As filed with the Securities and Exchange Commission on March 13, 2000
Registration No. 333-31252
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
Amendment No. 1 to
Form S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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STRUCTURED ASSET SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2440850
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Vesey Street
New York, New York 10285
(212) 526-7000
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Mark L. Zusy
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
(212) 526-4428
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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Copies to:
John Arnholz, Esq. Scott Kimmel, Esq.
Brown & Wood LLP Lehman Brothers Inc.
1666 K Street 200 Vesey Street
Washington, D.C. 20006-1208 New York, New York 10285
(202) 533-1444 (212) 526-2439
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
----------
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. |X|
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<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Amount Being Proposed Maximum Proposed Maximum
Title of Securities Being Registered Registered Offering Price Per Aggregate Offering Amount of
Unit(1) Price(1) Registration
Fee
- -------------------------------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $10,000,000,000.00 100% $10,000,000,000.00 $2,639,736.00(2)
====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $264.00 previously paid.
</TABLE>
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
which is part of this Registration Statement is a combined prospectus and
includes all the information currently required in a prospectus relating to
securities covered by Registration Statement No. 333-68513 previously filed by
the Registrant.
-----------------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, March [ ], 2000
PROSPECTUS SUPPLEMENT
(To Prospectus dated [ ], 2000)
$[[ ]] (Approximate)
STRUCTURED ASSET SECURITIES CORPORATION
Mortgage Pass-Through Certificates, Series [[ ]]
[[ ]],
[Servicer/Master Servicer]
[[ ]], the trustee, will issue the following certificates(1):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Consider carefully
the risk factors Class Principal CUSIP
beginning on page Class Amount (2) Interest Rate (3) Number
[[ ]] of this ----- ---------- ----------------- ------
prospectus.
</TABLE>
------------
For a list of
capitalized (1) [In general, interest and principal payable on any
terms used in payment date will be paid first to the certificates
this prospectus identified with an A in their class designation, then to
supplement, the Class M and Class B certificates, in that order.]
see the Glossary (2) These balances are approximate, as described in this
beginning on prospectus supplement.
page[[ ]] in (3) The interest for each class of certificates will be
this prospectus [described as applicable].
supplement and
on page [[ ]] [The Trust will also issue class [ ] certificates that will
in the prospectus. be entitled to receive distributions of [to be described]
and [REMIC residual certificates], as described in this
The certificates prospectus supplement.
will represent
interest in the This prospectus supplement and the accompanying prospectus
trustfund only relate only to the offering of the certificates listed in
and will not the chart above [and not to the class [ ] certificates or
represent interest the [REMIC residual certificates].
in or obligations
of any other [Describe mortgage loans in the trust fund.]
entity.
[Describe underwriting arrangements.]
This prospectus
supplement may
be used to offer
and sell any
series of
certificates only
if accompanied by
the prospectus.
The closing date for the offering of the certificates is expected to be on or
about [ ].
Neither the SEC nor any state securities commission has approved these
certificates 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 supplement is March [ ], 2000
<PAGE>
Important Notice about Information Presented in this
Prospectus Supplement and the Accompanying Prospectus
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
your certificates, and (b) this prospectus supplement, which describes the
specific terms of your series of certificates, including:
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 provided in this prospectus
supplement and the accompanying prospectus, including the information
incorporated by reference to other public filings made by the Depositor. We
have not authorized anyone to provide you with any other information. We are
not offering the certificates in any state where the offer is not permitted. We
do not claim the accuracy of the information in this prospectus supplement or
the accompanying prospectus as of any date other than the dates stated on their
respective covers.
We include cross references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Summary of Terms.........................................................................................5
Risk Factors.............................................................................................9
Potential Inadequacy of Credit Enhancement...........................................................9
Unpredictability and Effect of Prepayments...........................................................11
Geographic Concentration of Mortgage Loans..........................................................11
Description of the Certificates.........................................................................12
General..............................................................................................12
Book-Entry Registration of Class [ ] Certificates................................................14
Priority of Distributions............................................................................15
Distributions of Interest............................................................................15
Distributions of Principal...........................................................................16
Available Distribution Amount........................................................................17
[The Residual Certificate............................................................................18
[Allocation of Realized Losses.......................................................................18
Final Scheduled Distribution Date....................................................................20
Optional Termination of the Trust....................................................................20
The Trustee..........................................................................................20
Description of the Mortgage Pool........................................................................21
General..............................................................................................21
Additional Information..................................................................................26
[The Servicer]..........................................................................................26
General..............................................................................................26
Delinquency Experience...............................................................................26
Servicing of the Mortgage Loans.........................................................................28
[The Subservicer [if applicable].....................................................................28
[Insurance Coverage..................................................................................28
Servicing Compensation and Payment of Expenses.......................................................28
Prepayment Interest Shortfalls.......................................................................28
Advances.............................................................................................29
Collection of Taxes, Assessments and Similar Items...................................................29
Certain Rights Related to Foreclosure................................................................29
Trust Agreement.........................................................................................30
General..............................................................................................30
Assignment of Mortgage Loans.........................................................................30
Voting Rights........................................................................................31
Yield, Prepayment and Weighted Average Life.............................................................31
General..............................................................................................31
[Subordination of the Class [ ]Certificates......................................................33
Weighted Average Life................................................................................33
Material Federal Income Tax Considerations..............................................................36
General..............................................................................................36
[Residual Certificates...............................................................................36
Legal Investment Considerations.........................................................................37
Use of Proceeds.........................................................................................37
Underwriting............................................................................................37
ERISA Considerations....................................................................................38
Legal Matters...........................................................................................38
Ratings.................................................................................................38
</TABLE>
<PAGE>
Summary of Terms
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the certificates, you should carefully read this entire document and
the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding, but it is qualified by the
full description of these calculations, cash flows and other information
in this prospectus supplement and the accompanying prospectus.
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 [ ________ ], unless we specify otherwise. We explain in this
prospectus supplement under "Description of the Certificates -
Distributions of Principal" how the scheduled principal balance of a
mortgage loan is determined. Whenever we refer in this Summary or in the
Risk Factors section to the total principal balance of any mortgage
loans, we mean the total of their scheduled principal balances, unless we
specify otherwise.]
<PAGE>
Offered Certificates
Structured Asset Securities Corporation is offering the Class [ ] Mortgage
Pass-Through Certificates as part of series [ _______ ]. The certificates
represent ownership interests in the assets of the series [ ] trust fund.
The certificates will be issued in book-entry form.
Depositor
Structured Asset Securities Corporation is the Depositor. The Depositor's
principal offices are located at 200 Vesey Street, New York, New York 10285,
telephone (212) 526-5594.
Seller
Lehman Capital, A Division of Lehman Brothers Holdings Inc. will be the seller
of the mortgage loans. The seller's principal offices are located at 200 Vesey
Street, New York, New York 10285, telephone (212) 526-3305.
Trustee
[ ] will be the trustee under the trust agreement creating the trust.
See "Description of the Certificates -- The Trustee" herein.
Servicing
[ __________________ ] will service the mortgage loans in the trust pursuant to
a sale and servicing agreement that will be assigned to the trustee. The
servicer will receive a monthly fee with respect to each mortgage loan that it
services as described in "Servicer" and "Servicing of the Mortgage Loans" in
this prospectus supplement. [The servicer is required to make advances in
respect of scheduled payments on the mortgage loans, net of its servicing fee,
in certain circumstances described herein. If the servicer fails to make
advances, the trustee will be obligated to do so to the extent required by the
trust agreement.]
Interest Payments
Interest will accrue on the certificates for each month, or part of a month,
during which they are outstanding. Interest accrued for any month, or part of a
month, will generally be payable on the 25th day of the following month.
[You will receive from each pool of mortgage loans only the payments of
interest that the component parts of your certificates that relate to that
mortgage pool is entitled to. As described in this prospectus supplement, you
may receive less than you are entitled to from any particular pool of mortgage
loans if those mortgage loans do not generate enough interest in any particular
month to pay interest due.]
Principal Payments
Principal of each class of certificates will be payable on the 25th day of each
month as described in this prospectus supplement beginning at page [[ ]]. We
expect, although we cannot be certain, that the last payment of principal on
any certificate will be made on or before [[ ]], 20[[ ]].
See "Yield, Prepayment and Weighted Average Life - General" in this prospectus
supplement for a discussion of the factors that could affect when the principal
of each class of certificates will be paid in full.
Limited Recourse
The only source of cash available to make interest and principal payments on
the certificates will be the assets of the trust fund. The trust fund will have
no other source of cash and no other equity will be required or expected to
make any such payments.
Enhancement of Likelihood of Payment on the Certificates
The payment structure includes [forms of credit enhancement to be described as
applicable]. [The certificates will not be insured by any financial guaranty
insurance policy.]
See "Risk Factors - Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates - Credit Enhancement" in this prospectus
supplement for a detailed description of the forms of credit enhancement
available to the certificates.
[Subordination
Payments of interest and payments of principal will each be made to you before
such payments are made to the holders of the class [ ] certificates or the
[REMIC] residual certificate. In addition to your general priority over the
class [ ] certificates or the [REMIC] residual certificate, certificates with
an "A" in their class designation will have a payment priority as a group over
other certificates. Class [ ] Certificates will have a payment priority over
class [ ] certificates, and class [ ] certificates will have a payment priority
over class [ ] certificates.
See "Description of the Certificates - Credit Enhancement" in this prospectus
supplement.]
[Overcollateralization
On the closing date, the total principal amount of the certificates is expected
to exceed the total principal balance of the mortgage loans by approximately
$[[ ______ ]] or approximately [[ ]]%. Such a condition is referred to as
"undercollateralization." In the same way, the total principal amount of the
certificates' component parts that relate to each pool of mortgage loans is
expected to exceed the total principal balance of the mortgage loans in each
pool in approximately the same proportion.
Any interest received on the mortgage loans in each pool in excess of the
amount needed to pay interest on the certificates' component parts that relate
to that pool and certain expenses and fees will be used to reduce the total
principal balance of those component parts in order to eliminate the initial
undercollateralization.
If the initial undercollateralization is eliminated, and we cannot assure you
that it will be, the trustee will continue to apply excess interest to reduce
the total principal balance of the certificates to a level set by the rating
agencies until the total principal balance of the mortgage loans exceeds the
total outstanding principal amount of the certificates, and the total principal
balance of the mortgage loans in each pool exceeds the total principal amount
of the certificates' component parts that relate to that pool, by the amount
required by the rating agencies. Such a condition is referred to as
"overcollateralization." We cannot assure you that sufficient interest will be
generated by the mortgage loans to create overcollateralization, or to maintain
it after it has been created.
See "Risk Factors - Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates - Overcollateralization" in this prospectus
supplement.]
[Allocation of Losses
If, after the initial undercollateralization has been eliminated, the total
outstanding principal amount of any group of certificates' component parts as
of the end of the immediately preceding month exceeds the total principal
balance of the mortgage loans in the related pool, then the principal balance
of the component that is lowest in seniority and still outstanding will be
reduced (and you will receive no payments in respect of such reduction) until
the total outstanding principal amount of those component parts equals the
total principal balance of those mortgage loans.]
Mortgage Loans
On the closing date, which is expected to be on or about [[ _____ ]], the
assets of the trust will consist of [__ pools of] mortgage loans with a total
principal balance of approximately $[ ____ ]. 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 held by the trust will not be insured or guaranteed by any
government agency.]
See "Description of the Mortgage Pools" in this prospectus supplement and "The
Trust Fund - The Mortgage loans" in the prospectus for a general description of
the mortgage loans.
[Pre-Funding Arrangement
To be provided as applicable.]
Optional Termination
The [ _______________ ] has the right to purchase all the mortgage loans on any
distribution date when the total principal balance of those mortgage loans
declines to [ ]%, or less, of their initial total principal balance. If the [
____________ ] does not exercise its option to purchase the mortgage loans in
the related pool, [ _______ ] may purchase them. [If the mortgage loans in any
pool are purchased, certificateholders will be paid accrued interest on the
certificates' component parts that relate to that pool and principal equal to
the outstanding principal balance of those component parts.]
See "Description of the Certificates - Optional Purchase of Mortgage Loans;
Termination of the Trust" in this prospectus supplement for a description of
the purchase price to be paid for the mortgage loans.
Tax Status
[REMIC or FASIT status to be described as applicable.]
See "Material Federal Income Tax Consequences" in this prospectus supplement
and in the prospectus for additional information concerning the application of
federal income tax laws to the certificates.
ERISA Considerations
[To be provided as applicable.]
See "ERISA Considerations" in this prospectus supplement and in the prospectus
for a more complete discussion of these issues.
Legal Investment Considerations
The class [ ] certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 for as long
as they have the ratings described below.
There are other restrictions on the ability of certain types of investors to
purchase the certificates that prospective investors should consider which are
discussed in greater detail in this prospectus supplement and in the
accompanying prospectus.
See "Legal Investment Matters" in this prospectus supplement and in the
prospectus.
Ratings of the Certificates
The certificates will initially have the following ratings from [ ]:
Class Rating
- ----- ------
<PAGE>
Risk Factors
o The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
Potential Inadequacy
of Credit Enhancement.............. [The certificates are not insured by any
financial guaranty insurance policy. The
overcollateralization and subordination
features described in the summary are
intended to enhance the likelihood that
certificateholders will receive regular
payments of interest and principal.
Overcollateralization. In order to
eliminate the initial
undercollateralization and create
overcollateralization for each pool of
mortgage loans, it will be necessary that
those mortgage loans generate more
interest than is needed to pay interest on
the certificates and fees and expenses of
the trust fund. We expect that the
mortgage loans will generate more interest
than is needed to pay those amounts, at
least during certain periods, because the
weighted average of the interest rates on
the mortgage loans is higher than the
weighted average of the interest rates on
the certificates. We can not assure you,
however, that enough excess interest will
be generated to eliminate the initial
undercollateralization or to reach the
overcollateralization levels required by
the rating agencies for each pool. The
following factors will affect the amount
of excess interest that the mortgage loans
will generate:
o Prepayments. Every time a mortgage
loan is prepaid, total excess
interest after the date of prepayment
will be reduced because that mortgage
loan will no longer be outstanding
and generating interest. The effect
on your certificates of this
reduction will be influenced by the
number of prepaid loans and the
characteristics of the prepaid loans.
Prepayment of a disproportionately
high number of high interest rate
mortgage loans would have a greater
negative effect on future excess
interest.
o Defaults. The rate of defaults on the
mortgage loans may turn out to be
higher than expected. Defaulted
mortgage loans may be liquidated ,
and liquidated mortgage loans will no
longer be outstanding and generating
interest.
o Level of LIBOR. If LIBOR
increases, more money will needed to
pay interest to certificateholders,
so less money will be available as
excess interest.
See "Description of the Certificates --
Credit Enhancement--
Overcollateralization" in this prospectus
supplement.
Subordination. If subordination is
insufficient to absorb losses in excess of
any overcollateralization that is created,
then certificateholders will incur losses
and may never receive all of their
principal payments. You should consider
the following:
o if you buy a Class [ ] certificate
and losses in any month exceed excess
interest and any
overcollateralization that has been
created, the principal balance of
your certificate will be reduced
proportionately with the balances of
the other Class [ ] certificates by
the amount of that excess;
o if you buy a Class [ ] certificate
and losses in any month exceed excess
interest and any
overcollateralization that has been
created plus the total balance of the
Class [ ] certificates, the principal
balance of your certificate will be
reduced proportionately with the
balances of the other Class [ ]
certificates by the amount of that
excess; and
o if you buy a Class [ ] certificate
and losses in any month exceed excess
interest and any
overcollateralization that has been
created plus the total balance of the
Class [ ] and Class [ ] certificates,
the principal balance of your
certificate will be reduced
proportionately with the balances of
the other Class [ ] certificates by
the amount of that excess.
If, after overcollateralization is created
in the required amount, the mortgage loans
generate interest in excess of the amount
needed to pay interest and principal on
the certificates and fees and expenses of
the trust fund, the excess interest will
be used to pay you and other
certificateholders the amount of any
reduction in the principal balances of the
certificates by application of losses.
These payments will be made in order of
seniority. We cannot assure you, however,
that any excess interest will be generated
and, in any event, no interest will be
paid to you on the amount by which your
principal balance was reduced because of
the application of losses.
See "Description of the Certificates --
Credit Enhancement -- Subordination" and
"-- Application of Losses" in this
prospectus supplement.]
Unpredictability and
Effect of Prepayments.............. Borrowers may prepay their mortgage loans
in whole or in part at any time. A
prepayment of a mortgage loan will usually
result in a prepayment on the
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.
Approximately [[ _____ ]]% of the mortgage
loans impose a penalty for prepayments
during periods that range from [[one to
five]] years after origination, which may
discourage these borrowers from prepaying
their mortgage loans during the penalty
period.
Geographic Concentration
of Mortgage Loans.................. [Approximately [[ ]]% of the mortgage
loans expected to be in the trust fund on
the closing date are secured by property
in California. Delinquencies, defaults and
losses on the mortgage loans may be higher
than if fewer of the mortgage loans were
concentrated in one state because the
following conditions in California will
have a disproportionate impact on the
mortgage loans in general:
o weak economic conditions in
California, which may or may not
affect real property values, may
affect the ability of borrowers to
repay their loans on time;
o property in California may be more
susceptible than homes located in
other parts of the country to certain
types of uninsurable hazards, such as
earthquakes, as well as floods,
wildfires, mudslides and other
natural disasters; and
o declines in the California
residential real estate market may
reduce the values of properties
located in California, which would
result in an increase in the
loan-to-value ratios.
Natural disasters affect regions of the
United States from time to time, which may
result in increased losses on mortgage
loans in those regions, or in insurance
payments that will be counted as
prepayments of those mortgage loans.
Recently, several southeastern states have
been affected by hurricane and storm
activity. Approximately [ ]% of the
mortgage loans expected to be in the trust
fund on the closing date are secured by
property in mortgage loans [Alabama,
Florida, Georgia and Mississippi], and
some of those properties may have been
damaged or destroyed by these storms.]
[Additional risk factors to be provided as applicable.]
Description of the Certificates
General
[The Series [ ____ ] Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following Classes: (i) the Class [ ] Certificates (the
"Senior Certificates"), (ii) the Class [ ] Certificates (the "Subordinate
Certificates"), and (iii) the Class R Certificate (the "Residual Certificate").
The Senior Certificates and the Class [ ] Certificates are sometimes referred
to herein as the "Offered Certificates". Only the Offered Certificates are
offered hereby.]
Each Class of Offered Certificates will have the respective approximate initial
aggregate Certificate Principal Amount (a "Class Certificate Principal Amount")
set forth or described on the cover page hereof.
The Certificates will evidence the entire beneficial ownership interest in the
Trust Fund. The Trust Fund will generally consist of (i) the Mortgage Loans,
(ii) such assets as from time to time are identified as deposited in respect of
the Mortgage Loans in the Certificate Account, (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure and (iv) any
applicable insurance policies and all proceeds thereof.
Distributions on the Offered Certificates will be made on each Distribution
Date, commencing [ ], to Certificateholders of record on the immediately
preceding Record Date. The "Record Date" for each Distribution Date will be the
close of business on the last Business Day of the month immediately preceding
the month in which such Distribution Date occurs. A "Business Day" is generally
any day other than a Saturday or Sunday or a day on which banks in [New York or
[ ]] are closed.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (i) by check mailed to the address of such
Certificateholder as it appears on the books of the Trustee, or (ii) at the
request, submitted to the Trustee in writing at least five business days prior
to the related Record Date, of any holder of an Offered Certificate having an
initial Certificate Principal Amount of not less than $2,500,000, by wire
transfer (at the expense of such holder) in immediately available funds;
provided, that the final distribution in respect of any Offered Certificate
will be made only upon presentation and surrender of such Certificate at the
Corporate Trust Office of the Trustee. See "-- The Trustee" herein.
The Class [ _____ ] Certificates (the "Book-Entry Certificates") will be
issued, maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC") and its Participants. The Book-Entry Certificates will be
issued in minimum denominations of $[ _____ ] and integral multiples of $[ ] in
excess thereof.
The Book-Entry Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC. The Depositor has been informed
by DTC that DTC's nominee will be Cede & Co. ("Cede"). No person acquiring an
interest in a Book-Entry Certificate (each, a "Beneficial Owner") will be
entitled to receive a certificate representing such person's interest (a
"Definitive Certificate"), except as set forth below under "-- Book-Entry
Registration of Class [ _____ ] Certificates -- Definitive Certificates."
Unless and until Definitive Certificates are issued for the Book-Entry
Certificates under the limited circumstances described herein, all references
to actions by Certificateholders with respect to the Book-Entry Certificates
shall refer to actions taken by DTC upon instructions from its Participants,
and all references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the Book-Entry Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures.
Each Class of Class [ _______ ] Certificates will be issued in fully
registered, certificated form in minimum denominations of $[ _______ ] and
integral multiplies of $[ ______ ] in excess thereof (plus, in the case of one
Certificate of each such Class, any remaining amount). The Class R Certificate
will be issued as a single Certificate and maintained in fully registered
certificated form.
Book-Entry Registration of Class [ ] Certificates
General. Beneficial Owners that are not brokerage firms, banks, thrift
institutions or other financial intermediaries (each, a "Financial
Intermediary") or participating firms that act as agent for a Financial
Intermediary (each, a "Participant") but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Book-Entry
Certificates may do so only through Participants and Financial Intermediaries.
In addition, Beneficial Owners will receive all distributions of principal and
interest on the related Book-Entry Certificates through DTC and its
Participants. Accordingly, Beneficial Owners may experience delays in their
receipt of payments. Unless and until Definitive Certificates are issued for
the related Book-Entry Certificates, it is anticipated that the only registered
Certificateholder of such Book-Entry Certificates will be Cede, as nominee of
DTC. Beneficial Owners will not be recognized by the Depositor or the Trustee
as Certificateholders, as such term is used in the Trust Agreement, and
Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Financial Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal and interest on such Book-Entry Certificates.
Participants and Financial Intermediaries with which Beneficial Owners have
accounts with respect to such Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess physical certificates evidencing their interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Financial Intermediaries, will receive
distributions and will be able to transfer their interests in the Book-Entry
Certificates.
Neither the Depositor nor the Trustee or any of their respective affiliates
will have any liability for any actions taken by DTC or its nominee including,
without limitation, actions with respect to any aspect of the records relating
to or payments made on account of beneficial ownership interests in the
Book-Entry Certificates held by Cede, as nominee for DTC, or with respect to
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Certificates. Definitive Certificates will be issued to Beneficial
Owners or their nominees, respectively, rather than to DTC or its nominee, only
under the limited conditions set forth in the Prospectus under "Description of
the Certificates -- Book-Entry Registration."
Upon the occurrence of an event described in the Prospectus under "--
Book-Entry Registration," the Trustee (through DTC) is required to notify
Participants who have ownership of Book-Entry Certificates as indicated on the
records of DTC of the availability of Definitive Certificates for their
Book-Entry Certificates. Upon surrender by DTC of the Definitive Certificates
representing the Book-Entry Certificates and upon receipt of instructions from
DTC for re-registration, the Trustee will re-issue the Book-Entry Certificates
as Definitive Certificates in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders under the Trust
Agreement.
For additional information regarding DTC and the Book-Entry Certificates, see
"Description of the Certificates -- Book-Entry Registration" in the Prospectus.
Priority of Distributions
Distributions will be made on each Distribution Date from the Available
Distribution Amount (as defined herein) in the following order of priority:
[To be provided as applicable]
Distributions of Interest
The amount of interest distributable on each Distribution Date in respect of
each Class of Certificates will equal [To be provided as applicable] Interest
will accrue on the Certificates on the basis of a 360-day year consisting of
twelve 30-day months. Such interest will be distributed, except to the extent
described below, from the Available Distribution Amount on each Distribution
Date. Accrued Certificate Interest not distributed on the Distribution Date
related to the Interest Accrual Period in which it accrued, other than any Net
Prepayment Interest Shortfalls, will be an "Interest Shortfall." Interest will
not accrue on Interest Shortfalls.
The "Certificate Interest Rate" for each Class of Offered Certificates will be
the per annum rate described on the cover page hereof. The "Net Mortgage Rate"
for any Mortgage Loan at any time equals the Mortgage Rate thereof minus the
sum of the [Servicing Fee Rate and the Trustee Fee Rate] (each as defined
herein). The "Certificate Principal Amount" of any Certificate as of any
Distribution Date will equal such Certificate Principal Amount as of the
Closing Date as reduced by all amounts previously distributed on such
Certificate in respect of principal and the principal portion of any Realized
Losses previously allocated to such Certificate. The "Interest Accrual Period"
for each Class of Certificates will be the calendar month immediately preceding
the month of such Distribution Date.
Prepayment Interest Shortfalls. When a principal prepayment in full is made on
a Mortgage Loan, the mortgagor is charged interest only to the date of such
prepayment, instead of for a full month. Partial Principal Prepayments are
applied as of the first day of the month of receipt, with a resulting reduction
in interest payable for the month during which the partial prepayment is made.
Full or partial prepayments (or proceeds of other liquidations) received during
any Prepayment Period (as defined herein) will be distributed to
Certificateholders on the Distribution Date following such Prepayment Period.
To the extent that, as a result of a full or partial prepayment, a mortgagor is
not required to pay a full month's interest on the amount prepaid, a shortfall
in the amount available to make payment of interest on the Certificates could
result. The difference between one month's interest at the Mortgage Rate
(giving effect to any Relief Act Reduction), as reduced by the Servicing Fee
Rate, on a Mortgage Loan as to which a voluntary prepayment has been made and
the amount of interest actually received in connection with such prepayment is
a "Prepayment Interest Shortfall." With respect to prepayments in full or in
part, the Servicer is obligated to reduce the aggregate of its Servicing Fees
(as defined herein) for the related Distribution Date to fund any Prepayment
Interest Shortfalls. See "Servicing of the Mortgage Loans -- Prepayment
Interest Shortfalls." Any Prepayment Interest Shortfalls not funded by the
Servicer ("Net Prepayment Interest Shortfalls") will be allocated among all
Classes of Certificates, pro rata in proportion to Accrued Certificate Interest
thereon for the related Distribution Date.
Distributions of Principal
Distributions of principal on the Certificates will be made on each
Distribution Date as described herein in an aggregate amount equal to the
Principal Distribution Amount, to the extent of the Available Distribution
Amount available to make such payments in accordance with the priorities set
forth under "-- Priority of Distributions" above. The "Principal Distribution
Amount" for any Distribution Date will, equal [To be provided as applicable]
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is generally equal to the principal balance thereof as of the
Cut-off Date, reduced by (i) the principal portion of all Scheduled Payments
due on or before such date of determination, whether or not received, and (ii)
all amounts allocable to unscheduled principal payments received on or before
the last day of the Prepayment Period preceding such date of determination.
The "Class Percentage" for each Class of Certificates for each Distribution
Date will be equal to the percentage obtained by dividing the Class Certificate
Principal Amount of such Class immediately prior to such Distribution Date by
the aggregate Certificate Principal Amount of all Certificates immediately
prior to such date. The "Subordinate Class Percentage" for each Class of
Subordinated Certificates for each Distribution Date will be equal to the
percentage obtained by dividing the Class Certificate Principal Amount of such
Class immediately prior to such Distribution Date by the aggregate Certificate
Principal Amount of all Subordinate Certificates immediately prior to such
date.
The "Senior Percentage" for any Distribution Date is the percentage equivalent
of a fraction, the numerator of which is the aggregate Certificate Principal
Amount of the Senior Certificates immediately prior to such date and the
denominator of which is the aggregate Certificate Principal Amount of all
Classes of Certificates immediately prior to such date. The "Subordinate
Percentage" for any Distribution Date will be the difference between 100% and
the Senior Percentage for such date.
[The "Senior Prepayment Percentage" for any Distribution Date will be [To be
provided as applicable]]
[The Subordinate Prepayment Percentage for any Distribution Date will be the
difference between 100% and the Senior Prepayment Percentage for such date.]
[The "Subordinate Principal Distribution Amount" for each Distribution Date is
equal to the sum of:
[To be provided as applicable]
Available Distribution Amount
The "Due Period" related to each Distribution Date commences on the second day
of the month preceding the month in which such Distribution Date occurs and
ends on the first day of the month in which such Distribution Date occurs. For
each Distribution Date, the "Collection Period" ends on the Business Day
immediately preceding the related Remittance Date. The "Prepayment Period" is
the calendar month preceding the month in which the related Distribution Date
occurs. The "Remittance Date" is the [ ] day (or if such [ ] day is not a
Business Day, the next preceding Business Day) of the month in which the
related Distribution Date occurs.
The "Available Distribution Amount" on each Distribution Date, as more fully
described in the Trust Agreement, will generally equal the sum of the following
amounts:
(1) the total amount of all cash received by the Servicer with respect to the
related Collection Period (or the related Prepayment Period, in the case of
Principal Prepayments) and remitted to the Trustee on the related Remittance
Date, which includes (i) Scheduled Payments due on the Mortgage Loans during
the related Due Period and collected prior to the related Remittance Date or
advanced by the Servicer (or the Trustee), (ii) payments allocable to principal
on the Mortgage Loans (other than Liquidation Proceeds and Insurance Proceeds)
to the extent received in advance of their scheduled due dates and applied to
reduce the principal balance of the Mortgage Loans ("Principal Prepayments"),
together with accrued interest thereon, if any, identified as having been
received on the Mortgage Loans during the Prepayment Period, plus any amounts
paid by the Servicer in respect of Prepayment Interest Shortfalls, in each case
for such Distribution Date, (iii) the proceeds of any repurchase of a Mortgage
Loan required to be repurchased by the Servicer, the Seller or any other party
as a result of a breach of a representation or warranty, and (iv) Insurance
Proceeds and Liquidation Proceeds, minus:
(a) all Scheduled Payments of principal and interest collected but due on a
date subsequent to the related Due Period;
(b) all Principal Prepayments received or identified after the related
Prepayment Period (together with any interest payments, if any, received with
such prepayments to the extent that they represent (in accordance with the
Servicer's usual application of funds) the payment of interest accrued on the
related Mortgage Loans for the period subsequent to the related Prepayment
Period);
(c) Liquidation Proceeds and Insurance Proceeds received after the related
Prepayment Period with respect to the Mortgage Loans; and
(d) all amounts due or reimbursable to the Trustee pursuant to the Trust
Agreement and to the Servicer pursuant to the Sale and Servicing Agreement; and
(2) any other payments made by the Servicer, the Seller or the Depositor with
respect to such Distribution Date.
"Insurance Proceeds" means all proceeds of applicable insurance policies, to
the extent such proceeds are not applied to the restoration of the Mortgaged
Property or released to the Mortgagor.
"Liquidation Proceeds" means all amounts net of unreimbursed expenses incurred
in connection with liquidation or foreclosure and unreimbursed Advances, if
any, received and retained in connection with the liquidation of defaulted
Mortgage Loans, by foreclosure or otherwise, together with any net proceeds
received on a monthly basis with respect to any properties acquired on behalf
of the Certificateholders by foreclosure or deed in lieu of foreclosure.
[The Residual Certificate
In addition to distributions of principal and interest, the holder of the
Residual Certificate will be entitled to receive, generally, (i) the amount, if
any, of any Available Distribution Amount remaining on any Distribution Date
after distributions of principal and interest are made on the regular interests
and on the Residual Certificate on such date and (ii) the proceeds, if any, of
the assets of the Trust Fund remaining after the principal amounts of the
regular interests and of the Residual Certificate have been reduced to zero. It
is generally not anticipated that any material assets will be remaining for
such distributions at any such time. See "Certain Federal Income Tax
Considerations" herein and in the accompanying Prospectus.]
[Allocation of Realized Losses
On each Distribution Date, subject to the limitations set forth below with
respect to Special Hazard Losses, Fraud Losses and Bankruptcy Losses, the
principal portion of any Realized Losses on the Mortgage Loans will be
allocated to and reduce the Class Certificate Principal Amounts of, first, the
Class [ _________ ] Certificates, in that order, until the Class Certificate
Principal Amount of each such Class of Certificates has been reduced to zero,
before being allocated to the Senior Certificates, pro rata in proportion to,
and in reduction of, their respective outstanding Class Certificate Principal
Amounts.
The Class Certificate Principal Amount of the lowest ranking Class of
Subordinate Certificates then outstanding will also be reduced by the amount,
if any, by which the aggregate Certificate Principal Amount of all the
Certificates on any Distribution Date (after giving effect to distributions of
principal and allocation of Realized Losses on such date) exceeds the aggregate
Scheduled Principal Balance of the Mortgage Loans for the related Distribution
Date.
In general, a "Realized Loss" means (i) with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of such
Mortgage Loan plus all accrued and unpaid interest thereon and any related
expenses exceeds the amount of Liquidation Proceeds received in respect of such
Mortgage Loan (net of related expenses), or (ii) the amount by which, in the
event of bankruptcy of a borrower, a bankruptcy court reduces the secured debt
to the value of the related Mortgaged Property (a "Deficient Valuation").
"Bankruptcy Losses" are losses that are incurred as a result of Deficient
Valuations and any reduction, in a bankruptcy proceeding, of the amount of the
Scheduled Payment on a Mortgage Loan other than as a result of a Deficient
Valuation (a "Debt Service Reduction"). The principal portion of Debt Service
Reductions will not be allocated in reduction of the Class Certificate
Principal Balances of any Classes of Certificates. "Special Hazard Losses" are,
in general terms, Realized Losses arising out of certain direct physical loss
or damage to Mortgaged Properties that are not covered by a standard hazard
insurance policy, but excluding, among other things, faulty design or
workmanship and normal wear and tear. "Fraud Losses" are losses sustained on
Liquidated Mortgage Loans by reason of a default arising from fraud, dishonesty
or misrepresentations. In determining whether a Realized Loss is a loss of
principal or of interest, Liquidation Proceeds and other recoveries on a
Mortgage Loan will be applied first to outstanding expenses incurred with
respect to such Mortgage Loan, then to accrued, unpaid interest, and finally to
principal.
A "Liquidated Mortgage Loan" generally is a defaulted Mortgage Loan as to which
such Mortgage Loan or related REO Property has been disposed of and all amounts
expected to be recovered in respect of such Mortgage Loan have been received by
the Servicer on behalf of the Trust.
[The principal portion of Special Hazard Losses, Bankruptcy Losses (other than
Debt Service Reductions), and Fraud Losses that exceed the "Special Hazard Loss
Limit," "Bankruptcy Loss Limit," and "Fraud Loss Limit," respectively ("Excess
Losses"), will be allocated pro rata among all Classes of Certificates in
proportion to, and in reduction of, their respective outstanding Class
Certificate Principal Amounts. The "Special Hazard Loss Limit" will initially
be approximately $[ _____ ], the "Bankruptcy Loss Limit" will initially be
approximately $[ ], and the "Fraud Loss Limit" will initially be approximately
$[ _____ ].]
[The Special Hazard Loss Limit will be reduced, from time to time, to an amount
equal on any Distribution Date to the lesser of (a) the greatest of (i) [ ]% of
the aggregate of the Scheduled Principal Balances of the Mortgage Loans, (ii) [
_____ ] the Scheduled Principal Balance of the Mortgage Loan having the highest
Scheduled Principal Balance and (iii) the aggregate Scheduled Principal Balance
of the Mortgage Loans secured by Mortgaged Properties located in the single
California postal zip code area having the highest aggregate Scheduled
Principal Balance of any such zip code area and (b) the Special Hazard Loss
Limit as of the Closing Date less the amount, if any, of Special Hazard Losses
incurred since the Closing Date.]
[The Bankruptcy Loss Limit will be reduced, from time to time, by the amount of
Bankruptcy Losses allocated to the Certificates. The date on which the
Bankruptcy Loss Limit has been reduced to zero is the "Bankruptcy Coverage
Termination Date."]
[The Fraud Loss Limit will be reduced, from time to time, by the amount of
Fraud Losses allocated to the Certificates. In addition, on each anniversary of
the Cut-off Date, the Fraud Loss Limit will be reduced as follows: (a) on the
first and second anniversaries of the Cut-off Date, to an amount equal to the
excess of [ ]% of the aggregate Scheduled Principal Balance of the Mortgage
Loans as of the Cut-off Date (the "Cut-off Date Balance") over the cumulative
amount of Fraud Losses allocated to the Certificates, (b) on the third and
fourth anniversaries of the Cut-off Date, to an amount equal to the excess of [
]% of the Cut-off Date Balance over the cumulative amount of Fraud Losses
allocated to the Certificates and (c) on the fifth anniversary of the Cut-off
Date, to zero.]
In the event that any amount is recovered in respect of principal of a
Liquidated Mortgage Loan after any related Realized Loss has been allocated as
described herein, such amount will be distributed to the Certificates still
outstanding, pro rata on the basis of any Realized Losses previously allocated
thereto. It is generally not anticipated that any such amounts will be
recovered.]
Final Scheduled Distribution Date
Scheduled distributions on the Mortgage Loans included in the Trust Fund,
assuming no defaults or losses that are not covered by the credit support
described elsewhere herein, will be sufficient to make timely distributions of
interest on the Offered Certificates and to reduce the aggregate Certificate
Principal Amount of the Offered Certificates to zero not later than [ ]. The
actual final Distribution Date for the Offered Certificates may be earlier or
later, and could be substantially earlier, than their Final Scheduled
Distribution Date.
The Final Scheduled Distribution Date for the Offered Certificates has been
determined by adding one month to the month of scheduled maturity of the latest
maturing Mortgage Loan.
Optional Termination of the Trust
On any Distribution Date after the date on which the aggregate Scheduled
Principal Balance of the Mortgage Loans is less than [ ]% of the Cut-off Date
Balance, the [ ____________ ] (subject to the terms of the Trust Agreement)
will have the option to cause the sale of the Mortgage Loans, any REO Property
and any other property remaining in the Trust Fund and thereby effect the
termination of the Trust Fund and the retirement of the Certificates. The
purchase price of the Mortgage Loans must be equal to the sum of (a) 100% of
the aggregate outstanding principal balance of such Mortgage Loans, plus
accrued interest thereon at the applicable Mortgage Rate and (b) the fair
market value of all other property remaining in the Trust Fund. Such
liquidation will be treated as a prepayment in full of the Mortgage Loans for
purposes of distributions to Certificateholders. Upon such payment in full to
Certificateholders of such amounts, the Trust Fund will be terminated.
The Trustee
[ _________ ], will be the Trustee under the Trust Agreement. The Trustee will
be paid a monthly fee equal to [ ]% per annum (the "Trustee Fee Rate") of the
aggregate principal balance of the Mortgage Loans (the "Trustee Fee"), and will
also be entitled to retain, as additional compensation, any interest or other
income earned on funds deposited in the Certificate Account pending
distribution to Certificateholders. The Trustee's "Corporate Trust Office" for
purposes of the presentment and surrender of the Offered Certificates for the
final distribution thereon and for all other purposes is located at [ _____ ],
[ ____________ ], Attention: [ ______ ]), or such address as the Trustee may
designate from time to time by notice to the Certificateholders, the Depositor
and the Servicer.
Description of the Mortgage Pool
General
The Mortgage Pool will consist of approximately [ ] conventional, adjustable
rate, monthly payment Mortgage Loans with original terms to maturity of not
more than [ ] years. The Mortgage Loans had an aggregate Scheduled Principal
Balance as of the Cut-off Date of approximately $[ ]. The Mortgage Loans were
originated or acquired by [Originator] generally in accordance with the
underwriting criteria then in effect as described herein. Interest on the
Mortgage Loans accrues on the basis of a 360-day year consisting of twelve
30-day months. Wherever reference is made herein to a percentage of some or all
of the Mortgage Loans, such percentage is determined (unless otherwise
specified) on the basis of the aggregate Scheduled Principal Balance of such
Mortgage Loans as of the Cut-off Date.
Each Mortgage Loan bears interest at a Mortgage Rate that is [To be provided as
applicable]
The weighted average Loan-to-Value Ratio of the Mortgage Loans at origination
was approximately [ ]%, and no Mortgage Loan had a Loan-to-Value Ratio at
origination exceeding [ ]%. None of the Mortgaged Loans are covered by primary
mortgage insurance. The "Loan-to-Value Ratio" of a Mortgage Loan at any time is
the ratio of the principal balance of such Mortgage Loan at the date of
determination to (a) in the case of a purchase, the lesser of the sale price of
the Mortgaged Property and its appraised value at the time of sale, or (b) in
the case of a refinance or modification, the appraised value of the Mortgaged
Property at the time of such refinance or modification.
The Mortgage Loans are expected to have the following approximate aggregate
characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Trust Fund as a result of
incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate. In addition, a limited number of other mortgage loans
may be included in the Trust Fund prior to the issuance of the Offered
Certificates.
Number of Mortgage Loans............ [ ]
Aggregate Scheduled Principal
Balance........................... $[ ]
Mortgage Rates:
Weighted Average.................. [ ]%
Range............................. [ ]% to [ ]%
Weighted Average Remaining Term to
Maturity (in [ ]
months)...........................
The Scheduled Principal Balances of the Mortgage Loans ranged from $[
] to $[ ]. The Mortgage Loans had an average Scheduled Principal
Balance of approximately $[ ----- ].
No more than approximately [ ]% of the Mortgage Loans were secured by
Mortgaged Properties located in any one zip code area.
[None of the Mortgage Loans are subject to negative amortization.]
The following tables set forth, as of the Cut-off Date, the number, aggregate
Scheduled Principal Balance and percentage of the Mortgage Loans having the
stated characteristics shown in the tables in each range.
(The sum of the amounts of the aggregate Scheduled Principal Balances and the
percentages in the following tables may not equal the totals due to rounding.)
Original Loan-to-Value Ratios
ercentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Original Loan-to- Number of Principal Scheduled
Value Ratios* (%) Mortgage Loans Balance Principal Balance
--------------------- -------------- ---------- -----------------
$ %
Total...... $ 100.00%
==== ============ ======
The weighted average original Loan-to-Value Ratio is approximately [ ]%.
Mortgage Rates
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Mortgage Rates (%) Mortgage Loans Balance Principal Balance
- ----------------------- -------------- ---------- -----------------
$ %
Total........ $ 100.00%
==== ========== ======
The weighted average Mortgage Rate is approximately [ ]%.
Original Terms to Maturity
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Range of Maturities (months) Mortgage Loans Balance Principal Balance
---------------------------- -------------- ---------- -----------------
$
Total........ $ 100.00%
==== ========== ======
The weighted average original term to maturity is approximately [ _____ ]
months.
Remaining Terms to Maturity
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Range of Maturities (months) Mortgage Loans Balance Principal Balance
- ----------------------------- -------------- ---------- -----------------
$ %
Total........ $ 100.00%
==== ========== ======
The weighted average remaining term to maturity is approximately [ ] months.
Geographic Distribution
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
State Mortgage Loans Balance Principal Balance
----------- -------------- ---------- -----------------
........... $ %
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
Total $ 100.00%
==== ========== ======
Scheduled Principal Balances
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Scheduled Principal Balances ($) Mortgage Loans Balance Principal Balance
- -------------------------------- --------------- ---------- -----------------
$ %
Total.......... $ 100.00%
==== ========== ======
</TABLE>
The average Scheduled Principal Balance is approximately $[ ].
Property Types
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Property Type Mortgage Loans Balance Principal Balance
- -------------------- -------------- ---------- -----------------
$ %
Total..... $ 100.00%
==== ========== ======
Loan Purposes
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Loan Purposes Mortgage Loans Balance Principal Balance
--------------- -------------- ---------- -----------------
$ %
Total $ 100.00%
========== ======
Occupancy Status
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Occupancy Status Mortgage Loans Balance Principal Balance
---------------- -------------- ---------- -----------------
$ %
Total $ 100.00%
==== ========== ======
[The Index [if applicable]
The Index used in the determination of the Mortgage Rates of the Mortgage
Loans will be [ ], as published by [ _____________ ](the "Index").
<PAGE>
Additional Information
The description in this Prospectus Supplement of the Trust Fund and the
Mortgaged Properties is based upon the Trust Fund as constituted at the close
of business on the Cut-off Date, as adjusted for Scheduled Payments due on or
before such date. A Current Report on Form 8-K will be available to purchasers
of the Offered Certificates and will be filed, together with the Trust
Agreement and the Sale and Servicing Agreement, with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. In the event Mortgage Loans are removed from or added to
the Trust Fund as set forth under "Description of The Mortgage Pool," such
removal or addition will be noted in the Current Report on Form 8-K.
[The Servicer]
General
The information set forth in this section has been provided by [Servicer], and
neither the Depositor nor the Underwriter makes any representations or
warranties as to the accuracy or completeness of such information.
Delinquency Experience
Generally, when a mortgagor fails to make a required payment on a mortgage loan
and does not cure the deficiency promptly, the loan is classified as
delinquent. In many cases, delinquencies are cured promptly, but if not,
foreclosure proceedings are generally commenced. The procedural steps necessary
for foreclosure vary from state to state, but generally, if the loan is not
reinstated within certain periods specified by the relevant mortgage loan
documents, the property securing the loan can be acquired by the lender. If a
mortgagee takes title to the mortgaged property through foreclosure but the
mortgaged property had a value lower than the outstanding amount of the debt,
the law in certain states permits such mortgagee to obtain a deficiency
judgment in the amount of the difference. The laws of certain other states
restrict or prohibit such deficiency judgments. It is anticipated that, in
those states where deficiency judgments are permitted, the Servicer will
determine on a case-by-case basis whether to seek such a judgment.
Loan Servicing Activities. As of [ ], [Servicer]'s total loan portfolio
contained loans with an aggregate outstanding principal balance of
approximately $[ ] billion. The loans contained in [the Servicer]'s servicing
portfolio include fixed and adjustable rate loans, first and second lien loans
and one- to four family loans, and therefore may differ significantly from the
Mortgage Loans. There can be no assurance, and no representation is made, that
the delinquency experience with respect to the Mortgage Loans will be similar
to that reflected in the table below, nor is any representation made as to the
rate at which losses may be experienced on liquidation of defaulted Mortgage
Loans.
The following table sets forth certain information regarding the delinquency
experience of [Originator] with respect to all mortgage loans serviced by it.
The indicated periods of delinquency are based on the number of days past due
on a contractual basis.
Mortgage Loan Portfolio(1)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
[Date] [Date]
------------------------------ -----------------------------
Number Dollar Number Dollar
of Loans Amount Percent of Loans Amount Percent
--------- ------ ------ -------- ------- -------
Portfolio Principal
Balance......... $ 100.00% $ 100.00%
Delinquent Loans
30-59 days
delinquent........
60-89 days
delinquent........
90+ days
delinquent........
Non-accrual
Loans(2)..........
Total.............
Net Charge-offs...
REO...............
</TABLE>
- ----------
(1) Percentages in the table are rounded to the nearest 0.01%; dollar amounts
are rounded to the nearest dollar.
(2) In general, a "Non-accrual Loan" is a Mortgage Loan as to which (i)
payments are delinquent for a specified period (based on the principal balance
of such loan) or (ii) [the Servicer] determines that collection is in doubt.
The above delinquency statistics represent the recent experience of [the
Servicer]. There can be no assurance, however, that the delinquency experience
on the Mortgage Loans will be comparable. In addition, the foregoing statistics
include mortgage loans with a variety of payment and other characteristics that
may not correspond to those of the Mortgage Loans. The actual loss and
delinquency experience on the Mortgage Loans will depend on, among other
things, the value of the real estate and cooperative shares securing such
Mortgage Loans and the ability of the mortgagors to make required payments. If
[the Servicer] undertakes litigation or retains outside attorneys or
investigators the cost thereof will be borne by the Trust Fund or the
Certificateholders. [the Servicer] will not be required to advance funds for
the conduct of such litigation or the hiring of such outside attorneys or
investigators, if it reasonably believes that such advances will not be
promptly reimbursed.
The likelihood that mortgagors will become delinquent in the payment of their
mortgage loans and the rate of any subsequent foreclosures may be affected by a
number of factors related to borrowers' personal circumstances, including, for
example, unemployment or change in employment (or in the case of self- employed
mortgagors or mortgagors relying on commission income, fluctuations in income),
marital separation and a mortgagor's equity in the related mortgaged property.
In addition, delinquency and foreclosure experience may be sensitive to adverse
economic conditions, either nationally or regionally, may exhibit seasonal
variations and may be influenced by the level of interest rates and servicing
decisions on the applicable mortgage loans. Regional economic conditions
(including declining real estate values) may particularly affect delinquency
and foreclosure experience on mortgage loans to the extent that mortgaged
properties are concentrated in certain geographic areas.
Servicing of the Mortgage Loans
The Mortgage Loans will be serviced by [Servicer], as Servicer (the
"Servicer"), generally in accordance with the procedures as described in the
Prospectus under the heading "Servicing of Loans," pursuant to an agreement
(the "Sale and Servicing Agreement") between the Seller and [Servicer]. The
Seller's rights under the Sale and Servicing Agreement will be assigned to the
Trustee. References in the Prospectus to the "Master Servicer" generally
include the Servicer, and references in the Prospectus to the "Servicer"
generally include the Subservicer. Although the Servicer will employ the
Subservicer to directly service the Mortgage Loans, the Servicer will remain
liable for its servicing obligations under the Sale and Servicing Agreement as
if the Servicer were directly servicing the Mortgage Loan.
[The Subservicer [if applicable]
The Mortgage Loans will be subserviced by a designated servicing staff of the
[ ] . The Subservicer is [ ]. The Subservicer originates, purchases and
services residential and commercial mortgage loans through approximately [ ]
offices throughout the United States.]
[Insurance Coverage
The Servicer is required to obtain and thereafter maintain in effect a bond,
corporate guaranty or similar form of insurance coverage (which may provide
blanket coverage), or any combination thereof, insuring against loss occasioned
by the errors and omissions of the Servicer's officers and employees.]
Servicing Compensation and Payment of Expenses
The Servicer will be paid a monthly fee with respect to each Mortgage Loan
equal to [ ]% per annum (the "Servicing Fee Rate") of the principal balance of
such Mortgage Loan (the "Servicing Fee"). The Servicing Fee is subject to
reduction with respect to any Distribution Date as described below under "--
Prepayment Interest Shortfalls."
The Servicer will be entitled to receive, as additional compensation, any
interest or other income earned on funds it has deposited in a custodial
account pending remittance to the Trustee, as well as certain customary fees
and charges paid by borrowers. The Servicer will also 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 between Due Dates, the
mortgagor pays interest on the amount prepaid only from the last scheduled Due
Date to the date of prepayment. Partial principal prepayments are applied as of
the first day of the month of receipt, with a resulting reduction in interest
payable for the month during which the partial prepayment is made. Any
Prepayment Interest Shortfall is required to be paid by the Servicer, to the
extent that such amount does not exceed the aggregate of the Servicing Fees on
the Mortgage Loans serviced by it for the applicable Distribution Date, through
a reduction in the amount of such Servicing Fees. See "Description of the
Certificates -- Distribution of Interest" herein.
Advances
The Servicer will be obligated to make Advances with respect to delinquent
payments of principal of and interest on the Mortgage Loans, adjusted to the
related Net Mortgage Rate, to the extent that such Advances, in its judgment,
are recoverable from future payments and collections, insurance payments or
proceeds of liquidation of a Mortgage Loan. The Trustee will be obligated to
make any such Advances if the Servicer fails to do so, to the extent provided
in the Trust Agreement. The Servicer or the Trustee, as applicable, will be
entitled to recover any Advances made by it with respect to a Mortgage Loan out
of late payments thereon or out of related Liquidation Proceeds and Insurance
Proceeds or, if such amounts are insufficient, from collections on other
Mortgage Loans. Such reimbursements may result in Realized Losses.
The purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. No party
will be required to make any Advance with respect to a reduction in the amount
of the monthly payment on a Mortgage Loan due to a reduction made by a
bankruptcy court in the amount of a Scheduled Payment owed by a mortgagor or a
Relief Act Reduction.
Collection of Taxes, Assessments and Similar Items
The Servicer generally does not require that escrow accounts be maintained for
the collection of hazard insurance premiums and real estate taxes with respect
to the Mortgage Loans. The Servicer will make advances with respect to
delinquencies in required escrow payments by the related mortgagors.
Certain Rights Related to Foreclosure
[Certain rights in connection with foreclosure of defaulted Mortgage Loans may
be granted to the holders of the Class [ ] Certificates and, when such
Certificates are no longer outstanding, to the holders of the Class [ ]
Certificates. Such rights would include the right to delay foreclosure until a
Mortgage Loan has been delinquent for six months, provided that upon election
to delay foreclosure such holder establishes a reserve fund for the benefit of
the Trust Fund in an amount equal to 125% of the greater of the Scheduled
Principal Balance of such Mortgage Loan and the appraised value of the related
Mortgaged Property, plus three months' accrued interest on such Mortgage Loan.
Any exercise of such right to delay foreclosure could affect the amount
recovered upon liquidation of the related Mortgaged Property.]
Trust Agreement
General
The Certificates will be issued pursuant to a Trust Agreement (the "Trust
Agreement") dated as of [ ] 1, [ ] between the Depositor 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 Depositor will
provide to a prospective or actual Certificateholder, without charge, on
written request, a copy (without exhibits) of the Trust Agreement. Requests
should be addressed to Contract Finance, Lehman Brothers, 3 World Financial
Center, New York, New York 10285.
Assignment of Mortgage Loans
The Mortgage Loans will be assigned to the Trustee, together with all principal
and interest due on the Mortgage Loans after the Cut-off Date. The Trustee
will, concurrently with such assignment, authenticate and deliver the
Certificates. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the Trust Agreement which will specify with respect to each
Mortgage Loan, among other things, the original principal amount and the
outstanding principal amount as of the close of business on the Cut-off Date,
the Mortgage Rate, the Scheduled Payment, and the maturity date.
As to each Mortgage Loan, the following documents are generally required to be
delivered to the Trustee (or its custodian) in accordance with the Trust
Agreement: (i) the related original Mortgage Note endorsed without recourse to
the Trustee or in blank, (ii) the original Mortgage with evidence of recording
indicated thereon, (or, if such original recorded Mortgage has not yet been
returned by the recording office, a copy thereof certified to be a true and
complete copy of such Mortgage sent for recording) or, in the case of a
Cooperative Loan, the original security agreement and related documents, (iii)
an original assignment of the Mortgage to the Trustee or in blank in recordable
form or, in the case of a Cooperative Loan, an original assignment of security
agreement and related documents, (iv) the policies of title insurance issued
with respect to each Mortgage Loan (other than a Cooperative Loan), and (v) the
originals of any assumption, modification, extension or guaranty agreements.
Where necessary to protect the interest of the Trustee in the Mortgage Loans,
the assignments to the Trustee in connection with the Mortgage Loans are
required to be submitted for recording promptly after the Closing Date. A
custodian acting on behalf of the Seller will have reviewed each mortgage file
prior to the Closing Date and, if any such document is found to be defective in
any material respect and [Originator] does not cure such defect within 90 days
of notice thereof, [Originator] will obligated to purchase the related Mortgage
Loan from the Trust Fund (or, in certain circumstances, substitute another
mortgage loan).
Pursuant to the terms of the Sale and Servicing Agreement, [Originator] has
made, as of the date of such agreement (the "Sale Date"), to the Seller certain
representations and warranties concerning the Mortgage Loans that 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 the Sale and
Servicing Agreement will be assigned to the Trustee for the benefit of
Certificateholders. Within 90 days following its discovery of a breach of any
representation or warranty that materially or adversely affects the interests
of Certificateholders in a Mortgage Loan, or receipt of notice of such breach,
[Originator] will be obligated to 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, substitute another
mortgage loan).
The Seller will make to the Depositor (and the Depositor will assign its rights
thereunder to the Trustee for the benefit of Certificateholders) only certain
limited representations and warranties intended to address certain material
conditions that may arise with respect to the Mortgage Loans between the 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 [Originator] as described above, the Seller will be obligated in the
same manner as [Originator], as described above.
To the extent that any such Mortgage Loan is not repurchased by [Originator] or
the Seller and a Realized Loss occurs on such Mortgage Loan, holders of Offered
Certificates, in particular the Subordinate Certificates, may incur a loss.
Voting Rights
Voting rights under the Trust Agreement will be allocated among the
Certificates in proportion to their respective Certificate Principal Amounts.
Yield, Prepayment and Weighted Average Life
General
The yields to maturity on the Offered Certificates will be affected by the rate
of principal payments on the Mortgage Loans (including prepayments, which may
include amounts received by virtue of repurchase, condemnation, insurance or
foreclosure), the extent to which Mortgage Loans bearing higher Mortgage Rates
prepay at a more rapid rate than Mortgage Loans with lower rates, the amount
and timing of mortgagor delinquencies and defaults resulting in Realized
Losses, the purchase price for the Certificates and other factors.
Principal prepayments may be influenced by a variety of economic, geographic,
demographic, social, tax, legal and other factors. In general, if prevailing
interest rates fall below the interest rates on the Mortgage Loans, the
Mortgage Loans are likely to be subject to a higher rate of prepayment than if
prevailing rates remain at or above the interest rates on such Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on such
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include changes in
borrowers' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions. The Mortgage Loans may
generally be prepaid at any time without penalty and generally have due-on-sale
clauses.
The rate of principal payments on the Mortgage Loans will be affected by the
amortization schedules of the Mortgage Loans, the rate and timing of
prepayments thereon by the mortgagors, liquidations of defaulted Mortgage Loans
and repurchases of Mortgage Loans due to certain breaches of representations
and warranties or defective documentation. The weighted average remaining term
to maturity of the Mortgage Loans is approximately [ ] months; such seasoning
may influence the performance of the Mortgage Loans. The timing of changes in
the rate of prepayments, liquidations and repurchases of the 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. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
"Yield, Prepayment and Maturity Considerations"), no assurance can be given as
to such rate or the timing of principal payments on the Offered Certificates.
In general, the earlier a prepayment of principal of the related Mortgage
Loans, the greater the effect on an investor's yield to maturity. The effect on
an investor's yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Certificates may not be offset by a subsequent
like decrease (or increase) in the rate of principal payments.
Prepayments, liquidations and repurchases of the Mortgage Loans will result in
distributions to holders of the Offered Certificates of principal amounts that
would otherwise be distributed over the remaining terms of the Mortgage Loans.
The rate of defaults on the Mortgage Loans will also affect the rate and timing
of principal payments on the Mortgage Loans. In general, defaults on mortgage
loans are expected to occur with greater frequency in their early years.
As described herein, approximately [ ]% of the Mortgage Loans 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. The Mortgage Loans were generally originated (or
modified) with Mortgage Rates for their first three years below the rate that
would have resulted if based on the Index and related Gross Margin. The
Mortgage Loans may experience lower rates of prepayment during the period that
the loans bear interest at such lower Mortgage Rates. Notwithstanding the
foregoing, no assurance can be given as to any prepayment rate on the Mortgage
Loans.
The Certificate Interest Rate for the Offered Certificates at any time will be
equal to the weighted average of the Net Mortgage Rates of the Mortgage Loans.
To the extent that Mortgage Loans bearing relatively high Mortgage Rates
experience a more rapid rate of prepayment than Mortgage Loans with relatively
low rates, the Certificate Interest Rate for the Offered Certificates will be
reduced; such reduction could be substantial.
If the purchaser of a Certificate offered at a discount from its initial
principal amount calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is faster than that actually
experienced on the related Mortgage Loans, the actual yield to maturity may be
lower than that so calculated. Conversely, if the purchaser of a Certificate
offered at a premium calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield to maturity may be
lower than that so calculated.
The yields on the Offered Certificates will be reduced to the extent that Net
Prepayment Interest Shortfalls are experienced on the Mortgage Loans.
The effective yields to holders of the Offered Certificates will be lower than
the yields otherwise produced by the Certificate Interest Rate and the related
purchase price because monthly distributions will not be made to such holders
until the [ ] day (or the immediately following Business Day if such [ ____ ]
day is not a Business Day) of the month following the month in which interest
accrues on such Certificate (without any additional distribution of interest or
earnings thereon in respect of such delay.
[Subordination of the Class [ ]Certificates
On each Distribution Date, the holders of any higher ranking Class of
Certificates will have a preferential right to receive amounts of interest and
principal due to them on such Distribution Date before any distributions are
made on any Class of Certificates subordinate to such Class. As a result, the
yields to maturity and the aggregate amount of distributions on the Class [ ]
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 will be allocated first to the lower
ranking Classes of Subordinate Certificates, then to the Class [ ]
Certificates, then to the Class [ ] Certificates, and then to the Class [ ]
Certificates, in that order, until the Class Certificate Principal Amount of
each such Class has been reduced to zero, before any such Realized Losses will
be allocated to the Senior Certificates. The interest portion of Realized
Losses (other than Excess Losses) will reduce the amount available for
distribution on the related Distribution Date to the lowest ranking Class or
Classes of Certificates 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 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 [ ]
prepayment standard or model. The model used in this Prospectus Supplement for
the Mortgage Loans ("[ ]") represents [ ]. [ ] does not purport to be either a
historical description of the prepayment experience of any pool of mortgage
loans or a prediction of the anticipated rate of prepayment of any mortgage
loans, including the Mortgage Loans to be included in the Trust Fund.
The following tables were prepared based on the actual characteristics of the
Mortgage Loans expected to be included in the Mortgage Pool and the following
additional assumptions (the "Modeling Assumptions"): (i) the initial Class
Certificate Principal Amounts and the Certificate Interest Rate are as
indicated on the cover of this Prospectus Supplement; (ii) each Scheduled
Payment of principal and/or interest is timely received every month on the
first day of each month commencing in [ ]; (iii) principal prepayments are
received in full on the last day of each month commencing in [ ] and there are
no Net Prepayment Interest Shortfalls; (iv) there are no defaults or
delinquencies on the Mortgage Loans; (v) there are no repurchases or
substitutions of the Mortgage Loans; (vi) there is no optional termination of
the Trust Fund and (vii) the Certificates are issued on [ _____ ].
The actual characteristics of the Mortgage Loans may, and the performance of
the Mortgage Loans will, differ from the assumptions used in constructing the
tables set forth below, which are hypothetical in nature and are provided only
to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is not expected that the Mortgage
Loans will prepay at a constant rate until maturity, that all of the Mortgage
Loans will prepay at the same rate or that there will be no defaults or
delinquencies on the Mortgage Loans. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the tables at the various percentages of [ ]
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will cause the percentages of initial Class
Certificate Principal Amounts outstanding over time and the weighted average
lives of the Offered Certificates to differ (which difference could be
material) from the corresponding information in the tables for each indicated
percentage of [ ].
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class Certificate Principal Amounts of the
Offered Certificates that would be outstanding after each of the Distribution
Dates shown at various percentages of [ ].
<PAGE>
Percentage of Initial Class Certificate Principal Amount of the
Offered Certificates Outstanding at the Following Percentages of [ ]
Class [ ] Certificates
Distribution Date % % % % % % %
------------------------- ------ ------ ----- ----- ------ ----- ----
Initial Percentage....... 100% 100% 100% 100% 100% 100% 100%
Weighted Average Life in
Years**..................
- ----------
* Indicates a value between 0.0% and 0.5%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the Class Certificate Principal
Amount by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the aggregate of the net reductions of Class Certificate
Principal Amount described in (i) above.
<PAGE>
Material Federal Income Tax Considerations
General
An election will be made to treat the Trust Fund as a REMIC for federal income
tax purposes. In the opinion of Brown & Wood LLP, assuming compliance with all
provisions of the Trust Agreement, for federal income tax purposes the Trust
Fund will qualify as a REMIC pursuant to Section 860D of the Internal Revenue
Code of 1986, as amended (the "Code"), the Offered Certificates other than the
Class R Certificate will be considered to be "regular interests" in the REMIC
within the meaning of the Code, and the Class R Certificate will be considered
to be the sole class of "residual interest" in the REMIC within the meaning of
the Code. See "Certain Federal Income Tax Considerations" in the Prospectus.
Although the matter is not free from doubt, the Depositor intends to report
stated interest on the Offered Certificates as "qualified stated interest."
The Offered Certificates may be issued with original issue discount for federal
income tax purposes. See "Certain Federal Income Tax Considerations -- Taxation
of Regular Interest Certificates -- Interest and Acquisition Discount" in the
Prospectus. The prepayment assumption that will be used in determining the rate
of accrual of original issue discount, market discount and premium, if any, for
federal income tax purposes will be a rate equal to [ ]% [ ]. No representation
is made that the Mortgage Loans will prepay at these rates or at any other
rates. Original issue discount must be included in income as it accrues on a
constant yield method, regardless or whether a holder receives concurrently the
cash attributable to such original issue discount.
[Residual Certificates
Special tax considerations apply to an investment in Residual Certificates. In
certain circumstances, the method of taxation of Residual Certificates can
produce a significantly less favorable after-tax return for beneficial owners
of Residual Certificates than would be the case if (i) Residual Certificates
were taxable as debt instruments or (ii) no portion of the taxable income on a
Residual Certificate in each period were treated as "excess inclusion" income.
See "Certain Federal Income Tax Considerations -- Taxation of Holders of
Residual Interest Certificates" in the Prospectus.
Residual Certificates may not be transferred, sold, pledged or otherwise
assigned unless, prior to such transfer, the proposed transferee delivers to
the Trustee an affidavit certifying that such transferee is not a Disqualified
Organization and is not purchasing a Residual Certificate on behalf of a
Disqualified Organization and certifying as to such matters as may be necessary
to verify that no significant purpose of such transfer is to impede the
assessment or collection of tax, including the ability of such transferee to
pay applicable taxes. In addition, Residual Certificates may not be held by a
nominee. Each proposed transferee must also sign a transferee letter which, in
the case of a transfer to or from a Nonresident, generally would require
furnishing evidence that such transfer would be respected for federal income
tax purposes.]
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Considerations" in the Prospectus.
Legal Investment Considerations
The Senior Certificates and the Class [ ] 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. The Mortgage Loans will be acquired by the Depositor from the Seller in
a privately negotiated transaction.
Underwriting
Subject to the terms and conditions set forth in the underwriting agreement and
in a terms agreement (collectively, the "Underwriting Agreement") between the
Depositor and the Underwriter, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, all
of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will be
effected in each case from time to time in one or more negotiated transactions,
or otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect such transactions by selling the Certificates
to or through dealers, and such dealers may receive from the Underwriter, for
whom they act as agent, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Certificates may be deemed to
be an underwriter, and any discounts, commissions or concessions received by
them, and any profit on the resale of the Certificates purchased by them, may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended (the "Act"). The Underwriting Agreement provides that the
Depositor will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Act.
Lehman Brothers Inc. has entered into an agreement with the Depositor to
purchase the Class [ ] Certificates simultaneously with the purchase of the
Offered Certificates, subject to certain conditions.
Lehman Brothers Inc. is an affiliate of the Depositor.
ERISA Considerations
A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its legal advisors whether
the purchase or holding of Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or the Code. See "ERISA
Considerations" in the accompanying Prospectus.
Legal Matters
Certain legal matters with respect to the Certificates will be passed upon for
the Depositor and for the Underwriter by Brown & Wood LLP, Washington, D.C.
Ratings
It is a condition to the issuance of the Class [ ] Certificates that they be
rated "[ ]" by [ ]. It is a condition to the issuance of the Class [ ]
Certificates that they be rated "[ ]," "[ ]" and "[ ]," respectively, by [ ].
The rating of "AAA" is the highest rating that S&P and Fitch assign to
securities. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.
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 assigned to the Offered Certificates do not
represent any assessment of the likelihood or rate of principal prepayments.
The ratings do not address the possibility that the Offered Certificateholders
might suffer a lower than anticipated yield due to prepayments or may fail to
recoup their initial investments.
The security ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
<PAGE>
Glossary
Defined terms Page
- ------------- ----
<PAGE>
$[ ]
(Approximate)
Structured Asset
Securities Corporation
Mortgage Pass-Through Certificates
Series [ ]
[ ]
[Servicer/Master Servicer]
---------------
PROSPECTUS SUPPLEMENT
[ ]
---------------
LEHMAN BROTHERS
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, February [ ], 2000
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION
Depositor
Asset Trust Pass-Through Certificates
(Issuable in Series)
Consider carefully the The Trustee, on behalf of the Trust Fund:
risk factors beginning
on page[ ]of this o may periodically issue asset trust pass-through
prospectus. certificates in one or more series with one or
more classes; and
For a list of capitalized o will own -
terms used in this o mortgage loans or participation interests
prospectus, see the in mortgage loans, including manufactured
Glossary beginning on home loans;
page [ ]. o mortgage backed certificates insured or
guaranteed by FNMA, FHLMC or GNMA;
The certificates will o private mortgage backed certificates as
represent interest in described in this prospectus; payments due
the trust fund only and on those mortgage loans and mortgage
will not represent backed certificates;
interests in or o other property described in this
obligations of any other prospectus and the accompanying prospectus
entity. supplement; and
o may elect to have the assets of the trust fund
This prospectus may be characterized as a real estate mortgage investment
used to offer and sell conduit or financial asset securitization
any series of investment trust for tax purposes.
certificates only if
accompanied by the The Certificates:
prospectus supplement
for that series. o will represent interests in the trust fund and
will be paid only from the trust fund assets
described in this prospectus;
o may have one or more forms of credit
enhancement; and
o will be issued as part of a designated series
which may include one or more classes of
certificates and forms of credit enhancement.
The Certificateholders:
o 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 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 SEC nor any state securities commission has approved these
certificates 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 March [ ], 2000
<PAGE>
Important Notice about Information Presented in this
Prospectus and the Accompanying Prospectus Supplement
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus which
provides general information, some of which may not apply to a particular
series of certificates, including your certificates, and (b) the accompanying
prospectus supplement, which will describe the specific terms of your series of
certificates, including:
o the timing of interest and principal payments;
o information about the particular mortgage loans, mortgage backed
certificates and other assets in a trust fund;
o information about any credit enhancement provided for a class of
certificates;
o the ratings for each class of certificates; and o the method for
selling the certificates.
If the terms of a particular series of certificates vary between this
prospectus and the prospectus supplement, you should rely on the information in
the prospectus supplement.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information incorporated
by reference to other public filings made by the Depositor. We have not
authorized anyone to provide you with any other 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 or the accompanying
prospectus supplement is accurate as of any date other than the dates stated on
their respective covers.
We include cross references in this prospectus and the accompanying
prospectus supplement 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 supplement provide the pages on which
these captions are located.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Page
----
Summary of Terms.............................................................................7
Depositor............................................................................7
Certificates Offered.................................................................7
Distributions........................................................................8
The Trust Fund.......................................................................8
Mortgage Backed Securities...........................................................8
Mortgage Loans.......................................................................8
Guaranteed Investment Contracts and Other Agreements.................................9
Pre-Funding Account..................................................................9
Collection and Certificate Accounts..................................................9
Final Scheduled Distribution Date....................................................9
Optional Termination or Purchase of Certificates.....................................9
Trustee.............................................................................10
Servicing of Mortgage Loans.........................................................10
Credit Enhancement..................................................................10
Material Federal Income Tax Consequences............................................10
Legal Investment Considerations.....................................................11
Erisa Considerations................................................................11
Use of Proceeds.....................................................................11
Ratings.............................................................................11
Risk Factors................................................................................12
Limited Ability to Resell Certificates.............................................12
Adverse Effect of Prepayments on the Yield and Maturity of Certificates............12
Principal Prepayments Not Addressed by Ratings.....................................13
Description of the Certificates.............................................................17
General.............................................................................17
Distributions on the Certificates...................................................17
Optional Termination................................................................20
Optional Purchase of Certificates...................................................20
Other Purchases.....................................................................20
Book-Entry Registration.............................................................21
Yield, Prepayment and Maturity Considerations...............................................23
Payment Delays......................................................................23
Principal Prepayments...............................................................23
Timing of Reduction of Principal Amount.............................................23
Interest or Principal Weighted Certificates.........................................24
Final Scheduled Distribution Date...................................................24
Prepayments and Weighted Average Life...............................................24
Other Factors Affecting Weighted Average Life.......................................25
The Trust Funds.............................................................................27
General.............................................................................27
GNMA Certificates...................................................................28
FNMA Certificates...................................................................30
FHLMC Certificates..................................................................32
Private Mortgage-Backed Securities..................................................35
The Mortgage Loans..................................................................37
The Manufactured Home Loans.........................................................42
Pre-Funding Arrangements............................................................43
Collection Account and Certificate Account..........................................44
Other Funds or Accounts.............................................................45
Loan Underwriting Procedures and Standards..................................................46
Underwriting Standards..............................................................46
Loss Experience.....................................................................48
Representations and Warranties......................................................49
Substitution of Primary Assets......................................................50
Servicing of Loans..........................................................................51
General.............................................................................51
Collection Procedures; Escrow Accounts..............................................52
Deposits to and Withdrawals from the Collection Account.............................52
Servicing Accounts..................................................................54
Buy-Down Loans, GPM Loans and Other Subsidized Loans................................55
Advances and Limitations Thereon....................................................56
Maintenance of Insurance Policies and Other Servicing Procedures....................57
Presentation of Claims; Realization Upon Defaulted Loans............................60
Enforcement of Due-On-Sale Clauses..................................................61
Certain Rights Related to Foreclosure...............................................62
Servicing Compensation and Payment of Expenses......................................62
Evidence as to Compliance...........................................................63
Certain Matters Regarding the Master Servicer.......................................64
Credit Support..............................................................................65
General.............................................................................65
Subordinate Certificates; Subordination Reserve Fund................................66
Cross-Support Features..............................................................67
Insurance...........................................................................67
Letter of Credit....................................................................68
Certificate Guarantee Insurance.....................................................68
Reserve Funds.......................................................................68
Description of Mortgage and other Insurance.................................................69
Mortgage Insurance on the Loans.....................................................69
Hazard Insurance on the Loans.......................................................75
Bankruptcy Bond.....................................................................77
Repurchase Bond.....................................................................78
The Trust Agreements........................................................................78
Assignment of Primary Assets........................................................78
Repurchase and Substitution of Non-Conforming Loans.................................81
Reports To Certificateholders.......................................................83
Investment of Funds.................................................................84
Event of Default....................................................................85
Rights Upon Event of Default........................................................85
The Trustee.........................................................................86
Duties of the Trustee...............................................................87
Resignation of Trustee..............................................................87
Certificate Account.................................................................87
Expense Reserve Fund................................................................88
Amendment of Trust Agreement........................................................88
Voting Rights.......................................................................89
List of Certificateholders..........................................................89
REMIC or FASIT Administrator........................................................89
Termination.........................................................................89
Certain Legal Aspects of Loans..............................................................90
Mortgages...........................................................................90
Junior Mortgages; Rights of Senior Mortgages........................................91
Cooperative Loans...................................................................92
Foreclosure on Mortgages............................................................95
Realizing Upon Cooperative Loan Security............................................96
Rights of Redemption................................................................97
Anti-Deficiency Legislation and Other Limitations on Lenders........................98
Soldiers' and Sailors' Civil Relief Act of 1940....................................100
Environmental Risks................................................................101
Due-on-Sale Clauses in Mortgage Loans..............................................102
Enforceability of Prepayment and Late Payment Fees.................................103
Equitable Limitations on Remedies..................................................103
Applicability of Usury Laws........................................................104
Adjustable Interest Rate Loans.....................................................104
Manufactured Home Loans............................................................105
Material Federal Income Tax Considerations.................................................108
General............................................................................108
Characterization of Certificates...................................................109
Qualification as a REMIC...........................................................109
Qualification as a FASIT...........................................................111
Taxation of Regular Interest Certificates..........................................112
Sale or Exchange of Regular Interest Certificates..................................118
Taxation of the REMIC..............................................................118
Taxation of Holders of Residual Interest Certificates..............................120
Restrictions on Ownership and Transfer of REMIC Residual Interest Certificates.....122
REMIC Expenses.....................................................................123
Administrative Matters.............................................................123
Taxation of Holders of FASIT High-Yield Interests..................................124
Taxation of Holders of FASIT Ownership Interests...................................124
Tax Status as a Grantor Trust......................................................125
Tax Treatment of Foreign Investors.................................................130
State Tax Considerations...................................................................132
Erisa Considerations.......................................................................132
Legal Investment Considerations............................................................136
Legal Matters..............................................................................137
The Depositor..............................................................................138
Use of Proceeds............................................................................138
Plan of Distribution.......................................................................138
Additional Information.....................................................................139
Incorporation of Certain Documents by Reference............................................140
Reports to Certificateholders..............................................................140
Glossary...................................................................................141
</TABLE>
<PAGE>
Summary of Terms
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the certificates, you should carefully read this entire document and
the accompanying prospectus supplement.
o This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding, but it is qualified by the
full description of these calculations, cash flows and other information
in this prospectus and the accompanying prospectus supplement.
<PAGE>
Depositor
Structured Asset Securities Corporation, a limited purpose Delaware corporation
organized primarily for the purpose of acquiring assets for each trust fund.
See "The Depositor."
Certificates Offered
The Depositor will establish separate trust funds, each of which will issue a
series of asset trust pass-through certificates. The certificates of each
series will evidence beneficial interests in the trust fund or in a segregated
pool of trust fund assets.
Each series of certificates may be divided into one or more classes. The
related prospectus supplement will describe the certificates in detail.
The certificates of each series will be entitled to payment only from the
assets of the related trust fund.
The certificates of any class of any series may be:
o subordinated in right to receive payments and subject to allocation of
losses in favor or one or more other classes of certificates of such
series,
o entitled to receive payments:
o allocable only to principal, only to interest or to any combination
of principal and interest,
o allocable to prepayments of principal throughout the life of such
certificates or only during specified periods,
o only after the occurrence of specified events, or
o in accordance with a specified schedule or formula or on the basis of
payments, on specified portions of the mortgage assets.
In the case of certificates entitled to receive payments allocable to interest,
such certificates may receive:
o interest at a specified annual interest rate, which may be fixed, variable
or adjustable and may differ from the interest rate at which other classes
of certificates of such series are entitled to receive interest, and
o such payments only after the occurrence of specified events with interest
accruing until such events occur, in each case as specified in the related
prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
certificates of a series will not be guaranteed by any governmental agency or
instrumentality or any other person or entity.
The Depositor, a seller or one of their affiliates may retain or hold for sale
from time to time one or more classes of certificates.
See "Description of the Certificates."
Distributions
Each prospectus supplement will specify:
o when payments will be made to the certificates
o the amount of each payment allocable to principal and interest; and
o how the amounts distributed will be determined.
See "Description of the Certificates -- Allocation of Distributions."
The Trust Fund
The trust fund for a series will consist of one or a combination of the assets
listed below, a collection account and certificate account, and may include
certain insurance policies and other various forms of credit support to be
specified in the related prospectus supplement.
See "The Trust Funds -- Collection Account and Certificate Account," "Credit
Support," and "Description of Mortgage and Other Insurance."
The primary assets for a series of certificates may consist of any combination
of the following:
Mortgage Backed Securities
o securities insured or guaranteed by FNMA, FHLMC or GNMA; and
o mortgage backed debt or equity securities that are not guaranteed or
insured by the United States or an agency or instrumentality of the United
States.
Mortgage Loans
o Single family loans: mortgage loans secured by liens on one- to
four-family residential and mixed use properties, or participation
interests in such loans;
o Cooperative loans: loans secured by security interests in or similar liens
on shares in private, non-profit cooperative housing corporations and on
the related proprietary leases or occupancy agreements, or participation
interests in such loans;
o Condominium loans: loans secured by a mortgage on a condominium unit,
together with the condominium unit's interest in the common elements, or
participation interests in such loans;
o Multifamily loans: mortgage loans secured by liens on residential and
mixed use properties with five or more dwelling units, including buildings
owned by cooperatives, or participation interests in such loans; and
o Manufactured home loans: manufactured housing conditional sales contracts
and installment loan agreements, or participation interests in such loans.
All liens may be first, second or more-junior liens.
All or a portion of the mortgage loans in a mortgage pool may be insured by the
FHA and may be partially guaranteed by the VA, if so specified in the related
prospectus supplement.
The mortgaged properties may be located in any of the 50 states, the District
of Columbia and Commonwealth of Puerto Rico. The principal characteristics of
the mortgage loans included in a trust fund will be described in the related
prospectus supplement.
Guaranteed Investment Contracts and Other Agreements
o investment contracts or reinvestment agreements pursuant to which money
will be held in one or more funds or accounts on behalf of a series of
certificates and invested at a specified rate.
Pre-Funding Account
A trust may enter into a pre-funding arrangement with the Depositor for the
transfer of additional mortgage assets to the trust following the issuance of
the related certificates. If a pre-funding agreement is used, the trustee will
be required to deposit in a segregated pre-funding account a portion of the
proceeds of sale of the related certificates. Thereafter, the trustee will
acquire additional mortgage assets in exchange for money in the segregated
account pre-funding account.
The trustee will apply any proceeds remaining in the pre-funding account at the
end of a specified period, not to exceed three months, as a mandatory
prepayment of certificates as specified in the related prospectus supplement.
See "The Trust Funds -- Pre-Funding Arrangements."
Collection and Certificate Accounts
Payments on the assets in a trust fund will initially be remitted for deposit
in a collection account maintained by the trustee, servicer or master servicer.
Funds on deposit in the collection account will then be transferred to a
certificate account to be established with the trustee for the series of
certificates related to the trust fund. Certain amounts may be subtracted from
the amount deposited in the certificate account to cover servicing fees and
other amounts specified in the related prospectus supplement. The remaining
funds on deposit in the certificate account will be distributed by the trustee
to the certificateholders of a series as described in the related prospectus
supplement.
See "The Trust Funds-- Collection Account and Certificate Account."
Final Scheduled Distribution Date
The final scheduled distribution date for each class of a series will be set
forth in the related prospectus supplement and will be determined as described
in the related prospectus supplement. The final scheduled distribution date may
vary from the actual maturity date of the certificates of a series because the
actual maturity date will depend primarily upon the level of prepayments with
respect to the assets in the related trust fund and the applicable payment
priorities.
See "Risk Factors" and "Yield, Prepayment and Maturity Considerations."
Optional Termination or Purchase of Certificates
The certificates may be subject to early retirement or mandatory purchase.
See "Description of the Certificates-- Optional Termination" and "--Purchases."
Trustee
The trustee for each series of certificates will be identified in the related
prospectus supplement.
Servicing of Mortgage Loans
One or more servicers, which may include an affiliate of the Depositor, will
perform customary servicing functions for the mortgage loans included in each
trust fund. The servicer or servicers for a trust will be identified in the
related prospectus supplement.
A special servicer may be appointed to service, make certain decisions with
respect to, and take various actions with respect to delinquent or defaulted
mortgage loans or mortgage loans that are secured by mortgaged properties
acquired by foreclosure or by deed-in-lieu of foreclosure. The special servicer
for a series, if any, will be identified in the related prospectus supplement.
See "Servicing of Mortgage Loans."
Credit Enhancement
A trust may include, or the related certificates may be entitled to the
benefits of, certain ancillary or incidental assets intended to provide credit
enhancement for ultimate or timely distributions to the holders of such
certificates. These forms of credit enhancement may include reserve accounts,
insurance policies, guaranties, surety bonds, letters of credit, guaranteed
investment contracts, swap agreements, cap agreements and option agreements.
In addition, one or more classes of certificates of a series may be entitled to
the benefits of other credit enhancement arrangements, including subordination,
overcollateralization or cross support. The protection against losses or delays
afforded by any such assets or credit enhancement arrangements may be limited.
The specific forms of credit enhancement available for a trust fund or one or
more classes of certificates representing beneficial interests in such trust
fund will be described in the related prospectus supplement.
See "Credit Enhancement."
Material Federal Income Tax Consequences
The federal income tax consequences to the certificateholders will depend on,
among other factors, whether the related trust fund and/or specified portions
of the trust fund elect to be treated as "real estate mortgage investment
conduits" (each, a "REMIC") or "financial asset securitization investment
trusts" (each, a "FASIT") under the provisions of the Internal Revenue Code of
1986, as amended, or if the trust fund does not elect to be treated as a REMIC
or FASIT, whether the certificates are considered to be trust certificates,
partnership interests or debt instruments.
The prospectus supplement for each series of certificates will specify whether
the related trust fund will make a REMIC or FASIT election.
We recommend that you consult your tax advisors concerning the application of
federal income tax laws to your particular situation.
See "Material Federal Income Tax Consequences" herein and in the related
prospectus supplement.
Legal Investment Considerations
Some, but not all, of the certificates of a series may constitute
"mortgage-related securities" under the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") if they are rated in one of the two highest applicable
rating categories by at least one rating agency. Mortgage-related securities
will be "legal investments" for certain types of institutional investors to the
extent provided in SMMEA, subject, in each case, to state laws overriding SMMEA
and to any other regulations which may govern investments by such institutional
investors. Certificates that do not constitute "mortgage-related securities"
may not be legal investments to the same extent as mortgage-related securities
which will limit certain investors' ability to invest in, sell or otherwise
deal in such certificates.
See "Legal Investment Considerations" herein and in the related prospectus
supplement.
ERISA Considerations
Fiduciaries of employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended, or the Code, should carefully review whether
an investment in certificates could give rise to a transaction prohibited or
not otherwise permissible. Certain classes of certificates may not be offered
for sale or transfer to such plans.
See "ERISA Considerations" herein and in the related prospectus supplement.
Use of Proceeds
The Depositor will use the net proceeds from the sale of a series of
certificates for one or more purposes described in the prospectus supplement.
See "Use of Proceeds" herein and in the related prospectus supplement.
Ratings
Each class of certificates offered by this prospectus and the related
prospectus supplement will be rated in one of the four highest rating
categories by one or more nationally recognized statistical rating
organizations.
<PAGE>
Risk Factors
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth
under "Risk Factors" in the related prospectus supplement.
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.
Because the market value of the
certificates of each series will
fluctuate with changes in
prevailing rates of interest, the
sale of the certificates by a
certificateholder in any secondary
market that may develop may be at
a discount from par value or from
their purchase price.
Adverse Effect of Prepayments on the Yield
and Maturity of Certificates............... Prepayments, unless described
otherwise in the related
prospectus supplement, include:
o voluntary prepayments by the
obligors on the loans in a
trust fund, and
o liquidations on such loans due
to defaults and foreclosures.
The rate at which prepayments
occur on the loans underlying or
comprising the assets of a trust
fund will be affected by a variety
of factors, such as the level of
prevailing interest rates and
economic, demographic, tax,
social, legal and other factors.
Prepayments will affect the
average life and yield to
investors of each class of
certificates, and the extent to
which principal on any such class
is fully paid prior to its final
scheduled distribution date, if at
all. This is particularly true
where a series of certificates
includes an interest weighted
class offered at a significant
premium or a principal weighted
class offered at a substantial
discount. Yields on such classes
of certificates will be extremely
sensitive to prepayments on the
loans comprising or underlying the
assets for such series of
certificates.
o Where the amount of interest
allocated to an interest
weighted class is extremely
disproportionate to principal,
certificateholders purchasing
such certificates at a
significant premium could,
under some rapid prepayment
scenarios, fail to recover
their original investments.
o If the interest rate on
certificates of a series is
based upon a weighted average
of interest rates on the loans
comprising or underlying the
related trust fund assets,
interest on such certificates
may be paid or accrued in the
future at a rate lower than the
initial interest rate to the
extent that loans that bear
higher rates of interest are
prepaid more quickly than those
loans that bear lower rates of
interest.
See "Yield, Prepayment and
Maturity Considerations" herein.
Principal Prepayments Not Addressed
by Ratings................................. Ratings assigned to certificates
do not assess the likelihood of
principal prepayments on the loans
underlying or comprising assets of
the trust fund, or the degree to
which the rate of such prepayments
might differ from that originally
anticipated. Ratings reflect only
a rating agency's assessment of
the likelihood that timely
distributions will be made with
respect to the certificates rated
in accordance with the related
trust agreement. The rating
assigned to a certificate will not
address the possibility that
prepayment rates higher or lower
than anticipated by an investor
may cause that investor to
experience a lower than
anticipated yield, or that an
investor purchasing an interest
weighted certificate at a
significant premium might fail to
recoup his or her initial
investment.
See "Yield, Prepayment and
Maturity Considerations" herein.
Potential Inadequacy of Credit
Enhancement................................ The credit enhancement, if any, for
a series of certificates may be
limited in amount and may be
subject to periodic reduction in
accordance with a schedule or
formula. In addition, such credit
enhancement may provide only very
limited coverage as to certain
types of losses and may provide no
coverage as to certain other types
of losses. The trustee may be
permitted to reduce, terminate or
substitute all or a portion of the
credit enhancement for any series
of certificates to the extent
specified in the related
prospectus supplement.
See "Credit Enhancement."
Bankruptcy................................. The sellers and the Depositor
intend that the transfers of
assets to the Depositor and, in
turn, to the related trust fund
constitute sales rather than
pledges to secure indebtedness for
insolvency purposes. In the event
of the bankruptcy of a prior owner
of the assets, a trustee in
bankruptcy or a creditor of the
insolvent party could attempt to
recharacterize the sale of the
assets by the insolvent party as a
borrowing secured by a pledge of
assets. That position, if argued
or accepted by a court, could
result in delays in payment on the
certificates of the related
series. If such an attempt were
successful, holders of the related
certificates could suffer losses,
and could fail to fully recover
their initial investments.
Recent Origin of Certain Loan
Types...................................... Certain loan types that may be
included in the assets of a trust
fund such as GPM Loans, GEM Loans,
ARMs and Buy-Down Loans are of
relatively recent origin. As a
result, reliable prepayment, loss
and foreclosure statistics
relating to these loan types may
not be available and the rating
agencies may have difficulty in
estimating potential losses on
such loans. To the extent that
losses on these loans exceed the
levels estimated by the rating
agency rating the series of
certificates in determining the
required levels of
overcollateralization or other
credit support, the trust fund may
experience a loss. See "Loan
Underwriting Procedures and
Standards" and "Credit Support."
Greater Risks Involving Certain
Property Types............................. Loans made with respect to
multifamily property, manufactured
homes or cooperative dwellings may
entail risks of loss in the event
of delinquency and foreclosure or
repossession that are greater than
similar risks associated with
traditional single-family
property. To the extent losses on
such loans exceed levels estimated
by the rating agency in
determining required levels of
overcollateralization or other
credit support, the related trust
fund may experience a loss.
See "Servicing of Loans--
Maintenance of Insurance Policies
or Other Servicing Procedures" and
"Credit Support."
Limited Obligations and Assets of
the Depositor.............................. Unless otherwise set forth in the
prospectus supplement for a series
of certificates, the trust fund
for a series will be the only
available source of funds to make
distributions on the certificates
of such series. The only
obligations, if any, of the
Depositor with respect to the
certificates of any series will be
pursuant to certain
representations and warranties
made in the trust agreement for a
specific trust fund. The Depositor
does not have, and is not expected
in the future to have, any
significant assets to meet any
obligations to repurchase assets
that are the subject of a breach
of any representation or warranty.
If the Depositor were required to
repurchase a loan, its only source
of funds would be from funds
obtained from the enforcement of a
corresponding obligation, if any,
on the part of the originator or
seller of the loans, servicer or
master servicer, or from a reserve
fund established to provide funds
for such repurchases. If the
Depositor cannot enforce a
corresponding obligation or there
is no corresponding obligation to
repurchase a loan, then the trust
fund will bear the full risk of
holding such loan.
See "The Depositor" herein.
Limitations of FNMA and FHLMC
Guaranties................................. Although payments on FNMA and
FHLMC Certificates are guaranteed
by FNMA and FHLMC, respectively,
and FNMA and FHLMC are federally
chartered corporations, FNMA and
FHLMC guaranties are not backed by
the full faith and credit of the
United States. Neither the United
States nor any U.S. agency is
obligated to finance or otherwise
assist either FNMA or FHLMC in any
manner. So if the trust assets for
your certificates include FNMA and
FHLMC certificates, although these
certificates will be guaranteed by
the respective federally chartered
corporations, they will not be
backed by the full faith and
credit of the United States.
See "Additional Information" for
the availability of further
information regarding FNMA and
FHLMC.
ERISA Considerations....................... ERISA generally applies to
investments made by employee
benefit plans and transactions
involving the assets of such
plans. Due to the complexity of
regulations that govern these
plans, we recommend that
prospective investors subject to
ERISA consult their own counsel
regarding the consequences under
ERISA of acquiring, holding and
disposing of any certificates of
any series.
See "ERISA Considerations."
<PAGE>
Description of the Certificates
General
The Certificates will be issued in Series pursuant to separate Trust
Agreements between the Depositor and the Trustee for the related Series
identified in the related Prospectus Supplement. The following summaries
describe certain provisions common to each Series. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Trust Agreement and the Prospectus
Supplement relating to each Series. When particular provisions or terms used in
the Trust Agreement are referred to, such provisions or terms shall be as
specified in the Trust Agreement.
Each Series will consist of one or more Classes, one or more of which may
consist of Compound Interest Certificates, Floating Rate Certificates, Interest
Weighted Certificates, Principal Weighted Certificates, Planned Amortization
Certificates ("PACs") or such other Certificates as are described in the
related Prospectus Supplement. A Series may also include one or more Classes of
Subordinate Certificates. A Class of Subordinate Certificates will be offered
hereby or by any Prospectus Supplement only if rated by a Rating Agency in one
of its four highest applicable rating categories. If so specified in the
related Prospectus Supplement, the Primary Assets in a Trust Fund may be
divided into multiple Asset Groups.
Each Series will be issued in registered form, in the minimum original
principal amount or notional amount for Certificates of each Class specified in
the related Prospectus Supplement. The transfer of the Certificates may be
registered, and the Certificates may be exchanged, without the payment of any
service charge payable in connection with such registration of transfer or
exchange. If specified in the related Prospectus Supplement, one or more
Classes of a Series may be available in book-entry form only. See "--
Book-Entry Registration" herein.
Distributions on the Certificates
General. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Certificates will be
made on each Distribution Date to the extent of the "Available Distribution
Amount" as set forth in the related Prospectus Supplement.
Distributions of interest on Certificates that receive interest will be
made periodically at the intervals and at the Certificate Interest Rate
specified or, with respect to Floating Rate Certificates, determined in the
manner described in the related Prospectus Supplement. Interest on the
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless otherwise specified in the related Prospectus
Supplement. Distributions of principal on each class of the Certificates of a
Series will be made on a pro rata or random lot basis among all of the
Certificates of such Class, or otherwise, as specified in the related
Prospectus Supplement. Principal payments will be allocated to each Class of a
Series as specified in the related Prospectus Supplement.
If funds in the Certificate Account (together with any amounts transferred
from any Reserve Fund or applicable credit support) are insufficient to make
the full distribution to Certificateholders described above on any Distribution
Date, the funds available for distribution to the Certificateholders of each
Class will be distributed in accordance with their respective interests
therein, except that Subordinate Certificateholders, if any, will not, subject
to the limitations described in the related Prospectus Supplement, receive any
distributions until Senior Certificateholders receive the amount of present
distributions due them and the amount of distributions owed them which were not
timely distributed thereon and to which they are entitled (in each case
calculated as described in the related Prospectus Supplement). The difference
between the amount which the Certificateholders would have received if there
had been sufficient eligible funds available for distribution and the amount
actually distributed will be included in the calculation of the amount which
the Certificateholders are entitled to receive on the next Distribution Date.
Distributions of principal of and interest on Certificates of a Series
will be made by check mailed to Certificateholders of such Series registered as
such on the close of business on the record date specified in the related
Prospectus Supplement at their addresses appearing on the Certificate Register,
except that (a) distributions may be made by wire transfer (at the expense of
the Certificateholder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) the final
distribution in retirement of a Certificate will be made only upon presentation
and surrender of such Certificate at the corporate trust office of the Trustee
for such Series or such other office of the Trustee as specified in the
Prospectus Supplement. Notice of the final distribution on a Certificate will
be mailed to the Holder of such Certificate before the Distribution Date on
which such final distribution in retirement of the Certificate is expected to
be made. If specified in the related Prospectus Supplement, the Certificates of
a Series or certain Classes of a Series may be available only in book-entry
form. See "-- Book-Entry Registration" herein.
With respect to reports to be furnished to Certificateholders concerning a
distribution, see "The Trust Agreements -- Reports to Certificateholders".
Pass-Through Certificates Generally. With respect to a Series other than a
Multi-Class Series, distributions on the Certificates on each Distribution Date
will generally be allocated to each Certificate entitled thereto on the basis
of the undivided percentage interest (the "Percentage Interest") evidenced by
such Certificate in the Trust Fund or on the basis of their outstanding
principal amounts or notional amounts (subject to any subordination of the
rights of any Subordinate Classes to receive current distributions). See
"Subordinate Certificates" below as specified in the related Prospectus
Supplement.
If the Primary Assets for a Series have adjustable or variable interest
rates, then the Certificate Interest Rate of the Certificates of such Series
may also vary, due to changes in such rates and due to prepayments with respect
to Loans comprising or underlying the related Primary Assets. If the Primary
Assets for a Series have fixed interest rates, then the Certificate Interest
Rate on Certificates of the related Series may be fixed, or may vary, to the
extent prepayments cause changes in the weighted average interest rate or
pass-through rate of the Primary Assets. If the Primary Assets have lifetime or
periodic adjustment caps on the respective pass-through rates, then the
Certificate Interest Rate on the Certificates of the related Series may also
reflect such caps.
If so specified in the related Prospectus Supplement, a Series may include
one or more Classes of Interest Weighted Certificates, one or more Classes of
Principal Weighted Certificates, or both. Unless otherwise specified in the
Prospectus Supplement, payments received from the Primary Assets will be
allocated on the basis of the Percentage Interest of each Class in the
principal component of such distributions, the interest component of such
distributions, or both, and will be further allocated on a pro rata basis among
the Certificates within each Class. The method or formula for determining the
Percentage Interest of a Certificate will be set forth in the related
Prospectus Supplement.
Multi-Class Series. Unless otherwise specified in the Prospectus
Supplement, each Certificate of a Multi-Class Series will have a principal
amount or a notional amount and a specified Certificate Interest Rate (which
may be zero). Interest distributions on a Multi-Class Series will be made on
each Certificate entitled to an interest distribution on each Distribution Date
at the Certificate Interest Rate specified or, with respect to Floating Rate
Certificates, determined as described in the related Prospectus Supplement, to
the extent funds are available in the Certificate Account, subject to any
subordination of the rights of any Subordinate Class to receive current
distributions. See "Subordinate and Other Certificates" below and "Credit
Support".
Distributions of interest on a Class of Compound Interest Certificates
will commence only after the related Accretion Termination Date specified in
the related Prospectus Supplement. On each Distribution Date prior to and
including the Accretion Termination Date, interest on such Class of Compound
Interest Certificates will accrue and the amount of interest accrued on such
Distribution Date (the "Accrual Amount") will be added to the principal balance
thereof on the related Distribution Date. On each Distribution Date after the
Accretion Termination Date, interest distributions will be made on Classes of
Compound Interest Certificates on the basis of the current Compound Value of
such Class. The Compound Value of a Class of Compound Interest Certificates
equals the initial aggregate principal balance of the Class, plus accrued and
undistributed interest added to such Class through the immediately preceding
Distribution Date, less any principal distributions previously made in
reduction of the aggregate outstanding principal balance of such Class.
To the extent provided in the related Prospectus Supplement, a Series of
Multi-Class Certificates may include one or more Classes of Floating Rate
Certificates. The Certificate Interest Rate of a Floating Rate Certificate will
be a variable or adjustable rate, which may be subject to a Maximum Floating
Rate, Minimum Floating Rate, or both. For each Class of Floating Rate
Certificates, the related Prospectus Supplement will set forth the initial
Floating Rate (or the method of determining it), the Floating Rate Period, and
the formula, index, or other method by which the Floating Rate for each
Floating Rate Period will be determined.
To the extent provided in the related Prospectus Supplement, a Series of
Multi-Class Certificates may include one or more Classes of Planned
Amortization Certificates ("PACs"), Targeted Amortization Certificates ("TACs")
or other Certificates whose entitlement to distributions of principal is based
on a schedule of balances or amounts.
Distributions of principal will be allocated among the Classes of a
Multi-Class Series in the order of priority and amount specified in the related
Prospectus Supplement. The Principal Distribution Amount for a Multi-Class
Series on each Distribution Date will be as specified in the related Prospectus
Supplement.
Subordinate Certificates. One or more Classes of a Series may consist of
Subordinate Certificates. Subordinate Certificates may be included in a Series
to provide credit support as described herein under "Credit Support" in lieu of
or in addition to other forms of credit support. The extent of subordination of
a Class of Subordinate Certificates may be limited as described in the related
Prospectus Supplement. See "Credit Support". If the Primary Assets are divided
into separate Asset Groups, beneficial ownership of which is evidenced by
separate Classes of a Series, credit support may be provided by a cross-support
feature which requires that distributions be made to Senior Certificates
evidencing beneficial ownership of one Asset Group prior to making
distributions on Subordinate Certificates evidencing a beneficial ownership
interest in another Asset Group within the Trust Fund. Unless rated in one of
the four highest rating categories by at least one Rating Agency, Subordinate
Certificates will not be offered hereby or by the related Prospectus
Supplement.
Optional Termination
If so specified in the related Prospectus Supplement for a Series, the
Depositor, the Servicer or Master Servicer, or another entity designated in the
related Prospectus Supplement may, at its option, purchase or direct the sale
of a portion of the Primary Assets of a Trust Fund, or cause an early
termination of a Trust Fund by repurchasing all of the Primary Assets from such
Trust Fund or directing the sale of such Primary Assets, on or after a date
specified in the related Prospectus Supplement, or on or after such time as the
Aggregate Asset Principal Balance of the Primary Assets is less than a
specified percentage of the initial Aggregate Asset Principal Balance, or the
aggregate principal amount of the Certificates (or of certain Classes thereof)
is less than a specified percentage of their initial aggregate principal
amount, all as described in the related Prospectus Supplement. Such optional
termination will be in addition to terminations which may result from other
events. See "The Trust Agreements -- Deficiency Event" and "-- Termination".
Optional Purchase of Certificates
If so specified in the related Prospectus Supplement for a Series, one or
more Classes of the Certificates of such Series may be purchased, in whole or
in part, at the option of the Depositor, the Servicer or Master Servicer, or
another entity designated in the related Prospectus Supplement, at such times
and under the circumstances specified in such Prospectus Supplement. Notice of
any such purchase must be given by the Trustee prior to the optional purchase
date, as specified in the related Prospectus Supplement. The purchase price for
any Certificate so purchased will be set forth in the related Prospectus
Supplement.
Other Purchases
If so specified in the related Prospectus Supplement for a Series, any
Class of the Certificates of such Series may be subject to redemption, in whole
or in part, at the request of the holders of such Class or to mandatory
purchase by the Depositor, the Servicer or Master Servicer, or another entity
designated in the related Prospectus Supplement. Any such redemption at the
request of holders or mandatory purchase with respect to a Class of a Series of
the Certificates will be described in the related Prospectus Supplement and
will be on such terms and conditions as described therein.
The Depositor also may, at its option, obtain for any Series of the
Certificates, one or more guarantees from a company or companies acceptable to
the Rating Agencies. Such guarantees may provide for one or more of the
following for any Series of the Certificates: (i) call protection for any Class
of the Certificates of such Series; (ii) a guarantee of a certain prepayment
rate of some or all of the Loans underlying such Series; or (iii) certain other
guarantees, all as specified in the related Prospectus Supplement.
Book-Entry Registration
If so specified in the related Prospectus Supplement, the Certificates
will be issued in book-entry form in the minimum denominations specified in
such Prospectus Supplement and integral multiples thereof, and each Class will
be represented by a single Certificate registered in the name of the nominee of
the depository, The Depository Trust Company ("DTC"), a limited-purpose trust
company organized under the laws of the State of New York. If so specified in
the related Prospectus Supplement, no person acquiring an interest in the
Certificates (a "Certificateowner") will be entitled to receive a Certificate
representing such person's interest in the Certificates except in the event
that Definitive Certificates (as defined herein) are issued under the limited
circumstances set forth under "Definitive Certificates" below. Unless and until
Definitive Certificates are issued, it is anticipated that the only
Certificateholder of the Certificates will be Cede & Co., as nominee of DTC.
Certificateowners will not be "Certificateholders" or "Holders" under the Trust
Agreement, and Certificateowners will only be permitted to exercise the rights
of Certificateholders indirectly through DTC and its Participants.
DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is
available to entities that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participants").
Certificateowners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates may do
so only though Participants and Indirect Participants. Because DTC can only act
on behalf of Participants and Indirect Participants, the ability of a
Certificateowner to pledge such owner's Certificate to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Certificate, may be limited. In addition, under a book-entry format,
Certificateowners may experience some delay in their receipt of principal and
interest distributions with respect to the Certificates since such
distributions will be forwarded to DTC and DTC will then forward such
distributions to its Participants which in turn will forward them to Indirect
Participants or Certificateowners.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit principal and interest distributions and
distributions with respect to the Certificates. Participants and Indirect
Participants with which Certificateowners have accounts with respect to
Certificates similarly are required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective
Certificateowners. Accordingly, although Certificateowners will not possess
certificates, the Rules provide a mechanism by which Certificateowners will
receive distributions and will be able to transfer their interests.
The Depositor understands that DTC will take any action permitted to be
taken by a Certificateholder under the Trust Agreement only at the direction of
one or more Participants to whose account with DTC the Certificates are
credited. Additionally, the Depositor understands that DTC will take such
actions with respect to holders of a certain specified interest in the
Certificates or holders having a certain specified voting interest only at the
direction of and on behalf of Participants whose holdings represent that
specified interest or voting interest. DTC may take conflicting actions with
respect to other Holders of Certificates to the extent that such actions are
taken on behalf of Participants whose holdings represent that specified
interest or voting interest.
Unless otherwise specified in the related Prospectus Supplement, if
Certificates of a Series are issued initially in book-entry form only, the
Certificates will be issued in fully registered, certified form ("Definitive
Certificates") to Certificateowners, rather than to DTC, only if (i) DTC or the
Depositor advises the Trustee in writing that DTC is no longer willing or able
properly to discharge its responsibilities as depository with respect to the
Certificates, and the Depositor is unable to locate a qualified successor, (ii)
the Depositor, at its sole option, elects to terminate the book-entry system
through DTC, or (iii) after the occurrence of an Event of Default under the
Trust Agreement, Certificateowners representing a majority of the aggregate
outstanding principal amount of the Certificates advise DTC through
Participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interests of
Certificateowners.
Upon the occurrence of any of the events described in clauses (i), (ii) or
(iii) of the immediately preceding paragraph, DTC is required to notify all
Participants of the availability through DTC of Definitive Certificates. Upon
surrender by DTC of the certificates representing the Certificates and
instructions for registration the Trustee will issue all, but not less than all
of the remaining formerly DTC-held Certificates then outstanding in the form of
Definitive Certificates, and thereafter the Trustee and the Master Servicer
will recognize the holders of such Definitive Certificates as
Certificateholders under the Trust Agreement.
<PAGE>
Yield, Prepayment and Maturity Considerations
Payment Delays
With respect to any Series, a period of time will elapse between receipt
of payments or distributions on the Primary Assets and the Distribution Date on
which such payments or distributions are passed through to Certificateholders.
Such a delay will effectively reduce the yield that would otherwise be obtained
if payments or distributions were distributed on or near the date of receipt.
The related Prospectus Supplement will set forth an example of the timing of
receipts and the distribution thereof to Certificateholders so that the impact
of such a delay can be understood.
Principal Prepayments
With respect to a Series for which the Primary Assets consist of Loans or
participation interests therein, when a Loan prepays in full, the borrower will
generally be required to pay interest on the amount of prepayment only to the
prepayment date. In addition, the prepayment may not be required to be passed
through to Certificateholders until the month following receipt. The effect of
these provisions is to reduce the aggregate amount of interest which would
otherwise be available for distributions on the Certificates, thus effectively
reducing the yield that would be obtained if interest continued to accrue on
the Loan until the date on which the principal prepayment was scheduled to be
paid. To the extent specified in the related Prospectus Supplement, this effect
on yield may be mitigated by, among other things, an adjustment to the
servicing fee otherwise payable to the Master Servicer or Servicer with respect
to any such prepaid Loans. Further, if the Certificate Interest Rate or
Pass-Through Rate on Certificates of a Series is based upon a weighted average
of the interest rates on the Loans comprising or underlying the related Primary
Assets, interest on such Certificates may be paid or accrued in the future at a
rate lower than the initial interest rate to the extent that those of such
Loans which bear higher rates of interest initial are prepaid more quickly than
those of such Loans which bear lower rates of interest. See "Servicing of Loans
- -- Advances and Limitations Thereon".
Timing of Reduction of Principal Amount
A Multi-Class Series may provide that, for purposes of calculating
interest distributions, the principal amount of the Certificates is deemed
reduced as of a date prior to the Distribution Date on which principal thereon
is actually distributed. Consequently, the amount of interest accrued during
any Interest Accrual Period will be less than the amount that would have
accrued on the actual principal amount of the Certificates outstanding. The
effect of such provisions is to produce a lower yield on the Certificates than
would be obtained if interest were to accrue on the Certificates on the actual
unpaid principal amount of such Certificates to each Distribution Date. The
related Prospectus Supplement will specify the time at which the principal
amounts of the Certificates are determined or are deemed to reduce for purposes
of calculating interest distributions on Certificates of a Multi-Class Series.
Interest or Principal Weighted Certificates
If a Class of Certificates consists of Interest Weighted Certificates or
Principal Weighted Certificates, a lower rate of principal prepayments than
anticipated will negatively affect yield to investors in Principal Weighted
Certificates, and a higher rate of principal prepayments than anticipated will
negatively affect yield to investors in Interest Weighted Certificates. The
Prospectus Supplement for a Series including such Certificates will include a
table showing the effect of various levels of prepayment on yields on such
Certificates. Such tables will be intended to illustrate the sensitivity of
yields to various prepayment rates and will not be intended to predict, or
provide information which will enable investors to predict, yields or
prepayment rates.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date of each Class of any Multi-Class
Series will be specified in the related Prospectus Supplement and will be the
date (calculated on the basis of the assumptions applicable to such Series
described therein) on which the entire aggregate principal balance of such
Class will be reduced to zero. Since prepayments on the Loans underlying or
comprising the Primary Assets will be used to make distributions in reduction
of the outstanding principal amount of the Certificates, it is likely that the
actual maturity of any such Class will occur earlier, and may occur
substantially earlier, than its Final Scheduled Distribution Date.
Prepayments and Weighted Average Life
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of the principal
of such security will be repaid to the investor. The weighted average life of
the Certificates of a Series will be influenced by the rate at which principal
on the Loans comprising or underlying the Primary Assets for such Certificates
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
The rate of principal prepayments on pools of housing loans is influenced
by a variety of economic, demographic, geographic, legal, tax, social and other
factors. The rate of prepayments of conventional housing loans has fluctuated
significantly. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Loans comprising or underlying
the Primary Assets for a Series, such Loans are likely to prepay at rates
higher than if prevailing interest rates remain at or above the interest rates
borne by such Loans. It should be noted that the Loans comprising or underlying
the Primary Assets for a Series may have different interest rates, and the
stated pass-through or interest rate of certain Primary Assets or the
Certificate Interest Rate on the Certificates may be a number of percentage
points less than interest rates on such Loans. In addition, the weighted
average life of the Certificates may be affected by the varying maturities of
the Loans comprising or underlying the Primary Assets. If any Loans comprising
or underlying the Primary Assets for a Series have actual terms-to-stated
maturity less than those assumed in calculating the Final Scheduled
Distribution Date of the related Certificates, one or more Classes of the
Series may be fully paid prior to their respective Stated Maturities.
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below.
CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
such loans. SPA represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of a pool of loans. A prepayment
assumption of 100% of SPA assumes prepayment rates of 0.2% per annum of the
then outstanding principal balance of such loans in the first month of the life
of the loans and an additional 0.2% per annum in each month thereafter until
the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Loans
underlying or comprising the Primary Assets. Thus, it is likely that prepayment
of any Loans comprising or underlying the Primary Assets for any Series will
not conform to the FHA Prepayment Experience or to any level of CPR or SPA.
The Prospectus Supplement for each Multi-Class Series will describe the
prepayment standard or model used to prepare any illustrative tables setting
forth the weighted average life of each Class of such Series under a given set
of prepayment assumptions. The related Prospectus Supplement will also describe
the percentage of the initial principal balance of each Class of such Series
that would be outstanding on specified Distribution Dates for such Series based
on the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Loans comprising or underlying the related Primary
Assets are made at rates corresponding to various percentages of CPR or SPA or
at such other rates specified in such Prospectus Supplement. Such tables and
assumptions are intended to illustrate the sensitivity of weighted average life
of the Certificates to various prepayment rates and will not be intended to
predict or to provide information which will enable investors to predict the
actual weighted average life of the Certificates or prepayment rates of the
Loans comprising or underlying the related Primary Assets.
Other Factors Affecting Weighted Average Life
Type of Loan. Mortgage Loans made with respect to Multifamily Properties
may have provisions which prevent prepayment for a number of years and may
provide for payments of interest only during a certain period followed by
amortization of principal on the basis of a schedule extending beyond the
maturity of the related Mortgage Loan. ARMs, Bi-weekly Loans, GEM Loans, GPM
Loans or Buy-Down Loans comprising or underlying the Primary Assets may
experience a rate of principal prepayments which is different from the
principal prepayment rate for ARMs, Bi-weekly Loans, GEM Loans and GPM Loans
included in any other mortgage pool or from Conventional fixed rate Loans or
from other adjustable rate or graduated equity mortgages having different
characteristics. There can be no assurance as to the respective rates of
prepayment of such Loans in either stable or changing interest rate
environments.
In the case of Negatively Amortizing ARMs, if interest rates rise without
a simultaneous increase in the related Scheduled Payment, Deferred Interest and
negative amortization may result. However, borrowers may pay amounts in
addition to their Scheduled Payments in order to avoid such negative
amortization and to increase tax deductible interest payments. To the extent
that any of such Mortgage Loans negatively amortize over their respective
terms, future interest accruals are computed on the higher outstanding
principal balance of such Mortgage Loan and a smaller portion of the Scheduled
Payment is applied to principal than would be required to amortize the unpaid
principal over its remaining term. Accordingly, the weighted average life of
such Mortgage Loans will increase. During a period of declining interest rates,
the portion of each Scheduled Payment in excess of the scheduled interest and
principal due will be applied to reduce the outstanding principal balance of
the related Mortgage Loan, thereby resulting in accelerated amortization of
such ARM. Any such acceleration in amortization of the principal balance of any
Negatively Amortizing ARM will shorten the weighted average life of such
Mortgage Loan. The application of partial prepayments to reduce the outstanding
principal balance of a Negatively Amortizing ARM will tend to reduce the
weighted average life of the Mortgage Loan and will adversely affect the yield
to Holders who purchased their Certificates at a premium, if any, and Holders
of Interest Weighted Classes. The pooling of Negatively Amortizing ARMs having
Rate Adjustment Dates in different months, together with different initial
Mortgage Rates, Lifetime Mortgage Rate Caps, Minimum Mortgage Rates and stated
maturity dates, could result in some Negatively Amortizing ARMs which comprise
or underlie the Primary Assets experiencing negative amortization while the
amortization of other Negatively Amortizing ARMs may be accelerated.
If the Loans comprising or underlying the Primary Assets for a Series
include ARMs that permit the borrower to convert to a long-term fixed interest
rate loan, the Master Servicer, Servicer, or PMBS Servicer, as applicable, may,
if specified in the related Prospectus Supplement, be obligated to repurchase
any Loan so converted. Any such conversion and repurchase would reduce the
average weighted life of the Certificates of the related Series.
A GEM Loan provides for scheduled annual increases in the borrower's
Scheduled Payment. Because the additional portion of the Scheduled Payment is
applied to reduce the unpaid principal balance of the GEM Loan, the stated
maturity of a GEM Loan will be significantly shorter than the 25 to 30 year
term used as the basis for calculating the installments of principal and
interest applicable until the first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of housing
loans. Even though some Manufactured Home Loans may be FHA Loans, no statistics
similar to those describing the FHA experience above are available with respect
to Manufactured Home Loans.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Loans comprising or underlying the Primary Assets which
are foreclosed in relation to the number of Loans which are repaid in
accordance with their terms will affect the weighted average life of the Loans
comprising or underlying the Primary Assets and that of the related Series of
Certificates. Servicing decisions made with respect to the Loans, including the
use of payment plans prior to a demand for acceleration and the restructuring
of Loans in bankruptcy proceedings, may also have an impact upon the payment
patterns of particular Loans. In particular, the return to Holders of
Certificates who purchased their Certificates at a premium, if any, and the
return on an Interest Weighted Class may be adversely affected by servicing
policies and decisions relating to foreclosures.
Due on Sale Clauses. The acceleration of repayment as a result of certain
transfers of the Mortgaged Property securing a Loan is another factor affecting
prepayment rates, and is a factor that is not reflected in the FHA experience.
While each of the Mortgage Loans included in the FHA statistics is assumable by
a purchaser of the underlying mortgaged property, the Loans constituting or
underlying the Primary Assets may include "due-on-sale" clauses. Except as
otherwise described in the Prospectus Supplement for a Series, the PMBS
Servicer of Loans underlying Private Mortgage-Backed Securities and the Master
Servicer or the Servicer of Loans constituting the Primary Assets for a Series
will be required, to the extent it knows of any conveyance or prospective
conveyance of the related residence by any borrower, to enforce any
"due-on-sale" clause applicable to the related Loan under the circumstances and
in the manner it enforces such clauses with respect to other similar loans in
its portfolio. FHA Loans and VA Loans are not permitted to contain
"due-on-sale" clauses and are freely assumable by qualified persons. However,
as homeowners move or default on their housing loans, the Mortgaged Property is
generally sold and the loans prepaid, even though, by their terms, the loans
are not "due-on-sale" and could have been assumed by new buyers.
Optional Termination. If so specified in the related Prospectus
Supplement, the entity specified therein may cause an early termination of the
related Trust Fund by its repurchase of the remaining Primary Assets therein.
See "Description of the Certificates-- Optional Termination."
The Trust Funds
General
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of (a) the
Primary Assets; (b) amounts held from time to time in the Collection Account
and the Certificate Account established for such Series; (c) Mortgaged Property
which secured a Loan and which is acquired on behalf of the Certificateholders
by foreclosure, deed in lieu of foreclosure or repossession; (d) any Reserve
Fund for such Series, if specified in the related Prospectus Supplement; (e)
the Servicing Agreements, if any, relating to Loans in the Trust Fund, to the
extent that such agreements are assigned to the Trustee; (f) any primary
mortgage insurance policies relating to Loans in the Trust Fund; (g) any pool
insurance policy, any special hazard insurance policy, any bankruptcy bond or
other credit support relating to the Series; (h) investments held in any fund
or account or any Guaranteed Investment Contract and, if so specified in the
Prospectus Supplement, income from the reinvestment of such funds; and (i) any
other asset, instrument or agreement relating to the Trust Fund and specified
in the related Prospectus Supplement (which may include an interest rate swap
agreement or an interest rate cap agreement or similar agreement issued by a
bank, insurance company or savings and loan association).
To the extent specified in the related Prospectus Supplement, certain
amounts in respect of Retained Interests which are received with respect to an
Agency Certificate, a Private Mortgage-Backed Security or a Loan comprising the
Primary Assets for a Series will not be included in the Trust Fund for such
Series, but will be payable to the seller of such Agency Certificate, Private
Mortgage-Backed Security or Loan, to the Master Servicer, if any, to a
Servicer, the Depositor or another party, free and clear of the interest of
Certificateholders under the related Trust Agreement.
Primary Assets in the Trust Fund for a Series may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement: (a) GNMA Certificates (which may be GNMA I Certificates
or GNMA II Certificates), (b) FNMA Certificates, (c) FHLMC Certificates, (d)
Private Mortgage-Backed Securities, (e) Mortgage Loans or participation
interests therein and (f) Manufactured Home Loans or participation interests
therein. Private Mortgage-Backed Securities will evidence a beneficial
ownership interest in underlying assets which will consist of Agency
Certificates or Loans. Participation interests in a Loan Pool will be purchased
by the Depositor, or an affiliate, pursuant to a participation agreement (a
"Participation Agreement"). The interest acquired by the Depositor under such
Participation Agreement will be evidenced by a Pool Participation Certificate.
Unless otherwise specified in the related Prospectus Supplement, the terms of
such Participation Agreement are substantially the same as the terms of the
Trust Agreement and, except as noted herein, the description of provisions of
the Trust Agreement are equally descriptive of the terms of the Participation
Agreement. The Trustee will be the "certificateholder" with respect to a Pool
Participation Certificate. Loans which comprise the Primary Assets will be
purchased by the Depositor directly or through an affiliate in the open market
or in privately negotiated transactions. Some, none or all of the Loans may
have been originated by the Depositor or any of its affiliates. See "The Trust
Agreements -- Assignment of Primary Assets."
GNMA Certificates
General. The GNMA Certificates will be "fully modified pass-through"
mortgage-backed certificates issued and serviced by GNMA-approved issuers of
GNMA certificates (the "GNMA Servicers") under the GNMA I and/or the GNMA II
program. The full and timely payment of principal of and interest on such GNMA
Certificates is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States of America. The GNMA Certificates will be
based on and backed by a pool of eligible mortgage loans and will provide for
the payment by or on behalf of the GNMA Servicer to the registered holder of
such GNMA Certificate of monthly payments of principal and interest equal to
the aggregated amount of the monthly constant principal and interest payments
on each such mortgage loan, less servicing and guarantee fees aggregating the
excess of the interest on the mortgage loans over the GNMA Certificate's
pass-through rate. Each repayment to a holder of a GNMA Certificate will
include pass-through payments of any prepayments of principal of the mortgage
loans underlying the GNMA Certificate and the remaining principal balance in
the event of a foreclosure or other disposition of any such mortgage loan.
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the GNMA Servicer, the Depositor or any affiliate of the
Depositor, and the only recourse of a registered holder, such as the Trustee or
its nominee, is to enforce the guarantee of GNMA.
GNMA approves the issuance of each GNMA Certificate in accordance with a
guaranty agreement (the "Guaranty Agreement") between GNMA and the GNMA
Servicer of such GNMA Certificate. Pursuant to the Guaranty Agreement, the GNMA
Servicer is required to advance its own funds in order to make timely payments
of all amounts due on the GNMA Certificate, whether or not the payments
received by the GNMA Servicer on the underlying mortgage loans equal the
amounts due on such GNMA Certificate. If a GNMA Servicer is unable to make a
payment as it becomes due, it must promptly notify GNMA and request GNMA to
make the payment. Upon notification and request, GNMA will make such payments
directly to the registered holder of the GNMA Certificate. In the event no
payment is made by a GNMA Servicer and the GNMA Servicer fails to notify and
request GNMA to make such payment, the holder of the GNMA Certificate has
recourse only against GNMA to obtain such payment. The Trustee or its nominee,
as registered holder of the GNMA Certificates, may proceed directly against
GNMA under the terms of any GNMA Certificate or the Guaranty Agreement relating
to the GNMA Certificate for any amounts that are not paid under the GNMA
Certificate.
Monthly installment payments on a GNMA Certificate will be comprised of
interest due as specified on the GNMA Certificate plus the scheduled principal
payments on the mortgage loans backing such GNMA Certificate due on the first
day of the month in which the scheduled monthly installment on the GNMA
Certificate is due. The monthly installments on the GNMA Certificate will be
paid each month to the Trustee or its nominee as registered holder. In
addition, any principal prepayments or any other early recovery of principal on
the mortgage loans backing such GNMA Certificate received during any month will
be passed through to the registered holder of the GNMA Certificate the
following month.
With respect to GNMA Certificates issued under the GNMA I program, the
GNMA Servicer must make scheduled monthly payments of principal and interest,
plus pass-throughs of prepayments of principal and proceeds of foreclosures and
other dispositions of the mortgage loans, to registered holders no later than
the fifteenth day of each month. GNMA Certificates issued under the GNMA II
program provide for such payments to be mailed to registered holders by
Chemical Bank, as paying agent, no later than the twentieth day of each month.
A further difference between the two programs is that, under the GNMA I program
single issuer approach, an individual GNMA issuer assembles a pool of mortgages
against which it issues and markets GNMA I Certificates while, under the GNMA
II program, multiple issuer pools may be formed through the aggregation of loan
packages of more than one GNMA issuer. Under this option, packages submitted by
various GNMA issuers for a particular issue date and interest rate are
aggregated into a single pool which backs a single issue of GNMA II
Certificates. However, single issuer pools may be formed under the GNMA II
program as well.
The Underlying Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, mortgage loans underlying the GNMA Certificates included
in the Trust Fund for a Series will consist of FHA Loans and/or VA Loans, all
of which are assumable by a purchaser. GNMA Certificates securing a Series may
be backed by level payment mortgage loans, GNMA Loans, GEM Loans or Buy-Down
Loans or adjustable rate mortgage loans or other mortgage loans eligible for
inclusion in a GNMA Certificate. The mortgage loans may be secured by
Manufactured Homes, Single Family Property or Multifamily Property.
All mortgages underlying any GNMA Certificate issued under the GNMA I
program must have the same annual interest rate (except for pools of loans
secured by manufactured homes). The annual interest rate on each such GNMA
Certificate is equal to one-half percentage point less than the annual interest
rate on the mortgage loans backing such GNMA Certificate.
Mortgages underlying a GNMA Certificate issued under the GNMA II program
may have annual interest rates that vary from each other by up to one
percentage point. The annual interest rate on each such GNMA II Certificate is
between one-half percentage point and one and one-half percentage points less
than the highest annual interest rate on the mortgage loans included in the
pool of mortgages backing such GNMA Certificate.
The GNMA Certificates included in the Trust Fund for a Series may have
other characteristics and terms different from those described above, so long
as such GNMA Certificates and underlying mortgage loans meet the criteria of
each Rating Agency rating the Certificates of such Series. Such GNMA
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States of America. Section 306(g) of Title III of the National Housing Act of
1934, as amended (the "Housing Act") authorizes GNMA to guarantee the timely
payment of the principal of and the interest on GNMA Certificates, which are
based on and backed by a pool of mortgages insured by the FHA under the Housing
Act or Title V of the Housing Act of 1949, or partially guaranteed by the VA
under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of
Title 38, United States Code, or by other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." To meet its
obligations under such guarantees, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
FNMA Certificates
General. FNMA Certificates are either Guaranteed Mortgage Pass-Through
Certificates, Stripped Mortgage Backed Securities or Guaranteed REMIC
Pass-Through Certificates. FNMA Certificates represent factional undivided
interests in a pool of mortgage loans formed by FNMA. Unless otherwise
specified in the related Prospectus Supplement, each pool consists of mortgage
loans secured by a first lien on a one- to four-family residential property.
Mortgage loans comprising a pool are either provided by FNMA from its own
portfolio or purchased pursuant to the criteria set forth under the FNMA
purchase program.
FNMA guarantees to each holder of a FNMA certificate that it will
distribute amounts representing scheduled principal and interest (at the rate
provided for by such FNMA Certificate) on the mortgage loans in the pool
represented by such FNMA Certificate, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of FNMA under its guarantees are
obligations solely of FNMA and are neither backed by nor entitled to the full
faith and credit of the United States of America. If FNMA were unable to
satisfy such obligations, distributions on FNMA Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, delinquencies and defaults would affect monthly distributions on
such FNMA Certificates and could adversely affect the payments on the
Certificates of a Series secured by such FNMA Certificates.
Unless otherwise specified in the related Prospectus Supplement, FNMA
Certificates evidencing interests in pools formed on or after May 1, 1985
(other than FNMA Certificates backed by pools containing GPM Loans or mortgage
loans secured by multifamily projects) will be available in book-entry form
only. Distributions of principal of and interest on each FNMA Certificate will
be made by FNMA on the twenty-fifth day of each month to the persons in whose
name the FNMA Certificates are entered in the books of the Federal Reserve Bank
of New York (or registered on the FNMA Certificate register in the case of
fully registered FNMA Certificates) as of the close of business on the last day
of the preceding month. With respect to FNMA Certificates issued in book-entry
form, distributions will be made by wire; with respect to FNMA Certificates
issued in fully registered form, distributions will be made by check.
The Underlying Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, mortgage loans underlying FNMA Certificates in the Trust
Fund for a Series will consist of (i) fixed-rate level payment mortgage loans
that are Conventional Loans, (ii) fixed-rate level payment FHA Loans or VA
Loans, (iii) adjustable rate mortgage loans or GEM Loans, Buy-Down Loans or GPM
Loans, and (iv) mortgage loans secured by Single Family Property or by
Multifamily Property. Each mortgage loan must meet the applicable standards set
forth under the FNMA purchase program.
The original maturities of substantially all of the fixed rate level
payment Conventional Mortgage Loans are expected to be between either eight to
15 years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
FNMA Stripped Mortgage Backed Securities are issued by FNMA in series of
two or more classes, with each class representing a specified undivided
fractional interest in principal distributions and/or interest distributions
(adjusted to the series pass-through rate) on the underlying pool of mortgage
loans. The fractional interests of each class in principal and interest
distributions are not identical, but the classes in the aggregate represent
100% of the principal distributions and interest distributions (adjusted to the
series pass-through rate) on the respective pool. Because of such difference
between the fractional interests in principal and interest of each class, the
effective rate of interest on the principal of each class of FNMA Stripped
Mortgage Backed Securities may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans. The Guaranteed REMIC Pass-Through Certificates are
multiple-class pass-through certificates (representing beneficial interests in
a pool consisting primarily of FNMA or GNMA Certificates) as to which FNMA has
elected REMIC status for federal income tax purposes.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate (and the series pass-through rate
payable with respect to a FNMA Stripped Mortgage Backed Security) is equal to
the lowest interest rate of any mortgage loan in the related pool, less a
specified minimum annual percentage representing servicing compensation and
FNMA's guarantee fee. Under a regular servicing option (pursuant to which the
mortgagee or other servicer assumes the risk of foreclosure losses), the annual
interest rates on the mortgage loans underlying a FNMA Certificate will be
between .50 and 2.50 percentage points greater than the annual interest rate
for the FNMA Certificate (or the series pass-through rate payable with respect
to a FNMA Stripped Mortgage Backed Security), and, under a special servicing
option (pursuant to which the mortgagee or other servicer is reimbursed by FNMA
for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will be between .55 and 2.55 percentage points
greater than the annual FNMA Certificate interest rate (or the series
pass-through rate payable with respect to a FNMA Stripped Mortgage Backed
Security).
The Trust Fund for a Series may include FNMA Certificates having
characteristics and terms different from those described above, so long as such
FNMA Certificates and underlying mortgage loans meet the criteria of each
Rating Agency rating the Series. Such FNMA Certificates and underlying mortgage
loans will be described in the related Prospectus Supplement.
FNMA. FNMA is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (12 U.S.C. ss.1716 et seq.). FNMA was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase loans from any capital market
investors that may not ordinarily invest in mortgage loans, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital-surplus to capital-short
areas. In addition, FNMA issues mortgage backed securities, primarily in
exchange for pools of mortgage loans from lenders. See "Additional Information"
herein for the availability of further information with respect to FNMA and
FNMA Certificates.
FHLMC Certificates
General. The FHLMC Certificates represent an undivided interest in a group
of mortgages or participations therein (a "PC Pool") purchased by FHLMC. FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement and may be issued under either FHLMC's "Cash Program" or "Guarantor
Program" or may be Multiclass Mortgage Participation Certificates (Guaranteed)
representing multiple classes of certificates of beneficial interest in a pool
consisting primarily of FHLMC Certificates.
Under FHLMC's Cash Program, with respect to PC Pools formed prior to June
1, 1987 there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate; with respect to FHLMC Certificates issued on or after
that date, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates cannot exceed the pass-through rate on such FHLMC
Certificates by more than two hundred basis points. Under such program, FHLMC
purchases groups of whole mortgage loans from a number of sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which, when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield (expressed as a percentage)
required by FHLMC. The required yield, which includes a minimum servicing fee
retained by the servicer, is calculated using the outstanding principal balance
of the mortgage loans, an assumed term and a prepayment period as determined by
FHLMC. No loan or participation is purchased by FHLMC at greater than 100% of
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a PC Pool for a FHLMC Certificate issued under the
Cash Program will vary since mortgage loans and participations are purchased
and assigned to a PC Pool based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans. However, beginning with PC
Pools formed on or after June 1, 1987, the range of interest rates on the
mortgages in Cash Program PC Pools will not exceed 100 basis points.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate groups formed under the Guarantor Program, the range between
the lowest and highest annual interest rates on the mortgage loans in a PC Pool
may not exceed two hundred basis points, and beginning with PC Pools formed in
December 1987 under the Guarantor Program, the range of the interest rates on
the mortgage loans in a PC Pools will not exceed 100 basis points.
The FHLMC Certificates will be guaranteed by FHLMC as to the timely
payment of interest at the applicable FHLMC Certificate rate on the holder's
pro rata share of the unpaid principal balance outstanding on the underlying
mortgage loans, whether or not received. FHLMC also guarantees payment of
principal on the underlying mortgage loans, without any offset or deduction, to
the extent of the registered holder's pro rata share thereof, but does not,
except with respect to "Scheduled Principal" FHLMC Certificates issued under
the Guarantor Program, guarantee the timely payment of scheduled principal.
Under FHLMC's Gold PC Program, FHLMC guarantees the timely payment of principal
based on the difference between the pool factor published in the month
preceding the month of distribution and the pool factor published in such month
of distribution. Pursuant to its guarantee, FHLMC indemnifies holders of FHLMC
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. FHLMC may remit the amount due
on account of its guarantee of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgages
which FHLMC has purchased but not sold. The length of time necessary for FHLMC
to determine that a mortgage loan should be accelerated varies with the
particular circumstances of each mortgagor, and FHLMC has not adopted servicing
standards which require that the demand be made within any specified period.
Holders of FHLMC Certificates are entitled to receive their pro rata share
of all principal payments on the underlying mortgage loans received by FHLMC,
including any scheduled principal payments, full and partial prepayments of
principal and principal received by FHLMC by virtue of condemnation, insurance,
liquidation or foreclosure, including repayments of principal resulting from
acquisition by FHLMC of the real property securing the mortgage. FHLMC is
required to remit to each holder its pro rata share of principal payments on
the underlying mortgage loans, interest at an applicable FHLMC Certificate rate
and any other sums, such as prepayment fees, within 60 days of the date on
which FHLMC is deemed to receive such payments.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and
participations purchased results in the yield (expressed as a percentage)
required by FHLMC. The required yield, which includes a minimum servicing fee
retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations
in a FHLMC Certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a FHLMC Certificate
group based upon their yield to FHLMC rather than on the interest rate on the
underlying mortgage loans. Under FHLMC's Guarantor Program, the pass-through
rate on a FHLMC Certificate is established based upon the lowest interest rate
on the underlying mortgage loans, minus a minimum servicing fee and the amount
of FHLMC's management and guarantee income as agreed upon between the seller
and FHLMC.
FHLMC Certificates are not guaranteed by, and do not constitute debts or
obligations of, either the United States of America or any Federal Home Loan
Bank. If FHLMC were unable to satisfy such obligations, distributions on FHLMC
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans, and, accordingly, delinquencies and defaults would
affect monthly distributions on such FHLMC Certificates and could adversely
affect distributions on the Certificates of such Series.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first day
of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, the Federal Reserve Bank of New York maintains book-entry
accounts with respect thereto and makes payments of interest and principal each
month to holders in accordance with the holders' instructions. The first
payment to a holder of an FHLMC Certificate will normally be received by the
holder by the fifteenth day of the second month following the month in which
such person became a holder of the FHLMC Certificate. Thereafter, payments will
normally be received by the fifteenth day of each month.
The Underlying Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, each PC Pool underlying the FHLMC Certificates in the
Trust Fund for a Series will consist of first lien, fixed-rate, fully
amortizing, conventional residential mortgages or participation interests
therein. Unless otherwise specified in the related Prospectus Supplement, all
of the mortgage loans evidenced by a FHLMC Certificate are conventional
mortgages and therefore do not have the benefit of any guarantee or insurance
by, and are not obligations of, the United States of America. All mortgages
purchased by FHLMC must meet certain standards set forth in the FHLMC Act (as
defined below).
The Trust Fund for a Series may include FHLMC Certificates having other
characteristics and terms different from those described above, so long as such
FHLMC Certificates and the underlying mortgage loans meet the criteria of each
Rating Agency rating the Certificates of such Series. Such FHLMC Certificates
and underlying mortgage loans will be described in the related Prospectus
Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States of
America created pursuant to an Act of Congress (Title III of the Emergency Home
Finance Act of 1970, as amended, 12 U.S.C. 1451-1459) on July 24, 1970 (the
"FHLMC Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. It
provides an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC consists of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans from mortgage lending institutions and the resale of the
whole loans and participations so purchased in the form of guaranteed mortgage
securities, primarily FHLMC Certificates. In 1981, FHLMC initiated its
Guarantor Program under which FHLMC purchases mortgages from sellers in
exchange for FHLMC Certificates representing interests in the mortgages so
purchased. Transactions under the Guarantor Program have resulted in a
significant increase in the volume of FHLMC's purchases of mortgages and sales
of FHLMC Certificates. All mortgage loans purchased by FHLMC must meet certain
standards set forth in the FHLMC Act. FHLMC is confined to purchasing, so far
as practicable, mortgage loans which it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors. See "ADDITIONAL INFORMATION" for the
availability of further information with respect to FHLMC and FHLMC
Certificates.
Private Mortgage-Backed Securities
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates, evidencing an undivided interest in a pool of Loans
or Agency Certificates, or (b) collateralized mortgage obligations secured by
Loans or Agency Certificates. Private Mortgage-Backed Securities will have been
issued pursuant to a pooling and servicing agreement, a trust agreement, an
indenture or similar agreement (a "PMBS Agreement"). The seller/servicer of the
underlying Loans, or the issuer of the collateralized mortgage obligations, as
the case may be, will have entered into the PMBS Agreement with the trustee
under such PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee or its agent,
or a custodian, will possess the Loans underlying such Private Mortgage-Backed
Security. Loans underlying a Private Mortgage-Backed Security will be serviced
by a servicer (the "PMBS Servicer") directly or by one or more sub-servicers
who may be subject to the supervision of the PMBS Servicer. The PMBS Servicer
will be an FNMA or FHLMC approved servicer and, if FHA Loans underlie the
Private Mortgage-Backed Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending; a public agency or instrumentality of a state,
local or federal government; or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts, and selling beneficial interests in such trusts;
or one of such trusts. If so specified in the Prospectus Supplement, the PMBS
Issuer may be an affiliate of the Depositor. The obligations of the PMBS Issuer
will generally be limited to certain representations and warranties with
respect to the assets conveyed by it to the related trust. Unless otherwise
specified in the related Prospectus Supplement, the PMBS Issuer will not have
guaranteed any of the assets conveyed to the related trust or any of the
Private Mortgage-Backed Securities issued under the PMBS Agreement.
Additionally, although the Loans underlying the Private Mortgage-Backed
Securities may be guaranteed by an agency or instrumentality of the United
States, the Private Mortgage-Backed Securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private
Mortgage-Backed Securities by the PMBS Trustee or the PMBS Servicer. The PMBS
Issuer or the PMBS Servicer may have the right to repurchase assets underlying
the Private Mortgage-Backed Securities after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Underlying Loans. The Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing Loans or
GEM Loans, GPM Loans, Buy-Down Loans, Bi-Weekly Loans, ARMs, or Loans having
balloon or other irregular payment features. Loans may be secured by Single
Family Property, Multifamily Property, Manufactured Homes, or, in the case of
Cooperative Loans, by an assignment of the proprietary lease or occupancy
agreement relating to a Cooperative Dwelling and the shares issued by the
related cooperative. Except as otherwise specified in the related Prospectus
Supplement, (i) no Loan shall have had a Loan-to-Value Ratio at origination in
excess of 95%, (ii) each Mortgage Loan secured by Single Family Property and
having a Loan-to-Value Ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy, (iii) each Loan will have had an original
term to stated maturity of not less than 10 years and not more than 40 years,
(iv) no Loan that was more than 30 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the assets under
the related PMBS Agreement, (v) each Loan (other than a Cooperative Loan) will
be required to be covered by a standard hazard insurance policy (which may be a
blanket policy), and (vi) each Loan (other than a Cooperative Loan or a Loan
secured by a Manufactured Home) will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of Reserve Funds, subordination of other private mortgage
certificates issued under the PMBS Agreement, letters of credit, Insurance
Policies or other types of credit support may be provided with respect to the
Loans underlying the Private Mortgage-Backed Securities or with respect to the
Private Mortgage-Backed Securities themselves. The type, characteristics and
amount of credit support will be a function of certain characteristics of the
Loans and other factors and will have been established for the Private
Mortgage-Backed Securities on the basis of requirements of the Rating Agency.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify, to the
extent relevant, (i) the aggregate approximate principal amount and type of the
Agency Certificates and Private Mortgage-Backed Securities to be included in
the Trust Fund; (ii) certain characteristics of the Agency Certificates or
Loans which comprise the underlying assets for the Private Mortgage-Backed
Securities including, in the case of Loans, (A) the payment features of such
Loans (i.e., whether they are fixed rate or adjustable rate and whether they
provide for fixed level payments or other payment features), (B) the
approximate aggregate principal balance, if known, of underlying Loans insured
or guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the Loans, and (D) the minimum and maximum
stated maturities of the underlying Loans at origination; (iii) the certificate
rate or ranges thereof for the Private Mortgage-Backed Securities; (iv) the
weighted average certificate rate of the Private Mortgage-Backed Securities;
(v) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities; (vi) certain
characteristics of credit support, if any, such as Reserve Funds, Insurance
Policies, letters of credit or guarantees relating to the Loans underlying the
Private Mortgage-Backed Securities or to such Private Mortgage-Backed
Securities themselves; (vii) the terms on which the underlying Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (viii) the terms on which Loans may be substituted for those
originally underlying the Private Mortgage-Backed Securities.
If information of the nature described above regarding the Private
Mortgage-Backed Securities or Agency Certificates is not known to the Depositor
at the time the Certificates are initially offered, approximate or more general
information of the nature described above will be provided in the Prospectus
Supplement and any additional information will be set forth in a Current Report
on Form 8-K to be available to investors on the date of issuance of the related
Series and to be filed with the Commission within 15 days after the initial
issuance of such Certificates.
The Mortgage Loans
General. The Trust Fund for a Series may consist of Mortgage Loans or
participation interests therein. Mortgage Loans comprising the Primary Assets
and Mortgage Loans in which participation interests are conveyed to the Trustee
are both referred to herein as the "Mortgage Loans". Unless otherwise specified
in the Prospectus Supplement for the related Series, the Mortgage Loans will
have been originated by a savings and loan association, savings bank,
commercial bank, credit union, insurance company, or similar institution which
is supervised and examined by a Federal or State authority or by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to sections
203 and 211 of the National Housing Act. Some, none or all of the Mortgage
Loans may have been originated by the Depositor or an affiliate thereof. The
Mortgage Loans may include Conventional Loans, FHA Loans or VA Loans. The
Mortgage Loans may have fixed interest rates or adjustable interest rates and
may provide for fixed level payments or may be GPM Loans, GEM Loans, Buy-Down
Loans, Bi-Weekly Loans or Mortgage Loans with other payment characteristics as
described below and under "Yield, Prepayment and Maturity Considerations"
herein and in the related Prospectus Supplement. The Mortgage Loans may be
secured by mortgages or deeds of trust or other similar security instruments
creating a first lien or if so specified in the related Prospectus Supplement,
a second lien, on Mortgaged Property. The Mortgage Loans may also include
Cooperative Loans evidenced by promissory notes secured by a lien on the shares
issued by private, non-profit, cooperative housing corporations and on the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific Cooperative Dwellings. The Mortgage Loans may also include
Condominium Loans secured by a Mortgage on a Condominium Unit together with
such Condominium Unit's appurtenant interest in the common elements.
If specified in the applicable Prospectus Supplement, the Mortgage Loans
may be secured by mortgages, deeds of trust or other similar Security
Instruments creating a lien on borrowers' leasehold interests in real property
under circumstances that the Depositor determines are commonly acceptable to
institutional mortgage investors. A Mortgage Loan secured by a leasehold
interest in real property is secured not by a fee simple interest in the
Mortgaged Property but rather by a leasehold interest under which the mortgagor
has the right, for a specified term, to use the related real estate and the
residential dwelling or dwellings located thereon. Generally, a Mortgage Loan
will be secured by a leasehold interest only if the use of leasehold estates as
security for mortgage loans is customary in the area, the lease is not subject
to any prior lien that could result in termination of the lease and the term of
the lease ends at least five years beyond the maturity date of the related
Mortgage Loan.
The Mortgaged Properties may include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) or Multifamily Property (i.e., multifamily residential rental
properties or cooperatively-owned properties consisting of five or more
dwelling units). The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling
units. Multifamily Property may include mixed commercial and residential
structures. Each Single Family Property and Multifamily Property will be
located on land owned in fee simple by the borrower or on land leased by the
borrower for a term at least five years greater than the term of the related
Mortgage Loan unless otherwise specified in the related Prospectus Supplement.
Attached dwellings may include owner-occupied structures where each borrower
owns the land upon which the unit is built, with the remaining adjacent land
owned in common or dwelling units subject to a proprietary lease or occupancy
agreement in a cooperatively owned apartment building. The proprietary lease or
occupancy agreement securing a Cooperative Loan is generally subordinate to any
blanket mortgage on the related cooperative apartment building and/or on the
underlying land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement is subject to termination and the
cooperative shares are subject to cancellation by the cooperative if the
tenant-stockholder fails to pay maintenance or other obligations or charges
owed to the Cooperative by such tenant-stockholder. See "Certain Legal Aspects
of Loans".
The aggregate principal balance of Mortgage Loans with respect to
Mortgaged Properties which are owner-occupied will be disclosed in the related
Prospectus Supplement. Unless otherwise specified in the Prospectus Supplement,
the sole basis for a representation that a given percentage of the Mortgage
Loans are secured by Single-Family Property that is owner-occupied will be
either (i) the making of a representation by the mortgagor at origination of
the Mortgage Loan either that the underlying Mortgaged Property will be used by
the borrower for a period of at least six months every year or that the
borrower intends to use the Mortgaged Property as a primary residence, or (ii)
a finding that the address of the underlying Mortgaged Property is the
borrower's mailing address as reflected in the Servicer's records. To the
extent specified in the related Prospectus Supplement, the Mortgaged Properties
may include non-owner occupied investment properties and vacation and second
homes. Mortgage Loans secured by investment properties and Multifamily Property
may also be secured by an assignment of leases and rents and operating or other
cash flow guarantees relating to the Loans to the extent specified in the
related Prospectus Supplement.
The characteristics of the Mortgage Loans comprising or underlying the
Primary Assets for a Series may vary to the extent that credit support is
provided in levels satisfactory to each Rating Agency that assigns a rating to
a Series of Certificates. Unless otherwise specified in the related Prospectus
Supplement for a Series, the following selection criteria shall apply with
respect to the Mortgage Loans comprising the Primary Assets:
(a) no first lien Mortgage Loan shall have had a Loan-to-Value Ratio at
origination in excess of 95%, and no second lien Mortgage Loan shall have
had a Loan-to-Value Ratio at origination in excess of 125%;
(b) no first lien Mortgage Loan that is a Conventional Loan secured by a
Single Family Property may have a Loan-to-Value Ratio in excess of 80%,
unless covered by a primary mortgage insurance policy as described herein;
(c) each first lien Mortgage Loan must have an original term to maturity
of not less than 10 years and not more than 40 years and each second lien
Mortgage Loan must have an original term to maturity of not less than 5
years and not more than 30 years;
(d) no Mortgage Loan may be included which, as of the Cut-off Date, is
more than 59 days delinquent as to payment of principal or interest;
(e) no Mortgage Loan (other than a Cooperative Loan) may be included
unless a title insurance policy or, in lieu thereof, an attorney's opinion
of title, and a standard hazard insurance policy (which may be a blanket
policy) is in effect with respect to the Mortgaged Property securing such
Mortgage Loan.
The initial Loan-to-Value Ratio of any Mortgage Loan represents the ratio
of the principal amount of the Mortgage Loan outstanding at the origination of
such loan divided by the fair market value of the Mortgaged Property, as shown
in the appraisal prepared in connection with origination of the Mortgage Loan
(the "Appraised Value"). In the case of a Mortgage Loan to finance the purchase
of a Mortgaged Property, the fair market value of such Mortgaged Property is
the lesser of the purchase price paid by the borrower or the Appraised Value of
such Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Buy-Down Loans, during the period (the "Buy-Down Period") when the
borrower is not obligated, on account of the buy-down plan, to pay the full
Scheduled Payment otherwise due on such loan, each of the Buy-Down Loans will
provide for Scheduled Payments based on a hypothetical reduced interest rate
(the "Buy-Down Mortgage Rate") that will not have been more than 3% below the
mortgage rate at origination and for annual increases in the Buy-Down Mortgage
Rate during the Buy-Down Period that will not exceed 1%,and the Buy-Down Period
will not exceed three years. The maximum amount of funds that may be
contributed with respect to a Mortgaged Property having a Loan-to-Value Ratio
(i) of 90% or less at origination is limited to 10% of the Appraised Value of
the Mortgaged Property, and (ii) in excess of 90% at origination is limited to
6% of the Appraised Value of the Mortgaged Property, unless otherwise indicated
in the applicable Prospectus Supplement. Unless specified otherwise in the
related Prospectus Supplement, the maximum amount of funds (the "Buy-Down
Amounts") that may be contributed by the Servicer of the related Mortgaged Loan
is limited to 6% of the Appraised Value of the Mortgaged Property. This
limitation does not apply to contributions from immediate relatives or the
employer of the mortgagor. Except as may be otherwise indicated in the related
Prospectus Supplement, the borrower under each Buy-Down Loan will have been
qualified at a mortgage rate which is not more than 3% per annum below the
current mortgage rate at origination. Accordingly, the repayment of a Buy-Down
Loan is dependent on the ability of the borrower to make larger Scheduled
Payments after the Buy-Down Amounts have been depleted and, for certain
Buy-Down Loans, while such Buy-Down Amounts are being depleted.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Property, (a) no Mortgage Loan will have been delinquent
for more than 59 days within the 12-month period ending with the Cut-off Date,
(b) no more than two payments will have been 59 days or more delinquent during
a three-year period ending on the Cut-off Date, (c) Mortgage Loans with respect
to any single borrower will not exceed 5% of the aggregate principal balance of
the Loans comprising the Primary Assets as of the Cut-off Date, and (d) the
debt service coverage ratio with respect to each Mortgage Loan (calculated as
described in the related Prospectus Supplement) will not be less than 1.1:1.
Unless otherwise specified in the related Prospectus Supplement, the
Bi-Weekly Loans will consist of fixed-rate, bi-weekly payment, conventional,
fully-amortizing Mortgage Loans secured by first mortgages on one-to-four
family residential properties.
Unless otherwise specified in the related Prospectus Supplement, the ARMs
will provide for a fixed initial Mortgage Rate for one or more Scheduled
Payments; thereafter, the Mortgage Rates will adjust periodically based,
subject to the applicable limitations, on changes in the relevant Index
described in the applicable Prospectus Supplement, to a rate equal to the Index
plus the Gross Margin, which is a fixed percentage spread over the Index
established contractually for each ARM at the time of its origination. An ARM
may be convertible into a fixed-rate Mortgage Loan. To the extent specified in
the related Prospectus Supplement, any ARM so converted may be subject to
repurchase by the Servicer.
Adjustable mortgage rates can cause payment increases that some borrowers
may find difficult to make. However, each of the ARMs may provide that its
mortgage rate may not be adjusted to a rate above the applicable lifetime
mortgage rate cap (the "Lifetime Mortgage Rate Cap"), if any, or below the
applicable lifetime minimum mortgage rate (the "Minimum Mortgage Rate"), if
any, for such ARM. In addition, certain of the ARMs provide for limitations on
the maximum amount by which their mortgage rates may adjust for any single
adjustment period (the "Maximum Mortgage Rate Adjustment"). Some ARMs are
payable in self-amortizing payments of principal and interest. Other ARMs
("Negatively Amortizing ARMs") instead provide for limitations on changes in
the Scheduled Payment on such ARMs to protect borrowers from payment increases
due to rising interest rates. Such limitations can result in Scheduled Payments
which are greater or less than the amount necessary to amortize a Negatively
Amortizing ARM by its original maturity at the mortgage rate in effect during
any particular adjustment period. In the event that the Scheduled Payment is
not sufficient to pay the interest accruing on a Negatively-Amortizing ARM,
then the Deferred Interest is added to the principal balance of such ARM
causing the negative amortization thereof, and will be repaid through future
Scheduled Payments. If specified in the related Prospectus Supplement,
Negatively-Amortizing ARMs may provide for the extension of their original
stated maturity to accommodate changes in their mortgage rate. The relevant
Prospectus Supplement will specify whether the ARMs comprising or underlying
the Primary Assets are Negatively Amortizing ARMs.
The index applicable to any ARMs comprising the Primary Assets (the
"Index") will be the one-month LIBOR Index, the three-year Treasury Index, the
one-year Treasury Index, the Six Month Treasury Index, the Eleventh District
Costs of Funds Index or the National Monthly Median Cost of Funds Ratio to
FSLIC-Insured Institutions or such other index or indices as are specified or
described in the related Prospectus Supplement.
The related Prospectus Supplement for each Series will provide information
with respect to the Mortgage Loans as of the Cut-off Date, including, among
other things, (a) the aggregate outstanding principal balance of the Mortgage
Loans; (b) the weighted average Mortgage Rate on the Mortgage Loans, and, in
the case of ARMs, the weighted average of the current mortgage rates and the
Lifetime Mortgage Rate Caps, if any; (c) the average outstanding principal
balance of the Mortgage Loans; (d) the weighted average term-to-stated maturity
of the Mortgage Loans and the range of remaining terms-to-stated maturity; (e)
the range of Loan-to-Value Ratios for the Mortgage Loans; (f) the relative
percentage (by outstanding principal balance as of the Cut-off Date) of
Mortgage Loans that are ARMs, Cooperative Loans, Conventional Loans, Bi-Weekly
Loans, FHA Loans and VA Loans; (g) the percentage of Mortgage Loans (by
outstanding principal balance as of the Cut-off Date) that are not covered by
primary mortgage insurance policies; (h) any pool insurance policy, special
hazard insurance policy or bankruptcy bond or other credit support relating to
the Mortgage Loans; (i) the geographic distribution of the Mortgaged Properties
securing the Mortgage Loans and (j) the percentage of Mortgage Loans (by
principal balance as of the Cut-off Date) that are secured by Single Family
Property, Multifamily Property, Cooperative Dwellings, investment property and
vacation or second homes. The related Prospectus Supplement will also specify
any other limitations on the types or characteristics of Mortgage Loans which
may comprise or underlie the Primary Assets for a Series.
If information of the nature described above respecting the Mortgage Loans
is not known to the Depositor at the time the Certificates are initially
offered, approximate or more general information of the nature described above
will be provided in the Prospectus Supplement and any additional information
will be set forth in a Current Report on Form 8-K to be available to investors
on the date of issuance of the related Series and to be filed with the
Commission within 15 days after the initial issuance of such Certificates.
The Manufactured Home Loans
The Manufactured Home Loans comprising or underlying the Primary Assets
for a Series of Certificates will consist of manufactured housing conditional
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business and purchased by the
Depositor. Each Manufactured Home Loan will have been originated by a bank or
savings institution which is a FNMA- or FHLMC-approved seller/servicer or by
any financial institution approved for insurance by the Secretary of Housing
and Urban Development pursuant to Section 2 of the National Housing Act.
The Manufactured Home Loans may be Conventional Loans, FHA Loans or VA
Loans. Each Manufactured Home Loan will be secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Loans will be fully amortizing and will bear interest at a
fixed interest rate.
The Manufactured Homes securing the Manufactured Home Loans consist of
manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "manufactured home" as "a structure, transportable in
one or more sections, which in the traveling mode, is eight body feet or more
in width or forty body feet or more in length, or, when erected on site, is
three hundred twenty or more square feet, and which is built on a permanent
chassis and designed to be used as a dwelling with or without a permanent
foundation when connected to the required utilities, and includes the plumbing,
heating, air-conditioning, and electrical systems contained therein; except
that such term shall include any structure which meets all the requirements of
[this] paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
Unless otherwise specified in the related Prospectus Supplement for a
Series, the following restrictions apply with respect to Manufactured Home
Loans comprising or underlying the Primary Assets for a Series:
(a) no Manufactured Home Loan shall have had a Loan-to-Value Ratio at
origination in excess of 95%;
(b) each Manufactured Home Loan must have an original term to maturity of
not less than three years and not more than 30 years;
(c) no Manufactured Home Loan may be as of the Cut-off Date more than 59
days delinquent as to payment of principal or interest; and
(d) each Manufactured Home Loan must have, as of the Cut-off Date, a
standard hazard insurance policy (which may be a blanket policy) in effect
with respect thereto.
The initial Loan-to-Value Ratio of any Manufactured Home Loan represents
the ratio of the principal amount of the Manufactured Home Loan outstanding at
the origination of such loan divided by the fair market value of the
Manufactured Home, as shown in the appraisal prepared in connection with
origination of the Manufactured Home Loan (the "Appraised Value"). The fair
market value of the Manufactured Home securing any Manufactured Home Loan is
the lesser of the purchase price paid by the borrower or the Appraised Value of
such Manufactured Home. With respect to underwriting of Manufactured Home
Loans, see "Loan Underwriting Procedures and Standards". With respect to
servicing of Manufactured Home Loans, see "Servicing of Loans".
The related Prospectus Supplement for each Series will provide information
with respect to the Manufactured Home Loans comprising the Primary Assets as of
the Cut-off Date, including, among other things, (a) the aggregate outstanding
principal balance of the Manufactured Home Loans comprising or underlying the
Primary Assets; (b) the weighted average interest rate on the Manufactured Home
Loans; (c) the average outstanding principal balance of the Manufactured Home
Loans; (d) the weighted average scheduled term to maturity of the Manufactured
Home Loans and the range of remaining scheduled terms to maturity; (e) the
range of Loan-to-Value Ratios of the Manufactured Home Loans; (f) the relative
percentages (by principal balance as of the Cut-off Date) of Manufactured Home
Loans that were made on new Manufactured Homes and on used Manufactured Homes;
(g) any pool insurance policy, special hazard insurance policy or bankruptcy
bond or other credit support relating to the Manufactured Home Loans; and (h)
the distribution by state of Manufactured Homes securing the Loans. The related
Prospectus Supplement will also specify any other limitations on the types or
characteristics of Manufactured Home Loans which may be included in the Primary
Assets for a Series.
If information of the nature specified above respecting the Manufactured
Home Loans is not known to the Depositor at the time the Certificates are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and any
additional information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance of the related Series and to be
filed with the Commission within 15 days after the initial issuance of such
Certificates.
Pre-Funding Arrangements
To the extent provided in the related Prospectus Supplement for a Series,
the related Trust Agreement will provide for a commitment by the Depositor to
subsequently convey to the applicable Trust Fund additional Primary Assets
("Subsequent Primary Assets") following the date on which the related
Certificates are issued (a "Pre-Funding Arrangement"). With respect to a
Series, the Pre-Funding Arrangement will require that any Subsequent Primary
Assets included in the Trust Fund conform to the requirements and conditions
provided in the related Trust Agreement. If a Pre-Funding Arrangement is
utilized in connection with the issuance of the Series of Certificates, on the
closing date for the issuance of such Series the related Trustee will be
required to deposit in a segregated account (a "Pre-Funding Account") all or a
portion of the proceeds received by such Trustee in connection with the sale of
one or more Classes of Certificates of such Series; and, subsequently, the
Trust Fund will acquire Subsequent Primary Assets in exchange for the release
of money from the Pre-Funding Account for such Series. In addition, the
Pre-Funding Arrangement will be limited to a specified period, not to exceed
three months, during which time any transfers of Subsequent Primary Assets must
occur and to a maximum deposit to the related Pre-Funding Account of no more
than thirty-five percent (35%) of the aggregate proceeds received from the sale
of all Classes of Certificates of such Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Certificates as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Primary Assets to be included
in the Trust Fund after the closing date for the issuance of any particular
Series will require application of substantially all of the Pre-Funding
Account, and it is not anticipated that there will be any material amount of
principal distributions from amounts remaining on deposit in the Pre-Funding
Account in reduction of the principal balances of any Certificates, no
assurance can be given that such a distribution with respect to the
Certificates will not occur on the Distribution Date following the end of the
Pre-Funding Arrangement.
Amounts on deposit in the Pre-Funding Account will be invested as provided
in the related Trust Agreement in investments permitted by each applicable
Rating Agency.
Collection Account and Certificate Account
A separate Collection Account for each Series will be established by the
Trustee, or by the Master Servicer in the name of the Trustee, for deposit of
all distributions received with respect to the Primary Assets for such Series,
the amount of cash to be initially deposited therein, if any, and reinvestment
income thereon. If specified in the related Prospectus Supplement, any
reinvestment income or other gain from investments of funds in the Collection
Account will be credited to such Collection Account, and any loss resulting
from such investments will be charged to such Collection Account. Such
reinvestment income may, however, be payable to the Trustee, the Master
Servicer or a Servicer as additional compensation. See "Servicing of Loans" and
"The Trust Agreements -- Investment of Funds." In such a case, such
reinvestment income would not be included in calculation of the Available
Distribution Amount. See "Description of the Certificates -- Distributions on
the Certificates."
Funds on deposit in the Collection Account will be available for
remittance to the Trustee for deposit into the Certificate Account to the
extent of the Available Distribution Amount and for certain other payments
provided for in the Trust Agreement. Unless otherwise specified in the
Prospectus Supplement, amounts in the Collection Account constituting
reinvestment income which is payable to the Master Servicer as additional
servicing compensation or for the reimbursement of advances or expenses,
amounts in respect of any Excess Servicing Fee, Retained Interest, and amounts
to be deposited into any reserve fund will not be included in determining
amounts to be remitted to the Trustee for deposit into the Certificate Account.
A separate Certificate Account will be established by the Trustee in the
name of the Trustee for the benefit of the Certificateholders into which all
funds received from the Master Servicer (or Servicer) and all required
withdrawals from any reserve funds for such Series will be deposited, pending
distribution to the Certificateholders. If specified in the related Prospectus
Supplement, any reinvestment income or other gain from investments of funds in
the Certificate Account will be credited to the Certificate Account and any
loss resulting from such investments will be charged to such Certificate
Account. Such reinvestment income, may, however, be payable to the Trustee or
the Master Servicer as additional compensation. On each Distribution Date, all
funds on deposit in the Certificate Account, subject to certain permitted
withdrawals by the Trustee as set forth in the Trust Agreement, will be
available for remittance to the Certificateholders. See also "The Trust
Agreements -- Certificate Account" herein.
Other Funds or Accounts
A Trust Fund may include certain other funds and accounts or a security
interest in certain funds and accounts for the purpose of, among other things,
paying certain administrative fees and expenses of the Trust and accumulating
funds pending their distribution. If so specified in the related Prospectus
Supplement, certain funds may be established with the Trustee with respect to
Buy-Down Loans, GPM Loans, or other Loans having special payment features
included in the Trust Fund in addition to or in lieu of any such similar funds
to be held by the Servicer. See "Servicing of Loans -- Payments on Loans;
Deposits to Custodial Accounts." If Private Mortgage-Backed Securities are
backed by GPM Loans and the Asset Value with respect to a Multi-Class Series is
determined on the basis of the scheduled maximum principal balance of the GPM
Loans, a GPM Fund will be established which will be similar to that which would
be established if GPM Loans constituted the Primary Assets. See "Servicing of
Loans -- Payments on Loans; Deposits to Custodial Accounts" herein. Other
similar accounts may be established as specified in the related Prospectus
Supplement.
<PAGE>
Loan Underwriting Procedures and Standards
Underwriting Standards
The Depositor expects that all Loans comprising the Primary Assets for a
Series will have been originated generally in accordance with the underwriting
procedures and standards described herein, except as otherwise set forth in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans will have been originated by a savings and loan association,
savings bank, commercial bank, credit union, insurance company or similar
institution which is supervised and examined by a federal or state authority; a
mortgagee approved by the Secretary of Housing and Urban Development pursuant
to Sections 203 and 211 of the National Housing Act or a wholly-owned
subsidiary thereof; or by a subsidiary of the Depositor. Manufactured Home
Loans may have been originated by such institutions (other than a subsidiary of
the Depositor) or by a financial institution approved for insurance by the
Secretary of Housing and Urban Development pursuant to Section 2 of the
National Housing Act. Except as otherwise set forth in the related Prospectus
Supplement, the originator of a Loan will have applied underwriting procedures
intended to evaluate the borrower's credit standing and repayment ability and
the value and adequacy of the related property as collateral. FHA Loans and VA
Loans will have been originated in compliance with the underwriting policies of
the FHA and the VA, respectively.
In general, each borrower will have been required to complete an
application designed to provide to the original lender pertinent credit
information about the borrower. As part of the description of the borrower's
financial condition, the borrower generally will have furnished information
with respect to its assets, liabilities, income, credit history, employment
history and personal information, and furnished an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In general, an employment
verification is obtained from an independent source (typically the borrower's
employer), which reports the length of employment with that organization, the
borrower's current salary and whether it is expected that the borrower will
continue such employment in the future. If the borrower was self-employed, the
borrower may have been required to submit copies of recent signed tax returns.
The borrower may also have been required to authorize verifications of deposits
at financial institutions where the borrower had demand or savings accounts.
With respect to Multifamily Property, information concerning operating income
and expenses will have been obtained from the borrower showing operating income
and expenses during the preceding three calendar years. Certain considerations
may cause an originator of Loans to depart from these guidelines. For example,
when two individuals co-sign the loan documents, the incomes and expenses of
both individuals may be included in the computation.
The adequacy of the property financed by the related Loan as security for
repayment of such Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the Loan originator or independent appraisers selected
in accordance with pre-established guidelines established by the Loan
originator. The appraisal procedure guidelines will have required that the
appraiser or an agent on its behalf personally inspect the property and verify
that it was in good condition and that construction, if new, had been
completed. If an appraisal was required, such appraisal will have been based
upon a market data analysis of recent sales of comparable properties and, when
deemed applicable, a replacement cost analysis based on the current cost of
constructing or purchasing a similar property.
In general, based on the data provided, certain verifications and the
appraisal, a determination will have been made by the original lender that the
borrower's monthly income would be sufficient to enable the borrower to meet
its monthly obligations on the Loan and other expenses related to the property
(such as property taxes, utility costs, standard hazard and primary mortgage
insurance and, if applicable, maintenance fees and other levies assessed by a
Cooperative or a condominium association) and certain other fixed obligations
other than housing expenses. The originating lender's guidelines for Loans
secured by Single Family Property generally will specify that Scheduled
Payments plus taxes and insurance and all Scheduled Payments extending beyond
one year (including those mentioned above and other fixed obligations, such as
car payments) would equal no more than specified percentages of the prospective
borrower's gross income. These guidelines will generally be applied only to the
payments to be made during the first year of the Loan.
With respect to FHA Loans and VA Loans, traditional underwriting
guidelines used by the FHA and the VA, as the case may be, which were in effect
at the time of origination of each Loan will generally have been applied. With
respect to Multifamily Property, the Loan originator will have made an
assessment of the capabilities of the management of the project, including a
review of management's past performance record, its management reporting and
control procedures (to determine its ability to recognize and respond to
problems) and its accounting procedures to determine cash management ability.
Income derived from the Mortgaged Property constituting investment property may
have been considered for underwriting purposes, rather than the income of the
borrower from other sources. With respect to Mortgaged Property consisting of
vacation or second homes, no income derived from the property will have been
considered for underwriting purposes.
Certain types of Loans that may be included in the Primary Assets for a
Series may involve additional uncertainties not present in traditional types of
loans. For example, Buy-Down Loans, GEM Loans and GPM Loans provide for
escalating or variable payments by the borrower. These types of Loans are
underwritten on the basis of a judgment that the borrower will have the ability
to make larger Scheduled Payments in subsequent years. ARMs may involve similar
assessments.
To the extent specified in the related Prospectus Supplement, the
Depositor may purchase Loans (or participation interests therein) for inclusion
in a Trust Fund that are underwritten under standards and procedures which vary
from and are less stringent than those described herein. For instance, Loans
may be underwritten under a "limited documentation" or "no documentation"
program. With respect to such Loans, minimal investigation into the borrowers'
credit history and income profile is undertaken by the originator and such
Loans may be underwritten primarily on the basis of an appraisal of the
Mortgaged Property and Loan-to-Value Ratio on origination.
In addition, Mortgage Loans may have been originated in connection with a
governmental program under which underwriting standards were significantly less
stringent and designed to promote home ownership or the availability of
affordable residential rental property notwithstanding higher risks of default
and losses. The related Prospectus Supplement will specify the underwriting
standards applicable to such Mortgage Loans.
Certain states where the Mortgaged Properties may be located have
"antideficiency" laws requiring, in general, that lenders providing credit on
Single Family Property look solely to the property for repayment in the event
of foreclosure. See "Certain Legal Aspects of Loans" herein.
Loss Experience
The general appreciation of real estate values experienced in the past has
been a factor in limiting the general loss experience on Conventional Loans.
However, there can be no assurance that the past pattern of appreciation in
value of the real property securing such Loans will continue; in fact, some
regions of the country have experienced significant depreciation in real estate
values in recent periods. Further, there is no assurance that appreciation of
real estate values generally, if such appreciation occurs, will limit loss
experiences on non-traditional housing such as Multifamily Property,
Manufactured Homes or Cooperative Dwellings. Similarly, no assurance can be
given that the value of the Mortgaged Property (including Cooperative
Dwellings) securing a Loan has remained or will remain at the level existing on
the date of origination of such Loan. If the residential real estate market in
one or more regions of the United States should experience decline in property
values such that the outstanding balances of the Loans and any secondary
financing on the Mortgaged Properties securing such Loans become equal to or
greater than the value of such Mortgaged Properties, then the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. See "Certain Legal Aspects of
Loans" herein.
No assurance can be given that values of Manufactured Homes have or will
remain at the levels existing on the dates of origination of the related Loan.
Manufactured Homes are less likely to experience appreciation in value and more
likely to experience depreciation in value over time than other types of
Mortgaged Property. Additionally, delinquency, loss and foreclosure experience
on Manufactured Home Loans may be adversely affected to a greater degree by
regional and local economic conditions than more traditional Mortgaged
Property. Loans secured by Multifamily Property may also be more susceptible to
losses due to changes in local and regional economic conditions than Loans
secured by other Single Family Property. For example, unemployment resulting
from an economic downturn in local industry may sharply affect occupancy rates.
Also, interest rate fluctuations can make home ownership a more attractive
alternative to renting, causing occupancy rates and market rents to decline.
New construction can create an oversupply, particularly in a market that has
experienced low vacancy rates.
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Loans
included in the Primary Assets for a Series of Certificates are not covered by
the methods of credit support or the insurance policies described herein or in
the related Prospectus Supplement, such losses will be borne by Holders of the
Certificates of such Series. Even where credit support covers all losses
resulting from delinquency and foreclosure or repossession, the effect of
foreclosures and repossessions may be to increase prepayment experience on the
Primary Assets, thus reducing average weighted life and affecting yield to
maturity. See "Yield, Prepayment and Maturity Considerations".
Representations and Warranties
Unless otherwise specified in the related Prospectus Supplement, in the
Trust Agreement, the Depositor, the Master Servicer or another entity will
represent and warrant to the Trustee with respect to the Mortgage Loans
comprising the Primary Assets in a Trust Fund, upon delivery of the Mortgage
Loans to the Trustee hereunder, among other things, that: (i) any required
title insurance (or in the case of Mortgaged Properties located in areas where
such policies are generally not available, an attorney's certificate of title)
and any required standard hazard and primary mortgage insurance was in effect
as of the date of such representation and warranty; (ii) immediately prior to
the transfer and assignment of the Mortgage Loans the Depositor (or such other
entity) with respect to each Mortgage Loan had good title to and was sole owner
of each such Mortgage Loan; (iii) with respect to first lien Mortgage Loans,
each Mortgage constituted a valid first lien on the related Mortgaged Property
(subject only to permissible title insurance exceptions) and that the related
Mortgaged Property was free of material damage and was in good repair; (iv)
each Mortgage Loan at the time it was made complied in all material respects
with applicable state and federal laws, including usury, equal credit
opportunity and truth-in-lending or similar disclosure laws; and (v) each
Mortgage Loan was current as to all required payments (i.e., not more than one
or two payments delinquent).
If the Mortgage Loans include Cooperative Loans, no representations or
warranties with respect to title insurance or hazard insurance will be given.
In addition, if the Mortgage Loans include Condominium Loans, no representation
regarding hazard insurance will be given. Generally, the Cooperative or
Condominium Association itself is responsible for the maintenance of hazard
insurance for property owned by the Cooperative and the Condominium Association
is responsible for maintaining standard hazard insurance, insuring the entire
Condominium Building (including each individual Condominium Unit), and the
borrowers of that Cooperative or Condominium do not maintain separate hazard
insurance on their individual Cooperative Dwellings or Condominium Units. See
"Servicing of Loans -- Maintenance of Insurance Policies and Other Servicing
Procedures" herein. With respect to a Cooperative Loan, unless otherwise
specified in the related Prospectus Supplement, the Depositor will represent
and warrant based, in part, upon representations and warranties of the
originator of such Cooperative Loan that (i) with respect to first lien
Cooperative Loans, the security interest created by the cooperative security
agreements is a valid first lien on the collateral securing the Cooperative
Loan (subject to the right of the related Cooperative to cancel shares and
terminate the proprietary lease for unpaid assessments) and (ii) the related
Cooperative Dwelling is free of material damage and in good repair.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Manufactured Home Loan, the Depositor, based, in part, upon
representations and warranties of the originator of such Manufactured Home Loan
will represent and warrant, among other things that (i) immediately prior to
the transfer and assignment of the Manufactured Home Loans to the Trustee, the
Depositor had good title to, and was the sole owner of, each Manufactured Home
Loan; (ii) as of the date of such transfer and assignment, the Manufactured
Home Loans are subject to no offsets, defenses or counterclaims; (iii) each
Manufactured Home Loan at the time it was made complied in all material
respects with applicable state and federal laws, including usury, equal credit
opportunity and truth-in-lending or similar disclosure laws; (iv) with respect
to fist lien Manufactured Home Loans, as of the date of such transfer and
assignment, each Manufactured Home Loan constitutes a valid first lien on the
related Manufactured Home and such Manufactured Home is free of material damage
and is in good repair; (v) as of the date of such representation and warranty,
no Manufactured Home Loan is more than 59 days delinquent and there are no
delinquent tax or assessment liens against the related Manufactured Home; and
(vi) with respect to each Manufactured Home Loan, any required hazard insurance
policy was effective at the origination of each Manufactured Home Loan and
remained in effect on the date of the transfer and assignment of the
Manufactured Home Loan from the Depositor and that all premiums due on such
insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made by
the Depositor, the Master Servicer or another entity in respect of a Loan that
materially and adversely affects the value of such Loan, such entity will be
obligated to cure such breach in all material respects, repurchase such Loan
from the Trustee, or, unless specified otherwise in the related Prospectus
Supplement, deliver a Qualified Substitute Mortgage Loan as described below
under "The Trust Agreements -- Assignment of Primary Assets." The Depositor
does not have, and is not expected in the future to have, any significant
assets with which to meet its obligations to repurchase or substitute Loans as
to which there has been a breach of any representation or warranty, and its
only source of funds to make such a substitution or repurchase would be from
funds obtained from the enforcement of a corresponding obligation, if any, on
the part of the originator or seller of the Loans. See "Special Considerations
- -- Limited Obligations and Assets of the Depositor." The PMBS Trustee (in the
case of Private Mortgage-Backed Securities) or the Trustee, as applicable, will
be required to enforce this obligation following the practices it would employ
in its good faith business judgment were it the owner of such Loan. If so
specified in the related Prospectus Supplement, the Master Servicer may be
obligated to enforce such obligations rather than the Trustee or PMBS Trustee.
Substitution of Primary Assets
Substitution of Primary Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Primary Asset or
in the event the documentation with respect to any Primary Asset is determined
by the Trustee to be incomplete. The period during which such substitution will
be permitted generally will be indicated in the related Prospectus Supplement.
The related Prospectus Supplement will describe any other conditions upon which
Primary Assets may be substituted for Primary Assets initially included in the
Trust Fund.
<PAGE>
Servicing of Loans
General
Customary servicing functions with respect to Loans constituting the
Primary Assets in the Trust Fund will be provided, as specified in the related
Prospectus Supplement, either by the Master Servicer directly or through one or
more servicers (the "Servicers") subject to supervision by the Master Servicer,
or by a single Servicer that is a party to the Trust Agreement for a Series and
services the Loans directly or through one or more subservicers (the
"Subservicers"). In general, descriptions herein of the rights and obligations
of a Master Servicer will also be applicable to a Servicer, and descriptions
herein of the rights and obligations of Servicers that service Loans under the
supervision of a Master Servicer will generally be applicable to Subservicers.
If the Master Servicer is not directly servicing the Loans, then the Master
Servicer will (i) administer and supervise the performance by the Servicers of
their servicing responsibilities under their servicing agreements ("Servicing
Agreements") with the Master Servicer, (ii) maintain any standard or special
hazard insurance policy, primary mortgage insurance, bankruptcy bond or pool
insurance policy required for the related Loans and (iii) advance funds as
described below under "Advances". If the Master Servicer services the Loans
through Servicers as its agents, the Master Servicer may or may not, as
specified in the related Prospectus Supplement, be ultimately responsible for
the performance of all servicing activities, including those performed by the
Servicers, notwithstanding its delegation of certain responsibilities to such
Servicers. If a single Servicer services the Loans through Subservicers, such
Servicer will be ultimately responsible for the performance of all servicing
activities.
The Master Servicer will be a party to the Trust Agreement for any Series
for which Loans comprise the Primary Assets and may be a party to a
Participation Agreement executed with respect to any Participation Certificates
which constitute the Primary Assets. The Master Servicer may be an affiliate of
the Depositor. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer and each Servicer will be required to be a FNMA- or
FHLMC-approved seller/servicer and, in the case of FHA Loans, approved by HUD
as an FHA mortgagee.
The Master Servicer will be paid a Servicing Fee for the performance of
its services and duties under each Trust Agreement as specified in the related
Prospectus Supplement. Each Servicer, if any, will be entitled to receive
either a portion of the Servicing Fee or a separate fee. In addition, the
Master Servicer or Servicer may be entitled to retain late charges, assumption
fees and similar charges to the extent collected from mortgagors. If a Servicer
is terminated by the Master Servicer, the servicing function of the Servicer
will be either transferred to a substitute Servicer or performed by the Master
Servicer. The Master Servicer will be entitled to retain the fee paid to the
Servicer under a terminated Servicing Agreement if the Master Servicer elects
to perform such servicing functions itself.
The Master Servicer, at its election, may pay itself the Servicing Fee for
a Series with respect to each Mortgage Loan either by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to the deposit of
such payment in the Collection Account for such Series, (b) withdrawing the
Servicing Fee from the Collection Account after the entire Scheduled Payment
has been deposited in the Collection Account, or (c) requesting that the
Trustee pay the Servicing Fee out of amounts in the Certificate Account.
Collection Procedures; Escrow Accounts
The Master Servicer, acting directly or through Servicers, will make
reasonable efforts to collect all payments required to be made under the
Mortgage Loans and will, consistent with the Trust Agreement for a Series and
any applicable insurance policies and other credit supports, follow such
collection procedures as it follows with respect to comparable loans held in
its own portfolio. Consistent with the above, the Master Servicer and any
Servicer may, in its discretion, (i) waive any assumption fee, late payment
charge, or other charge in connection with a Loan and (ii) arrange with a
mortgagor a schedule for the liquidation of delinquencies by extending the Due
Dates for Scheduled Payments on such Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or the Servicers acting under its supervision, to the extent
permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") in which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums, and other comparable items that are
required to be paid to the mortgagee will be deposited. However, Mortgage Loans
and Manufactured Home Loans may not require such payments under the loan
related documents, in which case the Master Servicer would not be required to
establish any Escrow Account with respect to such Loans. Withdrawals from the
Escrow Accounts are to be made to effect timely payment of taxes, assessments,
mortgage and hazard insurance premiums, to refund to borrowers amounts
determined to be overages, to pay interest to borrowers on balances in the
Escrow Account to the extent required by law, to repair or otherwise protect
the property securing the related Loan and to clear and terminate such Escrow
Account. The Master Servicer or the applicable Servicers will be responsible
for the administration of the Escrow Accounts and generally will make advances
to such account when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
The Master Servicer or the Trustee will establish a separate account (the
"Collection Account") in the name of the Trustee. The Collection Account will
be maintained in an account or accounts (i) at a depository institution, the
long-term unsecured debt obligations of which at the time of any deposit
therein are rated within the two highest rating categories by each Rating
Agency rating the Certificates of such Series, (ii) the deposits in which are
insured to the maximum extent available by the FDIC or which are secured in a
manner meeting requirements established by each Rating Agency or (iii) with a
depository institution otherwise acceptable to each Rating Agency.
The Collection Account may be maintained as an interest-bearing account,
or the funds held therein may be invested, pending remittance to the Trustee,
in Eligible Investments. If so specified in the related Prospectus Supplement,
the Master Servicer will be entitled to receive as additional compensation any
interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will deposit into the Collection Account for each Series on the
Business Day following the Closing Date any amounts representing Scheduled
Payments due after the related Cut-off Date but received by the Master Servicer
on or before the Closing Date, and thereafter, after the date of receipt
thereof, the following payments and collections received or made by it (other
than in respect of principal of and interest on the related Loans due on or
before such Cut-off Date):
(i) All payments on account of principal, including prepayments, on such
Loans;
(ii) All payments on account of interest on such Loans after deducting
therefrom, at the discretion of the Master Servicer but only to the extent
of the amount permitted to be withdrawn or withheld from the Collection
Account in accordance with the related Trust Agreement, the Servicing Fee
in respect of such Loans;
(iii) All amounts received by the Master Servicer in connection with the
liquidation of defaulted Loans or property acquired in respect thereof,
whether through foreclosure sale or otherwise, including payments in
connection with such Loans received from the mortgagor, other than amounts
required to be paid to the mortgagor pursuant to the terms of the
applicable Mortgage or otherwise pursuant to law ("Liquidation Proceeds"),
exclusive of, in the discretion of the Master Servicer but only to the
extent of the amount permitted to be withdrawn from the Collection Account
in accordance with the related Trust Agreement, the Servicing Fee, if any,
in respect of the related Loan;
(iv) All proceeds received by the Trust under any title, hazard or other
insurance policy covering any such Loan, other than proceeds to be applied
to the restoration or repair of the Mortgaged Property or released to the
mortgagor in accordance with the related Trust Agreement (which shall be
retained by the Master Servicer and not deposited in the Collection
Account);
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Trust Agreement;
(vi) All Advances for such Series made by the Master Servicer pursuant to
the related Trust Agreement; and
(vii) All proceeds of any such Loans repurchased by the Depositor
pursuant to the related Trust Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it pursuant
to the related Trust Agreement; the Master Servicer's right to reimburse
itself is limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Mortgaged Property)
which represent late recoveries of Scheduled Payments respecting which any
such Advance was made;
(ii) to reimburse itself for any Advances for such Series that the Master
Servicer determines in good faith it will be unable to recover from amounts
representing late recoveries of Scheduled Payments respecting which such
Advance was made or from Liquidation Proceeds or the proceeds of insurance
policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Mortgaged Property and, to the extent that
Liquidation Proceeds after such reimbursement are in excess of the
outstanding principal balance of the related Loan, together with accrued
and unpaid interest thereon at the applicable Pass-Through Rate to the Due
Date next succeeding the date of its receipt of such Liquidation Proceeds,
to pay to itself out of such excess the amount of any unpaid Servicing Fee
and any assumption fees, late payment charges, or other charges on the
related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee out
of any interest component of any Scheduled Payment, late payment or other
recovery with respect to a particular Loan prior to the deposit of such
Scheduled Payment, late payment or recovery into the Collection Account, to
pay to itself the Servicing Fee, as adjusted pursuant to the related Trust
Agreement, from any the related Scheduled Payment, late payment or such
other recovery, to the extent permitted by such Trust Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Trust Agreement;
(vi) to pay to itself with respect to each Loan or REO Property acquired
in respect thereof that has been repurchased by the Depositor pursuant to
the related Trust Agreement all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to reimburse itself for the excess of any unreimbursed Advances
with respect to a particular Loan over the related Liquidation Proceeds;
(viii) to make payments to the Trustee of such Series for deposit into
the Certificate Account, if any, or for remittance to the
Certificateholders of such Series in the amounts and in the manner provided
for in the related Trust Agreement; and
(ix) to clear and terminate the Collection Account pursuant to the
related Trust Agreement.
In addition, if the Master Servicer deposits in the Collection Account for
a series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
Servicing Accounts
In those cases where a Servicer is servicing a Mortgage Loan, the Servicer
will establish and maintain an account (a "Servicing Account") that will comply
with the standards set forth above, and which is otherwise acceptable to the
Master Servicer. The Servicer is generally required to deposit into the
Servicing Account all amounts enumerated in the preceding paragraph in respect
of the Mortgage Loans received by the Servicer, less its servicing
compensation. On the date specified in the related Prospectus Supplement, the
Servicer will remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan. The Servicer may, to the extent
described in the related Prospectus Supplement, be required to advance any
monthly installment of principal and interest that was not received, less its
servicing fee, by the date specified in the related Prospectus Supplement.
Buy-Down Loans, GPM Loans and Other Subsidized Loans
With respect to each Buy-Down Loan, if any, included in a Trust Fund, the
Master Servicer will deposit all Buy-Down Amounts in a custodial account (which
may be interest-bearing) complying with the requirements set forth above for
the Collection Account (the "Buy-Down Fund"). The amount of such deposit,
together with investment earnings thereon at the rate specified in the related
Prospectus Supplement, will provide sufficient funds to support the payments on
such Buy-Down Loan on a level debt service basis. The Master Servicer will not
be obligated to add to the Buy-Down Fund should amounts therein and investment
earnings prove insufficient to maintain the scheduled level of payments on the
Buy-Down Loans, in which event distributions to the Certificateholders may be
affected. Unless otherwise provided in the related Prospectus Supplement, a
Buy-Down Fund will not be included in or deemed to be a part of the Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the terms of
all Buy-Down Loans provide for the contribution of buy-down funds in an amount
equal to or exceeding either (i) the total payments to be made from such funds
pursuant to the related buydown plan or (ii) if such buy-down funds are present
valued, that amount of buy-down funds which, together with investment earnings
thereon at a specified rate, compounded monthly, will support the scheduled
level of payments due under the Buy-Down Loan. Neither the Master Servicer, any
Servicer nor the Depositor will be obligated to add to such buy-down funds any
of its own funds should investment earnings prove insufficient to maintain the
scheduled level of payments on the Buy-Down Loan, in which event distributions
to Certificateholders may be affected. With respect to each Buy-Down Loan, the
Master Servicer will deposit in the Collection Account the amount, if any, of
the buy-down funds (and, if applicable, investment earnings thereon) for each
Buy-Down Loan that, when added to the amount due from the borrower on such
Buy-Down Loan, equals the full monthly payment which would be due on the
Buy-Down Loan if it were not subject to the buy-down plan.
If the borrower on a Buy-Down Loan prepays such Loan in its entirety
during the Buy-Down Period, the Master Servicer will withdraw from the Buy-Down
Fund and remit to the borrower in accordance with the related buy-down plan any
buy-down funds remaining in the Buy-Down Fund. If a prepayment by a borrower
during the Buy-Down Period together with buy-down funds will result in a
prepayment in full, the Master Servicer will withdraw from the Buy-Down Fund
for deposit in the Collection Account the buy-down funds and investment
earnings thereon, if any, which together with such prepayment will result in a
prepayment in full. If the borrower defaults during the Buy-Down Period with
respect to a Buy-Down Loan and the property securing the related Loan is sold
in liquidation (either by the Master Servicer or the insurer under any related
insurance policy), the Master Servicer will withdraw from the Buy-Down Fund the
buy-down funds and all investment earnings thereon, if any, for deposit in the
Collection Account or remit the same to the insurer if the mortgaged property
is transferred to such insurer and such insurer pays all of the loss incurred
in respect of such default. In the case of any such prepaid or defaulted
Buy-Down Loan, the buy-down funds in respect of which were supplemented by
investment earnings, the Master Servicer will withdraw from the Buy-Down Fund
and retain or remit to the borrower, depending upon the terms of the buy-down
plan, any investment earnings remaining in the related Buy-Down Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the Master Servicer will deposit the
subsidy funds in a custodial account (which may be interest-bearing) complying
with the requirements set forth above for the Collection Account (a "Subsidy
Fund"). Unless otherwise specified in the related Prospectus Supplement, the
terms of each such Loan will provide for the contribution of the entire
undiscounted amount of subsidy amounts necessary to maintain the scheduled
level of payments due during the early years of such Loan. Neither the Master
Servicer, any Servicer nor the Depositor will be obligated to add to such
Subsidy Fund any of its own funds. Unless otherwise provided in the related
Prospectus Supplement, such Subsidy Fund will not be included in or deemed to
be a part of the Trust Fund.
If the Depositor values any GPM Loans deposited into the Trust Fund for a
Multi-Class Series on the basis of such GPM Loan's scheduled maximum principal
balance, the Master Servicer will, if and to the extent provided in the related
Prospectus Supplement, deposit in a custodial account (which may be interest
bearing) (the "GPM Fund") complying with the requirements set forth above for
the Collection Account an amount which, together with reinvestment income
thereon at the rate set forth in the related Prospectus Supplement, will be
sufficient to cover the amount by which payments of principal and interest on
such GPM Loans assumed in calculating payments due on the Certificates of such
Multi-Class Series exceed the scheduled payments on such GPM Loans. The Trustee
will withdraw amounts from the GPM Fund for a Series upon a prepayment of such
GPM Loan as necessary and apply such amounts to the payment of principal and
interest on the Certificates of such Series. Neither the Depositor, the Master
Servicer nor any Servicer will be obligated to supplement the GPM Fund should
amounts therein and investment earnings thereon prove insufficient to maintain
the scheduled level of payments, in which event, distributions to the
Certificateholders may be affected. Unless otherwise specified in the related
Prospectus Supplement, such GPM Fund will not be included in or deemed to be
part of the Trust Fund.
With respect to any other type of Loan which provides for payments other
than on the basis of level payments, an account may be established as described
in the related Prospectus Supplement on terms similar to those relating to the
Buy-Down Fund, the Subsidy Fund or the GPM Fund.
Advances and Limitations Thereon
General. The related Prospectus Supplement will describe the circumstances
under which the Master Servicer or Servicer will make Advances with respect to
delinquent payments on Loans. Unless otherwise specified in the related
Prospectus Supplement, neither the Master Servicer nor any Servicer will be
obligated to make Advances, and such obligation may be limited in amount, may
be limited to advances received from the Servicers, if any, or may not be
activated until a certain portion of a specified reserve fund is depleted. If
the Master Servicer is obligated to make Advances, a surety bond or other
credit support may be provided with respect to such obligation as described in
the related Prospectus Supplement. Advances are intended to provide liquidity
and not to guarantee or insure against losses. Accordingly, any funds advanced
are recoverable by the Servicer or the Master Servicer, as the case may be, out
of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
Insurance Policies, or Liquidation Proceeds from the related Loan, the Servicer
or Master Servicer will be entitled to reimbursement from other funds in the
Collection Account or Servicing Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
Prospectus Supplement.
Advances in Connection With Prepaid Loans. In addition, when a borrower
makes a principal prepayment in full between Due Dates on the related Loan, the
borrower will generally be required to pay interest on the principal amount
prepaid only to the date of such prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Certificateholders of a Series will not be adversely affected by any resulting
shortfall in interest, the Master Servicer may be obligated to advance moneys
from its own funds to the extent necessary to include in its remittance to the
Trustee for deposit into the Certificate Account an amount equal to a full
Scheduled Payment of interest on the related Loan (adjusted to the applicable
Pass-Through Rate). Any such principal prepayment, together with a full
Scheduled Payment of interest thereon at the applicable Pass-Through Rate (to
the extent of such adjustment or advance), will be distributed to
Certificateholders on the related Distribution Date. If the amount necessary to
include a full Scheduled Payment of interest as described above exceeds the
amount which the Master Servicer is obligated to advance, as applicable, a
shortfall may occur as a result of a prepayment in full. See "Yield, Prepayment
and Maturity Considerations".
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Master Servicer will be required to
maintain or to cause the borrower on each Loan to maintain or will use its best
reasonable efforts to cause each Servicer of a Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the property securing the related Loan is located. See
"Description of Mortgage and Other Insurance" herein. Unless otherwise
specified in the related Prospectus Supplement, coverage will be in an amount
at least equal to the greater of (i) the amount necessary to avoid the
enforcement of any co-insurance clause contained in the policy or (ii) the
outstanding principal balance of the related Loan. The Master Servicer will
also maintain on REO Property that secured a defaulted Loan and that has been
acquired upon foreclosure, deed in lieu of foreclosure, or repossession, a
standard hazard insurance policy in an amount that is at least equal to the
maximum insurable value of such REO Property. No earthquake or other additional
insurance will be required of any borrower or will be maintained on REO
Property acquired in respect of a defaulted Loan, other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require such additional insurance. When, at the time of origination of a Loan,
the property securing that Loan is located in a federally designated special
flood hazard area, the Master Servicer will cause to be maintained or use its
best reasonable efforts to cause the Servicer to maintain with respect to such
property flood insurance as required under the Flood Disaster Protection Act of
1973, to the extent available, or as described in the related Prospectus
Supplement.
Any amounts collected by the Master Servicer or the Servicer, as the case
may be, under any such policies of insurance (other than amounts to be applied
to the restoration or repair of the Mortgaged Property, released to the
borrower in accordance with normal servicing procedures or used to reimburse
the Master Servicer for amounts to which it is entitled to reimbursement) will
be deposited in the Collection Account. In the event that the Master Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Master Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of
hazard insurance for the property owned by the cooperative and the
tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support. Similarly, the Depositor will not require that a standard
hazard or flood insurance policy be maintained on a Condominium Unit relating
to any Condominium Loan. Generally, the Condominium Association is responsible
for maintenance of hazard insurance insuring the entire Condominium building
(including each individual Condominium Unit), and the owner(s) of an individual
Condominium Unit do not maintain separate hazard insurance policies. To the
extent, however, that a Condominium Association and the related borrower on a
Condominium Loan do not maintain such insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of
damaged property, any damage to such borrower's Condominium Unit or the related
Condominium Building could significantly reduce the value of the collateral
securing such Condominium Loan to the extent not covered by other credit
support.
Special Hazard Insurance Policy. To the extent specified in the related
Prospectus Supplement, the Master Servicer will maintain a special hazard
insurance policy, in full force and effect with respect to the Loans. Unless
otherwise specified in the related Prospectus Supplement, the special hazard
insurance policy will provide for a fixed premium rate based on the declining
aggregate outstanding principal balance of the Loans. The Master Servicer will
agree to pay the premium for any special hazard insurance policy on a timely
basis. If the special hazard insurance policy is cancelled or terminated for
any reason (other than the exhaustion of total policy coverage), the Master
Servicer will exercise its best reasonable efforts to obtain from another
insurer a replacement policy comparable to the terminated special hazard
insurance policy with a total coverage which is equal to the then existing
coverage of the terminated special hazard insurance policy; provided that if
the cost of any such replacement policy is greater than the cost of the
terminated special hazard insurance policy, the amount of coverage under the
replacement policy will, unless otherwise specified in the related Prospectus
Supplement, be reduced to a level such that the applicable premium does not
exceed 150% of the cost of the special hazard insurance policy that was
replaced. Any amounts collected by the Master Servicer under the special hazard
insurance policy in the nature of insurance proceeds will be deposited in the
Collection Account (net of amounts to be used to repair, restore or replace the
related property securing the Loan or to reimburse the Master Servicer (or a
Servicer) for related amounts owed to it). Certain characteristics of the
special hazard insurance policy are described under "Description of Mortgage
and Other Insurance -- Hazard Insurance on the Loans."
Primary Mortgage Insurance. To the extent described in the related
Prospectus Supplement, the Master Servicer will be required to use its best
reasonable efforts to keep, or to cause each Servicer to keep, in full force
and effect, a primary mortgage insurance policy with respect to each
Conventional Loan secured by Single Family Property for which such coverage is
required for as long as the related mortgagor is obligated to maintain such
primary mortgage insurance under the terms of the related Loan. The Master
Servicer will not cancel or refuse to renew any such primary mortgage insurance
policy in effect at the date of the initial issuance of the Certificates that
is required to be kept in force unless a replacement primary mortgage insurance
policy for such cancelled or nonrenewed policy is maintained with a Qualified
Insurer.
Primary insurance policies will be required with respect to Manufactured
Home Loans only to the extent described in the related Prospectus Supplement.
If primary mortgage insurance is to be maintained with respect to Manufactured
Home Loans, the Master Servicer will be required to maintain such insurance as
described above. For further information regarding the extent of coverage under
a primary mortgage insurance policy, see "Description of Mortgage and Other
Insurance -- Mortgage Insurance on the Loans."
FHA Insurance and VA Guarantees. To the extent specified in the related
Prospectus Supplement, all or a portion of the Loans may be insured by the FHA
or guaranteed by the VA. The Master Servicer will be required to take such
steps as are reasonably necessary to keep such insurance and guarantees in full
force and effect. See "Description of Mortgage and Other Insurance -- Mortgage
Insurance on the Loans."
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated to use its best reasonable
efforts to maintain a pool insurance policy with respect to the Loans in the
amount and with the coverage described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the pool
insurance policy will provide for a fixed premium rate on the declining
aggregate outstanding principal balance of the Loans. The Master Servicer will
be obligated to pay the premiums for such pool insurance policy on a timely
basis.
The related Prospectus Supplement will identify the pool insurer for each
Series of Certificates. If the pool insurer ceases to be a Qualified Insurer
because it is not approved as an insurer by FHLMC or FNMA or because its
claims-paying ability is no longer rated in the category required by the
related Prospectus Supplement, the Master Servicer will be obligated to review,
no less often than monthly, the financial condition of the pool insurer to
determine whether recoveries under the pool insurance policy are jeopardized by
reason of the financial condition of the pool insurer. If the Master Servicer
determines that recoveries may be so jeopardized or if the pool insurer ceases
to be qualified under applicable law to transact a mortgage guaranty insurance
business, the Master Servicer will exercise its best reasonable efforts to
obtain from another Qualified Insurer a comparable replacement pool insurance
policy with a total coverage equal to the then outstanding coverage of the pool
insurance policy to be replaced; provided that, if the premium rate on the
replacement policy is greater than that of the existing pool insurance policy,
then the coverage of the replacement policy will, unless otherwise specified in
the related Prospectus Supplement, be reduced to a level such that its premium
rate does not exceed 150% of the premium rate on the pool insurance policy to
be replaced. Payments made under a pool insurance policy will be deposited into
the Collection Account (net of expenses of the Master Servicer or any related
unreimbursed advances or unpaid Servicing Fee). Certain characteristics of the
pool insurance policy are described under "Description of Mortgage and Other
Insurance -- Mortgage Insurance on the Loans."
Bankruptcy Bond. If so specified in the related Prospectus Supplement, the
Master Servicer will be obligated to use its best reasonable efforts to obtain
and thereafter maintain a bankruptcy bond or similar insurance or guaranty in
full force and effect throughout the term of the related Trust Agreement,
unless coverage thereunder has been exhausted through payment of claims. If so
specified in the Prospectus Supplement, the Master Servicer will be required to
pay from its servicing compensation the premiums for the bankruptcy bond on a
timely basis. Coverage under the bankruptcy bond may be cancelled or reduced by
the Master Servicer at any time, provided that such cancellation or reduction
does not adversely affect the then current rating of the related Series of
Certificates. See "Description of Mortgage and Other Insurance -- Bankruptcy
Bond" herein.
Presentation of Claims; Realization Upon Defaulted Loans.
The Master Servicer, on behalf of the Trustee and the Certificateholders,
will be required to present or cause to be presented, claims with respect to
any standard hazard insurance policy, pool insurance policy, special hazard
insurance policy, bankruptcy bond, or primary mortgage insurance policy, and to
the FHA and the VA, if applicable in respect of any FHA insurance or VA
guarantee respecting defaulted Mortgage Loans.
The Master Servicer will use its reasonable best efforts to foreclose
upon, repossess or otherwise comparably convert the ownership of the real
properties securing such of the related Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. In connection with such foreclosure or other
conversion, the Master Servicer will follow such practices and procedures as it
deems necessary or advisable and as are normal and usual in its servicing
activities with respect to comparable loans serviced by it. However, the Master
Servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines
that: (i) such restoration or foreclosure will increase the Liquidation
Proceeds in respect of the related Mortgage Loan available to the
Certificateholders after reimbursement to itself for such expenses and (ii)
that such expenses will be recoverable by it either through Liquidation
Proceeds or the proceeds of insurance. Notwithstanding anything to the contrary
herein, in the case of a Trust Fund for which a REMIC election has been made,
the Master Servicer shall not liquidate any collateral acquired through
foreclosure later than one year after the acquisition of such collateral. While
the holder of Mortgaged Property acquired through foreclosure can often
maximize its recovery by providing financing to a new purchaser, the Trust Fund
will have no ability to do so and neither the Master Servicer nor any Servicer
will be required to do so.
Similarly, if any property securing a defaulted Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy or the
applicable special hazard insurance policy, if any, are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
pool insurance policy or any primary mortgage insurance policy, FHA insurance,
or VA guarantee, neither the Master Servicer nor any Servicer will be required
to expend its own funds to restore the damaged property unless it determines
(i) that such restoration will increase the Liquidation Proceeds in respect of
such Loan after reimbursement of the expenses incurred by such Servicer or the
Master Servicer and (ii) that such expenses will be recoverable by it through
proceeds of the sale of the property or proceeds of the related pool insurance
policy or any related primary mortgage insurance policy, FHA insurance, or VA
guarantee.
As to collateral securing a Cooperative Loan, any prospective purchaser
will generally have to obtain the approval of the board of directors of the
relevant cooperative before purchasing the shares and acquiring rights under
the proprietary lease or occupancy agreement securing that Cooperative Loan.
See "Certain Legal Aspects of Loans -- Foreclosure on Shares of Cooperatives"
herein. This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the Cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the Trust Fund's ability to sell and realize the value of those shares.
With respect to a Loan secured by a Multifamily Property, the market value
of any property obtained in foreclosure or by deed in lieu of foreclosure will
be based substantially on the operating income obtained by renting the dwelling
units. As a default on a Loan secured by Multifamily Property is likely to have
occurred because operating income, net of expenses, is insufficient to make
debt service payments on the related Loan, it can be anticipated that the
market value of such property will be less than anticipated when such Loan was
originated. To the extent that equity does not cushion the loss in market value
and such loss is not covered by other credit support, a loss may be experienced
by the related Trust Fund. With respect to a defaulted Manufactured Home Loan,
the value of the related Manufactured Home can be expected to be less on resale
than the value of a new Manufactured Home. To the extent equity does not
cushion the loss in market value, and such loss is not covered by other credit
support, a loss may be experienced by the Trust Fund.
Enforcement of Due-On-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Mortgaged Property is about to be conveyed by the borrower,
the Master Servicer will, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such conveyance,
exercise its rights to accelerate the maturity of such Loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that
such clause is not enforceable under applicable law or if the enforcement of
such clause would result in loss of coverage under any primary mortgage
insurance policy. If such conditions are not met or the Master Servicer
reasonably believes that enforcement of a due-on-sale clause will not be
enforceable, the Master Servicer is authorized to accept from or enter into an
assumption agreement with the person to whom such property has been or is about
to be conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original borrower is released from liability and such
person is substituted as the borrower and becomes liable under the Loan. Any
fee collected in connection with an assumption will be retained by the Master
Servicer as additional servicing compensation. The terms of a Loan may not be
changed in connection with an assumption except that, if the terms of the Loan
so permit, and subject to certain other conditions, the interest rate may be
increased (but not decreased) to a prevailing market rate. Unless otherwise
specified in the related Prospectus Supplement, Certificateholders would not
benefit from any such increase.
Certain Rights Related to Foreclosure
Certain rights in connection with foreclosure of defaulted Mortgage Loans
may be granted to the holders of the Class of Subordinate Certificates ranking
lowest in priority and, when such Certificates are no longer outstanding, to
the holders of the Class of Subordinate Certificates ranking next lowest in
priority. Such rights may include the right to delay foreclosure until a
Mortgage Loan has been delinquent for six months, provided that upon election
to delay foreclosure such holder establishes a reserve fund for the benefit of
the Trust Fund in an amount equal to 125% of the greater of the Scheduled
Principal Balance of such Mortgage Loan or the appraised value of the related
Mortgaged Property, plus three months' accrued interest on such Mortgage Loan.
Any exercise of such right to delay foreclosure could affect the amount
recovered upon liquidation of the related Mortgaged Property. Such rights may
also include the right to recommend foreclosure or alternatives to foreclosure
with respect to a defaulted Mortgage Loan, and the right to purchase defaulted
Mortgage Loan from the Trust Fund.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement, the
Master Servicer or any Servicer will be entitled to a servicing fee in an
amount to be determined as specified in the related Prospectus Supplement. The
servicing fee may be fixed or variable, as specified in the related Prospectus
Supplement. In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or any Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges, or excess
proceeds following disposition of property in connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay the fees of the Servicers, if any, and certain
expenses incurred in connection with the servicing of the Loans, including,
without limitation, the payment of the fees and expenses of the Trustee and
independent accountants, payment of insurance policy premiums and the cost of
credit support, if any, payment of expenses incurred in enforcing the
obligations of Servicers and in preparation of reports to Certificateholders.
Certain of these expenses may be reimbursable pursuant to the terms of the
Trust Agreement from Liquidation Proceeds and the proceeds of insurance
policies and, in the case of enforcement of the obligations of Servicers, from
any recoveries in excess of amounts due with respect to the related Loans or
from specific recoveries of costs.
The Master Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Loans. The
related Trust Fund will suffer no loss by reason of such expenses to the extent
claims are paid under related insurance policies or from the Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage thereunder has been exhausted, the related Trust Fund
will suffer a loss to the extent that Liquidation Proceeds, after reimbursement
of the Master Servicer's expenses, are less than the outstanding principal
balance of and unpaid interest on the related Loan which would be distributable
to Certificateholders. In addition, the Master Servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted Loan, such right of reimbursement being prior
to the rights of the Certificateholders to receive any related proceeds of
insurance policies, Liquidation Proceeds or amounts derived from other credit
supports. The Master Servicer is also entitled to reimbursement from the
Collection Account for Advances. In addition, when a borrower makes a principal
prepayment in full between Due Dates on the related Loan, the borrower will
generally be required to pay interest on the amount prepaid only to the date of
prepayment. If and to the extent provided in the related Prospectus Supplement,
in order that one or more Classes of the Certificateholders of a Series will
not be adversely affected by any resulting shortfall in interest, the amount of
the Servicing Fee may be reduced to the extent necessary to include in the
Master Servicer's remittance to the Trustee for deposit into the Certificate
Account an amount equal to a full scheduled payment of interest on the related
Loan (adjusted to the applicable Pass-Through Rate). Any such principal
prepayment, together with a full Scheduled Payment of interest thereon at the
applicable Pass-Through Rate (to the extent of such adjustment or advance),
will be distributed to Certificateholders on the related Distribution Date. If
the amount necessary to include a full Scheduled Payment of interest as
described above exceeds the amount of the Servicing Fee, a shortfall to
Certificateholders may occur as a result of a prepayment in full. See "Yield,
Prepayment and Maturity Considerations".
The rights of the Master Servicer to receive funds from the Collection
Account for a Series, whether as the Servicing Fee or other compensation, or
for the reimbursement of Advances, expenses or otherwise, are not subordinate
to the rights of Certificateholders of such Series.
Evidence as to Compliance
Unless otherwise specified in the related Prospectus Supplement, the Trust
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of mortgage loans by the Master Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with the Trust Agreement except for (i) such exceptions as such
firm believes to be immaterial and (ii) such other exceptions as are set forth
in such statement.
The Trust Agreement for each Series will also provide for delivery to the
Trustee for such Series of an annual statement signed by an officer of the
Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Trust Agreement throughout the preceding calendar year.
Certain Matters Regarding the Master Servicer
The Master Servicer for each Series will be identified in the related
Prospectus Supplement. The Master Servicer may be an affiliate of the Depositor
and may have other business relationships with the Depositor and its
affiliates.
In the event of an Event of Default under the Trust Agreement, the Master
Servicer may be replaced by the Trustee or a successor Master Servicer. See
"The Trust Agreements -- Rights upon Events of Default" herein.
Unless otherwise provided in the Prospectus Supplement, the Master
Servicer has the right to assign its rights and delegate its duties and
obligations under the Trust Agreement for each Series; provided that the
purchaser or transferee accepting such assignment or delegation: (i) is
qualified to service mortgage loans for FNMA or FHLMC, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) has a net worth of
not less than $15,000,000, (iv) executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee, which
contains an assumption by such purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Master Servicer under the Trust Agreement from and after the
date of such agreement and (v) provided further that each Rating Agency's
rating of the Certificates for such Series in effect immediately prior to such
assignment, sale or transfer is not qualified, downgraded or withdrawn as a
result of such assignment, sale or transfer. No such assignment will become
effective until the Trustee or a successor Master Servicer has assumed the
Master Servicer's obligations and duties under the Trust Agreement. To the
extent that the Master Servicer transfers its obligations to a wholly-owned
subsidiary or affiliate, such subsidiary or affiliate need not satisfy the
criteria set forth above, however, in such instance, the assigning Master
Servicer will remain liable for the servicing obligations under the Trust
Agreement. Any entity into which the Master Servicer is merged or consolidated
or any successor corporation resulting from any merger, conversion or
consolidation will succeed to the Master Servicer's obligations under the
related Trust Agreement, provided that such successor or surviving entity meets
the requirements for a successor Master Servicer set forth in the preceding
paragraph.
Each Trust Agreement will also provide that neither the Master Servicer,
nor any director, officer, employee or agent of the Master Servicer, will be
under any liability to the related Trust Fund or the Certificateholders for any
action taken or for failing to take any action in good faith pursuant to the
Trust Agreement or for errors in judgment; provided, however, that neither the
Master Servicer nor any such person will be protected against any breach of
warranty or representations made under the Trust Agreement or the failure to
perform its obligations in compliance with any standard of care set forth in
the Trust Agreement or liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties thereunder.
Each Trust Agreement will further provide that the Master Servicer and any
director, officer, employee or agent of the Master Servicer is entitled to
indemnification from the related Trust Fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the Trust Agreement or the Certificates, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the Trust
Agreement provides that the Master Servicer is not under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the Trust Agreement which, in its opinion, may
involve it in any expense or liability. The Master Servicer may, in its
discretion, undertake any such action which it may deem necessary or desirable
with respect to the Trust Agreement and the rights and duties of the parties
thereto and the interests of the Certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs, and liabilities of the Trust Fund and the
Master Servicer will be entitled to be reimbursed therefor out of the
Collection Account.
Credit Support
General
For any Series, credit support may be provided with respect to one or more
Classes thereof or the related Primary Assets. Credit support may be in the
form of a letter of credit, the subordination of one or more Classes of the
Certificates of such series, the establishment of one or more reserve funds,
use of a pool insurance policy, bankruptcy bond, repurchase bond or special
hazard insurance policy, certificate guarantee insurance, the use of
cross-support features or another method of credit support described in the
related Prospectus Supplement, or any combination of the foregoing, in any
case, in such amounts and having such terms and conditions as are acceptable to
each Rating Agency. If so specified in the related Prospectus Supplement, any
form of credit support (including but not limited to insurance, letters of
credit or certificate guarantee insurance) may be structured so as to be drawn
upon by more than one Trust Fund to the extent described therein.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the credit support will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon at the Pass-Through Rate or Certificate
Interest Rate, as applicable. If losses occur which exceed the amount covered
by credit support or which are not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. See "The
Trust Agreements -- Deficiency Event." Moreover, if a form of credit support
covers more than one Trust Fund (each, a "Covered Trust"), holders of
Certificates issued by any of such Covered Trusts will be subject to the risk
that such credit support will be exhausted by the claims of other Covered
Trusts prior to such Covered Trust receiving any of its intended share of such
coverage. If credit support is provided with respect to a Series, or the
related Primary Assets, the related Prospectus Supplement will include a
description of (a) the amount payable under such credit support, (b) any
conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount payable under such credit support
may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, the related Prospectus Supplement will set forth
certain information with respect to the issuer of any third-party credit
support, including (a) a brief description of its principal business
activities, (b) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (c) if
applicable, the identity of regulatory agencies which exercise primary
jurisdiction over the conduct of its business and (d) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date
specified in the Prospectus Supplement.
Subordinate Certificates; Subordination Reserve Fund
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the Subordinate Certificateholders to
receive distributions of principal and interest from the Certificate Account on
any Distribution Date will be subordinated to such rights of the Senior
Certificateholders to the extent of the then applicable Subordinated Amount as
defined in the related Prospectus Supplement. The Subordinated Amount will
decrease whenever amounts otherwise payable to the Subordinate
Certificateholders are paid to the Senior Certificateholders (including amounts
withdrawn from the Subordination Reserve Fund, if any, and paid to the Senior
Certificateholders), and will (unless otherwise specified in the related
Prospectus Supplement) increase whenever there is distributed to the
Subordinate Certificateholders amounts in respect of which subordination
payments have previously been paid to the Senior Certificateholders (which will
occur when subordination payments in respect of delinquencies and certain other
deficiencies have been recovered).
A Series may include a Class of Subordinate Certificates entitled to
receive cash flows remaining after distributions are made to all other Classes.
Such right will effectively be subordinate to the rights of other
Certificateholders, but will not be limited to the Subordinated Amount. If so
specified in the related Prospectus Supplement, the subordination of a Class
may apply only in the event of (or may be limited to) certain types of losses
not covered by Insurance Policies or other credit support, such as losses
arising from damage to property securing a Loan not covered by standard hazard
insurance policies, losses resulting from the bankruptcy of a borrower and
application of certain provisions of the Bankruptcy Code, or losses resulting
from the denial of insurance coverage due to fraud or misrepresentation in
connection with the origination of a Loan.
With respect to any Series which includes one or more Classes of
Subordinate Certificates, a Subordination Reserve Fund may be established if so
specified in the related Prospectus Supplement. The Subordination Reserve Fund,
if any, will be funded with cash, a letter of credit, a demand note or Eligible
Reserve Fund Investments, or by the retention of amounts of principal or
interest otherwise payable to Holders of Subordinate Certificates, or both, as
specified in the related Prospectus Supplement. The Subordination Reserve Fund
will not be a part of the Trust Fund, unless otherwise specified in the related
Prospectus Supplement. If the Subordination Reserve Fund is not a part of the
Trust Fund, the Trustee will have a security interest therein on behalf of the
Senior Certificateholders. Moneys will be withdrawn from the Subordination
Reserve Fund to make distributions of principal of or interest on Senior
Certificates under the circumstances set forth in the related Prospectus
Supplement.
Moneys deposited in any Subordinated Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the related
Prospectus Supplement, any reinvestment income or other gain from such
investments will be credited to the Subordinated Reserve Fund for such Series,
and any loss resulting from such investments will be charged to such
Subordinated Reserve Fund. Amounts in any Subordinated Reserve Fund in excess
of the Required Reserve Fund Balance may be periodically released to the
Subordinate Certificateholders under the conditions and to the extent specified
in the related Prospectus Supplement. Additional information concerning any
Subordinated Reserve Fund will be set forth in the related Prospectus
Supplement, including the amount of any initial deposit to such Subordinated
Reserve Fund, the Required Reserve Fund Balance to be maintained therein, the
purposes for which funds in the Subordinated Reserve Fund may be applied to
make distributions to Senior Certificateholders and the employment of
reinvestment earnings on amounts in the Subordinated Reserve Fund, if any.
Cross-Support Features
If the Primary Assets for a Series are divided into separate Asset Groups,
the beneficial ownership of which is evidenced by a separate Class or Classes
of a Series, credit support may be provided by a cross-support feature which
requires that distributions be made on Senior Certificates evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Certificates evidencing the beneficial ownership interest in another Asset
Group within the Trust Fund. The related Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
Insurance
Credit support with respect to a Series may be provided by various forms
of insurance policies, subject to limits on the aggregate dollar amount of
claims that will be payable under each such insurance policy, with respect to
all Loans comprising or underlying the Primary Assets for a Series, or such of
the Loans as have certain characteristics. Such insurance policies include
primary mortgage insurance and standard hazard insurance and may, if specified
in the related Prospectus Supplement, include a pool insurance policy covering
losses in amounts in excess of coverage of any primary insurance policy, a
special hazard insurance policy covering certain risks not covered by standard
hazard insurance policies, a bankruptcy bond covering certain losses resulting
from the bankruptcy of a borrower and application of certain provisions of the
Bankruptcy Code, a repurchase bond covering the repurchase of a Loan for which
mortgage insurance or hazard insurance coverage has been denied due to
misrepresentations in connection with the origination of the related Loan, or
other insurance covering other risks associated with the particular type of
Loan. See "Description of Mortgage and Other Insurance." Copies of the actual
pool insurance policy, special hazard insurance policy, bankruptcy bond or
repurchase bond, if any, relating to the Loans comprising the Primary Assets
for a Series will be filed with the Commission as an exhibit to a Current
Report on Form 8-K to be filed within 15 days of issuance of the Certificates
of the related Series.
Letter of Credit
The letter of credit, if any, with respect to a Series of Certificates
will be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C
Bank will be obligated to honor drawings thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Loans on the related Cut-off Date or of one or more Classes of
Certificates (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the Bankruptcy Code, or losses resulting from denial of insurance coverage due
to misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each Series of Certificates will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "Description of the Certificates -- Optional
Termination" and "The Trust Agreements -- Termination." A copy of the letter of
credit for a Series, if any, will be filed with the Commission as an exhibit to
a Current Report on Form 8-K to be filed within 15 days of issuance of the
Certificates of the related Series.
Certificate Guarantee Insurance
Certificate guarantee insurance, if any, with respect to a Series of
Certificates will be provided by one or more insurance companies. Such
certificate guarantee insurance will guarantee, with respect to one or more
Classes of Certificates of the related Series, timely distributions of interest
and full distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
the certificate guarantee insurance will also guarantee against any payment
made to a Certificateholder which is subsequently recovered as a "voidable
preference" payment under the Bankruptcy Code. A copy of the certificate
guarantee insurance for a Series, if any, will be filed with the Commission as
an exhibit to a Current Report on Form 8-K to be filed with the Commission
within 15 days of issuance of the Certificates of the related Series.
Reserve Funds
One or more Reserve Funds may be established with respect to a Series, in
which cash, a letter of credit, Eligible Reserve Fund Investments, a demand
note or a combination thereof, in the amounts, if any, so specified in the
related Prospectus Supplement will be deposited. The Reserve Funds for a Series
may also be funded over time by depositing therein a specified amount of the
distributions received on the related Primary Assets as specified in the
related Prospectus Supplement.
Amounts on deposit in any Reserve Fund for a Series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes,
in the manner, and to the extent specified in the related Prospectus
Supplement. A Reserve Fund may be provided to increase the likelihood of timely
payments of principal of and interest on the Certificates, if required as a
condition to the rating of such Series by each Rating Agency, or to reduce the
likelihood of Special Distributions with respect to any Multi-Class Series. If
so specified in the related Prospectus Supplement, Reserve Funds may be
established to provide limited protection, in an amount satisfactory to each
Rating Agency, against certain types of losses not covered by Insurance
Policies or other credit support, such as losses arising from damage not
covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and the application of certain provisions of the
Bankruptcy Code or losses resulting from denial of insurance coverage due to
fraud or misrepresentation in connection with the origination of a Loan.
Following each Distribution Date amounts in such Reserve Fund in excess of any
required Reserve Fund balance may be released from the Reserve Fund under the
conditions and to the extent specified in the related Prospectus Supplement and
will not be available for further application by the Trustee.
Moneys deposited in any Reserve Funds will be invested in Eligible Reserve
Fund Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited to
the related Reserve Fund for such Series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or a Servicer as additional servicing
compensation. See "Servicing of Loans" and "The Trust Agreements -- Investment
of Funds." The Reserve Fund, if any, for a Series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the required Reserve Fund balance to be maintained, the purposes
for which funds in the Reserve Fund may be applied to make distributions to
Certificateholders and use of investment earnings from the Reserve Fund, if
any.
Description of Mortgage and Other Insurance
The following descriptions of primary mortgage insurance policies, pool
insurance policies, special hazard insurance policies, standard hazard
insurance policies, bankruptcy bonds, repurchase bonds and other insurance and
the respective coverages thereunder are general descriptions only and do not
purport to be complete. If so specified in the relevant Prospectus Supplement,
any of such insurance may be structured so as to protect against losses
relating to more than one Trust Fund in the manner described therein.
Mortgage Insurance on the Loans
General. Unless otherwise specified in the related Prospectus Supplement,
all Mortgage Loans that are Conventional Loans secured by Single Family
Property and which had initial Loan-to-Value Ratios of greater than 80% will be
covered by primary mortgage insurance policies providing coverage on the amount
of each such Mortgage Loan in excess of 75% of the original Appraised Value of
the related Mortgaged Property and remaining in force until the principal
balance of such Mortgage Loan is reduced to 80% of such original Appraised
Value. In addition, each Mortgage Loan that is a Conventional Loan secured by a
vacation or second home and which had a Loan-to-Value Ratio of more than 70% at
origination will be covered by a primary mortgage insurance policy until the
principal balance of such Mortgage Loan is reduced to below 70% of Appraised
Value.
A pool insurance policy will be obtained if so specified in the related
Prospectus Supplement to cover any loss (subject to limitations described
herein) occurring as a result of default by the borrowers to the extent not
covered by any primary mortgage insurance policy or FHA Insurance. See "Pool
Insurance Policy" below. Neither the primary mortgage insurance policies nor
any pool insurance policy will insure against certain losses sustained in the
event of a personal bankruptcy of the borrower under a Mortgage Loan. See
"Certain Legal Aspects of Loans" herein. Such losses will be covered to the
extent described in the related Prospectus Supplement by the bankruptcy bond or
other credit support, if any.
To the extent that the primary mortgage insurance policies do not cover
all losses on a defaulted or foreclosed Mortgage Loan, and to the extent such
losses are not covered by the pool insurance policy or other credit support for
such Series, such losses, if any, would affect payments to Certificateholders.
In addition, the pool insurance policy and primary mortgage insurance policies
do not provide coverage against hazard losses. See "Hazard Insurance on the
Loans" below. Certain hazard risks will not be insured and the occurrence of
such hazards could adversely affect payments to Certificateholders.
Primary Mortgage Insurance. Although the terms and conditions of primary
mortgage insurance vary, the amount of a claim for benefits under a primary
mortgage insurance policy covering a Mortgage Loan (herein referred to as the
"Insured Loss") generally will consist of the insured percentage (typically
ranging from 12% to 25%) of the unpaid principal amount of the covered Mortgage
Loan and accrued and unpaid interest thereon and reimbursement of certain
expenses, less (i) all rents or other payments collected or received by the
insured (other than the proceeds of hazard insurance) that are derived from or
in any way related to the Mortgaged Property, (ii) hazard insurance proceeds in
excess of the amount required to restore the mortgaged property and which have
not been applied to the payment of the Mortgage Loan, (iii) amounts expended
but not approved by the mortgage insurer, (iv) claim payments previously made
by the mortgage insurer and (v) unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary mortgage insurance
policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Mortgage Loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Mortgage Loan; (ii) failure to construct the
Mortgaged Property subject to the Mortgage Loan in accordance with specified
plans; (iii) physical damage to the Mortgaged Property; and (d) the related
Servicer not being approved as a servicer by the mortgage insurer.
Primary mortgage insurance policies generally contain provisions
substantially as follows: (i) under the policy, a claim includes unpaid
principal, accrued interest at the applicable loan interest rate to the date of
filing of a claim thereunder and certain advances (with a limitation on
attorneys' fees for foreclosures of 3% of the unpaid principal balance and
accumulated delinquent interest) described below; (ii) when a claim is
presented, the mortgage insurer will have the option of (a) paying the claim in
full and taking title to the property and arranging for the sale thereof or (b)
paying the insured percentage of the claim and allowing the insured to retain
title to the property; (iii) unless earlier directed by the mortgage insurer,
claims must be made within a specified period of time (typically, 60 days)
after the insured has acquired good and marketable title to the property; and
(iv) a claim must be paid within a specific period of time (typically, 60 days)
after the claim is accepted by the mortgage insurer.
As conditions precedent to the filing of or payment of a claim under a
primary mortgage insurance policy covering a Mortgage Loan, the insured will be
required to (i) advance or discharge (a) all hazard insurance policy premiums
and (b) as necessary and approved in advance by the mortgage insurer, (1) real
estate property taxes, (2) all expenses required to maintain the related
Mortgaged Property in at least as good a condition as existed at the effective
date of such primary mortgage insurance policy, ordinary wear and tear
excepted, (3) Mortgaged Property sales expenses, (4) any outstanding liens (as
defined in such primary mortgage insurance policy) on the Mortgaged Property
and (5) foreclosure costs, including court costs and reasonable attorneys'
fees; (ii) in the event of any physical loss or damage to the Mortgaged
Property, have restored and repaired the Mortgaged Property to at least as good
a condition as existed at the effective date of such primary mortgage insurance
policy, ordinary wear and tear excepted; and (iii) tender to the mortgage
insurer good and marketable title to and possession of the Mortgaged Property.
Other provisions and conditions of each primary mortgage insurance policy
covering a Mortgage Loan will generally include that: (a) no change may be made
in the terms of such Mortgage Loan without the consent of the mortgage insurer;
(b) written notice must be given to the mortgage insurer within 10 days after
the insured becomes aware that a borrower is delinquent in the payment of a sum
equal to the aggregate of two Scheduled Payments due under such Mortgage Loan
or that any proceedings affecting the borrower's interest in the Mortgaged
Property securing such Mortgage Loan have been commenced, and thereafter the
insured must report monthly to the mortgage insurer the status of any such
Mortgage Loan until such Mortgage Loan is brought current, such proceedings are
terminated or a claim is filed; (c) the mortgage insurer will have the right to
purchase such Mortgage Loan, at any time subsequent to the 10 days' notice
described in (b) above and prior to the commencement of foreclosure
proceedings, at a price equal to the unpaid principal amount of the Mortgage
Loan plus accrued and unpaid interest thereon at the applicable Mortgage Rate
and reimbursable amounts expended by the insured for the real estate taxes and
fire and extended coverage insurance on the Mortgaged Property for a period not
exceeding 12 months and less the sum of any claim previously paid under the
policy with respect to such Mortgage Loan and any due and unpaid premium with
respect to such policy; (d) the insured must commence proceedings at certain
times specified in the policy and diligently proceed to obtain good and
marketable title to and possession of the mortgaged property; (e) the insured
must notify the mortgage insurer of the institution of such proceedings,
provide it with copies of documents relating thereto, notify the mortgage
insurer of the price amounts specified in (c) above at least 15 days prior to
the sale of the Mortgaged Property by foreclosure, and bid such amount unless
the mortgage insurer specifies a lower or higher amount; and (f) the insured
may accept a conveyance of the Mortgaged Property in lieu of foreclosure with
written approval of the mortgage insurer, provided the ability of the insured
to assign specified rights to the mortgage insurer are not thereby impaired or
the specified rights of the mortgage insurer are not thereby adversely
affected.
The mortgage insurer will be required to pay to the insured either: (i)
the insured percentage of the loss; or (ii) at its option under certain of the
primary mortgage insurance policies, the sum of the delinquent Scheduled
Payments plus any advances made by the insured, both to the date of the claim
payment, and thereafter, Scheduled Payments in the amount that would have
become due under the Mortgage Loan if it had not been discharged plus any
advances made by the insured until the earlier of (a) the date the Mortgage
Loan would have been discharged in full if the default had not occurred, or (b)
an approved sale. Any rents or other payments collected or received by the
insured which are derived from or are in any way related to the mortgaged
property will be deducted from any claim payment.
FHA Insurance and VA Guarantees. The FHA is responsible for administering
various federal programs, including mortgage insurance, authorized under the
Housing Act, as amended, and the United States Housing Act of 1937, as amended.
Mortgage Loans designated in the related Prospectus Supplement as FHA Loans
will be insured under various FHA programs including the standard FHA 203(b)
program to finance the acquisition of one-to-four-family housing units and the
FHA 245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured. Mortgage
Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
Mortgage Loans relating to a Series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of origination
of such loan.
The insurance premiums for FHA Loans will be collected by HUD-approved
lenders or by the Master Servicer or Servicer and paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to HUD or
upon assignment of the defaulted Mortgage Loan to HUD. With respect to a
defaulted FHA Loan, the Master Servicer or Servicer is limited in its ability
to initiate foreclosure proceedings. When it is determined, by the Master
Servicer or Servicer or HUD, that default was caused by circumstances beyond
the mortgagor's control, the Master Servicer or Servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the mortgagor. Such plans may involve
the reduction or suspension of Scheduled Payments for a specified period, with
such payments to be made up on or before the maturity date of the Mortgage
Note, or the rescheduling or other adjustment of payments due under the
Mortgage Note up to or beyond the scheduled maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Master Servicer or the
Servicer in partial or full satisfaction of amounts due under the Mortgage Loan
(which payments are to be repaid by the borrower to HUD) or by accepting
assignment of the Mortgage Loan from the Master Servicer or the Servicer. With
certain exceptions, at least three full installments must be due and unpaid
under the Mortgage Loan, and HUD must have rejected any request for relief from
the mortgagor before the Master Servicer or the Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or the Servicer of each FHA Loan
will be obligated to purchase any such debenture issued in satisfaction of a
defaulted FHA Loan serviced by it for an amount equal to the unpaid principal
balance of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or the Servicer for certain costs and expenses
and to deduct certain amounts received or retained by the Master Servicer or
the Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the Mortgage Loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure to
perform any obligation or make any payment due under the Mortgage Loan and,
upon assignment, from the date of assignment, to the date of payment of the
claim, in each case at the same mortgage rate as the applicable HUD debenture
interest rate as described above.
Mortgage Loans designated in the related Prospectus Supplement as VA Loans
will be partially guaranteed by the VA under the Servicemen's Readjustment Act
of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one-to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Mortgage Loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guaranty for such Mortgage Loan.
With respect to a defaulted VA Loan, the Master Servicer or the Servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the mortgaged
property.
The amount payable under the guarantee will be the percentage of the VA
Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation as specified in the VA regulations. Payments
under the guarantee will equal the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA Loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. As
of January 1, 1990, the maximum guaranty that may be issued by the VA under a
VA guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgagee of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to maintain a pool insurance
policy and to present or cause the Servicers, if any, to present claims
thereunder on behalf of the Trustee and the Certificateholders. See "Servicing
of Loans -- Maintenance of Insurance Policies and Other Servicing Procedures."
Although the terms and conditions of pool insurance policies vary to some
degree, the following describes material aspects of such policies generally.
The related Prospectus Supplement will describe any provisions of a pool
insurance policy which are materially different from those described below. It
may also be a condition precedent to the payment of any claim under the pool
insurance policy that the insured maintain a primary mortgage insurance policy
that is acceptable to the pool insurer on all Mortgage Loans in the related
Trust Fund that have Loan-to-Value Ratios at the time of origination in excess
of 80% and that a claim under such primary mortgage insurance policy has been
submitted and settled. FHA Insurance and VA Guarantees may be deemed to be
acceptable primary insurance policies under the pool insurance policy. Assuming
satisfaction of these conditions, the pool insurer will pay to the insured the
amount of the loss which will generally be: (i) the amount of the unpaid
principal balance of the defaulted Mortgage Loan immediately prior to the
approved sale of the Mortgaged Property, (ii) the amount of the accumulated
unpaid interest on such Mortgage Loan to the date of claim settlement at the
contractual rate of interest and (iii) advances made by the insured as
described above less certain payments. An "approved sale" is (i) a sale of the
Mortgaged Property acquired by the insured because of a default by the borrower
to which the pool insurer has given prior approval, (ii) a foreclosure or
trustee's sale of the Mortgaged Property at a price exceeding the maximum
amount specified by the pool insurer, (iii) the acquisition of the Mortgaged
Property under the primary mortgage insurance policy by the mortgage insurer or
(iv) the acquisition of the Mortgaged Property by the pool insurer.
As a condition precedent to the payment of any loss, the insured must
provide the pool insurer with good and marketable title to the Mortgaged
Property. If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and the proceeds, if any, from the related standard hazard insurance
policy or the applicable special hazard insurance policy, if any, are
insufficient to restore the damaged Mortgaged Property to a condition
sufficient to permit recovery under the pool insurance policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to the Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it through liquidation proceeds or insurance
proceeds.
The original amount of coverage under the mortgage pool insurance policy
will be reduced over the life of the Certificates by the aggregate net dollar
amount of claims paid less the aggregate net dollar amount realized by the pool
insurer upon disposition of all foreclosed mortgaged properties covered
thereby. The amount of claims paid includes certain expenses incurred by the
Master Servicer as well as accrued interest at the applicable interest rate on
delinquent Mortgage Loans to the date of payment of the claim. See "Certain
Legal Aspects of Loans" herein. Accordingly, if aggregate net claims paid under
a mortgage pool insurance policy reach the original policy limit, coverage
under the mortgage pool insurance policy will lapse and any further losses will
be borne by the Trust Fund, and thus will affect adversely payments on the
Certificates. In addition, the exhaustion of coverage under any mortgage pool
insurance policy may affect the Master Servicer's or Servicer's willingness or
obligation to make Advances. If the Master Servicer or a Servicer determines
that an Advance in respect of a delinquent Loan would not be recoverable from
the proceeds of the liquidation of such Loan or otherwise, it will not be
obligated to make an advance respecting any such delinquency since the Advance
would not be ultimately recoverable by it. See "Servicing of Loans -- Advances
and Limitations Thereon."
Mortgage Insurance with Respect to Manufactured Home Loans. A Manufactured
Home Loan may be an FHA Loan or a VA Loan. Any primary mortgage or similar
insurance and any pool insurance policy with respect to Manufactured Home Loans
will be described in the related Prospectus Supplement.
Hazard Insurance on the Loans
Standard Hazard Insurance Policies. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the
improvements on the property caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike and civil commotion, subject to the conditions
and exclusions particularized in each policy. Because the standard hazard
insurance policies relating to the Loans will be underwritten by different
hazard insurers and will cover properties located in various states, such
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides, and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit support will adversely affect distributions to
Certificateholders. When a property securing a Loan is located in a flood area
identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Master Servicer will be required to cause flood insurance to be
maintained with respect to such property, to the extent available.
The standard hazard insurance policies covering properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require
the insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the dwellings,
structures and other improvements on the Mortgaged Property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause will provide that the hazard insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (generally defined as the replacement cost at the time and
place of loss, less physical depreciation) of the dwellings, structures and
other improvements damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such dwellings,
structures and other improvements on the Mortgaged Property. Since the amount
of hazard insurance to be maintained on the improvements securing the Loans
declines as the principal balances owing thereon decrease, and since the value
of residential real estate in the area where the Mortgaged Property is located
fluctuates in value over time, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damage to the Mortgaged Property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative is
responsible for maintenance of hazard insurance for the property owned by the
Cooperative and the tenant-stockholders of that Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that either the
Cooperative or the related borrower do not maintain such insurance, or do not
maintain adequate coverage, or do not apply any insurance proceeds to the
restoration of damaged property, then damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value of
the Mortgaged Property securing such Cooperative Loan. Similarly, the Depositor
will not require that a standard hazard or flood insurance policy be maintained
for any Condominium Loan. Generally, the Condominium Association is responsible
for maintenance of hazard insurance for the Condominium Building (including the
individual Condominium Units) and the owner(s) of an individual Condominium
Unit do not maintain separate hazard insurance policies. To the extent,
however, that either the Condominium Association or the related borrower do not
maintain such insurance, or do not maintain adequate coverage, or do not apply
any insurance proceeds to the restoration of damaged property, then damage to
such borrower's Condominium Unit or such Condominium Building could
significantly reduce the value of the Mortgaged Property securing such
Condominium Loan.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that,
where there has been damage to property securing a defaulted or foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to such property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
property or (ii) upon transfer of the property to the special hazard insurer,
the unpaid principal balance of such Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest
to the date of claim settlement and certain expenses incurred by the Master
Servicer or the Servicer with respect to such property. If the unpaid principal
balance plus accrued interest and certain expenses is paid by the special
hazard insurer, the amount of further coverage under the special hazard
insurance policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property
will reduce coverage by such amount. Special hazard insurance policies
typically do not cover losses occasioned by war, civil insurrection, certain
governmental actions, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, flood (if the mortgaged
property is in a federally designated flood area), chemical contamination and
certain other risks.
Restoration of the property with the proceeds described under (i) above is
expected to satisfy the condition under the pool insurance policy that the
property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such property.
The payment described under (ii) above will render unnecessary presentation of
a claim in respect of such Loan under the pool insurance policy. Therefore, so
long as the pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to holders of the Certificates, but will affect
the relative amounts of coverage remaining under the special hazard insurance
policy and pool insurance policy.
Other Hazard-Related Insurance; Liability Insurance. With respect to Loans
secured by Multifamily Property, certain additional insurance policies may be
required with respect to the Multifamily Property; for example, general
liability insurance for bodily injury or death and property damage occurring on
the property or the adjoining streets and sidewalks, steam boiler coverage
where a steam boiler or other pressure vessel is in operation, interest
coverage insurance, and rent loss insurance to cover operating income losses
following damage or destruction of the mortgaged property. With respect to a
Series for which Loans secured by Multifamily Property are included in the
Trust Fund, the related Prospectus Supplement will specify the required types
and amounts of additional insurance and describe the general terms of such
insurance and conditions to payment thereunder.
Bankruptcy Bond
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Loan at an amount less
than the then outstanding principal balance of such Loan. The amount of the
secured debt could be reduced to such value, and the holder of such Loan thus
would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "Certain Legal Aspects of
Loans" herein. If so provided in the related Prospectus Supplement, the Master
Servicer will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the Pool
secured by single unit primary residences. Such amount will be reduced by
payments made under such bankruptcy bond in respect of such Loans, unless
otherwise specified in the related Prospectus Supplement, and will not be
restored.
Repurchase Bond
If so specified in the related Prospectus Supplement, the Depositor or
Master Servicer will be obligated to repurchase any Loan (up to an aggregate
dollar amount specified in the related Prospectus Supplement) for which
insurance coverage is denied due to dishonesty, misrepresentation or fraud in
connection with the origination or sale of such Loan. Such obligation may be
secured by a surety bond guaranteeing payment of the amount to be paid by the
Depositor or the Master Servicer.
The Trust Agreements
The following summaries describe certain provisions of the Trust
Agreements. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the Trust
Agreements. Where particular provisions or terms used in the Trust Agreements
are referred to, such provisions or terms are as specified in the Trust
Agreements.
Assignment of Primary Assets
General. The Depositor will transfer, convey and assign to the Trustee all
right, title and interest of the Depositor in the Primary Assets and other
property to be included in the Trust Fund for a Series. Such assignment will
include all principal and interest due on or with respect to the Primary Assets
after the Cut-off Date specified in the related Prospectus Supplement (except
for any Retained Interests). The Trustee will, concurrently with such
assignment, execute and deliver the Certificates.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage- Backed Securities to be registered in the name of the Trustee
(or its nominee or correspondent). The Trustee (or its agent or correspondent)
will have possession of any certificated Private Mortgage-Backed Securities.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will not be in possession of or be assignee of record of any underlying assets
for a Private Mortgage-Backed Security. See "The Trust Funds -- Private
Mortgage-Backed Securities" herein. Each Private Mortgage-Backed Security will
be identified in a schedule appearing as an exhibit to the related Trust
Agreement (the "Mortgage Certificate Schedule"), which will specify the
original principal amount, outstanding principal balance as of the Cut-off
Date, annual pass-through rate or interest rate and maturity date for each
Private Mortgage-Backed Security conveyed to the Trustee. In the Trust
Agreement, the Depositor will represent and warrant to the Trustee regarding
the Private Mortgage-Backed Securities: (i) that the information contained in
the Mortgage Certificate Schedule is true and correct in all material respects;
(ii) that, immediately prior to the conveyance of the Private Mortgage-Backed
Securities, the Depositor had good title thereto, and was the sole owner
thereof, (subject to any Retained Interests); (iii) that there has been no
other sale by it of such Private Mortgage-Backed Securities and (iv) that there
is no existing lien, charge, security interest or other encumbrance (other than
any Retained Interest) on such Private Mortgage-Backed Securities.
Assignment of Mortgage Loans. In addition, the Depositor will, as to each
Mortgage Loan, deliver or cause to be delivered to the Trustee, or, as
specified in the related Prospectus Supplement, the Custodian, the Mortgage
Note endorsed without recourse to the order of the Trustee or in blank, the
original Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case a copy of
such Mortgage will be delivered, together with a certificate that the original
of such Mortgage was delivered to such recording office) and an assignment of
the Mortgage in recordable form. The Trustee, or, if so specified in the
related Prospectus Supplement, the Custodian, will hold such documents in trust
for the benefit of the Certificateholders.
If so specified in the related Prospectus Supplement, the Depositor will,
at the time of delivery of the Certificates, cause assignments to the Trustee
of the Mortgage Loans to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's
interest in the Mortgage Loan. If specified in the related Prospectus
Supplement, the Depositor will cause such assignments to be so recorded within
the time after delivery of the Certificates as is specified in the related
Prospectus Supplement, in which event, the Trust Agreement may, as specified in
the related Prospectus Supplement, require the Depositor to repurchase from the
Trustee any Mortgage Loan required to be recorded but not recorded within such
time, at the price described below with respect to repurchase by reason of
defective documentation. Unless otherwise provided in the related Prospectus
Supplement, the enforcement of the repurchase obligation would constitute the
sole remedy available to the Certificateholders or the Trustee for the failure
of a Mortgage Loan to be recorded.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, its agent, or a custodian,
the related original cooperative note endorsed to the order of the Trustee, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Depositor will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee, its agent, or a custodian will review the documents relating
to each Mortgage Loan within the time period specified in the related Trust
Agreement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be missing
or defective in any material respect, the Trustee (or such custodian) will
notify the Master Servicer and the Depositor, and the Master Servicer will
notify the party (the "Seller") from which the Depositor, or an affiliate
thereof, purchased such Mortgage Loan. If the Seller cannot cure the omission
or defect within the time period specified in the related Trust Agreement after
receipt of such notice, the Seller will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price or, if specified in the
related Prospectus Supplement, replace such Mortgage Loan with another mortgage
loan that meets certain requirements set forth therein. There can be no
assurance that a Seller will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage Loan Program -- Representations by Sellers;
Repurchases," neither the Master Servicer nor the Depositor will be obligated
to purchase such Mortgage Loan if the Seller defaults on its purchase
obligation, unless such breach also constitutes a breach of the representations
or warranties of the Master Servicer or the Depositor, as the case may be.
Unless otherwise specified in the related Prospectus Supplement, this purchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for omission of, or a material defect in, any document.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC or a FASIT election is to be made, unless the related Prospectus
Supplement otherwise provides, no purchase of a Mortgage Loan will be made if
such purchase would result in a prohibited transaction under the Code.
The Trustee will be authorized to appoint a custodian to maintain
possession of and, if applicable, to review the documents relating to the
Mortgage Loans as agent of the Trustee.
Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Trust Agreement (the "Mortgage Loan Schedule"). Such Mortgage
Loan Schedule will specify the number of Mortgage Loans which are Cooperative
Loans and, with respect to each Mortgage Loan: the original principal amount
and unpaid principal balance as of the Cut-off Date; the current interest rate;
the current Scheduled Payment of principal and interest; the maturity date of
the related mortgage note; if the Mortgage Loan is an ARM, the Lifetime
Mortgage Rate Cap, if any, and the current Index; and, if the Mortgage Loan is
a GPM Loan, a GEM Loan, a Buy-Down Loan or a Mortgage Loan with other than
fixed Scheduled Payments and level amortization, the terms thereof.
Assignment of Manufactured Home Loans. The Depositor will cause any
Manufactured Home Loans included in the Primary Assets for a Series of
Certificates to be assigned to the Trustee, together with principal and
interest due on or with respect to the Manufactured Home Loans after the
Cut-off Date specified in the related Prospectus Supplement. Each Manufactured
Home Loan will be identified in a loan schedule (the "Manufactured Home Loan
Schedule") appearing as an exhibit to the related Trust Agreement. Such
Manufactured Home Loan Schedule will specify, with respect to each Manufactured
Home Loan, among other things: the original principal balance and the
outstanding principal balance as of the close of business on the Cut-off Date;
the interest rate; the current scheduled Payment of principal and interest; and
the maturity date of the Manufactured Home Loan.
In addition, with respect to each Manufactured Home Loan, the Depositor
will deliver or cause to be delivered to the Trustee, or, as specified in the
related Prospectus Supplement, the custodian, the original Manufactured Home
Loan agreement and copies of documents and instruments related to each
Manufactured Home Loan and the security interest in the Manufactured Home
securing each Manufactured Home Loan. To give notice of the right, title and
interest of the Certificateholders to the Manufactured Home Loans, the
Depositor will cause a UCC-1 financing statement to be filed identifying the
Trustee as the secured party and identifying all Manufactured Home Loans as
collateral. Unless otherwise specified in the related Prospectus Supplement,
the Manufactured Home Loans agreements will not be stamped or otherwise marked
to reflect their assignment from the Depositor to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the Manufactured
Home Loans agreements without notice of such assignment, the interest of the
Certificateholders in the Manufactured Home Loans could be defeated. See
"Certain Legal Aspects of Loans -- Manufactured Home Loans."
The Depositor will provide limited representations and warranties to the
Trustee concerning the Manufactured Home Loans. Such representations and
warranties will include: (i) that the information contained in the Manufactured
Home Loan Schedule provides an accurate listing of the Manufactured Home Loans
and that the information respecting such Manufactured Home Loans set forth in
such Manufactured Home Loan Schedule is true and correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) that, immediately prior to the conveyance of the Manufactured Home Loans,
the Depositor had good title to, and was sole owner of, each such Manufactured
Home Loan (subject to any Retained Interests); (iii) that there has been no
other sale by it of such Manufactured Home Loans and that the Manufactured Home
Loan is not subject to any lien, charge, security interest or other
encumbrance; (iv) if the Master Servicer will not directly service the
Manufactured Home Loans, each Servicing Agreement entered into with a Servicer
with respect to Manufactured Home Loans comprising the Primary Assets has been
assigned and conveyed to the Trustee and is not subject to any offset,
counterclaim, encumbrance or other charge; and (v) the Depositor has obtained
from the Master Servicer, the Servicer, the originator of the Manufactured Home
Loans or such other entity that is the seller of the Manufactured Home Loans,
representations and warranties relating to certain information respecting the
origination of and current status of the Manufactured Home Loans, and has no
knowledge of any fact which would cause it to believe that such representations
and warranties are inaccurate in any material respect. See "Loan Underwriting
Procedures and Standards" herein.
Assignment of Participation Certificates. The Depositor will cause any
Participation Certificates obtained under a participation agreement to be
assigned to the Trustee by delivering to the Trustee such Participation
Certificates, which will be reregistered in the name of the Trustee. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will not
be in possession of or be assignee of record with respect to the Loans
represented by any Participation Certificate. Each Participation Certificate
will be identified in a "Participation Certificate Schedule" which will specify
the original principal balance, outstanding principal balance as of the Cut-off
Date, pass-through rate and maturity date for each Participation Certificate.
In the Trust Agreement, the Depositor will represent and warrant to the Trustee
regarding each Participation Certificate: (i) that the information contained in
the Participation Certificate Schedule is true and correct in all material
respects; (ii) that, immediately prior to the conveyance of the Participation
Certificates, the Depositor had good title to and was sole owner of such
Participation Certificates; (iii) that there has been no other sale by it of
such Participation Certificates and (iv) that such Participation Certificates
are not subject to any existing lien, charge, security interest or other
encumbrance (other than any Retained Interests).
Repurchase and Substitution of Non-Conforming Loans
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee is found by
the Trustee within 45 days of the execution of the related Trust Agreement, or
such other time period as is specified in the Prospectus Supplement for the
related Series, (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor does not cure such defect within 90 days, or
such other period as is specified in the related Prospectus Supplement, the
Depositor will, not later than 90 days, or such other period as is specified in
the related Prospectus Supplement, after the Trustee's notice to the Depositor
or the Master Servicer, as the case may be, of the defect, repurchase the
related Mortgage Loan or any property acquired in respect thereof from the
Trustee at a price equal to (a) the lesser of (i) the outstanding principal
balance of such Mortgage Loan (or, in the case of a foreclosed Mortgage Loan,
the outstanding principal balance of such Mortgage Loan immediately prior to
foreclosure) and (ii) the Trust Fund's federal income tax basis in the Mortgage
Loan, and (b), accrued and unpaid interest to the date of the next scheduled
payment on such Mortgage Loan at the related Pass-Through Rate or Certificate
Interest Rate (less any unreimbursed Advances respecting such Mortgage Loan),
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of such Mortgage Loan will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor may,
rather than repurchase the Loan as described above, remove such Loan from the
Trust Fund (the "Deleted Loan") and substitute in its place one or more other
Loans (each, a "Qualifying Substitute Mortgage Loan") provided, however, that
(i) with respect to a Trust Fund for which no REMIC election is made, such
substitution must be effected within 120 days of the date of initial issuance
of the Certificates and (ii) with respect to a Trust Fund for which a REMIC
election is made, such substitution must be made within two years of such date.
Any Qualifying Substitute Mortgage Loan will have, on the date of
substitution, (i) an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Loan (the amount of any shortfall
to be deposited to the Certificate Account in the month of substitution for
distribution to Certificateholders), (ii) an interest rate not less than (and
not more than 2% greater than) the interest rate of the Deleted Loan, (iii) a
remaining term-to-stated maturity not greater than (and not more than two years
less than) that of the Deleted Loan, and will comply with all of the
representations and warranties set forth in the applicable agreement as of the
date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the
sole remedies available to the Certificateholders or the Trustee for a material
defect in a Loan document.
The Depositor or another entity will make representations and warranties
with respect to Loans which comprise the Primary Assets for a Series. See "Loan
Underwriting Procedures and Standards -- Representations and Warranties" above.
If the Depositor or such entity cannot cure a breach of any such
representations and warranties in all material respects within 90 days after
notification by the Trustee of such breach, and if such breach is of a nature
that materially and adversely affects the value of such Loan, the Depositor or
such entity is obligated to repurchase the affected Loan or, if provided in the
related Prospectus Supplement, provide a Qualifying Substitute Mortgage Loan
therefor, subject to the same conditions and limitations on purchases and
substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations
of the responsible originator or seller of such Loans. See "Special
Considerations".
Reports To Certificateholders
The Trustee will prepare and forward to each Certificateholder on each
Distribution Date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any Series, among other things:
(i) (A) with respect to a Series other than a Multi-Class Series, the
amount of such distribution allocable to principal on the Primary Assets,
separately identifying the aggregate amount of any principal prepayments
included therein and the amount, if any, advanced by the Master Servicer or
by a Servicer or (B) with respect to a Multi-Class Series, the amount of the
principal distribution in reduction of stated principal amount (or Compound
Value) of each Class and the aggregate unpaid principal amount (or Compound
Value) of each Class following such distribution;
(ii) (A) with respect to a Series other than a Multi-Class Series, the
amount of such distribution allocable to interest on the Primary Assets and
the amount, if any, advanced by the Master Servicer or a Servicer or (B)
with respect to a Multi-Class Series, the amount of the interest
distribution;
(iii) the amount of servicing compensation with respect to the Principal
Assets and paid during the Due Period commencing on the Due Date to which
such distribution relates and the amount of servicing compensation during
such period attributable to penalties and fees;
(iv) the aggregate outstanding principal balance of the Principal Assets
as of the opening of business on the Due Date, after giving effect to
distributions allocated to principal and reported under (i) above;
(v) the aggregate outstanding principal amount of the Certificates of such
series as of the Due Date, after giving effect to distributions allocated to
principal reported under (i) above;
(vi) with respect to Compound Interest Certificates, prior to the Accrual
Termination Date in addition to the information specified in (i)(B) above,
the amount of interest accrued on such Certificates during the related
Interest Accrual Period and added to the Compound Value thereof;
(vii) in the case of Floating Rate Certificates, the Floating Rate
applicable to the distribution being made;
(viii) if applicable, the amount of any shortfall (i.e., the difference
between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Certificate Account and the amounts actually distributed);
(ix) if applicable, the number and aggregate principal balances of Loans
delinquent for (A) two consecutive payments and (B) three or more
consecutive payments, as of the close of the business on the Determination
Date to which such distribution relates;
(x) if applicable, the book value of any REO Property acquired on behalf
of Certificateholders through foreclosure, grant of a deed in lieu of
foreclosure or repossession as of the close of the business on the Business
Day preceding the Distribution Date to which such distribution relates;
(xi) the amount of any withdrawal from any applicable reserve fund
included in amounts actually distributed to Certificateholders and the
remaining balance of each reserve fund (including any Subordinated Reserve
Fund), if any, on such Distribution Date, after giving effect to
distributions made on such date; and
(xii) such other information as specified in the related Trust Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Certificateholder of record at any time during
such calendar year: (a) the aggregate of amounts reported pursuant to (i)
through (iv), (vi), (viii) and (xvi) above for such calendar year and (b) such
information specified in the Trust Agreement to enable Certificateholders to
prepare their tax returns including, without limitation, the amount of original
issue discount accrued on the Certificates, if applicable. Information in the
Distribution Date and annual reports provided to the Certificateholders will
not have been examined and reported upon by an independent public accountant.
However, the Master Servicer will provide to the Trustee a report by
independent public accountants with respect to the Master Servicer's servicing
of the Loans. See "Servicing of Loans -- Evidence as to Compliance" herein.
Investment of Funds
The Certificate Account, Collection Account or Custodial Account, if any,
and any other funds and accounts for a Series that may be invested by the
Trustee or by the Master Servicer (or by the Servicer, if any), can be invested
only in Eligible Investments acceptable to each Rating Agency, which may
include, without limitation, (i) direct obligations of, and obligations fully
guaranteed as to timely payment of principal and interest by, the United States
of America, FHLMC, FNMA or any agency or instrumentality of the United States
of America, the obligations of which are backed by the full faith and credit of
the United States of America, (ii) demand and time deposits, certificates of
deposit or bankers' acceptances, (iii) repurchase obligations pursuant to a
written agreement with respect to any security described in clause (i) above,
(iv) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or any
state, (v) commercial paper (including both non-interest-bearing discount
obligations and interest-bearing obligations payable on demand or on a
specified date not more than one year after the date of issuance thereof), (vi)
a Guaranteed Investment Contract issued by an entity having a credit rating
acceptable to each Rating Agency and (vii) any other demand, money market or
time deposit or obligation, security or investment as would not adversely
affect the then current rating by the Rating Agencies.
Funds held in a reserve fund or Subordinated Reserve Fund may be invested
in certain Eligible Reserve Fund Investments which may include Eligible
Investments, mortgage loans, mortgage pass-through or participation securities,
mortgage-backed bonds or notes or other investments to the extent specified in
the related Prospectus Supplement.
Eligible Investments or Eligible Reserve Fund Investments with respect to
a Series will include only obligations or securities that mature on or before
the date on which the amounts in the Collection Account are required to be
remitted to the Trustee and amounts in the Certificate Account, any Reserve
Fund or the Subordinated Reserve Fund for such Series are required or may be
anticipated to be required to be applied for the benefit of Certificateholders
of such Series.
If so provided in the related Prospectus Supplement, the reinvestment
income from the Subordination Reserve Fund, other Reserve Fund, Servicer
Account, Collection Account or the Certificate Account may be property of the
Master Servicer or a Servicer and not available for distributions to
Certificateholders. See "Servicing of Loans" herein.
Event of Default
Events of Default under the Trust Agreement for each Series include (i)
any failure by the Master Servicer or Servicer to distribute or remit any
required payment which continues unremedied for five business days (or such
shorter period as is specified in the applicable agreement) after the giving of
written notice of such failure to the Master Servicer or Servicer by the
Trustee for such Series, or to the Master Servicer or Servicer and the Trustee
by the Holders of Certificates of such Series evidencing not less than 25% of
the aggregate outstanding principal amount of the Certificates for such Series,
(ii) any failure by the Master Servicer or Servicer duly to observe or perform
in any material respect any other of its covenants or agreements in the Trust
Agreement which continues unremedied for 30 days after the giving of written
notice of such failure to the Master Servicer or Servicer by the Trustee, or to
the Master Servicer or Servicer and the Trustee by the Holders of Certificates
of such Series evidencing not less than 25% of the aggregate outstanding
principal amount of the Certificates and (iii) certain events in insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by the Master Servicer or Servicer indicating
its insolvency, reorganization or inability to pay its obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied under the Trust
Agreement for a Series, the Trustee for such Series or Holders of Certificates
of such Series evidencing not less than 25% of the aggregate outstanding
principal amount of the Certificates for such Series may terminate all of the
rights and obligations of the Master Servicer as servicer under the Trust
Agreement and in and to the Mortgage Loans (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the Trust
Agreement which rights the Master Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under the Trust Agreement and
will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the
form of assumption fees, late payment charges or otherwise as provided in the
Trust Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a housing and
home finance institution, bank or mortgage servicing institution with a net
worth of at least $15,000,000 to act as successor Master Servicer under the
provisions of such Trust Agreement relating to the servicing of the Mortgage
Loans. The successor Master Servicer would be entitled to reasonable servicing
compensation in an amount not to exceed the Servicing Fee as set forth in the
related Prospectus Supplement, together with the other servicing compensation
in the form of assumption fees, late payment charges or otherwise, as provided
in the Trust Agreement.
During the continuance of any Event of Default under the Trust Agreement
for a Series, the Trustee for such Series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and Holders of Certificates
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates for such Series may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon that Trustee. However, the Trustee will not
be under any obligation to pursue any such remedy or to exercise any of such
trusts or powers unless such Certificateholders have offered the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred by the Trustee therein or thereby. Also, the Trustee may
decline to follow any such direction if the Trustee determines that the action
or proceeding so directed may not lawfully be taken or would involve it in
personal liability or be unjustly prejudicial to the non- assenting
Certificateholders.
No Certificateholder of a Series, solely by virtue of such Holder's status
as a Certificateholder, will have any right under the Trust Agreement for such
Series to institute any proceeding with respect to the Trust Agreement, unless
such Holder previously has given to the Trustee for such Series written notice
of default and unless the Holders of Certificates evidencing not less than 25%
of the aggregate outstanding principal amount of the Certificates for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity, and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
The Trustee
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Certificates will be set forth
in the related Prospectus Supplement. The entity serving as Trustee may have
normal banking relationships with the Depositor or the Master Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Certificates. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Trust Agreement
relating to such Series will be conferred or imposed upon the Trustee and each
such separate trustee or co-trustee jointly, or, in any jurisdiction in which
the Trustee shall be incompetent or unqualified to perform certain acts, singly
upon such separate trustee or co-trustee who shall exercise and perform such
rights, powers, duties and obligations solely at the direction of the Trustee.
The Trustee may also appoint agents to perform any of the responsibilities of
the Trustee, which agents shall have any or all of the rights, powers, duties
and obligations of the Trustee conferred on them by such appointment; provided
that the Trustee shall continue to be responsible for its duties and
obligations under the Trust Agreement.
Duties of the Trustee
The Trustee makes no representations as to the validity or sufficiency of
the Trust Agreement, the Certificates or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Trust Agreement)
has occurred, the Trustee is required to perform only those duties specifically
required of it under the Trust Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the Trustee is required to examine them to determine whether they are in
the form required by the related Trust Agreement, however, the Trustee will not
be responsible for the accuracy or content of any such documents furnished by
it or the Certificateholders to the Master Servicer under the Trust Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own willful misconduct; provided, however, that the Trustee
will not be personally liable with respect to any action taken, suffered or
omitted to be taken by it in good faith in accordance with the direction of the
Certificateholders in an Event of Default, see "Rights Upon Event of Default"
above. The Trustee is not required to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties under a
Trust Agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Resignation of Trustee
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) by the Depositor, if the Trustee ceases to be eligible
to continue as such under the Trust Agreement, (ii) if the Trustee becomes
insolvent, (iii) if a tax is imposed or threatened with respect to the Trust
Fund by any state in which the Trustee or the Trust Fund held by the Trustee
pursuant to the Trust Agreement is located, or (iv) by the Holders of
Certificates evidencing over 50% of the aggregate outstanding principal amount
of the Certificates in the Trust Fund upon 30 days' advance written notice to
the Trustee and to the Depositor. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance
of the appointment by the successor Trustee.
Certificate Account
The Trustee will establish a separate account (the "Certificate Account")
in its name as Trustee for the Certificateholders. Unless otherwise specified
in the related Prospectus Supplement, the Certificate Account may be maintained
as an interest bearing account or the funds held therein may be invested,
pending disbursement to Certificateholders of the related Series, pursuant to
the terms of the Trust Agreement, in Eligible Investments. If so specified in
the related Prospectus Supplement, the Master Servicer will be entitled to
receive as additional compensation, any interest or other income earned on
funds in the Certificate Account. The Trustee will deposit into the Certificate
Account on the Business Day received all funds received from the Master
Servicer and required withdrawals from any Reserve Funds. Unless otherwise
specified in the related Prospectus Supplement, the Trustee is permitted from
time to time to make withdrawals from the Certificate Account for each Series
to remove amounts deposited therein in error, to pay to the Master Servicer any
reinvestment income on funds held in the Certificate Account to the extent it
is entitled, to remit to the Master Servicer its Servicing Fee to the extent
not previously withdrawn from the Collection Account, to make deposits to any
Reserve Fund, to make regular distributions to the Certificateholders and to
clear and terminate the Certificate Account.
Expense Reserve Fund
If specified in the Prospectus Supplement relating to a Series, the
Depositor may deposit on the related Closing Date in an account to be
established with the Trustee (the "Expense Reserve Fund") cash or eligible
investments which will be available to pay anticipated fees and expenses of the
Trustee or other agents. The Expense Reserve Fund for a Series may also be
funded over time through the deposit therein of all or a portion of cash flow,
to the extent described in the related Prospectus Supplement. The Expense
Reserve Fund, if any, will not be part of the Trust Fund held for the benefit
of the Holders. Amounts on deposit in any Expense Reserve Fund will be invested
in one or more Eligible Investments.
Amendment of Trust Agreement
Unless otherwise specified in the Prospectus Supplement, the Trust
Agreement for each Series of Certificates may be amended by the Depositor, the
Master Servicer, and the Trustee with respect to such Series, without notice to
or consent of the Certificateholders (i) to cure any ambiguity, (ii) to correct
or supplement any provision therein which may be inconsistent with any other
provision therein or in the Prospectus Supplement, (iii) to make any other
provisions with respect to matters or questions arising under such Trust
Agreement or (iv) to comply with any requirements imposed by the Code; provided
that any such amendment pursuant to clause (iii) above will not adversely
affect in any material respect the interests of any Certificateholders of such
Series not consenting thereto. Any such amendment pursuant to clause (iii) of
the preceding sentence shall be deemed not to adversely affect in any material
respect the interests of any Certificateholder if the Trustee receives written
confirmation from each Rating Agency rating such Certificates that such
amendment will not cause such Rating Agency to reduce the then current rating
thereof. The Trust Agreement for each Series may also be amended by the
Trustee, the Master Servicer and the Depositor with respect to such Series with
the consent of the Holders possessing not less than 66 2/3% of the aggregate
outstanding principal amount of the Certificates of each Class of such Series
affected thereby, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Trust Agreement or
modifying in any manner the rights of Certificateholders of such Series;
provided, however, that no such amendment may (a) reduce the amount or delay
the timing of payments on any Certificate without the consent of the Holder of
such Certificate; or (b) reduce the aforesaid percentage of aggregate
outstanding principal amount of Certificates of each Class, the Holders of
which are required to consent to any such amendment without the consent of the
Holders of 100% of the aggregate outstanding principal amount of each Class of
Certificates affected thereby.
Voting Rights
The related Trust Agreement will specify the method of determining
allocation of Voting Rights with respect to a Series.
List of Certificateholders
Upon written request of three or more Certificateholders of record of a
Series for purposes of communicating with other Certificateholders with respect
to their rights under the Trust Agreement or under the Certificates for such
Series, which request is accompanied by a copy of the communication which such
Certificateholders propose to transmit, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
No Trust Agreement will provide for the holding of any annual or other
meeting of Certificateholders.
REMIC or FASIT Administrator
With respect to any Multi-Class Series, preparation of certain reports and
certain other administrative duties with respect to the Trust Fund may be
performed by a REMIC or a FASIT administrator, who may be an affiliate of the
Depositor.
Termination
The obligations created by the Trust Agreement for a Series will terminate
upon the distribution to Certificateholders of all amounts distributable to
them pursuant to such Trust Agreement after (i) the later of the final payment
or other liquidation of the last Mortgage Loan remaining in the Trust Fund for
such Series or the disposition of all property acquired upon foreclosure or
deed in lieu of foreclosure in respect of any Mortgage Loan ("REO Property") or
(ii) the repurchase, as described below, by the Master Servicer from the
Trustee for such Series of all Mortgage Loans at that time subject to the Trust
Agreement and all REO Property. The Trust Agreement for each Series permits,
but does not require, the Master Servicer to repurchase from the Trust Fund for
such Series all remaining Mortgage Loans at a price equal to 100% of the
Aggregate Asset Principal Balance of such Mortgage Loans plus, with respect to
REO Property, if any, the outstanding principal balance of the related Mortgage
Loan, less, in either case, related unreimbursed Advances (in the case of the
Mortgage Loans, only to the extent not already reflected in the computation of
the Aggregate Asset Principal Balance of such Mortgage Loans) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Trust Agreement)
plus, in either case, accrued interest thereon at the weighted average Mortgage
Loan Pass-Through Rate through the last day of the Due Period in which such
repurchase occurs; provided, however, that if an election is made for treatment
as a REMIC or as a FASIT under the Code, the repurchase price may equal the
greater of (a) 100% of the Aggregate Asset Principal Balance of such Mortgage
Loans, plus accrued interest thereon at the applicable Net Mortgage Rates
through the last day of the month of such repurchase and (b) the aggregate fair
market value of such Mortgage Loans; plus the fair market value of any property
acquired in respect of a Mortgage Loan and remaining in the Trust Fund. The
exercise of such right will effect early retirement of the Certificates of such
Series, but the Master Servicer's right to so purchase is subject to the
Aggregate Principal Balance of the Mortgage Loans at the time of repurchase
being less than a fixed percentage, to be set forth in the related Prospectus
Supplement, of the Cut-off Date Aggregate Asset Principal Balance. In no event,
however, will the trust created by the Trust Agreement continue beyond the
expiration of 21 years from the death of the last survivor of certain person
identified therein. For each Series, the Master Servicer or the Trustee, as
applicable, will give written notice of termination of the Trust Agreement to
each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency specified
in the notice of termination. If so provided in the related Prospectus
Supplement for a Series, the Depositor or another entity may effect an optional
termination of the Trust Fund under the circumstances described in such
Prospectus Supplement. See "Description of the Certificates -- Optional
Termination of the Trust Fund" herein.
Certain Legal Aspects of Loans
The following discussion contains summaries of certain legal aspects of
housing loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the properties securing the housing loans are situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Loans.
Mortgages
The Mortgage Loans comprising or underlying the Primary Assets for a
Series will be secured by either mortgages or deeds of trust or deeds to secure
debt, depending upon the prevailing practice in the state in which the property
subject to a Mortgage Loan is located. The filing of a mortgage, deed of trust
or deed to secure debt creates a lien or title interest upon the real property
covered by such instrument and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. It is not prior
to the lien for real estate taxes and assessments or other charges imposed
under governmental police powers. Priority with respect to such instruments
depends on their terms, the knowledge of the parties to the mortgage and
generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is
the borrower/homeowner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a
land trust, there are three parties because title to the property is held by a
land trustee under a land trust agreement of which the borrower/homeowner is
the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. A deed of trust
transaction normally has three parties, the trustor, who is the
borrower/homeowner; the beneficiary, who is the lender, and the trustee, a
third-party grantee. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale,
to the trustee to secure payment of the obligation. The mortgagee's authority
under a mortgage and the trustee's authority under a deed of trust are governed
by the law of the state in which the real property is located, the express
provisions of the mortgage or deed of trust, and, in some cases, in deed of
trust transactions, the directions of the beneficiary.
Junior Mortgages; Rights of Senior Mortgages
If specified in the applicable Prospectus Supplement, Mortgage Loans
included in the Mortgage Pool will be secured by junior mortgages or deeds of
trust which are subordinate to senior mortgages or deeds of trust held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
the Certificateholders) as beneficiary under a junior deed of trust or as
mortgagee under a junior mortgage, are subordinate to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive rents, hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loan to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
Special Servicer asserts its subordinate interest in a property in foreclosure
litigation or satisfies the defaulted senior loan. As discussed more fully
below, in many states a junior mortgagee or beneficiary may satisfy a defaulted
senior loan in full, or may cure such default and bring the senior loan
current, in either event adding the amounts expended to the balance due on the
junior loan. Absent a provision in the senior mortgage, no notice of default is
required to be given to the junior mortgagee.
The form of the mortgage or deed of trust used by many institutional
lenders confers on the mortgagee or beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under the senior mortgage or deed of trust will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgage or deed of trust.
Proceeds in excess of the amount of senior mortgage indebtedness will, in most
cases, be applied to the indebtedness of a junior mortgage or trust deed. The
laws of certain states may limit the ability of mortgagees or beneficiaries to
apply the proceeds of hazard insurance and partial condemnation awards to the
secured indebtedness. In such states, the mortgagor or trustor must be allowed
to use the proceeds of hazard insurance to repair the damage unless the
security of the mortgagee or beneficiary has been impaired. Similarly, in
certain states, the mortgagee or beneficiary is entitled to the award for a
partial condemnation of the real property security only to the extent that its
security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or "optional" advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage or
deed of trust and the date of the future advance, and notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
and has actual knowledge of the intervening junior mortgages or deeds of trust
and other liens, the advance may be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
"future advance" clause rests, in many other states, on state law giving
priority to all advances made under the loan agreement up to a "credit limit"
amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust.
The form of mortgage or deed of trust used by many institutional lenders
typically requires the mortgagor or trustor to obtain the consent of the
mortgagee or beneficiary in respect of actions affecting the mortgaged
property, including, without limitation, leasing activities (including new
leases and termination or modification of existing leases), alterations and
improvements to buildings forming a part of the mortgaged property and
management and leasing agreements for the mortgaged property. Tenants will
often refuse to execute a lease unless the mortgagee or beneficiary executes a
written agreement with the tenant not to disturb the tenant's possession of its
premises in the event of a foreclosure. A senior mortgagee or beneficiary may
refuse to consent to matters approved by a junior mortgagee or beneficiary with
the result that the value of the security for the junior mortgage or deed of
trust is diminished. For example, a senior mortgagee or beneficiary may decide
not to approve a lease or to refuse to grant a tenant a non-disturbance
agreement. If, as a result, the lease is not executed, the value of the
mortgaged property may be diminished.
Cooperative Loans
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced
by promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property which it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien
or title interest is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Cooperative Loans are not secured by liens on real estate. The "owner" of
a cooperative apartment does not own the real estate constituting the
apartment, but owns shares of stock in a corporation which holds title to the
building in which the apartment is located, and by virtue of owning such stock
is entitled to a proprietary lease or occupancy agreement to occupy the
specific apartment. A Cooperative Loan is a loan secured by a lien on the
shares and an assignment of the lease or occupancy agreement. If the borrower
defaults on a Cooperative Loan, the lender's remedies are similar to the
remedies which apply to a foreclosure of a leasehold mortgage or deed of trust,
in that the lender can foreclose the loan and assume ownership of the shares
and of the borrower's rights as lessee under the related proprietary lease or
occupancy agreement. Typically, the lender and the cooperative housing
corporation enter into a recognition agreement that establishes the rights and
obligations of both parties in the event of a default by the borrower on its
obligations under the lease or occupancy agreement.
A corporation which is entitled to be treated as a housing cooperative
under the Code owns all the real property or some interest therein sufficient
to permit it to own the building and all separate dwelling units therein. The
Cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building and/or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as property mortgagor, is
also responsible for meeting these mortgage and rental obligations. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord are generally subordinate to the
interest of the holder of a blanket mortgage and to the interest of the holder
of a land lease. If the Cooperative is unable to meet the payment obligations
(i) arising under a blanket mortgage, the mortgagee holding a blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements or (ii) arising under its land lease, the
holder of the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. Also, a blanket mortgage on a Cooperative may
provide financing in the form of a mortgage that does not fully amortize, with
a significant portion of principal being due in one final payment at maturity.
The inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure
by the holder of a blanket mortgage could eliminate or significantly diminish
the value of any collateral held by the lender who financed an individual
tenant-stockholder of Cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans. Similarly, the termination of
the land lease by its holder could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual
tenant-stockholder of the Cooperative shares or, in the case of the Mortgage
Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed
through a Cooperative share loan evidenced by a promissory note and secured by
a security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the Cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "Realizing on Cooperative Loan Security" below.
There are certain risks that arise as a result of the cooperative form of
ownership which differentiate Cooperative Loans from other types of Mortgage
Loans. For example, the power of the board of directors of most cooperative
housing corporations to reject a proposed purchaser of a unit owner's shares
(and prevent the sale of an apartment) for any reason (other than reasons based
upon unlawful discrimination), or for no reason, significantly reduces the
universe of potential purchasers in the event of a foreclosure. Moreover, in
buildings where the "sponsor" (i.e., the owner of the unsold shares in the
corporation) holds a significant number of unsold interests in apartments,
cooperative apartment owners run a special risk that the sponsor may go into
default on its proprietary leases or occupancy agreements, and thereby cause a
default under the underlying mortgage loan to the cooperative housing
corporation which is secured by a mortgage on the building. In such event, the
unit owners may be forced to make up any shortfall in income to the cooperative
housing corporation resulting from the sponsor's default or risk losing their
apartments in a foreclosure proceeding brought by the holder of the mortgage on
the building. Not only would the value attributable to the right to occupy a
particular apartment be adversely affected by such an occurrence, but the
foreclosure of a mortgage on the building in which the apartment is located
could result in a total loss of the shareholder's equity in the building and
right to occupy the apartment (and a corresponding loss of the lender's
security for its Cooperative Loan).
Tax Aspects of Cooperative Ownership. In general, a "tenant-stockholder"
(as defined in Section 216(b)(2) of the Code) of a corporation that qualifies
as a "cooperative housing corporation" within the meaning of Section 216(b)(1)
of the Code is allowed a deduction for amounts paid or accrued within his
taxable year to the corporation representing his proportionate share of certain
interest expenses and certain real estate taxes allowable as a deduction under
Section 216(a) of the Code to the corporation under Sections 163 and 164 of the
Code. In order for a corporation to qualify under Section 216(b)(1) of the Code
for its taxable year in which such items are allowable as a deduction to the
corporation, such section requires, among other things, that at least 80% of
the gross income of the corporation be derived from its tenant-stockholders. By
virtue of this requirement, the status of a corporation for purposes of Section
216(b)(1) of the Code must be determined on a year-to-year basis. Consequently,
there can be no assurance that cooperatives relating to the Cooperative Loans
will qualify under such section for any particular year. In the event that such
a cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Section 216(a) of the Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that such a
failure would be permitted to continue over a period of years appears remote.
Foreclosure on Mortgages
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other
individual having an interest in the real property, including any junior
lienholders. The trustor, borrower, or any person having a junior encumbrance
on the real estate, may, during a reinstatement period, cure the default by
paying the entire amount in arrears plus the costs and expenses incurred in
enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful
nor in bad faith or the mortgagee's action established a waiver, fraud, bad
faith, or oppressive or unconscionable conduct such as to warrant a court of
equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of
the parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee generally being precluded from pursuing both at the same time.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the principal
amount of the mortgage or deed of trust plus accrued and unpaid interest and
the expenses of foreclosure, in which event the mortgagor's debt will be
extinguished or the lender may purchase for a lesser amount in order to
preserve its right against a borrower to seek a deficiency judgment in states
where such a judgment is available. Thereafter, the lender will assume the
burdens of ownership, including obtaining casualty insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of any mortgage guaranty insurance proceeds.
Realizing Upon Cooperative Loan Security
The Cooperative shares and proprietary lease or occupancy agreement owned
by the tenant- stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the Cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease
or occupancy agreement. The proprietary lease or occupancy agreement, even
while pledged, may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the Cooperative
apartment building incurred by such tenant-stockholder. Commonly, rent and
other obligations and charges arising under a proprietary lease or occupancy
agreement which are owed to the Cooperative are made liens upon the shares to
which the proprietary lease or occupancy agreement relates. In addition, the
proprietary lease or occupancy agreement generally permits the Cooperative to
terminate such lease or agreement in the event the borrower defaults in the
performance of covenants thereunder. Typically, the lender and the Cooperative
enter into a recognition agreement which establishes the rights and obligations
of both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by
the tenant- stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from a sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement or which have become liens on the shares relating
to the proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event the lender succeeds
to the tenant- shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative
Loan, the lender must obtain the approval or consent of the Cooperative as
required by the proprietary lease before transferring the Cooperative shares or
assigning the proprietary lease.
In New York, lenders generally have realized upon the pledged shares and
proprietary lease or occupancy agreement given to secure a Cooperative Loan by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to
those shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given
the debtor and the method, manner, time, place and terms of the sale.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elect to remain in the building but who did not purchase shares in the
cooperative when the building was so converted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption,
which is a nonstatutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The right
of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of a right of redemption is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the net amount realized upon the public sale of the real property and
the amount due to the lender. Other statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the judicial sale.
Cooperative Loans. Generally, lenders realize on cooperative shares and
the accompanying proprietary lease given to secure a Cooperative Loan under
Article 9 of the UCC. Some courts have interpreted section 9-504 of the UCC to
prohibit a deficiency award unless the creditor establishes that the sale of
the collateral (which, in the case of a Cooperative Loan, would be the shares
of the Cooperative and the related proprietary lease or occupancy agreement)
was conducted in a commercially reasonable manner.
Leases and Rents. Multifamily mortgage loan transactions often provide for
an assignment of the leases and rents pursuant to which the borrower typically
assigns its right, title and interest, as landlord under each lease and the
income derived therefrom, to the lender while either obtaining a license to
collect rents for so long as there is no default or providing for the direct
payment to the lender. Local law, however, may require that the lender take
possession of the property and appoint a receiver before becoming entitled to
collect the rents under the lease.
Federal Bankruptcy and Other Laws Affecting Creditors' Rights. In addition
to laws limiting or prohibiting deficiency judgments, numerous other statutory
provisions, including the federal bankruptcy laws, the Federal Soldiers' and
Sailors' Relief Act, and state laws affording relief to debtors, may interfere
with or affect the ability of the secured lender to realize upon collateral
and/or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, the filing of a petition acts as a stay against the enforcement
of remedies for collection of a debt. Moreover, a court with federal bankruptcy
jurisdiction may permit a debtor through a Chapter 13 rehabilitative plan under
the Bankruptcy Code to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the
filing of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. These courts have suggested
that such modifications may include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule and
reducing the lender's security interest to the value of the residence, thus
leaving the lender a general unsecured creditor for the difference between the
value of the residence and the outstanding balance of the loan. Federal
bankruptcy law and limited case law indicate that the foregoing modifications
could not be applied to the terms of a loan secured by property that is the
principal residence of the debtor. In all cases, the secured creditor is
entitled to the value of its security plus post-petition interest, attorney's
fees and costs to the extent the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights
in respect of a defaulted Loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal laws
impose specific statutory liabilities upon lenders who originate loans and who
fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the loans.
Federal Bankruptcy Laws Relating to Mortgage Loans Secured by Multifamily
Property. Section 365(a) of the Bankruptcy Code generally provides that a
trustee or a debtor-in-possession in a bankruptcy or reorganization case under
the Bankruptcy Code has the power to assume or to reject an executory contract
or an unexpired lease of the debtor, in each case subject to the approval of
the bankruptcy court administering such case. If the trustee or
debtor-in-possession rejects an executory contract or an unexpired lease, such
rejection generally constitutes a breach of the executory contract or unexpired
lease immediately before the date of the filing of the petition. As a
consequence, the other party or parties to such executory contract or unexpired
lease, such as the Mortgagor, as lessor under a lease, would have only an
unsecured claim against the debtor for damages resulting from such breach,
which could adversely affect the security for the related Mortgage Loan.
Moreover, under Section 502(b)(6) of the Bankruptcy Code, the claim of a lessor
for such damages from the termination of a lease of real property will be
limited to the sum of (i) the rent reserved by such lease, without
acceleration, for the greater of one year or 15 percent, not to exceed three
years, of the remaining term of such lease, following the earlier of the date
of the filing of the petition and the date on which such lender repossessed, or
the lessee surrendered, the leased property, and (ii) any unpaid rent due under
such lease, without acceleration, on the earlier of such dates.
Under Section 365(h) of the Bankruptcy Code, if a trustee for a lessor, or
a lessor as a debtor-in-possession, rejects an unexpired lease of real
property, the lessee may treat such lease as terminated by such rejection or,
in the alternative, may remain in possession of the leasehold for the balance
of such term and for any renewal or extension of such term that is enforceable
by the lessee under applicable nonbankruptcy law. The Bankruptcy Code provides
that if a lessee elects to remain in possession after such a rejection of a
lease, the lessee may offset against rents reserved under the lease for the
balance of the term after the date of rejection of the lease, and any such
renewal or extension thereof, any damages occurring after such date caused by
the nonperformance of any obligation of the lessor under the lease after such
date.
Under Section 365(f) of the Bankruptcy Code, if a trustee assumes an
executory contract or an unexpired lease of the debtor, the trustee or
debtor-in-possession generally may assign such executory contract or unexpired
lease, notwithstanding any provision therein or in applicable law that
prohibits, restricts or conditions such assignment, provided that the trustee
or debtor-in-possession provides adequate assurance of future performance by
the assignee. In addition, no party to an executory contract or an unexpired
lease may terminate or modify any rights or obligations under an executory
contract or an unexpired lease at any time after the commencement of a case
under the Bankruptcy Code solely because of a provision in the executory
contract or unexpired lease or in applicable law conditioned upon the
assignment of the executory contract or unexpired lease. Thus, an undetermined
third party may assume the obligations of the lessee or a Mortgagor under a
lease in the event of commencement of a proceeding under the Bankruptcy Code
with respect to the lessee or a Mortgagor, as applicable.
Under Sections 363(b) and (f) of the Bankruptcy Code, a trustee for a
lessor, or a lessor as debtor-in-possession, may, despite the provisions of the
related Mortgage Loan to the contrary, sell the Mortgaged Property free and
clear of all liens, which liens would then attach to the proceeds of such sale.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including mortgage loans and manufactured home
loans) incurred prior to the commencement of military service for the duration
of military service, (ii) may be entitled to a stay of proceedings on any kind
of foreclosure or repossession action in the case of defaults on such
obligations entered into prior to military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or
(iii) above are subject to challenge by creditors and if, in the opinion of the
court, the ability of a person to comply with such obligations is not
materially impaired by military service, the court may apply equitable
principles accordingly. If a borrower's obligation to repay amounts otherwise
due on a Mortgage Loan or Manufactured Home Loan included in a Trust for a
Series is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of
1940, neither the Servicer, the Master Servicer nor the Trustee will be
required to advance such amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the holders of the Certificates of such
Series.
Unless otherwise specified in the related Prospectus Supplement, any
shortfalls in interest collections on Mortgage Loans included in a Trust for a
Series resulting from application of the Soldiers' and Sailors' Civil Relief
Act of 1940 will be allocated to each Class of Certificates of such Series that
is entitled to receive interest in respect of such Mortgage Loans or
Manufactured Home Loans in proportion to the interest that each such Class of
Certificates would have otherwise been entitled to receive in respect of such
Mortgage Loans had such interest shortfall not occurred.
Environmental Risks
Under the laws of some states, and under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), it
is conceivable that a secured lender (such as the Trust Fund) may be held
liable as an "owner" or "operator" for the costs of addressing releases or
threatened releases of hazardous substances at a Mortgage Property, even though
the environmental damage or threat was caused by a prior or current owner or
"responsible parties", including owners and operators. However, CERCLA excludes
from the definition of "owner or operator" a secured creditor who holds indicia
of ownership primarily to protect its security interest, but does not
"participate in the management" of the Mortgaged Property (the "secured
creditor exclusion"). Thus, if a lender's activities begin to encroach on the
actual management of a contaminated property, the lender may incur liability as
an "owner or operator" under CERCLA. Similarly, if a lender forecloses and
takes title to a contaminated property, the lender may incur CERCLA liability
in various circumstances, including, but not limited to, when it holds the
property as an investment (including leasing the property to a third party), or
fails to market the property in a timely fashion.
Recently enacted amendments to CERCLA have clarified the range of
activities in which a lender may engage without becoming subject to liability
under CERCLA. However, liability for costs associated with the investigation
and cleanup of environmental contamination may also be governed by state law,
which may not provide any specific protections to lenders, or, alternatively,
may not impose liability on lenders at all.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs associated with releases
of petroleum contamination. Federal regulation of underground petroleum storage
tanks (other than heating oil tanks) is governed by Subtitle I of the federal
Resource Conservation and Recovery Act ("RCRA"). The United States
Environmental Protection Agency ("EPA") has promulgated a lender liability rule
for underground storage tanks regulated by Subtitle I of RCRA. Under the EPA
rule, a holder of a security interest in an underground storage tank, is not
considered an operator of the underground storage tank as long as petroleum is
not added to, stored in or dispensed from the tank. Moreover, recent amendments
to RCRA, enacted currently with the CERCLA amendments discussed in the previous
paragraph, extend to the holders of security interests in petroleum underground
storage tanks the same protections accorded to secured creditors under CERCLA.
It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide any specific
protection for lenders, or, alternatively, may not impose liability on lenders
at all.
Due-on-Sale Clauses in Mortgage Loans
Due-on-Sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been impaired in
various ways in certain states by statutory or decisional law. The ability of
lenders and their assignees and transferees to enforce due-on-sale clauses was
addressed by Congress when it enacted the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"). The legislation, subject
to certain exceptions, provides for federal preemption of all state
restrictions on the enforceability of due-on-sale clauses. Excluded from the
preemption are loans originated or assumed during a "window period" ("Window
Period Loans"). The window period runs from the date the state restricted the
enforcement of the clauses, either by constitution, statute, or statewide
judicial proclamation, to October 15, 1982. All Window Period Loans are
governed by the restrictive state law until October 15, 1985, unless the state
acted to extend the effect of the window period by further regulating such
loans. The Garn-St Germain Act further provides that loans originated by a
federal savings bank or a federally chartered savings and loan association
shall be governed by the regulations of the Federal Home Loan Bank Board. These
regulations preempt any state law restrictions and expressly allow these
federal lenders to enforce due-on-sale clauses. Loans originated by such
institutions are not subject to the window period and therefore due-on-sale
clauses in such loans are enforceable regardless of the date the loans
originated.
Although neither the Garn-St Germain Act nor the Federal Home Loan Bank
Board regulations promulgated thereunder actually lists the states with window
periods ("Window Period States"), FHLMC has taken the position, in prescribing
mortgage loan servicing standards with respect to loans which it has purchased,
that the Window Period States are Arizona, Arkansas, California, Colorado,
Florida, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and Washington.
(Despite Florida's status as a Window Period State, Florida case law indicates
that courts no longer require a lender to show an impairment of security before
enforcing a due-on-sale clause.) In regulations issued on November 8, 1983, as
amended on December 9, 1983, the Comptroller of the Currency indicated that
certain loans which were originated by national banks prior to October 15, 1982
and which were secured by property located in the states listed above were
Window Period Loans. These regulations limit the effect of state law
restrictions on the enforcement of due-on-sale clauses, with respect to Window
Period Loans originated by national banks, by shortening the window period. On
December 3, 1982, the National Credit Union Administration issued final
regulations allowing federal credit unions to enforce due-on-sale clauses in
long term first mortgage loans for transfers occurring on or after November 18,
1982, notwithstanding state law restrictions.
Under the Garn-St Germain Act, unless a Window Period State took action by
October 15, 1985 to further regulate enforcement of due-on-sale clauses, such
clauses would become enforceable even in Window Period Loans. Five of the
Window Period States (Arizona, Minnesota, Michigan, Washington and Utah) have
acted to restrict the enforceability of due-on-sale clauses in Window Period
Loans beyond October 15, 1985. The actions taken vary among such states. The
Garn-St Germain Act also sets forth nine specific instances in which no lender
covered by the Garn-St Germain Act may exercise its option pursuant to a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. The inability to enforce a due-on-sale clause may result in
transfer of the related Mortgaged Property to an uncreditworthy Person, which
could increase the likelihood of default or may result in a loan bearing an
interest rate below the current market rate being assumed by a new home buyer
rather than being paid off, which may have an impact upon the average life of
the Loans related to a Series and the number of such Loans which may be
outstanding until maturity.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes for the borrower's default and
the likelihood that the borrower will be able to reinstate the loan. In some
cases, courts have substituted their judgment for the lender's judgment and
have required that lenders reinstate loans or recast payment schedules in order
to accommodate borrowers who are suffering from temporary financial disability.
In other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect
to Mortgage Loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the Mortgage Loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ( "Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The Federal Home Loan Bank Board is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. Title V authorizes any state to reimpose interest rate limits by
adopting, before April 1, 1983, a state law, or by certifying that the voters
of such state have voted in favor of any provision, constitutional or
otherwise, which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V.
The Depositor has been advised by counsel that a court interpreting Title
V would hold that Mortgage Loans related to a Series originated on or after
January 1, 1980 are subject to federal preemption. Therefore, in a state that
has not taken the requisite action to reject application of Title V or to adopt
a provision limiting discount points or other charges prior to origination of
such Mortgage Loans, any such limitation under such state's usury law would not
apply to such Mortgage Loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
Mortgage Loans originated after the date of such state action will be eligible
as Primary Assets if such Mortgage Loans bear interest or provide for discount
points or charges in excess of permitted levels. No Mortgage Loan originated
prior to January 1, 1980 will bear interest or provide for discount points or
charges in excess of permitted levels.
Adjustable Interest Rate Loans
ARMs originated by non-federally chartered lenders have historically been
subject to a variety of restrictions. Such restrictions differed from state to
state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title
VIII"). Title VIII provides that, notwithstanding any state law to the
contrary, state-chartered banks may originate "alternative mortgage
instruments" (including ARMs) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions and all other
non-federally chartered housing creditors, including state-chartered savings
and loan associations; and state-chartered savings banks and mortgage banking
companies may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board with respect to
origination of alternative mortgage instruments by federal savings and loan
associations. Title VIII provides that any state may reject applicability of
the provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of such
provisions. Certain states have taken such action.
The Depositor has been advised by its counsel that it is their opinion
that a court interpreting Title VIII would hold that ARMs which were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
Manufactured Home Loans
Security Interests in the Manufactured Homes. Law governing perfection of
a security interest in a Manufactured Home varies from state to state. Security
interests in Manufactured Homes may be perfected either by notation of the
secured party's lien on the certificate of title or by delivery of the required
documents and payment of a fee to the state motor vehicle authority, depending
on state law. In some nontitle states, perfection pursuant to the provisions of
the UCC is required. The lender or a servicer may effect such notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a Manufactured Home Loan is registered. In the event
such notation or delivery is not effected or the security interest is not filed
in accordance with the applicable law (for example, is filed under a motor
vehicle title statute rather than under the UCC, in a few states), a first
priority security interest in the Manufactured Home securing a Manufactured
Home Loan may not be obtained. As Manufactured Homes have become larger and
often have been attached to their sites without any apparent intention to move
them, courts in many states have held that Manufactured Homes, under certain
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a Manufactured Home could be rendered
subordinate to the interests of other parties claiming an interest in the
Manufactured Home under applicable state real estate law. In order to perfect a
security interest in a Manufactured Home under real estate laws, the holder of
the security interest must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Manufactured Home Loans
typically contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest
in the Manufactured Home. If, however, a Manufactured Home is permanently
attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained
by the lender or its assignee. With respect to a Series of Certificates
evidencing interests in a Trust Fund that includes Manufactured Home Loans and
as described in the related Prospectus Supplement, the Depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not made and if
any of the foregoing events were to occur, the only recourse of the
Certificateholders would be against the Depositor pursuant to its repurchase
obligation for breach of warranties. A PMBS Agreement pursuant to which Private
Mortgage-Backed Securities backed by Manufactured Home Loans are issued will,
unless otherwise specified in the related Prospectus Supplement, have
substantially similar requirements for perfection of a security interest.
In general, upon an assignment of a Manufactured Home Loan, the
certificate of title relating to the Manufactured Home will not be amended to
identify the assignee as the new secured party. In most states, an assignment
is an effective conveyance of such security interest without amendment of any
lien noted on the related certificate of title and the new secured party
succeeds to the assignor's rights as the secured party. However, in some states
there exists a risk that, in the absence of an amendment to the certificate of
title, such assignment of the security interest might not be held effective
against creditors of the assignor.
Relocation of a Manufactured Home. In the event that the owner of a
Manufactured Home moves the home to a state other than the state in which such
Manufactured Home initially is registered, under the laws of most states the
perfected security interest in the Manufactured Home would continue for four
months after such relocation and thereafter only if and after the owner
reregisters the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and not reregister the Manufactured Home
in such state, and if steps are not taken to reperfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to reregister a Manufactured Home; accordingly, possession
of the certificate of title to such Manufactured Home must be surrendered or,
in the case of Manufactured Homes registered in states which provide for
notation of lien, the notice of surrender must be given to any person whose
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the owner of the Manufactured Home Loan would have the
opportunity to reperfect its security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, reregistration could defeat perfection. In
the ordinary course of servicing the Manufactured Home Loans, the Master
Servicer will be required to take steps to effect reperfection upon receipt of
notice of reregistration or information from the borrower as to relocation.
Similarly, when a borrower under a Manufactured Home Loan sells the related
Manufactured Home, the Trustee must surrender possession of the certificate of
title or the Trustee will receive notice as a result of its lien noted thereon
and accordingly will have an opportunity to require satisfaction of the related
Manufactured Home Loan before release of the lien. Under the Trust Agreement,
the Depositor is obligated to take such steps, at the Servicer's expense, as
are necessary to maintain perfection of security interests in the Manufactured
Homes. PMBS Agreements pursuant to which Private Mortgage-Backed Securities
backed by Manufactured Home Loans are issued will impose substantially similar
requirements.
Intervening Liens. Under the laws of most states, liens for repairs
performed on a Manufactured Home take priority even over a perfected security
interest. The Depositor will represent that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any
Manufactured Home Loan. However, such liens could arise at any time during the
term of a Manufactured Home Loan. No notice will be given to the Trustee or
Certificateholders in the event such a lien arises. PMBS Agreements pursuant to
which Private Mortgage-Backed Securities backed by Manufactured Home Loans are
issued will contain substantially similar requirements.
Enforcement of Security Interests in Manufactured Homes. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Manufactured Home Loan by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Manufactured Home Loan must give the debtor a number of days' notice, which
varies from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to
resale of the unit so that the debtor may redeem at or before such resale. In
the event of such repossession and resale of a Manufactured Home, the holder of
a Manufactured Home Loan would be entitled to be paid out of the sale proceeds
before such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the borrower.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a borrower for any deficiency on repossession and
resale of the Manufactured Home securing such borrower's loan. However, some
states impose prohibitions or limitations on deficiency judgments. See
"Antideficiency Legislation and Other Limitations on Lenders" above.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment. See "Federal Bankruptcy and Other Law Affecting Creditors' Rights"
and "Equitable Limitations on Remedies" above.
Consumer Protection Laws. The so-called "Holder-In-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract who is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the borrower thereunder. The effect of
this rule is to subject the assignee of such a contract to all claims and
defenses which the borrower could assert against the seller of goods. Liability
under this rule is limited to amounts paid under a Manufactured Home Loan;
however, the borrower also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought against such borrower.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the Manufactured Home
Loan, including the Truth-in-Lending Act, the Federal Trade Commission Act, the
Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related Manufactured
Home Loan.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses.
Loans and installment sale contracts relating to a Manufactured Home Loan
typically prohibit the sale or transfer of the related Manufactured Homes
without the consent of the lender and permit the acceleration of the maturity
of the Manufactured Home Loans by the lender upon any such sale or transfer for
which no such consent is granted.
In the case of a transfer of a Manufactured Home, the lender's ability to
accelerate the maturity of the related Manufactured Home Loan will depend on
the enforceability under state law of the "due-on-sale" clause. The Garn-St.
Germain Depositary Institutions Act of 1982 preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. See " `Due-On-Sale' Clauses in
Mortgage Loans" above. With respect to any Manufactured Home Loan secured by a
Manufactured Home occupied by the borrower, the ability to accelerate will not
apply to those types of transfers discussed in " `Due-On-Sale' Clauses in
Mortgage Loans" above. FHA Loans and VA Loans are not permitted to contain
"due-on-sale" clauses, and so are freely assumable.
Applicability of Usury Laws. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of Manufactured Homes. The
Manufactured Home Loans would be covered if they satisfy certain conditions,
among other things, governing the terms of any prepayments, late charges and
deferral fees and requiring a 30-day notice period prior to instituting any
action leading to repossession of or foreclosure with respect to the related
unit. See "Applicability of Usury Laws" above.
<PAGE>
Material Federal Income Tax Considerations
General
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Certificates.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The
statutory provisions, regulations, and interpretations on which this
interpretation is based are subject to change, and such a change could apply
retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon
investors who will hold Certificates as "capital assets" (generally, property
held for investment) within the meaning of Section 1221 of the Code, but much
of the discussion is applicable to other investors as well. Potential
purchasers of Certificates are advised to consult their own tax advisers
concerning the federal, state or local tax consequences to them of the
purchase, holding and disposition of the Certificates.
Characterization of Certificates
Unless otherwise stated in the applicable Prospectus Supplement, a REMIC
or a FASIT election will be made with respect to each Series of Certificates.
In such a case, special counsel to the Issuer will deliver its opinion to the
effect that under then-current law, the arrangement by which the Certificates
of that Series are issued will be treated as a REMIC or as a FASIT as long as
all of the provisions of the applicable Indenture or Trust Agreement, as
applicable, are complied with and the statutory and regulatory requirements are
satisfied. Certificates of such Series will be designated as "regular
interests" or "residual interests" in a REMIC, or as "regular interests" or
"ownership interests" in a FASIT, as specified in the related Prospectus
Supplement. The opinion will assume the accuracy of certain representations of
the Depositor contained in the Trust Agreement.
If the applicable Prospectus Supplement so specifies with respect to a
Series of Certificates, the Certificates of such Series will not be treated as
regular or residual interests in a REMIC or as regular interests or ownership
interests in a FASIT for federal income tax purposes but instead will be
treated as (i) indebtedness of the Issuer, (ii) an undivided beneficial
ownership interest in the Mortgage Loans (and the arrangement pursuant to which
the Mortgage Loans will be held and the Certificates will be issued will be
treated as a grantor trust under Subpart E, part I of subchapter J of the Code
and not as an association taxable as a corporation for federal income tax
purposes); (iii) equity interests in an association that will satisfy the
requirements for qualification as a real estate investment trust; or (iv)
interests in an entity that will satisfy the requirements for qualification as
a partnership for federal income tax purposes. The federal income tax
consequences to Certificateholders of any such Series will be described in the
applicable Prospectus Supplement.
Qualification as a REMIC
In order for a pool of assets (each, a "REMIC Pool") to qualify as a
REMIC, it must comply with certain ongoing requirements set forth in the Code.
First, the REMIC must fulfill an asset test, which requires that substantially
all of the assets of the REMIC as of the close of the third calendar month
beginning after the "Startup Day" (generally the date that the Certificates or
Bonds are issued) and at all times thereafter consist of "qualified mortgages"
and "permitted investments" (generally, temporary investments of collections on
qualified mortgages) as those terms are defined in the Code. In addition, a
REMIC must also establish reasonable arrangements to insure that residual
interests therein are not held by "disqualified organizations" (in general,
entities that are not subject to federal income tax). The Pooling and Servicing
Agreement will require compliance with the REMIC provisions.
The Code and applicable regulations define a "qualified mortgage" to
include an obligation that is principally secured by interest in real property
as those terms are defined in applicable regulations. In addition to the
foregoing, in order for a mortgage loan to be a "qualified mortgage," the fair
market value of the "interest in real property" (as specifically defined for
this purpose) securing the mortgage loan (reduced by certain items, including
the amount of any senior liens and a pro rata portion of any parity liens) must
equal at least 80% of the adjusted issue price of the mortgage loan (generally,
the proceeds of the loan to the borrower) at either (a) the time it was
originated or, if the Mortgage Loan has been significantly modified (as
described in applicable regulations), the time of such modification, or (b) the
time of contribution to the REMIC. Tax Counsel has not independently
investigated the qualification of the Mortgage Loans as "qualified mortgages"
pursuant to these provisions, but in rendering its opinion has relied on
representations of the Depositor in the Trust Agreement.
If a REMIC fails to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, the Code provides that the
entity will not be treated as a REMIC for such year or for any year thereafter.
In such case, the classification of the REMIC for federal income tax purposes
is uncertain. Some Classes of the Certificates may continue to be treated as
debt instruments for federal income tax purposes. On the other hand, all or a
part of the REMIC may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Certificates may be treated as
stock interests therein and not as debt instruments. The Code grants regulatory
authority to the Treasury Department to issue regulations that would grant
relief from disqualification where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith. Any such
relief may be accompanied by sanctions, however, such as the imposition of a
corporate tax on all or a portion of the REMIC's income for the period of time
during which the requirements for REMIC status were not satisfied.
Except to the extent the related Prospectus Supplement specifies
otherwise, if a REMIC election is made with respect to a Series of
Certificates, (i) Certificates held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC" within the
meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the
REMIC's assets consist of cash, government securities, "loans . . . secured by
an interest in real property," and other types of assets described in Code
Section 7701(a)(19)(C)); and (ii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(6)(B), and income with respect to the Certificates will be considered
"interest on obligations secured by mortgages on real property or on interest
in real property" within the meaning of Code Section 856(c)(3)(B) (assuming,
for both purposes, that at least 95% of the REMIC's assets are qualifying
assets). If less than 95% of the REMIC's assets consist of assets described in
(i) or (ii) above, then Certificates will qualify for the tax treatment
described in (i) or (ii) in the proportion that such REMIC assets are
qualifying assets. In general, Mortgage Loans secured by non-residential real
property will not constitute "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C).
It is possible that various reserves or funds will reduce the proportion
of REMIC assets which qualify under the standards described above.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code section 593(d) to any taxable year beginning after December 31, 1995.
Qualification as a FASIT
The Small Business and Job Protection Act of 1996 added Sections 860H
through 860L to the Code (the "FASIT Provisions"), which provide for a new type
of entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). Although the FASIT provisions of
the Code became effective on September 1, 1997, no Treasury regulations or
other administrative guidance have been issued with respect to those
provisions. Accordingly, definitive guidance cannot be provided with respect to
many aspects of the tax treatment of FASITs.
A Trust Fund will qualify as a FASIT if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and (B)
the nature of the investors' interests in the FASIT are met on a continuing
basis, and (iii) the Trust Fund is not a regulated investment company as
defined in section 851(a) of the Code.
For a Trust Fund to be eligible for FASIT status, substantially all of the
Trust Fund Assets must consist of "permitted assets" as of the close of the
third month beginning after the closing date and at all times thereafter (the
"FASIT Qualification Test"). Permitted assets include (i) cash or cash
equivalents, (ii) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate), (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying
hedging instruments, (vi) FASIT regular interest, and (vii) REMIC regular
interests. Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to such
holder.
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by
a fully taxable domestic C Corporation. FASIT interests will be classified as
either FASIT regular interests, which generally will be treated as debt for
federal income tax purposes, or FASIT ownership interests, which generally are
not treated as debt for such purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The Prospectus Supplement for each Series of Securities will indicate
which Securities of such Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and (vi) if it pays
interest, such interest is payable at either (a) a fixed rate with respect to
the principal amount of the regular interest or (b) a permissible variable rate
with respect to such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular interests (i.e.,
certain qualified floating rates and weighted average rates). Interest will be
considered to be based on a permissible variable rate if generally, (i) such
interest is unconditionally payable at least annually, (ii) the issue price of
the debt instrument does not exceed the total noncontingent principal payments
and (iii) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more "qualified floating
rate," one "qualified inverse floating rate," or a combination of "qualified
floating rates" that do not operate in a manner that significantly accelerates
or defers interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (iii), (iv), or (v) in the immediately preceding paragraph,
but otherwise meets all requirements to be treated as a FASIT, it may still
qualify as a type of regular interest known as a "High-Yield Interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause
(vi), but the interest payable on the interest consists of a specified portion
of the interest payments on permitted assets and that portion does not vary
over the life of the security, the interest will also qualify as a High-Yield
Interest. A High-Yield Interest may be held only by domestic C corporations
that are fully subject to corporate income tax ("Eligible Corporations"), other
FASITs, and dealers in securities who acquire such interests as inventory,
rather than for investment. In addition, holders of High-Yield Interests are
subject to limitations on offset of income derived from such interest. See
"Material Federal Income Tax Consequences -- Taxation of Trust as a FASIT --
Treatment of High-Yield Interests."
If a Trust Fund fails to comply with one or more of ongoing requirements
for FASIT status during any taxable year, the Code provides that its FASIT
status may be lost for that year and thereafter. If FASIT status is lost, the
treatment of the former FASIT and interests therein for federal income tax
purposes is uncertain. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the requirements
for FASIT status occurs inadvertently and in good faith, such regulations have
not yet been issued. It is possible that disqualification relief might be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the FASIT's income for the period of time in which the requirements
for FASIT status are not satisfied.
Taxation of Regular Interest Certificates
Interest and Acquisition Discount. Certificates that qualify as regular
interests in a REMIC ("Regular Interest Certificates") are generally treated as
indebtedness for federal income tax purposes. Certificates representing regular
interests in a FASIT are treated as debt instruments. Certificates designated
as regular interests in a REMIC or a FASIT will be referred to hereinafter
collectively as "Regular Interest Certificates." Stated interest on a Regular
Interest Certificate will be taxable as ordinary income using the accrual
method of accounting, regardless of the Certificateholder's normal accounting
method. Reports will be made annually to the IRS and to holders of Regular
Interest Certificates that are not excepted from the reporting requirements
regarding amounts treated as interest (including accrual of original issue
discount) on Regular Interest Certificates.
Compound Interest Certificates, Interest Weighted Certificates, and Zero
Coupon Certificates will, and other Certificates constituting Regular Interest
Certificates may, be issued with "original issue discount" ("OID") within the
meaning of Code Section 1273. Rules governing original issue discount are set
forth in sections 1271-1275 of the Code and the Treasury regulations thereunder
(the "OID Regulations"). The OID Regulations do not address the treatment of
instruments having contingent payments. However, Treasury regulations (the
"Contingent Regulations") governing the treatment of contingent payment
obligations have recently been finalized. As described more fully below, Code
Section 1272(a)(6) requires the use of an income tax accounting methodology
that utilizes (i) a single constant yield to maturity and (ii) the Prepayment
Assumption. Under Section 1272(a)(6) of the Code, special rules apply to the
computation of OID on instruments, such as the Regular Interest Certificates,
on which principal is prepaid based on prepayments of the underlying assets.
Neither the OID Regulations nor the Contingent Regulations contain rules
applicable to instruments governed by Section 1272(a)(6). Although technically
not applicable to prepayable securities, the Contingent Regulations may
represent the likely method to be applied in calculating OID on certain Classes
of Certificates. Until the Treasury issues guidance to the contrary, the
Servicer or other person responsible for computing the amount of original issue
discount to be reported to a Regular Interest Certificateholder each taxable
year (the "Tax Administrator") intends to base its computations on Code Section
1272(a)(6), the OID Regulations and the Contingent Regulations as described
below. However, because no regulatory guidance currently exists under Code
Section 1272(a)(6), there can be no assurance that the methodology described
below represents the correct manner of calculating original issue discount on
the Regular Interest Certificates.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Regular Interest Certificate and its issue
price. A holder of a Regular Interest Certificate must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Regular Interest Certificate will be considered
to be zero if it is less than a de minimis amount determined under the Code.
However, the amount of any de minimis OID must be included in income as
principal payments are received on an Offered Certificate, in the proportion
that each such payment bears to the original principal balance of the
Certificate.
The issue price of a Regular Interest Certificate of a Class will
generally be the initial offering price at which a substantial amount of the
Certificates in the Class are sold, and will be treated by the Issuer as
including, in addition, the amount paid by the Certificateholder for accrued
interest that relates to a period prior to the Closing Date of such Regular
Interest Certificate. Under the OID Regulations, the stated redemption price at
maturity is the sum of all payments on the Security other than any "qualified
stated interest" payments. Qualified stated interest is defined as any one of a
series of payments equal to the product of the outstanding principal balance of
the Security and a single fixed rate, or certain variable rates of interest
that is unconditionally payable at least annually. See "Variable Rate
Certificates" below. In the case of the Compound Interest Certificates, and
certain of the other Regular Interest Certificates, none of the payments under
the instrument will be considered "qualified stated interest," and thus the
aggregate amount of all payments will be included in the stated redemption
price. For example, any securities upon which interest can be deferred and
added to principal ("Deferred Interest Certificates") will not be "qualified
stated interest." In addition, because Certificates Owners are entitled to
receive interest only to the extent that payments are made on the Mortgage
Loans, interest on all Regular Interest Certificates may not be
"unconditionally payable." In that case, all of the yield on a Regular Interest
Certificate will be taxed as OID, but interest would not then be includible in
income again when received. Unless otherwise specified in the related
Prospectus Supplement, the Issuer intends to take the position that interest on
the Regular Interest Certificates is "unconditionally payable."
The holder of a Regular Interest Certificate issued with OID must include
in gross income, for all days during its taxable year on which it holds such
Regular Interest Certificate, the sum of the "daily portions" of such OID. Such
daily portions are computed by allocating to each day during a taxable year a
pro rata portion of the OID that accrued during the relevant accrual period. In
the case of a debt instrument, subject to Section 1272(a)(6) of the Code, such
as a Regular Interest Certificate, that is subject to acceleration due to
prepayments on other debt obligations securing such instrument, OID is computed
by taking into account the anticipated rate of prepayments assumed in pricing
the debt instrument (the "Prepayment Assumption"). The amount of OID that will
accrue during an accrual period (generally the period between interest payments
or compounding dates) is the excess (if any) of (i) the sum of (a) the present
value of all payments remaining to be made on the Regular Interest Certificate
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Regular
Interest Certificate, over (ii) an "adjusted issue price" of the Regular
Interest Security at the beginning of the accrual period. The adjusted issue
price of a Regular Interest Certificate is the sum of its issue price plus
prior accruals of OID, reduced by the total payments made with respect to such
Regular Interest Certificate in all prior periods, other than qualified stated
interest payments. The present value of the remaining payments is determined on
the basis of three factors: (i) the original yield to maturity of the Regular
Interest Certificate (determined on the basis of compounding at the end of each
accrual period and properly adjusted for the length of the accrual period),
(ii) events which have occurred before the end of the accrual period and (iii)
the assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to
be included in income by a Certificateholder to take into account prepayments
with respect to the Mortgage Loans at a rate that exceeds the Prepayment
Assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a Certificateholder to take into
account prepayments with respect to the Mortgage Loans at a rate that is slower
than the Prepayment Assumption. Although original issue discount will be
reported to Certificateholders based on the Prepayment Assumption, no
representation is made to Certificateholders that Mortgage Loans will be
prepaid at that rate or at any other rate.
The Issuer may adjust the accrual of OID on a Class of Regular Interest
Certificates in a manner that it believes to be appropriate, to take account of
realized losses on the Mortgage Assets, although the OID Regulations do not
provide for such adjustments. If the Service challenges the method adopted by
the Issuer, the rate of accrual of OID for a Class of Regular Interest
Certificates could increase.
Certain classes of Regular Interest Certificates may represent more than
one class of REMIC regular interests or FASIT regular interests. Unless the
applicable Prospectus Supplement specifies otherwise, based on the OID
Regulations and solely for the purposes of computing OID, the Trustee intends
to calculate OID on such Regular Interest Certificates as if the separate
regular interests were a single debt instrument.
Certain Series of Certificates may represent regular interests ("Lower
Tier Interests") in other REMICs or FASITs. Unless otherwise provided in the
applicable Prospectus Supplement, based on the OID Regulations and solely for
the purposes of computing OID, the Trustee intends to calculate OID on such
certificates as if the separate regular interests were a single debt
instrument.
A holder of a Regular Interest Certificate, which acquires the Regular
Interest Certificate for an amount that exceeds its stated redemption price,
will not include any original issue discount in gross income. A subsequent
holder of a Regular Interest Certificate which acquires the Regular Interest
Certificate for an amount that is less than its stated redemption price, will
be required to include original issue discount in gross income, but such a
holder who purchases such Regular Interest Certificate for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder
who pays more than a Regular Interest Certificate's issue price) to offset such
original issue discount by comparable economic accruals of portions of such
excess.
Interest Weighted Certificates. It is not clear how income should be
accrued with respect to a Regular Interest Certificates the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by a REMIC or a FASIT ("Interest Weighted
Certificates"). Absent guidance to the contrary, the Issuer intends to take the
position that all of the income derived from Interest Weighted Certificates
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated in the same manner as for a Compound Interest Security.
However, the Internal Revenue Service could assert that income derived from an
Interest Weighted Security should be calculated as if the Interest Weighted
Security were a bond purchased at a premium equal to the excess of the price
paid by such holder for the Interest Weighted Security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171 of
the Code with respect to all taxable debt instruments held by such holder, as
described below. Alternatively, the Internal Revenue Service could assert that
the Interest Weighted Security should be taxable under rules comparable to
those governing bonds issued with contingent principal payments or otherwise
treated as contingent payment instruments (although the Contingent Regulations
explicitly do not apply to REMIC regular interests). The OID Regulations do
not, at the present time, include regulations governing instruments that
provide for contingent payments. Under the Contingent Regulations, if they were
applicable to Interest Weighted Certificates (which, as Section 1272(a)(6)
instruments, are specifically excluded from the scope of the Contingent
Regulations) income on certain Certificates would be computed under the
"noncontingent bond method." The noncontingent bond method would generally
apply in a manner similar to the method prescribed by the Code under Section
1272(a)(6). See "- Variable Rate Regular Certificates." Under the noncontingent
bond method, however, if the interest payable for any period is greater or less
than the amount projected, the amount of income included for that period would
be either increased or decreased accordingly. Any reduction in the income
accrual for a period below zero (a "Net Negative Adjustment") would be treated
by a Certificateholder as ordinary loss to the extent that prior income
inclusions exceed the total Net Negative Adjustments previously treated as
ordinary loss by the Certificateholder, and may be carried forward to offset
future interest accruals. At maturity, any remaining Net Negative Adjustment
would be treated as a loss on retirement of the Certificate. The legislative
history of relevant Code provisions indicates, however, that negative amount of
OID on an instrument such as a REMIC regular interest may not give rise to
taxable losses in any accrual period prior to the instrument's disposition or
retirement. Thus, it is not clear whether any losses resulting from a Net
Negative Adjustment may be recognized currently or must be carried forward
until disposition or retirement of the debt obligation.
Variable Rate Regular Certificates. Under the OID Regulations, the amount
and accrual of OID that qualifies for treatment under the rules applicable to
variable rate debt instruments (a "VRDI Security") is determined, in general,
by converting the VRDI Security into a hypothetical fixed rate security and
applying the rules applicable to fixed rate securities described above to the
hypothetical fixed rate security. A VRDI Security providing for a qualified
floating rate or rates or a qualified inverse floating rate is converted to a
hypothetical fixed rate security by assuming that each qualified floating rate
or the qualified inverse floating rate will remain at its value as of the issue
date. A VRDI Security providing for an objective rate or rates is converted to
a hypothetical fixed rate security by assuming that each objective rate will
equal a fixed rate that reflects the yield that reasonably is expected for the
instrument. Such hypothetical fixed rate securities are assumed to have terms
identical to those provided under the related VRDI Certificates, except for a
rate that varies directly with an objective index. In the case of a VRDI
Security that does not provide for the payment of interest at least annually,
appropriate adjustments to the OID accruals and the qualified stated interest
payments are made in each accrual period to the extent that the interest
actually accrued or paid during the accrual period is greater or less than the
interest assumed to be accrued or paid under the hypothetical fixed rate
security.
Regular Interest Certificates of certain Series may provide for interest
based on a weighted average of the interest rates on some or all of the
Mortgage Loans of the related Trust ("Weighted Average Certificates"). Under
the OID Regulations, it appears that Weighted Average Certificates relating to
a Trust whose Mortgage Loans are exclusively ARM Loans bear interest at an
"objective rate," since the ARM Loans themselves bear interest at qualified
floating rates. Under the existing OID Regulations, Weighted Average
Certificates relating to a Trust whose Mortgage Loans are not exclusively ARM
Loans ("Non-Objective Weighted Average Certificates") do not bear interest at
an objective or a qualified floating rate and, consequently, are not governed
by the rules applicable to VRDI Certificates described above. Accordingly,
absent additional regulatory guidance, it appears that Non-Objective Weighted
Average Certificates would be taxed under the rules applicable to contingent
payment instruments. Under the Contingent Regulations, it appears that a
weighted average of fixed rates would qualify as an objective rate.
Effect of Defaults and Delinquencies. Each holder of a Regular Interest
Certificate will be required to accrue interest and original issue discount on
such Certificate without giving effect to any reductions in distributions
attributable to defaults or delinquencies on the Mortgage Loans, until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
Regular Interest Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a
Regular Interest Security eventually will recognize a loss or reduction in
income attributable to previously accrued and included income that, as a result
of such loss, ultimately will not be paid, the law is unclear with respect to
the timing and character of such losses or reduction in income. Accordingly,
holders of Regular Interest Certificates should consult their own tax advisors
on this point.
Under Section 166 of the Code, both corporate and noncorporate holders of
Regular Interest Certificates that hold such Certificates in connection with a
trade of business should be allowed to deduct, as ordinary losses, any losses
sustained during a taxable year in which their Regular Interest Certificates
become wholly or partially worthless as the result of one or more realized
losses on the Mortgage Loans. However, it appears that a noncorporate holder
that does not acquire a Regular Interest Security in connection with a trade or
business will not be entitled to deduct a loss under Section 166 of the Code
until such holder's Regular Interest Security becomes wholly worthless (that
is, until its outstanding principal balance has been reduced to zero) and that
the loss will be characterized as a short-term capital loss.
Market Discount and Premium. A purchaser of a Regular Interest Certificate
may also be subject to the market discount rules of the Code. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as payments of principal are received on such Regular Interest
Certificate, or upon sale or exchange of the Regular Interest Certificate. In
general terms, until regulations are promulgated, market discount may be
treated as accruing, at the election of the holder, either (i) under a constant
yield method, taking into account the Prepayment Assumption, or (ii) in
proportion to accruals of original issue discount (or, if there is no original
issue discount, in proportion to accruals of stated interest). A holder of a
Regular Interest Certificate having market discount may also be required to
defer a portion of the interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the Regular Interest Certificate. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the holder may elect to include such market discount in income currently
as it accrues on all market discount instruments acquired by such holder in
that taxable year or thereafter, in which case the interest deferral rule will
not apply.
A holder who purchases a Regular Interest Certificate (other than an
Interest Weighted Security, to the extent described above) at a cost greater
than its stated redemption price at maturity, generally will be considered to
have purchased the Certificate at a premium, which it may elect to amortize as
an offset to interest income on such Certificate (and not as a separate
deduction item) on a constant yield method. Although no regulations addressing
the computation of premium accrual on collateralized mortgage obligations or
REMIC and FASIT regular interests have been issued, applicable legislative
history indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a Regular
Interest Certificate will be calculated using the prepayment assumption used in
pricing such Regular Interest Certificate. If a holder makes an election to
amortize premium on a Certificate, such election will apply to all taxable debt
instruments (including all REMIC regular interests) held by the holder at the
beginning of the taxable year in which the election is made, and to all taxable
debt instruments acquired thereafter by such holder, and will be irrevocable
without the consent of the Internal Revenue Service. Purchasers who pay a
premium for the Regular Interest Security should consult their tax advisers
regarding the election to amortize premium and the method to be employed.
The Regulations dealing with amortizable bond premium specifically do not
apply to prepayable debt instruments subject to Code Section 1272(a)(6) such as
the Certificates. Absent further guidance from the IRS, the Trustee intends to
account for amortizable bond premium in the manner described above. Prospective
purchasers of Certificates should consult their tax advisors regarding the
possible application of the Amortizable Bond Premium Regulations.
Sale or Exchange of Regular Interest Certificates
A Regular Interest Certificateholder's tax basis in its Regular Interest
Certificates is the price such holder pays for a Certificate, increased by
amounts of original issue discount included in income and reduced by any
payments received (other than qualified periodic interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption
of a Regular Interest Certificates, measured by the difference between the
amount realized and the Regular Interest Certificate's basis as so adjusted,
will generally be capital gain or loss, assuming that the Regular Interest
Certificate is held as a capital asset, except to the extent of (i) accrued
market discount and (ii) in the case of a redemption or prepayment of a Regular
Interest Certificate, any OID, including OID that did not previously accrue.
If, however, a Regular Certificateholder is a bank, thrift, or similar
institution described in Section 582 of the Code, gain or loss realized on the
sale or exchange of a Regular Interest Certificate will be taxable as ordinary
income or loss. In addition, gain from the disposition of a Regular Interest
Certificate that might otherwise be capital gain will be treated as ordinary
income to the extent of the excess, if any, of (i) the amount that would have
been includible in the holder's income if the yield on such Regular Interest
Certificate had equaled 110% of the applicable federal rate as of the beginning
of such holder's holding period, over (ii) the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Certificate.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. The regular interests are generally taxable as debt of the
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue
discount or market discount on loans and other assets, and (ii) deductions,
including stated interest and original issue discount accrued on a Regular
Interest Security, amortization of any premium with respect to loans, and
servicing fees and other expenses of the REMIC. A holder of a Residual Interest
Security that is an individual or a "pass-through interest holder" (including
certain pass-through entities, but not including real estate investment trusts)
will be unable to deduct servicing fees payable on the loans or other
administrative expenses of the REMIC for a given taxable year, to the extent
that such expenses, when aggregated with the Residual Interest Securityholder's
other miscellaneous itemized deductions for that year, do not exceed two
percent of such holder's adjusted gross income. In addition, Code Section 68
provides that the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. See "REMIC
Expenses" below.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Start
Up Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The original issue discount provisions of the Code apply to loans of
individuals originated on or after March 2, 1984, and the market discount
provisions apply to all loans. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of original issue discount on
such loans will be equivalent to the method under which holders of Regular
Interest Certificates accrue original issue discount (i.e., under the constant
yield method taking into account the Prepayment Assumption). The REMIC will
deduct original issue discount on the Regular Interest Certificates in the same
manner that the holders of the Certificates include such discount in income,
but without regard to the de minimis rules. See "Taxation of Regular Interest
Certificates" above. However, a REMIC that acquires loans at a market discount
must include such market discount in income currently, as it accrues, on a
constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is possible
that such premium may be recovered in proportion to payments of loan principal.
Income from Foreclosure Property. To the extent that a REMIC derives
income from Foreclosed Properties that is treated as "net income from
foreclosure property," that income will be subject to taxation at the highest
corporate tax rate. Net income from foreclosure property generally includes
gain from the sale of a foreclosure property that is inventory property and net
income from the property that would not be treated as "rents from real
property" or other certain other qualifying income. In addition, if the
operation of the Foreclosed Property is treated as a trade or business carried
on by the REMIC, then unless the property is operated through an independent
contractor, the income from the foreclosed property will be subject to tax on
"income from nonpermitted assets" at a rate of 100%. A trust agreement or
indenture may permit the Servicer to operate a Foreclosed Property in a manner
that produces income subject to the foregoing taxes if certain conditions are
satisfied.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from other prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions,
a tax is imposed at the rate of 100% on amounts contributed to a REMIC after
the close of the three-month period beginning on the Start Up Day. The holders
of Residual Interest Certificates will generally be responsible for the payment
of any such taxes imposed on the REMIC. To the extent not paid by such Holders
or otherwise, however, such taxes will be paid out of the assets of the REMIC
and, unless otherwise specified in the related Prospectus Supplement, will be
allocated pro rata to all outstanding Classes of Certificates of such REMIC.
Taxation of Holders of Residual Interest Certificates
The Holder of a Certificate representing a REMIC residual interest (a
"Residual Interest Certificate") will take into account the "daily portion" of
the taxable income or net loss of the REMIC for each day during the taxable
year on which such holder held the Residual Interest Security. The daily
portion is determined by allocating to each day in any calendar quarter its
ratable portion of the taxable income or net loss of the REMIC for such
quarter, and by allocating that amount among the holders (on such day) of the
Residual Interest Certificates in proportion to their respective holdings on
such day.
The holder of a Residual Interest Certificate must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to such income or loss.
The reporting of taxable income without corresponding distributions could
occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on
Regular Interest Certificates issued without any discount or at an
insubstantial discount. (If this occurs, it is likely that cash distributions
will exceed taxable income in later years.) Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on Regular
Interest Certificates, will typically increase over time as lower yielding
Certificates are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Certificate in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Certificate will initially equal such holder's purchase
price, and will subsequently be increased by the amount of the REMIC's taxable
income allocated to the holder, and decreased (but not below zero) by the
amount of distributions made and the amount of the REMIC's net loss allocated
to the holder. Any disallowed loss may be carried forward indefinitely, but may
be used only to offset income generated by the same REMIC. The ability of
Residual Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which such holders should consult their tax
advisers.
Distributions. Distributions on a Residual Interest Certificate (whether
at their scheduled times or as a result of prepayments) will generally not
result in any additional taxable income or loss to a holder of a Residual
Interest Certificate. If the amount of such payment exceeds a holder's adjusted
basis in the Residual Interest Certificate, however, the holder will recognize
gain (treated as gain from the sale of the Residual Interest Certificate) to
the extent of such excess.
Mark-to-Market Rules. A residual interest in a REMIC, or an interest or
arrangement that is determined by the Commissioner to have substantially the
same effect, is not a "security" for purposes of the mark-to-market rules and
accordingly is not eligible to be marked to market.
Sale or Exchange. A holder of a Residual Interest Certificate will
recognize gain or loss on the sale or exchange of a Residual Certificate equal
to the difference, if any, between the amount realized and such
Certificateholder's adjusted basis in the Residual Interest Certificate at the
time of such sale or exchange. Except to the extent provided in regulations,
which have not yet been issued, any loss upon disposition of a Residual
Interest Certificate will be disallowed if the selling Certificateholder
acquires any residual interest in a REMIC or similar mortgage pool within six
months before or after such disposition.
Excess Inclusion Income. The portion of a Residual Certificateholder's
REMIC taxable income consisting of "excess exclusion" income may not be offset
by other deductions or losses, including net operating losses, on such
Certificateholder's federal income tax return. Further, if the holder of a
Residual Interest Certificate is an organization subject to the tax on
unrelated business income imposed by Code Section 511, such Residual
Certificateholder's excess inclusion income will be treated as unrelated
business taxable income of such Certificateholders. In addition, under Treasury
regulations yet to be issued, if a real estate investment trust, a regulated
investment company, a common trust fund, or certain cooperatives were to own a
Residual Interest Certificate, a portion of dividends (or other distributions)
paid by the real estate investment trust (or other entity) would be treated as
excess inclusion income. If a Residual Interest Certificate is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30%
which may not be reduced by treaty and is not eligible for treatment as
"portfolio interest."
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Certificate, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Start Up Day
multiplied by (ii) the adjusted issue price of such Residual Interest
Certificate at the beginning of such quarterly period. The adjusted issue price
of a Residual Interest Certificate at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest Certificate), increased
by the aggregate of the daily accruals for prior calendar quarters, and
decreased (but not below zero) by the amount of loss allocated to a holder and
the amount of distributions made on the Residual Interest Certificate before
the beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United States
government having remaining maturities in excess of nine years.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special
rule that taxable income cannot be less than excess inclusions. Second, a
residual holder's alternative minimum taxable income for a tax year cannot be
less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual holder elects to have such
rules apply only to tax years beginning after August 20, 1996.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Certificates may be disregarded. See "Restrictions on
Ownership and Transfer of Residual Interest Certificates" and "Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of REMIC Residual Interest Certificates
As a condition to qualification as a REMIC, reasonable arrangements must
be made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the Indenture or Trust Agreement, as
applicable, will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Issuer an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any
person holding as nominee), that owns a Residual Interest Security, the
pass-through entity will be required to pay an annual tax on its allocable
share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions
and the highest rate of tax for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes accrue on
the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. The present value is calculated based on the Prepayment
Assumption, using a discount rate equal to the "applicable federal rate" at the
time of transfer. If a transfer of a residual interest is disregarded, the
transferor would be liable for any Federal income tax imposed upon taxable
income derived by the transferee from the REMIC. A significant purpose to
impede the assessment or collection of tax exists if the transferor, at the
time of transfer, knew or should have known that the transferee would be
unwilling or unable to pay taxes on its share of the taxable income of the
REMIC. A similar limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "Tax
Treatment of Foreign Investors" below.
REMIC Expenses
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Certificates or the REMIC residual
interest. In the case of a "single class REMIC," however, the expenses will be
allocated, under temporary Treasury regulations, among the holders of the
Regular Interest Certificates and the holders of the Residual Interest
Certificates on a daily basis in proportion to the relative amounts of income
accruing to each Certificateholder on that day. In the case of a holder of a
Regular Interest Certificate who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the
Certificateholder exceed 2% of such Bondholder's or Certificateholder's
adjusted gross income and will not be deductible in computing alternative
minimum taxable income. In addition, Code Section 68 provides that the amount
of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The disallowance of this deduction may have a
significant impact on the yield of the Regular Interest Certificate to such a
holder. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such
a trust and which is structured with the principal purpose of avoiding the
single class REMIC rules.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the
Internal Revenue Service in a unified administrative proceeding.
Taxation of Holders of FASIT High-Yield Interests
FASIT High-Yield Interests are subject to special rules regarding the
eligibility of holders of such interest, and the ability of such holders to
offset income derived from those interests with losses. High-Yield Interests
only may be held by Eligible Corporations, other FASITs, and dealers in
securities who acquire such interests as inventory. If a securities dealer
(other than an Eligible Corporation) initially acquires a High-Yield Interest
as inventory, but later begins to hold it for investment, the dealer will be
subject to an excise tax equal to the income from the High-Yield Interest
multiplied by the highest corporate income tax rate. In addition, transfers of
High-Yield Interests to disqualified holders will be disregarded for federal
income tax purposes, and the transferor will continue to be treated as the
holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the High-Yield Interest, for either regular federal income tax purposes or
for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule that imposes corporate income tax on income derived from a
FASIT regular interest that is held by a pass-through entity (other than
another FASIT) that issues debt or equity securities backed by the FASIT
regular interest and that have the same features as High-Yield Interests.
Taxation of Holders of FASIT Ownership Interests
A FASIT ownership interest represents the residual equity interest in a
FASIT. As such, the holder of a FASIT ownership interest determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss and credit of a FASIT. In general, the character of the
income to the holder of a FASIT ownership interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is
treated as ordinary income. In determining that taxable income, the holder of a
FASIT ownership interest must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT regular interests issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
regular interests as are holders of High-Yield Interest.
Rules similar to the wash sale rules applicable to REMIC residual
interests also will apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership interest generally will be disallowed where
within six months before or after the disposition, the seller of such interest
acquires any other FASIT ownership interest that is economically comparable to
a FASIT ownership interest. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT ownership interest
was required to be marked-to-market under section 475 of the Code by such
holder, then section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually.
The holder of a FASIT ownership interest will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT,
and (iv) in certain cases, the receipt of income representing a servicing fee
or other compensation. Any Series of Securities for which a FASIT election is
made generally will be structured in order to avoid application of the
prohibited transaction tax.
Tax Status as a Grantor Trust
General. If the applicable Prospectus Supplement so specifies with respect
to a Series of Certificates, the Certificates of such Series will not be
treated as regular or residual interests in a REMIC for federal income tax
purposes but instead will be treated as an undivided beneficial ownership
interest in the Mortgage Loans and the arrangement pursuant to which the
Mortgage Loans will be held and the Certificates will be issued, will be
classified for federal income tax purposes as a grantor trust under Subpart E,
Part 1 of Subchapter J of the Code and not as an association taxable as a
corporation. In such a case, special counsel to the Issuer will deliver its
opinion to the effect that the arrangement by which the Certificates of that
Series are issued will be treated as a grantor trust as long as all of the
provisions of the applicable Trust Agreement are complied with and the
statutory and regulatory requirements are satisfied. In some Series
("Pass-Through Certificates"), there will be no separation of the principal and
interest payments on the Mortgage Loans. In such circumstances, a
Certificateholder will be considered to have purchased an undivided interest in
each of the Mortgage Loans. In other cases ("Stripped Certificates"), sale of
the Certificates will produce a separation in the ownership of the principal
payments and interest payments on the Mortgage Loans.
Each Certificateholder must report on its federal income tax return its
pro rata share of the gross income derived from the Mortgage Loans (not reduced
by the amount payable as fees to the Trustee and the Master Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in the
same manner as such items would have been reported under the
Certificateholder's tax accounting method had it held its interest in the
Mortgage Loans directly, received directly its share of the amounts received
with respect to the Mortgage Loans, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Certificates, such gross income
will consist of a pro rata share of all of the income derived from all of the
Mortgage Loans and, in the case of Stripped Certificates, such income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the Certificateholder owns an interest. The holder of
a Certificate will generally be entitled to deduct such Servicing Fees under
Section 162 or Section 212 of the Code to the extent that such Servicing Fees
represent "reasonable" compensation for the services rendered by the Trustee
and the Master Servicer (and Servicer, if other than the Master Servicer). In
the case of a noncorporate holder, however, Servicing Fees (to the extent not
otherwise disallowed, e.g., because they exceed reasonable compensation) will
be deductible in computing such holder's regular tax liability only to the
extent that such fees, when added to other miscellaneous itemized deductions,
exceed 2% of adjusted gross income and may not be deductible to any extent in
computing such holder's alternative minimum tax liability. In addition, Code
Section 68 provides that the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Certificates. The holder's purchase
price of a Pass-Through Certificate is to be allocated among the Mortgage Loans
in proportion to their fair market values, determined as of the time of
purchase of the Certificates. In the typical case, the Trustee believes it is
reasonable for this purpose to treat each Mortgage Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Mortgage Loans that it represents, since the Mortgage Loans, unless
otherwise specified in the applicable Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the
extent that the portion of the purchase price of a Certificate allocated to a
Mortgage Loan (other than to a right to receive any accrued interest thereon
and any undistributed principal payments) is less than or greater than the
portion of the principal balance of the Mortgage Loan allocable to the
Certificate, the interest in the Mortgage Loan allocable to the Certificate
will be deemed to have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents original issue discount or market discount. In the case of a
Mortgage Loan with original issue discount in excess of a prescribed de minimis
amount, a holder of a Certificate will be required to report as interest income
in each taxable year its share of the amount of original issue discount that
accrues during that year, determined under a constant yield method by reference
to the initial yield to maturity of the Mortgage Loan, in advance of receipt of
the cash attributable to such income and regardless of the method of federal
income tax accounting employed by that holder. Original issue discount with
respect to a Mortgage Loan could arise for example by virtue of the financing
of points by the originator of the Mortgage Loan, or by virtue of the charging
of points by the originator of the Mortgage Loan in an amount greater than a
statutory de minimis exception, in circumstances under which the points are not
currently deductible pursuant to applicable Code provisions. However, the OID
Regulations provide that if a holder acquires an obligation at a price that
exceeds its stated redemption price, the holder will not include any original
issue discount in gross income. In addition, if a subsequent holder acquires an
obligation for an amount that exceeds its adjusted issue price the subsequent
holder will be entitled to offset the original issue discount with economic
accruals of portions of such excess. Accordingly, if the Mortgage Loans
acquired by a Certificateholder are purchased at a price that exceeds the
adjusted issue price of such Mortgage Loans, any original issue discount will
be reduced or eliminated.
Certificateholders also may be subject to the market discount rules of
Sections 1276-1278 of the Code. A Certificateholder that acquires an interest
in Mortgage Loans with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Mortgage Loans
over the purchaser's purchase price) will be required under Section 1276 of the
Code to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the
Mortgage Loans received in that month and, if the Certificates are sold, the
gain realized. Such market discount would accrue in a manner to be provided in
Treasury regulations. The legislative history of the 1986 Act indicates that,
until such regulations are issued, such market discount would in general accrue
either (i) on the basis of a constant interest rate or (ii) in the ratio of (a)
in the case of Mortgage Loans not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Mortgage Loans originally issued at a discount, original issue discount in
the relevant period to total original issue discount remaining to be paid.
Section 1277 of the Code provides that the excess of interest paid or
accrued to purchase or carry a loan with market discount over interest received
on such loan is allowed as a current deduction only to the extent such excess
is greater than the market discount that accrued during the taxable year in
which such interest expense was incurred. In general, the deferred portion of
any interest expense will be deductible when such market discount is included
in income, including upon the sale, disposition, or repayment of the loan. A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by such holder during the taxable
year such election is made and thereafter, in which case the interest deferral
rule discussed above will not apply.
A Certificateholder who purchases a Certificate at a premium generally
will be deemed to have purchased its interest in the underlying Mortgage Loans
at a premium. A Certificateholder who holds a Certificate as a capital asset
may generally elect under Section 171 of the Code to amortize such premium as
an offset to interest income on the Mortgage Loans (and not as a separate
deduction item) on a constant yield method. The legislative history of the 1986
Act suggests that the same rules that will apply to the accrual of market
discount (described above) will generally also apply in amortizing premium with
respect to Mortgage Loans originated after September 27, 1985. If a holder
makes an election to amortize premium, such election will apply to all taxable
debt instruments held by such holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
Internal Revenue Service. Purchasers who pay a premium for the Certificates
should consult their tax advisers regarding the election to amortize premium
and the method to be employed. Although the law is somewhat unclear regarding
recovery of premium allocable to Mortgage Loans originated before September 28,
1985, it is possible that such premium may be recovered in proportion to
payments of Mortgage Loan principal.
Discount or Premium on Stripped Certificates. A Stripped Certificate may
represent a right to receive only a portion of the interest payments on the
Mortgage Loans, a right to receive only principal payments on the Mortgage
Loans, or a right to receive certain payments of both interest and principal.
Certain Stripped Certificated ("Ratio Strip Certificates") may represent a
right to receive differing percentages of both the interest and principal on
each Mortgage Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the original issue discount rules to stripped bonds and
stripped coupons. For purposes of computing original issue discount, a stripped
bond or a stripped coupon is treated as a debt instrument issued on the date
that such stripped interest is purchased with an issue price equal to its
purchase price or, if more than one stripped interest is purchased, the ratable
share of the purchase price allocable to such stripped interest. The Code, the
OID Regulations, and judicial decisions provide no direct guidance as to how
the interest and original issue discount rules are to apply to Stripped
Certificates. Under the method described above for REMIC Regular Interest
Certificates (the "Cash Flow Bond Method"), a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during such period. The 1986 Act
prescribed the same method for debt instruments "secured by" other debt
instruments, the maturity of which may be affected by prepayments on the
underlying debt instruments. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Certificates which technically represent ownership interests in the underlying
Mortgage Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Certificates, and it is expected that
original issue discount will be reported on that basis. In applying the
calculation to such Certificates, the Trustee will treat all payments to be
received with respect to the Certificates, whether attributable to principal or
interest on the loans, as payments on a single installment obligation and as
includible in the stated redemption price at maturity. The IRS could, however,
assert that original issue discount must be calculated separately for each
Mortgage Loan underlying a Certificate. In addition, in the case of Ratio Strip
Certificates, the Internal Revenue Service could assert that original issue
discount must be calculated separately for each stripped coupon or stripped
bond underlying a Certificate.
Under certain circumstances, if the Mortgage Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Certificateholder's recognition of income. If, however, the
Mortgage Loans prepay at a rate slower than the prepayment assumption, in some
circumstances the use of this method may decelerate a Certificateholder's
recognition of income.
In the case of a Stripped Certificate which either embodies only interest
payments on the underlying loans or (if it embodies some principal payments on
the Mortgage Loans) is issued at a price that exceeds the principal payments
(an "Interest Weighted Certificate"), the Trustee intends, absent contrary
authority, to report income to Certificateholders as OID, in the manner
described above in "-- Interest Weighted Certificates".
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Certificate is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped principal
payments; (ii) the non-Interest Weighted Certificates are subject to the
Proposed Regulations; (iii) each Interest Weighted Certificate is composed of
an unstripped undivided ownership interest in the Mortgage Loans and an
installment obligation consisting of stripped interest payments; or (iv) there
are as many stripped bonds or stripped coupons as there are scheduled payments
of principal and/or interest on each Mortgage Loan.
Given the variety of alternatives for treatment of the Certificates and
the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Certificates for federal income tax
purposes.
Character as Qualifying Mortgage Loans. In the case of Stripped
Certificates there is no specific legal authority existing regarding whether
the character of the Certificates, for federal income tax purposes, will be the
same as the Mortgage Loans. The IRS could take the position that the Mortgage
Loans' character is not carried over to the Certificates in such circumstances.
Pass-Through Certificates will be, and, although the matter is not free from
doubt, Stripped Certificates should be considered to represent "real estate
assets" within the meaning of Section 856(c)(6)(B) of the Code, and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code and interest income attributable to the
Certificates should be considered to represent "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Section 856(c)(3)(B) of the Code. However, Mortgage Loans secured by
non-residential real property will not constitute "loans secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C) of the Code. In
addition, it is possible that various reserves or funds underlying the
Certificates may cause a proportionate reduction in the above-described
qualifying status categories of Certificates.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code section 593(d) to any taxable year beginning after December 31, 1995.
Sale of Certificates. As a general rule, if a Certificate is sold, gain or
loss will be recognized by the holder thereof in an amount equal to the
difference between the amount realized on the sale and the Certificateholder's
adjusted tax basis in the Certificate. Such gain or loss will generally be
capital gain or loss if the Certificate is held as a capital asset. In the case
of Pass-Through Certificates, such tax basis will generally equal the holder's
cost of the Certificate increased by any discount income with respect to the
loans represented by such Certificate previously included in income, and
decreased by the amount of any distributions of principal previously received
with respect to the Certificate. Such gain, to the extent not otherwise treated
as ordinary income, will be treated as ordinary income to the extent of any
accrued market discount not previously reported as income. In the case of
Stripped Certificates, the tax basis will generally equal the
Certificateholder's cost for the Certificate, increased by any discount income
with respect to the Certificate previously included in income, and decreased by
the amount of all payments previously received with respect to such
Certificate.
Miscellaneous Tax Aspects
Backup Withholding. A Bondholder or Certificateholder, other than a
Residual Bondholder or Residual Certificateholder, may, under certain
circumstances, be subject to "backup withholding" at the rate of 31% with
respect to distributions or the proceeds of a sale of certificates to or
through brokers that represent interest or original issue discount on the
Certificates. This withholding generally applies if the holder of a Certificate
(i) fails to furnish the Issuer with its taxpayer identification number
("TIN"); (ii) furnishes the Issuer an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Issuer or such
holder's securities broker with a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that the holder is not
subject to backup withholding. Backup withholding will not apply, however, with
respect to certain payments made to Bondholders or Certificateholders,
including payments to certain exempt recipients (such as exempt organizations)
and to certain Nonresidents (as defined below). Holders of the Certificates
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The Issuer will report to the Certificateholders and to the Internal
Revenue Service for each calendar year the amount of any "reportable payments"
during such year and the amount of tax withheld, if any, with respect to
payments on the Certificates.
Tax Treatment of Foreign Investors
Under the Code, unless interest (including OID) paid on a Security (other
than a Residual Interest Security) is considered to be "effectively connected"
with a trade or business conducted in the United States by a nonresident alien
individual, foreign partnership or foreign corporation ("Nonresidents"), such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the
capital or profits interest in the Issuer or (ii) the recipient is a controlled
foreign corporation to which the Issuer is a related person) and will be exempt
from federal income tax. Upon receipt of appropriate ownership statements, the
Issuer normally will be relieved of the obligation to withhold federal income
tax from such interest payments. These provisions supersede the generally
applicable provisions of United States law that would otherwise require the
Issuer to withhold at a 30% rate (unless such rate were reduced or eliminated
by an applicable tax treaty) on, among other things, interest and other fixed
or determinable, annual or periodic income paid to Nonresidents.
Interest and original issue discount of Bondholders or Certificateholders
who are foreign persons are not subject to withholding if they are effectively
connected with a United States business conducted by the Bondholder or
Certificateholders. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Certificates who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." To the extent that a payment represents a portion of
REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require
such amounts to be taken into account at an earlier time in order to prevent
the avoidance of tax. Such regulations could, for example, require withholding
prior to the distribution of cash in the case of Residual Interest Certificates
that do not have significant value. Under the REMIC Regulations, if a Residual
Interest Security has tax avoidance potential, a transfer of a Residual
Interest Security to a Nonresident will be disregarded for all Federal tax
purposes. A Residual Interest Security has tax avoidance potential unless, at
the time of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual holder amounts that will equal at least
30% of each excess inclusion, and that such amounts will be distributed at or
after the time at which the excess inclusion accrues and not later than the
close of the calendar year following the calendar year of accrual. If a
Nonresident transfers a Residual Interest Security to a United States person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded an the transferor
continues to be treated as the owner of the Residual Interest Security for
purposes of the withholding tax provisions of the Code. See "Excess Inclusion
Income."
<PAGE>
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 Certificates. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore,
potential investors should consult their own tax advisors with respect to the
various state and local tax consequences of investment in the Bonds or
Certificates. In particular, potential investors in Residual Interest
Certificates should consult their tax advisers regarding the taxation of the
Residual Interest Certificates in general and the effect of foreclosure on the
Mortgaged Properties on such taxation.
ERISA Considerations
ERISA and the Code impose certain restrictions on employee benefit plans
("Plans") that are subject to ERISA and on persons who have certain specified
relationships to such Plans (so-called "parties in interest" within the meaning
of ERISA or "disqualified persons" within the meaning of the Code, hereinafter
referred to collectively as "Parties in Interest"). ERISA also imposes certain
duties on persons who are fiduciaries of Plans subject to ERISA and prohibits
certain transactions between a Plan and Parties in Interest with respect to
such Plan. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan, and any
person who provides investment advice with respect to such assets for a fee, is
a fiduciary of such Plan.
A final regulation promulgated by the Department of Labor (the "DOL")
defining the term "plan assets" was published in the Federal Register (the "DOL
Regulation"). Under the DOL Regulation, generally, when a Plan makes an equity
investment in another entity (for example, the purchase of a REMIC
Certificate), the underlying assets of that entity may be considered Plan
assets unless certain exceptions apply. There can be no assurance that any of
the exceptions set forth in the DOL Regulation will apply to the purchase or
holding of Certificates. A Plan's investment in Certificates may cause the
Loans or other assets comprising or underlying the Primary Assets to be deemed
Plan assets. If the Loans or other assets constitute Plan assets, then any
party exercising management or discretionary control regarding those assets may
be deemed to be a Plan "fiduciary," and thus subject to the fiduciary
requirements and prohibited transaction provisions of ERISA and the Code with
respect to the Loans and other assets. Certain affiliates of the Depositor,
including Lehman Brothers Inc., the Underwriter of the Certificates, and Lehman
Commercial Paper Incorporated, the parent of the Depositor, might be considered
or might become fiduciaries or other Parties in Interest with respect to
investing Plans. Moreover, the Trustee, the Master Servicer or any other
Servicer, any insurer, special hazard insurer, primary insurer or any other
issuer of a credit support instrument relating to the Primary Assets in a Trust
Fund or certain of their respective affiliates might be considered fiduciaries
or other Parties in Interest with respect to investing Plans. Prohibited
transactions within the meaning of ERISA and the Code could arise if
Certificates are acquired by a Plan with respect to which any such person is a
Party in Interest.
One or more exemptions may be available, however, with respect to any such
prohibited transaction, including, but not limited to: Prohibited Transaction
Class Exemption ("PTCE") 90-1, regarding investments by insurance company
pooled separate accounts; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 83-1, regarding mortgage pool investment trusts; PTCE
84-14, regarding transactions effected by a "qualified professional asset
manager; or PTCE 96-23, regarding transactions effected by an "in-house asset
manager."
PTCE 83-1 exempts from the prohibited transaction provisions of ERISA
certain transactions involving single family residential mortgage pool
investment trusts. With respect to Mortgage Loans secured solely by property
consisting of single family residential housing, PTCE 83-1 permits, subject to
certain general and specific conditions, transactions which might otherwise be
prohibited between Plans and Parties in Interest with respect to those Plans,
related to the origination, maintenance and termination of mortgage pools and
the acquisition and holding of certain mortgage pool pass-through certificates
by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgages in the mortgage pool. PTCE 83-1 does not
apply to investments in Subordinate Certificates to Certificates that evidence
an interest in distributions of principal only. Because certain of the
Certificates may, if specified in the related Prospectus Supplement, be
Subordinate Certificates or evidence an interest in distributions of principal
only or interest only from the pooled Mortgage Loans, PTCE 83-1 will not be
applicable to such Certificates.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (1) the maintenance of a system
of insurance or other protection for the pooled housing loans and property
securing such loans, and for indemnifying certificate holders against
reductions in pass-through payments due to property damage or defaults in loan
payments; (2) the existence of a pool trustee who is not an affiliate of the
pool sponsor; and (3) a limitation on the amount of the payment retained by the
pool sponsor together with other benefits inuring to its benefit, to not more
than adequate consideration for selling the housing loans plus reasonable
compensation for services provided by the pool sponsor to the loan pool. PTCE
83-1 also imposes additional specific conditions for certain types of
transactions and where certain Parties in Interest are fiduciaries with respect
to a Plan that acquires a Certificate.
If a Trust Fund consists of Agency Certificates, then under the terms of
the DOL Regulation, even if the acquisition or holding by a Plan of a
Certificate with respect to such Trust Fund were characterized as the
acquisition of ownership rights in the assets of the Trust Fund (including the
Agency Certificates) such acquisition or holding would not constitute
acquisition of ownership rights in the mortgage loans underlying the Agency
Certificates.
In addition, the DOL has granted to Lehman Brothers Inc. an administrative
exemption (Prohibited Transaction Exemption 91-14 et al.; Exemption Application
No. D-7958 et al., 56 Fed. Reg. 7413 (1991)) (the "Exemption") from certain of
the prohibited transaction rules of ERISA with respect to the initial
acquisition, holding and the subsequent disposition by Plans of certificates in
pass-through trusts that consist of certain receivables, loans, and other
obligations that meet the conditions and requirements of the Exemption. The
loans covered by the Exemption include mortgage loans and manufactured home
loans such as the Loans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) The rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other Certificates of the Trust Fund;
(3) The Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Fitch IBCA, Inc. or Duff & Phelps Credit
Rating Co.;
(4) The sum of all payments made to the underwriter in
connection with the distribution of the Certificates represents not
more than reasonable compensation for underwriting the Certificates;
the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Loans to the Trust Fund represents
not more than the fair market value of such Loans; the sum of all
payments made to and retained by the Master Servicer and any other
Servicer represents not more than reasonable compensation for such
person's services under the Trust Agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(5) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions only if, among other requirements: (i) no
fiduciary (or its affiliate) is an obligor with respect to more than five
percent of the fair market value of the obligations contained in the trust;
(ii) the Plan's investment in certificates does not exceed twenty-five percent
of all of the Certificates outstanding at the time of the acquisition and (iii)
immediately after the acquisition, no more than twenty-five percent of the
assets of the Plan are invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage
loans or other secured receivables (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five
percent of the total principal amount of the certificates being offered by the
trust, to be transferred to the trust within a 90-day or three-month period
following the closing date (the "Pre-Funding Period") instead of requiring that
all such Obligations be either identified or transferred on or before the
closing date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account
to the total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent.
(2) All Obligations transferred after the closing date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust,
which terms and conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the certificates to
be covered by the Exemption receiving a lower credit rating from a
Rating Agency upon termination of the Pre-funding Period than the
rating that was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate")
for all of the Obligations in the trust at the end of the Pre-Funding
Period must not be more than 100 basis points lower than the average
interest rate for the Obligations which were transferred to the trust
on the closing date.
(5) In order to ensure that the characteristics of the
Additional Obligations are substantially similar to the original
Obligations which are transferred to the trust,
(i) the characteristics of the Additional Obligations must
be monitored by an insurer or other credit support provider
which is independent of the depositor; or
(ii) an independent accountant retained by the depositor
must provide the depositor with a letter (with copies provided
to each Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing agreement. In
preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the Obligations
which were transferred to the trust as of the closing date.
(6) The Pre-Funding Period must end no later than three months
or 90 days after the closing date or earlier in certain circumstances
if the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding
may be invested only in certain permitted investments.
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the
Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account
at the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related trust agreement must describe the permitted
investments for the pre-funding and/or capitalized interest account
and, if no disclosed in the related prospectus or prospectus
supplement, the terms and conditions for eligibility of Additional
Obligations.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1,
the Exemption as amended or other exemptions, and the potential consequences to
their specific circumstances, prior to making an investment in the
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Investment Considerations
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the classes of Certificates offered thereby will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Classes of Certificates that
qualify as "mortgage related securities" will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
as, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any such entities. Under SMMEA, if a state
enacted legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," the Certificates will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline.
SMMEA also amended the legal investment authority of federally-chartered
depository institution as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
All depository institutions considering an investment in the Certificates
(whether or not the class of certificates under consideration for purchase
constitutes a "mortgage related security" should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective regulators) (the "Policy
Statement"), setting forth, in relevant part, certain securities trading and
sales practices deemed unsuitable for an institution's investment portfolio,
and guidelines for (and restrictions on) investing in mortgage derivative
products, including "mortgage related securities" that are "high-risk mortgage
securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Certificates not entitled to distributions allocated to principal or interest,
or Subordinated Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but no limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
Legal Matters
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters, and the
material federal income tax consequences of the Certificates will be passed
upon for the Depositor, by Brown & Wood LLP, Washington, D.C.
The Depositor
The Depositor was incorporated in the State of Delaware on January 2,
1987. The principal office of the Depositor is located at 200 Vesey Street, New
York, New York 10285. Its telephone number is (212) 526-5594.
The Certificate of Incorporation of the Depositor provides that the
Depositor may not conduct any activities other than those related to the issue
and sale of one or more Series and to serve as depositor of one or more trusts
that may issue and sell bonds or certificates. The Certificate of Incorporation
of the Depositor provides that any securities, except for subordinated
securities, issued by the Depositor must be rated in one of the three highest
categories available by any Rating Agency rating the Series.
The Series Supplement for a particular Series may permit the Primary
Assets pledged to secure the related Series of Certificates to be transferred
by the Issuer to a trust, subject to the obligations of the Certificates of
such Series, thereby relieving the Issuer of its obligations with respect to
such Certificates.
Use of Proceeds
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series offered hereby and by the related Prospectus Supplement
to purchase the Primary Assets, to repay indebtedness which has been incurred
to obtain funds to acquire the Primary Assets, to establish the Reserve Funds,
if any, for the Series and to pay costs of structuring and issuing the
Certificates. If so specified in the related Prospectus Supplement,
Certificates may be exchanged by the Depositor for Primary Assets. Unless
otherwise specified in the related Prospectus Supplement, the Primary Assets
for each Series of Certificates will be acquired by the Depositor either
directly, or through one or more affiliates which will have acquired such
Primary Assets from time to time either in the open market or in privately
negotiated transactions.
Plan of Distribution
Each Series of Certificates offered hereby and by means of the related
Prospectus Supplements may be offered through any one or more of the following:
Lehman Brothers Inc., an affiliate of the Depositor; underwriting syndicates
represented by Lehman Brothers Inc.; any originator of Loans underlying a
Series; or underwriters, agents or dealers selected by such originator
(collectively, the "Underwriters"). The Prospectus Supplement with respect to
each such Series of Certificates will set forth the terms of the offering of
such Series of Certificates and each Sequence within such Series, including the
name or names of the Underwriters (if known), the proceeds to the Depositor (if
any), and including either the initial public offering price, the discounts and
commissions to the Underwriters and any discounts or commissions allowed or
reallowed to certain dealers, or the method by which the prices at which the
Underwriters will sell the Certificates will be determined.
The Underwriters may or may not be obligated to purchase all of the
Certificates of a Series described in the Prospectus Supplement with respect to
such Series if any such Certificates are purchased. The Certificates may be
acquired by the Underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of
sale.
If so indicated in the Prospectus Supplement, the Depositor will authorize
Underwriters or other persons acting as the Depositor's agents to solicit
offers by certain institutions to purchase the Certificates from the Depositor
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Depositor. The obligation of any purchaser
under any such contract will be subject to the condition that the purchase of
the offered Certificates shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject. The
Underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
The Depositor may also sell the Certificates offered hereby and by means
of the related Prospectus Supplements from time to time in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Depositor may effect such transactions by selling Certificates to or through
dealers and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Certificates for whom they may act as agents.
The place and time of delivery for each Series of Certificates offered
hereby and by means of the related Prospectus Supplement will be set forth in
the Prospectus Supplement with respect to such Series.
Additional Information
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office,
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the World Wide Web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Seller has filed the Registration Statement, including all exhibits
thereto, through the EDGAR system and therefore such materials should be
available by logging onto the Commission's Web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above.
Copies of the most recent FNMA Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Director of Investor Relations of FNMA, 3900
Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115). The Depositor
did not participate in the preparation of FNMA's Prospectus or its annual or
quarterly reports or other financial information and, accordingly, makes no
representation as to the accuracy or completeness of the information set forth
therein.
Copies of the most recent Offering Circular for FHLMC Certificates as well
as FHLMC's most recent Information Statement and Information Statement
Supplement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry department of FHLMC at 8200 Jones
Branch Drive, McLean, Virginia 22102 (outside Washington, D.C. metropolitan
area, telephone 800-336-3672; within Washington, D.C. metropolitan area,
telephone 703-759-8160). The Depositor did not participate in the preparation
of FHLMC's Offering Circular, Information Statement or any supplement thereto
or any quarterly report thereof and, accordingly, makes no representations as
to the accuracy or completeness of the information set forth therein.
Incorporation of Certain Documents by Reference
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of any offering of the Certificates issued by such
Trust Fund shall be deemed to be incorporated by reference in this Prospectus
and to be a part of this Prospectus from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes of this Prospectus to the extent that a statement contained
herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
that have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Such requests should be directed to the
Corporate Trust Office of the Trustee specified in the accompanying Prospectus
Supplement.
Reports to Certificateholders
Periodic and annual reports concerning the related Trust Fund are required
under the Trust Agreement to be forwarded to Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, such reports will not
be examined and reported on by an independent public accountant. See "The Trust
Agreements -- Reports to Certificateholders" herein.
<PAGE>
Glossary
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a supplemental Glossary
in the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the Trust Agreement and the Trust Agreement generally provides a
more complete definition of certain of the terms. Reference should be made to
the Trust Agreement for a more complete definition of such terms.
"Accrual Date" means, with respect to any Multi-Class Series, the date
upon which interest begins accruing on the Certificates of the Series, as
specified in such Certificates and the related Prospectus Supplement.
"Accrual Amount" means, with respect to any Distribution Date for a
Multi-Class Series that occurs prior to or on the Accrual Termination Date, the
aggregate amount of interest that has accrued on the Compound Interest
Certificates of such Series during the Interest Accrual Period ending on or
prior to such Distribution Date but which is not then required to be paid.
"Accretion Termination Date" means, with respect to a Class of Compound
Interest Certificates, such date as may be specified in the related Prospectus
Supplement.
"Advance" means a cash advance by the Master Servicer or a Servicer in
respect of delinquent payments of principal of and/or interest on a Loan, and
for the other purposes specified herein and in the related Prospectus
Supplement.
"Agency Certificates" means GNMA Certificates, FNMA Certificates, and
FHLMC Certificates.
"Aggregate Asset Principal Balance" means, with respect to the Mortgage
Loans in the Trust Fund, the aggregate of the Asset Principal Balances for all
such Mortgage Loans at the time of any determination.
"Appraised Value" means, with respect to a property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at
origination of the Loan or the sales price of such mortgaged property.
"ARM" or "Adjustable Rate Mortgage" means a Mortgage Loan as to which the
related Mortgage Note provides for periodic adjustments in the interest rate
component of the Scheduled Payment pursuant to an Index as described in the
related Prospectus Supplement.
"Asset Group" means a group of individual Primary Assets which share
similar characteristics and are aggregated into one group for certain purposes.
"Asset Principal Balance" means, with respect to any Mortgage Loan, at the
time of any determination, its outstanding principal balance as of the Cut-off
Date reduced by all amounts distributed to Certificateholders (or used to fund
the Subordination Reserve Fund, if any) and reported as allocable to principal
payments on such Mortgage Loan.
"Assumed Deposit Date" means the date specified therefor in the Prospectus
Supplement for a Series, upon which distributions on the Primary Assets are
assumed to be received for purposes of calculating Reinvestment Income thereon.
"Available Distribution Amount" means the amount in the Certificate
Account (including amounts deposited therein from any reserve fund or other
fund or account) eligible for distribution to Certificateholders on a
Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Bi-Weekly Loan" means a Mortgage Loan which provides for payments of
principal and interest by the borrower once every two weeks.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulation or executive order to be closed.
"Buy-Down Fund" means a custodial account, established by the Master
Servicer or the Servicer for a Buy- Down Loan, that meets the requirements set
forth herein.
"Buy-Down Loan" means a level payment Mortgage Loan for which funds have
been provided by a Person other than the mortgagor to reduce the mortgagor's
Scheduled Payment during the early years of such Mortgage Loan.
"Buy-Down Period" means, with respect to a Buy-Down Loan, the period when
the related mortgagor is not obligated, on account of the buy-down plan, to pay
the full monthly payment otherwise due on the Buy-Down Loan.
"Certificate Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Master Servicer in respect of the Primary Assets in a Trust Fund.
"certificate guarantee insurance" means an insurance policy issued by one
or more insurance companies which will guarantee timely distributions of
interest and full distributions of principal of a Series on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement for the Series.
"Certificateholder" or "Holder" means the Person in whose name a
Certificate is registered in the Certificate register.
"Certificate Interest Rate" means, with respect to any Multi-Class Series,
the per annum rate at which interest accrues on the principal balance of the
Certificates of such Series or a Class of such Series, which rate may be fixed
or variable, as specified in the related Prospectus Supplement.
"Certificates" means the Asset Trust Pass-Through Certificates. "Class"
means a Class of Certificates of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Certificates of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Master Servicer for the deposit by the Master
Servicer of payments received from the Primary Assets in a Trust Fund (or from
the Servicers, if any).
"Compound Interest Certificate" means any Certificate of a Multi-Class
Series on which interest accrues and is added to the principal balance of such
Certificate periodically, but with respect to which no interest or principal
shall be payable except during the period or periods specified in the related
Prospectus Supplement.
"Compound Value" means, with respect to a Class of Compound Interest
Certificates, as of any Determination Date, the original principal balance of
such Class, plus all accrued and unpaid interest, if any, previously added to
the principal balance thereof and reduced by any payments of principal
previously made on such Class of Compound Interest Certificates.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium
Unit (together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Conventional Loan" means a Loan that is not insured or guaranteed by any
governmental agency.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) of a
security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated in the Trust Agreement for a
Series on or before which amounts due and payable with respect to a Primary
Asset will not inure to the benefit of Certificateholders of the Series.
"Cut-off Date Aggregate Asset Principal Balance" means, with respect to
the Loans in the Trust Fund as of the Cut-off Date, the Aggregate Asset
Principal Balance for all such Loans as of the Cut-off Date, reduced by all
payments of principal due on or before the Cut-off Date and not paid, and
increased by scheduled payments of principal due after the Cut-off Date but
received by the Master Servicer on or before the Cut-off Date.
"Deferred Interest" means excess interest resulting when the amount of
interest paid by a Mortgagor on a Negatively Amortizing ARM in any month is
less than the amount of interest accrued on the Stated Principal Balance
thereof.
"Deficiency Event" means, with respect to a Series, the inability of the
Trustee to distribute to Holders of one or more Classes of Certificates of the
Series (other than any Class of Subordinate Certificates prior to the time that
the Available Distribution Amount is reduced to zero), in accordance with the
terms thereof and the related Trust Agreement, any distribution of principal or
interest thereon when and as distributable due to insufficient funds for such
purpose then held in the related Trust Fund.
"Deleted Mortgage Loan" means a Mortgage Loan which is repurchased from
the Trust Fund by the Depositor or as to which a Qualifying Substitute Loan is
substituted therefor.
"Depositor" means Structured Asset Securities Corporation.
"Determination Date" means the day specified in the related Prospectus
Supplement as the day on which the Master Servicer calculates the amounts to be
distributed to Certificateholders on the next succeeding Distribution Date.
"Distribution Date" means, with respect to a Series or Class, each date
specified as a distribution date for such Series or Class in the related
Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable to the Trustee or its nominee on any Primary Asset.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "THE TRUST AGREEMENTS -- Investment of Funds."
"Eligible Reserve Fund Investments" means Eligible Investments and any
other obligations or securities described as Eligible Reserve Fund Investments
in the applicable Trust Agreement, as described in the related Prospectus
Supplement for a Series.
"ERISA" means the Employer Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Master Servicer or the Servicer for a Loan, into which payments by borrowers to
pay taxes, assessments, mortgage and hazard insurance premiums and other
comparable items that are required to be paid to the mortgagee are deposited.
"Excess Cash Flow" means, with respect to a Multi-Class Series, the
amount, if any, by which (a) the cash flow received from the Primary Assets in
the related Trust Fund and deposited in the related Certificate Account
(excluding any Retained Interest but including transfers from any applicable
Reserve Fund), net of applicable servicing fees, guarantee fees, insurance
premiums and other administrative expenses, on the relevant determination date
exceeds (b) the sum of (1) the Minimum Principal Distribution Amount for such
Series on such Distribution Date and (2) the Accrual Distribution Amount, if
any, on such Distribution Date.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration, a division of HUD.
"FHA Loan" means a fixed-rate housing loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Certificate" means a mortgage participation certificate or other
pass-through certificate guaranteed by FHLMC as to the timely payment of
interest and, except as specified in the related Prospectus Supplement, the
ultimate collection of principal, which represents ultimately a proportional
beneficial ownership interest in a pool of residential mortgage loans.
"Final Scheduled Distribution Date" means, with respect to a Class of a
Series, the date after which no Certificates of such Class will remain
outstanding assuming timely payments or distributions are made on the Primary
Assets in the related Trust Fund.
"Floating Rate" means a Certificate Interest Rate which is subject to
change from time to time.
"Floating Rate Certificate" means any Certificate of a Multi-Class Series
which accrues interest at a Floating Rate.
"Floating Rate Distribution Date" means the Distribution Date for a Class
of Floating Rate Certificates, which may be either more or less frequent than
the Distribution Date for other Classes of the Series.
"Floating Rate Period" means the period of time during which a given
Certificate Interest Rate applies to a Class of Floating Rate Certificates.
"FNMA" means the Federal National Mortgage Association.
"FNMA Certificate" means a guaranteed mortgage pass-through certificate or
a stripped mortgage-backed security, the full and timely payment of principal
of and interest on which is guaranteed by FNMA, which represents ultimately a
proportional beneficial ownership interest in a pool of residential mortgage
loans.
"FSLIC" means the Federal Savings and Loan Insurance Corporation or any
successor thereto.
"fund or account" means any fund or account, including, without
limitation, the Certificate Account or any reserve fund established under the
Trust Agreement for a Series, excluding any fund or account not available to
make distributions to Certificateholders.
"GEM Loan" means, unless specified otherwise in the related Prospectus
Supplement for a Series, a fixed rate, fully amortizing mortgage loan providing
for monthly payments based on a 10- to 30-year amortization schedule, with
further provisions for scheduled annual payment increases for a number of years
with the full amount of such increases being applied to principal, and with
further provision for level payments thereafter.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificate" means a mortgage pass-through certificate the full and
timely payment of principal of and interest on which is guaranteed by GNMA and
issued under either the GNMA I or the GNMA II program, which represents
ultimately a proportional beneficial ownership interest in a pool of
residential housing loans. A "GNMA I Certificate" is a GNMA Certificate issued
under the GNMA I program, and a "GNMA II Certificate" is a GNMA Certificate
issued under the GNMA II program.
"GPM Fund" means a trust account established by the Master Servicer or the
Servicer of a GPM Loan into which funds sufficient to cover the amount by which
payments of principal and interest on such GPM Loan assumed in calculating
payments due on the Certificates of the related Multi-Class Series exceed
scheduled payments on such GPM Loan.
"GPM Certificate" means a Certificate backed by GPM Loans.
"GPM Loan" means a mortgage loan providing for graduated payments, having
an amortization schedule (a) requiring the mortgagor's monthly installments of
principal and interest to increase at a predetermined rate annually for a
predetermined period of time after which the monthly installments become fixed
for the remainder of the mortgage term, (b) providing for deferred payment of a
portion of the interest due monthly during such period of time and (c)
providing for recoupment of the interest deferred through negative amortization
whereby the difference between the scheduled payment of interest on the
mortgage note and the amount of interest actually accrued is added monthly to
the outstanding principal balance of the mortgage note.
"Guaranteed Investment Contract" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
"HUD" means the United States Department of Housing and Urban Development.
"Index" means the index applicable to any adjustments in the Mortgage
Rates of any ARMs included in the Primary Assets.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to
Certificates, Loans, or Private Mortgage-Backed Securities.
"Insurance Proceeds" means, unless otherwise provided in a Supplement,
amounts paid by the insurer under any of the Insurance Policies covering any
Loan or Mortgaged Property.
"Interest Accrual Period" means the period specified in the related
Prospectus Supplement for a Multi-Class Series, during which interest accrues
on the Certificates or a Class of Certificates of such Series with respect to
any Distribution Date or Special Distribution Date.
"Interest Weighted Certificates" means a Class of Certificates entitled to
a greater percentage of interest on the Loans underlying or comprising the
Primary Assets for the Series than the percentage of principal on such Loans to
which it is entitled.
"IRS" means the Internal Revenue Service.
"L/C Bank" means the issuer of a letter of credit.
"L/C Percentage" means the maximum liability of a L/C Bank under a letter
of credit, equal to the percentage specified in the related Prospectus
Supplement for a Series for which a letter of credit is issued of the initial
aggregate principal balance of the Loans in the related Trust Fund or one or
more Class of Certificates of the Series.
"letter of credit" means an irrevocable letter of credit issued by the L/C
Bank to provide limited protection against certain losses relating to Loans, as
described in the related Prospectus Supplement for a Series.
"Lifetime Mortgage Rate Cap" means the lifetime limit on the Mortgage Rate
during the life of each ARM.
"Liquidation Proceeds" means amounts received by the Master Servicer or
Servicer in connection with the liquidation of a mortgage, net of liquidation
expenses.
"Loan" means a Mortgage Loan (including an interest therein) or a
Manufactured Home Loan (including an interest therein) that is deposited by the
Depositor into the Trust Fund for a Series.
"Loan-to-Value Ratio" means the ratio, expressed as a percentage, of the
principal amount of a Loan at the date of determination to the Appraised Value.
"Manufactured Home" means a manufactured home within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which
meets all the requirements of [this] paragraph except the size requirements and
with respect to which the manufacturer voluntarily files a certification
required by the Secretary of Housing and Urban Development and complies with
the standards established under [this] chapter."
"Manufactured Home Loan" means a loan secured by a Manufactured Home.
"Master Servicer" means, with respect to a Series secured by Loans, the
Person, if any, designated in the related Prospectus Supplement to manage and
supervise the administration and servicing by the Servicers of the Loans
comprising or underlying the Primary Assets for that Series, or the successors
or assigns of such Person.
"Maximum Floating Rate" means, as to any Multi-Class Series, the per annum
interest rate cap specified for any Floating Rate Certificates of such Series
in the related Prospectus Supplement.
"Minimum Floating Rate" means, as to any Multi-Class Series, the per annum
interest rate floor specified for any Floating Rate Certificates of such Series
in the related Prospectus Supplement.
"Minimum Principal Distribution Amount" means, with respect to a
Distribution Date for a Multi-Class Series, the amount, if any, by which (a)
the outstanding principal balance of the Certificates of such Series (before
giving effect to any payment of principal on that Distribution Date) exceeds
(b) the aggregate Asset Value of the Primary Assets for the Series as of that
Distribution Date.
"Minimum Mortgage Rate" means the lifetime minimum Mortgage Rate during
the life of each ARM.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note.
"Mortgage Loan" means a mortgage loan (including an interest therein)
secured by Mortgaged Property, including Cooperative Loans and Condominium
Loans.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgage Pool" means with respect to a Trust Fund for a Series of
Certificates, a pool of Mortgage Loans.
"Mortgaged Property" means the real property securing a Mortgage Loan.
"Mortgage Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rates borne by each Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"Multifamily Property" means any property securing a Loan consisting of
multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units.
"Multi-Class Series" means a Series of Certificates that may include
Floating Rate Certificates, Compound Interest Certificates and Planned
Amortization Certificates, and/or Subordinate and Senior Classes embodying a
subordination feature which protects the Senior Class or Classes in the event
of failure of timely payment of Primary Assets. With respect to Series of Asset
Trust Pass-Through Certificates other than Multi-Class Series, each Class is
designated to receive a particular portion of future principal or interest cash
flows on the Primary Assets, which designation does not change over the term of
the Certificates; provided, however, a Series may be so characterized if the
designation changes only on account of a subordination feature in one or more
Subordinate Classes which protects one or more Senior Classes in the event of
failure of timely payment of Primary Assets.
"1986 Act" means the Tax Reform Act of 1986.
"Negatively Amortizing ARMs" means ARMs which provide for limitations on
changes in the Scheduled Payment which can result in Scheduled Payments which
are greater or less than the amount necessary to amortize such ARM by its
stated maturity at the Mortgage Rate in effect in any particular month.
"Pass-Through Rate" means the rate of interest paid to the
Certificateholders in respect of the Primary Assets.
"PAC" ("Planned Amortization Certificates") means a Class of Certificates
of a Series on which no payment of principal will need to be made until the
earlier of the date specified in the related Prospectus Supplement or the date
on which the principal of all Certificates of the Series having an earlier
Final Scheduled Distribution Date have been paid in full.
"Percentage Interest" means, with respect to a Certificate, the proportion
(expressed as a percentage) of the percentage amounts of all of the
Certificates in the related Class represented by such Certificate, as specified
in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust (including any
beneficiary thereof), unincorporated organization, or government or any agency
or political subdivision thereof.
"PMBS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private
Mortgage-Backed Security is issued.
"PMBS Issuer" means, with respect to Private Mortgage-Backed Securities,
the depositor or seller/ servicer under a PMBS Agreement.
"PMBS Servicer" means the servicer of the Loans underlying a Private
Mortgage-Backed Security.
"PMBS Trustee" means the trustee designated under a PMBS Agreement.
"Participation Certificate" means a certificate evidencing a participation
interest in a pool of Loans.
"Prepayment Period" means, with respect to any Distribution Date, the
period specified in the related Prospectus Supplement for a Series.
"Primary Assets" means the Agency Certificates, Private Mortgage-Backed
Securities or Loans, as the case may be, which are included in the Trust Fund
for such Series. A Primary Asset refers to a specific Agency Certificate,
Private Mortgage-Backed Security or Loan, as the case may be.
"Principal Distribution Amount" means, unless specified otherwise in the
Prospectus Supplement for a Multi-Class Series, the sum of (a) the Accrual
Distribution Amount, if any, (b) the Minimum Principal Distribution Amount and
(c) the percentage, if any, of Excess Cash Flow specified in the related
Prospectus Supplement.
"Principal Weighted Certificates" means a Class of Certificates entitled
to a greater percentage of principal on the Loans underlying or comprising the
Primary Assets in the Trust Fund for the related Series than the percentage of
interest to which it is entitled.
"Private Mortgage-Backed Security" means a mortgage participation or
pass-through certificate representing a fractional, undivided interest in Loans
or collateralized mortgage obligations secured by Loans.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Proposed Regulations" means the proposed Treasury regulations issued
under Sections 1271-1273 and 1275 of the Code.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgage Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means any nationally recognized statistical rating
organization (or organizations) that was (or were) requested by the Depositor
to rate the Certificates upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC as described herein
under "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS - Tax Status as a REMIC."
"Reinvestment Income" means any interest or other earnings on Funds or
Accounts that are part of the Trust Fund for a Series.
"REMIC" means a real estate mortgage investment conduit under Section 860D
of the Code.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"Remittance Date" means the calendar day or days of each month, as
specified in the related Prospectus Supplement for a Series, on which the
Servicer is required to withdraw funds from the related Servicer Account for
remittance to the Master Servicer.
"REO Property" means real property which secured a defaulted Loan which
has been acquired upon foreclosure, deed in lieu of foreclosure or
repossession.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the Trust Agreement.
"Residual Interest" means a residual interest in a REMIC as described
herein under "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS - Tax Status as a
REMIC."
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement that is not sold by
the Depositor or seller of the Primary Asset and, therefore, is not included in
the Trust Fund for the related Series.
"Scheduled Payments" the scheduled payments of principal and interest to
be made by the borrower on a Mortgage Loan in accordance with the terms of the
related Mortgage Note.
"Senior Certificateholder" means the Holder of a Senior Certificate.
"Senior Certificates" means a Class of Certificates as to which the
Holders' rights to receive distributions of principal and interest are senior
to the rights of Holders of Subordinate Certificates, to the extent specified
in the related Prospectus Supplement.
"Servicer" means the entity which has primary liability for servicing
Loans if other than the Master Servicer.
"Servicing Account" means an account established by a Servicer (other than
the Master Servicer) who is directly servicing Loans, into which such Servicer
will be required to deposit all receipts received by it with respect to the
Primary Assets serviced by such Servicer.
"Single Family Property" means property securing a Loan consisting of
one-to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Subordinate Certificateholder" means a Holder of a Subordinate
Certificate.
"Subordinate Certificates" means a Class of Certificates as to which the
rights of Holders to receive distributions of principal and interest are
subordinated to the rights of Holders of Senior Certificates, to the extent and
under the circumstances specified in the related Prospectus Supplement.
"Subordinated Amount" means the amount, if any, specified in the related
Prospectus Supplement for a Series with a Class of Subordinated Certificates,
that the Subordinate Certificates are subordinated to the Senior Certificates
of the same Series.
"Subordination Reserve Fund" means the subordination reserve fund, if any,
for a Series with a Class of Subordinate Certificates, established pursuant to
the related Trust Agreement.
"Subsidy Account" means a custodial account established by the Master
Servicer or the Servicer for a Loan into which subsidy funds contributed by the
seller of the property securing the Loan (or by another party) necessary to
maintain the scheduled level of payments due on the Loan are deposited.
"Trust Agreement" means the trust agreement relating to a Series among the
Depositor, the Master Servicer, and the Trustee.
"Trustee" means the trustee under a Trust Agreement, and its successors.
"Trust Fund" means all property and assets held for the benefit of the
Certificateholders by the Trustee under the Trust Agreement for a Series of
Certificates including, without limitation, the Primary Assets (except any
Retained Interests), all amounts in the Certificate Account, Collection Account
or Servicer Accounts, distributions on the Primary Assets (net of servicing
fees), and reinvestment earnings on such net distributions and amounts
deposited in any reserve fund and the proceeds of any insurance policies
required to be maintained with respect to the Loans.
"UCC" means the Uniform Commercial Code.
"VA" means the Veterans Administration.
"VA Loans" means housing loans partially guaranteed by the VA.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee......................................... $2,639,736
Trustee's Fees and Expenses (including counsel fees)*........ 50,000
Printing and Engraving Costs*................................ 250,000
Rating Agency Fees*.......................................... 600,000
Legal Fees and Expenses*..................................... 750,000
Blue Sky Fees and Expenses*.................................. 20,000
Accounting Fees and Expenses*................................ 200,000
Miscellaneous*............................................... 100,000
Total..................................................... $4,609,736
- ----------
* Estimated in accordance with Item 511 of Regulation S-K.
Item 15. Indemnification of Directors and Officers.
The registrant's certificate of incorporation provide that directors and
officers of the registrant will be indemnified as permitted by Delaware law.
Section 145 of the Delaware Corporation Law provides, in substance, that
Delaware corporations have the power, under specified circumstances, to
indemnify their directors, officers, employees or agents in connection with
actions, suits or proceedings involving any of them by reason of the fact that
they were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides, under certain circumstances, for
indemnification of the Registrant and other persons.
Item 16. Exhibits.
1.1(2) Form of Underwriting Agreement
3.1(1) Certificate of Incorporation of Structured Asset
Securities Corporation as currently in effect
3.2(1) Bylaws of Structured Asset Securities Corporation as
currently in effect
4.1(2)(3) Form of Trust Agreement
4.2(2) Form of Servicing Agreement
4.3(2) Form of Standard Provisions for Servicing
5.1(4) Opinion of Brown & Wood LLP as to legality (including
consent of such firm)
8.1(4) Opinion of Brown & Wood LLP as to certain tax matters
(including consent of such firm included in Exhibit 5.1)
23.1(4) Consent of Brown & Wood LLP (included in Exhibit 5.1)
24.1(4) Power of Attorney (included on page II-4)
99.1(2) Form of Primary Mortgage Insurance Policy
99.2(2) Form of FHA Mortgage Insurance Certificate
99.3(2) Form of VA Loan Guaranty
99.4(2) Form of Mortgage Pool Insurance Policy
99.5(2) Form of Standard Hazard Insurance Policy
99.6(2) Form of Special Hazard Insurance Policy
99.7(2) Form of Bankruptcy Bond
99.8(3) Form of Mortgage Repurchase Bond
99.9(3) Form of Letter of Credit
99.10(3) Form of Interest Rate Protection Agreement
99.11(3) Form of Interest Rate Swap Agreement
99.12(3) Form of Certificate Guarantee Insurance Policy
99.13(2) (3)Form of Exchange Agreement
- ---------------------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 (Reg. No. 333-47499), filed with the Commission
on March 6, 1998.
(2) Incorporated herein by reference to Amendment No. 1 to Registration
Statement on Form S-11 (Reg. No. 33-13986), filed with the Commission
on December 12, 1987.
(3) Incorporated herein by reference to Form 8-K filed by Structured
Asset Securities Corporation on March 15, 1989.
(4) Previously filed.
Item 17. Undertakings
A. Undertaking in respect of Rule 415 offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in the
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934, as amended, that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
B. Undertaking in respect of filings incorporating subsequent Exchange Act
documents by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
D. Undertakings for registration statement permitted by Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed
to be part of this Registration Statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to Registration Statement on Form S-3 to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York on
the 13th day of March, 2000.
STRUCTURED ASSET SECURITIES
CORPORATION
By:/s/ Mark L. Zusy
---------------------------------------
Mark L. Zusy
Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement on Form S-3 has been signed
below by the following persons in the capacities and on the dates indicated.
Each person whose signature appears below constitutes and appoints Mark L.
Zusy, Neal Leonard, James J. Sullivan and David Goldfarb, and each of them his
or her true and lawful attorney-in-fact and agent, acting together or alone,
with full powers of substitution and resubstitution, for them and in their
name, place and stead, to sign any or all amendments to this Registration
Statement (including any pre-effective or post-effective amendment), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, acting together or alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, acting together or alone, or other
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
/s/ Mark L. Zusy
- -------------------------- Chairman and Director March 13, 2000
Mark L. Zusy
/s/ Neal Leonard
- -------------------------- Managing Director and March 13, 2000
Neal Leonard Director
/s/ James J. Sullivan
- -------------------------- Director March 13, 2000
James J. Sullivan
/s/ David Goldfarb
- -------------------------- Controller March 13, 2000
David Goldfarb (Principal Financial and
Accounting Officer)
