<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-35026
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 23, 2000)
$690,484,171 (APPROXIMATE)
STRUCTURED ASSET SECURITIES CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-4
[AURORA LOAN SERVICES INC. LOGO]
AURORA LOAN SERVICES INC.,
MASTER SERVICER
--------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-12 OF THIS PROSPECTUS
SUPPLEMENT.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of principal terms beginning on page S-97 in this
prospectus supplement and the index of defined terms on page 132 in the
prospectus. The certificates will represent interests in the trust fund only and
will not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
THE TRUST WILL ISSUE:
O 24 CLASSES OF SENIOR CERTIFICATES, AND
O SEVEN CLASSES OF SUBORDINATE CERTIFICATES.
The classes of certificates offered by this prospectus supplement are listed,
together with their initial class principal amounts and interest rates, under
"Summary of Terms -- The Offered Certificates" beginning on page S-6 of this
prospectus supplement. This prospectus supplement relates 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 Class 2-A5 Certificates will have the benefit of a certificate guaranty
insurance policy issued by MBIA Insurance Corporation. Subject to the exceptions
and limitations that are described in this prospectus supplement, the
certificate guaranty insurance policy will guarantee certain payments of
interest and principal to Class 2-A5 Certificateholders as described in this
prospectus supplement.
The assets of the trust fund 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 than if they had been underwritten in accordance with
higher standards.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The certificates 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. The Class 2-A5 Certificates will also be offered by Edward D.
Jones & Co., L.P., as a dealer, from time to time in negotiated transactions or
otherwise at varying prices determined at the time of sale. Proceeds to
Structured Asset Securities Corporation from the sale of these certificates will
be approximately 100% of their initial total principal amount, plus accrued
interest, before deducting expenses.
On or about October 27, 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.
LEHMAN BROTHERS EDWARD D. JONES & CO., L.P.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 23, 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 Mortgage Loans ................ S-10
Financing .......................................... S-10
Tax Status ......................................... S-10
ERISA Considerations ............................... S-10
Legal Investment Considerations .................... S-10
Ratings of the Certificates ........................ S-11
Risk Factors ............................................ S-12
Higher Expected Delinquencies of the
Mortgage Loans .................................. S-12
Potential Inadequacy of Credit Enhancement.......... S-12
No Cross-Collateralization between the
Mortgage Pools .................................. S-12
Unpredictability and Effect of Prepayments ......... S-13
Special Risks for Certain Classes of
Certificates .................................... S-13
Special Risks for the Class BX Certificates ........ S-14
Changes in LIBOR May Reduce the Yields on
the Class 1-A4, 1-A5, 1-A6 and 1-A7
Certificates .................................... S-14
Principal Payments on the Class 2-A5
Certificates May Be Less Predictable than
on Other Classes Because of Special Rules
on Making Principal Payments .................... S-14
Mortgage Loans with Interest-Only Payments.......... S-15
Balloon Loans ...................................... S-15
High LTV Loans ..................................... S-16
Default Risk on High Balance Mortgage
Loans ........................................... S-16
Geographic Concentration of Mortgage Loans.......... S-16
Lack of Primary Mortgage Insurance ................. S-16
Effects of Performance of Mortgage Loans on
Ratings of Certificates ......................... S-17
Limited Ability to Resell Certificates ............. S-17
Description of the Certificates ........................ S-18
General ............................................ S-18
Book-Entry Registration ............................ S-20
Priority of Distributions .......................... S-21
Distributions of Interest .......................... S-24
Distributions of Principal ......................... S-28
Available Distribution Amount ...................... S-32
Distributions of Principal on the Class 2-A5
Certificates .................................... S-33
Example of Distributions ........................... S-36
The Residual Certificate ........................... S-37
Allocation of Realized Losses ...................... S-37
Final Scheduled Distribution Date .................. S-39
Optional Termination of the Trust Fund ............. S-40
The Trustee ........................................ S-40
Description of the Mortgage Pools ...................... S-40
General ............................................ S-40
Pool 1 Mortgage Loans .............................. S-42
Pool 2 Mortgage Loans .............................. S-48
Pool 3 Mortgage Loans .............................. S-53
Underwriting Guidelines ............................ S-57
Aurora Underwriting Guidelines ..................... S-57
GreenPoint Underwriting Guidelines ................. S-58
The Borrower Advantage Program ..................... S-58
Additional Information .................................. S-60
The Master Servicer ..................................... S-60
The Servicers ........................................... S-61
GreenPoint ......................................... S-62
Servicing of the Mortgage Loans ......................... S-62
General ............................................ S-62
Servicing Compensation and Payment of
Expenses ........................................ S-62
Prepayment Interest Shortfalls ..................... S-63
Advances ........................................... S-63
Collection of Taxes, Assessments and Similar
Items ........................................... S-63
Insurance Coverage ................................. S-64
Evidence as to Compliance .......................... S-64
Certain Rights Related to Foreclosure .............. S-64
Trust Agreement ......................................... S-64
General ............................................ S-64
Assignment of Mortgage Loans ....................... S-64
Voting Rights ...................................... S-65
Yield, Prepayment and Weighted Average Life ............. S-65
General ............................................ S-65
Sensitivity of Certain Classes of Certificates ..... S-68
Subordination of the Offered Subordinate
Certificates .................................... S-73
Weighted Average Life .............................. S-73
PAGE
----
The Class 2-A5 Certificate Insurance Policy ............. S-90
The Class 2-A5 Certificate Insurer ................. S-91
Financial Information About the Class 2-A5
Certificate Insurer ............................. S-92
Where You Can Obtain Additional
Information About The Class 2-A5
Certificate Insurer ............................. S-92
Financial Strength Ratings of the Class 2-A5
Certificate Insurer ............................. S-93
Material Federal Income Tax Considerations .............. S-93
General ............................................ S-93
Residual Certificates .............................. S-93
Legal Investment Considerations ......................... S-94
Use of Proceeds ......................................... S-94
Underwriting ............................................ S-94
ERISA Considerations .................................... S-95
Experts ................................................. S-95
Legal Matters ........................................... S-95
Ratings ................................................. S-95
Index of Principal Terms ................................ S-97
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 ............ 10
Payment Delays ...................................... 10
Principal Prepayments ............................... 10
Timing of Reduction of Principal Amount ............. 10
Interest or Principal Weighted Securities ........... 10
Final Scheduled Distribution Date ................... 10
Prepayments and Weighted Average Life ............... 11
Other Factors Affecting Weighted Average
Life ............................................. 12
The Trust Funds .......................................... 14
General ............................................. 14
Ginnie Mae Certificates ............................. 15
Fannie Mae Certificates ............................. 17
Freddie Mac Certificates ............................ 18
Private Mortgage-Backed Securities .................. 21
The Mortgage Loans .................................. 23
The Manufactured Home Loans ......................... 27
Pre-Funding Arrangements ............................ 29
Collection Account and Distribution Account.......... 29
Other Funds or Accounts ............................. 30
Loan Underwriting Procedures and Standards ............... 30
Underwriting Standards .............................. 30
Loss Experience ..................................... 32
Representations and Warranties ...................... 33
Substitution of Primary Assets ...................... 34
Servicing of Loans ....................................... 35
General ............................................. 35
Collection Procedures; Escrow Accounts .............. 35
Deposits to and Withdrawals from the
Collection Account ............................... 36
Servicing Accounts .................................. 38
Buy-Down Loans, GPM Loans and Other
Subsidized Loans ................................. 38
Advances and Other Payments, and
Limitations Thereon .............................. 39
Maintenance of Insurance Policies and Other
Servicing Procedures ............................. 40
Presentation of Claims; Realization Upon
Defaulted Loans .................................. 42
Enforcement of Due-On-Sale Clauses .................. 43
Certain Rights Related to Foreclosure ............... 44
Servicing Compensation and Payment of
Expenses ......................................... 44
Evidence as to Compliance ........................... 45
Certain Matters Regarding the Master
Servicer ......................................... 45
Credit Support ........................................... 46
General ............................................. 46
Subordinate Securities; Subordination Reserve
Fund ............................................. 47
Cross-Support Features. ............................. 48
Insurance ........................................... 48
Letter of Credit. ................................... 48
Financial Guaranty Insurance Policy ................. 49
Reserve Funds ....................................... 49
Description of Mortgage and Other Insurance .............. 51
Mortgage Insurance on the Loans ..................... 51
Hazard Insurance on the Loans ....................... 56
Bankruptcy Bond ..................................... 58
Repurchase Bond ..................................... 58
The Agreements. .......................................... 59
Issuance of Securities .............................. 59
Assignment of Primary Assets. ....................... 59
Repurchase and Substitution of
Non-Conforming Loans ............................. 62
Reports To Securityholders .......................... 63
Investment of Funds ................................. 64
Event of Default; Rights Upon Event of
Default .......................................... 64
The Trustee ......................................... 67
Duties of the Trustee ............................... 67
Resignation of Trustee. ............................. 67
Distribution Account ................................ 68
Expense Reserve Fund. ............................... 68
Amendment of Agreement. ............................. 68
Voting Rights ....................................... 69
REMIC or FASIT Administrator. ....................... 69
PAGE
---------
Administration Agreement ............................ 69
Termination ......................................... 69
Legal Aspects of Loans. .................................. 71
Mortgages ........................................... 71
Junior Mortgages; Rights of Senior Mortgages......... 71
Cooperative Loans ................................... 73
Foreclosure on Mortgages. ........................... 74
Realizing Upon Cooperative Loan Security ............ 75
Rights of Redemption. ............................... 77
Anti-Deficiency Legislation and Other
Limitations on Lenders ........................... 77
Soldiers' and Sailors' Civil Relief Act of 1940...... 79
Environmental Risks ................................. 80
Due-on-Sale Clauses in Mortgage Loans ............... 80
Enforceability of Prepayment and Late
Payment Fees ..................................... 81
Equitable Limitations on Remedies ................... 81
Applicability of Usury Laws ......................... 81
S-4
<PAGE>
PAGE
-----
Adjustable Interest Rate Loans. ............... 82
Manufactured Home Loans ....................... 82
Material Federal Income Tax Considerations ......... 86
General ....................................... 86
Taxable Mortgage Pools ........................ 87
REMICs ........................................ 87
FASITs ........................................ 108
Partnership Trust Funds & Debt Securities .......... 117
State Tax Considerations ........................... 123
ERISA Considerations ............................... 123
Pre-Funding Accounts ............................... 126
Legal Investment Considerations .................... 128
Legal Matters ...................................... 129
The Depositor ...................................... 129
Use of Proceeds .................................... 129
Plan of Distribution ............................... 129
Additional Information ............................. 130
Incorporation of Certain Documents by Reference..... 131
Reports to Securityholders ......................... 131
Index of Defined Terms ............................. 132
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 TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST FUND OR IN ANY POOL, THAT PERCENTAGE HAS BEEN CALCULATED ON THE
BASIS OF THE TOTAL SCHEDULED PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF
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
The mortgage loans will initially be serviced by a variety of primary
servicers identified under "The Servicers" in this prospectus supplement.
TRUSTEE
Wells Fargo Bank Minnesota, N.A.
CLASS 2-A5 CERTIFICATE INSURER
MBIA Insurance Corporation
THE OFFERED CERTIFICATES
CLASSES OF CERTIFICATES
Structured Asset Securities Corporation's Mortgage Pass-Through
Certificates, Series 2000-4, consist of the classes of certificates listed in
the table on the following page, together with the 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>
SERIES 2000-4
<TABLE>
<CAPTION>
CLASS
PRINCIPAL CUSIP
CLASS AMOUNT(1) TYPE(6) INTEREST RATE NUMBER
------------------ -------------------- ------------ ---------------- ----------
<S> <C> <C> <C> <C>
1-A1 ............. $77,000,000 SEQ 7.15% 863572U84
1-A2 ............. 37,845,000 SEQ 7.00% 863572U92
1-A3(2) .......... (3) SEQ/NTL/IO 9.00% 863572V26
1-A4(2) .......... (3) NAS/FLT IO Adjustable(4) 863572V34
1-A5(2) .......... (3) NAS/INV IO Adjustable(4) 863572V42
1-A6 ............. 115,000,000 SEQ/FLT Adjustable(4) 863572V59
1-A7(2) .......... (3) SEQ/INV IO Adjustable(4) 863572V67
1-A8 ............. 9,000,000 SEQ 7.75% 863572V75
1-A9(2) .......... (3) SEQ/NTL/IO 9.00% 863572V83
1-A10 ............ 50,000,000 NAS 7.60% 863572V91
1-A11(2) ......... (3) NAS/IO 9.00% 863572W25
1-AP(5) .......... 2,279,101 RSTP/PO 0.00% 863572W33
2-A1 ............. 111,755,000 SEQ 7.00% 863572W41
2-A2(2) .......... (3) SEQ/NTL/IO 7.75% 863572W58
2-A3 ............. 115,000,000 SEQ 7.75% 863572W66
2-A4(2) .......... (3) SEQ/NTL/IO 0.04% 863572W74
2-A5 ............. 40,000,000 SEQ/RET 7.25% 863572W82
2-A6(2) .......... (3) SEQ/NTL/IO 7.75% 863572W90
2-AP(5) .......... 1,757,010 RSTP/PO 0.00% 863572X32
3-A1 ............. 92,397,000 Pass-thru 8.25% 863572X40
3-AP(5) .......... 212,960 RSTP/PO 0.00% 863572X57
3-AX(2) .......... (3) RSTP/IO 8.25% 863572X65
AX(2) ............ (3) RSTP/IO 7.75% 863572X73
B1 ............... 22,249,000 SUB Adjustable(4) 863572X81
B2 ............... 11,126,000 SUB Adjustable(4) 863572X99
BX(2) ............ (3) SUBIO 9.00% 863572Y23
B3 ............... 4,863,000 SUB Adjustable(4) 863572Y31
R ................ 100 Residual 9.00% 863572Y72
</TABLE>
--------
(1) These balances are approximate, as described in this prospectus
supplement.
(2) The Class 1-A3, 1-A4, 1-A5, 1-A7, 1-A9, 1-A11, 2-A2, 2-A4, 2-A6, 3-AX, AX
and BX Certificates will be interest-only certificates; they will not be
entitled to payments of principal.
(3) The Class 1-A3, 1-A4, 1-A5, 1-A7, 1-A9, 1-A11, 2-A2, 2-A4, 2-A6, 3-AX, AX
and BX Certificates will have no principal amount; they will accrue
interest on a notional amount, as described in this prospectus
supplement.
(4) The Class 1-A4, 1-A5, 1-A6, 1-A7, B1, B2 and B3 Certificates accrue
interest based on variable interest rates, as described in this
prospectus supplement.
(5) The Class 1-AP, 2-AP and 3-AP Certificates will be principal-only
certificates; they will not be entitled to payments of interest.
(6) SEQ = Sequential certificate
NTL/IO = Notional interest-only certificate
INV IO = Inverse floating rate interest-only certificate
FLT = Floating rate certificate
FLT IO = Floating interest-only certificate
NAS = Non-accelerated senior certificate
NAS/IO = Non-accelerated senior interest-only certificate
Pass-Thru = Pass-through certificate
RSTP/PO = Ratio strip principal-only certificate
RSTP/IO = Ratio strip interest-only certificate
RET = Retail certificate
SUB = Subordinate certificate
SUBIO = Subordinate interest-only certificate
References to "SEQ" or "NAS" for a class of interest-only certificates
means that the class or classes on which the notional balance of that
interest-only class is based is a sequential class or a non-accelerated
senior class, respectively.
S-7
<PAGE>
The certificates, 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 single
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 which
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, generally all of the mortgage loans in each of pool 1 and pool 2
have original terms to maturity of 15 to 30 years and consist of fixed rate
mortgage loans; the mortgage loans in pool 3 consist of fixed rate mortgage
loans with original terms to maturity of 15 to 30 years, have relatively high
loan-to-value ratios and have original principal balances which do not exceed
the applicable 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 designations and the Class R Certificate will be based on
collections on the pool 1 mortgage loans, payments on senior certificates
identified with a "2-" in their class designations will be based on collections
on the pool 2 mortgage loans and payments on senior certificates identified
with a "3-" in their class designations will be based on collections on the
pool 3 mortgage loans (or specified loans in such pool, in the case of the
Class 3-AX Certificates). Each class of the subordinate certificates, other
than the Class BX Certificates, will consist of three payment components: one
component relating to pool 1, one component relating to pool 2 and one
component relating to pool 3. The Class BX Certificates consist of two payment
components, each relating to pool 1.
Payments of interest on the Class AX Certificates will be calculated on
the basis of amounts collected on certain mortgage loans in pool 1 and pool 2,
as described in this prospectus supplement.
The certificates will have an approximate total initial principal amount
of $702,444,730. 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, other than
the Class BX Certificates, will consist of three payment components. Each
component is related to pool 1, pool 2 or pool 3, and will accordingly be
designated with either a "(1)", a "(2)" or a "(3)", respectively. The Class BX
Certificates have two payment components, the B(X1) and B(X2) components.
The balance, or notional balance, of each class of certificates
consisting of components at any time will each equal the sum of its components.
For example, the outstanding principal amount of the Class B1 Certificates will
equal the sum of the outstanding principal amount of the B1(1), B1(2) and B1(3)
components. In addition, the total amount of interest accrued on the Class B1
Certificates, for example, in any given payment period will equal the sum of
the amount of interest accrued on the B1(1), B1(2) and B1(3) components in the
corresponding period. The holder of a class consisting of components 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.
The Class 1-AP, 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 the three
mortgage pools and the different classes, and (2) the amount of 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.
S-8
<PAGE>
The key allocation concept for the Class 1-A1, 1-A2, 1-A6, 1-A8, 2-A1,
2-A3, 2-A5, 3-A1 and R Certificates is the related Senior Principal
Distribution Amount. The key allocation concept for the Class 1-A10
Certificates is the Class 1-A10 Priority Amount. The key allocation concept for
the Class 1-AP, 2-AP and 3-AP Certificates is the AP Principal Distribution
Amount. The key allocation concept for the Class B Certificates, other than the
Class BX Certificates, is the Subordinate Principal Distribution Amount.
The Class 1-A3, 1-A4, 1-A5, 1-A7, 1-A9, 1-A11, 2-A2, 2-A4, 2-A6, 3-AX, AX
and BX 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, other than the Class 2-A5 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, other than the Class 2-A5 Certificates, which will have the
benefit of a certificate guaranty insurance policy issued by MBIA Insurance
Corporation and a reserve fund to cover certain interest shortfalls allocated
to the Class 2-A5 Certificates.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE CERTIFICATES
The payment structure used by the trust fund includes subordination and
loss allocation 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.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates --Allocation of Realized Losses" in this
prospectus supplement for a detailed description of subordination and loss
allocation.
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 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 (other than "excess" losses) will be applied to
reduce the principal amount of the related component (i.e., the component for
such pool) still outstanding that has the lowest payment priority, until the
amount of that component has been reduced to zero. For example, losses in pool
1 will first be allocated in reduction of the B6(1) component balance until it
is reduced to zero, then to the B5(1) component until its balance has been
reduced to zero and likewise to the B4(1), B3(1), B2(1) and B1(1) components,
in that order, until the balance of each component has been reduced to zero. If
the applicable subordination is insufficient to absorb such losses, then senior
certificateholders in the related certificate group will incur losses and may
never receive all of their principal payments.
See "Description of the Certificates -- Allocation of Realized Losses" in
this prospectus supplement.
THE CERTIFICATE INSURANCE POLICY
The MBIA certificate insurance policy will guarantee certain interest and
principal payments to holders of the Class 2-A5 Certificates under the
circumstances described in this prospectus supplement. No other class of
certificates will benefit from the MBIA insurance policy.
For information about MBIA Insurance Corporation and for a more detailed
discussion of the MBIA insurance policy, see "The Class 2-A5 Certificate
Insurance Policy" in this prospectus supplement.
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about October 27,
2000, the assets of the trust will consist primarily of three pools of mortgage
loans with a total principal balance of approximately $702,444,730. 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 fixed rate, conventional, first lien
residential mortgage loans, nearly all of which have original terms to stated
maturity of 15 or 30 years.
S-9
<PAGE>
The mortgage loans in the trust fund were generally 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 primary
loan servicers, but will not be ultimately responsible for the servicing of the
mortgage loans except as provided in this prospectus supplement. Servicing may
subsequently be transferred to other primary servicers in accordance with the
trust agreement, as described in this prospectus supplement.
See "The Master Servicer" and "Servicing of the Mortgage Loans" in this
prospectus supplement.
OPTIONAL PURCHASE OF MORTGAGE LOANS
Structured Asset Securities Corporation may repurchase the mortgage loans
on any distribution date after 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 Termination of the Trust
Fund" in this prospectus supplement for a description of the purchase price to
be paid for the mortgage loans.
FINANCING
An affiliate of the underwriter has provided financing for the mortgage
loans. The Depositor will use a portion of the proceeds of the sale of the
certificates to repay the financing.
TAX STATUS
The trustee will elect to treat 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 REMIC "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-A3, 1-A4, 1-A5, 1-A7, 1-A9, 1-A11, 1-AP, 2-A2, 2-A4, 2-A6,
2-AP, 3-AP, 3-AX, AX and BX 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-A2, 1-A3, 1-A4, 1-A5, 1-A6, 1-A7, 1-A8,
1-A9, 1-A10, 1-A11, 1-AP, 2-A1, 2-A2, 2-A3, 2-A4, 2-A5, 2-A6, 2-AP and AX
Certificates may, but the Class R, 3-A1, 3-AP, 3-AX, B1, B2, BX 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-A2, 1-A3, 1-A4, 1-A5, 1-A6, 1-A7, 1-A8, 1-A9,
1-A10, 1-A11, 1-AP, 2-A1, 2-A2, 2-A3, 2-A4, 2-A5, 2-A6, 2-AP, 3-A1, 3-AP, 3-AX,
AX, 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.
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<PAGE>
RATINGS OF THE CERTIFICATES
The certificates offered by this prospectus supplement will initially
have the following ratings from Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc., and Fitch, Inc. The designation "N/A" means
that a rating agency will not rate the certificates of that class:
<TABLE>
<CAPTION>
STANDARD & FITCH
CLASS POOR'S RATING RATING
------------------------------- --------------- -------
<S> <C> <C>
1-A1 .......................... AAA AAA
1-A2 .......................... AAA AAA
1-A3 .......................... AAA AAA
1-A4 .......................... AAA AAA
1-A5 .......................... AAA AAA
1-A6 .......................... AAA AAA
1-A7 .......................... AAA AAA
1-A8 .......................... AAA AAA
1-A9 .......................... AAA AAA
1-A10 ......................... AAA AAA
1-A11 ......................... AAA AAA
1-AP .......................... AAA AAA
2-A1 .......................... AAA AAA
2-A2 .......................... AAA AAA
2-A3 .......................... AAA AAA
2-A4 .......................... AAA AAA
2-A5 .......................... AAA AAA
2-A6 .......................... AAA AAA
2-AP .......................... AAA AAA
3-A1 .......................... AAA AAA
3-AP .......................... AAA AAA
3-AX .......................... AAA AAA
AX ............................ AAA AAA
R ............................. AAA AAA
B1 ............................ N/A AA
B2 ............................ N/A A
BX ............................ N/A A
B3 ............................ N/A BBB
</TABLE>
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-11
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES.
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 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.... With the exception of the 2-A5 Certificates, the
certificates are not insured by any financial guaranty
insurance policy. The subordination and loss
allocation 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 (other than "excess"
losses) 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 pool 1 will first be allocated
in reduction of the B6(1) component balance until it
is reduced to zero and then to the B5(1) component
until its balance has been reduced to zero and
likewise to the B4(1), B3(1), B2(1) and B1(1)
components, in that order, until the balance of each
component has been reduced to zero. If applicable
subordination is insufficient to absorb such losses,
then senior certificateholders in the related
certificate group will likely incur losses and may
never receive all of their principal payments
See "Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Realized Losses"
in this prospectus supplement.
NO CROSS-COLLATERALIZATION
BETWEEN THE MORTGAGE
POOLS................. Interest and principal on the senior certificates
will be payable out of amounts collected in respect of
the mortgage loans in the related mortgage pool
(except that the Class AX Certificates will be
entitled to amounts from pool 1 and pool 2).
Similarly, interest on each component of the
subordinate certificates and principal on each
component of the subordinate certificates will be
payable out of amounts collected in respect of the
mortgage loans in the related mortgage pool. The
mortgage loan pools will not be "cross-collateralized"
-- interest and principal received on mortgage loans
in a pool will only be available to the related
certificates and components. As a result, a
disproportionately high rate of
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<PAGE>
delinquencies or defaults in one mortgage pool may
result in shortfalls or losses affecting the related
component or components at the same time that amounts
from the other mortgage pools 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
a B1 component may be reduced because of losses on
the mortgage loans in pool 1, even though the B2
component related to pool 2 is still outstanding and
continues to receive distributions related to pool 2.
Moreover, in the case of extremely high losses
experienced by one mortgage pool, it is possible that
the principal amount of the senior certificates of
such mortgage pool could be reduced by related losses
that exceed the principal balance of the subordinate
components of that pool, even though the subordinate
components of the other mortgage pools were still
outstanding and receiving distributions.
See "Description of the Mortgage Pools" and
"Description of the Certificates -- Priority of
Distributions," "-- Distributions of Interest" 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 5.40%
of the mortgage loans in pool 1 and approximately
38.30% of the mortgage loans in pool 2 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. All prepayment
penalties will be retained by the primary loan
servicers as additional loan servicing compensation.
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 prepayment 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.
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.
SPECIAL RISKS FOR
CERTAIN CLASSES OF
CERTIFICATES.......... The Class 1-AP, 2-AP and 3-AP Certificates are
principal-only certificates and the Class 1-A3, 1-A4,
1-A5, 1-A7, 1-A9, 1-A11, 2-A2, 2-A4, 2-A6, 3-AX, AX
and BX 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:
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<PAGE>
o A faster than expected rate of prepayments on
mortgage loans in pool 1, in the case of the Class
1-A3, 1-A4, 1-A5, 1-A7, 1-A9, 1-A11 and BX
Certificates; in pool 2, in the case of the Class
2-A2, 2-A4 and 2-A6 Certificates; or
o A faster than expected rate of prepayment on
specified mortgage loans in pool 1 and pool 2
having net interest rates equal to or greater than
9.00% and 7.75%, respectively, in the case of the
Class AX Certificates; or
o A faster than expected rate of prepayments on
specified mortgage loans in pool 3 having net
interest rates equal to or greater than 8.25%, in
the case of the Class 3-AX Certificates; or
o A slower than expected rate of prepayments on
mortgage loans in pool 1 having net interest rates
lower than 9.00%, in the case of the Class 1-AP
Certificates, mortgage loans in pool 2 having net
interest rates lower than 7.75%, in the case of the
Class 2-AP Certificates, or mortgage loans in pool
3 having net interest rates lower than 8.25%, in
the case of the Class 3-AP Certificates.
Prepayments on the related mortgage loans, including
liquidations, repurchases and insurance payments,
could result in the failure of investors in the
interest-only 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' yield to maturity.
SPECIAL RISKS FOR THE
CLASS BX CERTIFICATES. Because the Class BX Certificates are interest-only
certificates having a class notional amount based upon
a percentage of the component principal amount of
specified subordinate components, an investor in such
certificates must not only consider the risks of
prepayment of the mortgage loans described above, but
also that any losses on the mortgage loans in pool 1
will first impact the related subordinate components
before affecting the related senior certificates of
pool 1.
See "Description of the Certificates -- Allocation of
Realized Losses" in this prospectus supplement.
CHANGES IN LIBOR MAY
REDUCE THE YIELDS ON
THE CLASS 1-A4, 1-A5,
1-A6 AND 1-A7
CERTIFICATES.......... The amount of interest payable on the Class 1-A4,
1-A5, 1-A6 and 1-A7 Certificates is calculated by
reference to the London Interbank Offered Rate,
known as LIBOR. If LIBOR falls, the yield on the
Class 1-A4 and 1-A6 Certificates will be lower. By
contrast, if LIBOR rises, the yield on the Class
1-A5 and 1-A7 Certificates will be lower and could
fall to zero. The interest rates on the Class
1-A4, 1-A5, 1-A6 and 1-A7 Certificates will not
exceed specified rates, regardless of levels of
LIBOR.
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.
PRINCIPAL PAYMENTS ON
THE CLASS 2-A5
CERTIFICATES MAY BE
LESS PREDICTABLE THAN
ON OTHER CLASSES
BECAUSE OF SPECIAL
RULES ON MAKING
PRINCIPAL PAYMENTS.... As described in this prospectus supplement, there
are special rules for determining which holders
receive principal payments on the Class 2-A5
Certificates and when these payments are made.
Amounts available for
S-14
<PAGE>
payments of principal on this class will first be
paid to holders who have submitted requests for
principal payments in the order submitted and with
certain priorities given to holders who have died.
Any amounts not paid to these requesting holders will
be paid by random lot to other holders of this class.
If you submitted a request for principal payments,
you may not receive the amount requested, either
because other requests had priority over yours or
because the amount available for principal payments
on your class was insufficient to honor your request.
If the amount available for principal payments on
this class exceeds the amount requested by all
holders, you may receive payments in excess of the
amount you requested or, even if you did not make a
request, you may receive payments.
As a result, holders may not receive principal
payments when they are expecting them, and may
receive principal payments when they are not
expecting them. In addition to making payments on
this class somewhat unpredictable, the timing of
these payments may affect your yield, as described in
this prospectus supplement.
Investors in these certificates should pay particular
attention to the risk that they may be less likely to
receive principal payments when prevailing interest
rates available for reinvestment are high, and may be
more likely to receive principal payments when
prevailing interest rates available for reinvestment
are low.
See "Description of the Certificates -- Distributions
of Principal on the Class 2-A5 Certificates" in this
prospectus supplement for more information on factors
affecting the timing of payments on these
certificates.
MORTGAGE LOANS WITH
INTEREST-ONLY
PAYMENTS.............. Approximately 0.40% and 6.13% of the mortgage loans
in pool 1 and pool 2, respectively, 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 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.
BALLOON LOANS.......... Approximately 13.26% and 6.02% of the mortgage loans
in pool 1 and pool 2, respectively, are balloon loans.
Balloon loans pose a special payment risk because the
borrower must make a large lump sum payment of
principal at the end of the loan term. If the borrower
is unable to pay the lump sum or refinance the amount
owed, you may suffer a loss if the collateral for the
loan is insufficient and the other forms of credit
enhancement are insufficient or unavailable to cover
the loss.
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<PAGE>
HIGH LTV LOANS......... The mortgage loans included in pool 3 have original
loan-to-value ratios greater than 95% but less than
approximately 103%. Loans with high loan-to-value
ratios are likely to experience a higher rate of
delinquencies and losses than low loan-to-value ratio
loans because the borrower has little or no equity in
the related mortgaged property.
See "Description of the Mortgage Pools --
Underwriting Guidelines" and "-- The Borrower
Advantage Program" herein.
DEFAULT RISK ON HIGH
BALANCE MORTGAGE
LOANS................. The principal balances of approximately 17 of the
mortgage loans in pool 2 (representing approximately
11.00% of the pool 2 mortgage loans) were in excess of
$1,000,000 on the closing date, including
approximately 4 mortgage loans with principal balances
in excess of $2,000,000 (representing approximately
4.61% of the pool 2 mortgage loans). 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 34.42%, 48.56% and 8.43% of the
mortgage loans in pool 1, pool 2 and pool 3,
respectively, expected to be in the trust fund on the
closing date are secured by properties in California.
In addition, a significant percentage of the mortgage
loans expected to be in the trust fund on the closing
date are secured by properties in Florida, New York
and Colorado. The rate of delinquencies, defaults and
losses on the mortgage loans may be higher than if
fewer of the mortgage loans were concentrated in those
states because the following conditions in one or more
of those states 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 these
states may reduce the values of properties, which
would result in an increase in the loan-to-value
ratios.
o properties in one or more of those states,
particularly in California and Florida, 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.
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 35.17% and 12.57% of the mortgage loans
in pool 1 and pool 2, respectively, expected to be in
the trust fund on the closing date have original
loan-to-value ratios greater than 80%. Approximately
2.53% of these mortgage loans in pool 1 and 14.54% of
these mortgage loans in pool 2 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.
S-16
<PAGE>
EFFECTS OF PERFORMANCE
OF MORTGAGE LOANS
ON RATINGS OF
CERTIFICATES.......... If you are the owner of a Class AX Certificate or a
class of subordinate certificates (other than the
Class BX Certificates) the rating assigned to your
class will depend on the performance of the mortgage
loans in each group relating to such class. Therefore,
the poor performance of a single related pool may
affect the rating assigned to your class,
notwithstanding the better performance of the
remaining related pools.
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.
S-17
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 2000-4 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the Classes of Certificates set forth in the table on page S-7
along with the Class B-4, Class B-5 and Class B-6 Certificates. Classes of
Certificates with an "A" in their class designation and the Class R
Certificates are referred to herein as the "Senior Certificates;" the Class B1,
Class B2, Class BX and Class B3 Certificates are referred to herein as the
"Offered Subordinate Certificates;" and the Offered Subordinate Certificates
along with the Class B4, Class B5 and Class B6 Certificates are referred to
herein as the "Subordinate Certificates." Only the Senior Certificates and the
Offered Subordinate Certificates (the "Offered Certificates") are offered
hereby. The Class 1-AP, Class 2-AP and Class 3-AP Certificates are sometimes
referred to herein as the "Class AP Certificates" or the "Principal-Only
Certificates;" the Class 1-A3, Class 1-A4, Class 1-A5, Class 1-A7, Class 1-A9,
Class 1-A11, Class 2-A2, Class 2-A4, Class 2-A6, Class 3-AX, Class AX and Class
BX Certificates are sometimes referred to herein as the "Interest-Only
Certificates;" and Classes of Certificates whose class designation does not
include a "P" are sometimes referred to herein as the "Non-AP Senior
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
fixed rate, fully amortizing and balloon, 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) a reserve fund established for the benefit of the Class
2-A5 Certificates, (5) any applicable insurance policies and all proceeds
thereof and (6) with respect to the Class 2-A5 Certificates only, the Class
2-A5 Certificate Insurance Policy.
THE GROUP 1 CERTIFICATES. The Class 1-A1, Class 1-A2, Class 1-A3, Class
1-A4, Class 1-A5, Class 1-A6, Class 1-A7, Class 1-A8, Class 1-A9, Class 1-A10,
Class 1-A11, Class 1-AP and Class BX Certificates, together with the AX(1)
Component of the Class AX Certificates and the B(X1) and B(X2) Components of
the Class BX Certificates, and the B1(1), B2(1) and B3(1) Components of the
Class B1, Class B2 and Class B3 Certificates, respectively, are referred to
herein as the "Group 1 Offered Certificates." These Classes and Components,
together with the remaining Group 1 Components (as described below), are
referred to herein as the "Group 1 Certificates." Distributions of interest and
principal on the Group 1 Certificates will be based on interest and principal
received or advanced with respect to the Mortgage Loans in Pool 1.
THE GROUP 2 CERTIFICATES. The Class 2-A1, Class 2-A2, Class 2-A3, Class
2-A4, Class 2-A5, Class 2-A6 and Class 2-AP Certificates, together with the
AX(2) Component of the Class AX Certificates and the B1(2), B2(2) and B3(2)
Components of the Class B1, Class B2 and Class B3 Certificates, respectively,
are referred to herein as the "Group 2 Offered Certificates." These Classes and
Components, together with the remaining Group 2 Components (as described
below), are referred to herein as the "Group 2 Certificates." Distributions of
interest and principal on the Group 2 Certificates will be based on interest
and principal received or advanced with respect to the Mortgage Loans in Pool
2, except for the Class 2-A5 Certificates which will also have the benefit of a
certificate guaranty insurance policy and related reserve fund as described
herein. See "The Class 2-A5 Certificate Insurance Policy."
THE GROUP 3 CERTIFICATES. The Class 3-A1, Class 3-AP and Class 3-AX
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 with respect to the Mortgage Loans (or specified 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 or
Component Notional Amounts (as defined herein) set forth below:
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<TABLE>
<CAPTION>
APPROXIMATE INITIAL
COMPONENT
PRINCIPAL AMOUNT
OR COMPONENT
NOTIONAL AMOUNT
--------------------
<S> <C>
AX(1) Component ..................... $ 54,208*
AX(2) Component ..................... 839,582*
B(X1) Component ..................... 1,120,677*
B(X2) Component ..................... 195,154*
B1(1) Component ..................... 11,866,000
B1(2) Component ..................... 8,708,000
B1(3) Component ..................... 1,675,000
B2(1) Component ..................... 4,747,000
B2(2) Component ..................... 5,805,000
B2(3) Component ..................... 574,000
B3(1) Component ..................... 2,690,000
B3(2) Component ..................... 1,886,000
B3(3) Component ..................... 287,000
B4(1) Component ..................... 2,215,000
B4(2) Component ..................... 2,612,000
B4(3) Component ..................... 239,000
B5(1) Component ..................... 1,740,000
B5(2) Component ..................... 1,306,000
B5(3) Component ..................... 143,000
B6(1) Component ..................... 2,057,692
B6(2) Component ..................... 1,454,901
B6(3) Component ..................... 192,964
</TABLE>
--------
* Component Notional Balance
The holder of a Class AX, Class B1, Class B2, Class B3, Class B4, Class
B5, Class B6 or Class BX 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. The Class AX Certificates are composed of two
notional Components (the AX(1) and AX(2) Components), having the initial
Component Notional Amounts described above. Each class of subordinate
certificates (other than the Class BX Certificates) consists of three payment
components (the parenthetical designation of such payment component indicating
the Pool to which it relates). The Class BX Certificates are comprised of two
notional Components (the B(X1) and B(X2) Components, respectively), having the
initial Component Notional Amounts described above.
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" herein. The approximate
initial Class Principal Amount of each of the Class B4, Class B5 and Class B6
Certificates is $5,066,000, $3,189,000 and $3,705,557, respectively. 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 other than the Class 1-A6
and Class 1-A7 Certificates will be the last Business Day of the month
immediately preceding the month in which the Distribution Date occurs and, for
the Class 1-A6 and Class 1-A7 Certificates, will be
S-19
<PAGE>
the Business Day immediately preceding the related Distribution Date. A
"Business Day" is generally any day other than a Saturday or Sunday or a day on
which the Class 2-A5 Certificate Insurer (as defined herein) or banks in New
York, Minnesota 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 more
than a 25% Percentage Interest (as defined below) 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 Certificates
(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 1-A2, Class
1-A6, Class 1-A10, Class 1-AP, Class 2-A1, Class 2-A3, Class 2-AP, Class 3-A1
and Class 3-AP Certificates will be issued in minimum denominations of $25,000
and integral multiples of $1 in excess thereof. The Class 1-A8 and Class 2-A5
Certificates will be issued in minimum denominations of $1,000 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-A7 Certificates will be issued
in minimum denominations of $1,000,000 in Notional Amount (as defined herein)
and integral multiples of $1 in excess thereof. The Class 1-A3, Class 1-A4,
Class 1-A5, Class 1-A9, Class 1-A11, Class 2-A2 and Class 2-A6 Certificates
will be each issued in minimum Percentage Interests (as defined below) of 20%.
The Class AX and Class BX Certificates will be issued in minimum Percentage
Interests of 25%. The Class 2-A4 and Class 3-AX Certificates will be issued in
minimum Percentage Interests of 100%. The Class R Certificates (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.
o When used to establish minimum denominations and otherwise with respect
to a Class of Certificates, 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. When used to determine voting rights of
Certificateholders, the Percentage Interest of a Certificate other than an
Interest-Only Certificate will be the fraction, expressed as a percentage,
the numerator of which is that Certificate's Certificate Principal Amount
and the denominator of which is the total of the Class Principal Amounts
of all such Classes of Certificates; and the Percentage Interest of an
Interest-Only Certificate will be the fraction, expressed as a percentage,
the numerator of which is that Certificate's Notional Amount and the
denominator of which is the total of the Class Notional Amounts of all
such Classes of Certificates.
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
S-20
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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, the Class 2-A5 Certificate Insurer 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.
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 and the Components of each
Certificate Group will be made on each Distribution Date from the related
Available Distribution Amount (as defined herein). 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 in the following order of priority:
(1) from the Available Distribution Amount for Pool 2, to payment to the
Class 2-A5 Certificate Insurer, the monthly premium for the Class 2-A5
Certificate Insurance Policy for that Distribution Date;
(2) 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;
(3) from the Available Distribution Amount for each Mortgage Pool, to
payment of Accrued Certificate Interest on each Class or Component of Senior
Certificates of the related Certificate Group, other than the 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;
S-21
<PAGE>
(4) from the Available Distribution Amount for each Mortgage Pool, to
payment of any outstanding Interest Shortfalls (as defined herein) on each
Class or Component 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;
(5) 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, Class 1-A6, Class 1-A8, Class 1-A10,
Class 1-AP and Class R Certificates, in reduction of their Class Principal
Amounts, from the Available Distribution Amount for Pool 1, concurrently,
as follows:
(i) to the Class 1-A1, Class 1-A2, Class 1-A6, Class 1-A8, Class
1-A10 and Class R Certificates, the Senior Principal Distribution
Amount for Pool 1, in the following order of priority:
(a) to the Class R Certificate, until its Class Principal Amount
has been reduced to zero;
(b) to the Class 1-A10 Certificates, the lesser of (i) the Class
1-A10 Priority Amount (as defined herein) and (ii) approximately
98.6% of the Senior Principal Distribution Amount for Pool 1, until
the Class Principal Amount thereof has been reduced to zero; and
(c) to the Class 1-A1, Class 1-A2, Class 1-A6 and Class 1-A8
Certificates, the remaining Senior Principal Distribution Amount for
Pool 1, in the following order of priority:
(I) to the Class 1-A1, Class 1-A2 and Class 1-A6 Certificates,
until a total of approximately $1,770,000 has been distributed
under this clause (5)(A)(i)(c)(I) for such Distribution Date,
concurrently, as follows:
(x) approximately 95.00% of the amount distributable
pursuant to clause 5(A)(i)(c)(I), pro rata, to the Class 1-A1
and Class 1-A2 Certificates; and
(y) approximately 5.00% of the amount distributable pursuant
to clause 5(A)(i)(c)(I) to the Class 1-A6 Certificates; and
(II) sequentially, in the following order of priority:
(x) to the Class 1-A6 Certificates, until their Class
Principal Amount has been reduced to zero;
(y) pro rata, to the Class 1-A1 and Class 1-A2 Certificates,
until the Class Principal Amount of each of those Classes has
been reduced to zero; and
(z) to the Class 1-A8 Certificates until their Class
Principal Amount has been reduced to zero; and
(d) to the Class 1-A10 Certificates, until their Class Principal
Amount has been reduced to zero;
(ii) to the Class 1-AP Certificates, the AP Principal Distribution
Amount (as defined herein) for Pool 1, until their Class Principal
Amount has been reduced to zero;
(B) to the Class 2-A1, Class 2-A3, Class 2-A5 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, Class 2-A3 and Class 2-A5 Certificates, the
Senior Principal Distribution Amount for Pool 2, in the following order
of priority:
(a) if the Distribution Date occurs on or after the Distribution
Date in November 2003, to the Class 2-A5 Certificates, an amount up
to $40,000 for such Distribution Date, until their Class Principal
Amount has been reduced to zero;
(b) to the Class 2-A1 and Class 2-A3 Certificates, until a total
of approximately $1,850,000 has been distributed under this clause
(5)(B)(i)(b) for such Distribution Date, concurrently, as follows:
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<PAGE>
(I) approximately 90.00% of the amount distributable
pursuant to clause 5(B)(i)(b), to the Class 2-A1 Certificates;
and
(II) approximately 10.00% of the amount distributable
pursuant to clause 5(B)(i)(b) to the Class 2-A3 Certificates;
(c) sequentially, to the Class 2-A3 and Class 2-A1 Certificates,
in that order, until the Class Principal Amount of each of those
Classes have been reduced to zero; and
(d) to the Class 2-A5 Certificates, until their Class Principal
Amount has been reduced to zero;
(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;
(6) to the Class 1-AP, 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
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;
(7) from the Available Distribution Amount for Pool 2, to the Class 2-A5
Certificate Insurer, payment of any unreimbursed Insured Payments, plus all
amounts due to the Class 2-A5 Certificate Insurer under the insurance
agreement among the Class 2-A5 Certificate Insurer, the Seller, the
Depositor and the Trustee (the "Insurance Agreement"), together with
interest thereon at the rate specified in the Insurance Agreement; and
(8) to the extent of the remaining Available Distribution Amounts for each
Mortgage Pool, to the Subordinate Certificates and Components of the related
Certificate Group, as follows:
(A) to the extent of the remaining Available Distribution Amount for
Pool 1, to payment to the B1(1), B(X1), B2(1), B(X2), B3(1), B4(1), B5(1)
and B6(1) Components, in their order of seniority (i.e., the Component
designated with the lowest number is the highest ranking Component,
followed in ascending order by the next highest number and so forth,
provided that the B(X1) Component ranks coequally with the B1(1) Component
and the B(X2) Component ranks coequally with the B2(1) Component), 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 such Component on
such Distribution Date), (y) any outstanding Interest Shortfalls
previously allocated to such Component, and (z) other than in the case of
the Components of the Class BX Certificates, such Component's Subordinate
Component Percentage of the Subordinate Principal Distribution Amount for
Group 1 for such 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 2, to payment to the B1(2), B2(2), B3(2), B4(2), B5(2) and B6(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 Pool
allocated to such Component on such Distribution Date), (y) any
outstanding Interest Shortfalls previously allocated to such Component,
and (z) such Component's Subordinate Component Percentage of the
Subordinate Principal Distribution Amount for Group 2 for such
Distribution Date, except as provided below, in reduction of the Component
Principal Amounts thereof; and
(C) to the extent of remaining Available Distribution Amount for Pool 3,
to payment 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
S-23
<PAGE>
related Mortgage Pool allocated to such Component on such Distribution
Date), (y) any outstanding Interest Shortfalls previously allocated to
such Component, and (z) such Component's Subordinate Component Percentage
of the Subordinate Principal Distribution Amount for Group 3 for such
Distribution Date, except as provided below, in reduction of the Component
Principal Amounts thereof.
With respect to each Component other than the B6(1), B6(2) and B6(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 the related
Certificate Group will be made to any related Component of lower priority (the
"Restricted Components"), and the amount otherwise distributable to the
Restricted Components in respect of such payments will be allocated among the
remaining Components of the related Certificate Group, 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 of lower priority in
the related Certificate Group (without giving effect to distributions on such
date). The "Original Credit Support Percentage" for a Component is the Credit
Support Percentage for such 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 such
Component immediately prior to that Distribution Date by the sum of the
Component Principal Amounts of all related Components, immediately prior to
that date.
On and after the Distribution Date on which the aggregate Component
Principal Amounts of the Subordinate Components in a Certificate Group has been
reduced to zero (the "Credit Support Depletion Date" for such Certificate
Group), the Available Distribution Amount with respect to the related Mortgage
Pool remaining after distribution of interest to the related Senior
Certificates on such date will be distributed among the Senior Certificates in
such Certificate Group remaining outstanding, proportionately, 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 the Class AX Certificates and the
Subordinate Certificates, 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 Class AX Certificates and 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, Component Principal Amount or Component Notional Amount for
that Distribution Date at the applicable Interest Rate, as reduced by such
Class' or Component's share of (1) the interest portion of any Excess Losses
(as defined herein) for such Distribution Date, allocable as described below,
and (2) with respect to any Mortgage Loan as to which there has been a
reduction in the amount of interest collectible as a result of application of
the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act," and any such reduction, a "Relief Act Reduction"), the amount of any such
reduction, 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 and the Class
AX Certificates will equal the sum of the Accrued Certificate Interest during
the related Accrual Period on the related Components of such Class. Interest
will accrue on the Certificates and, if applicable, on each Component thereof
on the basis of a 360-day year consisting of twelve 30-day months. 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 will
be allocated among the Senior Certificates of the related Certificate Group
(and in the case of Pool 1 and Pool 2, the Components of the Class AX
Certificates) and the Components of the Subordinate Certificates of the related
Certificate Group proportionately based on 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 Class of Offered Certificates (other than
the Class 1-A4, Class 1-A5, Class 1-A6, Class 1-A7, Class B1, Class B2 and
Class B3 Certificates) will be the applicable annual rate specified in the
table
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<PAGE>
on page S-7 hereof. The "Interest Rate" for each Class of Subordinate
Certificates (other than the Class BX Certificates) will be the applicable
per annum rate equal in each case to the weighted average, by Component
Principal Amount, of the Component Interest Rates applicable to the
Components of such Class. Interest will accrue on the Components of the
Subordinate Certificates at the per annum rates (each, a "Component
Interest Rate") described below.
o "Component Interest Rates" are: for the AX(1) and AX(2) Components, 7.75%
per annum, for the B1(1) Component, 8.15% per annum, and for the B2(1)
Component, 8.63% per annum, and for the B3(1), B4(1), B5(1) and B6(1)
Components, 9.00% per annum, for the B1(2), B2(2), B3(2), B4(2), B5(2) and
B6(2) Components, 7.75% per annum; for the B1(3), B2(3), B3(3), B4(3),
B5(3) and B6(3) Components, 8.25% per annum; and for the B(X1) and B(X2)
Components, 9.00% per annum.
The Interest Rate for the Class 1-A4, Class 1-A5, Class 1-A6 and Class
1-A7 Certificates will be determined by reference to LIBOR:
o interest will accrue on the Class 1-A4 Certificates at an annual rate
of 0.00% for the first Accrual Period, and thereafter, with respect to
each Accrual Period, at an annual rate equal to the lesser of (1) (a)
the product of (x) LIBOR and (y) 22.50 minus (b) 159.75% and (2) 9.00%
subject to a minimum rate of 0.00%;
o interest will accrue on the Class 1-A5 Certificates at an annual rate
of 9.00% for the first Accrual Period, and thereafter, with respect to
each Accrual Period, at an annual rate equal to the lesser of (1) (a)
the product of (x) LIBOR and (y) --22.50 plus (b) 168.75% and (2)
9.00%, subject to a minimum rate of 0.00%;
o interest will accrue on the Class 1-A6 Certificates at an annual rate
of 7.27% for the first Accrual Period, and thereafter, with respect to
each Accrual Period, at an annual rate equal to the lesser of (1) LIBOR
plus 0.65% and (2) 9.00%, subject to a minimum rate of 0.65%; and
o interest will accrue on the Class 1-A7 Certificates at an annual rate
of 1.73% for the first Accrual Period, and thereafter, with respect to
each Accrual Period, at an annual rate equal to 8.35% minus LIBOR,
subject to a minimum rate of 0.00%.
o The "Net Mortgage Rate" of any Mortgage Loan is its mortgage interest
rate less the sum of the Trustee Fee Rate, the Servicing Fee Rate (as
defined herein), any Retained Interest Rate (as defined herein), any
Originator Retained Interest Rate (as defined herein) and any mortgage
insurance premium, as applicable thereto.
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 any Realized Losses (as defined herein)
previously allocated to that Certificate. The "Certificate Principal
Amount" of any Subordinate Certificate (other than a Class BX 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 at "-- Allocation of Realized Losses") 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-A3 Certificates for any
Distribution Date will equal the sum of (1) the product of (a)
20.5555555556% and (b) the Class Principal Amount of the Class 1-A1
Certificates immediately before that Distribution Date and (2) the
product of (a) 22.2222222222% and (b) the Class Principal Amount of the
Class 1-A2 Certificates immediately before that Distribution Date.
o The Class Notional Amount of the Class 1-A4 Certificates for any
Distribution Date will equal the product of (1) 10.00% and (2) the
Class Principal Amount of the Class 1-A10 Certificates immediately
before that Distribution Date.
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o The Class Notional Amount of the Class 1-A5 Certificates for any
Distribution Date will equal the product of (1) 10.00% and (2) the
Class Principal Amount of the Class 1-A10 Certificates immediately
before that Distribution Date.
o The Class Notional Amount of the Class 1-A7 Certificates for any
Distribution Date will equal the Class Principal Amount of the Class
1-A6 Certificates immediately before that Distribution Date.
o The Class Notional Amount of the Class 1-A9 Certificates for any
Distribution Date will equal the product of (1) 13.8888888889% and (2)
the Class Principal Amount of the Class 1-A8 Certificates immediately
before that Distribution Date.
o The Class Notional Amount of the Class 1-A11 Certificates for any
Distribution Date will equal the product of (1) 5.5555555556% and (2)
the Class Principal Amount of the Class 1-A10 Certificates immediately
before that Distribution Date.
o The Class Notional Amount of the Class 2-A2 Certificates for any
Distribution Date will equal the product of (1) 9.6774193548% and
(2)the Class Principal Amount of the Class 2-A1 Certificates
immediately before that Distribution Date.
o The Class Notional Amount of the Class 2-A4 Certificates for any
Distribution Date will equal the Class Principal Amount of the Class
2-A5 Certificates immediately before that Distribution Date.
o The Class Notional Amount of the Class 2-A6 Certificates for any
Distribution Date will equal the product of (1) 5.2903225806% and (2)
the Class Principal Amount of the Class 2-A5 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 product of (1) a fraction, the
numerator of which is the weighted average of the Net Mortgage Rates of
the Non-Discount Mortgage Loans in Pool 3 excluding any Retained
Interest Mortgage Loans (the "Pool 3 3-AX Loans") at the beginning of
the related Due Period minus 8.25%, and the denominator of which is
8.25% and (2) the total Scheduled Principal Balance of the Pool 3 3-AX
Loans as of the first day of the related Accrual Period.
o The Class Notional Amount of the Class AX Certificates will equal, as
to any Distribution Date, the sum of the Component Notional Amount of
the AX(1) Component and the Component Notional Amount of the AX(2)
Component.
o The Component Notional Amount of the AX(1) Component for any
Distribution Date will be equal to the product of (1) a fraction,
the numerator of which is the weighted average of the Net Mortgage
Rates of the Non-Discount Mortgage Loans in Pool 1 excluding any
Retained Interest Mortgage Loans (the "Pool 1 AX Loans") at the
beginning of the related Due Period minus 9.00%, and the
denominator of which is 7.75% and (2) the total Scheduled Principal
Balance of the Pool 1 AX Loans as of the first day of the related
Accrual Period.
o The Component Notional Amount of the AX(2) Component for any
Distribution Date will be equal to the Product of (1) a fraction,
the numerator of which is the weighted average of the Net Mortgage
Rates of the Non-Discount Mortgage Loans excluding any Retained
Interest Mortgage Loans (the "Pool 2 AX Loans") at the beginning of
the related Due Period minus 7.75%, and the denominator of which is
7.75% and (2) the total Scheduled Principal Balance of the Pool 2
AX Loans as of the first day of the related Accrual Period.
o The Class Notional Amount of the Class BX Certificates will equal, as
to any Distribution Date, the sum of the Component Notional Amount of
the B(X1) Component and the Component Notional Amount of the B(X2)
Component.
o The Component Notional Amount of the B(X1) Component of the Class
BX Certificates for any Distribution Date will equal the product of
(i) 9.4444444444% and (ii) the Component Principal Amount of the
B1(1) Component immediately before such Distribution Date.
o The Component Notional Amount of the B(X2) Component of the Class
BX Certificates for any Distribution Date will equal the product of
(i) 4.1111111111% and (ii) the Component Principal Amount of the
B2(1) Component immediately before such Distribution Date.
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o The "Accrual Period" for each Class of Certificates other than the Class
1-A6 and Class 1-A7 Certificates will be the calendar month immediately
preceding the month in which the related Distribution Date occurs. The
Accrual Period for the Class 1-A6 and Class 1-A7 Certificates will be the
period beginning on the Distribution Date in the calendar month 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 serviced by Aurora, 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 Servicers (as
defined herein) are obligated to reduce the total of their 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
Master Servicing compensation for the related Distribution Date to the extent
necessary to fund any Prepayment Interest Shortfalls required to be paid but
not paid by the Servicers. See "Servicing of the Mortgage Loans -- Prepayment
Interest Shortfalls" herein. Any Prepayment Interest Shortfalls not funded by
the Servicers or the Master Servicer ("Net Prepayment Interest Shortfalls")
will be allocated among the Classes of Certificates or Components as described
under "-- Priority of Distributions" above.
In order to provide protection to holders of the Class 2-A5 Certificates
against any Net Prepayment Interest Shortfalls relating to prepayments and any
Relief Act Reductions allocated to that Class, a reserve fund (the "Class 2-A5
Reserve Fund") will be established by the Depositor, into which approximately
$21,000 will be deposited on the Closing Date. No additional amounts will be
deposited into the Class 2-A5 Reserve Fund. Lehman Brothers Inc. will be
treated as the owner of the Class 2-A5 Reserve Fund for tax purposes, will
direct the Trustee with respect to investment of funds on deposit in the Class
2-A5 Reserve Fund and will be entitled to all investment earnings and bear all
investment losses. The Class 2-A5 Reserve Fund will not be an asset of the
REMIC. The amount of any Net Prepayment Interest Shortfalls and any Relief Act
Reductions allocated to the Class 2-A5 Certificates on any Distribution Date
will be withdrawn from the Class 2-A5 Reserve Fund for distribution to holders
of Class 2-A5 Certificates. After the amount on deposit in the Class 2-A5
Reserve Fund has been exhausted, any Net Prepayment Interest Shortfalls
relating to prepayments and any Relief Act Reductions allocated to the Class
2-A5 Certificates will be covered by the Class 2-A5 Certificate Insurance
Policy. See "The Class 2-A5 Certificate Insurance Policy."
The Class 1-AP, 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 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
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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:
(1) the product of (i) the related Senior Percentage and (ii) the
principal portion (multiplied 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 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
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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 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 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 any Mortgage
Pool with a 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 Net
Mortgage Rate and the denominator of which is the related Designated Rate.
The Non-AP Percentage with respect to any Mortgage Loan in any Mortgage
Pool with a 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 any
Mortgage Pool will be the percentage equivalent of the fraction, the
numerator of which is the related Designated Rate minus the applicable 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
any Mortgage Pool will be zero.
o The "Designated Rates" are: for Pool 1, 9.00%; for Pool 2, 7.75% and for
Pool 3, 8.25%.
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 each Class of Senior Certificates
(other than any related Class AP Certificates) for the related Mortgage
Pool immediately prior to that date and the denominator of which is the
related Non-AP Pool Balance for that date.
o The "Non-AP Pool Balance" for each Mortgage Pool 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 Class AP Certificates and in certain
respects, as described herein, the Class 1-A10) in the related Mortgage
Pool, while, in the absence of Realized Losses, increasing the relative
percentage interest in the Mortgage Pool 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.
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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%). 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 aggregate Component
Principal Amount of the related Components 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 aggregate Component Principal Amount of the related Components
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.
o The "Class 1-A10 Priority Amount" for any Distribution Date is equal to
the lesser of (1) the sum of (x) the product of the Class 1-A10 Percentage
for that date, the Class 1-A10 Scheduled Principal Percentage for that
date and the Group 1 Scheduled Principal Amount for that date and (y) the
product of the Class 1-A10 Percentage for that date, the Class 1-A10
Prepayment Shift Percentage for that date and the Group 1 Unscheduled
Principal Amount for that date, and (2) the Class Principal Amount of the
Class 1-A10 Certificates immediately before that date.
Notwithstanding the foregoing, on and after (1) the Credit Support
Depletion Date, the Class 1-A10 Certificates will be entitled to their
proportionate share of all scheduled and unscheduled payments of principal from
Group 1 and (2) the date on which the Class Principal Amounts of all of the
Group 1 Certificates (other than the Class 1-A10 Certificates) have been
reduced to zero, the Class 1-A10 Certificates shall be entitled to all of the
Group 1 Senior Principal Distribution Amount.
o The "Class 1-A10 Percentage" for any Distribution Date will be equal to
the lesser of (1) 100% and (2) the percentage obtained by dividing (x) sum
of (a) the Class Principal Amount of the Class 1-A10 Certificates
immediately before that date and (b) $20,000,000 by (y) the Group 1 Non-AP
Pool Balance immediately before that date.
o The "Class 1-A10 Scheduled Principal Percentage" for any Distribution
Date during the five years beginning on the first Distribution Date will
be 0%. Thereafter, the Class 1-A10 Scheduled Principal Percentage for any
Distribution Date occurring on or after the fifth anniversary of the first
Distribution Date will be 100%.
o The "Class 1-A10 Prepayment Shift Percentage" for any Distribution Date
during the five years beginning on the first Distribution Date will be 0%.
Thereafter, the Class 1-A10 Prepayment Shift Percentage for any
Distribution Date occurring on or after the fifth anniversary of the first
Distribution Date will be as follows: for any Distribution Date in the
first year thereafter, 30%; for any Distribution Date in the second year
thereafter, 40%; for any Distribution Date in the third year thereafter,
60%; for any Distribution Date in the fourth year thereafter, 80%; and for
any subsequent Distribution Date, 100%.
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o The "Group 1 Scheduled Principal Amount" for any Distribution Date and
each Mortgage Loan in Pool 1 is equal to the amount described in clause
(1) of the definition of Senior Principal Distribution Amount for Group 1
(without application of the related Senior Percentage).
o The "Group 1 Unscheduled Principal Amount" for any Distribution Date and
each Mortgage Loan in Pool 1 is equal to the sum of the amounts described
in clauses (2) and (3) (without application of the related Senior
Prepayment Percentage) of the definition of Senior Principal Distribution
Amount for Group 1.
o The "AP Principal Distribution Amount" for each Certificate Group 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;
(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 (i) the related Subordinate Percentage and (ii) the
principal portion (multiplied 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 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 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.
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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 Amounts of all
Components of the related Certificate Group prior to such date.
o The "Subordinate Prepayment Percentage" for each 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 each 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-A3, Class 1-A4, Class 1-A5, Class 1-A7, Class 1-A9, Class
1-A11, Class 2-A2, Class 2-A4, Class 2-A6, Class 3-AX, Class AX and Class BX
Certificates are Interest-Only Certificates; no principal will be distributable
thereon.
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,
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 Mortgage Loan
serviced by any other Servicer, or for any unscheduled, partial prepayment of
principal, the "Prepayment Period" related to each Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs. The
"Servicer Remittance Date" for each of the Servicers 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
each 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 related Servicer
Remittance Date or advanced by the Master Servicer or the Servicers (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 any 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 Servicers' 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 or the Trustee (or its custodian) (other than the Trustee Fee)
pursuant to the Trust Agreement or to the Servicers pursuant to the
Servicing Agreements;
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(e) any Retained Interest or Originator Retained Interest (each as
defined herein); and
(f) any Prepayment Penalty Amounts (as defined herein); and
(2) any other payments made by the Master Servicer, the Servicers 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 Servicers 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.
DISTRIBUTIONS OF PRINCIPAL ON THE CLASS 2-A5 CERTIFICATES
GENERAL. As to distributions of principal among Class 2-A5
Certificateholders, Deceased Holders (as defined below) will be entitled to a
first priority, and beneficial owners other than Deceased Holders ("Living
Holders") will be entitled to a second priority. Beneficial owners of the Class
2-A5 Certificates have the right to request that distributions of principal be
made on their Class 2-A5 Certificates on each Distribution Date on which
distributions of principal are made on the Class 2-A5 Certificates. These
requested distributions are subject to the priorities described below under "--
Payments to Requesting Beneficial Owners" and are further subject to the
limitations that they be made (1) only in lots equal to $1,000 of initial
Certificate Principal Amount (each, an "Individual Class 2-A5 Certificate") and
(2) only to the extent that the portion of the Senior Principal Distribution
Amount for Group 2 allocated to the Class 2-A5 Certificates on the applicable
Distribution Date (plus any amounts available from the Rounding Account (as
defined below)) provides sufficient funds for the requested distributions. To
the extent that amounts available for distribution of principal on the Class
2-A5 Certificates on any Distribution Date exceed the total requests for
principal distributions applicable to that Distribution Date, these excess
amounts will be distributed to the beneficial owners of Class 2-A5 Certificates
by random lot, as described under "-- Mandatory Distributions of Principal on
Class 2-A5 Certificates" below.
On each Distribution Date on which amounts are available for distribution
of principal on the Class 2-A5 Certificates, the total amount allocable to such
distribution will be rounded, as necessary, to an amount equal to an integral
multiple of $1,000, except as provided below, in accordance with the priorities
and limitations described herein. This rounding will be accomplished on the
first Distribution Date on which distributions of principal on the Class 2-A5
Certificates are made by withdrawing, from a non-interest bearing account to be
established on the Closing Date with a deposit of $999.99 by the Depositor (the
"Rounding Account"), the amount of funds, if any, needed to round the amount
otherwise available for such distribution upward to the next higher integral
multiple of $1,000. On each succeeding Distribution Date on which distributions
of principal on the Class 2-A5 Certificates are to be made, the total amount
allocable to the Class 2-A5 Certificates will be applied first to repay any
funds withdrawn from the Rounding Account for the Class 2-A5 Certificates on
the prior Distribution Date, and then the remainder, if any, will be similarly
rounded upward through another withdrawal from the Rounding Account and
distributed as principal on the Class 2-A5 Certificates. This process will
continue on succeeding Distribution Dates until the Class Principal Amount of
the Class 2-A5 Certificates has been reduced to zero. Thus, the total
distribution made in reduction of the principal balance of the Class 2-A5
Certificates on each Distribution Date may be slightly more or less than would
be the case in the absence of these rounding procedures, but the difference
will be no more than $999.99 on any Distribution Date. Under no circumstances
will the sum of all distributions of principal on the Class 2-A5 Certificates
through any Distribution Date be less than the amount that would have resulted
in the absence of these rounding procedures.
There can be no assurance that a beneficial owner of a Class 2-A5
Certificate who has submitted a request for a distribution will receive that
distribution at any particular time after the distribution is requested,
because there can be no assurance that funds will be available to make
distributions on any particular Distribution Date, or, even if funds are
available to make distributions, that a distribution with respect to the Class
2-A5 Certificates owned by any particular beneficial owner will be made. Also,
due to the procedure for mandatory distributions described below, there can be
no
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assurance that, on any Distribution Date on which funds available for
distribution of principal on the Class 2-A5 Certificates exceed the total
amount of distributions requested by beneficial owners of the Class 2-A5
Certificates, any particular beneficial owner will receive a principal
distribution from these excess funds. THUS, THE TIMING OF DISTRIBUTIONS OF
PRINCIPAL ON ANY PARTICULAR CLASS 2-A5 CERTIFICATE IS HIGHLY UNCERTAIN, AND
DISTRIBUTIONS MAY BE MADE EARLIER OR LATER THAN THE DATE THAT MAY BE DESIRED BY
A BENEFICIAL OWNER OF A CLASS 2-A5 CERTIFICATE. ACCORDINGLY, THE ALLOCATION OF
PRINCIPAL DISTRIBUTIONS ON THE CLASS 2-A5 CERTIFICATES MAY RESULT IN ACTUAL
YIELDS TO INVESTORS AND WEIGHTED AVERAGE LIVES THAT VARY SIGNIFICANTLY FROM
THOSE ANTICIPATED, AND YIELDS AND WEIGHTED AVERAGE LIVES WILL VARY AMONG THE
HOLDERS OF THE CLASS 2-A5 CERTIFICATES.
Notwithstanding any provisions herein to the contrary, on each
Distribution Date on and after the Credit Support Depletion Date for Group 2,
distributions of principal on the Class 2-A5 Certificates (including amounts
paid, if any, under the Class 2-A5 Certificate Insurance Policy) will be made
to holders of the Class 2-A5 Certificates in proportion to their Certificate
Principal Amounts and will not be made in integral multiples of $1,000 or
pursuant to requested distributions or mandatory distributions by random lot.
PROCEDURE FOR REQUESTED DISTRIBUTIONS. A beneficial owner may request that
distributions of principal on that beneficial owner's Class 2-A5 Certificates
be made on a Distribution Date by delivering a written request to the
Participant or Financial Intermediary that maintains the beneficial owner's
account in the Class 2-A5 Certificates so that the request is received by the
Trustee on or before the Record Date for that Distribution Date. In the case of
a request on behalf of a Deceased Holder, a certified copy of the death
certificate and any additional appropriate evidence of death and any tax
waivers are required to be forwarded to the Trustee under separate cover.
Requests of Deceased Holders that are incomplete may not be honored by the
Trustee and, if not honored, will lose their priority and must be resubmitted.
The Participant should in turn make the request of DTC (or, in the case of a
Financial Intermediary, the firm should notify the related Participant of such
request, and the Participant should make the request of DTC) on a form required
by DTC and provided to the Participant. Upon receipt of a request, DTC will
date and time stamp the request and forward it to the Trustee. DTC may
establish such procedures as it deems fair and equitable to establish the order
of receipt of requests for distributions received by it on the same day.
Neither the Master Servicer nor the Trustee will be liable for any delay by
DTC, any Participant or any Financial Intermediary in the delivery of requests
for distributions to the Trustee. Requests for distributions of principal
forwarded to the Trustee from DTC after the Record Date for the related
Distribution Date and requests for distributions received in a timely manner
but not accepted with respect to a particular Distribution Date will be treated
as requests for distributions on the next succeeding Distribution Date and each
succeeding Distribution Date thereafter until each request is accepted or is
withdrawn as described below. Each request for distributions of principal on a
Class 2-A5 Certificate submitted by a beneficial owner of a Class 2-A5
Certificate will be held by the Trustee until the request has been accepted or
has been withdrawn in writing. Each Individual Class 2-A5 Certificate covered
by such request will continue to bear interest at the related Certificate
Interest Rate through the Record Date for the related Distribution Date.
With respect to Class 2-A5 Certificates as to which beneficial owners have
requested distributions on a particular Distribution Date on which
distributions of principal on the Class 2-A5 Certificates are being made, the
Trustee will notify DTC prior to that Distribution Date whether, and the extent
to which, Class 2-A5 Certificates have been accepted for distributions.
Participants and Financial Intermediaries holding Class 2-A5 Certificates
should forward these notices to the beneficial owners. Individual Class 2-A5
Certificates that have been accepted for a distribution will be due and payable
on the applicable Distribution Date and will cease to bear interest after the
Record Date for that Distribution Date.
Any beneficial owner of a Class 2-A5 Certificate that has requested a
distribution may withdraw the request by so notifying in writing the
Participant or Financial Intermediary that maintains the beneficial owner's
account. The Participant should forward the withdrawal, on a form required by
DTC, to the Trustee. In the event that an account is maintained by an Financial
Intermediary, the Financial Intermediary should notify the related Participant,
which in turn should forward the withdrawal of the request to the Trustee. If a
notice of withdrawal of a request for distribution has not been received by the
Trustee on or before the Record Date for a Distribution Date, the previously
made request for distribution will be irrevocable with respect to the making of
distributions of principal on the Class 2-A5 Certificates on that Distribution
Date.
MANDATORY DISTRIBUTIONS OF PRINCIPAL ON CLASS 2-A5 CERTIFICATES. To the
extent, if any, that amounts available for distribution of principal on the
Class 2-A5 Certificates on a Distribution Date exceed the dollar amount of
requests for
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<PAGE>
distributions that have been received by the applicable date, additional Class
2-A5 Certificates in lots equal to Individual Class 2-A5 Certificates will be
selected to receive principal distributions in accordance with the
then-applicable established random lot procedures of DTC, and with the
then-applicable established procedures of the Participants and Financial
Intermediaries, which may or may not be by random lot. Investors should ask
Participants or Financial Intermediaries which allocation procedures they use.
Participants and Financial Intermediaries holding Class 2-A5 Certificates
selected for mandatory distributions of principal should provide notice of
mandatory distributions to the affected beneficial owners.
PAYMENTS TO REQUESTING BENEFICIAL OWNERS. On any Distribution Date on
which principal distributions are made on the Class 2-A5 Certificates, priority
of payment on the Class 2-A5 Certificates will be given to beneficial owners
for whom principal distribution requests are in effect. DTC will honor requests
in the following order of priority:
first, DTC will honor requests submitted on behalf of Deceased Holders in
the order of their receipt by DTC, until these requests have been honored in an
amount up to $100,000 for each requesting Deceased Holder; and
second, DTC will honor requests submitted on behalf of Living Holders in
the order of priority established by DTC, until these requests have been
honored in an amount up to $10,000 for each requesting Living Holder.
Thereafter, DTC will honor requests submitted on behalf of each Deceased
Holder as provided in step first up to a second $100,000 and requests submitted
on behalf of each Living Holder as provided in step second up to a second
$10,000. This sequence of priorities will be repeated until all Class 2-A5
Certificate principal distribution requests have been honored to the extent of
amounts available for distribution in reduction of the Class Principal Amount
of the Class 2-A5 Certificates.
If the amount of principal available for distribution on the Class 2-A5
Certificates on a particular Distribution Date is insufficient to honor all
requests, requests will be honored on succeeding Distribution Dates as
principal becomes available. In the case of requests on behalf of Living
Holders, DTC will establish a new order of priority for each Distribution Date.
This order will apply both to previously unsatisfied payment requests and to
newly submitted requests. A Class 2-A5 Certificate principal payment request
submitted on behalf of a Living Holder who later dies will become entitled to
the priority of a newly submitted request on behalf of a Deceased Holder. That
priority will be effective for each subsequent Distribution Date if DTC has
received a certified copy of the death certificate for the Deceased Holder, any
additional appropriate evidence of death and any requested tax waivers by the
last Business Day of the preceding calendar month.
DEFINITION OF "DECEASED HOLDER." A "Deceased Holder" is a beneficial
owner of a Class 2-A5 Certificate who was living at the time the interest was
acquired and whose executor or other authorized representative causes to be
furnished to the Trustee a certified copy of the death certificate for the
Deceased Holder, any additional evidence of death satisfactory to the Trustee
and any tax waivers requested by the Trustee. Class 2-A5 Certificates
beneficially owned by tenants by the entirety, joint tenants or tenants in
common will be considered to be beneficially owned by a single owner. The death
of a tenant by the entirety, joint tenant or tenant in common will be deemed to
be the death of the beneficial owner, and the Class 2-A5 Certificates so
beneficially owned will be eligible for priority with respect to distributions
of principal, subject to the limitations stated herein. Class 2-A5 Certificates
beneficially owned by a trust will be considered to be beneficially owned by
each beneficiary of the trust to the extent of the beneficiary's beneficial
interest therein, but in no event will a trust's beneficiaries collectively be
deemed to be beneficial owners of a number of Individual Class 2-A5
Certificates greater than the number of Individual Class 2-A5 Certificates of
which that trust is the owner. The death of a beneficiary of a trust will be
deemed to be the death of a beneficial owner of the Class 2-A5 Certificates
beneficially owned by the trust to the extent of the beneficiary's beneficial
interest in the trust. The death of an individual who was a tenant by the
entirety, joint tenant or tenant in common in a tenancy that is the beneficiary
of a trust will be deemed to be the death of the beneficiary of the trust. The
death of a person who, during his or her lifetime, was entitled to
substantially all of the beneficial ownership interest in a Class 2-A5
Certificate will be deemed to be the death of the beneficial owner of such
Class 2-A5 Certificate regardless of the registration of ownership, if the
beneficial ownership interest can be established to the satisfaction of the
Trustee; expenses incurred by the Trustee in an effort to determine the
beneficial ownership interest, including, without limitation, attorney's fees,
will be paid by the beneficial owner. Such beneficial interest will be deemed
to exist in typical cases of street name or nominee ownership, ownership by a
trustee, ownership under the Uniform Gifts to Minors Act and community property
or other joint ownership arrangements between a husband and wife. Beneficial
interest will include the power to sell, transfer or otherwise dispose of a
Class 2-A5 Certificate and the right to receive the proceeds therefrom, as well
as interest principal payable with
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respect thereto. As used in this prospectus supplement, a request for a
distribution of principal of a Class 2-A5 Certificate by a Deceased Holder
means a request by the personal representative, surviving tenant by the
entirety, surviving joint tenant or surviving tenant in common of the Deceased
Holder.
EXAMPLE OF DISTRIBUTIONS
The following sets forth an example of distributions on the Certificates
for the Distribution Date in December 2000. As described above, Prepayment
Periods differ among the Servicers:
<TABLE>
<CAPTION>
<S> <C> <C>
November 2 through
December 1 ............. Due Period: Payments due during the related Due Period
(November 2 through December 1) from borrowers
will be deposited in the Servicers' custodial accounts
as received and will include scheduled principal
payments plus interest on November 1 principal
balances of the Mortgage Loans.
November 1 through
November 30 ............ Prepayment Period Partial principal prepayments received during the
(partial and full related Prepayment Period and Prepayments in full
prepayments): received by Servicers other than Aurora during the
related Prepayment Period (November 1 through
November 30) will be deposited into the Servicers'
custodial accounts for the remittance to the Master
Servicer on December 18.
November 17 through
December 16 ............ Prepayment Period
(prepayments in full): Prepayments in full received by Aurora during the
related Prepayment Period (November 17 through
December 16) will be deposited into Aurora's
custodial account for remittance to the Master
Servicer on December 18.
November 30 or
December 22 ............ Record Date: Distributions will be made to Certificateholders of
record for all Classes, except for Classes 1-A6 and
1-A7, as of the close of business on the last Business
Day of the month immediately before the month in
which the Distribution Date occurs, and to
Certificateholders of record for Classes 1-A6 and
1-A7 as of the Business Day immediately preceding
the Distribution Date.
December 18 .............. Servicer Remittance The Servicers will remit collections and recoveries in
Date: respect of the related Mortgage Loans to the Master
Servicer on the 18th day (or if the 18th day is not a
Business Day, the next succeeding Business Day) of
each month, as specified in the related Servicing
Agreement.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
Servicers 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.
See "Material Federal Income Tax Considerations" herein and in the
accompanying Prospectus.
ALLOCATION OF REALIZED LOSSES
If a Realized Loss occurs on the Mortgage Loans in any Mortgage Pool,
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 (i.e., in the order of the B6, B5, B4,
B3, B2 and B1 Components), until the related Component Principal Amount thereof
has been reduced to zero (that is, such Realized Losses will be allocated to
the related Component of the Class B6 Certificates while such Components are
outstanding, then to the related Component of the Class B5 Certificates, and so
forth) and second, to the Senior Certificates (other than the Class AP
Certificates) of the related Certificate Group, proportionately, on the basis
of their respective Certificate Principal Amounts.
The AP Percentage of the principal portion of any Realized Loss on a
Discount Mortgage Loan in Pool 1 will be allocated to and reduce the Class
Principal Amount of the Class 1-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 1-AP Certificates on that date in respect of Realized Losses (other than
Excess Losses) on Pool 1 Mortgage Loans and all amounts previously allocated in
respect of Realized Losses to the Class 1-AP Certificates and not distributed
on prior Distribution Dates will be the "Class 1-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 1-AP
Deferred Amount will be made on the Class 1-AP Certificates in accordance with
priority (6) under "-- Priority of Distributions" herein. Any distribution in
respect of the Class 1-AP Deferred Amount will not reduce the Class Principal
Amount of the Class 1-AP Certificates. No interest will accrue on the Class
1-AP Deferred Amount. No distributions in respect of the Class 1-AP Deferred
Amount will be made after the Distribution Date on which the Class Principal
Amount of the Class 1-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 1 will be reduced by
the amount of any distributions in respect of the Class 1-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 1-AP Certificates will not be added to, the Class 1-AP Deferred 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
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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 (6) 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." 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 (6) 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.
The applicable Non-AP Percentage of the principal portion of any Excess
Loss (other than a Debt Service Reduction) on a Mortgage Loan in a Mortgage
Pool for any Distribution Date will be allocated proportionately to the Non-AP
Senior Certificates of the related Certificate Group on the basis of their
Class Principal Amounts, and to the Components of the Subordinate Classes of
the related Certificate Group on the basis of their Component Principal
Amounts. The applicable AP Percentage of the principal portion of any Excess
Loss (other than a Debt Service Reduction) on a Mortgage Loan in any Mortgage
Pool for any Distribution Date will be allocated proportionately to the related
Class of Class AP Certificates.
The Component Principal Amount of the lowest ranking Component then
outstanding in each Certificate Group 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 related Mortgage Pool for the
related Distribution Date (any such reduction, a "Component Writedown Amount").
o In general, a "Realized Loss" means (1) 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 (2) 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.
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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.
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 applicable 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 "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
$3,164,400, $7,280,000 and $957,710 for Pool 1, 2 and 3, respectively; the
"Bankruptcy Loss Limit" will initially be approximately $90,400, $165,260 and
$58,470 for Pool 1, 2 and 3, respectively; and the "Fraud Loss Limit" will
initially be approximately $6,328,800, $5,805,680 and $1,914,500 for Pool 1, 2
and 3, respectively.
The Special Hazard Loss Limit will be reduced, from time to time, to an
amount equal on any Distribution Date to the lesser of (a) the greatest of (1)
1% of the aggregate of the Scheduled Principal Balances of the Mortgage Loans,
(2) twice the Scheduled Principal Balance of the Mortgage Loan having the
highest Scheduled Principal Balance and (3) the aggregate Scheduled Principal
Balance of the Mortgage Loans secured by Mortgaged Properties located in the
single California postal zip code area having the highest aggregate Scheduled
Principal Balance of any such zip code area and (b) the Special Hazard Loss
Limit as of the Closing Date less the amount, if any, of Special Hazard Losses
incurred since the Closing Date.
The Bankruptcy Loss Limit will be reduced, from time to time, by the
amount of Bankruptcy Losses allocated to the Certificates. The date on which
the Bankruptcy Loss Limit has been reduced to zero is the "Bankruptcy Coverage
Termination Date."
The Fraud Loss Limit will be reduced, from time to time, by the amount of
Fraud Losses allocated to the Certificates. In addition, on each anniversary of
the Cut-off Date, the Fraud Loss Limit will be reduced as follows: (a) on the
first, second, third and fourth anniversaries of the Cut-off Date, to an amount
equal to the lesser of (1) the 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 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 Certificates 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.
Any Realized Losses allocable to the Class 2-A5 Certificates will be
covered by the Class 2-A5 Certificate Insurance Policy. See "The Class 2-A5
Certificate Insurance Policy."
FINAL SCHEDULED DISTRIBUTION DATE
The "Final Scheduled Distribution Date" (i.e., the Distribution Date
succeeding the month of the scheduled maturity of the latest maturing Mortgage
Loan in the related Mortgage Pool) applicable to each Class of Offered
Certificates is November 25, 2030. 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 for each Class of Offered
Certificates has been determined by adding one month to the month of scheduled
maturity of the latest maturing Mortgage Loan in the related Mortgage Pool.
S-39
<PAGE>
OPTIONAL TERMINATION OF THE TRUST FUND
On any Distribution Date after the 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 must 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, (c) any unreimbursed servicing advances for the
related Distribution Date and (d) any outstanding amounts due to the Class 2-A5
Certificate Insurer. 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
Wells Fargo Bank Minnesota, N.A., a national banking association, 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 0.0025% 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 investment earnings
or other income earned on amounts on deposit in the certificate account pending
distribution to Certificateholders. The Trustee will be entitled to
reimbursement for certain expenses prior to distribution of any amounts to
Certificateholders. The Trustee's "Corporate Trust Office" for purposes of
presentment and surrender of the Offered Certificates for the final
distribution thereon and for all other purposes is located at Sixth Avenue and
Marquette, Minneapolis, Minnesota 55479, Attention: Global Corporate Trust
Services: SASCO 2000-4, or any other address that the Trustee may designate
from time to time by notice to the Certificateholders, the Depositor, the Class
2-A5 Certificate Insurer and the Master Servicer.
DESCRIPTION OF THE MORTGAGE POOLS
GENERAL
The Mortgage Pools will consist of approximately 3,424 conventional, fixed
rate, fully amortizing and balloon Mortgage Loans with original terms to
maturity from the first due date of the scheduled monthly payment (a "Scheduled
Payment") of not more than 30 years, having a Cut-off Date Balance (after
giving effect to Scheduled Payments due on such date) of approximately
$702,444,730.
A fixed percentage of each interest payment on certain Mortgage Loans with
a Mortgage Rate in excess of the applicable Trust Rate (as defined below)
(approximately 74.92% of the Mortgage Loans in Pool 1, approximately 80.84% of
the Mortgage Loans in Pool 2 and approximately 15.53% of the Mortgage Loans in
Pool 3 (together the "Retained Interest Mortgage Loans")) will not be conveyed
to, or included in, the Trust Fund. The "Retained Interest Rate" for each
Retained Interest Mortgage Loan will equal the excess, if any, of the Mortgage
Rate of such Retained Interest Mortgage Loan over the applicable Trust Rate.
The amount of interest in respect of each Retained Interest Mortgage Loan
retained by the Depositor at the Retained Interest Rate is referred to herein
as the "Retained Interest." The "Trust Rate" for each Mortgage Loan will equal
the sum of (i) the applicable Designated Rate for the related Mortgage Pool
(i.e., 9.00% for Pool 1 Mortgage Loans, 7.75% for Pool 2 Mortgage Loans and
8.25% for Pool 3 Mortgage Loans), (ii) the Servicing Fee Rate, (iii) the
Trustee Fee Rate and (iv) any applicable mortgage insurance premium for such
Mortgage Loan. In addition, a portion of each interest payment on six Mortgage
Loans in Pool 1 (approximately 0.15% of the Pool 1 Mortgage Loans) and 98
Mortgage Loans in Pool 2 (approximately 10.41% of the Pool 2 Mortgage Loans)
will not be conveyed to, or included in, the Trust Fund. Such interest (the
"Originator Retained Interest"), calculated as 0.25% annually (the "Originator
Retained Interest Rate") on the principal balance of each such Mortgage Loan,
will be retained by the originator of such Mortgage Loans. Neither Retained
Interest nor Originator Retained Interest will be available for any
distributions on the Certificates, regardless of the performance of the
Mortgage Loans. The Retained Interest Mortgage Loans are not subject to
Originator Retained Interest.
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." Approximately
10.07%
S-40
<PAGE>
and 8.03% 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. All of the Pool 3 Mortgage Loans, a
majority of which were originated under the Borrower Advantage Program (see "--
The Borrower Advantage Program -- Borrower Advantage Underwriting Guidelines")
required "full" or "alternate documentation" underwriting. Certain
documentation with respect to some Mortgage Loans, including, in some cases,
the related Mortgage Note, Mortgage or title insurance policy, is unavailable.
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 CUT-OFF DATE BALANCE.
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 or individual
units in planned unit developments. 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
indirectly through a full assignment of such Mortgage Loans from an affiliate,
Lehman Brothers Bank, FSB, which initially purchased such Mortgage Loans from
the originators. See "Trust Agreement -- Assignment of Mortgage Loans" and "--
Underwriting Guidelines" herein.
Pursuant to its terms, each Mortgage Loan, other than a loan secured by a
condominium unit, is required to be covered by a standard hazard insurance
policy in an amount equal to the lower of the unpaid principal amount thereof
or the replacement value of the improvements on the Mortgaged Property.
Generally, a condominium association is responsible for maintaining hazard
insurance covering the entire building. See "Description of Mortgage and Other
Insurance -- Hazard Insurance on the Loans -- Standard Hazard Insurance
Policies" in the Prospectus.
Approximately 0.40% and 6.13% 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. None of the Pool 3 Mortgage Loans
provide such a feature.
Approximately 35.17% and 12.57% 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 97.47% and 85.46% 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 in
Pool 1 or Pool 2 after the date on which the related Loan-to-Value Ratio is 80%
or less. A majority of 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 "-- The Borrower Advantage Program -- Borrower Advantage Underwriting
Guidelines." 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. 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, 51 of the Pool 1 Mortgage Loans, representing
approximately 2.93% of such Pool 1 Mortgage Loans, 31 of the Pool 2 Mortgage
Loans, representing approximately 2.24% of such Pool 2 Mortgage Loans and 11 of
the Pool 3 Mortgage Loans, representing approximately 1.23% of such Pool 3
Mortgage Loans, were one Scheduled Payment delinquent. As of October 1, 2000,
no Mortgage Loan was two Scheduled Payments delinquent.
Approximately 86.74% and 93.98% of the Pool 1 and Pool 2 Mortgage Loans,
respectively, are fully amortizing. All of the Pool 3 Mortgage Loans are fully
amortizing. Approximately 13.26% and 6.02% of the Pool 1 and Pool 2 Mortgage
Loans, respectively, will have original terms to maturity that are shorter than
their amortization schedules, leaving final payments ("Balloon Payments") due
on their maturity dates that are significantly larger than other monthly
payments (such loans, "Balloon Loans"). Such Balloon Loans are generally
expected to have original terms to maturity of 15 years.
S-41
<PAGE>
The ability of a borrower to repay a Balloon Loan at maturity frequently will
depend on the borrower's ability to refinance the loan. Any loss on a Balloon
Loan as a result of the borrower's inability to refinance the loan will be
borne by Certificateholders, to the extent not covered by the applicable credit
enhancement described herein. None of the applicable Servicer, the Master
Servicer or the Trustee will make any Advance with respect to delinquent
Balloon Payments.
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>
<CAPTION>
<S> <C>
Number of Pool 1 Mortgage Loans ........... 1,665
Total Scheduled Principal Balance ......... $316,439,893
Mortgage Rates:
Weighted Average ......................... 9.692%
Range .................................... 8.500% to 11.375%
Weighted Average Remaining Term to Maturity
(in months) .............................. 329
</TABLE>
The Scheduled Principal Balances of the Pool 1 Mortgage Loans range from
approximately $2,490 to approximately $400,000. The Pool 1 Mortgage Loans have
an average Scheduled Principal Balance of approximately $190,054.
The weighted average Loan-to-Value Ratio at origination of the Pool 1
Mortgage Loans is approximately 80.55% and no Pool 1 Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding 100.00%.
Approximately 72.25%, 19.84% and 7.33% of the Pool 1 Mortgage Loans were
originated in accordance, generally, with the Underwriting Guidelines of each
of GreenPoint Mortgage Funding, Inc. ("GreenPoint Funding"), Aurora or Chase
Manhattan Mortgage Corporation ("Chase"), respectively, and approximately
52.51%, 40.01% and 7.33% of the Pool 1 Mortgage Loans are serviced by Aurora,
GreenPoint Funding and Chase, respectively.
No more than approximately 0.50% of the Pool 1 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
Approximately 0.12%, 0.88% and 4.41% of the Pool 1 Mortgage Loans are
subject to prepayment penalties during the first, third and fifth year,
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.)
S-42
<PAGE>
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>
10.01 to 20.00 .......... 1 $ 44,502.66 0.01%
20.01 to 30.00 .......... 8 794,502.41 0.25
30.01 to 40.00 .......... 13 1,427,351.63 0.45
40.01 to 50.00 .......... 31 4,569,975.01 1.44
50.01 to 60.00 .......... 62 11,443,080.35 3.62
60.01 to 70.00 .......... 160 27,225,201.85 8.60
70.01 to 80.00 .......... 886 159,638,003.27 50.45
80.01 to 90.00 .......... 299 60,760,357.74 19.20
90.01 to 100.00 .......... 205 50,536,918.49 15.97
----- --------------- ------
Total .................. 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
The weighted average original loan-to-value ratio is approximately 80.55%.
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>
8.001 to 8.500 ......... 14 $ 959,479.29 0.30%
8.501 to 9.000 ......... 261 45,737,083.42 14.45
9.001 to 9.500 ......... 409 77,056,551.85 24.35
9.501 to 10.000 ......... 631 123,317,721.09 38.97
10.001 to 10.500 ......... 273 54,780,799.06 17.31
10.501 to 11.000 ......... 70 13,816,202.81 4.37
11.001 to 11.500 ......... 7 772,055.89 0.24
----- --------------- ------
Total .................. 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 9.692%.
ORIGINAL TERMS TO MATURITY -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------------- -------------- ------- -----------------
<S> <C> <C> <C>
Less than or equal to 180 ......... 316 $ 48,211,508.67 15.24%
181 to 240 ........................ 8 934,208.05 0.30
241 to 360 ........................ 1,341 267,294,176.69 84.47
----- --------------- ------
Total ........................... 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 332
months.
S-43
<PAGE>
REMAINING TERMS TO MATURITY -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------------- -------------- ------- -----------------
<S> <C> <C> <C>
Less than or equal to 180 ......... 320 $ 48,289,551.67 15.26%
181 to 240 ........................ 11 1,172,545.08 0.37
241 or greater .................... 1,334 266,977,796.66 84.37
----- ---------------- ------
Total ........................... 1,665 $ 316,439,893.41 100.00%
===== ================ ======
</TABLE>
The weighted average remaining term to maturity is approximately 329
months.
LOAN TYPE -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
LOAN TYPE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
--------- -------------- ------- -----------------
<S> <C> <C> <C>
Fully Amortizing ......... 1,400 $274,495,479.22 86.74%
Balloon .................. 265 41,944,414.19 13.26
----- --------------- ------
Total .................. 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
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 ............ 499 $108,908,609.40 34.42%
New York .............. 90 22,520,523.04 7.12
Colorado .............. 130 20,797,382.36 6.57
Illinois .............. 90 20,123,049.70 6.36
Florida ............... 147 16,048,307.32 5.07
Arizona ............... 69 12,874,068.35 4.07
Massachusetts ......... 52 12,131,786.56 3.83
Washington ............ 62 11,843,301.40 3.74
Virginia .............. 51 10,596,644.84 3.35
Maryland .............. 51 9,990,726.56 3.16
Other ................. 424 70,605,493.88 22.31
----- --------------- ------
Total ............... 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
S-44
<PAGE>
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
RANGE OF SCHEDULED NUMBER OF PRINCIPAL SCHEDULED
PRINCIPAL BALANCES ($) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------- -------------- ------- -----------------
<S> <C> <C> <C>
0.01 to 50,000.00 ......... 117 $ 4,317,722.77 1.36%
50,000.01 to 100,000.00 ......... 354 26,774,601.05 8.46
100,000.01 to 150,000.00 ......... 294 36,384,668.16 11.50
150,000.01 to 200,000.00 ......... 153 26,680,006.23 8.43
200,000.01 to 250,000.00 ......... 103 23,175,764.71 7.32
250,000.01 to 300,000.00 ......... 325 89,593,969.87 28.31
300,000.01 to 350,000.00 ......... 211 68,773,864.61 21.73
350,000.01 to 400,000.00 ......... 108 40,739,296.01 12.87
--- --------------- ------
Total .......................... 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately
$190,054.
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 .................... 973 $185,331,572.17 58.57%
Planned Unit Development ......... 245 55,735,639.35 17.61
Two- to Four-Family .............. 278 52,262,537.59 16.52
Condominium ...................... 168 23,031,773.91 7.28
Cooperative ...................... 1 78,370.39 0.02
----- --------------- ------
Total .......................... 1,665 $316,439,893.41 100.00%
===== =============== ======
</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 .................... 1,267 $250,128,008.99 79.04%
Cash Out Refinance .......... 271 45,195,001.17 14.28
Rate/Term Refinance ......... 127 21,116,883.25 6.67
----- --------------- ------
Total ..................... 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
S-45
<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 ......... 996 $214,320,623.21 67.73%
Full Documentation ............ 415 61,026,051.13 19.29
No Documentation .............. 192 31,869,226.03 10.07
No Ratio ...................... 62 9,223,993.04 2.91
----- --------------- ------
Total ....................... 1,665 $316,439,893.41 100.00%
===== =============== ======
</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 ......... 1,198 $253,284,030.39 80.04%
Investment ........... 427 56,156,608.82 17.75
Second Home .......... 40 6,999,254.20 2.21
----- --------------- ------
Total .............. 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
PREPAYMENT PENALTY (YEARS) -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
PREPAYMENT PENALTY NUMBER OF PRINCIPAL SCHEDULED
(YEARS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
------- -------------- ------- -----------------
<S> <C> <C> <C>
0 .................. 1,476 $299,358,500.03 94.60%
1 .................. 6 366,922.47 0.12
3 .................. 27 2,772,871.02 0.88
5 .................. 156 13,941,599.89 4.41
----- --------------- ------
Total ............ 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
S-46
<PAGE>
SERVICERS -- POOL 1
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
SERVICERS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
--------- -------------- ------- -----------------
<S> <C> <C> <C>
Aurora ................... 961 $166,174,086.23 52.51%
GreenPoint ............... 572 126,604,434.23 40.01
Chase .................... 126 23,196,295.24 7.33
First Nationwide ......... 6 465,077.71 0.15
----- --------------- ------
Total .................. 1,665 $316,439,893.41 100.00%
===== =============== ======
</TABLE>
S-47
<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>
<CAPTION>
<S> <C>
Number of Pool 2 Mortgage Loans ........... 838
Total Scheduled Principal Balance ......... $290,283,912
Mortgage Rates:
Weighted Average ......................... 9.085%
Range .................................... 6.000% to 10.875%
Weighted Average Remaining Term to Maturity
(in months) .............................. 338
</TABLE>
The Scheduled Principal Balances of the Pool 2 Mortgage Loans range from
approximately $5,996 to approximately $3,636,590. The Pool 2 Mortgage Loans
have an average Scheduled Principal Balance of approximately $346,401.
The weighted average Loan-to-Value Ratio at origination of the Pool 2
Mortgage Loans is approximately 72.77%, and no Pool 2 Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding 100.00%.
Approximately 41.61%, 28.88% and 11.77% of the Pool 2 Mortgage Loans were
originated in accordance, generally, with the Underwriting Guidelines of each
of Aurora, GreenPoint Funding and Chase, respectively, and approximately
56.26%, 21.56% and 11.77% of the Pool 2 Mortgage Loans are serviced by Aurora,
GreenPoint Funding and Chase.
No more than approximately 2.22% of the Pool 2 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
Approximately 0.30%, 3.94% and 34.06% of the Pool 2 Mortgage Loans are
subject to prepayment penalties during the first, third and fifth years,
respectively, after origination.
S-48
<PAGE>
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 LOAN-TO- NUMBER OF PRINCIPAL SCHEDULED
VALUE RATIOS (%) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------- -------------- ------- -----------------
<S> <C> <C> <C>
10.01 to 20.00 ............ 2 $ 272,488.79 0.09%
20.01 to 30.00 ............ 5 311,353.18 0.11
30.01 to 40.00 ............ 11 5,355,303.46 1.84
40.01 to 50.00 ............ 33 12,021,509.52 4.14
50.01 to 60.00 ............ 57 28,980,867.06 9.98
60.01 to 70.00 ............ 136 60,774,509.90 20.94
70.01 to 80.00 ............ 428 146,085,860.14 50.33
80.01 to 90.00 ............ 114 28,517,375.37 9.82
90.01 to 100.00 ............ 52 7,964,644.45 2.74
--- --------------- ------
Total .................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
The weighted average original loan-to-value ratio is approximately 72.77%.
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>
5.001 to 6.000 ......... 2 $ 116,820.03 0.04%
6.501 to 7.000 ......... 13 1,088,524.55 0.37
7.001 to 7.500 ......... 85 13,220,714.61 4.55
7.501 to 8.000 ......... 73 11,977,553.05 4.13
8.001 to 8.500 ......... 174 51,955,297.76 17.90
8.501 to 9.000 ......... 177 58,064,454.94 20.00
9.001 to 9.500 ......... 113 57,299,019.73 19.74
9.501 to 10.000 ......... 142 72,961,643.96 25.13
10.001 to 10.500 ......... 51 20,366,074.22 7.02
10.501 to 11.000 ......... 8 3,233,809.02 1.11
--- --------------- ------
Total .................. 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 9.085%.
S-49
<PAGE>
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>
Less than or equal to 180 ......... 87 $ 26,291,093.81 9.06%
181 to 240 ........................ 7 615,705.45 0.21
241 to 360 ........................ 744 263,377,112.61 90.73
--- --------------- ------
Total ........................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 343 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>
Less than or equal to 180 ......... 87 $ 26,291,093.81 9.06%
181 to 240 ........................ 10 1,030,222.21 0.35
241 or greater .................... 741 262,962,595.85 90.59
--- --------------- ------
Total ........................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
The weighted average remaining term to maturity is approximately 338 months.
LOAN TYPE -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
LOAN TYPE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
--------- -------------- ------- -----------------
<S> <C> <C> <C>
Fully Amortizing ......... 801 $272,795,157.34 93.98%
Balloon .................. 37 17,488,754.53 6.02
--- --------------- ------
Total .................. 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
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 ......... 329 $140,948,408.58 48.56%
Florida ............ 71 18,449,350.17 6.36
Ohio ............... 138 17,885,222.36 6.16
New York ........... 27 13,392,507.58 4.61
Colorado ........... 37 11,097,987.73 3.82
Texas .............. 29 8,829,850.17 3.04
Nevada ............. 23 8,198,482.71 2.82
Georgia ............ 23 7,140,135.74 2.46
Wyoming ............ 6 6,973,259.57 2.40
New Jersey ......... 13 6,960,543.69 2.40
Other .............. 142 50,408,163.57 17.37
--- --------------- ------
Total ............. 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
S-50
<PAGE>
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
RANGE OF SCHEDULED NUMBER OF PRINCIPAL SCHEDULED
PRINCIPAL BALANCES($) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
--------------------- -------------- ------- -----------------
<S> <C> <C> <C>
0.01 to 50,000.00 ......... 30 $ 981,149.62 0.34%
50,000.01 to 100,000.00 ......... 79 5,721,182.33 1.97
100,000.01 to 150,000.00 ......... 119 14,634,051.08 5.04
150,000.01 to 200,000.00 ......... 60 10,407,242.55 3.59
200,000.01 to 250,000.00 ......... 69 15,557,268.42 5.36
250,000.01 to 300,000.00 ......... 77 21,377,493.11 7.36
300,000.01 to 350,000.00 ......... 66 21,358,009.11 7.36
350,000.01 to 400,000.00 ......... 43 16,268,158.86 5.60
400,000.01 to 450,000.00 ......... 83 35,382,219.82 12.19
450,000.01 to 500,000.00 ......... 79 37,977,120.68 13.08
500,000.01 to 550,000.00 ......... 24 12,536,025.41 4.32
550,000.01 to 600,000.00 ......... 22 12,690,165.13 4.37
600,000.01 to 650,000.00 ......... 27 17,252,516.08 5.94
650,000.01 to 700,000.00 ......... 7 4,742,237.68 1.63
700,000.01 to 750,000.00 ......... 4 2,897,297.61 1.00
750,000.01 to 800,000.00 ......... 8 6,231,694.90 2.15
800,000.01 to 850,000.00 ......... 2 1,663,709.08 0.57
850,000.01 to 900,000.00 ......... 8 7,025,462.57 2.42
900,000.01 to 950,000.00 ......... 4 3,740,558.63 1.29
950,000.01 to 1,000,000.00 ......... 10 9,897,377.49 3.41
1,000,000.01 to 1,250,000.00 ......... 6 6,942,728.17 2.39
1,250,000.01 to 1,500,000.00 ......... 4 5,737,811.23 1.98
1,750,000.01 to 2,000,000.00 ......... 3 5,878,800.76 2.03
2,000,000.01 or greater .............. 4 13,383,631.55 4.61
--- --------------- ------
Total ............................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately $346,401.
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 .................... 558 $191,378,562.85 65.93%
Planned Unit Development ......... 142 55,978,497.48 19.28
Two-to-Four-Family ............... 70 25,103,845.21 8.65
Condominium ...................... 68 17,823,006.33 6.14
--- --------------- ------
Total ........................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
S-51
<PAGE>
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 .................... 538 $177,280,227.82 61.07%
Cash Out Refinance .......... 163 75,329,280.25 25.95
Rate/Term Refinance ......... 137 37,674,403.80 12.98
--- --------------- ------
Total ...................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
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 ......... 368 $155,197,056.48 53.46%
Full Documentation ............ 356 97,916,601.49 33.73
No Documentation .............. 81 23,303,418.13 8.03
No Ratio ...................... 33 13,866,835.77 4.78
--- --------------- ------
Total ........................ 838 $290,283,911.87 100.00%
=== =============== ======
</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 ......... 718 $245,640,869.16 84.62%
Investment ........... 88 30,745,240.31 10.59
Second Home .......... 32 13,897,802.40 4.79
--- --------------- ------
Total ............... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
PREPAYMENT PENALTIES (YEARS) -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
PREPAYMENT PENALTY NUMBER OF PRINCIPAL SCHEDULED
(YEARS) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
------- -------------- ------- -----------------
<S> <C> <C> <C>
0 .................. 497 $179,117,718.70 61.70%
1 .................. 3 867,850.57 0.30
3 .................. 34 11,429,602.01 3.94
5 .................. 304 98,868,740.59 34.06
--- --------------- ------
Total ............. 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
SERVICERS -- POOL 2
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
SERVICERS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
--------- -------------- ------- -----------------
<S> <C> <C> <C>
Aurora ................... 507 $163,303,005.62 56.26%
GreenPoint ............... 156 62,577,851.06 21.56
Chase .................... 77 34,177,663.32 11.77
First Nationwide ......... 98 30,225,391.87 10.41
--- --------------- ------
Total ................... 838 $290,283,911.87 100.00%
=== =============== ======
</TABLE>
S-52
<PAGE>
POOL 3 MORTGAGE LOANS
The Pool 3 Mortgage Loans, a majority of which were originated under the
Borrower Advantage Program (as described under "-- The Borrower Advantage
Program -- The Borrower Advantage Underwriting Guidelines") 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 ........... 921
Total Scheduled Principal Balance ......... $95,720,924
Mortgage Rates:
Weighted Average ......................... 9.218%
Range .................................... 7.500% to 10.750%
Weighted Average Remaining Term to Maturity
(in months) .............................. 355
</TABLE>
The Scheduled Principal Balances of the Pool 3 Mortgage Loans range from
approximately $23,667 to approximately $303,092. The Pool 3 Mortgage Loans have
an average Scheduled Principal Balance of approximately $103,932. All such Pool
3 Mortgage Loans conform to the maximum original loan amount limitations for
single-family residential mortgaged properties issued by Fannie Mae and are
fully amortizing over their terms. In addition, all of the Pool 3 Mortgage
Loans were purchase money Mortgage Loans for primary residences of the
borrowers.
The weighted average Loan-to-Value Ratio at origination of the Pool 3
Mortgage Loans is approximately 102.22%, and no Pool 3 Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding approximately 103%. A majority of
such Mortgage Loans are covered by primary mortgage insurance policies issued
to the borrower by United Guaranty in connection with 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 mortgage property.
A majority of the Pool 3 Mortgage Loans were originated in accordance,
generally, with the Advantage Underwriting Guidelines as described at "-- The
Borrower Advantage Program -- Borrower Advantage Underwriting Guidelines."
No more than approximately 0.63% 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 LOAN-TO- NUMBER OF PRINCIPAL SCHEDULED
VALUE RATIOS (%) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------- -------------- ------- -----------------
<S> <C> <C> <C>
95.01 to 100.00 ........... 152 $16,996,905.57 17.76%
100.01 to 105.00 ........... 769 78,724,018.73 82.24
--- -------------- ------
Total .................... 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
The weighted average original loan-to-value ratio is approximately 102.22%.
S-53
<PAGE>
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 ......... 1 $ 107,419.21 0.11%
7.501 to 8.000 ......... 8 959,966.58 1.00
8.001 to 8.500 ......... 73 8,843,673.27 9.24
8.501 to 9.000 ......... 310 33,363,667.60 34.86
9.001 to 9.500 ......... 270 26,614,428.04 27.80
9.501 to 10.000 ......... 157 16,628,168.40 17.37
10.001 to 10.500 ......... 93 8,345,378.24 8.72
10.501 to 11.000 ......... 9 858,222.96 0.90
--- -------------- ------
Total .................. 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 9.218%.
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>
Less than or equal to 180 ......... 2 $ 258,533.08 0.27%
181 to 240 ........................ 2 196,812.23 0.21
241 to 360 ........................ 917 95,265,578.99 99.52
--- -------------- ------
Total ........................... 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
The weighted average original term to maturity is approximately 359 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>
Less than or equal to 180 ......... 2 $ 258,533.08 0.27%
181 to 240 ........................ 2 196,812.23 0.21
241 or greater .................... 917 95,265,578.99 99.52
--- -------------- ------
Total ........................... 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
The weighted average remaining term to maturity is approximately 355
months.
S-54
<PAGE>
GEOGRAPHIC DISTRIBUTION -- POOL 3
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
STATE MORTGAGE LOAN BALANCE PRINCIPAL BALANCE
----- ------------- ------- -----------------
<S> <C> <C> <C>
Texas .................. 114 $10,874,252.79 11.36%
California ............. 58 8,066,730.10 8.43
Florida ................ 62 6,428,907.14 6.72
Virginia ............... 30 4,400,487.82 4.60
Pennsylvania ........... 49 4,290,608.64 4.48
Michigan ............... 44 4,274,584.11 4.47
Missouri ............... 49 3,688,064.40 3.85
North Carolina ......... 31 3,549,936.56 3.71
Arizona ................ 28 3,205,880.09 3.35
Ohio ................... 39 3,063,084.62 3.20
Other .................. 417 43,878,388.03 45.84
--- -------------- ------
Total ................ 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES -- POOL 3
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
RANGE OF SCHEDULED NUMBER OF PRINCIPAL SCHEDULED
PRINCIPAL BALANCES ($) MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
---------------------- -------------- ------- -----------------
<S> <C> <C> <C>
0.01 to 50,000.00 ......... 110 $ 4,393,956.08 4.59%
50,000.01 to 100,000.00 ......... 361 27,291,721.39 28.51
100,000.01 to 150,000.00 ......... 307 37,694,560.13 39.38
150,000.01 to 200,000.00 ......... 105 17,716,359.08 18.51
200,000.01 to 250,000.00 ......... 36 8,070,837.33 8.43
250,000.01 to 300,000.00 ......... 1 250,398.49 0.26
300,000.01 to 350,000.00 ......... 1 303,091.80 0.32
--- -------------- ------
Total .......................... 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately
$103,932.
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 .................... 774 $78,276,409.36 81.78%
Planned Unit Development ......... 83 10,674,267.42 11.15
Condominium ...................... 64 6,770,247.52 7.07
--- -------------- ------
Total .......................... 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
S-55
<PAGE>
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 ......... 921 $95,720,924.30 100.00%
--- -------------- ------
Total .......... 921 $95,720,924.30 100.00%
=== ============== ======
</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 ............... 603 $63,491,325.59 66.33%
Alternate .......... 318 32,229,598.71 33.67
--- -------------- ------
Total ............ 921 $95,720,924.30 100.00%
=== ============== ======
</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 ......... 921 $95,720,924.30 100.00%
--- -------------- ------
Total .............. 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
SERVICERS -- POOL 3
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MORTGAGE LOANS
SCHEDULED BY TOTAL
NUMBER OF PRINCIPAL SCHEDULED
SERVICERS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
--------- -------------- ------- -----------------
<S> <C> <C> <C>
Countrywide ............ 436 $43,708,657.37 45.66%
Aurora ................. 208 21,125,757.84 22.07
Bank America ........... 117 13,096,035.87 13.68
North American ......... 51 5,270,062.60 5.51
Wells Fargo ............ 44 4,793,449.84 5.01
Crestar ................ 40 4,231,115.99 4.42
Irwin .................. 25 3,495,844.79 3.65
--- -------------- ------
Total ................ 921 $95,720,924.30 100.00%
=== ============== ======
</TABLE>
S-56
<PAGE>
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").
All of the Mortgage Loans serviced by Bank of America, N.A., Countrywide Home
Loans, Inc., Irwin Mortgage Corporation, North American Mortgage Company,
SunTrust Mortgage, Inc. and Wells Fargo Home Mortgage, Inc., and approximately
0.83% of the Mortgage Loans primarily serviced by Aurora were originated in
accordance with the underwriting guidelines applicable to the Borrower
Advantage Program (the "Borrower Advantage Underwriting Guidelines") as
described below at "-- The Borrower Advantage Program -- Borrower Advantage
Underwriting Guidelines". Of the remaining Mortgage Loans included the Trust
Fund, approximately 29.37% were originated or acquired in accordance with the
Underwriting Guidelines established by Aurora ("Aurora Underwriting
Guidelines"), approximately 50.00% were originated or acquired in accordance
with the Underwriting Guidelines established by GreenPoint Funding (the
"GreenPoint Underwriting Guidelines") and approximately 9.18% were originated
or acquired in accordance with the Underwriting Guidelines established by
Chase. The following are general summaries of the Aurora Underwriting
Guidelines, the GreenPoint 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
Approximately 52.36% of the Mortgage Loans 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.
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 generally 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
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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.
GREENPOINT UNDERWRITING GUIDELINES
Approximately 44.89% of the Mortgage Loans included in the Trust Fund
(including approximately 35.99% of the Mortgage Loans primarily serviced by
Aurora) were originated in accordance with the GreenPoint Underwriting
Guidelines. See "The Servicers -- GreenPoint" for a general description of
GreenPoint and its mortgage origination and servicing activities.
Generally, the GreenPoint Underwriting Guidelines are applied to evaluate
the prospective borrower's credit standing and repayment ability and the value
and adequacy of the mortgaged property as collateral. Based on these and other
factors, GreenPoint will determine the level of documentation to be provided by
the prospective borrower. Exceptions to the GreenPoint Underwriting Guidelines
are permitted where compensating factors are present.
In determining whether a prospective borrower has sufficient monthly
income available to meet the borrower's monthly obligation on the proposed
mortgage loan and monthly housing expenses and other financial obligations,
GreenPoint generally considers, when required by the applicable documentation
program, the ratio of those amounts to the proposed borrower's monthly gross
income. These ratios vary depending on a number of underwriting criteria,
including loan-to-value ratios, and are determined on a loan-by-loan basis.
GreenPoint acquires or originates many mortgage loans under "limited
documentation" or "no documentation" programs. Under the limited documentation
programs, more emphasis is placed on the value and adequacy of the mortgaged
property as collateral, credit history and other assets of the borrower, than
on verified income of the borrower. Mortgage loans underwritten under this type
of program are generally limited to borrowers with credit histories that
demonstrate an established ability to repay indebtedness in a timely fashion,
and certain credit underwriting documentation concerning income or income
verification and/or employment verification is waived. Loans originated and
acquired with limited documentation programs include cash-out refinance loans,
super-jumbos and mortgage loans secured by investor-owned properties. Permitted
maximum loan-to-value ratios (including secondary financing) under limited
documentation programs are generally more restrictive than mortgage loans
originated with full documentation or alternative documentation requirements.
Under "no documentation" programs, income ratios for the prospective
borrower are not calculated. Emphasis is placed on the value and adequacy of
the mortgaged property as collateral and the credit history of the prospective
borrower, rather than on verified income and assets of the borrower.
Documentation concerning income, employment verification and asset verification
is waived and income ratios are not calculated. Mortgage loans underwritten
under no documentation programs are generally limited to borrowers with
favorable credit histories and who satisfy other standards for limited
documentation programs.
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. and Fitch, Inc. (as in the case of any financial
strength rating, the issuing agency can withdraw or change such rating at any
time). The Borrower Advantage
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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 generally 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 the
participating originator 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.
A majority of the Mortgage Loans included in Pool 3 were all originated
under the Borrower Advantage Program and initially sold by either Bank of
America, N.A., Countrywide Home Loans, Inc., Irwin Mortgage Corporation, North
American Mortgage Company, SunTrust Mortgage, Inc. or Wells Fargo Home
Mortgage, Inc. 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 foregoing originators of the Mortgage Loans) made
certain representations and warranties concerning the characteristics of such
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 his ability to pay two
months' principal, interest and taxes with respect to the mortgage loan and
related mortgaged property.
The maximum loan amount which may be borrowed 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 for underwriting 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, the 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 which 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 of 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 also 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 credit repositories (i.e., 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 programs. Mortgage loans originated under "limited documentation"
or "no documentation" residential programs are not eligible for underwriting
under the Program.
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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, 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 none of the Depositor, the Class
2-A5 Certificate Insurer, the Seller, the Underwriter or any other Servicer
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.
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,
----------------------------------------------- AS OF
1996 1997(3) 1998(4) 1999(4) SEPTEMBER 30, 2000(4)
----------- ----------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
Total balance of mortgage loans serviced ................. $ 1,765 $ 1,203 $ 6,096 $ 3,870 $ 4,465
Percentage of mortgage loans delinquent by period of
delinquency(1)(2) 30 to 59 days ......................... 1.92% 3.21% 3.21% 4.03% 4.00%
60 to 89 days ........................................... 0.45 0.73 0.92 1.19 0.98
90 days or more ......................................... 0.25 0.28 0.42 0.30 0.38
------- ------- ------- ------- -------
Total percentage of mortgage loans delinquent(1)(2) ...... 2.62% 4.22% 4.55% 5.52% 5.36%
In foreclosure (excluding Bankruptcies) .................. 1.16 1.99 2.10 1.11 1.09
In bankruptcy ............................................ 0.47 0.78 0.61 1.15 0.97
------- ------- ------- ------- -------
Total(2) ................................................. 4.25% 6.99% 7.26% 7.78% 7.42%
======= ======= ======= ======= =======
</TABLE>
--------
(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.
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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 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, Bank of America, N.A., Chase Manhattan Mortgage Corporation,
Countrywide Home Loans, Inc., ("Countrywide"), First Nationwide Mortgage
Corporation, GreenPoint Funding, Irwin Mortgage Corporation, North American
Mortgage Company, SunTrust Mortgage, Inc. and Wells Fargo Home Mortgage, Inc.
(collectively, the "Servicers"). Aurora, GreenPoint Funding and Chase will
service approximately 49.91%, 26.93% and 8.17% (by Cut-off Date Balance),
respectively, of the Mortgage Loans. See "Description of the Mortgage Pools"
for a percentage breakdown by Pool of the servicing of the Mortgage Loans. It
is anticipated that certain of the Mortgage Loans currently serviced by
GreenPoint and Chase will be subject to a servicing transfer within the next
six months. 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 is obligated to terminate the Servicer
for certain events of default which indicate the Servicer is not performing, or
is unable to perform, its duties and obligations under the related servicing
agreement. In addition, under each servicing agreement, Lehman Capital has
retained the right to terminate the Servicer, without cause, upon thirty days'
notice and, with limited exceptions, the payment of certain termination fees
and expenses of the Servicer in connection with the transfer of the Mortgage
Loans to a successor servicer.
The information set forth in the following paragraphs has been provided by
GreenPoint Funding 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 Class 2-A5 Certificate Insurer, 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 same variable factors described under "The Master Servicer,"
the delinquency and/or loan loss data set forth below for GreenPoint Funding
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 their respective 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.
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GREENPOINT
GreenPoint Funding, a wholly-owned subsidiary of GreenPoint Financial
Corp. ("GreenPoint Financial"), is engaged in the mortgage banking business,
which consists of the origination, acquisition, sale and servicing of
residential mortgage loans secured primarily by one-to four-unit family
residences, and the purchase and sale of mortgage servicing rights. GreenPoint
Funding originates loans through a nationwide network of production branches.
Loans are originated primarily through GreenPoint's wholesale division, through
a network of independent mortgage loan brokers approved by GreenPoint, and also
through its retail lending division and correspondent lending division.
GreenPoint Funding's present business operations were formed through the
transfer to GreenPoint Funding, effective October 1, 1999, of the assets and
liabilities of Headlands Mortgage Company. Simultaneously with this transfer,
GreenPoint Mortgage Corp. ("GreenPoint Mortgage"), a subsidiary of GreenPoint
Financial specializing in non-conforming, no documentation loans, was merged
into GreenPoint Funding. All of the mortgage operations of GreenPoint Financial
are now conducted through GreenPoint Funding.
GreenPoint Funding's executive offices are located at 1100 Larkspur
Landing Circle, Suite 101, Larkspur, California, 94939.
As of September 30, 2000, GreenPoint Funding's mortgage loan servicing
portfolio consisted of 186,675 one- to four-unit family residential mortgage
loans with an aggregate principal balance of $17.7 billion. GreenPoint
Funding's primary source of mortgage servicing rights is from mortgage loans it
has originated.
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of all "Alternate A" mortgage loans
originated or acquired by GreenPoint, or serviced by GreenPoint Funding and
includes servicing portfolio information with respect to the dates and periods
prior to the consolidation of GreenPoint Financial's mortgage operations into
GreenPoint Funding on October 1, 1999.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Delinquent "Alternate A" Mortgage Loans and Pending
Foreclosures at Period End:
30-59 days ..................................................... 1.34% 1.80% 1.97% 2.76%
60-89 days ..................................................... 0.07 0.23 0.35 1.00
90 days or more (including pending foreclosures) ............... 0.11 0.39 0.98 0.96
---- ---- ---- ----
Total "Alternate A" delinquencies and foreclosures pending..... 1.52% 2.41% 3.30% 4.72%
==== ==== ==== ====
</TABLE>
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, 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 that Servicer and appoint a successor servicer as
provided in the Trust Agreement.
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 with 30 days' notice, 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, if the successor servicer is not at
that time already a Servicer of Mortgage Loans for the Trust, 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 (determined without regard to the Class 2-A5 Certificate
Insurance Policy).
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be paid a monthly fee (the "Master Servicing
Fee") equal to the investment earnings derived from principal and interest
collections received on the Mortgage Loans on deposit in the Collection Account
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established by the Master Servicer and invested in certain eligible investments
prior to their remittance to the Trustee on the Deposit Date. See "Description
of the Certificates -- Example of Distributions" herein. 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; 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 or a successor servicer is required to be funded by the Master
Servicer, to the extent that such amount does not exceed the total of its
Master Servicing Fee for the applicable Distribution Date, through a reduction
in the amount of that compensation. Prepayment Interest Shortfalls not funded
by the Servicers or the Master Servicer as described above and any Relief Act
Reductions that are allocable to the Class 2-A5 Certificates will be covered
initially by the Class 2-A5 Reserve Fund and, upon depletion of the Class 2-A5
Reserve Fund, by the Class 2-A5 Certificate Insurance Policy.
ADVANCES
Each Servicer will generally be obligated to make Advances with respect to
delinquent payments of principal of and interest on the Mortgage Loans (other
than Balloon Payments) adjusted to the related Mortgage Rate less the
applicable Retained Interest Rate, the Originator Retained Interest Rate and
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 to make any such Advances if any Servicer fails to do so, and the
Trustee will be obligated to make any required Advance if the Master Servicer
fails in its obligation to do so, to the extent provided in the Trust
Agreement. The Master Servicer, each Servicer or the Trustee, as applicable,
will be entitled to recover any Advances made by it with respect to a Mortgage
Loan out of late payments thereon or out of related liquidation proceeds and
insurance proceeds or, if 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
(except with respect to the Class 2-A5 Certificates as discussed above).
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.
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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 Wells Fargo
Bank Minnesota, N.A., 11000 Broken Land Parkway, Columbia, Maryland 21044.
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, the maturity date and the applicable
Servicer of such Mortgage Loan.
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, an
original assignment of security agreement and related
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<PAGE>
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 many of the Mortgage
Loans will have been recorded in the name of an agent on behalf of the holder
of the related Mortgage Note. In those cases, 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.
One or more of the documents described above, or other documents, are not
available with respect to certain of the Mortgage Loans. The Depositor will not
be obligated to repurchase or substitute for any such defective Mortgage Loan
unless a loss that would otherwise constitute a Realized Loss is incurred with
respect to such Mortgage Loan and such loss resulted from the failure to
deliver such documents.
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 the date of (or provided in)
the applicable agreement (each such date, a "Sale Date"), to the Seller certain
representations and warranties concerning the related Mortgage Loans that
generally include representations and warranties similar to those summarized in
the Prospectus under the heading "Loan Underwriting Procedures and Standards --
Representations and Warranties." The Seller's rights under each Sale Agreement
will be assigned by the Seller to the Depositor and, in turn, by the Depositor
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 holders of Offered Certificates 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 as
described above, 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 all voting rights,
and the remaining Classes of Certificates will be allocated 95% of the voting
rights under the Trust Agreement. Voting rights will be allocated among the
Classes of Offered Certificates in proportion to their respective Class
Principal Amounts or Class Notional Amounts, and among Certificates of each
Class in proportion to their Percentage Interests. On or after the date, if
any, on which the Class 2-A5 Certificate Insurer has paid a claim under the
Class 2-A5 Certificate Insurance Policy, the Class 2-A5 Certificate Insurer
will be entitled to exercise all consent, voting or related rights of the
holders of the Class 2-A5 Certificates.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
GENERAL
The yields to maturity (or to early termination) of the Offered
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, the extent to
which Mortgage Loans bearing higher Mortgage Rates prepay at a more rapid rate
than Mortgage Loans with lower Mortgage Rates, the amount and timing of
borrower delinquencies and defaults resulting in Realized Losses, the purchase
prices for such Certificates and other factors.
S-65
<PAGE>
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.
Approximately 5.40% of the Mortgage Loans in Pool 1 and 38.30% of the
Mortgage Loans in Pool 2 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"). None of the Mortgage Loans in
Pool 3 contain prepayment penalty provisions. 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.
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.
S-66
<PAGE>
As described herein, approximately 0.40% and 6.13% 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 herein, approximately 13.26% and 6.02% of the Pool 1 and Pool
2 Mortgage Loans, respectively, are Balloon Loans which will have original
terms to maturity that are shorter than their amortization schedules, leaving
final payments due on their maturity dates that are significantly larger than
other monthly payments. The Balloon Loans are generally expected to have
original terms to maturity of 15 years. The ability of a borrower to repay a
Balloon Loan at maturity frequently will depend on the borrower's ability to
refinance the loan. Investors should consider that they will bear any loss on a
Balloon Loan as a result of the borrower's inability to refinance the loan, to
the extent not covered by the applicable credit enhancement described herein.
As described under "Description of the Certificates" herein, the
applicable Non-AP Percentage of the amount of principal prepayments on the
Mortgage Loans in each Mortgage Pool will be allocated to the related Senior
Certificates (other than the Class AP Certificates), as a group, during the
first five years following the Closing Date (except as described herein). In
addition, the entire amount of the applicable Non-AP Percentage of scheduled
and unscheduled principal payments on the Pool 1 Mortgage Loans allocable to
the Pool 1 Senior Certificates (other than the Class 1-AP Certificates) during
that five year period will be allocated to the Class 1-A1, Class 1-A2, Class
1-A6, Class 1-A8 and Class R Certificates (except as described herein), thus
accelerating the payment of these Certificates while slowing the payment of the
Class 1-A10 Certificates.
The yields on the Offered Certificates (other than the Class 2-A5
Certificates) may be adversely affected by Net Prepayment Interest Shortfalls.
The yields on the Offered Certificates will be affected by the exercise by
the Depositor of its right to repurchase the Mortgage Loans as described under
"Description of the Certificates -- Optional Termination of the Trust Fund"
herein, or by the failure of the Depositor to exercise that right. Purchasers
of Group 3 Certificates should consider that disproportionately high rates of
prepayments for the Group 1 and Group 2 Mortgage Loans could result in the
Depositor exercising its right to repurchase the Mortgage Loans even though a
substantial amount of the Group 3 Mortgage Loans are still 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 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" herein.
The effective yield to holders of the Offered Certificates (other than the
Class 1-A6 and Class 1-A7 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).
S-67
<PAGE>
SENSITIVITY OF CERTAIN CLASSES OF CERTIFICATES
SENSITIVITY OF THE LIBOR CERTIFICATES. The yields of the Class 1-A4, 1-A5,
Class 1-A6 and Class 1-A7 Certificates will be highly sensitive to the level of
LIBOR. Investors in the Class 1-A4 and Class 1-A6 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 1-A4 and Class 1-A6 Certificates is 9.00%
(which would occur whenever LIBOR equals or exceeds 7.50% with respect to Class
1-A4 and 8.35% with respect to Class 1-A6 for any relevant Accrual Period other
than the first Accrual Period).
Conversely, investors in the Class 1-A5 and Class 1-A7 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 1-A5 and Class 1-A7 Certificates can fall as low as
0.00% (which will occur whenever LIBOR equals or exceeds 7.50% with respect to
Class 1-A5 and 8.35% with respect to Class 1-A7 for any relevant Accrual Period
other than the first Accrual Period). An investor considering the purchase of a
Class 1-A5 or Class 1-A7 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 1-A5 and
Class 1-A7 Certificates.
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 Principal-Only Certificates will be sensitive, and the yields of the
Interest-Only Certificates will be extremely sensitive, to the rate and timing
of principal prepayments on the related Mortgage Loans.
The Class AP Certificates will be sensitive to prepayments on the Discount
Mortgage Loans in the related Mortgage Pool. 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" herein.
Prospective investors in the Class 1-A3, Class 1-A4, Class 1-A5, Class
1-A7, Class 1-A9, Class 1-A11, Class BX, Class 2-A2, Class 2-A4 and Class 2-A6
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. Prospective investors in the Class 3-AX Certificates should
carefully consider the risk of a faster than anticipated rate of prepayment on
specified Mortgage Loans in Pool 3 with Net Mortgage Rates equal to or greater
than 8.25%. Prospective investors in the Class AX Certificates should carefully
consider the risk of a faster than anticipated rate of prepayment on specified
Pool 1 AX Loans and Pool 2 AX Loans.
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
(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
S-68
<PAGE>
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 or Class
Notional 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 or Class Notional 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-A3, Class 1-A4, Class 1-A5, Class
1-A7, Class 1-A9, Class 1-A11, Class 2-A2, Class 2-A4, Class 2-A6, Class BX,
Class 3-AX and Class 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 and the additional assumptions that (1) the applicable assumed purchase
price (expressed as a percentage of the Class Principal Balance or Class
Notional Amount, as applicable), exclusive of accrued interest for each Class
of Certificates is as set forth below and (2) the initial Class Principal
Amounts of the Class 1-AP, Class 2-AP and Class 3-AP Certificates and the
initial Class Notional Amounts and Certificate Interest Rates of the Class
1-A3, Class 1-A4, Class 1-A5, Class 1-A7, Class 1-A9, Class 1-A11, Class BX,
Class 2-A2, Class 2-A4, Class 2-A6, Class 3-AX and Class AX Certificates are as
set forth or described herein.
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-AP CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 64.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
-----------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 2.33% 6.15% 11.30% 17.01% 23.17%
Weighted Average Life in Years ......... 19.9 8.6 4.9 3.3 2.4
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 2-AP CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 60.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
-----------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 3.56% 8.68% 15.47% 23.39% 32.60%
Weighted Average Life in Years ......... 15.7 7.4 4.4 3.0 2.2
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 3-AP CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 61.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
-----------------------------------------------------------------
0% 50% 100% 150% 200%
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 2.56% 7.01% 13.19% 20.24% 28.11%
Weighted Average Life in Years ......... 20.2 8.6 4.8 3.2 1.4
</TABLE>
--------
* Corporate bond equivalent basis
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<PAGE>
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-A3 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 17.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
---------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 54.59% 24.60% 23.38% 16.24% (1.63)%
Weighted Average Life in Years ......... 15.7 3.0 2.9 2.5 1.9
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-A4 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 19.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
---------------------------------------------------------------------
0% 50% 100% 150% 200%
LEVEL OF LIBOR ---------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
7.100% and lower ....................... ** ** ** ** **
7.200% ................................. 9.24% 4.35% 1.46% (5.14)% (23.32)%
7.300% ................................. 23.39 20.92 19.26 14.27 1.76
7.500% and higher ...................... 50.07 49.32 48.72 46.20 38.95
Weighted Average Life in Years ......... 17.8 10.8 9.1 6.9 4.5
</TABLE>
--------
* Corporate bond equivalent basis
** Yields are lower than (99.99)%
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-A5 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 25.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
-------------------------------------------------------------------
0% 50% 100% 150% 200%
LEVEL OF LIBOR ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
7.100% and lower ....................... 37.37% 36.07% 35.10% 31.60% 22.36%
7.200% ................................. 27.24 25.18 23.75 19.22 7.78
7.300% ................................. 16.90 13.53 11.39 5.62 (9.03)
7.500% and higher ...................... ** ** ** ** **
Weighted Average Life in Years ......... 17.8 10.8 9.1 6.9 4.5
</TABLE>
--------
* Corporate bond equivalent basis
** Yields are lower than (99.99)%
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-A7 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 1.75%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
------------------------------------------------------------------------
LEVEL OF LIBOR 0% 50% 100% 150% 200%
---------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
4.620% ................................. 299.60% 291.85% 252.11% 199.72% 141.53%
5.620% ................................. 205.31 197.93 161.59 111.15 56.92
6.620% ................................. 121.44 114.63 81.08 29.04 (21.58)
8.350% and higher ...................... ** ** ** ** **
Weighted Average Life in Years ......... 24.4 11.0 2.9 1.3 0.9
</TABLE>
--------
* Corporate bond equivalent basis
** Yields are lower than (99.99)%
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<PAGE>
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-A9 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 32.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
---------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 29.23% 29.22% 28.96% 10.44% (5.21)%
Weighted Average Life in Years ......... 29.6 27.1 18.4 4.5 3.3
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 1-A11 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 39.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 22.75% 20.21% 18.51% 13.45% 0.76%
Weighted Average Life in Years ......... 17.8 10.8 9.1 6.9 4.5
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS BX CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 40.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
-------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 21.82% 20.03% 18.52% 17.25% 15.00%
Weighted Average Life in Years ......... 20.0 13.5 10.7 9.2 7.8
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 2-A2 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 15.75%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 50.16% 20.34% 17.67% 15.46% 0.82%
Weighted Average Life in Years ......... 14.6 3.0 2.8 2.7 2.1
</TABLE>
--------
* Corporate bond equivalent basis
S-71
<PAGE>
PRE-TAX YIELD* TO MATURITY OF THE CLASS 2-A4 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 0.20%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
---------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 19.74% 19.50% 17.12% 10.05% (2.85)%
Weighted Average Life in Years ......... 25.1 20.2 12.2 7.3 4.7
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 2-A6 CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 32.00%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 24.35% 24.21% 22.42% 16.32% 4.92%
Weighted Average Life in Years ......... 25.1 20.2 12.2 7.3 4.7
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS 3-AX CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 24.75%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
--------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 33.86% 24.04% 13.75% 2.90% (8.61)%
Weighted Average Life in Years ......... 21.0 8.9 5.0 3.3 2.5
</TABLE>
--------
* Corporate bond equivalent basis
PRE-TAX YIELD* TO MATURITY OF THE CLASS AX CERTIFICATES
(ASSUMED PURCHASE PRICE PERCENTAGE: 23.25%)
<TABLE>
<CAPTION>
PERCENTAGE OF PREPAYMENT ASSUMPTION
--------------------------------------------------------------------
0% 50% 100% 150% 200%
----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Yield* ................................. 33.54% 23.51% 12.98% 1.86% (9.94)%
Weighted Average Life in Years ......... 20.1 8.6 4.9 3.2 2.4
</TABLE>
--------
* Corporate bond equivalent basis
S-72
<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 Senior Certificates are senior to the
related Components of the Subordinate Certificates and Components having a
relatively higher priority of distribution within a particular Certificate
Group will have a preferential right to receive amounts of interest and
principal from the related Mortgage Pool on such Distribution Date. 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 of the related Certificate
Group, then to the higher ranking Components of such Certificate Group, in
inverse order of priority, until 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 assumes a constant
prepayment rate of 4% per annum of the outstanding principal balance of such
Mortgage Loans in the first month of the life of such Mortgage Loans and an
additional 1.2727272727% (precisely 14/11 percent) per annum in each month
thereafter until the eleventh month; beginning in the twelfth month and in each
month thereafter during the life of such Mortgage Loans, a constant prepayment
rate of 18% per annum is assumed. As used in the tables below, a 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption,
i.e. no prepayments; a 50% Prepayment Assumption assumes prepayment rates equal
to 50% of the Prepayment Assumption, and so forth. The Prepayment Assumption
does not purport to be either a historical description of the prepayment
experience of any pool of mortgage loans or a prediction of the anticipated
rate of prepayment of any mortgage loans, including the Mortgage Loans to be
included in the Trust Fund.
The tables beginning on page S-76 were prepared based on the following
additional 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 interest is
timely received on the first 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) there is no optional
termination of the Trust Fund; (7) the Certificates are issued on October 27,
2000; (8) Distribution Dates occur on the 25th day of each month commencing in
November 2000; and (9) the Mortgage Loans were assumed to have the following
characteristics:
S-73
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS OF POOL 1
<TABLE>
<CAPTION>
ORIGINAL REMAINING REMAINING INTEREST-
CURRENT NET TERM TO TERM TO AMORTIZATION ONLY
PRINCIPAL MORTGAGE MORTGAGE MATURITY MATURITY TERM TERM
BALANCE ($) RATE (%) RATE (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS)*
------------------ ----------------- --------------------- ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 .......... 66,125,109.93 9.0248867703 8.7355395116 359 356 N/A N/A
2 .......... 195,959,085.69 9.9119007700 9.5948839225(1) 360 357 N/A N/A
3 .......... 3,016,279.12 8.9832575127 8.6922102089 360 357 N/A N/A
4 .......... 1,856,228.94 9.4788262884 9.2263262884 360 358 N/A N/A
5 .......... 2,152,167.85 8.9390876901 8.6473398190 180 173 N/A N/A
6 .......... 3,578,726.02 9.8397823225 9.4559931045(1) 180 176 N/A N/A
7 .......... 536,200.61 9.0166976964 8.7641976964 180 177 N/A N/A
8 .......... 5,105,937.47 9.0526491994 8.8001491994 180 174 351 N/A
9 .......... 36,838,476.72 9.9283568273 9.6758568273(1) 180 177 357 N/A
10 ......... 559,681.06 8.9126638348 8.6601638348 360 358 N/A 118
11 ......... 712,000.00 9.6727528090 9.4202528090(1) 360 357 N/A 117
</TABLE>
--------
* Assumed Mortgage Loans which provide for monthly payments of interest at
the Mortgage Rate but no payments of principal for the term specified.
(1) Does not reflect Retained Interest.
ASSUMED MORTGAGE LOAN CHARACTERISTICS OF POOL 2
<TABLE>
<CAPTION>
ORIGINAL REMAINING REMAINING INTEREST-
CURRENT NET TERM TO TERM TO AMORTIZATION ONLY
PRINCIPAL MORTGAGE MORTGAGE MATURITY MATURITY TERM TERM
BALANCE ($) RATE (%) RATE (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS)*
----------------- ----------------- --------------------- ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 .......... 3,842,836.22 7.4018345462 7.1493345462 182 135 N/A N/A
2 .......... 4,104,170.33 8.9009927282 8.6484927282(1) 180 170 N/A N/A
3 .......... 298,241.05 7.8750000000 7.6225000000 180 178 N/A N/A
4 .......... 757,160.36 8.3780641379 8.1255641379 180 179 N/A N/A
5 .......... 16,239,353.93 7.4624355935 7.2099355935 357 319 N/A N/A
6 .......... 195,987,253.37 9.3375040900 9.0850040900(1) 360 358 N/A N/A
7 .......... 17,724,335.80 8.1284583787 7.6259583787 360 354 N/A N/A
8 .......... 16,038,256.28 8.5853356231 8.1379725430 360 355 N/A N/A
9 .......... 570,913.58 7.4747336081 7.2222336081 84 27 283 N/A
10 ......... 16,917,840.95 9.5215724507 9.2690724507(1) 180 177 357 N/A
11 ......... 151,200.00 8.0000000000 7.7475000000 360 359 N/A 119
12 ......... 17,652,350.00 9.2854708438 9.0329708438(1) 360 357 N/A 117
</TABLE>
--------
* Assumed Mortgage Loans which provide for monthly payments of interest at
the Mortgage Rate but no payments of principal for the term specified.
(1) Does not reflect Retained Interest.
S-74
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS OF POOL 3
<TABLE>
<CAPTION>
ORIGINAL REMAINING REMAINING INTEREST-
CURRENT NET TERM TO TERM TO AMORTIZATION ONLY
PRINCIPAL MORTGAGE MORTGAGE MATURITY MATURITY TERM TERM
BALANCE ($) RATE (%) RATE (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS)*
----------------- ----------------- --------------------- ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 ......... 3,361,761.09 8.2469452161 7.9944452161 360 348 N/A N/A
2 ......... 14,868,443.18 9.0230094545 8.7705094545(1) 360 353 N/A N/A
3 ......... 8,329,773.83 8.6061011786 8.1422166186 358 355 N/A N/A
4 ......... 69,160,946.20 9.3808468088 8.8118014678 359 356 N/A N/A
</TABLE>
--------
* Assumed Mortgage Loans which provide for monthly payments of interest at
the Mortgage Rate but no payments of principal for the term specified.
(1) Does not reflect Retained Interest.
The actual characteristics and the performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is not expected that the Mortgage Loans will prepay
at a constant rate until maturity, that all of the Mortgage Loans will prepay
at the same rate or that there will be no defaults or delinquencies on the
Mortgage Loans. Moreover, the diverse remaining terms to maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the tables at the various percentages of 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 the
Prepayment Assumption.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class 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-75
<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 AND 1-A2 CERTIFICATES
-----------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100% 100% 100% 100% 100%
October 2001 ........................... 98 83 82 82 82
October 2002 ........................... 97 66 65 65 50
October 2003 ........................... 95 48 47 39 5
October 2004 ........................... 93 31 30 8 0
October 2005 ........................... 90 14 12 0 0
October 2006 ........................... 88 1 0 0 0
October 2007 ........................... 86 0 0 0 0
October 2008 ........................... 84 0 0 0 0
October 2009 ........................... 81 0 0 0 0
October 2010 ........................... 79 0 0 0 0
October 2011 ........................... 76 0 0 0 0
October 2012 ........................... 72 0 0 0 0
October 2013 ........................... 68 0 0 0 0
October 2014 ........................... 64 0 0 0 0
October 2015 ........................... 58 0 0 0 0
October 2016 ........................... 54 0 0 0 0
October 2017 ........................... 50 0 0 0 0
October 2018 ........................... 45 0 0 0 0
October 2019 ........................... 40 0 0 0 0
October 2020 ........................... 34 0 0 0 0
October 2021 ........................... 27 0 0 0 0
October 2022 ........................... 20 0 0 0 0
October 2023 ........................... 13 0 0 0 0
October 2024 ........................... 4 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 ......... 15.7 3.0 2.9 2.5 1.9
</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 1-A6 CERTIFICATES
------------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100% 100% 100% 100% 100%
October 2001 ........................... 100 95 77 57 38
October 2002 ........................... 100 89 52 17 0
October 2003 ........................... 100 84 34 0 0
October 2004 ........................... 100 82 23 0 0
October 2005 ........................... 99 81 17 0 0
October 2006 ........................... 99 80 15 0 0
October 2007 ........................... 99 70 7 0 0
October 2008 ........................... 99 61 2 0 0
October 2009 ........................... 99 54 2 0 0
October 2010 ........................... 99 50 2 0 0
October 2011 ........................... 99 45 2 0 0
October 2012 ........................... 99 41 2 0 0
October 2013 ........................... 98 38 2 0 0
October 2014 ........................... 98 35 1 0 0
October 2015 ........................... 80 29 0 0 0
October 2016 ........................... 80 26 0 0 0
October 2017 ........................... 79 22 0 0 0
October 2018 ........................... 79 19 0 0 0
October 2019 ........................... 79 15 0 0 0
October 2020 ........................... 79 12 0 0 0
October 2021 ........................... 78 9 0 0 0
October 2022 ........................... 78 6 0 0 0
October 2023 ........................... 77 4 0 0 0
October 2024 ........................... 77 2 0 0 0
October 2025 ........................... 71 0 0 0 0
October 2026 ........................... 60 0 0 0 0
October 2027 ........................... 44 0 0 0 0
October 2028 ........................... 27 0 0 0 0
October 2029 ........................... 8 0 0 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 24.4 11.0 2.9 1.3 0.9
</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 1-A8 CERTIFICATES
-------------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100% 100% 100% 100% 100%
October 2001 ........................... 100 100 100 100 100
October 2002 ........................... 100 100 100 100 100
October 2003 ........................... 100 100 100 100 100
October 2004 ........................... 100 100 100 100 0
October 2005 ........................... 100 100 100 0 0
October 2006 ........................... 100 100 100 0 0
October 2007 ........................... 100 100 100 0 0
October 2008 ........................... 100 100 100 0 0
October 2009 ........................... 100 100 100 0 0
October 2010 ........................... 100 100 100 0 0
October 2011 ........................... 100 100 100 0 0
October 2012 ........................... 100 100 100 0 0
October 2013 ........................... 100 100 100 0 0
October 2014 ........................... 100 100 100 0 0
October 2015 ........................... 100 100 88 0 0
October 2016 ........................... 100 100 70 0 0
October 2017 ........................... 100 100 55 0 0
October 2018 ........................... 100 100 43 0 0
October 2019 ........................... 100 100 34 0 0
October 2020 ........................... 100 100 26 0 0
October 2021 ........................... 100 100 20 0 0
October 2022 ........................... 100 100 15 0 0
October 2023 ........................... 100 100 11 0 0
October 2024 ........................... 100 100 8 0 0
October 2025 ........................... 100 94 6 0 0
October 2026 ........................... 100 71 4 0 0
October 2027 ........................... 100 49 2 0 0
October 2028 ........................... 100 30 1 0 0
October 2029 ........................... 100 12 * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 29.6 27.1 18.4 4.5 3.3
</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 1-A10 CERTIFICATES
------------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100% 100% 100% 100% 100%
October 2001 ........................... 100 100 100 100 100
October 2002 ........................... 100 100 100 100 100
October 2003 ........................... 100 100 100 100 100
October 2004 ........................... 100 100 100 100 65
October 2005 ........................... 100 100 100 86 23
October 2006 ........................... 98 95 90 53 3
October 2007 ........................... 97 88 79 32 0
October 2008 ........................... 95 79 64 19 0
October 2009 ........................... 93 69 48 12 0
October 2010 ........................... 90 57 34 9 0
October 2011 ........................... 88 47 23 6 0
October 2012 ........................... 85 37 15 5 0
October 2013 ........................... 82 29 7 3 0
October 2014 ........................... 79 21 2 2 0
October 2015 ........................... 59 6 0 1 0
October 2016 ........................... 56 1 0 1 0
October 2017 ........................... 53 0 0 1 0
October 2018 ........................... 49 0 0 * 0
October 2019 ........................... 45 0 0 * 0
October 2020 ........................... 40 0 0 * 0
October 2021 ........................... 35 0 0 * 0
October 2022 ........................... 29 0 0 * 0
October 2023 ........................... 23 0 0 * 0
October 2024 ........................... 16 0 0 * 0
October 2025 ........................... 8 0 0 * 0
October 2026 ........................... 0 0 0 * 0
October 2027 ........................... 0 0 0 * 0
October 2028 ........................... 0 0 0 * 0
October 2029 ........................... 0 0 0 * 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 17.8 10.8 9.1 6.9 4.5
</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 1-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 85 78 70
October 2002 ........................... 98 83 69 56 45
October 2003 ........................... 97 75 56 41 28
October 2004 ........................... 96 67 45 29 18
October 2005 ........................... 95 60 37 21 11
October 2006 ........................... 94 54 30 15 7
October 2007 ........................... 92 49 24 11 5
October 2008 ........................... 91 44 19 8 3
October 2009 ........................... 89 39 16 6 2
October 2010 ........................... 87 35 13 4 1
October 2011 ........................... 85 31 10 3 1
October 2012 ........................... 83 27 8 2 *
October 2013 ........................... 81 24 6 1 *
October 2014 ........................... 78 21 5 1 *
October 2015 ........................... 71 18 4 1 *
October 2016 ........................... 69 16 3 * *
October 2017 ........................... 66 14 2 * *
October 2018 ........................... 63 12 2 * *
October 2019 ........................... 60 10 1 * *
October 2020 ........................... 57 9 1 * *
October 2021 ........................... 53 7 1 * *
October 2022 ........................... 49 6 1 * *
October 2023 ........................... 44 5 * * *
October 2024 ........................... 39 4 * * *
October 2025 ........................... 33 3 * * *
October 2026 ........................... 27 2 * * *
October 2027 ........................... 21 2 * * *
October 2028 ........................... 14 1 * * *
October 2029 ........................... 6 * * * 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 19.9 8.6 4.9 3.3 2.4
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%
S-80
<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 ........................... 98 84 82 82 82
October 2002 ........................... 97 66 64 64 61
October 2003 ........................... 94 48 46 46 19
October 2004 ........................... 92 31 28 22 0
October 2005 ........................... 90 16 11 1 0
October 2006 ........................... 88 3 0 0 0
October 2007 ........................... 86 0 0 0 0
October 2008 ........................... 83 0 0 0 0
October 2009 ........................... 80 0 0 0 0
October 2010 ........................... 77 0 0 0 0
October 2011 ........................... 73 0 0 0 0
October 2012 ........................... 69 0 0 0 0
October 2013 ........................... 64 0 0 0 0
October 2014 ........................... 60 0 0 0 0
October 2015 ........................... 54 0 0 0 0
October 2016 ........................... 49 0 0 0 0
October 2017 ........................... 43 0 0 0 0
October 2018 ........................... 37 0 0 0 0
October 2019 ........................... 31 0 0 0 0
October 2020 ........................... 23 0 0 0 0
October 2021 ........................... 15 0 0 0 0
October 2022 ........................... 7 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 ......... 14.6 3.0 2.8 2.7 2.1
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%.
S-81
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS 2-A3 CERTIFICATES
-----------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
---------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100% 100% 100% 100% 100%
October 2001 ........................... 100 96 80 63 45
October 2002 ........................... 100 91 58 26 0
October 2003 ........................... 99 88 43 4 0
October 2004 ........................... 99 86 34 0 0
October 2005 ........................... 99 85 30 0 0
October 2006 ........................... 99 83 25 0 0
October 2007 ........................... 98 73 12 0 0
October 2008 ........................... 98 62 3 0 0
October 2009 ........................... 98 52 0 0 0
October 2010 ........................... 97 43 0 0 0
October 2011 ........................... 97 36 0 0 0
October 2012 ........................... 97 28 0 0 0
October 2013 ........................... 96 22 0 0 0
October 2014 ........................... 96 16 0 0 0
October 2015 ........................... 85 9 0 0 0
October 2016 ........................... 85 5 0 0 0
October 2017 ........................... 84 1 0 0 0
October 2018 ........................... 83 0 0 0 0
October 2019 ........................... 83 0 0 0 0
October 2020 ........................... 82 0 0 0 0
October 2021 ........................... 81 0 0 0 0
October 2022 ........................... 80 0 0 0 0
October 2023 ........................... 76 0 0 0 0
October 2024 ........................... 65 0 0 0 0
October 2025 ........................... 52 0 0 0 0
October 2026 ........................... 38 0 0 0 0
October 2027 ........................... 24 0 0 0 0
October 2028 ........................... 8 0 0 0 0
October 2029 ........................... 0 0 0 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 23.5 9.3 3.4 1.5 1.0
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%
S-82
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS 2-A5 CERTIFICATES
-------------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
---------------------------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ..................... 100% 100% 100% 100% 100%
October 2001 ........................... 100 100 100 100 100
October 2002 ........................... 100 100 100 100 100
October 2003 ........................... 100 100 100 100 100
October 2004 ........................... 99 99 99 99 78
October 2005 ........................... 98 98 98 98 31
October 2006 ........................... 96 96 96 64 7
October 2007 ........................... 95 95 95 39 0
October 2008 ........................... 94 94 94 24 0
October 2009 ........................... 93 93 81 16 0
October 2010 ........................... 92 92 65 11 0
October 2011 ........................... 90 90 52 8 0
October 2012 ........................... 89 89 42 6 0
October 2013 ........................... 88 88 34 4 0
October 2014 ........................... 87 87 27 3 0
October 2015 ........................... 86 86 20 2 0
October 2016 ........................... 84 84 16 1 0
October 2017 ........................... 83 83 12 1 0
October 2018 ........................... 82 74 10 1 0
October 2019 ........................... 81 64 8 * 0
October 2020 ........................... 80 55 6 * 0
October 2021 ........................... 78 46 4 * 0
October 2022 ........................... 77 39 3 * 0
October 2023 ........................... 76 32 2 * 0
October 2024 ........................... 75 26 2 * 0
October 2025 ........................... 74 20 1 * 0
October 2026 ........................... 72 15 1 * 0
October 2027 ........................... 71 10 1 * 0
October 2028 ........................... 70 6 * * 0
October 2029 ........................... 43 3 * * 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 25.1 20.2 12.2 7.3 4.7
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%.
** The weighted average lives shown for the Class 2-A5 Certificates apply to
the Class 2-A5 Certificates as a group and, because principal
distributions on the Class 2-A5 Certificates will be made on the basis of
requests for distributions or by random lot, are not likely to reflect
the experience of any particular investor, even if the Pool 2 Mortgage
Loans were to prepay at the constant rates assumed.
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<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 ........................... 98 89 81 72 63
October 2002 ........................... 96 80 65 51 40
October 2003 ........................... 91 69 51 36 24
October 2004 ........................... 89 61 40 25 15
October 2005 ........................... 86 54 32 18 9
October 2006 ........................... 84 48 25 13 6
October 2007 ........................... 81 42 20 9 4
October 2008 ........................... 77 36 16 6 2
October 2009 ........................... 74 32 12 4 1
October 2010 ........................... 70 27 10 3 1
October 2011 ........................... 66 23 7 2 *
October 2012 ........................... 63 20 6 1 *
October 2013 ........................... 61 18 5 1 *
October 2014 ........................... 58 16 4 1 *
October 2015 ........................... 55 14 3 * *
October 2016 ........................... 53 12 2 * *
October 2017 ........................... 49 10 2 * *
October 2018 ........................... 46 8 1 * *
October 2019 ........................... 42 7 1 * *
October 2020 ........................... 38 6 1 * *
October 2021 ........................... 34 5 1 * *
October 2022 ........................... 30 4 * * *
October 2023 ........................... 25 3 * * *
October 2024 ........................... 19 2 * * *
October 2025 ........................... 14 1 * * *
October 2026 ........................... 8 1 * * *
October 2027 ........................... 3 * * * *
October 2028 ........................... 2 * * * *
October 2029 ........................... 1 * * * *
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 15.7 7.4 4.4 3.0 2.2
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%.
S-84
<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 92 84 76 69
October 2002 ........................... 99 83 68 55 42
October 2003 ........................... 98 74 55 39 26
October 2004 ........................... 97 67 44 27 15
October 2005 ........................... 96 60 35 19 8
October 2006 ........................... 95 54 28 13 5
October 2007 ........................... 94 48 22 9 2
October 2008 ........................... 92 43 18 6 1
October 2009 ........................... 91 38 14 4 1
October 2010 ........................... 89 34 12 3 *
October 2011 ........................... 88 31 9 2 *
October 2012 ........................... 86 27 7 2 *
October 2013 ........................... 84 24 6 1 *
October 2014 ........................... 81 21 5 1 *
October 2015 ........................... 79 19 4 1 *
October 2016 ........................... 76 17 3 * *
October 2017 ........................... 73 15 2 * *
October 2018 ........................... 70 13 2 * *
October 2019 ........................... 67 11 1 * *
October 2020 ........................... 63 9 1 * *
October 2021 ........................... 58 8 1 * *
October 2022 ........................... 54 7 1 * *
October 2023 ........................... 49 5 * * *
October 2024 ........................... 43 4 * * *
October 2025 ........................... 37 3 * * *
October 2026 ........................... 30 3 * * *
October 2027 ........................... 23 2 * * *
October 2028 ........................... 15 1 * * *
October 2029 ........................... 6 * * * *
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.8 8.7 4.8 3.1 2.2
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%
S-85
<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 91 83 75 67
October 2002 ........................... 98 82 68 54 43
October 2003 ........................... 97 74 55 39 27
October 2004 ........................... 96 67 45 28 17
October 2005 ........................... 95 60 36 20 11
October 2006 ........................... 94 54 29 15 7
October 2007 ........................... 93 48 24 11 4
October 2008 ........................... 91 43 19 8 3
October 2009 ........................... 89 39 15 5 2
October 2010 ........................... 88 35 12 4 1
October 2011 ........................... 86 31 10 3 1
October 2012 ........................... 84 27 8 2 *
October 2013 ........................... 82 24 6 1 *
October 2014 ........................... 79 21 5 1 *
October 2015 ........................... 76 19 4 1 *
October 2016 ........................... 74 16 3 * *
October 2017 ........................... 70 14 2 * *
October 2018 ........................... 67 12 2 * *
October 2019 ........................... 63 11 1 * *
October 2020 ........................... 59 9 1 * *
October 2021 ........................... 55 8 1 * *
October 2022 ........................... 50 6 1 * *
October 2023 ........................... 45 5 * * *
October 2024 ........................... 39 4 * * *
October 2025 ........................... 33 3 * * 0
October 2026 ........................... 26 2 * * 0
October 2027 ........................... 19 2 * * 0
October 2028 ........................... 11 1 * * 0
October 2029 ........................... 3 * * 0 0
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.2 8.6 4.8 3.2 2.3
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%.
S-86
<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 97
October 2005 ........................... 96 96 96 96 96
October 2006 ........................... 95 92 89 86 83
October 2007 ........................... 93 87 81 75 59
October 2008 ........................... 92 81 71 61 38
October 2009 ........................... 90 74 60 47 24
October 2010 ........................... 89 66 48 34 15
October 2011 ........................... 87 59 39 24 10
October 2012 ........................... 85 53 31 17 6
October 2013 ........................... 83 47 25 12 4
October 2014 ........................... 81 41 20 9 2
October 2015 ........................... 71 33 14 6 1
October 2016 ........................... 68 29 11 4 1
October 2017 ........................... 66 25 9 3 *
October 2018 ........................... 63 22 7 2 *
October 2019 ........................... 60 19 5 1 *
October 2020 ........................... 56 16 4 1 *
October 2021 ........................... 52 14 3 1 *
October 2022 ........................... 48 12 2 * *
October 2023 ........................... 44 10 2 * *
October 2024 ........................... 39 8 1 * *
October 2025 ........................... 33 6 1 * *
October 2026 ........................... 27 5 1 * *
October 2027 ........................... 21 3 * * *
October 2028 ........................... 14 2 * * *
October 2029 ........................... 6 1 * * *
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.1 13.5 10.7 9.2 7.8
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%
S-87
<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 ........................... 98 98 98 98 99
October 2003 ........................... 98 98 98 98 98
October 2004 ........................... 97 97 97 97 97
October 2005 ........................... 96 96 96 96 96
October 2006 ........................... 94 92 89 86 83
October 2007 ........................... 93 87 81 75 59
October 2008 ........................... 92 81 71 61 38
October 2009 ........................... 90 74 60 47 24
October 2010 ........................... 89 66 48 34 15
October 2011 ........................... 87 59 39 24 9
October 2012 ........................... 85 52 31 17 6
October 2013 ........................... 83 47 25 12 4
October 2014 ........................... 80 41 20 9 2
October 2015 ........................... 71 33 14 6 1
October 2016 ........................... 68 29 11 4 1
October 2017 ........................... 66 25 9 3 *
October 2018 ........................... 63 22 7 2 *
October 2019 ........................... 60 19 5 1 *
October 2020 ........................... 56 16 4 1 *
October 2021 ........................... 53 14 3 1 *
October 2022 ........................... 48 12 2 * *
October 2023 ........................... 44 10 2 * *
October 2024 ........................... 39 8 1 * *
October 2025 ........................... 33 6 1 * *
October 2026 ........................... 27 5 1 * *
October 2027 ........................... 21 3 * * *
October 2028 ........................... 14 2 * * *
October 2029 ........................... 6 1 * * *
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.0 13.4 10.6 9.2 7.8
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%
S-88
<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 97
October 2005 ........................... 96 96 96 96 96
October 2006 ........................... 95 92 89 86 83
October 2007 ........................... 93 87 81 75 59
October 2008 ........................... 92 81 71 61 38
October 2009 ........................... 90 74 60 47 24
October 2010 ........................... 89 66 48 34 15
October 2011 ........................... 87 59 39 24 9
October 2012 ........................... 85 53 31 17 6
October 2013 ........................... 83 47 25 12 4
October 2014 ........................... 81 41 20 9 2
October 2015 ........................... 70 33 14 6 1
October 2016 ........................... 68 29 11 4 1
October 2017 ........................... 65 25 9 3 *
October 2018 ........................... 63 22 7 2 *
October 2019 ........................... 59 19 5 1 *
October 2020 ........................... 56 16 4 1 *
October 2021 ........................... 52 14 3 1 *
October 2022 ........................... 48 12 2 * *
October 2023 ........................... 44 10 2 * *
October 2024 ........................... 39 8 1 * *
October 2025 ........................... 33 6 1 * *
October 2026 ........................... 27 5 1 * *
October 2027 ........................... 21 3 * * *
October 2028 ........................... 14 2 * * *
October 2029 ........................... 6 1 * * *
October 2030 ........................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life in Years ......... 20.0 13.5 10.7 9.2 7.8
</TABLE>
--------
* Indicates a value between 0.0% and 0.5%
S-89
<PAGE>
THE CLASS 2-A5 CERTIFICATE INSURANCE POLICY
The following information has been supplied by MBIA Insurance Corporation
(the "Class 2-A5 Certificate Insurer") for inclusion in this Prospectus
Supplement. The Class 2-A5 Certificate Insurer does not accept any
responsibility for the accuracy or completeness of this Prospectus Supplement
or any information or disclosure contained herein, or omitted herefrom other
than with respect to the accuracy of the information regarding the Class 2-A5
Certificate Insurance Policy and Class 2-A5 Certificate Insurer set forth under
the heading "The Class 2-A5 Certificate Insurance Policy". Additionally, the
Class 2-A5 Certificate Insurer makes no representation regarding the Class 2-A5
Certificates or the advisability of investing in the Class 2-A5 Certificates. A
copy of the Class 2-A5 Certificate Insurance Policy may be obtained from the
Trustee upon request.
The Class 2-A5 Certificate Insurer, in consideration of the payment of a
premium and subject to the terms of the Class 2-A5 Certificate Insurance Policy
(the "Class 2-A5 Certificate Insurance Policy"), thereby unconditionally and
irrevocably guarantees to any Class 2-A5 Certificateholder that an amount equal
to each full and complete Insured Payment will be received from the Class 2-A5
Certificate Insurer by the Trustee or its successors, as trustee for the Class
2-A5 Certificateholders, on behalf of the Class 2-A5 Certificateholders, for
distribution by the Trustee to each Class 2-A5 Certificateholder of that
Certificateholder's proportionate share of the Insured Payment.
The Class 2-A5 Certificate Insurer's obligations under the Class 2-A5
Certificate Insurance Policy, with respect to a particular Insured Payment,
will be discharged to the extent funds equal to the applicable Insured Payment
are received by the Trustee, whether or not those funds are properly applied by
the Trustee. Insured Payments will be made only at the time set forth in the
Class 2-A5 Certificate Insurance Policy, and no accelerated Insured Payments
will be made regardless of any acceleration of the Class 2-A5 Certificates,
unless the acceleration is at the sole option of the Class 2-A5 Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Class 2-A5 Certificate
Insurance Policy does not cover shortfalls, if any, attributable to any
liability of a REMIC, the Trust Fund or the Trustee for withholding taxes, if
any (including interest and penalties in respect of any liability for
withholding taxes). THE CLASS 2-A5 CERTIFICATE INSURANCE POLICY WILL NOT
PROVIDE CREDIT ENHANCEMENT FOR ANY CLASS OF CERTIFICATES OTHER THAN THE CLASS
2-A5 CERTIFICATES.
The Class 2-A5 Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by
the Class 2-A5 Certificate Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the Class 2-A5 Certificate Insurer
that the order is final and not subject to appeal;
o an assignment in a form that is reasonably required by the Class 2-A5
Certificate Insurer, irrevocably assigning to the Class 2-A5 Certificate
Insurer all rights and claims of the Class 2-A5 Certificateholder relating
to or arising under the Class 2-A5 Certificates against the debtor which
made the preference payment or otherwise with respect to the preference
payment; and
o appropriate instruments to effect the appointment of the Class 2-A5
Certificate Insurer as agent for the Class 2-A5 Certificateholder in any
legal proceeding related to the preference payment, which instruments are
in a form satisfactory to the Class 2-A5 Certificate Insurer;
provided, that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Class 2-A5 Certificate Insurer will be disbursed
to the receiver or the trustee in bankruptcy named in the final order of the
court exercising jurisdiction on behalf of the Class 2-A5 Certificateholder and
not to any Class 2-A5 Certificateholder directly unless the Class 2-A5
Certificateholder has returned principal or interest paid on the Class 2-A5
Certificates to the receiver or trustee in bankruptcy, in which case that
payment will be disbursed to the Class 2-A5 Certificateholder.
The Class 2-A5 Certificate Insurer will pay any other amount payable under
the Class 2-A5 Certificate Insurance Policy no later than 12:00 p.m., New York
time, on the later of the Distribution Date on which the related Deficiency
Amount is due or the second business day following receipt in New York, New
York on a business day by State Street Bank and Trust Company, N.A., as fiscal
agent for the Class 2-A5 Certificate Insurer or any successor fiscal agent
appointed by the Class 2-A5 Certificate Insurer of a notice from the Trustee
specifying the Insured Payment which is due
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<PAGE>
and owing on the applicable Distribution Date; provided that if the notice is
received after 12:00 p.m., New York time, on that business day, it will be
deemed to be received on the following business day. If any notice received by
the Class 2-A5 Certificate Insurer's fiscal agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under the Class 2-A5
Certificate Insurance Policy it will be deemed not to have been received by the
Class 2-A5 Certificate Insurer's fiscal agent for the purposes of this
paragraph, and the Class 2-A5 Certificate Insurer or the fiscal agent, as the
case may be, will promptly so advise the Trustee and the Trustee may submit an
amended notice.
Insured Payments due under the Class 2-A5 Certificate Insurance Policy,
unless otherwise stated therein, will be disbursed by the Class 2-A5
Certificate Insurer's fiscal agent to the Trustee, on behalf of the Class 2-A5
Certificateholders by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Trustee for the payment of the
Insured Payment and legally available therefor.
The fiscal agent is the agent of the Class 2-A5 Certificate Insurer only
and the fiscal agent will in no event be liable to the Class 2-A5
Certificateholders for any acts of the fiscal agent or any failure of the Class
2-A5 Certificate Insurer to deposit or cause to be deposited sufficient funds
to make payments due under the Class 2-A5 Certificate Insurance Policy.
As used herein and in the Class 2-A5 Certificate Insurance Policy, the
following terms shall have the following meanings:
"Deficiency Amount" means with respect to any Distribution Date, the
excess, if any, of Guaranteed Distributions over the Available Distribution
Amount for Pool 2 available to Class 2-A5 Certificateholders.
"Guaranteed Distributions" means (a) for any Distribution Date, (i) the
Accrued Certificate Interest for the Class 2-A5 Certificates for such
Distribution Date including any Net Prepayment Interest Shortfalls relating to
prepayments and any Relief Act Reductions allocable to such Class of
Certificates on such Distribution Date that are not covered by the Class 2-A5
Reserve Fund, and (ii) the amount of any Realized Loss allocated to the Class
2-A5 Certificates on such Distribution Date, and (b) for the Final Scheduled
Distribution Date, the Class Principal Amount of the Class 2-A5 Certificates to
the extent unpaid on the Final Scheduled Distribution Date.
"Insured Payment" means (i) as of any Distribution Date any Deficiency
Amount and (ii) any Preference Amount.
"Preference Amount" means any amount previously distributed to a Class
2-A5 Certificateholder on the Class 2-A5 Certificates that is recoverable and
sought to be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time
to time in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Class 2-A5 Certificate Insurance Policy and
not otherwise defined in Class 2-A5 Certificate Insurance Policy shall have the
respective meanings set forth in the Trust Agreement as of the date of
execution of the Class 2-A5 Certificate Insurance Policy, without giving effect
to any subsequent amendment or modification to the Trust Agreement unless such
amendment or modification has been approved in writing by the Class 2-A5
Certificate Insurer.
The Class 2-A5 Certificate Insurance Policy is not cancelable for any
reason. The premium on the Class 2-A5 Certificate Insurance Policy is not
refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class 2-A5 Certificates.
The Class 2-A5 Certificate Insurance Policy is being issued under and
pursuant to, and will be construed under, the laws of the State of New York,
without giving effect to the conflict of laws principles thereof.
The insurance provided by the Class 2-A5 Certificate Insurance Policy is
not covered by the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law.
THE CLASS 2-A5 CERTIFICATE INSURER
The Class 2-A5 Certificate Insurer is the principal operating subsidiary
of MBIA Inc., a New York Stock Exchange listed company. MBIA Inc. is not
obligated to pay the debts of or claims against the Class 2-A5 Certificate
Insurer. The Class 2-A5 Certificate Insurer is domiciled in the State of New
York and licensed to do business in and is subject to regulation under the laws
of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico,
the
S-91
<PAGE>
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Class 2-A5 Certificate Insurer has two
European branches, one in the Republic of France and the other in the Kingdom
of Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Class
2-A5 Certificate Insurer, changes in control and transactions among affiliates.
Additionally, the Class 2-A5 Certificate Insurer is required to maintain
contingency reserves on its liabilities in specified amounts and for specified
periods of time.
FINANCIAL INFORMATION ABOUT THE CLASS 2-A5 CERTIFICATE INSURER
The consolidated financial statements of the Class 2-A5 Certificate
Insurer, a wholly owned subsidiary of MBIA Inc., and its subsidiaries as of
December 31, 1999 and December 31, 1998 and for each of the three years in the
period ended December 31, 1999, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of MBIA Inc.
for the year ended December 31, 1999, and the consolidated financial statements
of the Class 2-A5 Certificate Insurer and its subsidiaries as of June 30, 2000
and for the six months ended June 30, 2000 and June 30, 1999 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended June 30, 2000,
are hereby incorporated by reference into this Prospectus Supplement and shall
be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated by
reference herein modifies or supersedes that statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Class 2-A5 Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing those documents.
The tables below present selected financial information of the Class 2A-5
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities and
generally accepted accounting principles:
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING PRACTICES
------------------------------------
DECEMBER 31, 1999 JUNE 30, 2000
------------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets ............. $7,045 $7,349
Liabilities ................. 4,632 4,880
Capital and Surplus ......... 2,413 2,469
</TABLE>
<TABLE>
<CAPTION>
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
------------------------------------
DECEMBER 31, 1999 JUNE 30, 2000
------------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets ....................... $7,446 $7,858
Liabilities .................. 3,218 3,384
Shareholder's Equity ......... 4,228 4,474
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE CLASS 2-A5 CERTIFICATE
INSURER
Copies of the financial statements of the Class 2-A5 Certificate Insurer
incorporated by reference herein and copies of the Class 2-A5 Certificate
Insurer's 1999 year-end audited financial statements prepared in accordance
with statutory accounting practices are available, without charge, from the
Class 2-A5 Certificate Insurer. The address of the Class 2-A5 Certificate
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Class 2-A5 Certificate Insurer is (914) 273-4545.
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FINANCIAL STRENGTH RATINGS OF THE CLASS 2-A5 CERTIFICATE INSURER
Moody's Investors Service, Inc. rates the financial strength of the Class
2-A5 Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of the Class 2-A5 Certificate
Insurer "AAA."
Fitch rates the financial strength of the Class 2-A5 Certificate Insurer
"AAA."
Each rating of the Class 2-A5 Certificate Insurer should be evaluated
independently. The ratings reflect each respective rating agency's current
assessment of the creditworthiness of the Class 2-A5 Certificate Insurer and
its ability to pay claims on its policies of insurance. Any further explanation
as to the significance of the above ratings may be obtained only from the
applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class
2-A5 Certificates, and the ratings may be subject to revision or withdrawal at
any time by the rating agencies. Any downward revision or withdrawal of any of
the above ratings may have an adverse effect on the market price of the Class
2-A5 Certificates. The Class 2-A5 Certificate Insurer does not guaranty the
market price of the Class 2-A5 Certificates nor does it guaranty that the
ratings on the Class 2-A5 Certificates will not be revised or withdrawn.
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.
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 Owners of REMIC Regular Interests -- (2) Original Issue 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.
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
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<PAGE>
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 -- (5) Tax Related Restrictions on Transfer of Residual
Certificates -- 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.
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 $600,000.
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.
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<PAGE>
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
The Senior Certificates (other than the Class 3-A1, Class 3-AP and Class
3-AX Certificates) may be purchased by any employee benefit plan or other
retirement arrangement (collectively, "ERISA Plan") subject to the Employment
Retirement Income Security Act of 1974, as amended ("ERISA"). NONE OF THE CLASS
3-A1, CLASS 3-AP, CLASS 3-AX OR ANY OF THE SUBORDINATE CERTIFICATES MAY BE
PURCHASED BY AN ERISA PLAN. A fiduciary of any employee benefit plan or other
retirement arrangement subject to 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.
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.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1999,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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 that they be
rated "AAA" by Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") and Fitch, Inc. ("Fitch," and together with S&P, the
"Rating Agencies"). It is a condition to the issuance of the Class R
Certificate that it be rated "AAA" by S&P and Fitch. 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 BX Certificates and 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 on the Class 2-A5
Certificates are without regard to the Class 2-A5 Certificate Insurance Policy.
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.
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<PAGE>
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
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<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Accrual Period ................................................ S-27
Accrued Certificate Interest .................................. S-24
Act ........................................................... S-94
AP Percentage ................................................. S-29
AP Principal Distribution Amount .............................. S-31
Aurora ........................................................ S-60
Aurora Underwriting Guidelines ................................ S-57
Available Distribution Amount ................................. S-32
Balloon Loans ................................................. S-41
Balloon Payments .............................................. S-41
Bankruptcy Coverage Termination Date .......................... S-39
Bankruptcy Loss Limit ......................................... S-39
Bankruptcy Losses ............................................. S-39
Beneficial Owner .............................................. S-20
Bloomberg Screen LIUS01M Index Page ........................... S-27
Book-Entry Certificates ....................................... S-20
Borrower Advantage Program .................................... S-41
Borrower Advantage Underwriting Guidelines .................... S-57
Business Day .................................................. S-20
CCGI .......................................................... S-59
Certificate Group ............................................. S-18
Certificate Principal Amount .................................. S-25
Certificates .................................................. S-18
Chase ......................................................... S-42
Class 1-A10 Percentage ........................................ S-30
Class 1-A10 Prepayment Shift Percentage ....................... S-30
Class 1-A10 Priority Amount ................................... S-30
Class 1-A10 Scheduled Principal Percentage .................... S-30
Class 1-AP Deferred Amount .................................... S-37
Class 2-A5 Certificate Insurance Policy ....................... S-90
Class 2-A5 Certificate Insurer ................................ S-90
Class 2-A5 Reserve Fund ....................................... S-27
Class 2-AP Deferred Amount .................................... S-38
Class 3-AP Deferred Amount .................................... S-38
Class AP Certificates ......................................... S-18
Class Notional Amount ......................................... S-19
Class Percentage .............................................. S-24
Class Principal Amount ........................................ S-19
Code .......................................................... S-93
Component ..................................................... S-18
Component Interest Rate ....................................... S-25
Component Principal Amount .................................... S-25
Component Writedown Amount .................................... S-38
Corporate Trust Office ........................................ S-40
Countrywide ................................................... S-61
Credit Support Depletion Date ................................. S-24
Credit Support Percentage ..................................... S-24
Cut-off Date .................................................. S-29
Cut-off Date Balance .......................................... S-19
Debt Service Reduction ........................................ S-39
Deceased Holder ............................................... S-35
Deficiency Amount ............................................. S-91
Deficient Valuation ........................................... S-38
Definitive Certificate ....................................... S-20
Deposit Date ................................................. S-32
Depositor .................................................... S-20
Designated Rates ............................................. S-29
Discount Mortgage Loan ....................................... S-29
Distribution Date ............................................ S-19
DTC .......................................................... S-20
Due Period ................................................... S-32
ERISA ........................................................ S-95
ERISA Plan ................................................... S-95
Excess Losses ................................................ S-39
Final Scheduled Distribution Date ............................ S-39
Financial Intermediary ....................................... S-20
Fitch ........................................................ S-95
Fraud Loss Limit ............................................. S-39
Fraud Losses ................................................. S-39
GreenPoint Financial ......................................... S-62
GreenPoint Funding ........................................... S-42
GreenPoint Mortgage .......................................... S-62
GreenPoint Underwriting Guidelines ........................... S-57
Group 1 Certificates ......................................... S-18
Group 1 Offered Certificates ................................. S-18
Group 1 Scheduled Principal Amount ........................... S-31
Group 1 Unscheduled Principal Amount ......................... S-31
Group 2 Certificates ......................................... S-18
Group 2 Offered Certificates ................................. S-18
Group 3 Certificates ......................................... S-18
Group 3 Offered Certificates ................................. S-18
Guaranteed Distributions ..................................... S-91
Harbourton ................................................... S-60
Individual Class 2-A5 Certificate ............................ S-33
Insurance Agreement .......................................... S-23
Insurance Proceeds ........................................... S-33
Insured Payment .............................................. S-91
Interest Rate ................................................ S-24
Interest Shortfall ........................................... S-24
Interest-Only Certificates ................................... S-18
Lehman Capital ............................................... S-40
LIBOR ........................................................ S-27
LIBOR Determination Date ..................................... S-27
Liquidated Mortgage Loan ..................................... S-39
Liquidation Proceeds ......................................... S-33
LIUS01M ...................................................... S-27
Living Holders ............................................... S-33
Loan-to-Value Ratio .......................................... S-41
London Banking Day ........................................... S-27
Master Servicer .............................................. S-60
Master Servicing Fee ......................................... S-62
Modeling Assumptions ......................................... S-73
Mortgage Loans ............................................... S-18
Mortgage Pool ................................................ S-18
Mortgaged Property ........................................... S-41
Net Mortgage Rate ............................................ S-25
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
------------- ----
<S> <C>
Net Prepayment Interest Shortfalls ............................ S-27
New Proposed Regulations ...................................... S-93
Non-AP Percentage ............................................. S-29
Non-AP Pool Balance ........................................... S-29
Non-AP Senior Certificates .................................... S-18
Non-Discount Mortgage Loan .................................... S-29
Notional Amount ............................................... S-25
Offered Certificates .......................................... S-18
Offered Subordinate Certificates .............................. S-18
Original Credit Support Percentage ............................ S-24
Original Group Subordinate Amount ............................. S-30
Originator Retained Interest .................................. S-40
Originator Retained Interest Rate ............................. S-40
Participant ................................................... S-20
Penalty Period ................................................ S-66
Percentage Interest ........................................... S-20
Pool 1 ........................................................ S-18
Pool 1 AX Loans ............................................... S-26
Pool 2 ........................................................ S-18
Pool 2 AX Loans ............................................... S-26
Pool 3 ........................................................ S-18
Pool 3 3-AX Loans ............................................. S-26
Preference Amount ............................................. S-91
Prepayment Assumption ......................................... S-68
Prepayment Interest Excess .................................... S-27
Prepayment Interest Shortfall ................................. S-27
Prepayment Penalty Amount ..................................... S-66
Prepayment Period ............................................. S-32
Principal Prepayments ......................................... S-32
Principal-Only Certificates ................................... S-18
Program ....................................................... S-58
Proposed Amendments ........................................... S-95
Rating Agencies ............................................... S-95
Realized Loss ................................................. S-38
Record Date ................................................... S-19
Reference Banks ............................................... S-27
Relief Act .................................................... S-24
Relief Act Reduction .......................................... S-24
Reserve Interest Rate ......................................... S-28
Residual Certificate .......................................... S-20
Restricted Components ......................................... S-24
Retained Interest ............................................. S-40
Retained Interest Mortgage Loans .............................. S-40
Retained Interest Rate ........................................ S-40
Rounding Account .............................................. S-33
Rules ......................................................... S-21
S&P ........................................................... S-95
Sale Agreement ................................................ S-65
Sale and Assignment Agreement ................................. S-65
Sale Date ..................................................... S-65
Scheduled Payment ............................................. S-40
Scheduled Principal Balance ................................... S-29
Seller ........................................................ S-40
Senior Certificates ........................................... S-18
Senior Percentage ............................................. S-29
Senior Prepayment Percentage .................................. S-29
Senior Principal Distribution Amount .......................... S-28
Servicer Remittance Date ...................................... S-32
Servicers ..................................................... S-61
Servicing Fee ................................................. S-63
Servicing Fee Rate ............................................ S-63
SMMEA ......................................................... S-94
Special Hazard Loss Limit ..................................... S-39
Special Hazard Losses ......................................... S-39
Subordinate Certificates ...................................... S-18
Subordinate Component Percentage .............................. S-32
Subordinate Percentage ........................................ S-32
Subordinate Prepayment Percentage ............................. S-32
Subordinate Principal Distribution Amount ..................... S-31
Tax Counsel ................................................... S-93
Transferor .................................................... S-65
Trust Agreement ............................................... S-64
Trust Fund .................................................... S-18
Trust Rate .................................................... S-40
Trustee ....................................................... S-40
Trustee Fee ................................................... S-40
Trustee Fee Rate .............................................. S-40
Underwriter ................................................... S-94
Underwriting Agreement ........................................ S-94
Underwriting Guidelines ....................................... S-57
United Guaranty ............................................... S-41
</TABLE>
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<PAGE>
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION
DEPOSITOR
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
---------------
EACH TRUST FUND:
o 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
o will be established to hold assets transferred to it by Structured Asset
Securities Corporation, including:
o mortgage loans or participation interests in mortgage loans, including
manufactured home loans;
o mortgage backed certificates insured or guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae; and/or
o private mortgage backed certificates, as described in this prospectus;
and
o 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:
o will be offered for sale pursuant to a prospectus supplement;
o 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
o may have one or more forms of credit enhancement.
The securityholders will receive distributions of principal and interest
that are dependent upon the rate of payments, including prepayments, on the
mortgage loans, mortgage backed certificates and other assets in the trust
fund.
The prospectus supplement will state whether the securities are expected
to be classified as indebtedness and whether the trust will make a REMIC or
FASIT election for federal income tax purposes.
The Attorney General of the State of New York has not passed on or
endorsed the merits of this offering. Any representation to the contrary is
unlawful.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
LEHMAN BROTHERS
The date of this prospectus is May 23, 2000
<PAGE>
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
2
<PAGE>
requesting payment by wire transfer) in certain circumstances described in the
prospectus supplement; provided, however, that the final distribution in
retirement of a Security will be made only upon presentation and surrender of
the Security at the corporate trust office of the trustee or as otherwise
specified in the prospectus supplement. Advance notice of the final
distribution on a Security will be mailed to the securityholders.
Distributions of interest on Securities entitled to receive interest will
be made periodically at the intervals and Interest Rates specified or
determined in accordance with the prospectus supplement. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months, unless the prospectus supplement specifies a different
basis. Distributions of principal on each class of Securities in a series will
be made on a pro rata or random lot basis among all of the Securities of the
class, or as otherwise specified in the prospectus supplement.
The funds in the Distribution Account (together with any amounts
transferred from any Reserve Fund or applicable credit support) may be
insufficient to make the full distribution to securityholders on a Distribution
Date. In this case, the funds available for distribution to the securityholders
of each class will be distributed in accordance with their respective
interests. However, as described in the prospectus supplement, holders of
Securities will receive their current distributions and past amounts due but
unpaid to them before holders of Subordinate Securities are paid (in each case,
these amounts are calculated as described in the prospectus supplement). The
difference between the amount that the securityholders would have received if
there had been sufficient eligible funds available for distribution and the
amount actually distributed will be included in the calculation of the amount
that the securityholders are entitled to receive on the next Distribution Date.
For a description of the reports to be furnished to securityholders
concerning a distribution, see "The Agreements -- Reports to Securityholders."
SINGLE CLASS SECURITIES GENERALLY. With respect to a series of Securities
that is not a Multi-Class Series, distributions on the Securities on each
Distribution Date will generally be allocated to each Security entitled to
payment on the basis of the undivided percentage interest (the "Percentage
Interest") evidenced by the Security, or on the basis of the Security's
outstanding principal amount or notional amount (subject to any subordination
of the rights of any classes of Subordinate Securities to receive current
distributions), as specified in the prospectus supplement. See "Subordinate
Securities" below.
If the Primary Assets for a series of Securities have adjustable or
variable interest rates, then the rate at which interest accrues on the
principal balance of the Securities or on a class in the series (the "Interest
Rate") may also vary, due to changes in prevailing interest rates and due to
prepayments on Loans comprising or underlying the Primary Assets. If the
Primary Assets for a series have fixed interest rates, then the Interest Rate
on Securities of a series may be fixed, or may vary, to the extent prepayments
cause changes in the weighted average interest rate of the Primary Assets. If
the Primary Assets have lifetime or periodic adjustment caps on their
respective rates, then the Interest Rate on the Securities of the related
series may also reflect those caps.
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
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Securities in the event of failure of timely payment of the Primary Assets.
Unless otherwise specified in the prospectus supplement, each Security of a
Multi-Class Series will have a principal amount or a notional amount and a
specified Interest Rate (that may be zero). Interest distributions on a
Multi-Class Series will be made on each Security entitled to an interest
distribution on each Distribution Date at the Interest Rate specified in or
determined in accordance with the prospectus supplement, to the extent funds
are available in the Distribution Account, subject to any subordination of the
rights of any classes of Subordinate Securities to receive current
distributions. See "Subordinate Securities" below and "Credit Support --
Subordinate Securities; Subordination Reserve Fund."
Distributions of interest on Compound Interest Securities will begin only
after the related accretion termination date specified in the prospectus
supplement. On each Distribution Date on or before the accretion termination
date, interest on the Compound Interest Securities accrues, and the amount of
interest accrued is added on each Distribution Date to the principal balance of
the Security. On each Distribution Date after the accretion termination date,
interest distributions will be made on classes of Compound Interest Securities
on the basis of the current Compound Value of the class. The "Compound Value"
of a class of Compound Interest Securities equals the initial aggregate
principal balance of the class, plus accrued and undistributed interest added
to the class through the immediately preceding Distribution Date, less any
principal distributions previously made to reduce the aggregate outstanding
principal balance of the class.
A Multi-Class Series may also include one or more classes of Floating Rate
Securities. The Interest Rate of a Floating Rate Security will be a variable or
adjustable rate, which may be subject to a maximum floating rate, a minimum
floating rate, or both, as specified in the prospectus supplement. For each
class of Floating Rate Securities, the prospectus supplement will set forth the
initial Floating Rate (or the method of determining it), the period during
which the Floating Rate applies, and the formula, index, or other method by
which the Floating Rate for each period will be determined.
Distributions of principal will be allocated among the classes of a
Multi-Class Series in the order of priority and amount specified in the
prospectus supplement. Generally, the "Principal Distribution Amount" for a
Multi-Class Series on any Distribution Date will be equal to the sum of (1) the
accrual distribution amount for any Compound Interest Securities, (2) the
Minimum Principal Distribution Amount and (3) the percentage, if any, of the
excess cash flow specified in the prospectus supplement. The "Minimum Principal
Distribution Amount" is the amount, if any, by which the outstanding principal
balance of the Securities of a series (before giving effect to any 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
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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.
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
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or Euroclear upon instructions from their Participants (as defined below), and
all references herein to distributions, notices, reports and statements to
securityholders with respect to the Book-Entry Securities will refer to
distributions, notices, reports and statements to DTC, Clearstream or
Euroclear, as applicable, for distribution to Beneficial Owners by DTC in
accordance with the procedures of DTC and if applicable, Clearstream and
Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in the
United States, or, if the Offered Securities are offered for sale globally,
through Clearstream or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream and Euroclear systems also is available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
DTC. DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
Participants, some of which (and/or their representatives) own DTC, and
facilitate the clearance and settlement of securities transactions between its
Participants through electronic book-entry changes in 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.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific securities to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of its Participants, and has no record of or
relationship with persons holding through Participants of Euroclear.
Clearstream and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold positions in customers' securities accounts in the depositaries names
on the books of DTC. Citibank will act as depositary for Clearstream and The
Chase Manhattan Bank will act as depositary for Euroclear (individually the
"Relevant Depositary" and collectively, the "European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES. Except as described below,
no Beneficial Owner will be entitled to receive a physical certificate
representing a Certificate or a Note. Unless and until Definitive Securities
are issued, it is anticipated that the only "securityholder" of the Offered
Securities will be Cede & Co., as nominee of DTC. Beneficial Owners will not be
"Certificateholders" or "Noteholders" as those terms are used in the related
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Clearstream or Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and
on the records of Clearstream or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have
accounts with respect to Offered Securities are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer their
interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Beneficial Owners who are not Participants
may transfer ownership of Offered Securities only through Participants and
Indirect Participants by instructing the Participants and Indirect Participants
to transfer Offered Securities, by book-entry transfer, through DTC for the
account of the purchasers of the Offered Securities, which account is
maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfer of ownership of Book-Entry
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
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Because of time zone differences, any credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream or Euroclear on that business day.
Cash received in Clearstream or Euroclear as a result of sales of securities by
or through a Participant of Clearstream or Euroclear to a Participant of DTC
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Securities, see "Material Federal Income Tax
Considerations -- REMICs -- Taxation of Certain Foreign Investors," "-- Grantor
Trust Funds -- Taxation of Certain Foreign Investors" and "-- Partnership Trust
Funds and Debt Securities -- Tax Consequences to Foreign Securityholders"
herein and, if the Book-Entry Securities are globally offered and the
prospectus supplement so provides, see "Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream or Euroclear will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants
of Clearstream or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Participants of
Clearstream or Euroclear may not deliver instructions directly to the European
Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC will
be responsible for disbursing the distribution to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, because the
distributions will be forwarded by the trustee to Cede & Co. Any distributions
on Securities held through Clearstream or Euroclear will be credited to the
cash accounts of Participants of Clearstream or Euroclear in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Considerations -- REMICs -- Taxation of Certain Foreign
Investors," -- "Grantor Trust Funds -- Taxation of Certain Foreign Investors"
and "-- Partnership Trust Funds and Debt Securities -- Tax Consequences to
Foreign Securityholders" herein. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Securities to persons or entities that do not participate in the
depository system, or 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.
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Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Securities are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the related Agreement,
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Securities are credited, to the extent that actions are
taken on behalf of Financial Intermediaries whose holdings include the
Book-Entry Securities. If the Book-Entry Securities are globally offered,
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a securityholder under the related Agreement,
on behalf of a Participant of Clearstream or Euroclear only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect those actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Securities that conflict with actions taken with respect to other
Offered Securities.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities among
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and the procedures may be
discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee, any
securities registrar or paying agent or any of their affiliates will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
DEFINITIVE SECURITIES. Securities initially issued in book-entry form will
be issued as Definitive Securities to Beneficial Owners or their nominees,
rather than to DTC or its nominee only (1) if DTC or the depositor advises the
trustee in writing that DTC is no longer willing or able to properly discharge
its responsibilities as depository for the Securities and the depositor is
unable to locate a qualified successor, (2) if the depositor, at its option,
elects to end the book-entry system through DTC or (3) in accordance with any
other provisions described in the prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the Book-Entry
Securities, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Securities to which they are entitled, and
thereafter the trustee will recognize the holders of those Definitive
Securities as securityholders under the related Agreement.
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YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
PAYMENT DELAYS
With respect to any series, a period of time will elapse between receipt
of payments or distributions on the Primary Assets and the Distribution Date on
which the payments or distributions are paid to securityholders. This delay
will effectively reduce the yield that would otherwise be obtained if payments
or distributions were distributed on or near the date of receipt. The
prospectus supplement will set forth an example of the timing of receipts and
the distribution of collections to securityholders, so that the impact of this
delay can be understood.
PRINCIPAL PREPAYMENTS
With respect to a series for which the Primary Assets consist of Loans or
participation interests in Loans, when a Loan prepays in full, the borrower
will generally be required to pay interest on the amount of the prepayment only
to the prepayment date. In addition, the prepayment may not be required to be
paid to securityholders until the month following receipt. The effect of these
provisions is to reduce the aggregate amount of interest that would otherwise
be available for distributions on the Securities. Therefore, the yield that
would be obtained if interest continued to accrue on the Loan until the
principal prepayment is paid to securityholders, is effectively reduced. To the
extent specified in the prospectus supplement, this effect on yield may be
mitigated by, among other things, an adjustment to the servicing fee otherwise
payable to the master servicer or servicer with respect to prepaid Loans.
Further, if the Interest Rate on a class of Securities in a series is based
upon a weighted average of the interest rates on the Loans comprising or
underlying the Primary Assets, interest on these Securities may be paid or
accrued in the future at a rate lower than the initial interest rate, to the
extent that Loans bearing higher rates of interest are prepaid more quickly
than Loans bearing lower rates of interest. See "Servicing of Loans -- Advances
and Limitations Thereon."
TIMING OF REDUCTION OF PRINCIPAL AMOUNT
A Multi-Class Series may provide that, for purposes of calculating
interest distributions, the principal amount of the Securities is deemed
reduced as of a date prior to the Distribution Date on which principal thereon
is actually distributed. Consequently, the amount of interest accrued during
any interest accrual period, as specified in the prospectus supplement, will be
less than the amount that would have accrued on the actual principal amount of
the Securities outstanding. The effect of these provisions is to produce a
lower yield on the Securities than would be obtained if interest were to accrue
on the Securities on the actual unpaid principal amount of the Securities to
each Distribution Date. The prospectus supplement will specify the time at
which the principal amounts of the Securities are determined or are deemed
reduced for purposes of calculating interest distributions on Securities of a
Multi-Class Series.
INTEREST OR PRINCIPAL WEIGHTED SECURITIES
If a class of Securities consists of Interest Weighted Securities or
Principal Weighted Securities, a lower rate of principal prepayments than
anticipated will negatively affect yield to investors in Principal Weighted
Securities, and a higher rate of principal prepayments than anticipated will
negatively affect yield to investors in Interest Weighted Securities. The
prospectus supplement will include a table showing the effect of various levels
of prepayment on yields on these types of Securities. The tables will
illustrate the sensitivity of yields to various prepayment rates and will not
purport to predict, or provide information enabling investors to predict,
yields or prepayment rates.
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
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class of Certificates is the date on which the entire aggregate principal
balance of the class will be reduced to zero. These calculations will be based
on the assumptions described in the prospectus supplement. Because prepayments
on the Loans underlying or comprising the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual maturity of the class will occur
earlier, and may occur substantially earlier, than its Final Scheduled
Distribution Date. Furthermore, with respect to the Certificates, as a result
of delinquencies, defaults and liquidations of the assets in the trust fund,
the actual final distribution date of any Certificate may occur later than its
Final Scheduled Distribution Date.
PREPAYMENTS AND WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of the principal
of the security will be repaid to the investor. The weighted average life of
the Securities of a series will be influenced by the rate at which principal on
the Loans comprising or underlying the Primary Assets for the Securities is
paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
The rate of principal prepayments on pools of housing loans is influenced
by a variety of economic, demographic, geographic, legal, tax, social and other
factors. The rate of prepayments of conventional housing loans has fluctuated
significantly. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Loans comprising or underlying
the Primary Assets for a series, those Loans are likely to prepay at rates
higher than if prevailing interest rates remain at or above the interest rates
borne by those Loans. It should be noted that the Loans comprising or
underlying the Primary Assets for a series may have different interest rates,
and the stated pass-through or interest rate of certain Primary Assets or the
Interest Rate on the Securities may be a number of percentage points less than
interest rates on the Loans. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Loans comprising or
underlying the Primary Assets. If any Loans comprising or underlying the
Primary Assets for a series have actual terms-to-stated maturity less than
those assumed in calculating the Final Scheduled Distribution Date of the
related Securities, one or more classes of the series may be fully paid prior
to their respective stated maturities.
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below.
CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
the loans. SPA represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of a pool of loans. A prepayment
assumption of 100% of SPA assumes prepayment rates of 0.2% per annum of the
then outstanding principal balance of the loans in the first month of the life
of the loans and an additional 0.2% per annum in each month thereafter until
the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
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
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supplement, including assumptions that prepayments on the Loans comprising or
underlying the related Primary Assets are made at rates corresponding to
various percentages of CPR or SPA or at such other rates specified in the
prospectus supplement. These tables and assumptions are intended to illustrate
the sensitivity of weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities or prepayment rates of the Loans comprising or underlying the
related Primary Assets.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF LOAN. Mortgage Loans secured by multifamily residential rental
property or cooperatively owned multifamily property consisting of five or more
dwelling units ("Multifamily Properties") may have provisions that prevent
prepayment for a number of years and may provide for payments of interest only
during a certain period followed by amortization of principal on the basis of a
schedule extending beyond the maturity of the related Mortgage Loan. ARMs,
Bi-weekly Loans, GEM Loans, GPM Loans or Buy-Down Loans comprising or
underlying the Primary Assets may experience a rate of principal prepayments
that is different from the principal prepayment rate for ARMs, Bi-weekly Loans,
GEM Loans and GPM Loans included in any other mortgage pool or from
Conventional fixed rate Loans or from other adjustable rate or graduated equity
mortgages having different characteristics. There can be no assurance as to the
respective rates of prepayment of these Loans in either stable or changing
interest rate environments.
In the case of a Negatively Amortizing ARM, if interest rates rise without
a simultaneous increase in the related scheduled payment of principal and
interest (the "Scheduled Payment"), negative amortization may result or the
amount of interest accrued on the Stated Principal Balance thereof may exceed
the amount of interest paid by the mortgagor in any month (such excess,
"Deferred Interest"). However, borrowers may pay amounts in addition to their
Scheduled Payments in order to avoid negative amortization and to increase tax
deductible interest payments.
To the extent that any of Mortgage Loans negatively amortize over their
respective terms, future interest accruals are computed on the higher
outstanding principal balance of the Mortgage Loan and a smaller portion of the
Scheduled Payment is applied to principal than would be required to amortize
the unpaid principal over its remaining term. Accordingly, the weighted average
life of the Mortgage Loans will increase.
In a declining interest rate environment, the portion of each Scheduled
Payment in excess of the scheduled interest and principal due will be applied
to reduce the outstanding principal balance of the related Mortgage Loan,
thereby resulting in accelerated amortization of the ARM. Any such acceleration
in amortization of the principal balance of any Negatively Amortizing ARM will
shorten the weighted average life of the Mortgage Loan. The application of
partial prepayments to reduce the outstanding principal balance of a Negatively
Amortizing ARM will tend to reduce the weighted 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
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balance of the GEM Loan, the stated maturity of a GEM Loan will be
significantly shorter than the 25 to 30 year term used as the basis for
calculating the installments of principal and interest applicable until the
first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of housing
loans. Even though some Manufactured Home Loans may be FHA Loans, no statistics
similar to those describing the FHA experience above are available with respect
to Manufactured Home Loans.
In the case of Mortgage Loans that do not require the borrowers to make
payments of principal or interest until the occurrence of certain maturity
events, the Mortgage Loans will generate enough cash to pay interest and
principal on the Securities of the related series only if specified maturity
events occur with sufficient frequency and relative regularity. There can be no
assurance regarding the rate and timing of the occurrence of maturity events
with respect to these Mortgage Loans.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the Loans comprising or underlying the Primary Assets that
are foreclosed in relation to the number of Loans that are repaid in accordance
with their terms will affect the weighted average life of the Loans comprising
or underlying the Primary Assets and that of the related series of Securities.
Servicing decisions made with respect to the Loans, including the use of
payment plans prior to a demand for acceleration and the restructuring of Loans
in bankruptcy proceedings, may also have an impact upon the payment patterns of
particular Loans. In particular, the return to holders of Securities who
purchased their Securities at a premium, if any, and the return on a class of
Interest Weighted Securities may be adversely affected by servicing policies
and decisions relating to foreclosures.
DUE ON SALE CLAUSES. The acceleration of repayment as a result of certain
transfers of the real property securing a Mortgage Loan (the "Mortgaged
Property") is another factor affecting prepayment rates, and is a factor that
is not reflected in the FHA experience. While each of the Mortgage Loans
included in the FHA statistics is assumable by a purchaser of the underlying
mortgaged property, the Loans constituting or underlying the Primary Assets may
include "due-on-sale" clauses. Except as otherwise described in the prospectus
supplement for a series, the PMBS Servicer of Loans underlying Private
Mortgage-Backed Securities and the master servicer or the servicer of Loans
constituting the Primary Assets for a series will be required, to the extent it
knows of any conveyance or prospective conveyance of the related residence by
any borrower, to enforce any "due-on-sale" clause applicable 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."
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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
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");
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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.
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
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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.
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
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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:
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.
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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. Section 1716 et seq.).
Fannie Mae was originally established in 1938 as a United States government
agency to provide supplemental liquidity to the mortgage market and was
transformed into a stockholder-owned and privately managed corporation by
legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
home mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase loans from any
capital market investors that may not ordinarily invest in mortgage loans,
thereby expanding the total amount of funds available for housing. Operating
nationwide, Fannie Mae helps to redistribute mortgage funds from
capital-surplus to capital-short areas. In addition, Fannie Mae issues mortgage
backed securities, primarily in exchange for pools of mortgage loans from
lenders. See "Additional Information" for the availability of further
information with respect to Fannie Mae and Fannie Mae certificates.
FREDDIE MAC CERTIFICATES
GENERAL. The Freddie Mac certificates represent an undivided interest in a
group of mortgages or participations in mortgages (a "PC Pool") purchased by
Freddie Mac. Freddie Mac certificates are sold under the terms of a Mortgage
Participation Certificate Agreement and may be issued under either Freddie
Mac's "Cash Program" or "Guarantor Program" or may be Multiclass Mortgage
Participation Certificates (Guaranteed) representing multiple classes of
certificates of beneficial interest in a pool consisting primarily of Freddie
Mac certificates.
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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:
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
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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 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
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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 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
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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;
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;
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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;
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
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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
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Mortgaged Property for a period of at least six months every year or that the
borrower intends to use the Mortgaged Property as a primary residence, or (2) a
finding that the address of the Mortgaged Property is the borrower's mailing
address, as reflected in the servicer's records. To the extent specified in the
prospectus supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes. Mortgage Loans secured by
investment properties and Multifamily Property may also be secured by an
assignment of leases and rents and operating or other cash flow guarantees
relating to the Loans.
The characteristics of the Mortgage Loans comprising or underlying the
Primary Assets for a series may vary if credit support is provided in levels
satisfactory to the Rating Agencies that rate a series of Securities.
Generally, unless otherwise specified in the prospectus supplement, the
following selection criteria apply to Mortgage Loans included in the Primary
Assets:
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;
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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
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.
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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:
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
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Loan will have been originated by a bank or savings institution that is a
Fannie Mae- or Freddie Mac-approved seller/servicer or by any financial
institution approved for insurance by the Secretary of Housing and Urban
Development pursuant to Section 2 of the National Housing Act.
The Manufactured Home Loans may be Conventional Loans, FHA Loans or VA
Loans. Each Manufactured Home Loan will be secured by a Manufactured Home.
Unless otherwise specified in the prospectus supplement, the Manufactured Home
Loans will be fully amortizing and will bear interest at a fixed interest rate.
Each "Manufactured Home" securing the Manufactured Home Loan consists of a
manufactured home within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three
hundred twenty or more square feet, and which is built on a permanent chassis
and designed to be 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;
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(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.
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."
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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
resulting from the investments will be charged to the Distribution Account.
Reinvestment income, may, however, be payable to the trustee or the master
servicer as additional compensation. On each Distribution Date, all funds on
deposit in the Distribution Account, subject to certain permitted withdrawals
by the trustee as set forth in the Agreements, will be available for remittance
to the securityholders. See also "The Agreements -- Distribution Account."
OTHER FUNDS OR ACCOUNTS
A trust fund may include other funds and accounts or a security interest
in certain funds and accounts for the purpose of, among other things, paying
certain administrative fees and expenses of the trust and accumulating funds
pending their distribution. If specified in the prospectus supplement, certain
funds may be established with the trustee with respect to Buy-Down Loans, GPM
Loans, or other Loans having special payment features included in the trust
fund in addition to or in lieu of any similar funds to be held by the servicer.
See "Servicing of Loans -- Collection Procedures; Escrow Accounts" and "--
Deposits to and Withdrawals from the Collection Account." If Private
Mortgage-Backed Securities are backed by GPM Loans, and the asset value with
respect to a Multi-Class Series is determined on the basis of the scheduled
maximum principal balance of the GPM Loans, a GPM Fund will be established that
will be similar to that which would be established if GPM Loans constituted the
Primary Assets. See "Servicing of Loans -- Deposits to and Withdrawals from the
Collection Account." Other similar accounts may be established as specified in
the prospectus supplement.
LOAN UNDERWRITING PROCEDURES AND STANDARDS
UNDERWRITING STANDARDS
The depositor expects that Loans comprising the Primary Assets for a
series of Securities will have been originated generally in accordance with
underwriting procedures and standards similar to those described in this
prospectus, except as otherwise described in the prospectus supplement.
Unless otherwise specified in the prospectus supplement, the originators
of the Mortgage Loans will have been savings and loan associations, savings
banks, commercial banks, credit unions, insurance companies or similar
institutions supervised and examined by a federal or state authority;
mortgagees approved by the Secretary of Housing and Urban Development pursuant
to Sections 203 and 211 of the National Housing Act, or wholly-owned
subsidiaries thereof; or by subsidiaries of the depositor. Manufactured Home
Loans may have been originated by these institutions (other than a subsidiary
of the depositor) or by a financial institution approved for insurance by the
Secretary of Housing and Urban Development pursuant to Section 2 of the
National Housing Act. Except as otherwise set forth in the prospectus
supplement, the originator of a Loan will have applied underwriting procedures
intended to evaluate the borrower's credit standing and repayment ability and
the value and adequacy of the related property as collateral. FHA Loans and VA
Loans will have been originated in compliance with the underwriting policies of
the FHA and the VA, respectively.
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In general, each borrower will have been required to complete an
application designed to provide to the original lender pertinent credit
information about the borrower. As part of the description of the borrower's
financial condition, the borrower generally will have furnished information
with respect to its assets, liabilities, income, credit history, employment
history and personal information, and furnished an authorization to apply for a
credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In general, an employment
verification is obtained from an independent source (typically the borrower's
employer), which reports the length of employment with that organization, the
borrower's current salary and whether it is expected that the borrower will
continue that employment in the future. If the borrower was self-employed, the
borrower may have been required to submit copies of recent signed tax returns.
The borrower may also have been required to authorize verifications of deposits
at financial institutions where the borrower had demand or savings accounts.
With respect to Multifamily Property, information concerning operating income
and expenses will have been obtained from the borrower showing operating income
and expenses during the preceding three calendar years. Certain considerations
may cause an originator of Loans to depart from these guidelines. For example,
when two individuals co-sign the loan documents, the incomes and expenses of
both individuals may be included in the computation.
The adequacy of the property financed by the related Loan as security for
repayment of the Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the Loan originator or independent appraisers selected
in accordance with pre-established guidelines established by the Loan
originator. The appraisal procedure guidelines will have required that the
appraiser or an agent on its behalf personally inspect the property and verify
that it was in good condition and that construction, if new, had been
completed. If an appraisal was required, the appraisal will have been based
upon a market data analysis of recent sales of comparable properties and, when
deemed applicable, a replacement cost analysis based on the current cost of
constructing or purchasing a similar property.
In general, based on the data provided, certain verifications and the
appraisal, a determination will have been made by the original lender that the
borrower's monthly income would be sufficient to enable the borrower to meet
its monthly obligations on the Loan and other expenses related to the property
(such as property taxes, utility costs, standard hazard and primary mortgage
insurance and, if applicable, maintenance fees and other levies assessed by a
Cooperative or a condominium association) and certain other fixed obligations
other than housing expenses. The originating lender's guidelines for Loans
secured by Single Family Property generally will specify that Scheduled
Payments plus taxes and insurance and all Scheduled Payments extending beyond
one year (including those mentioned above and other fixed obligations, such as
car payments) would equal no more than specified percentages of the prospective
borrower's gross income. These guidelines will generally be applied only to the
payments to be made during the first year of the Loan.
With respect to FHA Loans and VA Loans, traditional underwriting
guidelines used by the FHA and the VA, as the case may be, which were in effect
at the time of origination of each Loan will generally have been applied. With
respect to Multifamily Property, the Loan originator will have made an
assessment of the capabilities of the management of the project, including a
review of management's past performance record, its management reporting and
control procedures (to determine its ability to recognize and respond to
problems) and its accounting procedures to determine cash management ability.
Income derived from the Mortgaged Property constituting investment property may
have been considered for underwriting purposes, rather than the income of the
borrower from other sources. With respect to Mortgaged Property consisting of
vacation or second homes, no income derived from the property will have been
considered for underwriting purposes.
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.
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To the extent specified in the prospectus supplement, the depositor may
purchase Loans (or participation interests therein) for inclusion in a trust
fund that are underwritten under standards and procedures that vary from and
are less stringent than those described in this prospectus. For instance, Loans
may be underwritten under a "limited documentation" or "no documentation"
program. With respect to those Loans, minimal investigation into the borrowers'
credit history and income profile is undertaken by the originator and the Loans
may be underwritten primarily on the basis of an appraisal of the Mortgaged
Property and Loan-to-Value Ratio on origination.
In addition, Mortgage Loans may have been originated in connection with a
governmental program under which underwriting standards were significantly less
stringent and designed to promote home ownership or the availability of
affordable residential rental property notwithstanding higher risks of default
and losses. The prospectus supplement will specify the underwriting standards
applicable to the Mortgage Loans.
Certain states where the Mortgaged Properties may be located have
"antideficiency" laws requiring, in general, that lenders providing credit on
Single Family Property look solely to the property for repayment in the event
of foreclosure. See "Legal Aspects of Loans."
LOSS EXPERIENCE
The general appreciation of real estate values experienced in the past has
been a factor in limiting the general loss experience on Conventional Loans.
However, we cannot assure you that the past pattern of appreciation in value of
the real property securing the Loans will continue; in fact, some regions of
the country have experienced significant depreciation in real estate values in
recent periods. Also, there is no assurance that appreciation of real estate
values generally, if appreciation occurs, will limit loss experiences on
non-traditional housing such as Multifamily Property, Manufactured Homes or
Cooperative Dwellings. Similarly, no assurance can be given that the value of
the Mortgaged Property (including Cooperative Dwellings) securing a Loan has
remained or will remain at the level existing on the date of origination of the
Loan. If the residential real estate market in one or more regions of the
United States should experience decline in property values so that the
outstanding balances of the Loans and any secondary financing on the Mortgaged
Properties securing the Loans become equal to or greater than the value of the
related Mortgaged Properties, then the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. See "Legal Aspects of Loans."
No assurance can be given that values of Manufactured Homes have or will
remain at the levels existing on the dates of origination of the related Loan.
Manufactured Homes are less likely to experience appreciation in value and more
likely to experience depreciation in value over time than other types of
Mortgaged Property. Additionally, delinquency, loss and foreclosure experience
on Manufactured Home Loans may be adversely affected to a greater degree by
regional and local economic conditions than more traditional Mortgaged
Property. Loans secured by Multifamily Property may also be more susceptible to
losses due to changes in local and regional economic conditions than Loans
secured by other Single Family Property. For example, unemployment resulting
from an economic downturn in local industry may sharply affect occupancy rates.
Also, interest rate fluctuations can make home ownership a more attractive
alternative to renting, causing 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."
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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, 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;
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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.
SUBSTITUTION OF PRIMARY ASSETS
Substitution of Primary Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Primary Asset or
in the event the documentation with respect to any Primary Asset is determined
by the trustee to be incomplete. The prospectus supplement will indicate the
period during which a substitution will be permitted and will describe any
other conditions upon which Primary Assets may be substituted for Primary
Assets initially included in the trust fund.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans constituting the
Primary Assets in the trust fund will be provided, as specified in the
prospectus supplement, either by the master servicer directly or through one or
more servicers subject to supervision by the master servicer, or by a single
servicer that is a party to the applicable Agreement for a series and services
the Loans directly or through one or more subservicers (the "Subservicers"). In
general, descriptions of the rights and obligations of a master servicer will
also be applicable to a servicer, and descriptions of the rights and
obligations of servicers that service Loans under the supervision of a master
servicer will generally be applicable to Subservicers. If the master servicer
is not directly servicing the Loans, then the master servicer will generally:
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.
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
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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 mortgagor pursuant to the terms of the
applicable Mortgage
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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
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o to clear and terminate the Collection Account pursuant to the related
Agreement.
In addition, if the master servicer deposits in the Collection Account for
a series any amount not required to be deposited therein, it may, at any time,
withdraw the amount from the Collection Account.
SERVICING ACCOUNTS
In those cases where a servicer is servicing a Mortgage Loan, the servicer
will establish and maintain an account (a "Servicing Account") that will comply
with the standards set forth above, and which is otherwise acceptable to the
master servicer. The servicer is generally required to deposit into the
Servicing Account all amounts enumerated in the preceding paragraph in respect
of the Mortgage Loans received by the servicer, less its servicing
compensation. On the date specified in the prospectus supplement, the servicer
will remit to the master servicer all funds held in the Servicing Account with
respect to each Mortgage Loan. The servicer may, to the extent described in the
prospectus supplement, be required to advance any monthly installment of
principal and interest that was not received, less its servicing fee, by the
date specified in the prospectus supplement.
BUY-DOWN LOANS, GPM LOANS AND OTHER SUBSIDIZED LOANS
With respect to each Buy-Down Loan, if any, included in a trust fund, the
master servicer will deposit all Buy-Down Amounts in a custodial account (which
may be interest-bearing) complying with the requirements set forth above for
the Collection Account (the "Buy-Down Fund"). The amount of the deposit,
together with investment earnings thereon at the rate specified in the
prospectus supplement, will provide sufficient funds to support the payments on
the Buy-Down Loan on a level debt service basis. The master servicer will not
be obligated to add to the Buy-Down Fund should amounts therein and investment
earnings prove insufficient to maintain the scheduled level of payments on the
Buy-Down Loans, in which event distributions to the securityholders may be
affected.
Unless otherwise provided in the prospectus supplement, a Buy-Down Fund
will not be included in or deemed to be a part of the trust fund. Unless
otherwise specified in the prospectus supplement, the terms of all Buy-Down
Loans provide for the contribution of buy-down funds in an amount equal to or
exceeding either (1) the total payments to be made from those funds pursuant to
the related buydown plan or (2) if the buy-down funds are present valued, that
amount of buy-down funds which, together with investment earnings thereon at a
specified rate, compounded monthly, will support the scheduled level of
payments due under the Buy-Down Loan. Neither the master servicer, any servicer
nor the depositor will be obligated to add to the buy-down funds any of its own
funds should investment earnings prove insufficient to maintain the scheduled
level of payments on the Buy-Down Loan, in which event distributions to
securityholders may be affected. With respect to each Buy-Down Loan, the master
servicer will deposit in the Collection Account the amount, if any, of the
buy-down funds (and, if applicable, investment earnings thereon) for each
Buy-Down Loan that, 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
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mortgaged property is transferred to the insurer and the insurer pays all of
the loss incurred in respect of the default. In the case of any prepaid or
defaulted Buy-Down Loan, the buy-down funds in respect of which were
supplemented by investment earnings, the master servicer will withdraw from the
Buy-Down Fund and retain or remit to the borrower, depending upon the terms of
the buy-down plan, any investment earnings remaining in the related Buy-Down
Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the master servicer will deposit the
subsidy funds in a custodial account (which may be interest-bearing) complying
with the requirements set forth above for the Collection Account (a "Subsidy
Fund"). Unless otherwise specified in the prospectus supplement, the terms of
each such Loan will provide for the contribution of the entire undiscounted
amount of subsidy amounts necessary to maintain the scheduled level of payments
due during the early years of the Loan. Neither the master servicer, any
servicer nor the depositor will be obligated to add to the Subsidy Fund any of
its own funds. Unless otherwise provided in the prospectus supplement, the
Subsidy Fund will not be included in or deemed to be a part of the trust fund.
If the depositor values any GPM Loans deposited into the trust fund for a
Multi-Class Series on the basis of the GPM Loan's scheduled maximum principal
balance, the master servicer will, if and to the extent provided in the
prospectus supplement, deposit in a custodial account (which may be interest
bearing) (the "GPM Fund") complying with the requirements set forth above for
the Collection Account an amount which, together with reinvestment income
thereon at the rate set forth in the prospectus supplement, will be sufficient
to cover the amount by which payments of principal and interest on the GPM
Loans assumed in calculating payments due on the Securities of that Multi-Class
Series exceed the scheduled payments on the GPM Loans. The trustee will
withdraw amounts from the GPM Fund for a series upon a prepayment of the GPM
Loan as necessary and apply those amounts to the payment of principal and
interest on the Securities of the related series. Neither the depositor, the
master servicer nor any servicer will be obligated to supplement the GPM Fund
should amounts therein and investment earnings thereon prove insufficient to
maintain the scheduled level of payments, in which event, distributions to the
securityholders may be affected. Unless otherwise specified in the prospectus
supplement, the GPM Fund will not be included in or deemed to be part of the
trust fund.
With respect to any other type of Loan that provides for payments other
than on the basis of level payments, an account may be established as described
in the prospectus supplement on terms similar to those relating to the Buy-Down
Fund, the Subsidy Fund or the GPM Fund.
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.
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PAYMENTS IN CONNECTION WITH PREPAID LOANS. In addition, when a borrower
makes a principal prepayment in full between the due dates on which the
borrower is required to make its payments on the Loan, as specified in the
prospectus supplement (each, a "Due Date"), the borrower will generally be
required to pay interest on the principal amount prepaid only to the date of
the prepayment. If and to the extent provided in the prospectus supplement, in
order that one or more classes of the securityholders of a series will not be
adversely affected by any resulting shortfall in interest, the master servicer
may be obligated to make payment from its own funds to the extent necessary to
include in its remittance to the trustee for deposit into the Distribution
Account an amount equal to a full Scheduled Payment of interest on the related
Loan (adjusted to the applicable Interest Rate). Any principal prepayment,
together with a full Scheduled Payment of interest thereon at the applicable
Interest Rate (to the extent of the adjustment or advance), will be distributed
to securityholders on the related Distribution Date. If the amount necessary to
include a full Scheduled Payment of interest as described above exceeds the
amount that the master servicer is obligated to pay, a shortfall may occur as a
result of a prepayment in full. See "Yield, Prepayment and Maturity
Considerations."
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. Except as otherwise specified
in the prospectus supplement, the master servicer will be required to maintain
or to cause the borrower on each Loan to maintain or will use its best
reasonable efforts to cause each servicer of a Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the property securing the related Loan is located. See
"Description of Mortgage and Other Insurance." Unless otherwise specified in
the prospectus supplement, coverage will be in an amount at least equal to the
greater of (1) the amount necessary to avoid the enforcement of any
co-insurance clause contained in the policy or (2) the outstanding principal
balance of the related Loan.
The master servicer will also maintain on REO Property that secured a
defaulted Loan and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard 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
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extent, however, that a Cooperative and the related borrower on a Cooperative
Loan do not maintain insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to the borrower's Cooperative Dwelling or the Cooperative's building
could significantly reduce the value of the collateral securing the Cooperative
Loan to the extent not covered by other credit support. Similarly, the
depositor will not require that a standard hazard or flood insurance policy be
maintained on a Condominium Unit relating to any Condominium Loan. Generally,
the Condominium Association is responsible for maintenance of hazard insurance
insuring the entire Condominium building (including each individual Condominium
Unit), and the owner(s) of an individual Condominium Unit may not maintain
separate hazard insurance policies. To the extent, however, that a Condominium
Association and the related borrower on a Condominium Loan do not maintain
insurance or do not maintain adequate coverage or any insurance proceeds are
not applied to the restoration of damaged property, any damage to the
borrower's Condominium Unit or the related Condominium Building could
significantly reduce the value of the collateral securing the Condominium Loan
to the extent not covered by other credit support.
SPECIAL HAZARD INSURANCE POLICY. To the extent specified in the prospectus
supplement, the master servicer will maintain a special hazard insurance
policy, in full force and effect with respect to the Loans. Unless otherwise
specified in the prospectus supplement, the special hazard insurance policy
will provide for a fixed premium rate based on the declining aggregate
outstanding principal balance of the Loans. The master servicer will agree to
pay the premium for any special hazard insurance policy on a timely basis. If
the special hazard insurance policy is cancelled or terminated for any reason
(other than the exhaustion of total policy coverage), the master servicer will
exercise its best reasonable efforts to obtain from another 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."
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FHA INSURANCE AND VA GUARANTEES. To the extent specified in the prospectus
supplement, all or a portion of the Loans may be insured by the FHA or
guaranteed by the VA. The master servicer will be required to take steps
reasonably necessary to keep the insurance and guarantees in full force and
effect. See "Description of Mortgage and Other Insurance -- Mortgage Insurance
on the Loans."
POOL INSURANCE POLICY. If specified in the prospectus supplement, the
master servicer will be obligated to use its best reasonable efforts to
maintain a pool insurance policy with respect to the Loans in the amount and
with the coverage described in the prospectus supplement. Unless otherwise
specified in the prospectus supplement, the pool insurance policy will provide
for a fixed premium rate on the declining aggregate outstanding principal
balance of the Loans. The master servicer will be obligated to pay the premiums
for the pool insurance policy on a timely basis.
The prospectus supplement will identify the pool insurer for each series
of Securities. If the pool insurer ceases to be a Qualified Insurer because it
is not approved as an insurer by Freddie Mac or Fannie Mae or because its
claims-paying ability is no longer rated in the category required by the
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
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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 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
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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.
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
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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.
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
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servicer will remain liable for the servicing obligations under the related
Agreement. Any entity into which the master servicer is merged or consolidated
or any successor corporation resulting from any merger, conversion or
consolidation will succeed to the master servicer's obligations under the
related Agreement, provided that the successor or surviving entity meets the
requirements for a successor master servicer set forth in the preceding
paragraph.
Each Agreement will also provide that neither the master servicer, nor any
director, officer, employee or agent of the master servicer, will be under any
liability to the related trust fund or the securityholders for any action taken
or for failing to take any action in good faith pursuant to the related
Agreement or for errors in judgment; provided, however, that neither the master
servicer nor any such person will be protected against any breach of warranty
or representations made under the related Agreement or the failure to perform
its obligations in compliance with any standard of care set forth in the
related Agreement or liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties thereunder.
Each Agreement will further provide that the master servicer and any
director, officer, employee or agent of the master servicer is entitled to
indemnification from the related trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the Agreements or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the related Agreement provides
that the master servicer is not under any obligation to appear in, prosecute or
defend any legal action that is not incidental to its servicing
responsibilities under the related Agreement which, in its opinion, may involve
it in any expense or liability. The master servicer may, in its discretion,
undertake any action which it may deem necessary or desirable with respect to
the related Agreement and the rights and duties of the parties thereto and the
interests of the securityholders thereunder. In this case, the legal expenses
and costs of the action and any liability resulting therefrom will be expenses,
costs, and liabilities of the trust fund and the master servicer will be
entitled to be reimbursed therefor out of the Collection Account.
CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of a
series of Securities or for the related Primary Assets. Credit support may take
the form of one or more of the following:
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,
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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 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
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otherwise payable to holders of Subordinate Securities, or both, as specified
in the prospectus supplement. The Subordination Reserve Fund will not be a part
of the trust fund, unless otherwise specified in the prospectus supplement. If
the Subordination Reserve Fund is not a part of the trust fund, the trustee
will have a security interest therein on behalf of the senior securityholders.
Moneys will be withdrawn from the Subordination Reserve Fund to make
distributions of principal of or interest on Senior Securities under the
circumstances set forth in the prospectus supplement.
Moneys deposited in any Subordinated Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the prospectus
supplement, any reinvestment income or other gain from these investments will
be credited to the Subordinated Reserve Fund for the related series, and any
loss resulting from the investments will be charged to the Subordinated Reserve
Fund. Amounts in any Subordinated Reserve Fund in excess of the Required
Reserve Fund Balance may be periodically released to the holders of Subordinate
Securities under the conditions and to the extent specified in the prospectus
supplement. Additional information concerning any Subordinated Reserve Fund
will be set forth in the prospectus supplement, including the amount of any
initial deposit to the Subordinated Reserve Fund, the Required Reserve Fund
Balance to be maintained therein, the purposes for which funds in the
Subordinated Reserve Fund may be applied to make distributions to senior
securityholders and the employment of reinvestment earnings on amounts in the
Subordinated Reserve Fund, if any.
CROSS-SUPPORT FEATURES
If the Primary Assets for a series are divided into separate Asset Groups,
beneficial ownership of which is evidenced by, or which secure, a separate
class or classes of a series, credit support may be provided by a cross-support
feature that requires that distributions be made on Senior Securities backed by
one Asset Group prior to distributions on Subordinate Securities backed by
another Asset Group within the trust fund. The prospectus supplement for a
series that includes a cross-support feature will describe the manner and
conditions for applying the cross-support feature.
INSURANCE
Credit support with respect to a series may be provided by various forms
of insurance policies, subject to limits on the aggregate dollar amount of
claims that will be payable under each insurance policy, with respect to all
Loans comprising or underlying the Primary Assets for a series, or those Loans
with certain characteristics. The insurance policies include primary mortgage
insurance and standard hazard insurance and may, if specified in the prospectus
supplement, include a pool insurance policy covering losses in amounts in
excess of coverage of any primary insurance policy, a special hazard insurance
policy covering certain risks not covered by standard hazard insurance
policies, a bankruptcy bond covering certain losses resulting from the
bankruptcy of a borrower and application of certain provisions of the
Bankruptcy Code, a repurchase bond covering the repurchase 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
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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
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
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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.
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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") 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;
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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 and reasonable 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;
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;
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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, 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
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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 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
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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 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.
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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.
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
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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 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
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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.
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
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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;
(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);
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(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 or warranties of the
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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
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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.
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
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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 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:
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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) 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 of a specified
percentage of the then aggregate outstanding
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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.
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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.
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
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(4) to comply with any requirements imposed by the Code;
provided that any amendment except pursuant to clause (3) above, will not
adversely affect in any material respect the interests of any securityholders
of the related series not consenting thereto. If provided in the Agreement, any
amendment pursuant to clause (3) of the preceding sentence will be deemed not
to adversely affect in any material respect the interests of any securityholder
if the trustee receives written confirmation from each Rating Agency rating the
Securities of that series that the amendment will not cause the Rating Agency
to reduce the then current rating.
As specified in the prospectus supplement, the Agreement may also be
amended by the parties to the Agreement with the consent of the securityholders
possessing a specified percentage of the aggregate outstanding principal amount
of the Securities (or, if only certain classes are affected by the amendment, a
specified percentage of the aggregate outstanding principal amount of each
class affected), for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Agreement or modifying in
any manner the rights of securityholders; provided, however, that no amendment
may:
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:
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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:
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.
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LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
housing loans that are general in nature. Because certain of these legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the properties securing the housing loans are situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Loans.
MORTGAGES
The Mortgage Loans (other than any Cooperative Loans) comprising or
underlying the Primary Assets for a series will be secured by either mortgages
or deeds of trust or deeds to secure debt, depending upon the prevailing
practice in the state in which the property subject to a Mortgage Loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by the instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police
powers. Priority with respect to the instruments depends on their terms, the
knowledge of the parties to the mortgage and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage, the mortgagor, who is the borrower/homeowner or the land
trustee (as described below), and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and
the mortgage. In the case of a land trust, there are three parties because
title to the property is held by a land trustee under a land trust agreement of
which the borrower/homeowner is the beneficiary; at origination of a mortgage
loan, the borrower executes a separate undertaking to make payments on the
mortgage note. A deed of trust transaction normally has three parties, the
trustor, who is the borrower/homeowner; the beneficiary, who is the lender, and
the trustee, a third-party grantee. Under a deed of trust, the trustor grants
the 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
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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.
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.
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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.
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
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eoccupy 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 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
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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 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
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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.
In the case of foreclosure on a mortgage secured by the cooperative
building itself, where the building was converted from a rental building to a
building owned by a cooperative, under a non-eviction plan, some states require
that a purchaser at a foreclosure sale take the property subject to rent
control and rent stabilization laws that apply to certain tenants who elect to
remain in the building but who did not purchase shares in the cooperative when
the building was so converted. In addition, all cooperative units that were
previously rent controlled or rent stabilized may convert to their prior state
of rent-controlled or rent-stabilized apartments.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption,
which is a nonstatutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The right
of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of a right of redemption is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to the statutory prohibitions on deficiency judgments, certain
Mortgage Loans in the trust fund may, by their terms, prohibit recourse to the
borrower in the event proceeds from foreclosure or other liquidation are
insufficient to satisfy the debt. These Mortgage Loans may also not require
payments of principal and interest until maturity, thereby increasing the
likelihood that a deficiency will exist.
COOPERATIVE LOANS. Generally, lenders realize on cooperative shares and
the accompanying proprietary lease given to secure a Cooperative Loan under
Article 9 of the UCC. Some courts have interpreted section 9-504 of the UCC to
prohibit a deficiency award unless the creditor establishes that the sale of
the collateral (which, in the case of a Cooperative Loan, would be the shares
of the Cooperative and the related proprietary lease or occupancy agreement)
was conducted in a commercially reasonable manner.
LEASES AND RENTS. Multifamily mortgage loan transactions often provide for
an assignment of the leases and rents pursuant to which the borrower typically
assigns its right, title and interest, as landlord under each lease and the
income derived therefrom, to the lender while either obtaining a license to
collect rents for so long as there is no default or providing for the direct
payment to the lender. Local law, however, may require that the lender take
possession of the property and appoint a receiver before becoming entitled to
collect the rents under the lease.
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
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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.
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
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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.
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ENVIRONMENTAL RISKS
Under the laws of some states, and under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), it
is conceivable that a secured lender (such as the trust fund) may be held
liable as an "owner" or "operator" for the costs of addressing releases or
threatened releases of hazardous substances at a Mortgage Property, even though
the environmental damage or threat was caused by a prior or current owner or
"responsible parties", including owners and operators. However, CERCLA excludes
from the definition of "owner or operator" a secured creditor who holds indicia
of ownership primarily to protect its security interest, but does not
"participate in the management" of the Mortgaged Property (the "secured
creditor exclusion"). Thus, if a lender's activities begin to encroach on the
actual management of a contaminated property, the lender may incur liability as
an "owner or operator" under CERCLA. Similarly, if a lender forecloses and
takes title to a contaminated property, the lender may incur CERCLA liability
in various circumstances, including, but not limited to, when it holds the
property as an investment (including leasing the property to a third party), or
fails to market the property in a timely fashion.
Amendments to CERCLA enacted in 1996 have clarified the range of
activities in which a lender may engage without becoming subject to liability
under CERCLA. However, liability for costs associated with the investigation
and cleanup of environmental contamination may also be governed by state law,
which may not provide any specific protections to lenders, or, alternatively,
may not impose liability on lenders at all.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs associated with releases
of petroleum contamination. Federal regulation of underground petroleum storage
tanks (other than heating oil tanks) is governed by Subtitle I of the federal
Resource Conservation and Recovery Act ("RCRA"). The United States
Environmental Protection Agency ("EPA") has promulgated a lender liability rule
for underground storage tanks regulated by Subtitle I of RCRA. Under the EPA
rule, a holder of a security interest in an underground storage tank, is not
considered an operator of the underground storage tank as long as petroleum is
not added to, stored in or dispensed from the tank. Moreover, amendments to
RCRA, enacted concurrently with the CERCLA amendments discussed in the previous
paragraph, extend to the holders of security interests in petroleum underground
storage tanks the same protections accorded to secured creditors under CERCLA.
It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide any specific
protection for lenders, or, alternatively, may not impose liability on lenders
at all.
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
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enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from a bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes for the borrower's default and
the likelihood that the borrower will be able to reinstate the loan. In some
cases, courts have substituted their judgment for the lender's judgment and
have required that lenders reinstate loans or recast payment schedules in order
to accommodate borrowers who are suffering from temporary financial disability.
In other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for 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
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application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V.
The depositor has been advised by counsel that a court interpreting Title
V would hold that Mortgage Loans related to a series originated on or after
January 1, 1980 are subject to federal preemption. Therefore, in a state that
has not taken the requisite action to reject application of Title V or to adopt
a provision limiting discount points or other charges prior to origination of
the Mortgage Loans, any such limitation under the state's usury law would not
apply to the Mortgage Loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
Mortgage Loans originated after the date of the state action will be eligible
as Primary Assets if the Mortgage Loans bear interest or provide for discount
points or charges in excess of permitted levels. No Mortgage Loan originated
prior to January 1, 1980 will bear interest or provide for discount points or
charges in excess of permitted levels.
ADJUSTABLE INTEREST RATE LOANS
ARMs originated by non-federally chartered lenders have historically been
subject to a variety of restrictions. These restrictions differed from state to
state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title
VIII"). Title VIII provides that, notwithstanding any state law to the
contrary, state-chartered banks may originate "alternative mortgage
instruments" (including ARMs) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative 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.
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As Manufactured Homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that Manufactured Homes, under certain circumstances, may become
subject to real estate title and recording laws. As a result, a security
interest in a Manufactured Home could be rendered subordinate to the interests
of other parties claiming an interest in the Manufactured Home under applicable
state real estate law. In order to perfect a security interest in a
Manufactured Home under real estate laws, the holder of the security interest
must file either a "fixture filing" under the provisions of the UCC or a real
estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located.
Manufactured Home Loans typically contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an
interest in the Manufactured Home that is prior to the security interest
originally retained by the lender or its assignee. With respect to a series of
Securities evidencing interests in a trust fund that includes Manufactured Home
Loans and as described in the prospectus supplement, the depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If the real estate filings are not made and if any
of the foregoing events were to occur, the only recourse of the securityholders
would be against the depositor pursuant 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
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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.
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.
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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.
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.
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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 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.
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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 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:
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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
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REMIC Pool, and are dependent on the absence of defaults or delinquencies on
qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the REMIC
Pool or prepayment interest shortfalls.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the REMIC Provisions during any taxable
year, the REMIC Provisions provide that the entity will not be treated as a
REMIC for that year and thereafter. In that event, that entity may be taxable
as a corporation under Treasury regulations, and the related REMIC Securities
may not be accorded the status or given the tax treatment described below.
Although the REMIC Provisions authorize the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of
REMIC status, the Treasury Department has not issued any such regulations. Any
relief provided, moreover, may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the trust fund's income
for the period in which the requirements for that status are not satisfied. The
trust agreement for each REMIC Pool will include provisions designed to
maintain the trust fund's status as a REMIC under the REMIC Provisions. The
depositor does not anticipate that the status of any REMIC Pool as a REMIC will
be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES. To the extent
provided in the applicable prospectus supplement, a Regular Security could
represent not only the ownership of a REMIC regular interest, but also an
interest a notional principal contract. This can occur. For instance, when the
applicable trust agreement provides that the rate of interest payable by the
REMIC on the regular interest is subject to a cap based on the weighted average
of the net interest rates payable on the qualified mortgages held by the REMIC.
In these instances, the trust agreement may provide for a reserve fund that
will be held as part of the trust fund but not as an asset of any REMIC created
pursuant to the trust agreement (an "outside reserve fund"). The outside
reserve fund would typically be funded from monthly excess cashflow. If 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
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property loans" in former Code Section 593(d) for taxable years beginning after
December 31, 1995. The requirements in the SBJPA of 1996 that these
institutions must "recapture" a portion of their existing bad debt reserves is
suspended if a certain portion of their assets are maintained in "residential
loans" under Code Section 7701(a)(19)(C)(v), but only if those loans were made
to acquire, construct or improve the related real property and not for the
purpose of refinancing. However, no effort will be made to identify the portion
of the mortgage loans of any series meeting this requirement, and no
representation is made in this regard.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Securities
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure
held pending sale and amounts in reserve accounts would be considered to be
part of the mortgage loans, or whether those assets (to the extent not invested
in assets described in the foregoing sections) otherwise would receive the same
treatment as the mortgage loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on mortgage loans held
pending distribution are considered part of the mortgage loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
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
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Regulations include an anti-abuse rule allowing the Internal Revenue Service to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result because of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion therein and the appropriate method for reporting interest and
original issue discount for the regular interests.
Each regular interest (except to the extent described below for a regular
interest on which principal is distributed in a single installment or by lots
of specified principal amounts upon the request of a securityholder or by
random lot (a "non-pro rata security")) will be treated as a single installment
obligation for purposes of determining the original issue discount ineludible
in a regular interest holder's income. The total amount of original issue
discount on a regular interest is the excess of the "stated redemption price at
maturity" of the regular interest over its "issue price." The issue 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
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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 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
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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 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.
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(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.
The purchaser will be required to defer deduction of a portion of the
excess of the interest paid or accrued on indebtedness incurred to purchase or
carry a regular interest over the interest distributable thereon. The deferred
portion of the interest expense in any taxable year generally will not exceed
the accrued market discount on the regular interest for that year. Any deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the regular
interest is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the regular interest holder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by the regular interest holder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "-- Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which that election may be deemed to be made. A person who purchases
a regular interest at a price lower than the remaining amounts includible in
the stated redemption price at maturity of the Security, but higher than its
adjusted issue price, does not acquire the regular interest with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount for a regular interest will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption price
at maturity of the regular interest (or, in the case of a regular interest
having original issue discount, the adjusted issue price of that regular
interest) multiplied by the weighted average maturity of the regular interest
(determined as described above in the third paragraph under "-- Original Issue
Discount" above) remaining after the date of purchase. It appears that de
minimis market discount would be reported in a manner similar to de minimis
original issue discount. See "-- Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular class of regular interests. Prospective
investors
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should consult their own tax advisors regarding the application of the market
discount rules. Investors should also consult Revenue Procedure 92-67
concerning the elections to include market discount in income currently and to
accrue market discount on the basis of the constant yield method.
(6) Amortizable Premium
A regular interest purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the regular interest holder holds that regular interest as a
"capital asset" within the meaning of Code Section 1221, the regular interest
holder may elect under Code Section 171 to amortize the premium under a
constant yield method that reflects compounding based on the interval between
payments on the regular interest. The election will apply to all taxable debt
obligations (including REMIC regular interests) acquired by the regular
interest holder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the Internal Revenue Service.
The Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations as the regular interests. Amortizable
bond premium generally will be treated as an offset to interest income on a
regular interest, rather than as a separate deductible item. See "-- Election
to Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a regular interest may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial prepayment assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election
for a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular interest holders will be required to report income for regular
interests on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a regular interest, particularly a
subordinate Security, may have income, or may incur a diminution in cash flow
as a result of a default or 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
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uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that regular interest holders that are corporations or
that otherwise hold the regular interests in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
regular interest becoming wholly or partially worthless, and that, in general,
regular interest holders that are not corporations and do not hold the regular
interests in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any regular interests becoming wholly worthless. Although the
matter is not free from doubt, non-corporate regular interest holders should be
allowed a bad debt deduction at the time the principal balance of the regular
interests is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable class of regular interests has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
regular interests are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that would be deductible only against future
positive original issue discount or otherwise upon termination of the class.
Regular interest holders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
for their regular interests. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate
and non-corporate holders, the Internal Revenue Service may take the position
that losses attributable to accrued original issue discount may only be
deducted as capital losses in the case of non-corporate holders who do not hold
the Regular Securities in connection with a trade or business.
(9) Sale or Exchange of Regular Securities
If a regular interest holder sells or exchanges a regular interest, the
regular interest holder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the regular
interest. The adjusted basis of a regular interest generally will equal the
original cost of the regular interest to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income for the regular interest and reduced by amounts included in the stated
redemption price at maturity of the regular interest that were previously
received by the seller, by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
regular interest realized by an investor who holds the regular interest as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the regular interest has been held for the long-term
capital gain holding period (currently, more than one year). Gain will be
treated as ordinary income
(1) if a regular interest is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would
have accrued on the regular interest holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously 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
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(3) to the extent that the gain does not exceed the excess, if any, of
(a) the amount that would have been includible in the gross income of the
holder if its yield on that regular interest were 110% of the applicable
federal rate as of the date of purchase, over (b) the amount of income
actually includible in the gross income of the holder for that regular
interest.
In addition, gain or loss recognized from the sale of a regular interest
by certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Long-term capital gains of certain
noncorporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income of those taxpayers (39.6%) for property held for more than
one year. Currently, the maximum tax rate for corporations is the same for both
ordinary income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("residual holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a residual holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in
that quarter and by allocating that daily portion among the residual holders in
proportion to their respective holdings of Residual Securities in the REMIC
Pool on that day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that
(1) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses related
to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from
amortization of issue premium, if any, on the regular interests, plus income on
reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the regular
interests. The REMIC Pool's deductions include interest and original issue
discount expense on the regular interests, servicing fees on the mortgage
loans, other administrative expenses of the REMIC Pool and realized losses on
the mortgage loans. The requirement that residual holders report their pro rata
share of taxable income or net loss of the REMIC Pool will continue until there
are no Securities of any class of the related series outstanding.
The taxable income recognized by a residual holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest, original issue discount or market discount income
or amortization of premium for the mortgage loans, on the one hand, and the
timing of deductions for interest (including original issue discount) or income
from amortization of issue premium on the regular interests, on the other hand.
If an interest in the 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
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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 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
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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 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.
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(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 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
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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
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that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Security for a series will bear a legend referring to
those restrictions on transfer, and each residual holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
trust agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a residual holder (other than a residual holder
who is not a U.S. Person as defined below under "-- Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
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.
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FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (1) the future value
of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (2) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and before the end of the
next succeeding taxable year for the accumulated withholding tax liability to
be paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership
(except as provided in applicable Treasury regulations) or other entity treated
as a partnership or as a 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
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ending six months after the sale or disposition, acquires (or enters into any
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final
regulations (the "Mark to Market Regulations") under Code Section 475 relating
to the requirement that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities of
a dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
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.
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(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.
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
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REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
In general, the allocable portion will be determined based on the ratio
that a REMIC securityholder's income, determined on a daily basis, bears to the
income of all holders of regular interests and Residual Securities for a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess of
the interest income at the Interest Rate on regular interests that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Interests
Interest, including original issue discount, distributable to regular
interest holders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person
provides the trustee, or the person who would otherwise be required to withhold
tax from those distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If that statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
(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
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form" within the meaning of Code Section 163 (f) (1). Generally, mortgage loans
will not be, but regular interests in another REMIC Pool will be, considered
obligations issued in registered form. Furthermore, residual holders will not
be entitled to any exemption from the 30% withholding tax (or lower treaty
rate) to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." See "-- Taxation of Owners of Residual Securities --
Limitations on Offset or Exemption of REMIC Income" above. If the amounts paid
to residual holders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by those Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to those Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, those amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition of
debt instruments that have original issue discount. See "-- Tax-Related
Restrictions on Transfer of Residual Securities -- Foreign Investors" above
concerning the disregard of certain transfers having "tax avoidance potential."
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Residual Securities.
(3) Backup Withholding
Distributions made on the regular interests, and proceeds from the sale of
the regular interests to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under some circumstances, principal distributions) unless the Regular Holder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the trustee, its agent or
the broker who effected the sale of the Regular Security, or that Holder is
otherwise an exempt recipient under applicable provisions of the Code. Any
amounts to be withheld from distribution on the regular interests would be
refunded by the Internal Revenue Service or allowed as a credit against the
Regular Holder's federal income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
regular interests or beneficial owners who own regular interests through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of regular interests (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 for a particular series of regular interests. Holders
through nominees must request the information from the nominee.
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."
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Residual holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a residual holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each residual holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The Internal Revenue Service may assess a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Pool level. A REMIC Pool
typically will not register as a tax shelter pursuant to Code Section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Security as a nominee
for another person may be required to furnish the related REMIC Pool, in a
manner to be provided in Treasury regulations, with the name and address of
that person and other specified information.
FASITS
CLASSIFICATION OF FASITS. For each series of FASIT Securities, assuming
compliance with all provisions of the related trust agreement, in the opinion
of Brown & Wood LLP, the related trust fund will qualify as a FASIT. A FASIT is
any entity that (1) elects FASIT status, (2) satisfies certain requirements
concerning the interests it issues (the "interests test"), and (3) satisfies
certain requirements concerning the composition of its assets (the "asset
test"). Any entity described in Section 851(a) of the Code (i.e., a regulated
investment company), however, would not be eligible to elect FASIT status.
THE INTERESTS TEST. All interests in a FASIT must be designated as either
regular interests or as the ownership interest. A FASIT can have only one
ownership interest and it must be held directly at all times by an "eligible
corporation" (i.e., a domestic "C " corporation that is subject to tax and that
is not a regulated investment company, a real estate investment trust, a REMIC,
or a subchapter T cooperative). The ownership interest need not have any
particular economic characteristics.
Generally, A FASIT regular interest is any interest issued by the FASIT on
or after its startup day that is designated as such and that (1)
unconditionally entitles the holder to receive a specified principal amount,
(2) provides that interest payments, if any, be determined based on a fixed
rate, or, except as otherwise provided in Treasury Regulations, which have not
been promulgated, at a rate that would qualify as a variable rate under the
REMIC regulations, (3) does not have a stated 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
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(4) above, and (5) any regular interest in a REMIC or in another FASIT. The
term "permitted asset" does not, however, include any debt instrument, other
than a cash equivalent, issued by the holder of the ownership interest or any
person related to the holder.
If the trust fund fails to comply with one or more of the requirements for
FASIT status during any taxable year, the trust fund may lose its FASIT status
for that year and all years thereafter. If the trust fund were to lose its
FASIT status, the trust fund could be taxable as a corporation.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will be
accorded the same tax treatment under the Code as payments received on REMIC
regular interests. Holders of FASIT Regular Securities must report income from
these Securities under an accrual method of accounting, even if they otherwise
would have used the cash receipts and disbursements method. Except in the case
of FASIT Regular Securities issued with original issue discount, interest paid
or accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Holder and a principal payment on the Security will be treated as
a return of capital to the extent that the securityholder's basis is allocable
to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on the Securities in the same manner described for REMIC
regular interests. See "-- REMICs -- Taxation of Owners of REMIC Regular
Interests" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
regular interests. See "-- REMICs -- Taxation of Owners of REMIC Regular
Interests -- Sale or Exchange of Regular Securities."
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.
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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;
(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.
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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 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.
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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 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.
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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.
(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
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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) 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
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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 "-- 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.
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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.
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.
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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.
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
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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:
(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
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(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.
(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
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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
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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.
(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
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may be precluded from separately litigating a proposed adjustment to the items
of the Partnership Trust Fund. An adjustment could also result in an audit of a
securityholder's returns and adjustments of items not related to the income and
losses of the Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN SECURITYHOLDERS. It is not clear whether the
Partnership Trust Fund would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect to
Non-U.S. Persons, because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the Partnership Trust Fund would be engaged in a trade or
business in the United States for those purposes, the Partnership Trust Fund
will withhold as if it were so engaged to protect the Partnership Trust Fund
from possible adverse consequences of a failure to withhold. The Partnership
Trust Fund expects to withhold on the portion of its taxable income that is
allocable to securityholders who are Non-U.S. Persons pursuant to Section 1446
of the Code, as if that income were effectively connected to a U.S. trade or
business, at a rate of 35% for Non-U.S. Persons that are taxable as
corporations and 39.6% for all other foreign holders. Amounts withheld will be
deemed distributed to the Non-U.S. Person securityholders. Subsequent adoption
of Treasury regulations or the issuance of other administrative pronouncements
may require the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund may rely
on Form W-8, Form W-9 or the holder's certification of nonforeign status signed
under penalties of perjury.
Each Non-U.S. Person holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Partnership Trust Fund's income. Each
Non-U.S. Person holder must obtain a taxpayer identification number from the
Internal Revenue Service and submit that number to the Partnership Trust Fund
on Form W-8 to assure appropriate crediting of the taxes withheld. A Non-U.S.
Person holder generally would be entitled to file with the Internal Revenue
Service a claim for refund for taxes withheld by the Partnership Trust Fund,
taking the position that no taxes were due because the Partnership Trust Fund
was not engaged in a U.S. trade or business. However, interest payments made
(or accrued) to a securityholder who is a Non-U.S. Person generally will be
considered guaranteed payments to the extent that those payments are determined
without regard to the income of the Partnership Trust Fund. If these interest
payments are properly characterized as guaranteed payments, then the interest
may not be considered "portfolio interest." As a result, securityholders who
are Non-U.S. Persons may be subject to United States federal income tax and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. In that case, a Non-U.S. Person holder would only be
entitled to claim a refund for that portion of the taxes in excess of the taxes
that should be withheld for the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Partnership Securities and
proceeds from the sale of the Partnership Securities will be subject to a
"backup" withholding tax of 31% if, in general, the securityholder fails to
comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
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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 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
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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.
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 IBCA, 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.
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A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
for that Security. However, to the extent Securities are subordinate, the
Exemption will not apply to an investment by a Plan.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Sections 4975(c) (1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Security on behalf of an "Excluded Plan" by any person who has
discretionary authority or renders investment advice with respect to the assets
of that Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in
the initial issuance of Securities between the depositor or an underwriter
and a Plan when the person who has discretionary authority or renders
investment advice with respect to the investment of Plan assets in the
Securities is (a) an obligor with respect to 5% or less of the fair market
value of the assets of the trust fund or (b) an affiliate of that person;
(2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
trust fund. The depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied for the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code) for
transactions in connection with the servicing, management and operation of the
Mortgage Pools, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if those restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" (within the meaning of Section
3(14) of ERISA) or a "disqualified person" (within the meaning of Section
4975(e)(2) of the Code) with respect to an investing Plan by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to that person) solely as a result of the Plan's ownership of
Securities.
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
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prohibited transaction rules of ERISA and the Code for which no exemption may
be available. Accordingly, Non-Equity Securities may not be purchased using the
assets of any Plan if any of the depositor, the servicer, the trustee or
underwriter has investment authority for those assets.
In addition, certain affiliates of the depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager," PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving
bank collective investment funds, PTCE 95-60, which exempts certain
transactions involving insurance company general accounts, or PTCE 96-23, which
exempts certain transactions effected on behalf of a Plan by certain "in-house"
asset managers. It should be noted, however, that even if the conditions
specified in one or more of these exemptions are met, the scope of relief
provided by these exemptions may not necessarily cover all acts that might be
construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to that investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary that proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE
83-1, which provides exemptive relief for certain transactions involving
mortgage pool investment trusts. The prospectus supplement for a series of
Securities may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with respect to the Securities
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Stripped Securities should consider the federal income tax
consequences of that investment.
Any Plan fiduciary considering whether to purchase a Security on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to that investment.
The sale of Securities to a Plan is in no respect a representation by the
depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
PRE-FUNDING ACCOUNTS
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions 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%.
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(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
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.
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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
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<PAGE>
date. Institutions with which these contracts may be made include commercial
and savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases these
institutions must be approved by the depositor. The obligation of any purchaser
under the contract will be subject to the condition that the purchase of the
offered Securities will not at the time of delivery be prohibited under the
laws of the jurisdiction to which the purchaser is subject. The Underwriters
and any other agents will not have any responsibility in respect of the
validity or performance of the contracts.
The depositor may also sell the Securities offered hereby and by means of
the prospectus supplements from time to time in negotiated transactions or
otherwise, at prices determined at the time of sale. The depositor may effect
the transactions by selling Securities to or through dealers and the dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the depositor and any purchasers of Securities for whom they
may act as agents.
The place and time of delivery for each series of Securities offered
hereby and by means of the prospectus supplement will be set forth in the
prospectus supplement with respect to the series.
In the ordinary course of business, Lehman Brothers Inc. or other
Underwriters, or their respective affiliates, may engage in various securities
and financing transactions, including loans or repurchase agreements to provide
interim financing of mortgage loans pending the sale of the mortgage loans or
interests therein, including the Securities.
ADDITIONAL INFORMATION
The depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This prospectus, which forms a part of
the Registration Statement, omits certain information contained in the
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows:
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
130
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703-759-8160). The depositor did not participate in the preparation of Freddie
Mac's Offering Circular, Information Statement or any supplement thereto or any
quarterly report thereof and, accordingly, makes no representations as to the
accuracy or completeness of the information set forth therein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the accompanying prospectus supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this prospectus and
prior to the termination of any offering of the Securities issued by the trust
fund will be deemed to be incorporated by reference in this prospectus and to
be a part of this prospectus from the date of the filing of the documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein will be deemed to be modified or superseded for all purposes
of this prospectus to the extent that a statement contained herein (or in the
accompanying prospectus supplement) or in any other subsequently filed document
that also is or is deemed to be incorporated by reference modifies or replaces
the statement. Any statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
The trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, on the written or oral
request of that person, a copy of any or all of the documents referred to above
that have been or may be incorporated by reference in this prospectus (not
including exhibits to the information that is incorporated by reference unless
the exhibits are specifically incorporated by reference into the information
that this prospectus incorporates). Requests should be directed to the
Corporate Trust Office of the trustee specified in the accompanying prospectus
supplement.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related trust fund are required
under the Agreements to be forwarded to securityholders. Unless otherwise
specified in the prospectus supplement, the reports will not be examined and
reported on by an independent public accountant. See "The Agreements -- Reports
to Securityholders."
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Adjustable Rate Mortgages .................. 26
Agency Certificates ........................ 15
Aggregate Asset Principal Balance .......... 5
Agreements ................................. 59
Appraised Value ............................ 25, 28
ARMs ....................................... 26
Asset Group ................................ 2
Asset Principal Balance .................... 5
Bankruptcy Code ............................ 47
Beneficial Owner ........................... 5
Bi-Weekly Loans ............................ 23
Book-Entry Registration .................... 2
Book-Entry Securities ...................... 2
Business Day ............................... 68
Buy-Down Amounts ........................... 26
Buy-Down Fund .............................. 38
Buy-Down Loans ............................. 25
Buy-Down Mortgage Rate ..................... 25
Buy-Down Period ............................ 25
Buydown .................................... 55
Cash Program ............................... 18
CERCLA ..................................... 80
Certificates ............................... 2
Clearstream ................................ 5
Collection Account ......................... 36
Commission ................................. 130
Compound Interest Securities ............... 2
Compound Value ............................. 4
Condominium ................................ 24
Condominium Association .................... 33
Condominium Building ....................... 33
Condominium Unit ........................... 24
Conventional Loans ......................... 17
Cooperative Corporation .................... 6
Cooperative Dwellings ...................... 24
Cooperatives ............................... 24
Covered Trust .............................. 47
CPR ........................................ 11
Cut-off Date ............................... 14
DCR ........................................ 124
Definitive Securities ...................... 2
Deleted Loan ............................... 62
Distribution Account ....................... 68
DOL ........................................ 123
DTC ........................................ 5
Due Date ................................... 40
EDGAR ...................................... 130
Eligible Investments ....................... 64
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Eligible Reserve Fund Investments .......... 64
EPA ........................................ 80
ERISA ...................................... 123
ERISA Considerations ....................... 124
Escrow Accounts ............................ 36
Euroclear .................................. 5
Euroclear Operator ......................... 6
European Depositaries ...................... 7
Exchange Act ............................... 131
Excluded Plan .............................. 125
Exemption .................................. 124
Expense Reserve Fund ....................... 68
Fannie Mae ................................. 18
FHA ........................................ 16
FHA Loans .................................. 23
Financial Intermediary ..................... 7
Fitch ...................................... 124
Floating Rate Securities ................... 2
Freddie Mac ................................ 21
Freddie Mac Act ............................ 21
FSLIC ...................................... 26
Garn-St Germain Act ........................ 80
GEM Loans .................................. 23
Ginnie Mae ................................. 16
Ginnie Mae Servicers ....................... 15
GPM Fund ................................... 39
GPM Loans .................................. 23
Guarantor Program .......................... 18
Guaranty Agreement ......................... 15
Holder-In-Due-Course ....................... 84
Housing Act ................................ 16
HUD ........................................ 21
Index ...................................... 26
Indirect Participants ...................... 6
Insurance Policies ......................... 22
Insured Loss ............................... 51
Interest Rate .............................. 3
Interest Weighted Securities ............... 2
Investment and Deposit Activities .......... 128
L/C Bank ................................... 48
L/C Percentage ............................. 49
Lifetime Mortgage Rate Cap ................. 26
Liquidation Proceeds ....................... 37
Loan-to-Value Ratio ........................ 25
Loans ...................................... 15
Manufactured Home .......................... 28
Manufactured Home Loan Schedule ............ 61
Manufactured Home Loans .................... 27
</TABLE>
132
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<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Maximum Mortgage Rate Adjustment .............. 26
Minimum Mortgage Rate ......................... 26
Minimum Principal Distribution Amount ......... 4
Moody's ....................................... 124
Mortgage Certificate Schedule ................. 59
Mortgage Loans ................................ 23
Mortgage Rates ................................ 12
Mortgaged Property ............................ 13
Multi-Class Series ............................ 3
Multifamily Properties ........................ 12
NCUA .......................................... 128
Negatively Amortizing ARMs .................... 26
No-Bid ........................................ 55
Non-Equity Securities ......................... 125
Non-U.S. Person ............................... 106
Notes ......................................... 2
Offered Securities ............................ 2
PACs .......................................... 2
Participants .................................. 6
Participation Agreement ....................... 15
Participation Certificate Schedule ............ 61
Participation Certificates .................... 61
Parties in Interest ........................... 123
PC Pool ....................................... 18
Percentage Interest ........................... 3
Permitted Investments ......................... 127
Planned Amortization Certificates ............. 2
Plans ......................................... 123
PMBS Agreement ................................ 21
PMBS Issuer ................................... 21
PMBS Servicer ................................. 21
PMBS Trustee .................................. 21
Policy Statement .............................. 128
Pre-Funding Account ........................... 29
Pre-Funding Arrangement ....................... 29
Pre-Funding Limit ............................. 126
Primary Assets ................................ 14
Principal Distribution Amount ................. 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Principal Weighted Securities ................. 2
Private Mortgage-Backed Securities ............ 14
PTCE .......................................... 126
Qualified Insurer ............................. 41
Qualifying Substitute Mortgage Loan ........... 62
Rating Agency ................................. 4
RCRA .......................................... 80
Relevant Depositary ........................... 7
REO Property .................................. 69
Retained Interest ............................. 14
Rules ......................................... 7
S&P ........................................... 124
Scheduled Principal ........................... 19
Securities .................................... 2
Senior Securities ............................. 4
Servicing Account ............................. 38
Servicing Agreements .......................... 35
Single Family Property ........................ 17
SMMEA ......................................... 128
SPA ........................................... 11
Subordinate Securities ........................ 2, 4
Subordinated Amount ........................... 47
Subordination Reserve Fund .................... 47
Subsequent Assets ............................. 127
Subsequent Primary Assets ..................... 29
Subservicers .................................. 35
Subsidy Fund .................................. 39
Taxable Mortgage Pools ........................ 87
Terms and Conditions .......................... 7
Tiered REMICs ................................. 90
Title V ....................................... 81
Title VIII .................................... 82
UCC ........................................... 76
underwriter ................................... 124
Underwriters .................................. 129
VA ............................................ 16
VA Loans ...................................... 16
</TABLE>
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$690,484,171
(APPROXIMATE)
STRUCTURED ASSET
SECURITIES CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2000-4
[AURORA LOAN SERVICES INC. LOGO]
Aurora Loan Services Inc.
Master Servicer
--------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
October 23, 2000
--------------------------------------------------------------------------------
LEHMAN BROTHERS
Edward D. Jones & Co., L.P.
