
(other than a Debt Service Reduction) on a Mortgage Loan in Pool 2 or Pool 3
for any Distribution Date will be allocated to the related Class of Class AP
Certificates.
The Component Principal Amount of the lowest ranking Component then
outstanding related to Pool 1 and Pool 2 will also be reduced by the amount, if
any, by which the total Certificate Principal Amount of the related Senior
Certificates and the total Component Principal Amount of the related Components
on any Distribution Date (after giving effect to distributions of principal and
allocation of Realized Losses on that date) exceeds the total Scheduled
Principal Balance of the Mortgage Loans in Pool 1 and Pool 2 for the related
Distribution Date (any such reduction, a "Component Writedown Amount" with
respect to the Components related to Pool 1 and Pool 2).
The Component Principal Amount of the lowest ranking Component then
outstanding in Certificate Group 3 will also be reduced by the amount, if any,
by which the total Certificate Principal Amount of all the related Senior
Certificates and the total Component Principal Amount of the related Components
on any Distribution Date (after giving effect to distributions of principal and
allocation of Realized Losses on that date) exceeds the total Scheduled
Principal Balance of the Mortgage Loans in the Pool 3 for the related
Distribution Date (any such reduction, a "Component Writedown Amount" with
respect to the Components related to Pool 3).
o The "Apportioned Principal Balance" of any of the B1(1-2), B2(1-2),
B3(1-2), B4(1-2), B5(1-2) or B6(1-2) Components for any Distribution Date
will equal the Component Principal Amount of that Component immediately
prior to that Distribution Date multiplied by a fraction, the numerator of
which is the applicable Group Subordinate Amount for that date and the
denominator of which is the sum of the Group Subordinate Amounts for Pool
1 and Pool 2 for that date.
o In general, a "Realized Loss" means (a) with respect to a Liquidated
Mortgage Loan, the amount by which the remaining unpaid principal balance
of that Mortgage Loan plus all accrued and unpaid interest thereon and any
related expenses exceeds the amount of Liquidation Proceeds applied to the
principal balance of that Mortgage Loan, or (b) the amount by which, in
the event of bankruptcy of a borrower, a bankruptcy court reduces the
secured debt to the value of the related Mortgaged Property (a "Deficient
Valuation"). In determining whether a Realized Loss is a loss of principal
or of interest, Liquidation Proceeds and other recoveries on a Mortgage
Loan will be applied first to outstanding expenses incurred with respect
to such Mortgage Loan, then to accrued, unpaid interest, and finally to
principal.
o "Bankruptcy Losses" are losses that are incurred as a result of
Deficient Valuations and any reduction, in a bankruptcy proceeding, of
the amount of the Scheduled Payment on a Mortgage Loan other than as a
result of a Deficient Valuation (a "Debt Service Reduction"). The
principal portion of Debt Service Reductions will not be allocated in
reduction of the Certificate Principal Amounts of any Certificates.
o "Special Hazard Losses" are, in general terms, Realized Losses arising
out of certain direct physical loss or damage to Mortgaged Properties
that are not covered by a standard hazard insurance policy, but
excluding, among other things, faulty design or workmanship and normal
wear and tear.
S-35
<PAGE>
o "Fraud Losses" are losses sustained on a Liquidated Mortgage Loan by
reason of a default arising from fraud, dishonesty or misrepresentation.
o A "Liquidated Mortgage Loan" generally is a defaulted Mortgage Loan as to
which the Mortgage Loan or related REO Property has been disposed of and
all amounts expected to be recovered in respect of that Mortgage Loan have
been received by the Master Servicer or the Servicer on behalf of the
Trust Fund.
The principal portion of Special Hazard Losses, Bankruptcy Losses (other
than Debt Service Reductions) and Fraud Losses on the Mortgage Loans that
exceed the applicable "Special Hazard Loss Limit," "Bankruptcy Loss Limit," and
"Fraud Loss Limit," respectively ("Excess Losses"), will be allocated as
described above. The "Special Hazard Loss Limit" will initially be
approximately $3,995,944.28, $3,575,000.00 and $1,174,795.19 for Pool 1, Pool 2
and Pool 3, respectively; the "Bankruptcy Loss Limit" will initially be
approximately $100,000 for each Mortgage Pool; and the "Fraud Loss Limit" will
initially be approximately $1,672,845.37, $1,670,742.99 and $2,349,590.37 for
Pool 1, Pool 2 and Pool 3, respectively.
Each Special Hazard Loss Limit will be reduced, from time to time, to an
amount equal on any Distribution Date to the lesser of (a) the greatest of (1)
1% of the aggregate of the Scheduled Principal Balances of the related Mortgage
Loans, (2) twice the Scheduled Principal Balance of the related Mortgage Loan
having the highest Scheduled Principal Balance and (3) the aggregate Scheduled
Principal Balance of the related Mortgage Loans secured by Mortgaged Properties
located in the single California postal zip code area having the highest
aggregate Scheduled Principal Balance of any such zip code area and (b) such
Special Hazard Loss Limit as of the Closing Date less the amount, if any, of
related Special Hazard Losses incurred since the Closing Date.
Each Bankruptcy Loss Limit will be reduced, from time to time, by the
amount of Bankruptcy Losses allocated to the related Certificates and
Components. The date on which a Bankruptcy Loss Limit has been reduced to zero
is the "Bankruptcy Coverage Termination Date."
Each Fraud Loss Limit will be reduced, from time to time, by the amount of
Fraud Losses allocated to the related Certificates and Components. In addition,
on each anniversary of the Cut-off Date, each Fraud Loss Limit will be reduced
as follows: (a) on the first, second, third and fourth anniversaries of the
Cut-off Date, to an amount equal to the lesser of (1) such Fraud Loss Limit as
of the most recent anniversary of the Cut-off Date and (2) 1% of the aggregate
Scheduled Principal Balance of all the related Mortgage Loans as of the most
recent anniversary of the Cut-off Date and (b) on the fifth anniversary of the
Cut-off Date, to zero.
In the event that any amount is recovered in respect of principal of a
Liquidated Mortgage Loan after any related Realized Loss has been allocated as
described herein, such amount will be distributed to the related Certificates
and Components still outstanding, proportionately, on the basis of any Realized
Losses previously allocated thereto. It is generally not anticipated that any
such amounts will be recovered.
Final Scheduled Distribution Date
Scheduled distributions on the Mortgage Loans in each Mortgage Pool,
assuming no defaults or losses that are not covered by the limited credit
support described elsewhere herein, will be sufficient to make timely
distributions of interest on the Offered Certificates and to reduce the total
Certificate Principal Amount of the Offered Certificates not later than
November 25, 2030 (the "Final Scheduled Distribution Date"). The actual final
Distribution Date for each Class of Offered Certificates may be earlier or
later, and could be substantially earlier, than the Final Scheduled
Distribution Date.
The Final Scheduled Distribution Date has been determined by adding one
month to the month of scheduled maturity of the latest maturing Mortgage Loan
in any Mortgage Pool.
Optional Purchase of the Class 1-A1 and Class 2-A1 Certificates
The initial holder of the Class 1-A2 Certificate will, so long as it holds
such Certificate, have the option to repurchase all, but not less than all, of
the Class 1-A1 Certificates remaining outstanding on or after the Distribution
Date in July 2003 (the "Class 1-A1 Call Date") for a price equal to the
outstanding Certificate Principal Amount of each such Certificate plus interest
accrued thereon at the applicable Certificate interest
S-36
<PAGE>
Rate. The initial holder of the Class 2-A2 Certificate will, so long as it
holds such Certificate, have the option to repurchase all, but not less than
all, of the Class 2-A1 Certificates remaining outstanding on or after the
Distribution Date in May 2005 (the "Class 2-A1 Call Date") for a price equal to
the outstanding Certificate Principal Amount of each such Certificate plus
interest accrued thereon at the applicable Certificate interest Rate.
Optional Purchase of the Mortgage Loans
On any Distribution Date after the Distribution Date on which the total
Scheduled Principal Balance of the Mortgage Loans (determined in the aggregate
rather than by pool) is less than 10% of the Cut-off Date Balance of the
Mortgage Loans, the Depositor (subject to the terms of the Trust Agreement)
will have the option to repurchase the Mortgage Loans, any REO Property and any
other property remaining in the Trust Fund and thereby effect the termination
of the Trust Fund and the retirement of the Certificates. The purchase price of
the Mortgage Loans will be equal to the sum of (a) 100% of the total
outstanding principal balance of the Mortgage Loans, plus accrued interest
thereon at the applicable Mortgage Rate, (b) the fair market value of all other
property remaining in the Trust Fund and (c) any unreimbursed servicing
advances for the related Distribution Date. This repurchase will be treated as
a prepayment of the Mortgage Loans for purposes of distributions to
Certificateholders. Upon payment in full to Certificateholders of these
amounts, the Trust Fund will be terminated.
The Trustee
The Chase Manhattan Bank will be the Trustee under the Trust Agreement (in
such capacity, the "Trustee"). The Trustee will be paid a monthly fee (the
"Trustee Fee") calculated as a fixed percentage equal to 0.0065% annually (the
"Trustee Fee Rate") on the total Scheduled Principal Balance of the related
Mortgage Loans as of the first day of the related Due Period, calculated
separately by Mortgage Pool, and will also be entitled to retain, as additional
compensation, any interest or other income earned on funds on deposit in the
Certificate Account pending distribution to Certificateholders. The Trustee
will be entitled to reimbursement for certain expenses and other amounts prior
to distribution of any amounts to Certificateholders. The Trustee's "Corporate
Trust Office" for purposes of presentment and surrender of the Offered
Certificates for the final distribution thereon and for all other purposes is
located at 450 West 33rd Street, 14th Floor, New York, New York 10001,
Attention: Capital Markets Fiduciary Services, or any other address that the
Trustee may designate from time to time by notice to the Certificateholders,
the Depositor and the Master Servicer.
Description of the Mortgage Pools
General
The Mortgage Pools will consist of approximately 1,449 conventional,
adjustable rate, fully amortizing Mortgage Loans with original terms to
maturity from the first due date of the scheduled monthly payment (a "Scheduled
Payment") of not more than 30 years, having a Cut-off Date Balance (after
giving effect to Scheduled Payments due on such date) of approximately
$284,658,936. The Mortgage Loans generally provide for adjustment of the
applicable Mortgage Rate, as specified in the related Mortgage Note, based on
the One-Year CMT Index (as defined below) and for corresponding adjustments to
the monthly payment amount due thereon, in each case as specified in the
related Mortgage Note and subject to the limitations described below. The Pool
1 Mortgage Loans have interest rates that first adjust after an initial period
of three years following origination and then adjust annually thereafter. The
Pool 2 Mortgage Loans have interest rates that first adjust after an initial
period of five years following origination and then adjust annually thereafter.
The Pool 3 Mortgage Loans have interest rates that first adjust after an
initial period of seven years following origination and then adjust annually
thereafter.
The Mortgage Loans were acquired by Lehman Capital, A Division of Lehman
Brothers Holdings Inc. (the "Seller" or "Lehman Capital"), from various
originators as described under "Underwriting Guidelines -- General."
Approximately 11.91% and 14.59% of the Pool 1 and Pool 2 Mortgage Loans,
respectively, were originated under "no documentation" programs, pursuant to
which no information was obtained regarding borrowers' income or employment and
there was no verification of the borrowers' assets. The Pool 3 Mortgage Loans
were originated under "full" or "alternate" documentation programs in
accordance with the Borrower Advantage Program described under "-- Underwriting
Guidelines -- The Borrower Advantage Program"
S-37
<PAGE>
herein. The Seller will make only limited representations and warranties with
respect to the Mortgage Loans. See "Trust Agreement -- Assignment of Mortgage
Loans" herein.
Wherever reference is made herein to a percentage of some or all of the
Mortgage Loans, that percentage is determined (unless otherwise specified) on
the basis of the total Scheduled Principal Balance of these Mortgage Loans as
of the Cut-off Date.
All of the Mortgage Loans are secured by first mortgages or deeds of trust
or other similar security instruments creating first liens on one- to
four-family residential properties (each, a "Mortgaged Property") consisting of
one- to four-family dwelling units, individual condominium units, individual
units in planned unit developments or shares issued by cooperative housing
corporations and the related leasehold interests. The Mortgage Loans to be
included in the Mortgage Pools will be acquired by the Depositor from the
Seller, which acquired the Mortgage Loans either directly from the various
originators or from an affiliate, Lehman Brothers Bank, FSB, which initially
purchased such Mortgage Loans from the originators. See "Trust Agreement --
Assignment of Mortgage Loans" herein.
Pursuant to its terms, each Mortgage Loan, other than a Cooperative Loan
or 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 cooperative housing corporation or condominium
association is responsible for maintaining hazard insurance covering the entire
building. See "Description of Mortgage and Other Insurance -- Hazard Insurance
on the Loans -- Standard Hazard Insurance Policies" in the Prospectus.
Approximately 15.78% and 20.27% of the Pool 1 and Pool 2 Mortgage Loans,
respectively, provide for monthly payments of interest at the Mortgage Rate but
no payments of principal for the first ten years after origination of such
Mortgage Loan. Following such ten year period, the monthly payment on each such
Mortgage Loan will be increased to an amount sufficient fully to amortize the
outstanding principal balance of such Mortgage Loan over its remaining term and
pay interest at the related Mortgage Rate.
Approximately 8.18% and 9.93% of the Pool 1 and Pool 2 Mortgage Loans,
respectively, and all of the Pool 3 Mortgage Loans have original Loan-to-Value
Ratios in excess of 80%; approximately 95.90% and 94.94% of these Pool 1 and
Pool 2 Mortgage Loans, respectively, are covered by primary mortgage guaranty
insurance policies, which policies insure, generally, any portion of the unpaid
principal balance of a Mortgage Loan in excess of 75% of the value of the
related Mortgaged Property. No such primary mortgage guaranty insurance policy
will be required to be maintained with respect to any such Mortgage Loan after
the date on which the related Loan-to-Value Ratio is 80% or less. The Pool 3
Mortgage Loans are covered by primary mortgage insurance policies issued by
United Guaranty Corporation ("United Guaranty") in connection with the Borrower
Advantage Program, as described under "-- Underwriting Guidelines -- The
Borrower Advantage Program." Such policies insure, generally, any portion of
the unpaid principal balance of the insured mortgage loan in excess of 67% of
the value of the related mortgaged property. With respect to approximately
4.49% of the Mortgage Loans in Pool 3, a premium is payable monthly at a rate
equal to 1.00% per annum (the "PMI Premium Rate") of the outstanding principal
balance of such Mortgage Loans. The "Loan-to-Value Ratio" of a Mortgage Loan at
any time is the ratio of the principal balance of the Mortgage Loan at the date
of determination to (a) in the case of a purchase, the lesser of the sale price
of the Mortgaged Property and its appraised value at the time of sale, or (b)
in the case of a refinance or modification, the appraised value of the
Mortgaged Property at the time of the refinance or modification.
As of October 1, 2000, approximately $886,780 of the Pool 1 Mortgage
Loans, representing approximately 1.06% of the Pool 1 Mortgage Loans, and
approximately $1,134,087 of the Pool 2 Mortgage Loans, representing
approximately 1.36% of the Pool 2 Mortgage Loans, were 30 to 59 days delinquent
in payment.
The Mortgage Loans generally provide for annual adjustment of the related
Mortgage Rate, as specified in the related Mortgage Note, and for corresponding
adjustments to the monthly payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date");
provided that the first such adjustment for the Mortgage Loans in Pool 1 will
occur after an initial period of three years following origination, the first
such adjustment for the Mortgage Loans in Pool 2 will occur after an initial
period of five years following origination, and the first such adjustment for
the Mortgage Loans in Pool 3 will occur after an initial period of seven years
following origination. On each Adjustment Date for each 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 applicable Index (as
described below) and a fixed percentage amount (the
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<PAGE>
"Gross Margin"), provided that the Mortgage Rate on each such Mortgage Loan
will not increase or decrease by more than a fixed percentage specified in the
related Mortgage Note (the "Periodic Cap") on any related Adjustment Date,
except in the case of the first such adjustment, and will not exceed a
specified maximum Mortgage Rate over the life of such Mortgage Loan (the
"Maximum Rate") or be less than a specified minimum Mortgage Rate over the life
of such Mortgage Loan (the "Minimum Rate"). The Mortgage Rate on a Mortgage
Loan 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 weighted averages of the Initial Caps are approximately
2.012% per annum, in the case of Pool 1, 2.007%, in the case of Pool 2, and
3.237%, in the case of Pool 3. Effective with the first monthly payment due on
each 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 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
Mortgage Loan, as adjusted on any related Adjustment Date, may be less than the
sum of the Index and the related Gross Margin, rounded as described herein. See
"-- The Index" below. The Mortgage Loans generally do not permit the related
mortgagor to convert the adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
The Mortgage Pools will include eleven 50% participation interests in
Mortgage Loans. For purposes of this Prospectus Supplement, the participation
interests are treated as Mortgage Loans having Scheduled Principal Balances as
of the Cut-off Date equal in each case to 50% of the scheduled principal
balance of the related participated mortgage loan. Each mortgage loan that is
subject to a participation agreement will be master serviced, and will be
initially serviced, by Aurora for the benefit of the holders of the
participation interests. Under the participation agreement, the participation
master servicer will distribute amounts required to be distributed under the
participation servicing agreement to the participants in proportion to their
percentage interests.
Because in each case there will be two participants, each holding a 50%
interest under the related participation agreement, all actions requiring a
vote of the participants, such as termination of the participation master
servicer or appointment of a successor participation master servicer, will
require the consent of both participants. Each participant is entitled to
receive information and reports with respect to the related loan. It is
expected that the participations not included in the Trust Fund will initially
be held by the Seller, which will have no voting rights; they may later be
assigned to other securitization trusts or to other parties. There can be no
assurance that any subsequent holder of the participation interests not
included in the Trust Fund will act in the best interests of
Certificateholders.
The Index
The index (the "Index") applicable to the determination of the substantial
majority of the Mortgage Rates for the Mortgage Loans will generally be the
weekly average yield on actively traded U.S. Treasury securities adjusted to a
constant maturity of one year as reported by the Federal Reserve Board in
statistical release H.15(519) (the "One-Year CMT Index") and as most recently
available as of forty-five days prior to the Adjustment Date. In the event that
the Index becomes unavailable or is otherwise unpublished, the Master Servicer
will select a comparable alternative index over which it has no direct control
and which is readily verifiable.
Pool 1 Mortgage Loans
The Pool 1 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, Pool 1 Mortgage Loans may be removed from the Trust Fund as a
result of incomplete documentation or otherwise, if the Depositor deems such
removal necessary or appropriate. In addition, a limited number of other
mortgage loans may be included in the Trust Fund (and in Pool 1) prior to the
issuance of the Offered Certificates.
<TABLE>
<S> <C>
Number of Pool 1 Mortgage Loans ................................. 226
Total Scheduled Principal Balance ............................... $83,642,268
Mortgage Rates:
Weighted Average ............................................... 8.978%
Range .......................................................... 7.875% to 9.750%
Weighted Average Remaining Term to Maturity (in months) ......... 357
</TABLE>
S-39
<PAGE>
The Pool 1 Mortgage Loans have interest rates that first adjust after an
initial period of three years following origination and then adjust annually
thereafter.
The Scheduled Principal Balances of the Pool 1 Mortgage Loans range from
approximately $43,357 to approximately $1,997,972. The Pool 1 Mortgage Loans
have an average Scheduled Principal Balance of approximately $370,099.
The Pool 1 Mortgage Loans were originated in accordance, generally, with
the Underwriting Guidelines of Aurora and the Pool 1 Mortgage Loans are
initially serviced by Aurora.
The weighted average Loan-to-Value Ratio at origination of the Pool 1
Mortgage Loans is approximately 66.84%, and no Pool 1 Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding 95.00%.
No more than approximately 3.61% of the Pool 1 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
Approximately 5.85%, 11.51% and 8.92% of the Pool 1 Mortgage Loans are
subject to prepayment penalties during the first year, the first three years
and the first five years, respectively, after origination.
The following tables set forth as of the Cut-off Date the number, total
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 total Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
Original Loan-to-Value Ratios -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Range of Original Number of Principal Scheduled
Loan-to-Value Ratios (%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
0.01 to 10.00 ........... 1 $ 139,919.44 0.17%
20.01 to 30.00 ........... 5 4,997,219.00 5.97
30.01 to 40.00 ........... 5 4,641,595.90 5.55
40.01 to 50.00 ........... 12 5,531,004.01 6.61
50.01 to 60.00 ........... 13 6,431,011.73 7.69
60.01 to 70.00 ........... 56 23,328,376.90 27.89
70.01 to 80.00 ........... 106 31,727,561.53 37.93
80.01 to 90.00 ........... 20 4,853,921.92 5.80
90.01 to 100.00 .......... 8 1,991,657.88 2.38
--- --------------- ------
Total ................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average original loan-to-value ratio is approximately 66.84%.
Mortgage Rates -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Mortgage Rates (%) Mortgage Loans Balance Principal Balance
------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
7.501 to 8.000 .......... 2 $ 648,649.19 0.78%
8.001 to 8.500 .......... 37 12,886,739.40 15.41
8.501 to 9.000 .......... 99 35,360,326.73 42.28
9.001 to 9.500 .......... 76 32,452,270.15 38.80
9.501 to 10.000 ......... 12 2,294,282.84 2.74
--- --------------- ------
Total .................. 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 8.978% per annum.
S-40
<PAGE>
Original Terms to Maturity -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
--------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
360 ................. 226 $ 83,642,268.31 100.00%
--- --------------- ------
Total .............. 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 360 months.
Remaining Terms to Maturity -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
--------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
351 to 360 .......... 226 $ 83,642,268.31 100.00%
--- --------------- ------
Total .............. 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average remaining term to maturity is approximately 357 months.
Geographic Distribution -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
State Mortgage Loans Balance Principal Balance
-------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
California ......... 125 $ 47,936,131.98 57.31%
Colorado ........... 30 11,016,725.98 13.17
Nevada ............. 4 3,418,355.03 4.09
Utah ............... 5 3,260,361.44 3.90
New York ........... 9 3,250,938.10 3.89
Washington ......... 7 3,018,290.79 3.61
Florida ............ 7 1,893,429.70 2.26
Arizona ............ 6 1,698,355.30 2.03
Texas .............. 4 1,521,416.78 1.82
Illinois ........... 5 1,139,450.32 1.36
Other .............. 24 5,488,812.89 6.56
--- ---------------- ------
Total ............. 226 $ 83,642,268.31 100.00%
=== ================ ======
</TABLE>
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<PAGE>
Cut-off Date Scheduled Principal Balances -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Scheduled Principal Balances ($) Mortgage Loans Balance Principal Balance
---------------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
less than 50,000 ................. 2 $ 88,209.43 0.11%
50,001 to 100,000 ................ 10 805,837.45 0.96
100,001 to 150,000 ............... 35 4,453,348.93 5.32
150,001 to 200,000 ............... 26 4,528,004.88 5.41
200,001 to 250,000 ............... 23 5,258,639.07 6.29
250,001 to 300,000 ............... 26 7,125,144.96 8.52
300,001 to 350,000 ............... 32 10,581,075.27 12.65
350,001 to 400,000 ............... 15 5,611,047.07 6.71
400,001 to 450,000 ............... 5 2,140,184.31 2.56
450,001 to 500,000 ............... 8 3,793,408.37 4.54
500,001 to 550,000 ............... 6 3,174,413.89 3.80
550,001 to 600,000 ............... 6 3,442,882.91 4.12
600,001 to 650,000 ............... 4 2,580,866.11 3.09
700,001 to 750,000 ............... 3 2,184,840.39 2.61
750,001 to 800,000 ............... 3 2,336,015.72 2.79
800,001 to 850,000 ............... 1 806,890.28 0.96
850,001 to 900,000 ............... 3 2,660,492.14 3.18
900,001 to 950,000 ............... 1 923,846.11 1.10
950,001 to 1,000,000 ............. 8 7,916,972.17 9.47
1,000,001 to 1,250,000 ........... 3 3,405,685.37 4.07
1,250,001 to 1,500,000 ........... 4 5,830,473.32 6.97
1,750,001 to 2,000,000 ........... 2 3,993,990.16 4.78
--- --------------- ------
Total ........................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately $370,099.
Property Type -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Property Type Mortgage Loans Balance Principal Balance
---------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Single Family .................... 138 $ 54,502,467.21 65.16%
Planned Unit Development ......... 40 14,655,157.91 17.52
Two- to Four- Family ............. 19 7,922,847.41 9.47
Condominium ...................... 29 6,561,795.78 7.85
--- --------------- ------
Total ........................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
Loan Purpose -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Loan Purpose Mortgage Loans Balance Principal Balance
----------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Purchase .................... 155 $ 53,117,319.59 63.51%
Cash Out Refinance .......... 64 27,859,276.25 33.31
Rate/Term Refinance ......... 7 2,665,672.47 3.19
--- --------------- ------
Total ...................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
S-42
<PAGE>
Loan Documentation -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Loan Documentation Mortgage Loans Balance Principal Balance
-------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Limited Documentation .......... 91 $ 36,123,479.22 43.19%
Full Documentation ............. 75 24,179,622.90 28.91
No Income Verification ......... 31 13,381,225.23 16.00
No Documentation ............... 29 9,957,940.96 11.91
--- --------------- ------
Total ......................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
Occupancy Status -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Occupancy Status Mortgage Loans Balance Principal Balance
---------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Primary Home ......... 161 $ 60,937,260.71 72.85%
Investment ........... 52 14,564,086.79 17.41
Second Home .......... 13 8,140,920.81 9.73
--- --------------- ------
Total ............... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
Maximum Rates -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Range of Maximum Rates (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
13.501 to 14.000 ........... 2 $ 648,649.19 0.78%
14.001 to 14.500 ........... 37 12,886,739.40 15.41
14.501 to 15.000 ........... 99 35,360,326.73 42.28
15.001 to 15.500 ........... 76 32,452,270.15 38.80
15.501 to 16.000 ........... 12 2,294,282.84 2.74
--- --------------- ------
Total ..................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average Maximum Rate is approximately 14.978%.
Minimum Rates -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Range of Minimum Rates (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
2.001 to 2.500 ............. 2 $ 397,539.99 0.48%
2.501 to 3.000 ............. 222 82,369,850.81 98.48
3.001 to 3.500 ............. 1 310,050.16 0.37
8.001 to 8.500 ............. 1 564,827.35 0.68
--- --------------- ------
Total ..................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average Minimum Rate is approximately 2.789%.
S-43
<PAGE>
Gross Margins -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Gross Number of Principal Scheduled
Margins (%) Mortgage Loans Balance Principal Balance
------------------------ ---------------- ----------------- ------------------
<S> <C> <C> <C>
2.251 to 2.500 ......... 2 $ 397,539.99 0.48%
2.501 to 2.750 ......... 223 82,934,678.16 99.15
3.001 to 3.250 ......... 1 310,050.16 0.37
--- --------------- ------
Total ................. 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
The weighted average Gross Margin is approximately 2.751%.
Next Rate Adjustment Date -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Next Rate Adjustment Date Mortgage Loans Balance Principal Balance
--------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
January 2003 .............. 1 $ 105,405.08 0.13%
March 2003 ................ 2 194,198.17 0.23
April 2003 ................ 4 917,270.98 1.10
May 2003 .................. 5 1,122,096.16 1.34
June 2003 ................. 72 26,464,072.29 31.64
July 2003 ................. 53 16,405,587.00 19.61
August 2003 ............... 64 30,631,156.18 36.62
September 2003 ............ 25 7,802,482.45 9.33
-- --------------- ------
Total .................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
Subsequent Periodic Caps -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Subsequent Periodic Cap (%) Mortgage Loans Balance Principal Balance
----------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
1.751 to 2.000 .............. 226 $ 83,642,268.31 100.00%
--- --------------- ------
Total ...................... 226 $ 83,642,268.31 100.00%
=== =============== ======
</TABLE>
Initial Periodic Caps -- Pool 1
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Initial Periodic Cap (%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
1.751 to 2.000 ........... 225 $ 82,644,594.93 98.81%
2.751 to 3.000 ........... 1 997,673.38 1.19
--- ---------------- ------
Total ................... 226 $ 83,642,268.31 100.00%
=== ================ ======
</TABLE>
S-44
<PAGE>
Pool 2 Mortgage Loans
The Pool 2 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, Pool 2 Mortgage Loans may be removed from the Trust Fund as a
result of incomplete documentation or otherwise, if the Depositor deems such
removal necessary or appropriate. In addition, a limited number of other
mortgage loans may be included in the Trust Fund (and in Pool 2) prior to the
issuance of the Offered Certificates.
<TABLE>
<S> <C>
Number of Pool 2 Mortgage Loans ................................. 251
Total Scheduled Principal Balance ............................... $83,537,149
Mortgage Rates:
Weighted Average .............................................. 8.872%
Range ......................................................... 7.625% to 10.750%
Weighted Average Remaining Term to Maturity (in months) ......... 356
</TABLE>
The Pool 2 Mortgage Loans have interest rates that first adjust after an
initial period of five years following origination and then adjust annually
thereafter.
The Scheduled Principal Balances of the Pool 2 Mortgage Loans range from
approximately $31,407 to approximately $1,787,500. The Pool 2 Mortgage Loans
have an average Scheduled Principal Balance of approximately $332,817.
The Pool 2 Mortgage Loans were originated in accordance, generally, with
the Underwriting Guidelines of Aurora and the Pool 2 Mortgage Loans are
initially serviced by Aurora.
The weighted average Loan-to-Value Ratio at origination of the Pool 2
Mortgage Loans is approximately 68.74%, and no Pool 2 Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding 95.00%.
No more than approximately 4.14% of the Pool 2 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
Approximately 5.57%, 10.66% and 16.54% of the Pool 2 Mortgage Loans are
subject to prepayment penalties during the first year, the first three years
and the first five years, respectively, after origination.
The following tables set forth as of the Cut-off Date the number, total
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 total Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
Original Loan-to-Value Ratios -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Original Number of Principal Scheduled
Loan-to-Value Ratios (%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
20.01 to 30.00 ........... 5 $ 1,958,434.00 2.34%
30.01 to 40.00 ........... 7 5,928,028.86 7.10
40.01 to 50.00 ........... 5 2,056,816.96 2.46
50.01 to 60.00 ........... 18 11,509,035.45 13.78
60.01 to 70.00 ........... 41 18,356,407.11 21.97
70.01 to 80.00 ........... 142 35,435,305.17 42.42
80.01 to 90.00 ........... 28 7,569,362.88 9.06
90.01 to 100.00 .......... 5 723,759.21 0.87
--- ---------------- ------
Total ................... 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
The weighted average original loan-to-value ratio is approximately 68.74%.
S-45
<PAGE>
Mortgage Rates -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Mortgage Rates (%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
7.501 to 8.000 .......... 7 $ 3,551,620.26 4.25%
8.001 to 8.500 .......... 44 18,261,400.02 21.86
8.501 to 9.000 .......... 97 34,808,148.70 41.67
9.001 to 9.500 .......... 66 19,568,680.78 23.43
9.501 to 10.000 ......... 33 6,721,280.79 8.05
10.001 to 10.500 ......... 3 564,263.72 0.68
10.501 to 11.000 ......... 1 61,755.37 0.07
-- ---------------- ------
Total ................... 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
The weighted average Mortgage Rate is approximately 8.872% per annum.
Original Terms to Maturity -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
--------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
360 ................. 251 $ 83,537,149.64 100.00%
--- --------------- ------
Total .............. 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 360 months.
Remaining Terms to Maturity -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
--------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
345 to 360 .......... 251 $ 83,537,149.64 100.00%
--- --------------- ------
Total .............. 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
The weighted average remaining term to maturity is approximately 356 months.
Geographic Distribution -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
State Mortgage Loans Balance Principal Balance
-------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
California ......... 121 $ 45,285,377.82 54.21%
Florida ............ 15 6,462,056.10 7.74
Colorado ........... 19 6,101,931.65 7.30
Utah ............... 6 4,576,585.34 5.48
Georgia ............ 7 2,749,115.87 3.29
New Jersey ......... 3 1,949,089.45 2.33
Nevada ............. 6 1,904,959.44 2.28
Virginia ........... 4 1,677,534.67 2.01
Hawaii ............. 4 1,430,797.59 1.71
Michigan ........... 26 1,239,191.68 1.48
Other .............. 40 10,160,510.03 12.16
--- ---------------- ------
Total ............. 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
S-46
<PAGE>
Cut-Off Date Scheduled Principal Balances -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Scheduled Principal Balances($) Mortgage Loans Balance Principal Balance
--------------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
less than 50,000 ............... 17 $ 714,386.21 0.86%
50,001 to 100,000 .............. 31 2,171,317.08 2.60
100,001 to 150,000 ............. 25 3,207,280.72 3.84
150,001 to 200,000 ............. 24 4,112,936.35 4.92
200,001 to 250,000 ............. 24 5,329,768.23 6.38
250,001 to 300,000 ............. 25 6,975,928.19 8.35
300,001 to 350,000 ............. 23 7,657,585.86 9.17
350,001 to 400,000 ............. 18 6,764,111.96 8.10
400,001 to 450,000 ............. 7 2,992,454.14 3.58
450,001 to 500,000 ............. 9 4,291,477.22 5.14
500,001 to 550,000 ............. 6 3,189,269.05 3.82
550,001 to 600,000 ............. 6 3,509,306.94 4.20
600,001 to 650,000 ............. 10 6,366,506.61 7.62
650,001 to 700,000 ............. 1 661,292.74 0.79
700,001 to 750,000 ............. 1 730,807.01 0.87
750,001 to 800,000 ............. 4 3,058,784.40 3.66
800,001 to 850,000 ............. 3 2,459,973.05 2.94
850,001 to 900,000 ............. 3 2,653,437.46 3.189
950,001 to 1,000,000 ............ 7 6,912,765.93 8.28
1,000,001 to 1,250,000 .......... 2 2,381,297.54 2.85
1,250,001 to 1,500,000 .......... 4 5,608,962.95 6.71
1,750,001 to 2,000,000 .......... 1 1,787,500.00 2.14
-- --------------- ------
Total ......................... 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately $332,817.
Property Type -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Property Type Mortgage Loans Balance Principal Balance
---------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Single Family .................... 159 $ 48,780,106.71 58.39%
Planned Unit Development ......... 47 20,028,329.78 23.98
Two- to Four-Family .............. 22 7,553,100.86 9.04
Condominium ...................... 22 6,415,612.29 7.68
Cooperative ...................... 1 760,000.00 0.91
--- ---------------- ------
Total .......................... 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
Loan Purpose -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Loan Purpose Mortgage Loans Balance Principal Balance
----------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Purchase .................... 164 $ 54,895,625.09 65.71%
Cash Out Refinance .......... 79 25,300,158.83 30.29
Rate/Term Refinance ......... 8 3,341,365.72 4.00
--- ---------------- ------
Total ..................... 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
S-47
<PAGE>
Loan Documentation -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Loan Documentation Mortgage Loans Balance Principal Balance
-------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Limited Documentation .......... 90 $ 32,584,499.44 39.01%
Full Documentation ............. 101 29,162,348.07 34.91
No Documentation ............... 35 12,184,724.37 14.59
No Income Verification ......... 25 9,605,577.76 11.50
--- ---------------- ------
Total ........................ 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
Occupancy Status -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Occupancy Status Mortgage Loans Balance Principal Balance
---------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Primary Home ......... 154 $ 55,697,350.28 66.67%
Investment ........... 83 20,692,884.77 24.77
Second Home .......... 14 7,146,914.59 8.56
--- ---------------- ------
Total .............. 251 $ 83,537,149.64 100.00%
=== ================ ======
</TABLE>
Maximum Rates -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Range of Maximum Rates (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
12.501 to 13.000 ........... 1 $ 771,126.35 0.92%
13.501 to 14.000 ........... 6 2,780,493.91 3.33
14.001 to 14.500 ........... 44 18,261,400.02 21.86
14.501 to 15.000 ........... 97 34,808,148.70 41.67
15.001 to 15.500 ........... 66 19,568,680.78 23.43
15.501 to 16.000 ........... 33 6,721,280.79 8.05
16.001 to 16.500 ........... 3 564,263.72 0.68
16.501 to 17.000 ........... 1 61,755.37 0.07
-- --------------- ------
Total ..................... 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
The weighted average Maximum Rate is approximately 14.863%.
Minimum Rates -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Range of Minimum Rates (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
2.001 to 2.500 ............. 221 $75,287,057.32 90.12%
2.501 to 3.000 ............. 29 7,883,425.60 9.44
6.501 to 7.000 ............. 1 366,666.72 0.44
--- --------------- ------
Total ..................... 251 $83,537,149.64 100.00%
=== =============== ======
</TABLE>
The weighted average Minimum Rate is approximately 2.542%.
S-48
<PAGE>
Gross Margins -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Range of Gross Margins (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
2.251 to 2.500 ............. 222 $ 75,653,724.04 90.56%
2.501 to 2.750 ............. 29 7,883,425.60 9.44
--- --------------- ------
Total ..................... 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
The weighted average Gross Margin is approximately 2.523%.
Next Rate Adjustment Date -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Next Rate Adjustment Date Mortgage Loans Balance Principal Balance
--------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
July 2004 ................. 1 $ 987,931.96 1.18%
September 2004 ............ 2 618,029.33 0.74
January 2005 .............. 1 278,083.93 0.33
February 2005 ............. 2 508,396.41 0.61
March 2005 ................ 9 2,469,842.05 2.96
April 2005 ................ 57 13,936,002.18 16.68
May 2005 .................. 62 25,243,416.31 30.22
June 2005 ................. 26 7,117,729.33 8.52
July 2005 ................. 20 4,010,630.94 4.80
August 2005 ............... 29 12,689,778.44 15.19
September 2005 ............ 31 15,120,108.76 18.10
October 2005 .............. 11 557,200.00 0.67
-- --------------- ------
Total .................... 251 $83,537,149.64 100.00%
=== =============== ======
</TABLE>
Subsequent Periodic Caps -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Subsequent Periodic Cap (%) Mortgage Loans Balance Principal Balance
----------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
2.000 ....................... 251 $ 83,537,149.64 100.00%
--- --------------- ------
Total ...................... 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
Initial Periodic Caps -- Pool 2
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Initial Periodic Cap (%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
1.751 to 2.000 ........... 250 $ 82,939,241.52 99.28%
2.751 to 3.000 ........... 1 597,908.12 0.72
--- --------------- ------
Total ................... 251 $ 83,537,149.64 100.00%
=== =============== ======
</TABLE>
S-49
<PAGE>
Pool 3 Mortgage Loans
The Pool 3 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, Pool 3 Mortgage Loans may be removed from the Trust Fund as a
result of incomplete documentation or otherwise, if the Depositor deems such
removal necessary or appropriate. In addition, a limited number of other
mortgage loans may be included in the Trust Fund (and in Pool 3) prior to the
issuance of the Offered Certificates.
<TABLE>
<S> <C>
Number of Pool 3 Mortgage Loans ................................. 972
Total Scheduled Principal Balance ............................... $117,479,518
Mortgage Rates:
Weighted Average ............................................... 8.543%
Range .......................................................... 7.125% to 10.500%
Weighted Average Remaining Term to Maturity (in months) ......... 353
</TABLE>
The Pool 3 Mortgage Loans have interest rates that first adjust after an
initial period of seven years following origination and then adjust annually
thereafter.
The Scheduled Principal Balances of the Pool 3 Mortgage Loans range from
approximately $23,584 to approximately $249,107. The Pool 3 Mortgage Loans have
an average Scheduled Principal Balance of approximately $120,864.
Approximately 88.14% of the Pool 3 Mortgage Loans were originated in
accordance, generally, with the Underwriting Guidelines of Chase and
approximately 11.86% of the Pool 3 Mortgage Loans were originated under the
Borrower Advantage Program. Approximately 88.14% of the Pool 3 Mortgage Loans
are serviced by Chase.
The weighted average Loan-to-Value Ratio at origination of the Pool 3
Mortgage Loans is approximately 102.04%, and no Pool 3 Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding 103.00%.
No more than approximately 0.65% of the Pool 3 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
None of the Pool 3 Mortgage Loans are subject to prepayment penalties.
The following tables set forth as of the Cut-off Date the number, total
Scheduled Principal Balance and percentage of the Pool 3 Mortgage Loans having
the stated characteristics shown in the tables in each range. (The sum of the
amounts of the total Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
Original Loan-to-Value Ratios -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Range of Original Number of Principal Scheduled
Loan-to-Value Ratios(%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
90.01 to 100.00 ......... 193 $ 24,668,940.12 21.00%
100.01 to 110.00 ......... 779 92,810,578.41 79.00
--- ----------------- ------
Total ................... 972 $ 117,479,518.53 100.00%
=== ================= ======
</TABLE>
<PAGE>
The weighted average original loan-to-value ratio is approximately 02.04%.
Mortgage Rates -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Range of Number of Principal Scheduled
Mortgage Rates(%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
7.001 to 7.500 .......... 18 $ 2,216,696.36 1.89%
7.501 to 8.000 .......... 154 19,677,615.28 16.75
8.001 to 8.500 .......... 327 41,042,825.62 34.94
8.501 to 9.000 .......... 321 37,305,531.03 31.75
9.001 to 9.500 .......... 120 13,821,993.98 11.77
9.501 to 10.000 ......... 30 3,188,946.08 2.71
10.001 to 10.500 ......... 2 225,910.18 0.19
--- ---------------- ------
Total ................... 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
The weighted average Mortgage Rate is approximately 8.543% per annum.
S-50
<PAGE>
Original Terms to Maturity -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
--------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
360 ................. 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total .............. 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
The weighted average original term to maturity is approximately 360 months.
Remaining Terms to Maturity -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
--------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
344 to 360 .......... 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total .............. 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
The weighted average remaining term to maturity is approximately 353 months.
Geographic Distribution -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
State Mortgage Loans Balance Principal Balance
---------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
California ........... 78 $ 13,047,045.48 11.11%
Texas ................ 114 12,323,332.07 10.49
Florida .............. 79 9,022,233.44 7.68
Arizona .............. 65 8,742,916.22 7.44
Virginia ............. 43 6,342,702.00 5.40
Georgia .............. 38 5,058,430.26 4.31
Pennsylvania ......... 50 4,800,494.12 4.09
Illinois ............. 44 4,594,009.32 3.91
Washington ........... 31 4,450,597.57 3.79
Ohio ................. 44 4,204,375.22 3.58
Other ................ 386 44,893,382.83 38.21
--- ---------------- ------
Total ............... 972 $117,479,518.53 100.00%
=== ================ ======
</TABLE>
Cut-off Date Scheduled Principal Balances-- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Range of Number of Principal Scheduled
Scheduled Principal Balances ($) Mortgage Loans Balance Principal Balance
---------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
less than 50,000 ................ 45 $ 1,784,787.24 1.52%
50,001 to 100,000 ............... 338 26,452,168.80 22.52
100,001 to 150,000 ............... 350 43,782,996.70 37.27
150,001 to 200,000 ............... 154 26,409,624.81 22.48
200,001 to 250,000 ............... 85 19,049,940.98 16.22
--- ---------------- ------
Total ........................... 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately $120,864.
S-51
<PAGE>
Property Type -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled By Total
Number of Principal Scheduled
Property Type Mortgage Loans Balance Principal Balance
---------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Single Family .................... 707 $ 83,259,361.76 70.87%
Planned Unit Development ......... 136 19,305,167.09 16.43
Condominium ...................... 129 14,914,989.68 12.70
--- ---------------- ------
Total ........................... 972 $117,479,518.53 100.00%
=== ================ ======
</TABLE>
Loan Purpose -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Loan Purpose Mortgage Loans Balance Principal Balance
------------------ ---------------- -------------------- ------------------
<S> <C> <C> <C>
Purchase ......... 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total ........... 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
Loan Documentation -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Loan Documentation Mortgage Loans Balance Principal Balance
--------------------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
Full Documentation .............. 971 $117,354,992.57 99.89%
Alternate Documentation ......... 1 124,525.96 0.11
--- --------------- ------
Total .......................... 972 $117,479,518.53 100.00%
=== =============== ======
</TABLE>
Occupancy Status -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Occupancy Status Mortgage Loans Balance Principal Balance
---------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
Primary Home ......... 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total ............... 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
<PAGE>
Maximum Rates -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Range of Maximum Rates (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
12.001 to 12.500 ........... 18 $ 2,216,696.36 1.89%
12.501 to 13.000 ........... 154 19,677,615.28 16.75
13.001 to 13.500 ........... 327 41,042,825.62 34.94
13.501 to 14.000 ........... 321 37,305,531.03 31.75
14.001 to 14.500 ........... 120 13,821,993.98 11.77
14.501 to 15.000 ........... 30 3,188,946.08 2.71
15.001 to 15.500 ........... 2 225,910.18 0.19
--- ---------------- ------
Total ..................... 972 $ 17,479,518.53 100.00%
=== ================ ======
</TABLE>
The weighted average Maximum Rate is approximately 13.543%.
S-52
<PAGE>
Minimum Rates -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Range of Minimum Rates (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
2.750 ...................... 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total .................. 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
The weighted average Minimum Rate is approximately 2.750%.
Gross Margins -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Range of Gross Margins (%) Mortgage Loans Balance Principal Balance
---------------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
2.750 ...................... 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total .................. 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
The weighted average Gross Margin is approximately 2.750%.
Next Rate Adjustment Date -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Next Rate Adjustment Date Mortgage Loans Balance Principal Balance
--------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
June 2006 ................. 4 $ 444,745.78 0.38%
July 2006 ................. 20 2,528,209.16 2.15
August 2006 ............... 30 3,660,667.14 3.12
September 2006 ............ 60 7,107,503.16 6.05
October 2006 .............. 77 9,269,528.13 7.89
November 2006 ............. 87 9,967,047.12 8.48
December 2006 ............. 65 8,002,509.98 6.81
January 2007 .............. 50 5,610,575.25 4.78
February 2007 ............. 36 3,729,969.96 3.17
March 2007 ................ 53 6,763,604.58 5.76
April 2007 ................ 71 8,452,846.38 7.20
May 2007 .................. 83 10,308,932.70 8.78
June 2007 ................. 102 12,775,386.32 10.87
July 2007 ................. 110 13,909,462.55 11.84
August 2007 ............... 74 9,166,888.76 7.80
September 2007 ............ 48 5,481,341.56 4.67
October 2007 .............. 2 300,300.00 0.26
--- ---------------- ------
Total ................. 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
<PAGE>
Subsequent Periodic Caps -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Subsequent Periodic Cap (%) Mortgage Loans Balance Principal Balance
----------------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
1.751 to 2.000 .............. 972 $ 117,479,518.53 100.00%
--- ---------------- ------
Total ................... 972 $ 117,479,518.53 100.00%
=== ================ ======
</TABLE>
S-53
<PAGE>
Initial Periodic Caps -- Pool 3
<TABLE>
<CAPTION>
Percentage of
Total Mortgage Loans
Scheduled by Total
Number of Principal Scheduled
Initial Periodic Cap (%) Mortgage Loans Balance Principal Balance
-------------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C>
2.751 -- 3.000 ........... 864 $ 103,551,917.98 88.14%
4.751 -- 5.000 ........... 108 13,927,600.55 11.86
--- ----------------- ------
Total ................ 972 $ 117,479,518.53 100.00%
=== ================= ======
</TABLE>
Underwriting Guidelines
The Mortgage Loans have been originated or acquired by the various
Servicers or their correspondents in accordance with such Servicer's respective
underwriting standards and guidelines (each, the "Underwriting Guidelines"). Of
the Mortgage Loans included the Trust Fund, approximately 58.73%, representing
all of the Mortgage Loans in Pool 1 and Pool 2, were originated or acquired in
accordance with the Underwriting Guidelines established by Aurora ("Aurora
Underwriting Guidelines"), and approximately 36.38%, representing approximately
88.14% of the Mortgage Loans in Pool 3, were originated or acquired in
accordance with the Underwriting Guidelines established by Chase (the "Chase
Underwriting Guidelines"). The following are general summaries of the Aurora
Underwriting Guidelines, the Chase Underwriting Guidelines and the Borrower
Advantage Underwriting Guidelines. These summaries do not purport to be a
complete description of any such Underwriting Guidelines.
Aurora Underwriting Guidelines
All of the Mortgage Loans initially serviced by Aurora and included in the
Trust Fund were originated under the Aurora Underwriting Guidelines.
Aurora's Underwriting Guidelines are intended to evaluate the value and
adequacy of the mortgaged property as collateral and to consider the borrower's
credit standing and repayment ability. On a case-by-case basis, Aurora may
determine that, based upon compensating factors, a prospective borrower not
strictly qualifying under the applicable underwriting guidelines warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratios, low debt-to-income ratios, 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
underwriting exceptions.
Aurora's Underwriting Guidelines are applied in accordance with a
procedure that generally requires (1) an appraisal of the mortgaged property
(and generally in the case of mortgaged property with a loan amount exceeding
$650,000, two appraisals), by qualified independent appraisers, that conform to
Fannie Mae and Freddie Mac standards and (2) a review of such appraisal by
Aurora and, depending upon the original principal balance and loan-to-value
ratio of the mortgaged property, may include a field review of the original
appraisal by another independent appraiser. Each appraisal includes a market
data analysis based on recent sales of comparable homes in the area and a
replacement cost analysis based on the current cost of constructing a similar
home. The Aurora Underwriting Guidelines generally permit single-family
mortgage loans with loan-to-value ratios at origination of up to 103% (or, with
respect to certain Mortgage Loans, up to 95%) for the highest credit grading
category, depending on the creditworthiness of the borrower, the type and use
of the property, the debt-to-income ratio and the purpose of the loan
application.
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 matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments.
In general, a substantial majority of the Mortgage Loans originated or
acquired by Aurora were originated consistent with and generally conform to
"full documentation," "limited documentation," or "no ratio documentation"
residential loan programs.
S-54
<PAGE>
Verification of employment, income and assets in a Mortgage Loan file is
dependent on the documentation program. For "full documentation" program loans,
documentation consistent with Fannie Mae/Freddie Mac guidelines is required,
which includes verification of current employment, a two-year history of
previous employment (or for self-employed borrowers, two years of income tax
returns), verification through deposit verifications of sufficient liquid
assets for down payments, closing costs and reserves, and depository account
statements or settlement statements documenting the funds received from the
sale of the previous home. For "limited documentation" program loans, current
employment is verified, a two-year history of previous employment is verified,
qualifying income is based on the stated amount provided by the prospective
borrower, and deposit verifications are made to ensure sufficient liquid
assets. "No ratio" program loans require verification of current employment, a
minimum of two years' history of previous employment and verification of
sufficient liquid assets. 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 all program guidelines (except for no
documentation program guidelines).
Certain of the Mortgage Loans originated by Aurora were originated or
acquired under "no documentation" program guidelines, pursuant to which no
information was obtained regarding the borrowers' income or employment and
there was no verification of the borrowers' assets. The no documentation
program guidelines require stronger credit profiles than the other loan
programs, and have substantially more restrictive requirements for loan
amounts, loan-to-value ratios and occupancy requirements.
For a description of Aurora, see "The Master Servicer" herein.
The Borrower Advantage Program
General. The Borrower Advantage Program (sometimes referred to herein as
the "Program") was established in 1998 by United Guaranty Corporation ("United
Guaranty"), a wholly-owned subsidiary of American International Group, Inc.
United Guaranty is a primary mortgage insurer with a financial strength of
"AAA" as determined by Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") and Fitch, Inc. ("Fitch") (as in the case
of any financial strength rating, the issuing agency can withdraw or change
such rating at any time). The Borrower Advantage Program enables participating
mortgage originators to provide borrowers having well-established, favorable
credit histories and adequate monthly income with first lien mortgage financing
on residential mortgage properties with high loan-to-value ratios up to a
maximum, in certain cases, of 103%. This is intended to afford qualified
borrowers the opportunity to obtain competitive mortgage financing (usually not
available for high loan-to-value ratio loans) with little or no down payment.
Certain of the mortgage loans originated in accordance with the Borrower
Advantage Underwriting Guidelines are sold by participating originators to
Centre Capital Group Inc. ("CCGI"), a subsidiary of United Guaranty. United
Guaranty is the primary mortgage insurance provider for mortgage loans
originated under the Program.
The Mortgage Loans included in Pool 3 were originated under the Borrower
Advantage Program and initially sold to CCGI. CCGI, in turn, sold such Mortgage
Loans to Lehman Capital under a master mortgage loan purchase and warranties
agreement pursuant to which CCGI (and not the originators of the Mortgage
Loans) made certain representations and warranties concerning the
characteristics of the Pool 3 Mortgage Loans and the origination of such
Mortgage Loans in accordance with the Borrower Advantage Underwriting
Guidelines. Accordingly, a breach of any such representation or warranty which
materially affects the value of any Mortgage Loan will require CCGI (and not
the originator) to repurchase the defective Mortgage Loan from the Trust Fund.
Borrower Advantage Underwriting Guidelines. To qualify under the Borrower
Advantage Program, a mortgage loan must be a purchase-money loan secured by a
first mortgage on an owner-occupied, single-family (one-unit detached or
attached properties and condominiums) primary residence. Refinancings, junior
lien financings, or financings for secondary homes or investment properties are
not eligible for origination under the Program. The maximum base loan-to-value
ratio allowed under the Program is 100%; however, closing costs, financed
mortgage insurance premiums and other prepaid items may be included in the
proceeds of the mortgage loan so long as the loan-to-value ratio of the
financing does not exceed approximately 103%. Although no down payment is
required at closing, the borrower must demonstrate the ability to pay two
months' principal, interest and taxes with respect to the mortgage loan and
related mortgaged property.
S-55
<PAGE>
The maximum loan amount under the Borrower Advantage Program may not
exceed $334,263. Only 15-or 30-year term, fixed rate, fixed-payment financing
or positively amortizing 30-year adjustable rate financing is eligible under
the Program. Accordingly, balloon, negative amortization, interest-only and
temporary buy-down mortgage loans do not qualify for underwriting under the
Program.
To qualify for financing under the Program, a borrower must demonstrate an
established credit history, as well as the ability to meet monthly debt service
payments on the mortgage loan and other credit obligations. An "established
credit history" is generally defined as a minimum of three conventional credit
references that have been active for a minimum of two years. Generally, no late
payment history is allowed in the last 12 months and only one 30-day late
payment is allowed during the last 24 months. If the borrower's delinquency
history exceeds these limits, then the age, frequency, severity and explanation
of the derogatory credit item must be independently evaluated to determine the
borrower's ability to timely pay credit obligations. However, borrowers who
have been 30 days delinquent in payment on their existing mortgage financing in
the last 12 months are generally ineligible under the Program. Borrowers with a
previous bankruptcy or who have previously been subject to foreclosure
proceedings or a deed-in-lieu of foreclosure on a previously-owned mortgage
property are ineligible to participate in the Program.
To be accepted under the Program, borrowers should be able to demonstrate
stable income for a minimum of two years and the likelihood of continuance of
such level of income. The borrower's qualifying ratios (i.e., housing debt to
gross income and total debt to gross income) must be no more than 33% and 38%,
respectively. In addition, the credit score assigned to the borrower, which is
based on the overall credit history of the borrower as may be obtained from any
of the three major credit reporting agencies (Equifax, Trans Union and
Experian) must be at least 700.
The appraisal of the related mortgage property must evidence sufficient
value to recover the full investment if a loan default occurs.
Mortgage loans originated under the Borrower Advantage Program are
originated consistent with "full documentation" or "alternate documentation"
residential mortgage loan programs. Mortgage loans originated under "limited
documentation" or "no documentation" programs are not eligible under the
Program.
Chase Underwriting Guidelines
In general, the Mortgage Loans serviced by Chase were originated under
underwriting guidelines substantially similar to the underwriting guidelines
described above under the heading "Description of the Mortgage Pools --
Underwriting Guidelines -- The Borrower Advantage Program -- Borrower Advantage
Underwriting Guidelines," with the following exceptions: (1) the Chase
guidelines permit junior lien financings in the case of community grants; (2)
although no down payment is required at closing, the borrower must have cash
equal to two months' principal, interest and taxes on the mortgaged property
from the borrower's own sources; (3) the maximum loan amount may not exceed
$334,750; (4) the only product offered is a 30-year positively amortizing
mortgage loan which bears interest at a fixed rate for seven years and then
bears interest at an adjustable rate that resets annually; and (5) to the
extent that there are compensating factors, exceptions to the product
parameters may be made and documented in the mortgage file.
Additional Information
The description in this Prospectus Supplement of the Mortgage Pools and
the Mortgaged Properties is based upon the Mortgage Pools as constituted at the
close of business on the Cut-off Date, as adjusted for Scheduled Payments due
on or before that date. A Current Report on Form 8-K will be filed, together
with the Trust Agreement and certain other transaction documents, 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 Pools as described 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.
The Master Servicer
The information in this section has been provided by Aurora Loan Services
Inc. ("Aurora" or the "Master Servicer"), and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of this information. Although Aurora performs servicing duties for
a large loan portfolio, it has limited experience as a master servicer.
S-56
<PAGE>
Aurora, an affiliate of Lehman Brothers Holdings Inc., began operation as
a servicer of residential mortgage loans in August 1997 following the
acquisition of substantially all of the assets and a majority of the management
and employees of Harbourton Financial Services L.P. ("Harbourton"). Prior to
this acquisition, Harbourton liquidated a substantial portion of its servicing
portfolio, generally retaining loans with higher rates of delinquency.
Aurora's executive offices and centralized real estate master servicing
facility are located at 2530 South Parker Road, Suite 601, Aurora, Colorado
80014, and its centralized real estate loan servicing facility is located at
601 Fifth Avenue, Scottsbluff, Nebraska 69361. Aurora has been approved to
service mortgage loans for Ginnie Mae, Fannie Mae, and Freddie Mac.
As of September 30, 2000, Aurora's total loan servicing and subservicing
portfolio included loans with total outstanding principal balance of
approximately $11.89 billion, of which the substantial majority are
sub-serviced for Lehman Brothers Holdings Inc. The following table sets forth
certain information regarding the delinquency and foreclosure experience of
Aurora and Harbourton with respect to non-VA/FHA-insured mortgage loans. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis.
Delinquencies and Foreclosures
(Dollars in Millions)
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------
1996 1997(3) 1998(4) 1999(4)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total balance of mortgage loans serviced ............ $ 1,765 $ 1,203 $ 6,096 $ 3,870
Percentage of mortgage loans delinquent by period of
delinquency(1)(2)
30 to 59 days ...................................... 1.92% 3.21% 3.21% 4.03%
60 to 89 days ...................................... 0.45 0.73 0.92 1.19
90 days or more. ................................... 0.25 0.28 0.42 0.30
-------- -------- -------- --------
Total percentage of mortgage loans delinquent(1)(2) . 2.62% 4.22% 4.55% 5.52%
In foreclosure (excluding Bankruptcies). ............ 1.16 1.99 2.10 1.11
In bankruptcy. ...................................... 0.47 0.78 0.61 1.15
-------- -------- -------- --------
Total(2) ............................................ 4.25% 6.99% 7.26% 7.78%
======== ======== ======== ========
<CAPTION>
As of September 30,
--------------------
2000(4)
--------------------
<S> <C>
Total balance of mortgage loans serviced ............ $ 4,465
Percentage of mortgage loans delinquent by period of
delinquency(1)(2)
30 to 59 days ...................................... 4.00%
60 to 89 days ...................................... 0.98%
90 days or more. ................................... 0.38%
-------
Total percentage of mortgage loans delinquent(1)(2) . 5.36%
In foreclosure (excluding Bankruptcies). ............ 1.09%
In bankruptcy. ...................................... 0.97%
-------
Total(2) ............................................ 7.42%
=======
</TABLE>
<PAGE>
-----------
(1) Total portfolio and delinquency information is for conventional loans only,
excluding bankruptcies.
(2) Percentages are based on the principal balances of mortgage loans.
(3) Excludes information related to the servicing of certain sub-prime loans
acquired in 1997 and 1998.
(4) A weighted average of the MBS method for conventional loans and the ABS
method for subprime loans is used in calculation of delinquency
percentage. Under the MBS methodology, a loan is considered delinquent if
any payment is past due one or more days. In contrast, under the ABS
methodology, a loan is considered delinquent if any payment is past due 30
days or more. The period of delinquency is based upon the number of days
that payments are contractually past due (assuming 30-day months).
Consequently, under the ABS methodology, a loan due on the first day of a
month is not 30 days delinquent until the first day of the next month.
The above delinquency and foreclosure statistics represent the recent
experience of Aurora. The loans in Aurora's servicing portfolio may differ
significantly from the Mortgage Loans. The actual loss and delinquency
experience on the Mortgage Loans will depend, among other things, on the value
of the Mortgaged Properties securing such Mortgage Loans and the ability of
borrowers to make required payments. There can be no assurance, and no
representation is made, that the delinquency experience with respect to the
Mortgage Loans will be similar to that reflected in the tables above, nor is
any representation made as to the rate at which losses may be experienced on
liquidation of defaulted Mortgage Loans.
The likelihood that borrowers will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be
affected by a number of factors related to borrowers' personal circumstances,
including, for example, unemployment or change in employment (or in the case of
self-employed 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
S-57
<PAGE>
experience may be sensitive to adverse economic conditions, either nationally
or regionally, may exhibit seasonal variations and may be influenced by the
level of interest rates and servicing decisions on the applicable mortgage
loans. Regional economic conditions (including declining real estate values)
may particularly affect delinquency and foreclosure experience on mortgage
loans to the extent that mortgaged properties are concentrated in certain
geographic areas.
As Master Servicer, Aurora will monitor the performance of the primary
Servicers of the Mortgage Loans (see "The Servicers" below) in accordance with
the provisions of the underlying servicing agreements and the Trust Agreement.
Aurora will not, however, be ultimately responsible for the servicing of the
Mortgage Loans (other than these Mortgage Loans for which Aurora also acts in
the capacity of a primary servicer), except to the extent described under
"Servicing of the Mortgage Loans" below.
The Servicers
The Mortgage Loans included in the Trust Fund will initially be serviced
by Aurora, Chase Manhattan Mortgage Corporation ("Chase") and other servicers
(collectively, the "Servicers"). Aurora and Chase will service approximately
58.73% and 36.38% (by Cut-off Date Balance), respectively, of the Mortgage
Loans. See "Description of the Mortgage Pools" for a percentage breakdown by
Mortgage Pool of the servicing of the Mortgage Loans. The 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, maintenance of insurance and enforcement of
foreclosures proceedings with respect to the Mortgage Loans and the related
mortgaged properties. Such responsibilities will be performed under the
supervision of the Master Servicer in each case in accordance with the
provisions of the related servicing agreement. Under each servicing agreement,
the Master Servicer has the right to terminate the Servicer for certain events
of default. In addition, under each servicing agreement, Lehman Capital
generally has retained the right to terminate the Servicer, without cause, upon
thirty days' notice and, with limited exceptions, the payment by Lehman Capital
of certain termination fees and expenses of the Servicer in connection with the
transfer of the Mortgage Loans to successor servicer.
The information set forth in the following paragraphs has been provided by
Chase as the Servicer providing primary servicing for a substantial percentage
of the Mortgage Loans in the Trust Fund. Similar information has been provided
by Aurora under the heading "The Master Servicer". None of the Depositor, the
Seller, the Underwriter, the Master Servicer or any other Servicer makes any
representations or warranties as to the accuracy or completeness of such
information.
Due to the factors described under "The Master Servicer," the delinquency
and/or loan loss data set forth below for Chase solely represents the
historical experience of such Servicer's servicing portfolio for the periods
indicated and no representation is made by such Servicer that the delinquency
and/or loss experience of the Mortgage Pools will be similar to that of its
servicing portfolio, nor is any representation made by such Servicer as to the
rate at which losses may be experienced on liquidation of defaulted Mortgage
Loans in the Mortgage Pools.
Chase Manhattan Mortgage Corporation
Chase is a New Jersey corporation formed in 1920. It is a wholly owned
indirect subsidiary of Chase Manhattan Bank USA, National Association. Chase is
engaged in the mortgage origination and servicing businesses and is a
HUD-approved mortgagee. Chase is subject to supervision, examination and
regulation by the Office of the Comptroller of the Currency and various state
regulatory bodies. The address of Chase is 343 Thornall Street, Edison, New
Jersey 08837, and its telephone number is (732) 205-0600. Chase makes loans in
all 50 states and the District of Columbia primarily for the purpose of
enabling borrowers to purchase or refinance residential real property, secured
by first liens on such property.
On September 13, 2000, The Chase Manhattan Corporation and J.P. Morgan &
Co. Incorporated announced their agreement to merge. The merger is anticipated
to occur in the first quarter of 2001. Chase is a wholly-owned indirect
subsidiary of The Chase Manhattan Corporation.
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<PAGE>
Loan Delinquency, Foreclosure and Loss Experience. The recent mortgage
loan delinquency and loan foreclosure experience of Chase as servicer of first
mortgage loans secured by one- to four-family residential properties which were
originated by or for Chase (exclusive of any such mortgage loans as to which
master servicing or subservicing arrangements exist) (expressed as percentages
of the total portfolio of such loans as of such date) is as follows:
<TABLE>
<CAPTION>
As of September 30, As of December 31,
------------------------ --------------------------------------------------
2000 1999 1998
------------------------ ------------------------ -----------------------
By By By By By By
Number Principal Number Principal Number Principal
Period of Delinquency of Loans Balance of Loand Balance of Loans Balance
-------------------------- ---------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days. ........... 2.90% 2.49% 3.04% 2.55% 3.31% 2.74%
60 to 89 days. ........... 0.69% 0.58% 0.72% 0.60% 0.80% 0.65%
90 days or more. ......... 0.55% 0.46% 0.58% 0.58% 0.61% 0.50%
---- ---- ---- ---- ---- ----
Total ................... 4.14% 3.53% 4.34% 3.73% 4.72% 3.89%
==== ==== ==== ==== ==== ====
Foreclosure ............. 1.21% 1.01% 1.27% 1.05% 1.51% 1.24%
</TABLE>
The following table presents, for the portfolio of mortgage loans
originated by or for Chase which are owned by The Chase Manhattan Bank or its
affiliates, the net gains (losses) as a percentage of the average principal
amount of such portfolio on the disposition of properties acquired in
foreclosure or by deed-in-lieu of foreclosure during the periods indicated.
<TABLE>
<CAPTION>
Nine-Month Period Ended Year Ended
September 30, 2000 December 31, 1999
------------------------- ----------------------
(Dollars in Millions) (Dollars in Millions)
<S> <C> <C>
Average portfolio principal amount ......... $29,342 $25,321
</TABLE>
<TABLE>
<CAPTION>
Nine-Month Period Ended Year Ended
September 30, 2000 December 31, 1999
------------------------- ------------------
<S> <C> <C>
Net gains (losses)(1). ......... (0.013%) (0.07%)
</TABLE>
-----------
(1) Losses are defined as unrealized losses on properties acquired in
foreclosure or by deed-in-lieu of foreclosure and proceeds from sale less
outstanding book balance (after recognition of such unrealized losses)
less certain capitalized costs related to disposition of the related
property (exclusive of accrued interest). If accrued interest were
included in the calculation of losses, the level of losses could
substantially increase.
There can be no assurance that the delinquency, foreclosure and loss
experience on the Mortgage Loans will correspond to the delinquency,
foreclosure and loss experience set forth in the foregoing tables. In general,
during periods in which the residential real estate market is experiencing an
overall decline in property values such that the principal balances of the
Mortgage Loans and any secondary financing on the related Mortgaged Properties
become equal to or greater than the value of the related Mortgaged Properties,
rates of delinquencies, foreclosure and losses could be significantly higher
than might otherwise be the case. In addition, adverse economic conditions
(which may affect real property values) may affect the timely payment by
Mortgagors of Monthly Payments, and accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Pool.
Servicing of the Mortgage Loans
General
Notwithstanding anything to the contrary in the Prospectus, the Master
Servicer will not be ultimately responsible for the performance of the
servicing activities by a servicer other than Aurora in its capacity as a
servicer, except as described under "-- Prepayment Interest Shortfalls" and "--
Advances" below. If any servicer fails to fulfill its obligations under the
applicable servicing agreement, the Master Servicer is obligated to terminate
such servicer and appoint a successor servicer as provided in the Trust
Agreement.
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Generally, the Seller will retain ownership of the servicing rights with
respect to the Mortgage Loans serviced by the Servicers and may transfer the
servicing of the related Mortgage Loans to one or more successor servicers at
any time, without cause, subject to the conditions set forth in the Trust
Agreement and the related servicing agreement, including the requirements that
any such successor servicer be qualified to service mortgage loans for Freddie
Mac or Fannie Mae and that each Rating Agency confirm in writing that the
transfer of servicing will not result in a qualification, withdrawal or
downgrade of the then-current ratings of any of the Certificates.
Servicing Compensation and Payment of Expenses
The Master Servicer will be paid a monthly fee (the "Master Servicing
Fee") with respect to each Mortgage Loan calculated as 0.01% (except with
respect to the participation interests described under "Description of the
Mortgage Loans -- General," as to which the Master Servicing Fee will be
calculated as 0.03%) annually of the outstanding principal balance of each
related Mortgage Loan as of the first day of the related Due Period together
with investment earnings derived from principal and interest collections
received on the Mortgage Loans on deposit in the Collection Account established
by the Master Servicer and invested in certain eligible investments prior to
their remittance to the Trustee on the Master Servicer Remittance Date. See
"Description of the Certificates -- Example of Distributions." Each Servicer
will be paid a monthly fee (a "Servicing Fee") with respect to each Mortgage
Loan serviced by it calculated as 0.25% annually (the "Servicing Fee Rate") of
the outstanding principal balance of each related Mortgage Loan as of the first
day of the related Due Period.
Each Servicer will also be entitled to receive, to the extent provided in
the applicable Servicing Agreement, additional compensation in the form of (1)
any interest or other income earned on funds it has deposited in a custodial
account pending remittance to the Master Servicer; (2) certain customary fees
and charges paid by borrowers, including any Prepayment Penalty Amounts (as
defined herein); and (3) any Prepayment Interest Excess, to the extent not
offset by Prepayment Interest Shortfalls.
The Master Servicing Fees and the Servicing Fees are subject to reduction
as described below under "Prepayment Interest Shortfalls." See "Servicing of
Loans -- Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding expenses payable by the Master Servicer and the
Servicers. The Master Servicer and the Servicers 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), with a
resulting reduction in interest payable for the month during which the
prepayment is made. Any Prepayment Interest Shortfall is generally required to
be paid by the applicable Servicer, but only to the extent that such amount
does not exceed the total of the Servicing Fees on the Mortgage Loans serviced
by it for the applicable Distribution Date.
Any Prepayment Interest Shortfall required to be funded but not funded by
the Servicers is required to be funded by the Master Servicer, to the extent
that such amount does not exceed the Total Master Servicing Compensation for
the applicable Distribution Date, through a reduction in the amount of that
compensation.
Advances
Each Servicer will generally be obligated to make Advances with respect to
delinquent payments of principal of and interest on the Mortgage Loans adjusted
to the related Mortgage Rate less the Servicing Fee Rate, to the extent that
such Advances, in its judgment, are reasonably recoverable from future payments
and collections, insurance payments or proceeds of liquidation of a Mortgage
Loan. The Master Servicer will be obligated, in its capacity as successor
Servicer, to make any such Advances if any Servicer fails to do so, and the
Trustee (solely in its capacity as successor servicer) will be obligated to
make any required Advance if the Master Servicer fails in its obligation to do
so, to the extent provided in the Trust Agreement. The Master Servicer, each
Servicer or the Trustee, in its capacity as successor servicer, as applicable,
will be entitled to
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<PAGE>
recover any Advances made by it with respect to a Mortgage Loan out of late
payments thereon or out of related liquidation proceeds and insurance proceeds
or, if those amounts are insufficient, from collections on other Mortgage
Loans. Such reimbursements may result in Realized Losses.
The purpose of making these Advances is to maintain a regular cash flow to
the Certificateholders, rather than to guarantee or insure against losses. No
party will be required to make any Advances with respect to reductions in the
amount of the monthly payments on Mortgage Loans due to reductions made by a
bankruptcy court in the amount of a Scheduled Payment owed by a borrower or a
reduction of the applicable Mortgage Rate by application of the Relief Act.
Collection of Taxes, Assessments and Similar Items
The Servicers will, to the extent required by the related loan documents,
maintain escrow accounts for the collection of hazard insurance premiums and
real estate taxes with respect to the Mortgage Loans, and will make advances
with respect to delinquencies in required escrow payments by the related
borrowers.
Insurance Coverage
The Master Servicer and the Servicers 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, as servicer, a firm of
independent accountants will furnish a statement to the Trustee to the effect
that such firm has examined certain documents and records relating to the
servicing of mortgage loans similar to the Mortgage Loans by the Master
Servicer and that, on the basis of such examination, such firm is of the
opinion that the servicing has been conducted in accordance with the terms of
the Trust Agreement, except for (1) exceptions as the firm believes to be
immaterial and (2) any other exceptions set forth in such statement.
Certain Rights Related to Foreclosure
Certain rights in connection with foreclosure of defaulted Mortgage Loans
may be granted to the holders of the Class B6 Certificates; when the Class B6
Certificates are no longer outstanding, to the holders of the Class B5
Certificates; and when the Class B5 Certificates are no longer outstanding, to
the holders of the Class B4 Certificates. These rights could include (1) the
right to delay foreclosure until a Mortgage Loan has been delinquent for six
months, provided that upon election to delay foreclosure such holder
establishes a reserve fund for the benefit of the Trust Fund in an amount equal
to 125% of the greater of the Scheduled Principal Balance of such Mortgage Loan
and the appraised value of the related Mortgaged Property, plus three months'
accrued interest on such Mortgage Loan, (2) the right to request that the
Master Servicer or the Servicers take certain actions with respect to defaulted
Mortgage Loans and (3) the right to purchase certain defaulted Mortgage Loans
from the Trust Fund. The exercise of a right to delay foreclosure could affect
the amount recovered upon liquidation of the related Mortgaged Property.
Trust Agreement
General
The Certificates will be issued pursuant to a Trust Agreement (the "Trust
Agreement") dated as of October 1, 2000 among the Depositor, the Master
Servicer and the Trustee. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the terms and
conditions of the Trust Agreement and the Offered Certificates. Offered
Certificates in certificated form will be transferable and exchangeable at the
Corporate Trust Office of the Trustee, which will serve as certificate
registrar and paying agent. The Trustee will provide to a prospective or actual
Certificateholder, without charge, on written request, a copy (without
exhibits) of the Trust Agreement. Requests should be addressed to The Chase
Manhattan Bank, 450 West 33rd Street, 14th Floor, New York, New York 10001,
Attention: Capital Markets Fiduciary Services.
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<PAGE>
Assignment of Mortgage Loans
The Mortgage Loans will be assigned to the Trustee, together with all
principal and interest received with respect to the Mortgage Loans on and after
the Cut-off Date, other than Scheduled Payments due on that 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, and the maturity date.
As to each Mortgage Loan, the following documents are generally required
to be delivered to the Trustee (or its custodian) in accordance with the Trust
Agreement: (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 the original recorded Mortgage has not yet been
returned by the recording office, a copy thereof certified to be a true and
complete copy of such Mortgage sent for recording) or, in the case of a
Cooperative Loan, the original security agreement and related documents, (3) an
original assignment of the Mortgage to the Trustee or in blank in recordable
form (except as described below) or, in the case of a Cooperative Loan, the
original security agreement and related documents, (4) the policies of title
insurance issued with respect to each Mortgage Loan (other than a Cooperative
Loan), and (5) the originals of any assumption, modification, extension or
guaranty agreements. It is expected that the Mortgages or assignments of
Mortgage with respect to each Mortgage Loan (other than a Cooperative Loan)
will have been recorded in the name of an agent on behalf of the holder of the
related Mortgage Note. In that case, no Mortgage assignment in favor of the
Trustee will be required to be prepared, delivered or recorded. Instead, the
applicable Servicer will be required to take all actions as are necessary to
cause the Trustee to be shown as the owner of the related Mortgage Loan on the
records of the agent for purposes of the system of recording transfers of
beneficial ownership of mortgages maintained by the agent.
Pursuant to the terms of the agreements (each a "Sale Agreement") whereby
the Mortgage Loans were purchased by the Seller, each transferor of Mortgage
Loans (a "Transferor") has made or assigned, as of each date of sale (each such
date, a "Sale Date"), to the Seller certain representations and warranties
concerning the related Mortgage Loans that generally include representations
and warranties similar to those summarized in the Prospectus under the heading
"Loan Underwriting Procedures and Standards -- Representations and Warranties."
The Seller's rights under each Sale Agreement will be assigned to the Trustee
for the benefit of holders of Offered Certificates. Within the period of time
specified in the applicable Sale Agreement following its discovery of a breach
of any representation or warranty that materially or adversely affects the
interests of Certificateholders in a Mortgage Loan, or receipt of notice of
such breach, the applicable Transferor will be obligated to cure such breach or
purchase the affected Mortgage Loan from the Trust Fund for a price equal to
the unpaid principal balance thereof plus accrued interest thereon (or, in
certain circumstances, to substitute another mortgage loan).
Pursuant to the terms of a sale and assignment agreement (the "Sale and
Assignment Agreement") whereby the Mortgage Loans will be purchased by the
Depositor, the Seller will make to the Depositor (and the Depositor will assign
its rights thereunder to the Trustee for the benefit of holders of Offered
Certificates) only certain limited representations and warranties intended to
address certain material conditions that may arise with respect to the Mortgage
Loans between the applicable Sale Date and the Closing Date. In the event of a
breach of any such representation or warranty that does not constitute a breach
of any representation or warranty made by the applicable Transferor, the Seller
will be obligated in the same manner as the Transferor, as described above.
To the extent that any Mortgage Loan as to which a representation or
warranty has been breached is not repurchased by the applicable Transferor or
the Seller and a Realized Loss occurs with respect to that Mortgage Loan,
holders of Offered Certificates, in particular the Offered Subordinate
Certificates, may incur a loss.
Voting Rights
The Interest-Only Certificates will be allocated 5% of the voting rights
under the Trust Agreement, and the remaining Classes of Certificates will be
allocated 95% of the voting rights. Voting rights will be allocated among the
Classes of Certificates other than Interest-Only Certificates in proportion to
their respective Class Principal Amounts, and among Certificates of each Class
in proportion to their Percentage Interests.
S-62
<PAGE>
Yield, Prepayment and Weighted Average Life
General
The yields to maturity (or to early termination) of the Senior
Certificates will be affected by the rate of principal payments (including
prepayments, which may include amounts received by virtue of repurchase,
condemnation, insurance or foreclosure) on the Mortgage Loans in the related
Mortgage Pool, and the yields on the Subordinate Certificates will be affected
by the rate of principal payments on the Mortgage Loans in all three Mortgage
Pools. Yields will also be affected by the amount and timing of borrower
delinquencies and defaults resulting in Realized Losses on the Mortgage Loans
in the related Mortgage Pool, in the case of the Senior Certificates, or on all
the Mortgage Loans, in the case of the Subordinate Certificates, the purchase
prices for such Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on 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.
The Pool 1 Mortgage Loans, the Pool 2 Mortgage Loans and the Pool 3
Mortgage Loans have interest rates that first adjust after an initial period of
three, five and seven years, respectively, following origination and then
adjust annually thereafter. The likelihood of prepayment on any Mortgage Loan
will increase on or about the date of the first adjustment of the related
Mortgage Rate.
Approximately 26.27% of the Pool 1 Mortgage Loans and approximately 32.77%
of the Pool 2 Mortgage Loans provide for payment by the borrower of a
prepayment premium (each, a "Prepayment Penalty Amount") during the first one
to five years after origination (the "Penalty Period"). In any twelve-month
period during the Penalty Period, the borrower may generally prepay up to 20%
of the original principal balance of that Mortgage Loan without penalty. The
penalty for prepayments in excess of 20% of the original principal balance will
generally be equal to six months' interest on any amount prepaid in excess of
20%. No Prepayment Penalty Amount is assessed for any prepayment made after the
applicable Penalty Period or if that prepayment is concurrent with the sale of
the Mortgaged Property. These Prepayment Penalty Amounts may have the effect of
reducing the amount or the likelihood of prepayment on the Mortgage Loans with
Prepayment Penalty Amounts during the applicable Penalty Period.
The rate of principal payments on the Mortgage Loans will also be affected
by the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments thereon by the 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 repurchases of the related Mortgage Loans may,
and the timing of Realized Losses will, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Because the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
"Yield, Prepayment and Maturity Considerations"), no assurance can be given as
to such rate or the timing of principal payments on the Offered Certificates.
In general, the earlier a prepayment of principal of the related Mortgage
Loans, the greater the effect on an investor's yield. 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.
The rate and timing of principal prepayments on the Mortgage Loans in any
Mortgage Pool, which have Mortgage Rates and original terms to maturity that
differ from those of the Mortgage Loans in the other Mortgage Pools, may differ
significantly from the rate and timing of prepayments on the Mortgage Loans in
the other Mortgage Pools.
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<PAGE>
From time to time, areas of the United States may be affected by flooding,
severe storms, landslides, wildfires, earthquakes or other natural disasters.
Under the Sale and Assignment Agreement, the Seller will represent and warrant
that as of the Closing Date each Mortgaged Property was free of material
damage. In the event of an uncured breach of this 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, landslides or earthquakes (or other cause) occurs after the Closing
Date, the Seller will not have any repurchase obligation. In addition, the
standard hazard policies covering the Mortgaged Properties generally do not
cover damage caused by earthquakes, flooding and landslides, and earthquake,
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, the 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 the Offered
Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions to holders of the related Certificates of principal
amounts that would otherwise be distributed over the remaining terms of such
Mortgage Loans. The rate of defaults on the Mortgage Loans will also affect the
rate and timing of principal payments on the Mortgage Loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in
their early years.
As described herein, approximately 15.78% and 20.27% of the Pool 1 and
Pool 2 Mortgage Loans, respectively, do not provide for monthly payments of
principal for the first ten years following origination. Instead, only monthly
payments of interest are due during such period. Other considerations aside,
due to such characteristics, borrowers may be disinclined to prepay such loans
during such ten year period. In addition, because no principal is due on such
loans for their initial ten year period, the Certificates will amortize at a
slower rate during such period than would otherwise be the case. Thereafter,
when the monthly payments on such loans are recalculated on the basis of a
twenty year, level payment amortization schedule as described herein, principal
payments on the Certificates are expected to increase correspondingly, and, in
any case, at a faster rate than if payments on the underlying loans were
calculated on the basis of a thirty year amortization schedule. Notwithstanding
the foregoing, no assurance can be given as to any prepayment rate on the
Mortgage Loans.
As described under "Description of the Certificates" herein, the
applicable Non-AP Percentage (or, in the case of Pool 1, 100%) of the amount of
principal prepayments on the Mortgage Loans in each Mortgage Pool will be
allocated to the related Senior Certificates (other than, in the case of
Certificate Group 2 and Certificate Group 3, the related Class AP
Certificates), as a group, during the first five years following the Closing
Date (except as described herein).
The yields on the Offered Certificates may be adversely affected by Net
Prepayment Interest Shortfalls. The yields on the Class 2-A1, Class 2-A2 and
Class 2-A3 Certificates will be affected by the level of LIBOR from time to
time.
The yields on the Class 1-A1 and Class 1-A2 Certificates will be affected
by the exercise by holders of the Call Certificates of their right to purchase
the Class 1-A1 or Class 1-A2 Certificates, as applicable, as described under
"Description of the Certificates -- Optional Purchase of the Class 1-A1 and
Class 2-A1 Certificates or by their failure to exercise that right. Investors
should anticipate that the call rights will be exercised if the call price is
less than the value of the Class 1-A1 or Class 2-A1 Certificates in the
secondary market, and will not be exercised if the call price is greater than
such value. Yields on the Offered Certificates will also be affected by the
exercise by the Depositor of its right to repurchase the Mortgage Loans as
described under "Description of the Certificates -- Optional Purchase of the
Mortgage Loans" herein, or by the failure of the Depositor to exercise that
right. Prospective purchasers of Group 3 Certificates should consider that
disproportionately high rates of prepayments of Mortgage Loans in Pool 1 and
Pool 2 could result in the Depositor exercising its right to repurchase the
Mortgage Loans even though a substantial proportion of the Pool 3 Mortgage
Loans remain outstanding.
If the purchaser of a Certificate offered at a discount from its initial
principal amount, particularly the Principal-Only Certificates, calculates its
anticipated yield to maturity (or early termination) based on an
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<PAGE>
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. Investors in the Principal-Only Certificates should
carefully consider that a slower than anticipated rate of prepayment on the
Discount Mortgage Loans in the related Mortgage Pool could result in an actual
yield that is lower than the anticipated yield. Conversely, if the purchaser of
a Certificate offered at a premium, particularly an Interest-Only Certificate,
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. Investors in the
Interest-Only Certificates should carefully consider that a faster than
anticipated rate of prepayments on the Mortgage Loans in the related Mortgage
Pool could result in an actual yield that is lower than the anticipated yield,
and could result in the failure of such investors to fully recover their
initial investments. See "Risk Factors -- Special Risks for Certain Classes of
Certificates."
The effective yield to holders of the Offered Certificates (other than the
Class 2-A1 and Class 2-A3 Certificates) will be lower than the yield otherwise
produced by the applicable Interest Rate and the related purchase price because
monthly distributions will not be payable to such holders until the 25th day of
the month (or the immediately following Business Day if such day is not a
Business Day) following the month in which interest accrues on the Mortgage
Loans (without any additional distribution of interest or earnings thereon in
respect of such delay).
Sensitivity of Certain Classes of Certificates
Sensitivity of the LIBOR Certificates. The yields of the Class 2-A1, Class
2-A2 and Class 2-A3 Certificates will be highly sensitive to the level of
LIBOR. Investors in the Class 2-A1 and Class 2-A2 Certificates should consider
the risk that lower than anticipated levels of LIBOR could result in actual
yields that are lower than anticipated yields on those Certificates. The
maximum Interest Rate on the Class 2-A1 and Class 2-A2 Certificates is the
lesser of 9.00% (which would occur whenever LIBOR equals or exceeds 8.40% for
any relevant Accrual Period other than the first Accrual Period) and the
Adjusted Net WAC for Pool 2.
Conversely, investors in the Class 2-A3 Certificates should consider (1)
the risk that higher than anticipated levels of LIBOR could result in actual
yields that are lower than anticipated yields, and (2) the fact that Interest
Rate on the Class 2-A3 Certificates can fall as low as 0.00% (which will occur,
subject to the Adjusted Net WAC for Pool 2, whenever LIBOR equals or exceeds
8.40% for any relevant Accrual Period other than the first Accrual Period). An
investor considering the purchase of a Class 2-A3 Certificate in the
expectation that LIBOR will decline over time, thus increasing the Interest
Rate on that Class, should also consider the risk that if mortgage interest
rates decline concurrently with LIBOR, the Mortgage Loans may experience rapid
rates of prepayments; this may result in a rapid decline in the Class Notional
Amount of the Class 2-A3 Certificates, which is based on the Class Principal
Amount of the Class 2-A1 and Class 2-A2 Certificates. In particular, this could
result in the failure of investors in the Class 2-A3 Certificate to fully
recover their investment.
Levels of LIBOR may have little or no correlation to levels of prevailing
mortgage interest rates. It is possible that lower prevailing mortgage interest
rates, which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR. Conversely, higher prevailing
mortgage interest rates, which might be expected to result in slower
prepayments, could occur concurrently with a decreased level of LIBOR. In
addition, the timing of changes in the level of LIBOR may affect the actual
yield to maturity to an investor in the LIBOR Certificates even if the average
level is consistent with the investor's expectation. In general, the earlier a
change in the level of LIBOR, the greater the effect on the investor's yield to
maturity. As a result, the effect on an investor's yield to maturity of a level
of LIBOR that is higher (or lower) than the rate anticipated by that investor
during the period immediately following the issuance of the certificates is not
likely to be offset by a subsequent like reduction (or increase) in the level
or LIBOR.
Sensitivity of Principal-Only and Interest-Only Certificates. The yields
of the Class 2-AP and Class 3-AP Certificates will be sensitive, and the yields
of the Class 1-AX, Class 2-AX, Class 2-A3 and Class 3-AX Certificates will be
extremely sensitive, to the rate and timing of principal prepayments on the
Pool 1 Mortgage Loans, in the case of the Class 1-AX Certificates; on the Pool
2 Mortgage Loans, in the case of the Class 2-AP, Class 2-AX and Class 2-A3
Certificates; and on the Pool 3 Mortgage Loans, in the Class 3-AP and Class
3-AX Certificates. In particular, investors should consider that the yields on
the Class 1-AX, Class 2-AX and Class 3-AX Certificates will be extremely
sensitive to a faster than expected rate of prepayments on
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<PAGE>
mortgage loans in pool 1 having Net Mortgage Rates higher than 7.25%, in the
case of the Class 1-AX Certificates, mortgage loans in pool 2 having Net
Mortgage Rates higher than 9.00%, in the case of the Class 2-AX Certificates,
and mortgage loans in pool 3 having Net Mortgage Rates higher than 7.00%, in
the case of the Class 3-AX Certificates.
Prospective investors in the Class AP Certificates should consider the
risk that a slower than anticipated rate of prepayments (including
liquidations, insurance payments and repurchases due to breaches of
representations and warranties) on the Discount Mortgage Loans in the related
Mortgage Pool, which have Mortgage Rates that are lower than those of the other
Mortgage Loans in their respective Mortgage Pools and may therefore be less
likely to prepay, could result in actual yields that are lower than the
anticipated yields. Prospective investors in the Class AP Certificates should
also consider the effect of the rate of prepayments of the Mortgage Loans that
provide only for monthly payments of interest for the first ten years following
origination. See "Risk Factors -- Mortgage Loans with Interest-Only Payments."
Prospective investors in the Interest-Only Certificates should carefully
consider the risk that a faster than anticipated rate of prepayments on the
Mortgage Loans in the related Mortgage Pool could result in actual yields that
are lower than the anticipated yields, and could result in the failure of such
investors to fully recover their initial investments.
To illustrate the significance of prepayments on the yields on these
Certificates, the following tables indicate the pre-tax yields to maturity (on
a corporate bond equivalent basis) and weighted average lives under the
specified assumptions at the constant percentages of the Prepayment Assumption
(as described below) shown. The yields shown were calculated by determining the
monthly discount rates that, when applied to the assumed streams of cash flows
to be paid on the applicable Class of Certificates, would cause the discounted
present value of such assumed streams of cash flows to equal the assumed
aggregate purchase price of such Class and converting such monthly rates to
corporate bond equivalent rates. These calculations do not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as distributions on such Certificates and
consequently do not purport to reflect the return on any investment in any such
Class of Certificates when such reinvestment rates are considered. The weighted
average lives shown were determined by (1) multiplying the net reduction, if
any, of the applicable Class Principal Amount by the number of years from the
date of issuance of the applicable Class of Certificates to the related
Distribution Date, (2) adding the results and (3) dividing the sum by the
aggregate of the net reductions of Class Principal Amount described in clause
(1) above. It is unlikely that any of the Pool 1, Pool 2 or Pool 3 Mortgage
Loans will prepay at any of the assumed constant rates shown or at any other
constant rate until maturity. (Such weighted average lives are shown for
illustrative purposes only in the case of the Class 1-AX, Class 2-AX, Class
2-A3 and Class 3-AX Certificates. Such Certificates are not entitled to
distributions of principal and therefore have no weighted average lives.) The
timing of changes in the rate of prepayments may significantly affect the
actual yields to maturity and weighted average lives, even if the average rate
of principal prepayments is consistent with an investor's expectation.
Each of the following tables was prepared on the basis of the
characteristics of the Mortgage Loans expected to be included in Pool 1, Pool 2
and Pool 3, the Modeling Assumptions set forth under "-- Weighted Average Life"
below, except as described in this paragraph, and the additional assumptions
that (1) the applicable assumed purchase price, exclusive of accrued interest
for each Class of Certificates is as set forth below and (2) the initial Class
Principal Amounts of the Class 2-AP and Class 3-AP Certificates and the initial
Class Notional Amounts and Certificate Interest Rates of the Class 1-AX, Class
2-AX, Class 2-A3 and Class 3-AX Certificates are as set forth or described
herein. The tables relating to the Class 1-AX, Class 2-AX, Class 2-A3 and Class
3-AX Certificates were prepared on the basis of the assumption that the holders
of the Call Certificates exercise their right to purchase the Class 1-A1 or
Class 2-A1 Certificates, as applicable on the first Distribution Date on which
they are entitled to do so. The tables relating to the Class 2-AP and Class
3-AP Certificates were prepared on the basis of the assumption that the holders
of the Call Certificates do not exercise their right to purchase the Class 1-A1
or Class 2-A1 Certificates, as applicable.
S-66
<PAGE>
Pre-Tax Yield* to Maturity of the Class 1-AX Certificates
(Assumed Purchase Price Percentage: 2.148%)
<TABLE>
<CAPTION>
Percentage of Prepayment Assumption
--------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 50.16 38.04 25.09 11.06 (4.42)
Weighted Average Life in Years ......... 2.7 2.4 2.0 1.7 1.5
</TABLE>
-----------
* Corporate bond equivalent basis
Pre-Tax Yield* to Maturity of the Class 2-AX Certificates
(Assumed Purchase Price Percentage: 0.104%)
<TABLE>
<CAPTION>
Percentage of Prepayment Assumption
--------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 52.83 40.46 27.08 12.28 (4.89)
Weighted Average Life in Years ......... 4.5 3.6 2.8 2.2 1.7
</TABLE>
-----------
* Corporate bond equivalent basis
Pre-Tax Yield* to Maturity of the Class 2-A3 Certificates
(Assumed Purchase Price Percentage: 2.871%)
<TABLE>
<CAPTION>
Percentage of Prepayment Assumption
-------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 63.63 50.80 36.96 21.69 4.12
Weighted Average Life in Years ......... 4.5 3.6 2.8 2.2 1.7
</TABLE>
-----------
* Corporate bond equivalent basis
Pre-Tax Yield* to Maturity of the Class 2-AP Certificates
(Assumed Purchase Price Percentage: 72.000%)
<TABLE>
<CAPTION>
Percentage of Prepayment Assumption
-----------------------------------------------------------
0% 50% 100% 150% 200%
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 1.60 5.32 9.55 14.01 19.04
Weighted Average Life in Years ......... 21.0 6.9 3.9 2.7 2.0
</TABLE>
-----------
* Corporate bond equivalent basis
Pre-Tax Yield* to Maturity of the Class 3-AX Certificates
(Assumed Purchase Price Percentage: 3.011%)
<TABLE>
<CAPTION>
Percentage of Prepayment Assumption
-------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 37.16 27.85 18.00 7.43 (4.18)
Weighted Average Life in Years ......... 6.1 4.8 3.7 2.9 2.3
</TABLE>
-----------
* Corporate bond equivalent basis
<PAGE>
Pre-Tax Yield* to Maturity of the Class 3-AP Certificates
(Assumed Purchase Price Percentage: 68.00%)
<TABLE>
<CAPTION>
Percentage of Prepayment Assumption
-----------------------------------------------------------
0% 50% 100% 150% 200%
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 2.03 5.92 9.99 14.17 18.81
Weighted Average Life in Years ......... 19.7 7.4 4.4 3.2 2.5
</TABLE>
-----------
* Corporate bond equivalent basis
S-67
<PAGE>
The Pool 1, Pool 2 and Pool 3 Mortgage Loans may not have the
characteristics assumed for purposes of the tables above, and there can be no
assurance that the Mortgage Loans will prepay at any of the constant rates
assumed, that the actual pre-tax yields to maturity and weighted average lives
for the Principal-Only or Interest-Only Certificates will correspond to any of
the calculated yields and weighted average lives shown herein, or that the
purchase prices of such Certificates will be as assumed. Each investor should
make its own determination as to the appropriate assumptions to be used and
factors to be considered in deciding whether to purchase a Principal-Only or
Interest-Only Certificate.
Subordination of the Offered Subordinate Certificates
On each Distribution Date, the holders of Certificates having a relatively
higher priority of distribution will have a preferential right to receive
amounts of interest and principal from the related Mortgage Pool or Mortgage
Pools on such Distribution Date before any distributions are made from the
related Mortgage Pool or Mortgage Pools on any Class of Certificates
subordinate to such higher ranking Class, as described herein. As a result, the
yields to maturity and the aggregate amount of distributions on the Class B1,
Class B2 and Class B3 Certificates will be more sensitive than the yields of
higher ranking Certificates to the rate of delinquencies and defaults on the
Mortgage Loans.
As more fully described herein, the principal portion of Realized Losses
(other than Excess Losses) on the Mortgage Loans in each Mortgage Pool will be
allocated first to the lower ranking Components relating to that Mortgage Pool,
then to the higher ranking Components relating to that Mortgage Pool, in
inverse order of priority, until the Component Principal Amount of each such
Component has been reduced to zero, before any such Realized Losses will be
allocated to the Senior Certificates of the related Certificate Group. The
interest portion of Realized Losses on the Mortgage Loans in a Mortgage Pool
(other than Excess Losses) will reduce the amount available for distribution on
the related Distribution Date to the lowest ranking related Component
outstanding on such date.
Weighted Average Life
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a constant
prepayment standard or model. The model used in this Prospectus Supplement for
the Mortgage Loans is a prepayment assumption (the "Prepayment Assumption")
that represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the related pool of Mortgage Loans for the
life of such Mortgage Loans. A 100% Prepayment Assumption for Pool 1 and Pool 2
assumes a constant prepayment rate of 18% per annum of the outstanding
principal balance of such Mortgage Loans until the eighth month prior to the
weighted average of the first adjustment dates of the Mortgage Loans in Pool 1
and Pool 2, respectively, and an additional 1.5% in each month thereafter for
the next eight months; and in each month thereafter during the life of such
Mortgage Loans, a constant prepayment rate of 30% per annum is assumed. A 100%
Prepayment Assumption for Pool 3 assumes a constant prepayment rate of 15% per
annum of the outstanding principal balance of such Mortgage Loans until the
eighth month prior to the weighted average of the first adjustment dates of the
Mortgage Loans in Pool 3, and an addition 1.875% in each month thereafter for
the next eight months; and in each month thereafter during the life of such
Mortgage Loans, a constant prepayment rate of 30% is assumed. As used in the
tables below, a 0% Prepayment Assumption assumes prepayment rates equal to 0%
of the Prepayment Assumption, i.e. no prepayments; a 50% Prepayment Assumption
assumes prepayment rates equal to 50% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be either a historical
description of the prepayment experience of either pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans to be included in the Trust Fund.
The following tables were prepared based on the following assumptions
(collectively, the "Modeling Assumptions"): (1) the initial Class Principal
Amounts and the Interest Rates are as described in this Prospectus Supplement;
(2) each Scheduled Payment of principal and/or interest is timely received on
the first
S-68
<PAGE>
day of each month commencing in November 2000; (3) principal prepayments are
received in full on the last day of each month commencing in October 2000 and
there are no Net Prepayment Interest Shortfalls; (4) there are no defaults or
delinquencies on the Mortgage Loans; (5) there are no repurchases or
substitutions of the Mortgage Loans; (6) the One-Year CMT Index is equal to
6.02%; (7) there is no optional termination of the Trust Fund; (8) the
Certificates are issued on October 30, 2000; (9) Distribution Dates occur on
the 25th day of each month commencing in November 2000; and (10) the Mortgage
Loans comprise three Mortgage Pools consisting of eight Mortgage Loans having
the following characteristics:
S-69
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS*
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Current Gross Current Net Term to
Principal Mortgage Rate Mortgage Maturity
Amortization Balance ($) (%) Rate (%)** (months)
-------------------- ------------------ ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Pool 1
Adjustable (IO)*** 13,194,703.96 8.8878115417 8.6213115417 358
Adjustable ......... 70,447,564.35 8.9953282745 8.7263361780 357
Pool 2
Adjustable (IO)*** 14,494,515.74 8.6771716925 8.4080853695 356
Adjustable ......... 52,888,470.30 8.7149626304 8.4481562319 356
Adjustable (IO)*** 2,436,163.46 9.5715002504 9.2903255373 355
Adjustable ......... 13,718,000.14 9.5578886966 9.2895680266 356
Pool 3
Adjustable ......... 429,119.39 7.1902608939 6.9237608939 347
Adjustable ......... 117,050,399.14 8.5482147887 8.2366677144 353
<CAPTION>
S-70
Weighted Weighted
Average Average
Original Remaining
Interest Interest Next Rate Gross Initial Maximum
Only Term Only Term Adjustment Margin Periodic Rate Cap Minimum
Amortization (months) (months) Date (%) Cap (%) (%) Rate (%)
-------------------- ----------- ----------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Pool 1
Adjustable (IO)*** 120 118 07/01/03 2.750 2.000 14.888 2.750
Adjustable ......... NA NA 07/01/03 2.751 2.014 14.995 2.796
Pool 2
Adjustable (IO)*** 120 116 06/01/05 2.511 2.000 14.677 2.511
Adjustable ......... NA NA 05/01/05 2.524 2.011 14.700 2.554
Adjustable (IO)*** 120 115 05/01/05 2.500 2.000 15.572 2.500
Adjustable ......... NA NA 06/01/05 2.537 2.000 15.558 2.537
Pool 3
Adjustable ......... NA NA 08/01/06 2.750 3.000 12.190 2.750
Adjustable ......... NA NA 02/01/07 2.750 3.238 13.548 2.750
</TABLE>
* Each of the assumed Mortgage Loans; (i) has a weighted average original term
to maturity of 360 months, (ii) has a Mortgage Rate that is based on One Year
CMT and resets every 12 months, and (iii) has a subsequent periodic cap equal
to 2.000%.
** The Current Net Mortgage Rate equals the Current Gross Mortgage Rate less
(i) the applicable Servicing Fee Rate and (ii) any applicable PMI Premium Rate,
(iii) the Trustee Fee Rate and (iv) the Master Servicing Fee Rate.
*** These Mortgage Loans are not entitled to monthly payments of principal for
the first ten years following origination. Thereafter, monthly payments of
principal will be made in equal amounts sufficient to amortize the principal
balance of such Mortgage Loans over the remaining 240 months to maturity.
S-70
<PAGE>
The actual characteristics of the Mortgage Loans will differ from the
assumptions used in constructing the tables set forth below, which are
hypothetical in nature and are provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is not expected that the Mortgage Loans will prepay at a constant
rate until maturity, that all of the Mortgage Loans will prepay at the same
rate or that there will be no defaults or delinquencies on the Mortgage Loans.
Moreover, the diverse remaining terms to maturity of the Mortgage Loans could
produce slower or faster principal distributions than indicated in the tables
at the various percentages of the Prepayment Assumption specified, even if the
weighted average remaining term to maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment or loss experience,
will cause the percentages of initial Class 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 Prepayment Assumption.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of the Prepayment Assumption.
The weighted average life of an Offered Certificate is determined by (1)
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, (2) adding the results and (3) dividing the sum
by the aggregate of the net reductions of Class Principal Amount described in
(1) above.
S-71
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class 1-A1 Certificates
-----------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 90 80 70 61
October 2002 ........................... 99 80 63 48 35
October 2003 ........................... 98 67 43 24 10
October 2004 ........................... 97 55 27 9 0
October 2005 ........................... 96 45 16 1 0
October 2006 ........................... 95 37 10 0 0
October 2007 ........................... 94 31 5 0 0
October 2008 ........................... 93 25 3 0 0
October 2009 ........................... 92 21 2 0 0
October 2010 ........................... 91 18 1 0 0
October 2011 ........................... 89 15 1 0 0
October 2012 ........................... 87 12 1 0 0
October 2013 ........................... 85 10 * 0 0
October 2014 ........................... 82 8 * 0 0
October 2015 ........................... 80 7 * 0 0
October 2016 ........................... 77 6 * 0 0
October 2017 ........................... 74 5 * 0 0
October 2018 ........................... 71 4 * 0 0
October 2019 ........................... 67 3 * 0 0
October 2020 ........................... 63 2 * 0 0
October 2021 ........................... 59 2 * 0 0
October 2022 ........................... 54 2 * 0 0
October 2023 ........................... 49 1 * 0 0
October 2024 ........................... 44 1 * 0 0
October 2025 ........................... 38 1 * 0 0
October 2026 ........................... 31 * * 0 0
October 2027 ........................... 24 * * 0 0
October 2028 ........................... 16 * * 0 0
October 2029 ........................... 7 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 21.0 6.0 3.0 2.0 1.5
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-72
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class 2-A1 Certificates
-----------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 90 80 70 60
October 2002 ........................... 99 80 63 48 35
October 2003 ........................... 98 72 50 33 19
October 2004 ........................... 97 63 38 20 8
October 2005 ........................... 97 52 24 7 0
October 2006 ........................... 96 43 15 1 0
October 2007 ........................... 95 35 9 0 0
October 2008 ........................... 93 29 5 0 0
October 2009 ........................... 92 24 3 0 0
October 2010 ........................... 91 20 2 0 0
October 2011 ........................... 89 17 2 0 0
October 2012 ........................... 87 14 1 0 0
October 2013 ........................... 85 12 1 0 0
October 2014 ........................... 82 10 1 0 0
October 2015 ........................... 80 8 * 0 0
October 2016 ........................... 77 6 * 0 0
October 2017 ........................... 74 5 * 0 0
October 2018 ........................... 70 4 * 0 0
October 2019 ........................... 67 3 * 0 0
October 2020 ........................... 63 3 * 0 0
October 2021 ........................... 58 2 * 0 0
October 2022 ........................... 54 2 * 0 0
October 2023 ........................... 48 1 * 0 0
October 2024 ........................... 43 1 * 0 0
October 2025 ........................... 37 1 * 0 0
October 2026 ........................... 30 * * 0 0
October 2027 ........................... 23 * * 0 0
October 2028 ........................... 15 * * 0 0
October 2029 ........................... 6 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.9 6.5 3.5 2.3 1.7
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-73
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class 2-AP Certificates
-----------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 90 82 73 64
October 2002 ........................... 99 82 66 53 40
October 2003 ........................... 98 74 54 38 26
October 2004 ........................... 97 66 43 27 15
October 2005 ........................... 97 56 30 15 6
October 2006 ........................... 96 47 21 8 2
October 2007 ........................... 95 40 14 4 1
October 2008 ........................... 94 33 10 2 *
October 2009 ........................... 92 28 7 1 *
October 2010 ........................... 91 23 5 1 *
October 2011 ........................... 89 19 3 * *
October 2012 ........................... 87 16 2 * *
October 2013 ........................... 85 13 2 * *
October 2014 ........................... 82 11 1 * *
October 2015 ........................... 80 9 1 * *
October 2016 ........................... 77 7 * * *
October 2017 ........................... 74 6 * * *
October 2018 ........................... 70 5 * * *
October 2019 ........................... 67 4 * * 0
October 2020 ........................... 63 3 * * 0
October 2021 ........................... 58 3 * * 0
October 2022 ........................... 54 2 * * 0
October 2023 ........................... 48 2 * * 0
October 2024 ........................... 43 1 * * 0
October 2025 ........................... 37 1 * * 0
October 2026 ........................... 30 1 * 0 0
October 2027 ........................... 23 * * 0 0
October 2028 ........................... 15 * * 0 0
October 2029 ........................... 6 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 21.0 6.9 3.9 2.7 2.0
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-74
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class 3-A1 Certificates
-----------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 91 84 76 68
October 2002 ........................... 98 84 70 57 46
October 2003 ........................... 97 76 58 43 31
October 2004 ........................... 96 69 48 32 20
October 2005 ........................... 95 63 40 24 12
October 2006 ........................... 94 54 29 14 5
October 2007 ........................... 93 45 19 7 1
October 2008 ........................... 91 38 13 3 0
October 2009 ........................... 90 31 9 2 0
October 2010 ........................... 88 26 6 1 0
October 2011 ........................... 86 22 4 * 0
October 2012 ........................... 84 18 3 * 0
October 2013 ........................... 82 15 2 * 0
October 2014 ........................... 80 12 1 * 0
October 2015 ........................... 77 10 1 * 0
October 2016 ........................... 75 8 1 * 0
October 2017 ........................... 72 7 * * 0
October 2018 ........................... 68 6 * * 0
October 2019 ........................... 65 4 * * 0
October 2020 ........................... 61 4 * * 0
October 2021 ........................... 56 3 * * 0
October 2022 ........................... 52 2 * * 0
October 2023 ........................... 46 2 * * 0
October 2024 ........................... 41 1 * * 0
October 2025 ........................... 35 1 * * 0
October 2026 ........................... 28 1 * * 0
October 2027 ........................... 21 * * * 0
October 2028 ........................... 13 * * * 0
October 2029 ........................... 4 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.4 7.5 4.4 3.1 2.3
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-75
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class 3-AP Certificates
-----------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 92 84 77 69
October 2002 ........................... 98 84 71 59 48
October 2003 ........................... 97 76 59 45 33
October 2004 ........................... 95 70 50 34 23
October 2005 ........................... 94 63 40 25 15
October 2006 ........................... 92 53 28 14 6
October 2007 ........................... 91 44 19 7 2
October 2008 ........................... 90 37 13 4 1
October 2009 ........................... 88 31 9 2 *
October 2010 ........................... 86 26 6 1 *
October 2011 ........................... 84 21 4 1 *
October 2012 ........................... 82 18 3 * *
October 2013 ........................... 80 15 2 * 0
October 2014 ........................... 78 12 1 * 0
October 2015 ........................... 75 10 1 * 0
October 2016 ........................... 72 8 1 * 0
October 2017 ........................... 69 7 * 0 0
October 2018 ........................... 66 5 * 0 0
October 2019 ........................... 62 4 * 0 0
October 2020 ........................... 58 3 * 0 0
October 2021 ........................... 53 3 * 0 0
October 2022 ........................... 48 2 * 0 0
October 2023 ........................... 43 2 * 0 0
October 2024 ........................... 37 1 0 0 0
October 2025 ........................... 31 1 0 0 0
October 2026 ........................... 24 1 0 0 0
October 2027 ........................... 16 * 0 0 0
October 2028 ........................... 8 * 0 0 0
October 2029 ........................... 0 0 0 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 19.7 7.4 4.4 3.2 2.5
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-76
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class B1 Certificates
------------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 99 99 99 99
October 2002 ........................... 99 99 99 99 99
October 2003 ........................... 98 98 98 98 98
October 2004 ........................... 97 97 97 97 93
October 2005 ........................... 96 96 96 96 68
October 2006 ........................... 95 91 86 75 40
October 2007 ........................... 94 84 74 50 24
October 2008 ........................... 93 75 59 30 12
October 2009 ........................... 91 65 44 17 5
October 2010 ........................... 90 54 30 9 2
October 2011 ........................... 88 45 21 5 1
October 2012 ........................... 86 38 14 3 *
October 2013 ........................... 84 31 10 1 *
October 2014 ........................... 81 26 7 1 *
October 2015 ........................... 79 21 4 * *
October 2016 ........................... 76 17 3 * *
October 2017 ........................... 73 14 2 * *
October 2018 ........................... 70 12 1 * *
October 2019 ........................... 66 9 1 * *
October 2020 ........................... 62 7 1 * *
October 2021 ........................... 58 6 * * *
October 2022 ........................... 53 5 * * 0
October 2023 ........................... 48 4 * * 0
October 2024 ........................... 42 3 * * 0
October 2025 ........................... 36 2 * * 0
October 2026 ........................... 30 1 * * 0
October 2027 ........................... 22 1 * * 0
October 2028 ........................... 14 * * 0 0
October 2029 ........................... 6 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.8 11.5 9.0 7.3 5.9
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-77
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class B2 Certificates
------------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 99 99 99 99
October 2002 ........................... 99 99 99 99 99
October 2003 ........................... 98 98 98 98 98
October 2004 ........................... 97 97 97 97 93
October 2005 ........................... 96 96 96 96 63
October 2006 ........................... 95 91 86 73 34
October 2007 ........................... 94 84 74 47 19
October 2008 ........................... 93 75 59 28 9
October 2009 ........................... 92 65 44 16 4
October 2010 ........................... 90 55 30 9 1
October 2011 ........................... 88 45 21 5 1
October 2012 ........................... 86 38 14 2 *
October 2013 ........................... 84 31 10 1 *
October 2014 ........................... 82 26 7 1 *
October 2015 ........................... 79 21 4 * *
October 2016 ........................... 76 17 3 * *
October 2017 ........................... 73 14 2 * *
October 2018 ........................... 70 12 1 * *
October 2019 ........................... 66 9 1 * *
October 2020 ........................... 62 7 1 * *
October 2021 ........................... 58 6 * * 0
October 2022 ........................... 53 5 * * 0
October 2023 ........................... 48 4 * * 0
October 2024 ........................... 43 3 * * 0
October 2025 ........................... 36 2 * * 0
October 2026 ........................... 30 1 * * 0
October 2027 ........................... 23 1 * 0 0
October 2028 ........................... 15 * * 0 0
October 2029 ........................... 6 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.9 11.5 9.0 7.2 5.7
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-78
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class B3 Certificates
------------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 99 99 99 99 99
October 2002 ........................... 99 99 99 99 99
October 2003 ........................... 98 98 98 98 98
October 2004 ........................... 97 97 97 97 92
October 2005 ........................... 96 96 96 96 60
October 2006 ........................... 95 91 86 72 31
October 2007 ........................... 94 84 74 46 16
October 2008 ........................... 93 75 59 27 8
October 2009 ........................... 92 65 44 15 3
October 2010 ........................... 90 55 30 8 1
October 2011 ........................... 88 46 21 4 *
October 2012 ........................... 86 38 14 2 *
October 2013 ........................... 84 31 10 1 *
October 2014 ........................... 82 26 7 1 *
October 2015 ........................... 79 21 4 * *
October 2016 ........................... 77 17 3 * *
October 2017 ........................... 73 14 2 * *
October 2018 ........................... 70 12 1 * *
October 2019 ........................... 66 9 1 * *
October 2020 ........................... 63 7 1 * *
October 2021 ........................... 58 6 * * 0
October 2022 ........................... 53 5 * * 0
October 2023 ........................... 48 4 * * 0
October 2024 ........................... 43 3 * * 0
October 2025 ........................... 37 2 * * 0
October 2026 ........................... 30 1 * * 0
October 2027 ........................... 23 1 * 0 0
October 2028 ........................... 15 * * 0 0
October 2029 ........................... 6 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.9 11.6 9.0 7.2 5.6
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-79
<PAGE>
Percentage of Initial Class Principal Amount of the Offered Certificates
Outstanding at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class R Certificates
----------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100 100 100 100 100
October 2001 ........................... 0 0 0 0 0
October 2002 ........................... 0 0 0 0 0
October 2003 ........................... 0 0 0 0 0
October 2004 ........................... 0 0 0 0 0
October 2005 ........................... 0 0 0 0 0
October 2006 ........................... 0 0 0 0 0
October 2007 ........................... 0 0 0 0 0
October 2008 ........................... 0 0 0 0 0
October 2009 ........................... 0 0 0 0 0
October 2010 ........................... 0 0 0 0 0
October 2011 ........................... 0 0 0 0 0
October 2012 ........................... 0 0 0 0 0
October 2013 ........................... 0 0 0 0 0
October 2014 ........................... 0 0 0 0 0
October 2015 ........................... 0 0 0 0 0
October 2016 ........................... 0 0 0 0 0
October 2017 ........................... 0 0 0 0 0
October 2018 ........................... 0 0 0 0 0
October 2019 ........................... 0 0 0 0 0
October 2020 ........................... 0 0 0 0 0
October 2021 ........................... 0 0 0 0 0
October 2022 ........................... 0 0 0 0 0
October 2023 ........................... 0 0 0 0 0
October 2024 ........................... 0 0 0 0 0
October 2025 ........................... 0 0 0 0 0
October 2026 ........................... 0 0 0 0 0
October 2027 ........................... 0 0 0 0 0
October 2028 ........................... 0 0 0 0 0
October 2029 ........................... 0 0 0 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 0.1 0.1 0.1 0.1 0.1
</TABLE>
-----------
* Indicates a value between 0.0% and 0.5%.
S-80
<PAGE>
Material Federal Income Tax Considerations
General
The Trust Agreement provides that the Trust Fund will comprise a
Lower-Tier REMIC and an Upper-Tier REMIC in a tiered REMIC structure. In the
opinion of Brown & Wood LLP ("Tax Counsel"), assuming compliance with the Trust
Agreement, for federal income tax purposes the Lower-Tier REMIC and the
Upper-Tier REMIC will each qualify as a REMIC within the meaning of Section
860D of the Internal Revenue Code of 1986, as amended (the "Code"). In
addition, in the opinion of Tax Counsel, the Offered Certificates, other than
the Class R Certificate, will evidence ownership of REMIC regular interests
within the meaning of Section 860G(a)(1) of the Code and the Class R
Certificate will evidence ownership of the sole class of residual interest,
within the meaning of Section 860G(a)(2) of the Code, in each of the Lower-Tier
REMIC and the Upper-Tier REMIC.
Although the matter is not free from doubt, the Depositor intends to
report stated interest on the Offered Certificates, other than the
Interest-Only Certificates, the Principal-Only Certificates and the Class R
Certificates, as qualified stated interest within the meaning of the Treasury
Regulations ("OID Regulations") concerning original issue discount ("OID"). A
holder of the Offered Certificates must include qualified stated interest in
income as it accrues regardless of the holder's usual method of accounting.
The Principal-Only Certificates and the Interest-Only Certificates will
be, and the other Classes of Offered Certificates may be, issued with OID for
federal income tax purposes. See "Material Federal Income Tax Considerations --
Taxation of Regular Interest Certificates -- Interest and Acquisition Discount"
in the Prospectus. The prepayment assumption that will be used in determining
the rate of accrual of OID, market discount and premium, if any, for federal
income tax purposes will be a rate equal to 100% of the Prepayment Assumption.
No representation is made that the Mortgage Loans will prepay at these rates or
at any other rates. OID must be included in income as it accrues on a constant
yield method, regardless or whether a holder receives concurrently the cash
attributable to such OID.
The Class 1-A1 and Class 2-A1 Certificates
Status. The Class 1-A1 and Class 2-A1 Certificates (the "Callable
Certificates") can be purchased at par by the holder of the Class 1-A2 and
Class 2-A2 Certificates, respectively (the "Call Certificates"), on their
respective call dates. For federal income tax purposes, each holder of a Class
of Callable Certificates will be treated as having purchased an undivided
interest in a regular interest in the Upper Tier REMIC, and as having written a
call option on such interest at the time of the purchase in favor of the
related class of Call Certificates. An owner of Call Certificates will be
treated as having purchased the call option from the holder of the related
Callable Certificate in exchange for an option premium in an amount equal to
the fair market value of the call option on the related Class of Callable
Certificate.
Allocations. An owner of an interest in Callable Certificates should be
considered to have purchased its regular interest in the Upper Tier REMIC for
an amount equal to the sum of the actual purchase price paid for the Callable
Certificates plus the amount of the option premium the owner is deemed to have
received from the owner of the related Call Certificates. Consequently, an
owner of Callable Certificates will have a basis in the interest in the Upper
Tier REMIC that will be greater than the purchase price paid directly by the
owner to acquire the Callable Certificates.
Lehman Brothers Inc. expects that the call option premium with respect to
the Class 1-A1 Certificates will be equal to 0.49% of the initial Class
Principal Amount of the Class 1-A1 Certificates and the call option premium
with respect to the Class 2-A1 Certificates will be equal to 0.30% of the
initial Class Principal Amount of the Class 2-A1.
Taxation of Call Option Premium. An owner of Callable Certificates will
not be required to include immediately in income the option premium that such
owner is deemed to have received upon the purchase of Callable Certificates.
Instead, the owner must account for such premium when the rights represented by
the Call Certificates are exercised, or when those rights lapse, or when those
rights are otherwise terminated with respect to the owner.
An owner of Callable Certificates will include option premium in income as
short-term capital gain when the option lapses. The principal balance of the
Upper Tier REMIC regular interest to which the Callable
S-81
<PAGE>
Certificates relate likely will be reduced over time through principal
payments. Under existing authorities, it is not entirely clear whether the
rights held by the owner of the Call Certificates would be deemed to lapse as
the Upper Tier REMIC regular interests pay down. Each owner of Callable
Certificates is encouraged to consult its own tax advisor on these matters.
If an owner of Call Certificates exercises its option to acquire the
Callable Certificates, an owner of the Callable Certificates would include in
its amount realized from the sale of the Callable Certificates an amount equal
to the unamortized portion of the option premium.
When an owner sells an interest in Callable Certificates, the owner will
be deemed to have sold its interest in the Upper Tier REMIC for a total price
equal to the sum of the sales price received from the purchaser for its
interest in the Upper Tier REMIC plus the fair market value of the call option
at the time of sale. Thus, the amount realized by the owner upon the sale of a
Callable Certificate could be greater than the purchase price paid directly by
the purchaser. When the owner transfers its interest in Callable Certificates,
the transfer will be treated as a closing transaction with respect to the call
option the owner is deemed to have written. As a result, the owner could
recognize a short-term capital gain or loss equal to the difference between the
unamortized amount of option premium and the fair market value of the option on
the transfer date.
Residual Certificates
Special tax considerations apply to an investment in a Residual
Certificate. In certain circumstances, the method of taxation of a Residual
Certificate can produce a significantly less favorable after-tax return for a
beneficial owner of a Residual Certificate than would be the case, if (1) such
Residual Certificate was taxable as a debt instrument or (2) no portion of the
taxable income on such Residual Certificate in each period was treated as
"excess inclusion" income. See "Material Federal Income Tax Considerations --
Taxation of Owners of Residual Securities" in the Prospectus.
Under applicable regulations, if a Residual Certificate is a "noneconomic
residual interest," as described below, a transfer of such Residual Certificate
to a U.S. person will be disregarded for all federal tax purposes unless no
significant purpose of the transfer was to impede the assessment or collection
of tax. See "Material Federal Income Tax Considerations -- Taxation of Owners
of Residual Securities -- (5) Tax Related Restrictions on Transfer of Residual
Securities" in the Prospectus.
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 considerations 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.
Under the REMIC Regulations, if a Residual Certificate has tax avoidance
potential, a transfer of a Residual Certificate to a Nonresident will be
disregarded for all Federal tax purposes. See "Material Federal Income Tax
Considerations -- Taxation of Certain Foreign Investors" in the Prospectus.
It is expected that a Residual Certificate will be a "noneconomic residual
interest" and will have "tax avoidance potential" within the meaning of the
proposed regulations.
Legal Investment Considerations
The Senior Certificates and the Class B1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating agencies, and, as such, are legal investments for certain entities to
the extent provided in SMMEA. Such investments, however, will be subject to
general regulatory considerations governing investment practices under state
and federal laws.
S-82
<PAGE>
Moreover, institutions whose investment activities are subject to review
by certain regulatory authorities may be or may become subject to restrictions,
which may be retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain mortgage related securities. In
addition, several states have adopted or may adopt regulations that prohibit
certain state-chartered institutions from purchasing or holding similar types
of securities.
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Offered Certificates may be purchased
by such investors.
Use of Proceeds
The net proceeds from the sale of the Offered Certificates will be applied
by the Depositor, or an affiliate thereof, toward the purchase of the Mortgage
Loans 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 Lehman Brothers Inc. (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.
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $450,000.
Lehman Brothers Inc. has entered into an agreement with the Depositor to
purchase the Class B4, Class B5 and Class B6 Certificates simultaneously with
the purchase of the Offered Certificates, subject to certain conditions.
The Underwriter is an affiliate of the Depositor and Aurora.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by the
Underwriter, an affiliate of the Seller, the Depositor and Aurora, in
connection with market making transactions in the Offered Certificates. The
Underwriter may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
ERISA Considerations
A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code, should carefully review with its legal advisors whether
the purchase or holding of Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or the Code. See "ERISA
Considerations" in the accompanying Prospectus.
S-83
<PAGE>
Employee benefit plans ("Plans") that are subject to ERISA, and any person
utilizing the assets of such a Plan, may not purchase the Class 3-A2, Class
3-AP, Class 3-AX, Class R, Class B1, Class B2 or Class B3 Certificates (the
"ERISA-Restricted Certificates"). The Trust Agreement will include certain
restrictions on the transfer of the ERISA-Restricted Certificates.
The U.S. Department of Labor has proposed amendments (the "Proposed
Amendments") to certain prohibited transaction exemptions that, if finalized in
current form, generally will be effective as of August 23, 2000. Among other
changes, it is anticipated that the amended exemption would permit a Plan to
purchase subordinate certificates rated in any of the four highest ratings
categories (provided that all other requirements of the applicable exemption
are met). Notwithstanding that, however, even if the Proposed Amendments are
issued in final form as currently contemplated, a Plan would still not be
permitted to purchase the ERISA-Restricted Certificates.
Beneficial owners of Class 1-A1 and Class 2-A1 Certificates may obtain the
names of the registered holders of the Class 1-A2 and Class 2-A2 Certificates,
respectively, by contacting the Trustee at its Corporate Trust Office.
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 Senior Certificates, other than
the Principal-Only and Interest-Only Certificates, that they be rated "AAA" by
Fitch and S&P (the "Rating Agencies"). It is a condition to the issuance of the
Principal-Only and Interest-Only Certificates that they be rated "AAA" by Fitch
and S&P. It is a condition to the issuance of the Class B1 Certificates that
they be rated "AA" by Fitch. It is a condition to the issuance of the Class B2
Certificates that they be rated "A" by Fitch. It is a condition to the issuance
of the Class B3 Certificates that they be rated "BBB" by Fitch.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. A securities rating addresses the likelihood of
the receipt by Offered Certificateholders of distributions in the amount of
scheduled payments on the Mortgage Loans. The rating takes into consideration
the characteristics of the Mortgage Loans and the structural, legal and tax
aspects associated with the Offered Certificates.
The ratings of the Interest-Only Certificates do not address whether
investors in those Certificates will fail to recoup their initial investment
due to a faster than anticipated rate of prepayments. The ratings of the
Principal-Only Certificates only address the return of their Class Principal
Amounts. The rating of the Class R Certificate does not assess the likelihood
of return to investors except to the extent of the Class Principal Amount and
interest thereon.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-84
<PAGE>
Index of Principal Terms
Page
----
Accrual Period...........................................................S-26
Accrued Certificate Interest.............................................S-24
Act......................................................................S-83
Adjusted Net Mortgage Rate...............................................S-25
Adjusted Net WAC.........................................................S-25
Adjusted Principal Balance...............................................S-25
Adjustment Date..........................................................S-38
AP Percentage............................................................S-28
AP Principal Distribution Amount.........................................S-29
Apportioned Principal Balance............................................S-35
Aurora...................................................................S-56
Aurora Underwriting Guidelines...........................................S-54
Available Distribution Amount............................................S-32
Average Rate.............................................................S-25
Bankruptcy Coverage Termination Date.....................................S-36
Bankruptcy Loss Limit....................................................S-36
Bankruptcy Losses........................................................S-35
Beneficial Owner.........................................................S-21
Bloomberg Screen LIUS01M Index Page......................................S-27
Book-Entry Certificates..................................................S-20
Business Day.............................................................S-20
Call Certificates........................................................S-19
Callable Certificates....................................................S-81
CCGI.....................................................................S-55
Certificate Group........................................................S-19
Certificate Principal Amount.............................................S-25
Certificates.............................................................S-19
Chase....................................................................S-58
Chase Underwriting Guidelines............................................S-54
Class 1-A1 Call Date.....................................................S-36
Class 2-A1 Call Date.....................................................S-37
Class 2-AP Deferred Amount...............................................S-34
Class 3-A1 Reset Date....................................................S-25
Class 3-AP Deferred Amount...............................................S-34
Class AP Certificates....................................................S-19
Class AP Deferred Amount.................................................S-34
Class Notional Amount....................................................S-20
Class Percentage.........................................................S-23
Class Principal Amount...................................................S-20
Code.....................................................................S-81
Component................................................................S-19
Component Interest Rate..................................................S-25
Component Principal Amount...............................................S-26
Component Writedown Amount...............................................S-35
Corporate Trust Office...................................................S-37
Credit Support Depletion Date............................................S-23
Credit Support Percentage................................................S-23
Cut-off Date.............................................................S-28
Cut-off Date Balance.....................................................S-20
Debt Service Reduction...................................................S-35
Deficient Valuation......................................................S-35
Definitive Certificate...................................................S-21
Deposit Date.............................................................S-32
Depositor................................................................S-21
Designated Rates.........................................................S-28
<PAGE>
Page
----
Discount Mortgage Loan...................................................S-28
Distribution Date........................................................S-20
DTC......................................................................S-20
Due Period...............................................................S-31
ERISA....................................................................S-83
ERISA-Restricted Certificates............................................S-84
Excess Losses............................................................S-36
Final Scheduled Distribution Date........................................S-36
Financial Intermediary...................................................S-21
Fitch....................................................................S-55
Fraud Loss Limit.........................................................S-36
Fraud Losses.............................................................S-36
Gross Margin.............................................................S-39
Group 1 Certificates.....................................................S-19
Group 1-2 Subordinate Percentage.........................................S-30
Group 2 Certificates.....................................................S-19
Group 3 Certificates.....................................................S-19
Group 3 Offered Certificates.............................................S-19
Group Subordinate Amount.................................................S-31
Harbourton...............................................................S-57
Index....................................................................S-39
Initial Cap..............................................................S-39
Initial Net Mortgage Rate................................................S-28
Insurance Proceeds.......................................................S-32
Interest Rate............................................................S-24
Interest Shortfall.......................................................S-24
Interest-Only Certificates...............................................S-19
Lehman Capital...........................................................S-37
LIBOR....................................................................S-27
LIBOR Determination Date.................................................S-27
Liquidated Mortgage Loan.................................................S-36
Liquidation Proceeds.....................................................S-32
LIUS01M..................................................................S-27
Loan-to-Value Ratio......................................................S-38
London Banking Day.......................................................S-27
Master Servicer..........................................................S-56
Master Servicing Fee.....................................................S-60
Maximum Rate.............................................................S-39
Minimum Rate.............................................................S-39
Modeling Assumptions.....................................................S-68
Mortgage Loans...........................................................S-19
Mortgage Pool............................................................S-19
Mortgaged Property.......................................................S-38
Net Mortgage Rate........................................................S-25
Net Prepayment Interest Shortfalls.......................................S-26
New Proposed Regulations.................................................S-82
Non-AP Percentage........................................................S-28
Non-AP Pool Balance......................................................S-29
Non-AP Senior Certificates...............................................S-19
Non-Discount Mortgage Loan...............................................S-28
Notional Amount..........................................................S-26
Offered Certificates.....................................................S-19
Offered Subordinate Certificates.........................................S-19
OID......................................................................S-81
OID Regulations..........................................................S-81
S-85
<PAGE>
Page
----
One-Year CMT Index.......................................................S-39
Original Credit Support Percentage.......................................S-23
Original Group Subordinate Amount........................................S-29
Participant..............................................................S-21
Penalty Period...........................................................S-63
Percentage Interest......................................................S-21
Periodic Cap.............................................................S-39
PMI Premium Rate.........................................................S-38
Plans....................................................................S-84
Pool 1...................................................................S-19
Pool 1 Mortgage Loans....................................................S-19
Pool 2...................................................................S-19
Pool 2 Mortgage Loans....................................................S-19
Pool 3...................................................................S-19
Pool Balance.............................................................S-29
Prepayment Assumption....................................................S-68
Prepayment Interest Excess...............................................S-26
Prepayment Interest Shortfall............................................S-26
Prepayment Penalty Amount................................................S-63
Prepayment Period........................................................S-31
Principal Prepayments....................................................S-32
Principal-Only Certificates..............................................S-19
Program..................................................................S-55
Proposed Amendments......................................................S-84
Rating Agencies..........................................................S-84
Realized Loss............................................................S-35
Record Date..............................................................S-20
Reference Banks..........................................................S-27
Relief Act...............................................................S-24
Relief Act Reduction.....................................................S-24
Reserve Interest Rate....................................................S-27
Residual Certificate.....................................................S-20
Restricted Components....................................................S-23
Rules....................................................................S-21
S&P......................................................................S-55
Page
----
Sale Agreement...........................................................S-62
Sale and Assignment Agreement............................................S-62
Sale Date................................................................S-62
Scheduled Payment........................................................S-37
Scheduled Principal Balance..............................................S-28
Seller...................................................................S-37
Senior Certificates......................................................S-19
Senior Percentage........................................................S-28
Senior Prepayment Percentage.............................................S-29
Senior Principal Distribution Amount.....................................S-27
Servicer Remittance Date.................................................S-32
Servicers................................................................S-58
Servicing Fee............................................................S-60
Servicing Fee Rate.......................................................S-60
SMMEA....................................................................S-82
Special Hazard Loss Limit................................................S-36
Special Hazard Losses....................................................S-35
Subordinate Certificates.................................................S-19
Subordinate Component Percentage.........................................S-30
Subordinate Percentage...................................................S-30
Subordinate Prepayment Percentage........................................S-30
Subordinate Principal Distribution Amount................................S-30
Tax Counsel..............................................................S-81
Transferor...............................................................S-62
Trust Agreement..........................................................S-61
Trust Fund...............................................................S-19
Trustee..................................................................S-37
Trustee Fee..............................................................S-37
Trustee Fee Rate.........................................................S-37
Undercollateralization Distribution......................................S-31
Undercollateralized Group................................................S-31
Underwriter..............................................................S-83
Underwriting Agreement...................................................S-83
Underwriting Guidelines..................................................S-54
United Guaranty..........................................................S-38
S-86
<PAGE>
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
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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:
o accrue interest based on a variable or adjustable rate ("Floating Rate
Securities");
o 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");
o 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");
o 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");
o 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");
o 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
o 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."
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
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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.
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
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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 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.
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o "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.
o "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 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:
o call protection for any class of Securities of a series;
o a guarantee of a certain prepayment rate of some or all of the Loans
underlying the series; or
o 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.
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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 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.
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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 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.
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
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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 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
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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.
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
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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.
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
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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.
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.
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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 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.
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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 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:
o 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");
o amounts held from time to time in the Collection Account and the
Distribution Account established for a series of Securities;
o 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;
o any Reserve Fund established pursuant to the Agreement for a series of
Securities, if specified in the prospectus supplement;
o any Servicing Agreements relating to Mortgage Loans in the trust fund, to
the extent that these agreements are assigned to the trustee;
o any primary mortgage insurance policies, FHA insurance, or VA guarantee
relating to Mortgage Loans in the trust fund;
o any pool insurance policy, special hazard insurance policy, bankruptcy
bond or other credit support relating to the series;
o 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
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o 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).
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:
o Ginnie Mae certificates (which may be Ginnie Mae I certificates or
Ginnie Mae II certificates);
o Fannie Mae certificates;
o Freddie Mac certificates;
o mortgage pass-through certificates representing a fractional, undivided
interest in Loans or collateralized mortgage obligations secured by Loans
("Private Mortgage-Backed Securities");
o Mortgage Loans or participation interests in Mortgage Loans; and
o 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 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.
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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 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.
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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 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:
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o fixed-rate level payment mortgage loans that are not insured or
guaranteed by any governmental agency ("Conventional Loans");
o fixed-rate level payment FHA Loans or VA Loans;
o adjustable rate mortgage loans;
o GEM Loans, Buy-Down Loans or GPM Loans; and
o 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.
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. ss. 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
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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.
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:
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o 30 days following foreclosure sale;
o 30 days following payment of the claim by any mortgage insurer; or
o 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.
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
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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 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:
o mortgage pass-through certificates, evidencing an undivided interest in a
pool of Loans or Agency Certificates; or
o 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 prospectus
supplement, the PMBS
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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:
o no Loan will have had a Loan-to-Value Ratio at origination in excess of
95%;
o 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;
o each Loan will have had an original term to stated maturity of not less
than 10 years and not more than 40 years;
o 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;
o 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
o 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.
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:
o the aggregate approximate principal amount and type of the Agency
Certificates and Private Mortgage-Backed Securities to be included in the
trust fund;
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o 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;
o the interest rate or range of interest rates of the Private
Mortgage-Backed Securities;
o the weighted average interest rate of the Private Mortgage-Backed
Securities;
o the PMBS Issuer, the PMBS Servicer and the PMBS Trustee for the Private
Mortgage-Backed Securities;
o 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;
o 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
o 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.
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:
o fixed interest rate or adjustable interest rate Mortgage Loans;
o "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;
o "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;
o Buy-Down Loans;
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o "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
o Mortgage Loans with other payment characteristics as described in this
prospectus and the prospectus supplement.
The Mortgage Loans may include:
o "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
o "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.
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
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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:
o 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%;
o 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;
o 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;
o 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
o 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:
o 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%;
o the Buy-Down Period may not exceed three years;
o 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;
o 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
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o 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:
o no Mortgage Loan may be delinquent for more than 59 days within the
12-month period ending with the Cut-off Date;
o no more than two payments may be 59 days or more delinquent during a
three-year period ending on the Cut-off Date;
o 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
o the debt service coverage ratio for each Mortgage Loan (calculated as
described in the prospectus supplement) will not be less than 1.1:1.
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:
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o the death of the borrower, or the last living of two co-borrowers;
o the borrower, or the last living of two co-borrowers, ceasing to use the
related Mortgaged Property as his or her principal residence; or
o 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.
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
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structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which
meets all the requirements of [this] paragraph except the size requirements and
with respect to which the manufacturer voluntarily files a certification
required by the Secretary of Housing and Urban Development and complies with
the standards established under [this] chapter."
Unless otherwise specified in the prospectus supplement for a series, the
following restrictions apply with respect to Manufactured Home Loans comprising
or underlying the Primary Assets for a series:
o no Manufactured Home Loan may have a Loan-to-Value Ratio at origination
in excess of 95%;
o each Manufactured Home Loan must have an original term to maturity of not
less than three years and not more than 30 years;
o 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
o 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 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.
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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 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
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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.
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.
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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.
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
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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 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:
o 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;
o 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;
o 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;
o 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
o 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,
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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 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:
o 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;
o as of the date of the transfer and assignment, the Manufactured Home
Loans are subject to no offsets, defenses or counterclaims;
o 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;
o 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;
o 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
o 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.
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Substitution of Primary Assets
Substitution of Primary Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Primary Asset or
in the event the documentation with respect to any Primary Asset is determined
by the trustee to be incomplete. The 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.
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:
o administer and supervise the performance by the servicers of their
servicing responsibilities under their servicing agreements ("Servicing
Agreements") with the master servicer,
o maintain any standard or special hazard insurance policy, primary
mortgage insurance, bankruptcy bond or pool insurance policy required for
the related Loans and
o 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:
o 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,
o withdrawing the Servicing Fee from the Collection Account after the
entire Scheduled Payment has been deposited in the Collection Account, or
o 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):
o all payments on account of principal, including prepayments, on the
Loans;
o 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 withheld from the Collection
Account in accordance with the related Agreement, the Servicing Fee in
respect of the Loans;
o 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
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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;
o 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);
o all amounts required to be deposited therein from any applicable Reserve
Fund for the related series pursuant to the related Agreement;
o all Advances for the related series made by the master servicer pursuant
to the related Agreement; and
o 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:
o 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;
o 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;
o 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;
o 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;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
o 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;
o to reimburse itself for the excess of any unreimbursed Advances with
respect to a particular Loan over the related Liquidation Proceeds;
o 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
o to clear and terminate the Collection Account pursuant to the related
Agreement.
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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, 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.
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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.
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
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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 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
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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 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.
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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
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 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
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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.
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.
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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 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.
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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:
o is qualified to service mortgage loans for Fannie Mae or Freddie Mac;
o is reasonably satisfactory to the trustee for the related series;
o has a net worth of not less than $15,000,000; and
o 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.
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.
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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:
o an irrevocable letter of credit;
o the subordination of one or more classes of the Securities of a series;
o reserve funds;
o a pool insurance policy, bankruptcy bond, repurchase bond or special
hazard insurance policy;
o a surety bond or financial guaranty insurance policy;
o the use of cross-support features; or
o another method of credit support described in the prospectus supplement.
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:
o the amount payable under the credit support;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o 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
o 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:
o a brief description of its principal business activities;
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
o if applicable, the credit ratings assigned to it by rating agencies; and
o 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
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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
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
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not covered by standard hazard insurance policies, a bankruptcy bond covering
certain losses resulting from the bankruptcy of a borrower and application of
certain provisions of the Bankruptcy Code, a repurchase bond covering the
repurchase of a Loan for which mortgage insurance or hazard insurance coverage
has been denied due to misrepresentations in connection with the origination of
the related Loan, or 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.
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
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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 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")
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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:
o 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;
o 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;
o amounts expended but not approved by the mortgage insurer;
o claim payments previously made by the mortgage insurer; and
o 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:
o 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;
o failure to construct the Mortgaged Property subject to the Mortgage Loan
in accordance with specified plans;
o physical damage to the Mortgaged Property; and
o 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
(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:
o 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 an dreasonable attorneys' fees;
o 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
o 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:
o no change may be made in the terms of the Mortgage Loan without the
consent of the mortgage insurer;
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o 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;
o 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;
o 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;
o 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
o the insured may accept a conveyance of the Mortgaged Property in lieu of
foreclosure with written approval of the mortgage insurer, provided the
ability of the insured to assign specified rights to the mortgage insurer
are not thereby impaired or the specified rights of the mortgage insurer
are not thereby adversely affected.
The mortgage insurer will be required to pay to the insured either: (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,
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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 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
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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 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
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the pool insurance policy that the insured maintain a primary mortgage
insurance policy that is acceptable to the pool insurer on all Mortgage Loans
in the related trust fund that have Loan-to-Value Ratios at the time of
origination in excess of 80% and that a claim under 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:
o the amount of the unpaid principal balance of the defaulted Mortgage Loan
immediately prior to the approved sale of the Mortgaged Property,
o the amount of the accumulated unpaid interest on the Mortgage Loan to the
date of claim settlement at the contractual rate of interest, and
o advances made by the insured as described above less certain payments.
An "approved sale" is:
o 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,
o a foreclosure or trustee's sale of the Mortgaged Property at a price
exceeding the maximum amount specified by the pool insurer,
o the acquisition of the Mortgaged Property under the primary mortgage
insurance policy by the mortgage insurer, or
o 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."
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.
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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 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
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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.
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.
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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.
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;
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(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:
o the mortgage note endorsed without recourse to the order of the trustee
or in blank;
o 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
o 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 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
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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.
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:
o that the information contained in the Participation Certificate Schedule
is true and correct in all material respects;
o that, immediately prior to the conveyance of the Participation
Certificates, the depositor had good title to and was sole owner of the
Participation Certificates;
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o that there has been no other sale by it of the Participation
Certificates; and
o 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 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 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
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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:
o 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;
o demand and time deposits, certificates of deposit or bankers'
acceptances;
o repurchase obligations pursuant to a written agreement with respect to
any security described in the first clause above;
o 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;
o 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);
o a guaranteed investment contract issued by an entity having a credit
rating acceptable to each Rating Agency; and
o 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."
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:
o 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)
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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;
o 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
o 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 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.
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Indenture
As specified in the prospectus supplement, events of default under the
indenture for each series of Notes generally include:
o 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;
o 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;
o 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;
o certain events of bankruptcy, insolvency, receivership or liquidation of
the trust; or
o 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:
o 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;
o 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
o 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
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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
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:
o if the trustee ceases to be eligible to continue to act as trustee under
the Agreement;
o if the trustee becomes insolvent; or
o 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.
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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 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
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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:
o reduce the amount or delay the timing of payments on any Security without
the consent of the holder of that Security; or
o 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. 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:
o 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
o 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:
o 100% of the Aggregate Asset Principal Balance of the Mortgage Loans,
plus
o with respect to REO Property, if any, the outstanding principal balance
of the related Mortgage Loan, minus
o 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
o unreimbursed expenses that are reimbursable pursuant to the terms of the
trust agreement, plus
o 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:
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o 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
o 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, 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
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agreement of which the borrower/homeowner is the beneficiary; at origination of
a mortgage loan, the borrower executes a separate undertaking to make payments
on the mortgage note. A deed of trust transaction normally has three parties,
the trustor, who is the borrower/homeowner; the beneficiary, who is the lender,
and the trustee, a third-party grantee. Under a deed of trust, the trustor
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
Junior Mortgages; Rights of Senior Mortgages
If specified in the applicable prospectus supplement, 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 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.
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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 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.
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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.
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
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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 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
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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 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.
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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.
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 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.
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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:
o 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;
o 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
o 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.
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
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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.
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:
o 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
o 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.
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Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes for the borrower's default and
the likelihood that the borrower will be able to reinstate the loan. In some
cases, courts have substituted their judgment for the lender's judgment and
have required that lenders reinstate loans or recast payment schedules in order
to accommodate borrowers who are suffering from temporary financial disability.
In other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect
to Mortgage Loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the Mortgage Loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The Federal Home Loan Bank Board is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. Title V authorizes any state to reimpose interest rate limits by
adopting, before April 1, 1983, a state law, or by certifying that the voters
of 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.
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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 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.
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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 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 respect to any Manufactured Home Loan secured by a
Manufactured Home occupied by the borrower, the ability to accelerate will not
apply to those types of transfers discussed in "Due On Sale Clauses in Mortgage
Loans" above. FHA Loans and VA Loans are not permitted to contain "due-on-sale"
clauses, and so are freely assumable.
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Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations 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:
o 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;
o 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;
o 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;
o Partnership Securities representing interests in a trust fund (a
"Partnership Trust Fund") that is treated as a partnership for federal
income tax purposes; and
o Debt Securities representing indebtedness of a Partnership Trust Fund of
the beneficial owner of a Grantor Trust Fund for federal income tax
purposes.
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
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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 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
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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:
o in exchange for any qualified mortgage within a three-month period
thereafter; or
o 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 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.
o 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.
o 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.
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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 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.
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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.
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
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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 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 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
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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 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
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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 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.
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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 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
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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 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
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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 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.
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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 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.
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
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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."
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
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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.
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
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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 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.
o "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.
o "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
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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
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
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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 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
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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.
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
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.
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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 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
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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.
(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
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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.
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.
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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 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.
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(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."
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.
(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;
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(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.
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
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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.
(2) Tax Status
For a series, in the opinion of Brown & Wood LLP a Standard Security owned
by a:
o "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.
o 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).
o 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
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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 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.
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(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 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:
o 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;
o 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
o 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)
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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 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.
(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
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"-- 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;
(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.
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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."
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.
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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 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:
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(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.
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.
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(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.
(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, 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
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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 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
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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 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:
o 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.
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o 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.
o 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, Inc. ("Fitch").
o 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
o 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 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
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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.
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.
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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 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:
o the characteristics of the Subsequent Assets must be monitored by an
insurer or other credit support provider that is independent of the
depositor; or
o 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:
o the Pre-Funding Account and/or capitalized interest account used in
connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding Limit for the
trust fund; and
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o 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.
(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
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.
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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 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
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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:
o Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and
o 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 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.
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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
Page
-----
Adjustable Rate Mortgages .................. 25
Agency Certificates ........................ 14
Aggregate Asset Principal Balance .......... 5
Agreements ................................. 55
Appraised Value ............................ 24
ARMs ....................................... 25
Asset Group ................................ 2
Asset Principal Balance .................... 5
Bankruptcy Bond ............................ 54
Bankruptcy Code ............................ 45
Beneficial Owner ........................... 5
Bi-Weekly Loans ............................ 23
Book-Entry Securities ...................... 2
Business Day ............................... 64
Buydown .................................... 51
Buy-Down Amounts ........................... 24
Buy-Down Fund .............................. 36
Buy-Down Loans ............................. 24
Buy-Down Mortgage Rate ..................... 24
Buy-Down Period ............................ 24
Cash Program ............................... 18
CERCLA ..................................... 74
Certificates ............................... 2
Clearstream ................................ 5
Code ....................................... 80
Collection Account ......................... 34
Commission ................................. 121
Compound Interest Securities ............... 2
Compound Value ............................. 4
Condominium ................................ 23
Condominium Association .................... 32
Condominium Building ....................... 32
Condominium Unit ........................... 23
Conventional Loans ......................... 17
Cooperative Corporation .................... 6
Cooperative Dwellings ...................... 23
Cooperatives ............................... 23
Covered Trust .............................. 44
CPR ........................................ 11
Cut-off Date ............................... 13
DCR ........................................ 116
Deferred Interest .......................... 11
Definitive Securities ...................... 2
Deleted Loan ............................... 58
Distribution Account ....................... 64
<PAGE>
Page
-----
DOL ........................................ 115
DTC ........................................ 5
Due Date ................................... 37
EDGAR ...................................... 121
Eligible Investments ....................... 60
Eligible Reserve Fund Investments .......... 60
EPA ........................................ 75
ERISA ...................................... 114
Escrow Accounts ............................ 34
Euroclear .................................. 5
Euroclear Operator ......................... 6
European Depositaries ...................... 7
Exchange Act ............................... 122
Excluded Plan .............................. 116
Exemption .................................. 115
Expense Reserve Fund ....................... 64
Fannie Mae ................................. 17
FASIT ...................................... 80
FASIT Provisions ........................... 80
FHA ........................................ 16
FHA Loans .................................. 22
Financial Intermediary ..................... 7
Fitch ...................................... 116
Floating Rate Securities ................... 2
Freddie Mac ................................ 20
Freddie Mac Act ............................ 20
FHA/VA Claim Proceeds ...................... 49
FSLIC ...................................... 25
Garn-St Germain Act ........................ 75
GEM Loans .................................. 22
Ginnie Mae ................................. 16
Ginnie Mae Servicers ....................... 14
GPM Fund ................................... 37
GPM Loans .................................. 22
Guarantor Program .......................... 18
Guaranty Agreement ......................... 15
Holder-In-Due-Course ....................... 79
Housing Act ................................ 16
HUD ........................................ 20
Index ...................................... 25
Indirect Participants ...................... 6
Insurance Policies ......................... 21
Insured Loss ............................... 47
Interest Rate .............................. 3
Interest Weighted Securities ............... 2
123
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Page
-----
L/C Bank ...................................... 46
L/C Percentage ................................ 46
Lifetime Mortgage Rate Cap .................... 25
Liquidation Proceeds .......................... 35
Loans ......................................... 14
Loan-to-Value Ratio ........................... 24
Manufactured Home ............................. 26
Manufactured Home Loan Schedule ............... 57
Manufactured Home Loans ....................... 26
Maximum Mortgage Rate Adjustment .............. 25
Minimum Mortgage Rate ......................... 25
Minimum Principal Distribution Amount ......... 4
Moody's ....................................... 116
Mortgage Certificate Schedule ................. 55
Mortgage Loan Schedule ........................ 57
Mortgage Loans ................................ 22
Mortgage Rates ................................ 12
Mortgaged Property ............................ 13
Multi-Class Series ............................ 3
Multifamily Properties ........................ 11
NCUA .......................................... 119
Negatively Amortizing ARMs .................... 25
No-Bid ........................................ 51
Non-Equity Securities ......................... 117
Non-U.S. Person ............................... 99
Notes ......................................... 2
Offered Securities ............................ 2
PACs .......................................... 2
Participants .................................. 6
Participation Agreement ....................... 14
Participation Certificate Schedule ............ 57
Participation Certificates .................... 57
Parties in Interest ........................... 115
PC Pool ....................................... 18
Percentage Interest ........................... 3
Planned Amortization Certificates ............. 2
Plans ......................................... 114
PMBS Agreement ................................ 20
PMBS Issuer ................................... 20
PMBS Servicer ................................. 20
PMBS Trustee .................................. 20
Policy Statement .............................. 119
Pre-Funding Account ........................... 28
<PAGE>
Page
---
Pre-Funding Arrangement ....................... 28
Pre-Funding Limit ............................. 118
Principal Distribution Amount ................. 4
Principal Weighted Securities ................. 2
Private Mortgage-Backed Securities ............ 14
PTCE .......................................... 117
Qualified Insurer ............................. 39
Qualifying Substitute Mortgage Loan ........... 58
Rating Agency ................................. 4
RCRA .......................................... 75
Relevant Depositary ........................... 7
REMIC ......................................... 80
REMIC Povisions ............................... 80
REO Property .................................. 65
Retained Interest ............................. 14
Rules ......................................... 7
S&P ........................................... 116
Scheduled Payments ............................ 11
Scheduled Principal ........................... 18
Secured Creditor Exclusion .................... 75
Securities .................................... 2
Seller ........................................ 56
Senior Securities ............................. 4
Servicing Account ............................. 36
Servicing Agreements .......................... 33
Single Family Property ........................ 17
SMMEA ......................................... 119
SPA ........................................... 11
Subordinate Securities ........................ 2,4
Subordination Reserve Fund .................... 45
Subsequent Primary Assets ..................... 28
Subservicers .................................. 33
Subsidy Fund .................................. 37
Taxable Mortgage Pools ........................ 81
Terms and Conditions .......................... 7
Tiered REMICs ................................. 84
Title V ....................................... 76
Title VIII .................................... 77
UCC ........................................... 71
underwriter ................................... 115
Underwriters .................................. 120
VA ............................................ 16
VA Loans ...................................... 15
124
<PAGE>
$278,609,960
(Approximate)
STRUCTURED ASSET SECURITIES CORPORATION
Mortgage Pass-Through Certificates,
Series 2000-5
[GRAPHIC OMITTED]
Aurora Loan Services Inc.
Master Servicer
------------------------------
PROSPECTUS SUPPLEMENT
October 25, 2000
------------------------------
LEHMAN BROTHERS
